BLAXXUN INTERACTIVE INC
S-1/A, 2000-06-09
PREPACKAGED SOFTWARE
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<PAGE>   1


      AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 2000


                                                      REGISTRATION NO. 333-34316
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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


                                AMENDMENT NO. 2


                                  TO FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------

                           BLAXXUN INTERACTIVE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                <C>                                <C>
             DELAWARE                             7372                            04-3284474
 (STATE OR OTHER JURISDICTION OF      (PRIMARY STANDARD INDUSTRIAL             (I.R.S. EMPLOYER
  INCORPORATION OR ORGANIZATION)      CLASSIFICATION CODE NUMBER)            IDENTIFICATION NO.)
</TABLE>

                         1550 BRYANT STREET, SUITE 770
                            SAN FRANCISCO, CA 94103
                                  415-437-6160
              (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
       INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                            ------------------------

                               FRANZ BUCHENBERGER
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                           BLAXXUN INTERACTIVE, INC.
                         1550 BRYANT STREET, SUITE 770
                            SAN FRANCISCO, CA 94103
                                 (415) 437-6160
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)
                            ------------------------

                                   COPIES TO:

<TABLE>
<S>                                <C>                                <C>
        DR. ANDREAS RODIN               STEVEN M. PECK, ESQUIRE               TOBIAS MULLER-DEKU
        POLLATH & PARTNER             HUTCHINS, WHEELER & DITTMAR      BRUCKHAUS WESTRICK HELLER LOBER
       FRIEDRICHSTRASSE 200            A PROFESSIONAL CORPORATION              TAUNUSANLAGE 11
        10117 BERLIN-MITTE                 101 FEDERAL STREET              60329 FRANKFURT AM MAIN
             GERMANY                  BOSTON, MASSACHUSETTS 02110                  GERMANY
       011-49-30-223-322-15                   617-951-6600                    011-49-69-273-08-0
</TABLE>

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

    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

    If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

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

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

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

    If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
                            ------------------------
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                                EXPLANATORY NOTE

     This Registration Statement contains two forms of prospectus: one
prospectus will be used in connection with the registration of the offering with
the United States Securities and Exchange Commission and the other prospectus
will be used in connection with the offering in Germany. The German prospectus
will be produced in English and in German. The U.S. prospectus and the German
prospectus are identical in all respects except for the front cover page and the
back cover page of the German prospectus, which are different. The German
versions of the front cover page and the back cover page are attached to this
prospectus as pages A-1, A-2, A-3 and A-4 and are labeled "Alternate Pages for
the German Prospectus." Final forms of each prospectus will be filed with the
U.S. Securities and Exchange Commission under Rule 424(b).
<PAGE>   3

        THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY
        BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
        STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
        EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES
        IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
        OFFER OR SALE IS NOT PERMITTED.


                   SUBJECT TO COMPLETION. DATED JUNE 9, 2000.


                         [                  ] Shares of
                                  Common Stock

                           blaxxun interactive, Inc.

                        [blaxxun interactive, Inc. LOGO]
     This is an initial public offering of shares of common stock of blaxxun
interactive, Inc. A total of 7,000,000 shares of common stock are being offered
by blaxxun. The shares of common stock will be offered to the public in the
Federal Republic of Germany. Additionally, shares of common stock will be
offered to a limited number of our directors, officers, employees or other
persons who have business relationships with us, and to persons or entities
related to them, who are not located in the United States.


     It is currently estimated that the initial public offering price will be
between $9.00 and $12.00 per share (between E 9.45 and E 12.60 per share at an
assumed exchange rate of $.95 per euro). For factors considered in determining
the initial public offering price, see "Underwriting."


     We intend to apply to list our common stock on the Neuer Markt of the
Frankfurt Stock Exchange. We expect that this listing will become effective and
that trading of the shares of common stock will begin promptly after the initial
public offering price is determined through negotiations between blaxxun and the
underwriters. Our trading symbol on the Neuer Markt will be BXX.
                            ------------------------
      THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.   SEE "RISK FACTORS"
BEGINNING ON PAGE 8 TO READ ABOUT FACTORS THAT YOU SHOULD CONSIDER BEFORE BUYING
SHARES OF OUR COMMON STOCK.

<TABLE>
<S>                                <C>                      <C>                      <C>
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</TABLE>

<TABLE>
<CAPTION>
                                                                  UNDERWRITING
                                           PRICE TO              DISCOUNTS AND             PROCEEDS TO
                                            PUBLIC                COMMISSIONS                BLAXXUN
<S>                                <C>                      <C>                      <C>
-------------------------------------------------------------------------------------------------------------
Per Share.........................          E[  ]                    E[  ]                    E[  ]
-------------------------------------------------------------------------------------------------------------
Total.............................          E[  ]                    E[  ]                    E[  ]
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>


     Selling stockholders listed on page 58 of this prospectus have granted to
the Underwriters 45 option to purchase 1,100,000 additional shares of Common
Stock, solely to cover over-allotments, if any. In addition, certain existing
shareholders have agreed to lend the underwriters up to 1,100,000 shares of
common stock for 45 days following this offering. To the extent that the option
is exercised, the Underwriters will offer the additional shares to the public at
the Price to the Public shown above. The Company will not receive any proceeds
from the sale of Common Stock by the selling stockholders. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, proceeds to Company and proceeds to selling stockholders will be
approximately $85,050,000, $3,827,000, $73,500,000, and $11,550,000,
respectively based on an estimated $10.50 per share. See "Principal and Selling
Stockholders" and "Underwriting."


     NEITHER THE SECURITIES EXCHANGE COMMISSION, THE NEUER MARKT OF THE
FRANKFURT STOCK EXCHANGE, NOR ANY OTHER REGULATORY BODY HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

     The underwriters expect to deliver the shares of common stock to investors
on             , 2000 in Frankfurt am Main, Germany.
DG BANK DEUTSCHE GENOSSENSCHAFTSBANK AG

                     Prospectus dated               , 2000

<PAGE>   4

                                     [LOGO]

                           THE VIRTUAL WORLDS COMPANY

    [PICTURE OF SIMULATED REAL-WORLD; PEOPLE STANDING IN LOBBY OF AN OFFICE
                                   BUILDING]
<PAGE>   5

     You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
                            ------------------------

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Prospectus Summary..........................................    1
The Offering................................................    3
Summary Consolidated Financial Data.........................    4
Risk Factors................................................    6
Special Note Regarding Forward Looking Statements...........   16
How We Intend to Use the Proceeds from this Offering........   17
Dividend Policy.............................................   17
Exchange Rate Information...................................   17
Capitalization..............................................   19
Dilution....................................................   20
Selected Consolidated Financial Data........................   21
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................   23
Business....................................................   39
Statutory Information.......................................   50
Management..................................................   52
Principal and Selling Stockholders..........................   58
Relationships with blaxxun and Related Transactions.........   61
Description of Capital Stock................................   63
Shares Eligible for Future Sale.............................   66
The German Equity Market....................................   67
German Tax Matters..........................................   70
Certain United States Tax Considerations for Non-United
  States Holders............................................   72
Underwriting................................................   75
Legal Matters...............................................   77
Experts.....................................................   77
Where You Can Find Additional Information...................   77
Index to Consolidated Financial Statements..................  F-1
</TABLE>


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

     Through and including        , 2000 (the 25th day after the date of this
Prospectus), all dealers effecting transactions in these securities in the
United States, whether or not participating in this offering, may be required to
deliver a Prospectus. This is in addition to a dealer's obligation to deliver a
Prospectus when acting as an underwriter and with respect to an unsold allotment
or subscription.

                                        i
<PAGE>   6

                               PROSPECTUS SUMMARY

     You should read the following summary together with the more detailed
information regarding blaxxun and the financial statements and notes appearing
elsewhere in this prospectus. This summary may not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully. Unless otherwise noted, information
in this prospectus assumes that the underwriters will not exercise their
over-allotment option. Also, unless otherwise noted, information in this
prospectus takes into account a 2:1 stock split which will occur simultaneously
with the closing of this offering. Information in this prospectus, unless
otherwise noted, assumes the conversion of all outstanding shares of preferred
stock into shares of common stock simultaneously with the closing of this offer.
Our fiscal year ends July 31 and references to a particular fiscal year are
references to the fiscal year ending July 31 of the relevant year.

The Company:            blaxxun is a provider of innovative software and
                        services that allow organizations to develop and operate
                        Virtual Worlds for commerce, community and collaboration
                        over the Internet. Virtual Worlds are feature rich
                        online environments where people can come together and,
                        by navigating through the website:

                        - engage in commerce by going shopping and accessing
                          customer service;

                        - engage in community by interacting with others,
                          attending events and being entertained; and

                        - engage in collaboration by participating in
                          cooperation scenarios.

                        To address the needs of advanced Virtual Worlds
                        applications, we have developed a set of products and
                        technologies that we license to our customers directly
                        and through third party resellers. We believe that our
                        focus on innovative technology, open technology
                        standards, scalability and extensibility (ability to
                        easily add features and accommodate additional volume),
                        support of multiple hardware and software platforms and
                        business relationships has established us as a leader in
                        the technology behind the Internet Virtual Worlds
                        market.


                        During fiscal 1999, our revenues were approximately
                        $1,846,000 and our net loss was approximately
                        $6,831,000. Our accumulated deficit as of July 31, 1999
                        was approximately $18,475,000. At April 30, 2000 our
                        accumulated deficit had increased to approximately
                        $25,638,000. As of July 31, 1999, goodwill and other
                        intangible assets amounted to approximately $7,455,000,
                        or 62%, of our total assets. Expected amortization
                        expense of this goodwill and other intangible assets of
                        the fiscal years 2000, 2001 and 2003 is approximately
                        $3,660,000, $3,658,000 and $173,000, respectively.


                        Our business consists of selling Virtual Worlds
                        technology products, like the blaxxun Community
                        Platform, providing professional services based on our
                        Virtual Worlds technology, as well as operating selected
                        Internet communities, like Cybertown.com, learnetix.de
                        and soccercity.de, that use our technology to create
                        leading Virtual Worlds. The blaxxun Community Platform
                        is our most feature rich product intended for use by
                        organizations which require the most sophisticated
                        Virtual Worlds technology. Our other products have been
                        derived from the technology behind the blaxxun Community
                        Platform and are designed for users, including
                        businesses, other organizations and individuals, who do
                        not require the full range of features or volume
                        capacity available with the blaxxun Community Platform.

                        A number of global companies already use our technology
                        for a variety of applications. Our strategy is to
                        aggressively expand this customer base and to deepen and
                        extend relationships with existing customers, third
                        party resellers

                                        1
<PAGE>   7

                        and technology collaborators. We also intend to leverage
                        our technology leadership position by targeting smaller
                        business customers and individuals with new products
                        incorporating our technology, such as blaxxun3D, the
                        blaxxun Avatar Studio and the blaxxun Instant Community.

Other Information:      blaxxun was incorporated under the laws of the State of
                        Delaware in July of 1995. Our principal executive office
                        and the offices of our wholly owned subsidiary,
                        Cybertown, Inc., are located at 1550 Bryant Street,
                        Suite 770, San Francisco, California 94103. U.S.A. The
                        principal executive office of our wholly owned
                        subsidiary blaxxun interactive AG is located at
                        Elsenheimerstrasse 61, Munich, Germany. Our web site is
                        located at http://www.blaxxun.com. Information contained
                        on our web site does not constitute part of this
                        prospectus.

                        blaxxun(TM), Cybertown(TM), blaxxun Instant
                        Community(TM), blaxxun3D(TM), blaxxunContact(TM), the
                        blaxxun logo and The Virtual Worlds Company(TM) are
                        registered and unregistered trademarks, service marks
                        and trade names of blaxxun. This prospectus also
                        contains brand names, trademarks or service marks of
                        companies other than blaxxun interactive, Inc., and
                        these brand names, trademarks and service marks are the
                        property of their respective holders.

                                        2
<PAGE>   8

                                  THE OFFERING

     References to "we," "us" or "blaxxun" refer to blaxxun interactive, Inc.,
together with its wholly owned subsidiaries, blaxxun interactive AG and
Cybertown, Inc. In addition, references to "$" or "dollars" are to United States
dollars and "E" is to euros.

COMMON STOCK OFFERED

     Shares of our company offered pursuant to this prospectus include:


     - 7,000,000 shares of our common stock which will be newly issued from our
       authorized capital stock pursuant to a resolution expected to be passed
       by our board of directors on June 19, 2000 for the purposes of this
       offering; and



     - up to an additional 1,100,000 shares of our common stock, which will be
       available for sale by the selling stockholders pursuant to a 45-day
       over-allotment option granted to the underwriters to the extent that
       option is exercised. For further details, see "Underwriting."


FRIENDS & FAMILY PROGRAM

     We have also reserved up to 350,000 shares of the shares of common stock
offered, excluding the shares of common stock included in the over-allotment
option, for sale at the initial public offering price to our employees, and
persons or entities who have business relationships with us, and persons or
entities related to them. The number of shares available for sale to other
investors will be reduced to the extent these persons or entities purchase the
reserved shares. None of the reserved shares will be sold to persons located in
the United States. For further details, see "Underwriting."

UNDERWRITERS

     The shares to be offered pursuant to this prospectus will initially be
purchased by DG BANK Deutsche Genossenschaftsbank AG and the members of the
underwriting consortium. For further details, see "Underwriting."

STOCK EXCHANGE LISTING

     In connection with this offering, we will apply for the admission of the
entirety of our issued and outstanding shares of common stock to the regulated
market with trading on the Neuer Markt of the Frankfurt Stock Exchange. We
currently expect that the admission will take place on [       ], 2000. The
first day on which the offered shares will be quoted on Neuer Markt is currently
anticipated to be [       ], 2000.

TRADING SYMBOL FOR THE NEUER MARKT

     The trading symbol for our shares on the Neuer Markt is expected to be BXX.

DESIGNATED SPONSORS FOR NEUER MARKT

     We have retained DG BANK Deutsche Genossenschaftsbank AG and Merck Finck &
Co. to act as designated sponsors for the shares on Neuer Markt. For additional
information concerning the Neuer Markt and the delivery and payment for and
clearing transferability of the shares, see "The German Securities Market."

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

     Neither we, the selling stockholders nor the underwriters have taken, or
will take any action in any jurisdiction that would not permit a public offering
of the shares or in which possession or distribution of a prospectus is
prohibited. No person has been authorized to give any information or to make any
representation other than those contained in this prospectus, and, if given or
made, such information or representation must not be relied upon as having been
authorized.

                                        3
<PAGE>   9

                      SUMMARY CONSOLIDATED FINANCIAL DATA


     The consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of blaxxun
included elsewhere in this prospectus. The statement of operations data set
forth below for the fiscal years ended July 31, 1997, 1998, and 1999 have been
derived from the audited consolidated financial statements of blaxxun included
elsewhere in this prospectus, which have been audited by KPMG Deutsche
Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftspruefungsgesellschaft,
independent auditors. The consolidated statement of operations data for the
nine-month periods ended April 30, 1999 and 2000, and the consolidated balance
sheet data as of April 30, 2000, are derived from unaudited interim consolidated
financial statements. The unaudited interim consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements contained in this prospectus and include all adjustments, consisting
only of normal and recurring adjustments, that we consider necessary for a fair
presentation of such information. The historical results are not necessarily
indicative of results to be expected for any future period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."


     We commenced operations in August 1995 and therefore fiscal 1996 was the
first year we had consolidated financial statements.


<TABLE>
<CAPTION>
                                                                             NINE MONTHS ENDED
                                           YEAR ENDED JULY 31,                   APRIL 30,
                                -----------------------------------------   --------------------
                                1996(3)     1997      1998      1999(4)      1999        2000
                                -------   --------   -------   ----------   -------   ----------
                                                                                 UNAUDITED
                                        (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                             <C>       <C>        <C>       <C>          <C>       <C>
STATEMENTS OF OPERATIONS DATA:
Revenues......................  $    --   $    595   $ 1,193   $    1,846   $ 1,333   $    4,112
Amortization of goodwill and
  other intangible assets.....       --         --        --       (3,521)   (2,698)      (2,494)
Operating loss................   (3,243)    (5,525)   (1,699)      (6,752)   (4,742)      (6,610)
Net loss......................   (3,216)    (5,352)   (3,076)      (6,831)   (5,077)      (7,163)
Basic and diluted net loss per
  share(1)....................            $(669.04)   (25.75)      (23.96)   (20.00)      (18.73)
Basic and diluted weighted
  average common shares
  outstanding(1)..............               8,000   119,473      285,093   253,828      382,345
Pro forma basic and diluted
  net loss per share(2).......                                 $    (0.43)                  (.41)
Pro forma basic and diluted
  weighted average common
  shares outstanding(2).......                                 15,863,328             17,397,384
</TABLE>



<TABLE>
<CAPTION>
                                                          JULY 31,                     APRIL 30,
                                           ---------------------------------------    -----------
                                            1996      1997       1998      1999(5)       2000
                                           ------    -------    -------    -------    -----------
                                                                                       UNAUDITED
<S>                                        <C>       <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents................  $3,097    $    28    $ 3,111    $ 3,215      $ 5,300
Working capital..........................   2,454       (927)     2,115      2,414        4,369
Goodwill and other intangible assets.....      --         --         --      7,455        4,088
Total assets.............................   3,614        367      3,592     12,085       13,479
Long-term obligations, less current
  portion................................      --      2,041      3,892      3,776        2,186
Stockholders' equity (deficit)...........  $2,783    $(2,706)   $(1,605)   $ 6,352      $ 8,142
</TABLE>


---------------
(1) Historic per share and share information does not reflect the 2:1 stock
    split which will occur simultaneously with the closing of this offering.

(2) Because of the significance of the conversion of all outstanding shares of
    the Company's convertible preferred stock upon the completion of a qualified
    public offering of the Company's common stock, the

                                        4
<PAGE>   10

    Company has presented pro forma basic and diluted net loss per share and the
    pro forma weighted average number of basic and diluted shares outstanding as
    if the preferred stock had been converted on August 1, 1998 or on their date
    of issuance, if later. The pro forma share and per share amounts also
    reflect the impact of the 2:1 stock split which will occur simultaneously
    with the closing of the offering.


(3) As of and for the year ended July 31, 1996, the Company had no common shares
    outstanding.



(4) During 1999, the Company acquired the remaining interest in blaxxun
    interactive AG through the issuance of 1,976,000 shares, on a pre-split
    basis, of Series D convertible preferred stock.


                                        5
<PAGE>   11

                                  RISK FACTORS

     This offering involves a high degree of risk. You should carefully consider
the following before you decide to buy our common stock. You should also refer
to the other information set forth in this prospectus, including the discussions
in "Special Note Regarding Forward-Looking Statements," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
as well as our consolidated financial statements and the related notes.

                         RISKS RELATED TO OUR BUSINESS

WE HAVE NEVER ACHIEVED PROFITABILITY AND WE EXPECT TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.


     We have a history of losses since we commenced operations in 1995. Our net
loss for fiscal 1999 was approximately $6,831,000 and our accumulated deficit
was approximately $18,475,000 as of July 31, 1999. At April 30, 2000 our
accumulated deficit had increased to approximately $25,638,000. We have not
achieved profitability and we expect to incur net losses for the foreseeable
future. We cannot assure you that our revenues will grow or that we will achieve
or maintain profitability in the future. Based on our projections of future
revenue growth, we estimate that our software development and maintenance costs
will increase from approximately $1.8 million in fiscal 1999 to approximately
$28.2 million in fiscal 2002. We estimate that our sales and marketing costs
will increase from approximately $2.0 million in fiscal 1999 to approximately
$30.7 million in fiscal 2002. We estimate that our general and administrative
costs will increase from approximately $1.2 million in fiscal 1999 to
approximately $11.3 million in fiscal 2002. Accordingly, we will need to
significantly increase revenues to achieve and maintain profitability. Our
ability to increase revenues and achieve profitability will be affected by the
other risks and uncertainties described in this section and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."


OUR LIMITED OPERATING HISTORY AND ONGOING DEVELOPMENT OF SUBSTANTIAL PRODUCTS
MAKES FORECASTING DIFFICULT.


     Forecasting our revenues is difficult due to our limited operating history
and newly developed product offerings. If we do not achieve our expected
revenues, our operating results will be below our expectations and the
expectations of our investors and market analysts, which could cause the price
of our common stock to decline. We anticipate that a substantial portion of our
future revenue growth will come from products recently released or still under
development. During the second quarter of fiscal 2000, we released blaxxun3D and
blaxxun Avatar Studio. During March 2000, we released another product, blaxxun
Instant Community. Those products generated $139,000 in revenue as of April 30,
2000. The timing and extent of revenues to be achieved from sales of these new
and developing products are not subject to accurate projection due to our lack
of sales history, unknown market acceptance and the uncertainty of development
completion. As a result, we have limited meaningful historical financial data
upon which to plan revenues and operating expenses. Our ability to forecast
accurately our quarterly revenues is further limited because our Community
Platform products have relatively long sales cycles that make it difficult to
predict the quarters in which sales will occur. We plan our expenses in part
based on our future revenue projections. Most of our expenses are fixed, making
it difficult to quickly reduce spending if revenues are lower than projected. We
currently expect that our expenses will increase significantly for the
foreseeable future. See "Business -- Products."


OUR VIRTUAL WORLDS PRODUCTS MAY NOT BE ACCEPTED.

     The Virtual Worlds market is in an early stage of development and our
products, which are Virtual Worlds products, may therefore not achieve market
acceptance. Other multimedia technologies, such as streaming video technology,
have to date obtained more market acceptance than the Virtual Worlds technology
upon which our products are based. See "Business -- Competition." Our blaxxun
Community Platform products are complex and generally involve capital
expenditures by our customers in excess of $100,000. In addition, many of our
prospective customers have made significant investments in internally-developed
or custom systems and would incur significant costs in switching to third-party
products such as our blaxxun Community Platform. These factors may cause our
Virtual Worlds technology not to be accepted by the market or to be accepted at
a slower rate than other technologies. If Virtual Worlds do not receive

                                        6
<PAGE>   12

market acceptance or achieve market acceptance at a slower rate than we
anticipate, our expected revenues could decrease significantly and cause
substantial harm to our business.

     Our products are based on the so-called "open" ISO standards VRML, HTML,
HTTP and XML. Open standards are publicly known interface and technology
standards which allow the compatibility of products from different manufacturers
and developers. VRML standard is a relatively new open standard, and no
assurance can be given that other forms of technology will not supersede the
VRML or other standards upon which our products are based. Failure of our
products to conform to the dominant technology standards could have a material
adverse effect on the market's acceptance of our products.

EXPANSION OF OUR OPERATIONS MAY STRAIN OUR RESOURCES AND WE MAY NOT BE ABLE TO
ADEQUATELY MANAGE OUR GROWTH.

     We might not be able to adequately manage our growth. Our recent growth has
placed, and will continue to place, a significant strain on our managerial,
operational and financial resources. We must implement and improve our
operational and financial systems and expand, train and manage our employee base
to manage this future growth effectively. In particular, we need to further
develop the organizational structure of our United States sales force, in order
to manage rapid growth effectively. We believe that in order to effectively
manage growth we will have to create or modify our organizational structures
present in our sales force and in our accounting group, product development
group and customer service group. We cannot assure you that we will be able to
effectively implement or reorganize these aspects of our business in a manner
that will enable us to adequately manage our growth. If we do fail to implement
or reorganize these aspects of our business, we may incur significantly
increased losses.

IF WE LOSE OUR KEY MANAGEMENT MEMBERS WE MAY BE UNABLE TO REPLACE THEM.

     Competition for qualified senior personnel in the software industry and in
the Internet Virtual Worlds area, as well as other markets in which we recruit,
is extremely intense and characterized by rapidly increasing salaries, which may
increase our operating expenses or hinder our ability to recruit qualified
candidates. We rely on the services of our founders and other key management,
sales and technical personnel, whose knowledge of our business and technical
expertise would be extremely difficult to replace. Our officers and key
employees are generally free to terminate their employment with us at any time
with little or no notice. None of our employees have executed non-compete
agreements and thus, there is nothing to prohibit them from competing with us
following the termination of their employment. The loss of services of any of
our key employees for any reason could harm our business. In the past five
years, we have lost only one key member of our management who is deceased. Given
our stage of development, we are dependent on our ability to attract, retain and
motivate high caliber senior personnel, and we may not be able to recruit and
retain additional qualified senior personnel. The loss of one or more of our key
employees could materially harm our business.

WE MAY NOT BE ABLE TO RETAIN OR RECRUIT QUALIFIED PERSONNEL.

     If we are unable to adequately train and educate our new technical
personnel, our product development and customer service functions may be
adversely affected. If we are unable to service our customers as we grow,
customers may become dissatisfied with our products and services and we may lose
customers. It is possible that we will not be able to retain or recruit
sufficient numbers of qualified technical personnel, which could disrupt our
operations, inhibit growth and harm our business. In addition to our dependence
on our senior personnel, our ability to grow will be dependent on our ability to
attract, retain and motivate high caliber personnel at other levels,
particularly technical personnel, who we may not be able to adequately recruit,
retain or motivate. Attracting and maintaining the personnel to meet our
technical needs requires training and education. Competition for these types of
employees in the software industry and the Internet Virtual Worlds area, as well
as other markets in which we recruit, is extremely intense and characterized by
rapidly increasing salaries, which may increase our operating expenses or hinder
our ability to recruit qualified candidates.

                                        7
<PAGE>   13

IF WE FAIL TO EXPAND OUR SALES OPERATIONS, WE MAY NOT BE ABLE TO INCREASE
REVENUES FROM THE SALES OF OUR PRODUCTS.


     If we are unable to maintain our current sales force and expand our direct
sales operations, we may not be able to increase sales of our products and our
revenues may not grow adequately. We depend on an effective direct sales force
to market our products. As of April 30, 2000, our direct sales force is 12
people. We need to expand our direct sales operations in order to increase
market awareness of our products and services in order to increase revenues. The
demand for sales personnel is very competitive in our industry due to the
limited number of people with the requisite technical skills and understanding
of our software products and the Internet.


IF WE FAIL TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH INDIRECT RESELLERS OF
OUR PRODUCTS, OUR DISTRIBUTION CAPABILITIES WILL BE HARMED.


     In the future we expect to rely upon our indirect sales channels, which
consist of resellers who incorporate our software into their products and
"resell" the resulting products. For fiscal 1998, fiscal 1999 and the nine
months ended April 30, 2000, 16%, 1% and 4% of our revenues, respectively, were
generated through these indirect sales channels, with approximately 9%, 1% and
2% of revenues, respectively, being generated through a single third party
reseller of our technology. Superscape Ltd, UK accounted for 9% of our revenues
for the fiscal year ended July 31, 1998. In order to successfully market our
products, we need to increase relationships with our indirect sales channels and
establish similar relationships with other third parties. We expect these
indirect sales channels to be particularly important to the sales and marketing
of our new products. Our failure to maintain existing relationships or to
establish a sufficient number of new relationships with indirect sales partners
would limit our distribution capabilities and, in turn, adversely affect our
business.


WE DEPEND UPON A SMALL NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES SO THE LOSS OF ANY OF OUR LARGE CUSTOMERS COULD HAVE MATERIAL ADVERSE
EFFECT ON US.


     Historically, we have received a significant portion of our revenues from a
limited number of customers. Our largest three customers for fiscal 1998,
largest four customers for fiscal 1999, and largest customer for the nine months
ended April 30, 2000, represented 47%, 63% and 11% respectively, of our
revenues. Similarly, our accounts receivable are concentrated. As of July 31,
1998, July 31, 1999 and April 30, 2000, 99%, 85% and 57%, respectively of our
accounts receivable were also owed by the top six, four and three customers. We
believe that a customer's decision to license its technology is relatively
discretionary and, for large-scale users, generally involves a significant
commitment of capital resources. Therefore, any downturn in the economy or in
the business of our current or potential customers could have a material adverse
effect on our revenues. Additionally, we can not assure you that our large
customers will continue to enter into or renew existing support, maintenance and
upgrade contracts or that revenues from those contracts will continue to be
significant. The loss of a material portion of such revenues would likely have a
material adverse effect on our business, financial condition and results of
operations. For a further discussion of customer concentration, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 25.


IF WE ARE UNABLE TO MEET THE RAPID CHANGES IN SOFTWARE TECHNOLOGY, OUR EXISTING
PRODUCTS COULD BECOME OBSOLETE OR UNMARKETABLE.

     Our failure to develop new software products and product enhancements in a
timely fashion would decrease our market acceptance and sales of our software
products, which would harm our business. The market for Virtual Worlds products
is characterized by rapid technological change, frequent new product
introductions and technology enhancements, uncertain product life cycles, rapid
changes in customer demands and evolving industry standards. Our success depends
in part on our ability to innovate and develop new versions of our software in a
timely manner, keep pace with technological developments and provide new
products and services that achieve rapid and broad market acceptance. Our
product and software development efforts inherently are difficult to manage and
keep on schedule. We on occasion have experienced development delays and related
cost overruns, and there can be no assurance that we will not encounter such
problems in the future. In addition, there can be no assurance that we can
identify new software products and
                                        8
<PAGE>   14

service opportunities successfully and develop and bring to market new software
products and services in a timely manner or that any such product innovations
will achieve the market penetration or price stability necessary for
profitability. New products based on new technologies or new industry standards
can render our existing software products obsolete.


THE PORTION OF OUR BUSINESS BASED ON OUR COMMUNITIES MAY NOT BE PROFITABLE.



     The success of our communities depends upon our ability to leverage our
existing and future Web traffic and consumer audience to grow revenues and in
the future generate multiple revenue streams. The potential profitability of
this business model is unproven, and to be successful, we must, among other
things, develop and market content that achieves broad market acceptance by our
community users, Internet advertisers and commerce vendors. We may fail to
develop and promote our communities effectively, which may prevent us from
retaining or attracting new visitors and advertisers to our communities. There
can be no assurance that we will be able to effectively develop or maintain our
communities, and even if the development and maintenance is successful, there
can be no assurance that our communities will be able to sustain revenue growth
or generate significant revenues or profits, if any.


WE FACE INTENSE COMPETITION THAT COULD KEEP US FROM GROWING OR EVEN MAINTAINING
OUR MARKET SHARE.

     The Virtual Worlds technology market is competitive, subject to rapid
change and significantly affected by new product introductions and other
activities of industry participants. We compete with various providers of
multimedia communication solutions and expect additional competition from other
established and emerging companies. Furthermore, our competitors may combine
with each other, and other companies may enter our markets by acquiring or
entering into strategic relationships with our competitors. Many of our current
and potential competitors have longer operating histories, significantly greater
financial, technical, product development and marketing resources, greater name
recognition and larger customer bases than we do. Our present or future
competitors may be able to develop products comparable or superior to those we
offer, adapt more quickly than we do to new technologies, evolving industry
trends or customer requirements, or devote greater resources to the development,
promotion and sale of their products than we do. We may not be able to compete
effectively in our markets, competition may intensify and our inability to
compete successfully against our current and future competitors may cause us to
experience price reductions, reduced gross margins and loss of market share, any
one of which could materially and adversely affect our business. For further
description of our principal competitors, see Business -- Competition."

THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE TRADING
OF OUR COMMON STOCK.

     Our operating results are subject to fluctuations, and if we fail to meet
the expectations of securities analysts or investors, our stock price could
decline significantly. The primary factors that may cause fluctuations of our
operating results include the following:

     - the size, timing and contractual terms of sales of our products and
       services due to the long and unpredictable sales cycle for our products;

     - technical difficulties in our software that could delay product shipments
       or increase the costs of introducing new products;

     - the timing of recognizing revenue and deferred revenue under U.S. GAAP;

     - changes in our pricing policies or pricing policies of competitors;

     - increases in sales, marketing, product development or administrative
       expenses;

     - changes in our mix of revenues generated from product sales and services;

     - changes in our mix of sales channels through which our products and
       services are sold;

     - our ability to maintain quality levels for our products and implement
       quality Internet Virtual Worlds solutions for our customers;

                                        9
<PAGE>   15

     - the fixed nature of our operating expenses, such as base compensation for
       our employees and rent; and

     - costs related to acquisitions of technology or businesses.

Because of these factors, we believe that quarter-to-quarter comparisons of our
results of operations as an indication of our future performance will not
necessarily be meaningful. Our future quarterly operating results may fluctuate
and may not meet the expectations of securities analysts or investors. If this
occurs, the price of our common stock would likely decline.

THE SUCCESS OF OUR INTERNATIONAL OPERATIONS IS DEPENDENT UPON MANY FACTORS WHICH
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS INTERNATIONALLY.


     We market and sell our products in the United States and internationally.
In fiscal 1998, 1999 and in the nine month period ended April 30, 2000, we
generated 98%, 79% and 75%, respectively, of our total revenues to customers
located outside of the United States with 23%, 53%, and 39% respectively,
generated from customers in Germany. We intend to substantially expand our
international operations and enter new international markets, through extended
sales and marketing operations, joint ventures and strategic alliances, which
will require significant management attention and financial resources. See
"Business -- Our Strategy -- Global Expansion." Our international operations
are, and will be, subject to a variety of risks associated with conducting
business internationally, many of which are beyond our control. The following
factors may adversely affect our ability to achieve and maintain profitability
and our ability to sell our products internationally:


     - expenses associated with customizing products for foreign countries;

     - political and economic instabilities;

     - potentially adverse tax consequences and regulatory requirements;

     - legal uncertainties regarding liability, export and import restrictions,
       tariffs and other trade barriers;

     - uncertainty of product acceptance by different cultures;

     - dependence on local partners who may not be able to meet the needs of a
       growing international market;

     - greater difficulty in accounts receivable collection and longer
       collection periods;

     - difficulties and costs of staffing and managing foreign operations;

     - unexpected changes in regulatory requirements related to the Internet;
       and

     - limited or unfavorable intellectual property protection.

     Our international sales growth will be limited if we are unable to
establish additional foreign operations, expand international sales channel
management and support organizations, hire additional personnel, customize
products for local markets and establish relationships with additional
distributors and third-party integrators.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE
ABLE TO USE OUR TECHNOLOGY OR TRADEMARKS, WHICH COULD WEAKEN OUR COMPETITIVE
POSITION.

     Our competitive position may be weakened if we do not effectively protect
our intellectual property rights. We rely on a combination of copyright,
trademark and trade secret laws and restrictions on disclosure to protect our
intellectual property rights. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Monitoring unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States or
Germany.

     Additionally, we may be a party to litigation in the future to protect our
intellectual property or as a result of alleged infringement of others'
intellectual property. These claims and any resulting lawsuits could subject
                                       10
<PAGE>   16

us to significant liability for damages and invalidation of our proprietary
rights. Any such claims, with or without merit, could be time-consuming to
defend, result in costly litigation, divert management's attention and resources
and cause product shipment delays. Any potential intellectual property
litigation also could force us to do one or more of the following:

     - stop selling, incorporating or using our products or services that use
       the challenged intellectual property;

     - obtain from the owner of the infringed intellectual property right a
       license to sell or use the relevant technology, which license may not be
       available on reasonable terms, or at all; or

     - redesign those products or services that use such technology.

     If we are forced to take any of the foregoing actions, we may be unable to
develop and sell our products, or provide services based thereon, which would
reduce or eliminate our revenues. To date, we have not been notified that our
products infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement with respect to our
current or future products. We expect that developers of database, content
management and e-commerce software products will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and as the functionality of products increasingly overlaps.

OUR INTERNATIONAL OPERATIONS EXPOSE US TO RISKS ASSOCIATED WITH CURRENCY
FLUCTUATIONS, WHICH MAKES OUR FUTURE RESULTS OF OPERATIONS DIFFICULT TO PREDICT.


     Currency fluctuations make our future results of operations difficult to
predict. To date, a majority of our international revenues and costs have been
denominated in foreign currencies, primarily in Deutsche Mark and, since the
Deutsche Mark conversion to the euro in January 1999, in euros. In fiscal 1998,
1999 and the nine month period ended April 30, 2000, 80%, 82% and 47%,
respectively, of our revenues were denominated in Deutsche Mark and euro. We
booked foreign currency transaction losses of approximately $94,000 in fiscal
1998 and foreign currency exchange gains of approximately $33,000 and $151,000
in fiscal 1999 and the nine months ended April 30, 2000, respectively. We
believe that a significant portion of our international revenues and costs will
be denominated in foreign currencies in the future. We cannot predict the
potential consequences to our business as a result of the adoption of the euro
as a common currency in parts of Europe. To date, we have not engaged in any
foreign exchange hedging transactions, and we are, therefore, subject to foreign
currency risk, particularly in connection with the U.S. dollar and euro exchange
rates.


     A majority of the expenses of our subsidiary blaxxun interactive AG are
denominated in Deutsche Mark. However, the value of Deutsche Mark is tied to the
value of the euro. As a result, fluctuation in the value of the euro relative to
the U.S. dollar could adversely affect our results of operations. Even when
foreign currency expenses are substantially offset by foreign currency revenues
in the same currency, profits may be diminished when reported in dollars.
Fluctuations in the U.S. dollar relative to the euro will affect comparisons of
our reported results of operations and financial condition. Due to the
constantly changing currency exposures and the volatility of currency exchange
rates, we could experience currency losses in the future, and we cannot predict
the effect of the exchange rate fluctuations upon our future results of
operations. For more information regarding currency fluctuations, see "Exchange
Rate Information."

WE HAVE IN THE PAST AND EXPECT TO CONTINUE TO ACQUIRE COMPLEMENTARY BUSINESSES,
WHICH MAY CAUSE DISRUPTIONS IN OUR ONGOING BUSINESS ACTIVITIES.

     We have acquired and intend to continue to acquire complementary web sites,
companies, technologies, services and products as appropriate opportunities
arise. These acquisitions might disrupt our ongoing business activities. If we
identify an appropriate acquisition opportunity, we might not be able to
negotiate the terms of that acquisition successfully, obtain financing, or
integrate the acquired company's personnel and operations. We may also have
difficulty continuing to acquire web sites and other Internet media properties
at the prices historically paid due to the escalation of Internet media
valuations. If we make acquisitions outside of our core business, assimilating
the acquired technology, services or products into our operations could be

                                       11
<PAGE>   17

difficult. This may cause a disruption in our ongoing business, distract
management and make it difficult to maintain standards, controls and procedures.
In addition, we might be required to incur debt or issue equity securities to
pay for any future acquisitions. If the market price for acquisition targets
increases substantially, our business, results of operations and financial
condition could suffer.

OUR SOFTWARE PRODUCTS MAY HAVE UNKNOWN DEFECTS, WHICH COULD HARM OUR REPUTATION
OR IMPEDE MARKET ACCEPTANCE OF OUR PRODUCTS.

     Despite our testing of our software products, defects have occurred in the
past and may occur in the future. Complex software like ours may be difficult to
integrate with customers' existing systems and may contain errors or defects
when first introduced or when new versions or enhancements are released.
Although we conduct extensive testing, we may not discover software defects that
affect our current or new products until after they are sold, and we are not
currently insured against product defects. In addition, any defect in other
software or hardware with which our software interacts could be mistakenly
attributed to our software by our customers or their end-users. These defects or
perceptions of defects could cause our customers and their end-users to
experience service interruptions. Service interruptions could damage our
reputation or increase our product development costs, divert our product
development resources, cause us to lose revenue, or delay market acceptance of
our products, anyone of which could harm our business, financial condition and
results of operations.

WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS TO US.

     We may be subject to product liability claims for defects in our products.
A successful product liability claim brought against us in excess of our
relevant insurance coverage could be costly. Any of these claims, even if not
meritorious, could result in costly litigation or divert management's attention
and resources.

                         RISKS RELATED TO THE INTERNET

OUR FUTURE RESULTS DEPEND ON CONTINUED GROWTH IN THE USE OF THE INTERNET.

     Our future results depend on continued growth in the use of the Internet
for information, publication, distribution and commerce. Our business could
suffer if Internet usage does not continue to grow and evolve. Internet usage
and usage of our technology in particular, may be inhibited for a number of
reasons, including:

     - inadequate network infrastructure;

     - security concerns;

     - inconsistent quality of service;

     - lack of availability of cost-effective and high-speed Internet access;
       and

     - changes in government regulation of the Internet.

     In addition, changes in network infrastructure, transmission and content
delivery methods and underlying software platforms, and the emergence of new
Internet access devices, such as television set-top boxes, could dramatically
change the structure and competitive dynamic of the market for Virtual Worlds,
including Internet realtime 3D products. These changes might limit the
functionality of Virtual Worlds and also allow for expansion of competing
technologies. In addition, future outages and other interruptions occurring
throughout the Internet could lead to decreased use of Virtual Worlds and would
therefore harm our Virtual Worlds business. Because electronic commerce over the
Internet is relatively new and evolving, it is difficult to predict whether the
Internet will be a viable commercial marketplace or whether the Internet or
intranets will be viable mediums of communication. Sales of our products will
continue to depend in large part on the emergence of the Internet as a viable
commercial marketplace with a strong and reliable infrastructure. The Internet
has experienced substantial growth in the number of users and amount of traffic,
and there can be no assurance that its technological infrastructure will be able
to support the demands placed on it by continued growth. There can be no
assurance that the infrastructure or complementary services necessary to make
the
                                       12
<PAGE>   18

Internet a viable commercial medium will be developed or, if developed, that the
Internet will become a viable commercial medium for products and services such
as those offered by us.

WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND
LEGAL UNCERTAINTIES WITH RESPECT TO THE INTERNET.

     New Internet legislation or regulation, or the application of existing laws
and regulations to the Internet and e-commerce could add additional costs and
risks to doing business on the Internet. We are subject to regulations
applicable to businesses generally and laws or regulations directly applicable
to communications over the Internet and access to e-commerce. Although there are
currently few laws and regulations directly applicable to e-commerce, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing, content,
copyrights, distribution, antitrust, taxation and characteristics and quality of
products and services. For example, the United States Congress recently enacted
Internet laws regarding children's privacy, copyrights and the transmission of
sexually explicit material and is currently considering federal tax legislation
concerning e-commerce. In addition, the European Union recently enacted its own
Internet privacy regulations. The burden of compliance with any additional laws
or regulations regarding the Internet may decrease the growth of the Internet or
e-commerce, which could, in turn, decrease the demand for our products and
services and increase our costs of doing business. Additionally, due to the
global nature of the Internet, it is possible that the governments of foreign
jurisdictions may attempt to regulate our transmissions or to prosecute us for
violations of their laws. We may unintentionally violate these laws and these
laws may be modified, or new laws enacted, in the future.

THE REGULATION OF DOMAIN NAMES MAY CHANGE, WHICH MAY MAKE IT DIFFICULT FOR US TO
BUILD BRAND RECOGNITION.

     In addition, regulation could reduce the value of our domain names which
would harm our brand recognition. We own the Internet domain names
www.blaxxun.com, www.cybertown.com, as well as numerous other domain names both
in the United States and internationally. Our domain names are important because
they allow visitors to locate our web sites and build brand recognition.
Internet regulatory bodies currently regulate domain names. The regulation of
domain names in the United States and internationally is subject to change. In
the United States, .com, .net and .org are top-level domains, or domains that
are very highly sought after. Regulatory bodies could establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. As a result, we might not acquire and
maintain the "www.blaxxun.com" or comparable domain names in all the countries
in which we conduct business, which could harm our business. Also, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear and still evolving. We
might be unable to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our trademarks and other proprietary
rights. If this occurs, our business, results of operations and financial
condition would suffer.

LEGISLATION REGARDING PRIVACY OF PERSONAL INFORMATION ABOUT USERS MAY AFFECT OUR
COMMUNITIES.

     We are subject to and must comply with data protection legislation which
restricts our ability to collect and exploit users' personal data. Our business
is particularly dependent on the existing and future data protection laws in
Europe, the United States and in each specific country where we operate.
European data protection legislation is drafted in very broad terms, and there
are few sources of guidance as to its interpretation. Therefore, it is difficult
to foresee the extent to which its enforcement by relevant authorities will
restrict our operations. We believe that a rigid interpretation of data
protection legislation could hinder our ability to conduct our business as
planned. Our failure to comply with applicable law could subject us to severe
legal sanctions which could have a material adverse effect on our business and
results of operations.

     We maintain a privacy policy which is not to disclose individually
identifiable information about any user of our products or services to a third
party without the user's consent. Despite this policy, however, if third persons
were able to penetrate our network security or otherwise misappropriate users'
personal information, we could be subject to liability claims. These claims
could include claims for unauthorized purchases, impersonation or other similar
fraud claims, as well as claims for other misuses of personal information, for
                                       13
<PAGE>   19

example for unauthorized marketing purposes. We could incur additional expenses
if new regulations regarding the use of personal information were introduced, if
our privacy practices are investigated or if our privacy policies are viewed
unfavorably by users or potential users.


IF THE USE OF COOKIES BECOMES IMPERMISSIBLE, OUR COMMUNITIES' EXPECTED
ADVERTISING REVENUES MAY DECLINE.



     Our communities currently use "cookies," with the consent of the user, to
collect usage information about the user to facilitate and improve the user's
experience in viewing our communities and to target relevant advertising,
content and e-commerce offerings to users. Cookies are small files of
information placed on a user's hard drive that convey user information to the
website through the user's browser software. Some Internet commentators and
European data protection commissioners have suggested that, depending on the
mode of application, the use of cookies is impermissible. Should this view
prevail, the effectiveness of our communities and their ability to derive
advertising revenue could be limited.



OUR COMMUNITIES MAY EXPERIENCE DISRUPTIONS WHICH MAY LEAD TO DECREASED TRAFFIC
AND SALES.



     Our systems may fail or experience a slowdown and our users depend on
others for access to our communities. Our network must accommodate a high volume
of traffic and deliver frequently updated information. Our communities have in
the past, and may in the future, experience slower response times or decreased
traffic for a variety of reasons. Slower response times can result from general
Internet problems, routing and equipment problems by third-party Internet access
providers, problems with third-party advertising servers and increased traffic
to our servers. Our network could experience interruptions in service due to the
failure or delay in the transmission or receipt of this information. In
addition, our community of Internet users depends on Internet service providers,
online service providers and other web sites' operators for access to our
communities. Those providers have experienced outages in the past, and may
experience outages or delays in the future. Moreover, our Internet
infrastructure might not be able to support continued growth of our communities.
If we experience any of these problems, our reputation and brand name could
suffer, users might perceive our communities as not functioning properly and our
business, results of operations and financial condition could suffer.



WE MAY BE SUED AS A RESULT OF INFORMATION PUBLISHED OR POSTED ON OR ACCESSIBLE
FROM THE COMMUNITIES WE OPERATE.



     We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or other claims relating to the information published in
the communities we operate. These types of claims have been brought, sometimes
successfully, against online services in the past, and can be costly to defend.
We may also be subjected to claims based on content that is accessible from our
communities through links to other web sites or through content and materials
that visitors to our communities may post.


                         RISKS RELATED TO THIS OFFERING

THERE HAS BEEN NO PUBLIC MARKET FOR OUR COMMON STOCK PRIOR TO THIS OFFERING AND
A PUBLIC MARKET MAY NOT DEVELOP OR BE SUSTAINED.

     Prior to this offering, there has been no public market for our common
stock. The price of the common stock that will prevail in the market after this
offering may be higher or lower than the price you pay. An active public market
for our common stock may not develop or be sustained after this offering. If you
purchase shares of common stock in this offering, you will pay a price that was
not established in a competitive market. Rather, you will pay the price that we
negotiated with the representatives of the underwriters. Many factors could
cause the market price of our common stock to rise and fall. Some of these
factors are:

     - variations in our quarterly results;

     - announcements of technological innovations by us or by our competitors;

                                       14
<PAGE>   20

     - introductions of new products or new pricing policies by us or by our
       competitors;

     - acquisitions or strategic alliances by us or by our competitors;

     - recruitment or departure of key personnel;

     - the gain or loss of significant orders;

     - changes in the estimates of our operating performance or changes in
       recommendations by securities analysts; and

     - market conditions in the industry and the economy as a whole.

OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY.

     The market for stocks of technology and Internet-related companies,
particularly those traded on the Neuer Markt, has experienced extreme price and
volume fluctuations that often have been unrelated to these companies' operating
performance. These fluctuations could lower the market price of our common stock
regardless of our actual operating performance.

     In the past, securities class action litigation has often been brought
against a company following a period of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could harm our business.

INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER OUR COMPANY AFTER THE
OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL.


     Immediately following this offering, our officers, directors and affiliated
entities will beneficially own 43.3% of our voting stock and could significantly
influence the outcome of actions requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership may delay, deter or prevent transactions that would
result in a change of control, which in turn could reduce the market price of
our common stock. For information regarding stockholdings by our officers,
directors and 5% stockholders, see "Principal and Selling Stockholders."


PROVISIONS OF OUR CHARTER DOCUMENTS, DELAWARE LAW AND THE GERMAN TAKE-OVER CODE
MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN OUR CONTROL AND
COULD DEPRESS THE PRICE OF OUR COMMON STOCK.

     Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company or our management, even if doing so would be beneficial to our
stockholders. These provisions could also discourage proxy contests and make it
more difficult for you and other stockholders to elect directors and take other
corporate actions. As a result, these provisions could limit the price that
investors are willing to pay in the future for shares of our common stock. These
provisions include:

     - authorizing the board of directors to issue additional preferred stock;

     - prohibiting cumulative voting in the election of directors;

     - limiting the persons who may call special meetings of stockholders;

     - prohibiting stockholder action by written consent; and

     - establishing advance notice requirements for nominations for election to
       the board of directors or for proposing matters that can be acted on by
       stockholders at stockholders' meetings.

     We are also subject to provisions of Delaware law that could delay, deter
or prevent us from entering into a transaction, including Section 203 of the
Delaware General Corporation Law, which prohibits a Delaware corporation from
engaging in a business combination with an interested stockholder unless
specific conditions are met. See "Description of Capital Stock -- Preferred
Stock" and "Delaware Anti-Takeover Law and our Charter and Bylaw Provisions."

                                       15
<PAGE>   21

     In addition, in connection with our listing on the Neuer Markt of the
Frankfurt Stock Exchange, we are required to comply with the German Take-Over
Code. The Stock Exchange Expert Commission at the German Federal Ministry of
Finance (Borsensachverstandigenkommission beim Bundesministerium der Finanzen)
has issued the German Take-Over Code (Ubernahmekodex) as a voluntary regulatory
framework governing public take-over bids for domestic stock corporations that
are quoted on domestic stock exchanges. If we were to be acquired by a third
party, that third party will have to:

     - notify German regulatory authorities and the public of the offer;

     - provide disclosures to the target company's stockholders;

     - treat stockholders equally in an offer; and

     - comply with other regulatory requirements.

Compliance with Delaware law and the German Take-Over Code could delay, defer or
prevent us from entering into a transaction. This could limit the price that
investors are willing to pay for our common stock.

THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AFTER THIS
OFFERING THAT COULD CAUSE THE PRICE OF OUR COMMON STOCK TO FALL.


     A total of 16,977,592, or 89%, of our total outstanding shares are
restricted from immediate resale but may be sold into the market in the near
future, following the expiration of the Neuer Markt and underwriter lock-up
periods. This could cause the market price of our common stock to drop
significantly, even if our business is doing well. In addition, the sale of
these shares could impair our ability to raise capital through the sale of
additional stock. For information regarding the availability of shares for
future sale, see "Shares Eligible for Future Sale."


YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION BY INVESTING IN OUR
COMMON STOCK.


     The initial public offering price is substantially higher than the net
tangible book value of each outstanding share of common stock immediately after
the offering. Purchasers of our common stock in this offering will suffer
immediate and substantial dilution. This dilution will reduce the net tangible
book value of their shares because these investments will be at a substantially
higher per share price than they were for our existing stockholders. The
dilution will be $7.74 per share from the assumed initial public offering price
of E[ ] per share ($10.50 per share at an exchange rate reported by The Wall
Street Journal on [          ] of [$     ] per E[  ]). If outstanding options or
warrants to purchase shares of common stock are exercised, you will incur
further dilution. For information regarding the dilutive effect of this offering
on your investment, see "Dilution."


               SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

     This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance, and involve known
or unknown risks, uncertainties and other factors that may cause our or our
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "predicts," "estimates" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined in "Risk
Factors."

     Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
do not intend to update any of the forward-looking statements after the date of
this prospectus to conform these statements to actual results, except as
required by applicable law.

                                       16
<PAGE>   22

              HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING


     We estimate the net proceeds from the sale of the 7,000,000 shares of
common stock offered by us will be approximately E[  , or $68,192,000]. This
estimate is based on an assumed public offering price of E[     ], or $10.50 per
share, after deducting the estimated underwriting discounts and commissions and
the estimated offering expenses payable by us in the amount of approximately E[
          ], or $3,308,000, and E     , or $2,000,000, respectively and an
exchange rate of $[          ] per euro. We will not receive any of the proceeds
from the sale of common stock by the selling stockholders.



     The principal purposes of this offering are to fund anticipated operating
losses, software development efforts, increase our working capital, create a
public market for our common stock, facilitate our future access to the public
capital markets, and increase our visibility in our markets. We expect to use
55% of the proceeds of this offering to expand our national and international
sales and marketing activities. We expect to use another 25% of the proceeds of
this offering to expand our software development efforts and to use the
remainder for strategic investments and general working capital. Additionally,
we may decide to repay two long-term notes payable to Technologie
Beteiligungs-Gesellschaft der Deutschen Ausgleichsbank with a principle value of
approximately $2,186,000 at April 30, 2000. The stated interest rates on these
notes range from six to seven percent and are subject to substantial prepayment
premiums ranging from 30% to 35% of the face amount of the respective note. We
may also use a portion of the net proceeds to acquire additional businesses,
products and technologies or to establish joint ventures that we believe will
complement our current or future business. The amounts actually expended for
such working capital purposes may vary significantly and will depend on a number
of factors, including the amount of our future revenues and the other factors
described under "Risk Factors." Accordingly, our management will retain broad
discretion in the allocation of the net proceeds of this offering.


                                DIVIDEND POLICY

     We have never declared or paid cash dividends on our capital stock. We
currently anticipate that we will retain any future earnings to fund the
development and growth of our business. Therefore, we do not anticipate paying
any cash dividends in the foreseeable future.

                           EXCHANGE RATE INFORMATION

     We report our consolidated financial statements in U.S. dollars. However, a
significant portion of our revenues and expenses have historically been
recognized in Deutsche Mark. We expect that a significant portion of our
revenues and expenses will be recognized in Deutsche Mark or, after June 30,
2002, in euros. In addition, portions of our financial information in this
prospectus have been presented in Deutsche Mark and euros. The exchange rate
information provided below is for informational purposes only. No representation
is made that the U.S. dollar amounts referred to herein could be or could have
been converted into Deutsche Mark or euros, as the case may be, at any
particular rate or at all.

     The treaty establishing the European Community, as amended by the Treaty on
European Union, or the Maastricht Treaty, to which the Federal Republic of
Germany is a signatory, provided that on January 1, 1999, the euro became the
common currency of those Member States of the European Monetary Union, or EMU,
that satisfied the convergence criteria set forth in the Maastricht Treaty,
including Germany. The conversion rate between the Deutsche Mark, which
continues to have legal tender status through a transition period ending June
30, 2002, at the latest, and the euro was fixed by the Council of the European
Union at DM 1.95583. Prices quoted for the shares on the Neuer Markt will be
quoted in euros.

     We do not currently anticipate paying any dividends to stockholders.
However, any dividends we do declare would be in U.S. dollars, and exchange rate
fluctuations would affect the euro equivalent of any cash dividend received by
holders of common shares. For more information, see "Dividend Policy."

     The table below sets forth, for the periods and dates indicated,
information concerning the Noon Buying Rate in the city of New York for cable
transfers in foreign currencies certified by the Federal Reserve Bank of New
York for customs purposes, expressed in Deutsche Mark per $1.00 or euros per
$1.00 as the case may

                                       17
<PAGE>   23

be. The columns titled "Average" refer to the average of the Noon Buying Rates
on the last business day of each full calendar month during the relevant period.

                    DEUTSCHE MARK EXCHANGE RATE INFORMATION
                                    DM/$1.00

<TABLE>
<CAPTION>
               CALENDAR YEAR                  HIGH       LOW      AVERAGE    JULY 31    DECEMBER 31
               -------------                 -------    ------    -------    -------    -----------
<S>                                          <C>        <C>       <C>        <C>        <C>
1997.......................................  1.8810     1.5413    1.7347     1.8325       1.7991
1998.......................................  1.8542     1.6060    1.7597     1.7795       1.6670
1999.......................................  1.9506     1.6571    1.8332     1.8289       1.9504
</TABLE>

     The table below sets forth, for the period and dates indicated, information
concerning the Noon Buying Rate expressed in euros per $1.00. No representation
is made that the euro or U.S. dollar amounts referred to herein could be or
could have been converted into U.S. dollars or euros, as the case may be, at any
particular rate or at all.


     At April 30, 2000 the DM/U.S. dollar exchange rate was 2.1500.


                         EURO EXCHANGE RATE INFORMATION
                                   EURO/$1.00

<TABLE>
<CAPTION>
               CALENDAR YEAR                  HIGH       LOW      AVERAGE    JULY 31    DECEMBER 31
               -------------                 -------    ------    -------    -------    -----------
<S>                                          <C>        <C>       <C>        <C>        <C>
1999.......................................  1.1803     1.0027    1.0669     1.0694       1.0028
</TABLE>

     Accordingly, fluctuations in the price of the Deutsche Mark will also
reflect fluctuations in the value of the euro.


     At April 30, 2000 the euro/U.S. dollar exchange rate was 1.0993.


                                       18
<PAGE>   24

                                 CAPITALIZATION


     The following table sets forth our capitalization as of April 30, 2000. Our
capitalization is presented:


     - on an actual basis;


     - on a pro forma basis to give effect to the conversion of all outstanding
       shares of convertible preferred stock into 9,148,910 shares of common
       stock, on a pre-split basis, and the 2 for 1 stock split effected in
       connection with the offering.


     - on a pro forma as adjusted basis, after giving effect to the sale of
       7,000,000 shares of common stock by us at an assumed initial public
       offering price of E[     ], or $10.50 per share (the midpoint of the
       range set forth on the cover page of this prospectus) at an exchange rate
       reported by The Wall Street Journal for [            , 2000] of $[     ]
       per E1.00), less the estimated underwriting discount and estimated
       expenses we expect to pay in connection with this offering and the
       application of the net proceeds as described in "How We Intend to Use the
       Proceeds From This Offering."

     You should read this table in conjunction with our Consolidated Financial
Statements included elsewhere in this prospectus.


<TABLE>
<CAPTION>
                                                                AS OF APRIL 30, 2000
                                                     ------------------------------------------
                                                                                     PRO FORMA
                                                        ACTUAL        PRO FORMA     AS ADJUSTED
                                                     ------------    -----------    -----------
                                                                   (IN THOUSANDS)
<S>                                                  <C>             <C>            <C>
Notes payable......................................  $  2,186,047    $ 2,186,047    $ 2,186,047
Stockholders' equity:
  Convertible preferred stock......................        50,914              0              0
  Common stock.....................................         3,969        190,916        260,916
  Additional paid-in-capital.......................    35,233,909     35,097,876    103,220,376
  Deferred compensation............................      (241,545)      (241,545)      (241,545)
  Accumulated deficit..............................   (25,637,698)   (25,637,698)   (25,637,698)
  Cumulative translation adjustment................    (1,267,690)    (1,267,690)    (1,267,690)
                                                     ------------    -----------    -----------
  Total stockholders' equity.......................     8,141,859      8,141,859     76,334,359
                                                     ------------    -----------    -----------
Total capitalization...............................  $ 10,327,906    $10,327,906    $78,520,406
                                                     ============    ===========    ===========
</TABLE>



     Common stock outstanding after this offering excludes 2,608,662 shares
issuable upon exercise of stock options as of April 30, 2000.


     See "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included elsewhere in this prospectus.

                                       19
<PAGE>   25

                                    DILUTION

     If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value per
share by dividing the net tangible book value (total assets less intangible
assets and total liabilities) by the number of outstanding shares of common
stock. We have included amounts in this table in both euros and U.S. dollars
based on exchange rates of $[     ] per E1.00, the exchange rate in effect on
[            , 2000], as reported by The Wall Street Journal.


     Our pro forma net tangible book value at April 30, 2000, after giving
effect to the conversion of all outstanding shares of our preferred stock into
19,091,592 shares of common stock upon the closing of this offering was E[     ]
($4,053,897), or E[     ] ($0.21) per share of common stock.



     After giving effect to the sale of the 7,000,000 shares of common stock by
us at an assumed initial public offering price of E[     ] ($10.50) per share
(less the underwriting discounts and estimated expenses we expect to pay in
connection with this offering), our pro forma net tangible book value at April
30, 2000 would be approximately E[     ] ($72,246,397), or E[     ] ($2.77) per
share. This represents an immediate increase in the pro forma net tangible book
value of E[     ] ($2.56) per share to existing stockholders and an immediate
dilution of E[     ] ($7.73) per share to new investors, or approximately
[     ]% of the assumed offering price of E[     ] ($10.50) per share.


     The following table illustrates this per share dilution:


<TABLE>
<CAPTION>
                                                                 E          $
                                                              --------    ------
<S>                                                           <C>         <C>
Assumed public offering price per share.....................               10.50
Pro forma net tangible book value per share at April 30,
  2000......................................................                0.21
Increase per share attributable to new investors............                2.56
Pro forma net tangible book value per share after the
  offering..................................................                2.77
Dilution per share to new investors.........................                7.73
</TABLE>



     The following table shows on a pro forma basis at April 30, 2000, after
giving effect to the automatic conversion of all outstanding shares of our
preferred stock into a total of 19,091,592 shares of common stock upon the
closing of this offering, the number of shares of common stock offered by us,
the total consideration paid to us and the average price paid per share by
existing stockholders and by new investors purchasing common stock in this
offering:



<TABLE>
<CAPTION>
                           SHARES PURCHASED           TOTAL CONSIDERATION
                       ------------------------    --------------------------    AVERAGE PRICE
                         NUMBER      PERCENTAGE       AMOUNT       PERCENTAGE      PER SHARE
                       ----------    ----------    ------------    ----------    -------------
<S>                    <C>           <C>           <C>             <C>           <C>
Existing
  stockholders.......  19,091,592        73%         34,110,370        32%         $   1.79
New investors........   7,000,000        27%         73,500,000        68%         $  10.50
                       ----------       ---        ------------       ---          --------
Total................  26,091,592       100%        107,610,870       100%         $   4.12
                       ==========       ===        ============       ===          ========
</TABLE>


     If the underwriters exercise their option to purchase additional shares in
full, the percentage of shares held by existing stockholders after this offering
will be reduced to 70%, and the number of shares held by new investors will be
increased to 8,100,000 shares or 30% of the number of shares to be outstanding
after this offering. See "Principal and Selling Stockholders."

     In addition to the shares of common stock outstanding after the offering,
we may issue additional shares of common stock under the following plans and
arrangements:


     - 2,608,662 shares of common stock issuable upon exercise of outstanding
       options (of which options to purchase 683,744 shares of common stock were
       exercisable at April 30, 2000) under our stock compensation plans at a
       weighted average exercise price of $1.61 per share; and



     - 689,966 shares are available for future issuance under our stock
       compensation plans.


     Please read the capitalization table together with the sections of this
prospectus entitled "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Consolidated Financial Statements included elsewhere in this
prospectus.

                                       20
<PAGE>   26

                      SELECTED CONSOLIDATED FINANCIAL DATA


     The consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of blaxxun
included elsewhere in this prospectus. The statement of operations data set
forth below for the fiscal years ended July 31, 1997, 1998, and 1999 have been
derived from the audited consolidated financial statements of blaxxun included
elsewhere in this prospectus, which have been audited by KPMG Deutsche
Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftspruefungsgesellschaft,
independent auditors. The consolidated statement of operations data for the
nine-month periods ended April 30, 1999 and 2000, and the consolidated balance
sheet data as of April 30, 2000, are derived from unaudited condensed
consolidated interim financial statements. The unaudited condensed consolidated
interim financial statements have been prepared on the same basis as the audited
consolidated financial statements contained in this prospectus and include all
adjustments, consisting only of normal and recurring adjustments, that we
consider necessary for a fair presentation of such information. The historical
results are not necessarily indicative of results to be expected for any future
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."


     We commenced operations in August 1995 and therefore fiscal 1996 was the
first year we had consolidated financial statements.


<TABLE>
<CAPTION>
                                                                                   NINE MONTHS ENDED
                                                 YEARS ENDED JULY 31                    APRIL 30
                                      -----------------------------------------   --------------------
                                      1996(3)     1997      1998      1999(4)      1999        2000
                                      -------   --------   -------   ----------   -------   ----------
                                                                                      Unaudited
                                                       (In thousands, except per share and share data)
<S>                                   <C>       <C>        <C>       <C>          <C>       <C>
Net revenues:.......................  $    --        595     1,193        1,846     1,333        4,112
Operating expenses:
  Software development and
     maintenance....................    1,565      2,085     1,491        1,848     1,354        2,910
  Sales and marketing...............      919      2,472       695        2,027     1,244        3,551
  General and administrative........      759      1,564       706        1,203       778        1,767
  Amortization of goodwill and other
     intangible assets..............       --         --        --        3,521     2,698        2,494
                                      -------   --------   -------   ----------   -------   ----------

          Total operating
            expenses................    3,243      6,121     2,892        8,599     6,075       10,722
                                      -------   --------   -------   ----------   -------   ----------

          Operating loss............   (3,243)    (5,525)   (1,699)      (6,752)   (4,742)      (6,610)

Other, net..........................       27        173    (1,377)         (78)     (335)        (553)
                                      -------   --------   -------   ----------   -------   ----------

Net loss............................  $(3,216)    (5,352)   (3,076)      (6,831)   (5,077)      (7,163)
                                      =======   ========   =======   ==========   =======   ==========

Basic and diluted net loss per
  share(1)..........................            $(669.04)   (25.75)      (23.96)   (20.00)      (18.73)
                                                ========   =======   ==========   =======   ==========
Weighted average number of basic and
  diluted shares outstanding(1).....               8,000   119,473      285,093   253,828      382,345
                                                --------   -------   ----------   -------   ----------
Pro forma basic and diluted net loss
  per share(2)......................                                 $   (0.43)                  (0.41)
Pro forma weighted average number of
  basic and diluted shares
  outstanding(2)....................                                 15,863,328             17,397,384
</TABLE>


     Totals may not add due to rounding differences.

                                       21
<PAGE>   27


<TABLE>
<CAPTION>
                                                          JULY 31                      APRIL 30
                                         -----------------------------------------    ----------
                                          1996      1997       1998       1999(4)        2000
                                         ------    -------    -------    ---------    ----------
                                                                                      (UNAUDITED)
<S>                                      <C>       <C>        <C>        <C>          <C>
BALANCE SHEET DATA:
Cash and cash equivalents..............  $3,097    $    28    $ 3,111    $   3,215      $5,300
Working capital........................   2,454       (927)     2,115        2,414       4,369
Goodwill and other intangibles.........      --         --         --        7,455       4,088
Total assets...........................   3,614        367      3,592       12,085      13,479
Long-term obligations, less current
  portion..............................      --      2,041      3,892        3,776       2,186
Stockholders' equity (deficit).........  $2,783    $(2,706)   $(1,605)   $   6,352      $8,142
</TABLE>


---------------
Notes:

(1) Historic per share and share information does not reflect the 2:1 stock
    split which will occur simultaneously with the closing of this offering.

(2) Because of the significance of the conversion of all outstanding shares of
    the Company's convertible preferred stock upon the completion of a qualified
    public offering of the Company's common stock, the Company has presented pro
    forma basic and diluted net loss per share and the pro forma weighted
    average number of basic and diluted shares outstanding as if the preferred
    stock had been converted on August 1, 1998 or on their date of issuance, if
    later. The pro forma share and per share amounts also reflect the impact of
    the 2:1 stock split which will occur simultaneously with the closing of the
    offering.


(3) As of and for the year ended July 31, 1996, the Company had no common shares
    outstanding.



(4) During 1999, the Company acquired the remaining interest in blaxxun
    interactive AG through the issuance of 1,976,000 shares, on a pre-split
    basis, of Series D convertible preferred stock.


                                       22
<PAGE>   28

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This discussion includes forward-looking statements based on assumptions
about our future business. Our actual results could differ materially from those
contained in the forward-looking statements.

     All information included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations refers to blaxxun interactive,
Inc. and our subsidiaries blaxxun interactive AG and Cybertown, Inc. on a
consolidated basis. The following discussion and analysis of our financial
condition and results of operations should be read in conjunction with the
audited consolidated financial statements and the unaudited interim condensed
consolidated financial statements and related notes included elsewhere in this
prospectus. Our financial statements and related notes have been prepared in
accordance with U.S. generally accepted accounting principles. See page 18
"Special Note Regarding Forward Looking Statements".

OVERVIEW

     We are a provider of innovative software infrastructure and solutions that
allow organizations to develop and operate Virtual Worlds for commerce,
community and collaboration over the Internet. Virtual Worlds are online
visually striking environments where people can come together and, by navigating
through a website, go shopping, interact with others, access customer service,
attend events, be entertained and participate in cooperation scenarios. Virtual
Worlds is a market driven by improvements in software and hardware
infrastructure, increasing and broadening use of the Internet by end users and
convergence of media platforms such as Internet PCs, TV and other devices. Our
Virtual Worlds technologies utilize open standards and enable a variety of new
applications that were not feasible until recently.


     We market and sell our products in the United States and internationally.
In fiscal 1998, 1999 and in the nine month period ended April 30, 2000, we
generated 98%, 79% and 75%, respectively, of our total revenues from customers
located outside of the United States with 23%, 53% and 39% respectively,
generated from customers in Germany.



     From commencement of our operations in August 1995 through July 1999, our
operating activities related primarily to increasing our software and
development capabilities, designing and developing the software products we are
currently selling and staffing our administrative, sales and marketing
organizations. Since our inception, we have incurred significant losses, and as
of July 31, 1999, we had an accumulated deficit of approximately $18,475,000. As
of April 30, 2000, we had an accumulated deficit of approximately $25,638,000,
and our net loss for the nine months ended April 30, 2000, was approximately
$7,163,000. We have not achieved profitability on a quarterly or annual basis
and anticipate that we will incur net losses for the foreseeable future. We
expect to continue to incur significant selling and marketing, product
development, professional services and administrative expenses, and as a result,
we will need to generate significantly higher revenues to achieve and then
maintain profitability.



     Customer concentration.  Over the past several years, we have been
dependent on a few key customers. In 1997, approximately 56% of our net revenues
were derived from two customers Planet Direct, Inc.(a CMGI related entity) and
Triad Projektgesellschaft mbH. In 1998, approximately 47% of our revenues were
derived from three customers, European Commission, Vanilla Online Ltd. and IBM
Canada Ltd. In 1999, approximately 63% of our revenues came from four customers,
European Commission (17%), Intel Corporation (17%), Global Information Systems
Technology, Inc. (15%) and Advopolis AG (14%). For the nine months ended April
30, 2000, 11% of revenues were derived from 1 customer, Advopolis AG. Although
we are seeking to further diversify our customer base and expand our net
revenues through our product offerings, we anticipate that our operating results
will continue to depend on volume sales to a relatively small number of
customers.


     Business Segments.  We currently operate in three business segments:

     - The Product segment includes license revenue; product support and
       maintenance agreements; and, collaborative research and co-development
       agreements with public entities, primarily the European

                                       23
<PAGE>   29


       Commission. In fiscal 1998, 1999 and in the nine month period ended April
       30, 2000, 64%, 63% and 60%, respectively, of total revenue was derived
       from the Product segment.



     - The Professional Services segment includes custom application
       development. In fiscal 1998, 1999 and in the nine months period ended
       April 30, 2000, 36%, 39% and 31%, respectively, of total revenue was
       derived from the Professional Services segment.



     - The Communities segment includes the operation of Internet communities.
       In fiscal 1998, 1999 and in the nine months period ended April 30, 2000,
       0%, 0% and 9%, respectively, of total revenue was derived from the
       Communities Services segment.



     Product Segment.  License revenue is currently substantially derived from
the sales of our blaxxun Community Platform product line, and to a lesser
extent, from our recently released other products. License revenue generated
from our blaxxun Community Platform product line was approximately $450,000,
$649,000 and $1,599,000 for fiscal 1998 and 1999, and for the nine months ended
April 30, 2000, respectively. Revenue generated from our other products was
approximately $139,000 for the nine months ended April 30, 2000. There were no
other revenues generated from sales of our other products in any other period.



     As part of our Product segment, we supplement our product offerings with
technical product support and maintenance. These services include several levels
of support including software updates, telephone and email technical support.
Substantially all of our Community Platform customers enter into product support
and maintenance agreements upon the commercial release of the customers'
application that includes licensed blaxxun products. Product support and
maintenance arrangements are typically one year of length and provide technical
support and the right to unspecified upgrades on an if-and-when-available basis.
78%, or seven out of nine, of the product support and maintenance agreements
signed during fiscal 1999 that were renewable by April 30, 2000 have been
renewed. Renewing parties generally do not receive any discounts to renew their
contracts.



     Our collaborative research and co-development agreements with public
entities relate to research and co-development projects that are generally
between one and three years in duration. These agreements have accounted for
21.4%, 19.4% and 13.6% of total net revenues for fiscal 1998 and 1999, and for
the nine months ended April 30, 2000, respectively. As part of these agreements,
the public entity generally acquires the right to internally use and purchase,
on favorable terms, the products that are developed as a result of these
activities. The collaborators retain the rights to market the products
developed. Since inception, we have entered into eight contracts with total
revenues of approximately $3,197,000. Other participants in these projects
include British Broadcasting Corporation plc, BMW AG, British Telecommunications
plc, Canal Plus Multimedia S.A., Deutsche Telekom AG, France Telecom S.A.,
Intershop Communications GmbH, Italtel SPA, Pixelpark MMK AG, Siemens AG,
Swisscom AG, Telecom Italia s.r.l., and Telenor AS.


     Professional Services Segment.  Our Professional Services Group supports
customers in the business planning stage and helps them to effectively design
the application, determine cost and resource requirements and optimize their
business model. This group also provides fee-based consulting services designed
to allow the seamless integration of our products into the software systems of
our customers, as well as custom application development.


     Communities Segment.  Revenues from our Internet communities are currently
composed of advertising/sponsoring revenues which was approximately $387,000 for
the nine months ended April 30, 2000. There was no other revenue generated from
Internet communites in any other period. Although we have entered into barter
transactions, no revenue was recognized from barter transactions during any of
the three years ended July 31, 1999 or the nine months period ending April 30,
2000.


     Revenue Recognition Policies.  Our revenue recognition policy is in
accordance with AICPA Statement of Position (SOP) 97-2, "Software Revenue
Recognition", as amended.

     License revenue is generally recognized when the following criteria have
been met: persuasive evidence of an arrangement exists, delivery has occurred,
the fee is fixed or determinable and collectibility is probable. Revenues from
multiple-element software arrangements are allocated to each element of the
arrangement

                                       24
<PAGE>   30

based on the relative fair values of the elements. For electronic delivery, the
software is considered to have been delivered when we have provided the customer
with the access codes that allow for immediate possession of the software.

     Revenues from product support and maintenance arrangements is recognized on
a straight-line basis over the life of the related agreement, which is typically
one year.

     Revenues under collaborative research and co-development agreements with
public entities, like the European Commission, typically consist of
non-refundable ongoing research and co-development milestone payments earned
upon the attainment of specified milestones as defined in each contract. Such
payments approximate one-half of the research and development costs incurred
with respect to the agreements. The revenue is recognized in the period the
milestone was successfully achieved, which is determined when the public entity
agrees that the required results stipulated in the agreement have been met.

     Revenue from custom development projects is recognized when earned based
upon the performance requirements of the respective agreements or on a
percentage of completion basis. These agreements are generally less than one
year in length. Revenues from consulting and training services are recognized as
the services are performed.

     Communities segment revenues from advertising/sponsoring are recognized
over the period the advertising or sponsoring is performed.

     If support and maintenance, consulting, development services, or training
are included in an arrangement that includes a license agreement, amounts
related to product support and maintenance, consulting, development services, or
training and the licenses are allocated based on vendor-specific evidence.
Vendor-specific objective evidence for support, consulting and development
services, training and license agreements is based on the price when such
elements are sold separately, or, when not sold separately, the price is
established by management having the relevant authority. Where discounts are
offered on multiple element arrangements, a proportionate amount of that
discount is applied to each element included in the arrangement based on each
element's fair value.


     We record cash receipts from customers in excess of recognized revenue as
deferred revenue. The timing and amount of cash receipts from customers can vary
significantly depending on specific contract terms and can therefore have a
significant impact on the amount of deferred revenue in any given period. At
April 30, 2000, total deferred revenues was approximately $605,000.


     Expense Overview.  Software development and maintenance costs include
research and development costs, costs of custom development projects, costs of
product support and maintenance, costs of community operations and cost of
license revenues. Costs of community operations consists primarily of technical
operation expenses of our Internet communities, as well as costs associated with
revenues generated by the communities, mainly commissions for third party
agencies. Software development and maintenance costs are mainly composed of
salaries and related expenses, costs of third party subcontractors and an
allocation of our occupancy, communications and depreciation expenses. Software
development and maintenance costs include software research and development
costs of approximately $1,911,000, $658,000, and $740,000 for fiscal 1997, 1998
and 1999, respectively. Additionally, we incurred costs associated with
co-development agreements with public entities of $0, $515,000, and $704,000 for
fiscal 1997, 1998 and 1999, respectively, for which we retain the rights to
market any products resulting from these collaborative activities. Research and
development costs related mainly to the development of the blaxxun Community
Platform. The first version was released in the third quarter of fiscal 1996,
version 2.0 in fiscal 1997, version 3.0 during fiscal 1998 and the latest
version in fiscal 1999. During fiscal 1999 and fiscal 2000, we developed the
first versions of blaxxun Avatar Studio and blaxxun3D, which were released in
November 1999 and January 2000 and blaxxun Instant Community, which was released
in March 2000. Development costs incurred in the research and development of new
software products are expensed as incurred until technological feasibility in
the form of a working model has been established. Costs incurred between
technological feasibility and the first shipment of the product would be
capitalized. Since inception, all costs incurred between technological
feasibility and the first shipment of the product were insignificant, and,
accordingly, no costs have been capitalized. Currently we

                                       25
<PAGE>   31

deliver our products generally by download from the Internet. In the future, we
expect to incur other costs, including the cost of manuals and product
documentation, media used to deliver our products, shipping and fulfillment
costs as we bring packaged products to market.

     Sales and marketing expenses mainly include personnel and marketing
expenses, including trade shows, public relations, marketing collaterals and an
allocation of our occupancy, communications and depreciation expenses.


     General and administrative expenses mainly include salaries and related
expenses for executive, financial, accounting and office management personnel,
legal and professional fees and an allocation of our facilities, communications
and depreciation expenses. It also includes amortization of deferred stock
compensation. We account for stock-based compensation using the intrinsic value
method prescribed by APB 25, "Accounting for Stock Issued to Employees" under
which no compensation cost for stock options is recognized for stock option
awards granted at or above fair market value. We have recorded deferred
compensation for fiscal 1998 and 1999, and for the nine months ended April 30,
2000 of approximately $115,000, $79,000, and $183,000, respectively, for the
difference between the grant price and the estimated fair value of our stock on
the date of grant. This amount is being amortized over the vesting period,
generally ranging up to 48 months, of the individual option grants on a
straight-line basis. Deferred compensation expense amortized during fiscal 1998
and 1999, and the nine months ended April 30, 2000 was approximately $35,000,
$41,000, and $79,000, respectively.



     Amortization of goodwill and other intangible assets related mainly to the
purchase of the remaining interest in our German subsidiary, blaxxun interactive
AG, during fiscal 1999. We accounted for the acquisition of the minority
interests using the purchase method of accounting. During fiscal 1999, we
incurred a charge immediately following the acquisition for purchased research
and development costs. The charge of $195,000, included in amortization of
goodwill and other intangible assets, represents the fair value of the
technologies acquired for use in our own development efforts. We determined the
amounts of the purchase price to be allocated to in-process research and
development based upon an independent third party valuation. The technological
feasibility of the products being developed had not been established as of the
date of the acquisition and, if unsuccessful, had no alternative future use in
research and development activities or otherwise. The purchase price was also
allocated to identifiable assets such as assembled work force and licensing
agreements and goodwill. These intangible assets are being amortized over
periods ranging from seven to thirty-six months. Amortization expense for
goodwill and other intangible assets amounted to approximately $3,521,000 for
fiscal 1999 and approximately $2,494,000 for the nine months period ended April
30, 2000.


     Other, net consists of interest income earned on cash deposited in money
market accounts, interest expenses incurred on notes payable and convertible
notes payable, foreign currency transaction gains and losses, gains and losses
on the disposal of assets, equity in losses of joint venture and franchise
taxes.

                                       26
<PAGE>   32

RESULTS OF OPERATIONS

     The following table sets forth the financial data derived from our
statements of operations since our inception for the periods indicated (In
thousands, except share and per share data):


<TABLE>
<CAPTION>
                                                                                    NINE MONTHS ENDED
                                                 YEARS ENDED JULY 31                    APRIL 30
                                      ------------------------------------------   -------------------
                                      1996(3)     1997      1998       1999(4)      1999       2000
                                      -------   --------   -------   -----------   ------   ----------
                                                                                        UNAUDITED
<S>                                   <C>       <C>        <C>       <C>           <C>      <C>
Net revenues:.......................  $    --        595     1,193         1,846    1,333        4,112
Operating expenses:
  Software development and
     maintenance....................    1,565      2,085     1,491         1,848    1,354        2,910
  Sales and marketing...............      919      2,472       695         2,027    1,244        3,551
  General and administrative........      759      1,564       706         1,203      778        1,767
  Amortization of goodwill and other
     intangible assets..............       --         --        --         3,521    2,698        2,494
                                      -------   --------   -------   -----------   ------   ----------

          Total operating
            expenses................    3,243      6,121     2,892         8,599    6,075       10,722
                                      -------   --------   -------   -----------   ------   ----------

          Operating loss............   (3,243)    (5,525)   (1,699)       (6,752)  (4,742)      (6,610)
                                      -------   --------   -------   -----------   ------   ----------

Other, net..........................       27        173    (1,778)          (78)    (335)        (553)
                                      -------   --------   -------   -----------   ------   ----------

Net loss............................  $(3,216)    (5,352)   (3,076)        6,831   (5,077)      (7,163)
                                      =======   ========   =======   ===========   ======   ==========

Basic and diluted net loss per
  share(1)..........................            $(669.04)   (25.75)       (23.96)  (20.00)      (18.73)
Weighted average number of basic and
  diluted shares outstanding(1).....               8,000   119,473       285,093   253,828     382,345
Pro forma basic and diluted net loss
  per share(2)......................                                 $     (0.43)                (0.41)
Pro forma weighted average number of
  basic and diluted shares
  outstanding(2)....................                                  15,863,328            17,397,384
</TABLE>



Totals may not add due to rounding differences.


Notes:

(1) Historic per share and share information does not reflect the 2:1 stock
    split which will occur simultaneously with the closing of this offering.

(2) Because of the significance of the conversion of all outstanding shares of
    the Company's convertible preferred stock upon the completion of a qualified
    public offering of the Company's common stock, the Company has presented pro
    forma basic and diluted net loss per share and the pro forma weighted
    average number of basic and diluted shares outstanding as if the preferred
    stock had been converted on August 1, 1998 or on their date of issuance, if
    later. The pro forma share and per share amounts also reflect the impact of
    the 2:1 stock split which will occur simultaneously with the closing of the
    offering.


(3) As of and for the year ended July 31, 1996, the Company had no common shares
    outstanding.



(4) During 1999, the Company acquired the remaining interest in blaxxun
    interactive AG through the issuance of 1,976,000 shares, on a pre-split
    basis, of Series D convertible preferred stock.



  Nine Months ended April 30, 1999 and 2000



     Net Revenues.  Net revenues increased from approximately $1,333,000 in the
nine months ended April 30, 1999, to approximately $4,112,000 in the nine months
ended April 30, 2000. This increase would have been approximately $71,000 higher
on a constant dollar basis, especially relating to the stronger U.S. dollar
compared to the Deutsche Mark or euro. Revenues from related parties in the nine
months ended


                                       27
<PAGE>   33


April 30, 2000 were approximately $240,000. We did not have any related party
revenues in the nine month period ended April 30, 1999.



     These figures reflect higher revenues for all of our segments, particularly
the Product segment. The net revenues of our segments during the first nine
months of fiscal 1999 and 2000 were as follows:



     - Net revenues of the Product segment increased from $834,000 to
       approximately $2,718,000.



     This increase is primarily due to license revenues which increased from
     approximately $499,000 to $1,994,000 mainly based on an increase in the
     number of licenses sold as well as an increase in the average package size,
     based on the number of concurrent users, of the blaxxun Community Platform.
     We have also introduced new products, blaxxun3D and blaxxun Avatar Studio,
     both released during the second quarter of fiscal 2000, which started to
     contribute to the results of this segment by approximately $139,000.
     Intersegment sales between the Communities and the Products segments
     increased from nil to approximately $256,000.



     Revenues from collaborative co-development agreements with public entities
     increased to approximately $559,000 from approximately $294,000 primarily
     due to four new projects that started between July 1999 and January 2000,
     offset by two projects that were completed by July 1999.



     - Net revenues of the Professional Services segment increased to
       approximately $1,703,000 from approximately $499,000. The increase is
       primarily based on increased average project size sold to new customers.
       In addition, intersegment sales between the Communities and the Services
       segments increased from nil to approximately $439,000.



     - Net revenues of the Communities segment was approximately $387,000 which
       related entirely to Cybertown. There were no revenues in this segment in
       the nine month period ending April 30, 1999. Revenues are composed of
       advertising and sponsoring transactions.



     Our fixed order backlog as of April 30, 1999 and 2000 was approximately
$922,000 and $15,304,000, respectively, of which approximately $392,000 and
$14,470,000 relates to the Product segment, $530,000 and $743,000 relates to the
Professional Services segment and $0 and $91,000 relates to the Communities
segment. The Product segment order backlog as of April 30, 1999 and April 30,
2000 relates to purchases of software licenses of $325,000 and $12,336,000,
respectively, and collaborative co-development agreements with public entities
of $77,000 and $2,134,000, respectively. The Product segment increased primarily
due to two significant agreements with value added resellers to market our
products. On February 1, 2000, we entered into an agreement with General
Investment Bankers, a Latin American Reseller, resulting in a fixed purchase
commitment of approximately $6,000,000 included above, before a maximum rebate
of $1,000,000, for the period from February 2000 until July 31, 2003. We expect
to realize approximately $400,000 from this agreement in fiscal 2000.



     On February 25, 2000, we entered into an agreement with Infomatec Media AG,
a German reseller and technology partner, resulting in an order commitment of
approximately $5,5000,000, included above, to be realized from March 2000
through July 31, 2002. We expect to realize approximately $750,000 from this
agreement in fiscal 2000. Infomatec participated in our Series F convertible
preferred stock offering and, on February 28, 2000, purchased stock convertible
into 508,000 shares of our common stock for a purchase price of $2,997,000.
Under our agreement with Infomatec, we have an option (but not an obligation) to
repurchase our shares from Infomatec if Infomatec fails to meet purchasing
benchmarks within the time frames set forth in the agreement.



     We expect to recognize approximately $2,380,000 during fiscal 2000 and the
remaining $12,924,000 over the next three fiscal years, although no assurance
can be given that such amounts will in fact be realized.



     Software Development and Maintenance Costs.  Software development and
maintenance costs increased from approximately $1,354,000 in the first nine
months of fiscal year 1999 to approximately $2,910,000 in the first nine months
of fiscal year 2000. The average number of software development employees
increased from 16 during the nine months ended April 30, 1999 to 34 during the
nine months ended April 30, 2000. We anticipate that software development costs
will continue to increase in absolute terms as we plan to

                                       28
<PAGE>   34

significantly expand our software development team to maintain our technological
lead in the field of Virtual Worlds. We expect to increase our average number of
software development staff to over 200 by fiscal 2004. Software development and
maintenance costs of our different segments were as follows:


     - Software development and maintenance cost in our Product segment
       increased from approximately $878,000 to approximately $1,658,000
       primarily due to higher personnel costs based on new hires associated
       with the development of new products, enhancement and support of existing
       products, and quality assurance, testing, and documentation. Based on the
       higher number of employees, allocated costs for occupancy, depreciation
       and communication cost also increased.



     - Software development and maintenance costs in the Professional Services
       segment increased from approximately $215,000 to approximately $711,000.



     - Software development and maintenance costs in the Communities segment
       increased from approximately $261,000 to approximately $1,150,000 because
       the Communities segment initiated operations of Cybertown during November
       1998. These costs mainly relate to further expansion of the community
       offering of Cybertown, in particular to adding more places and virtual
       worlds to the community. In addition, approximately $389,000 of the
       increase relates to costs for SoccerCity that started operations during
       November 1999.



     Additionally during the nine months ended April 30, 2000, we recognized
deferred revenue of approximately $605,000 associated with the Products segment.
The majority of these deferred revenue is expected to be recognized during
fiscal 2000.



     Sales and Marketing Expenses.  Sales and marketing expenses increased from
approximately $1,244,000 in the first nine months of fiscal 1999 to
approximately $3,551,000 in the first nine months of fiscal 2000. The increase
was primarily attributable to an increase in the average number of direct sales,
pre-sales support and marketing employees from 11 for the nine months ended
April 30, 1999 to 26 for the nine months ended April 30, 2000, as well as an
increase in marketing programs, including collateral, trade shows and public
relations related to product launch activities for the blaxxun3D, blaxxun Avatar
Studio and blaxxun Instant Community. Sales and marketing expenses may continue
to increase in absolute numbers as we continue to expand our marketing programs
and sales force to support product launches, international expansion as well as
expansion of our community operations. We expect to increase our average number
of sales and marketing staff to over 200 by fiscal 2004.



     Sales and marketing expenses increased in the Product segment from
approximately $929,000 to approximately $2,039,000 and in the Professional
Services segment from approximately $296,000 to approximately $494,000. Sales
and marketing increases in the Product and Professional Services segments mainly
related to personnel costs based on increased level of staff. Sales and
marketing expenses in the Communities segment were approximately $1,019,000, up
from approximately $20,000 in the nine months period ended April 30, 1999. The
Communities segment expenses relate mainly to personnel costs, with an average
of six people employed who work primarily on social interaction and
communication with community members, organizing events and other marketing
activities. These expenses mainly resulted from the growth of Cybertown, whose
registered member base increased from April 1999 from approximately 90,000 to
April 2000 to more than 340,000 members.



     General and Administrative Expenses.  General and administrative expenses
increased from approximately $778,000 for the nine-month period ended April 30,
1999 to approximately $1,767,000 for the comparable period in 2000. The increase
was primarily due to personnel costs associated with newly hired personnel and
related costs required to manage our growth as well as professional and legal
fees. The average number of general and administrative employees increased from
6 during the nine months period ended April 30, 1999 to 11 during the nine month
period ending April 30, 2000. We expect that general and administrative expenses
will increase in absolute cost as we continue to add additional staffing to
support expanded operations and incur expenses relating to its our
responsibilities as a public company. We expect to increase our average number
of general and administrative staff to over 100 by fiscal 2004.



     General and administrative expenses increased in the Product segment from
approximately $579,000 to approximately $1,329,000 and in the Professional
Services segment from approximately $184,000 to


                                       29
<PAGE>   35


approximately $322,000. The Communities segment increased from approximately
$15,000 to approximately $116,000.



     Amortization of goodwill and other intangible assets.  Amortization expense
for goodwill and other intangible assets decreased from approximately $2,698,000
for the nine months period ended April 30, 1999 to approximately $2,494,000 for
the period ended April 30, 2000, primarily as a result of the in-process
research and development of $195,000 immediately expensed in 1999. Amortization
of goodwill and other intangible assets relate mainly to the purchase of the
remaining interest in blaxxun interactive AG as well as to the acquisition of
Cybertown, Inc. during fiscal 1999.



     Other expense, net increased from approximately $335,000 to approximately
$553,000. Net interest expense decreased from approximately $267,000 to
approximately $227,000. Foreign exchange losses, net was approximately $60,000
in 1999 compared to a gain of approximately $151,000, primarily due to
transaction gains incurred on Deutsche Mark or euro based account balances.



     During September 1999, we entered into a 50% joint venture with Cornelsen
Verlag GmbH & Co. ("Cornelsen"), a German schoolbook publisher, to create and
operate learnetix, an Internet learning community. Our equity in losses was
approximately $474,000 primarily due to planned start-up expenses to develop the
Internet community. We expect to make continued investments in and expect to
incur operating losses from learnetix, as we plan to further increase traffic to
make learnetix the leading learning community in the market. Major cost drivers
include costs to design the websites, integrate and customize the software to
operate the community as well as marketing costs to promote the community
services to the target markets. Learnetix was launched during November 1999, and
generated revenue of approximately $46,000 during the nine month period ended
April 30, 2000.



     EBITA loss for the Products segment for the nine months of fiscal 2000
increased from a loss of approximately $1,594,000 to a loss of $2,208,000. The
increase in the EBITA loss was primarily due to increased personnel related
costs associated with new hires for the enhancement of existing products and the
development of new products.



     The Professional Services achieved positive EBITA for the first time in the
nine month period ended April 30, 2000. EBITA for the period was approximately
$227,000 versus a loss of approximately $221,000 for the comparable period in
1999. The achievement of EBITA was due to the addition of new customers and the
renewal of service agreements with existing customers partially offset by an
increase in personnel related costs.



     EBITA loss for the Communities segment for 2000 increased from a loss of
$295,000 to a loss of approximately $1,898,000. The increase in the EBITA loss
was primarily due to increased costs associated with the expansion of Cybertown,
increased sales and marketing expenses to attract new community members, and
costs associated with the establishment of Soccercity.


  Net loss


     As a result of the factors identified above, our net loss for the nine
months ended April 30, 1999 was approximately $5,077,000 as compared to
approximately $7,163,000 for the comparable period ended April 30, 2000.


  Fiscal Years Ended July 31, 1998 and 1999

     During the end of fiscal 1997, we significantly reduced our U.S.
operations. During late fiscal 1998 we began to rebuild, especially our U.S.
sales and marketing and administrative teams, to better serve our customers in
the U.S., and to sell our new Community Platform 4.0 to the important U.S.
market. As a result of these actions, expenses in all categories increased,
primarily due to additional staffing.

     Net Revenues.  Net revenues increased from approximately $1,193,000 in the
fiscal 1998, to approximately $1,846,000 in fiscal 1999. The increase would have
been approximately $1,000 higher on a constant dollar basis, relating to the
stronger $ compared to the Deutsche Mark or euro. There were no revenues from

                                       30
<PAGE>   36

related parties in fiscal 1998 or 1999. Net revenues of our segments during
fiscal 1998 and 1999 were as follows:

     - Net revenues of the Product segment increased from approximately $761,000
       to approximately $1,156,000.

       The increase is primarily due to license revenues which grew from
       approximately $450,000 to approximately $685,000 based on both an
       increase in the number of licenses sold and the average package size,
       based on the number of concurrent users, of the blaxxun Community
       Platform.

       Revenues from collaborative agreements with public entities increased
       from approximately $255,000 to approximately $358,000 primarily due to
       two new projects started during fiscal 1999.

       Revenues from support and maintenance agreements increased from
       approximately $53,000 to approximately $118,000 primarily due to the
       increase in the platform sales as well as first renewals of existing
       customers.

     - Net revenues of the Professional Services segment grew from approximately
       $432,000 to approximately $727,000. The increase is primarily based on
       both an increase in average project size and in the number of customers.

     Software Development and Maintenance Costs.  Software development and
maintenance costs increased from approximately $1,491,000 in fiscal 1998 to
approximately $1,848,000 in fiscal 1999. The average number of software
development employees increased from 13 during fiscal 1998 to 20 during fiscal
1999. Software development and maintenance costs of our segments during fiscal
1998 and 1999 were as follows:

     - Software development and maintenance costs in the Product segment
       declined by approximately $56,000 to $1,144,000 primarily due to
       reallocations of staff to the Communities segment that initiated
       operations during fiscal 1999. Software development costs relate
       primarily to personnel costs and include an allocation of depreciation,
       occupancy and communication costs.

     - Software development and maintenance costs in the Professional Services
       segment also declined by approximately $15,000 to $275,000 primarily due
       to reallocation of staff to the Communities segment that initiated
       operations during fiscal 1999. Software development costs relate
       primarily to personnel cost as well as to depreciation, occupancy and
       communication costs.

     - Software development and maintenance costs in the Communities segment
       were approximately $429,000 in the year ended July 31, 1999. Our
       Communities segment initiated operations during November 1998 with
       acquisition of Cybertown. We incurred costs mainly related to improving
       the software and graphic capabilities of Cybertown as well as initial
       technical operating costs.

     Sales and Marketing Expenses.  Sales and marketing expenses increased from
approximately $695,000 in fiscal year ended July 31, 1998 to approximately
$2,027,000 in fiscal year ended July 31, 1999. The increase was primarily
attributable to an increase in the average number of direct sales, pre-sales
support and marketing employees from 5 in fiscal 1998 to 13 in fiscal 1999, as
well as an increase in marketing programs, including collateral, trade shows and
public relations related to product launch activities of the blaxxun Community
Platform version 4.0.

     Sales and marketing expenses increased especially in the Product and
Communities segment. The Product segment increased from approximately $540,000
to approximately $1,378,000 and the Professional Services segment increased from
approximately $155,000 to approximately $330,000. The Communities segment was
approximately $319,000 as a result of starting operations in fiscal 1999.

     General and Administrative Expenses.  General and administrative expenses
increased from approximately $706,000 in fiscal 1998 to approximately $1,203,000
in fiscal year ended July 31, 1999. The increase was primarily due to personnel
cost, occupancy costs and legal and professional fees and reflects our efforts
in the U.S.

     General and administrative expenses increased in the Product segment from
approximately $548,000 to approximately $906,000, and in the Professional
Services segment from approximately $158,000 to approximately $217,000. The
Communities segment was approximately $79,000 during its first year of
operation.

                                       31
<PAGE>   37

     Amortization of goodwill and other intangible assets.  Amortization expense
for goodwill and other intangible assets was approximately $3,521,000 for the
year ended July 31, 1999. Amortization of goodwill and other intangible assets
relate to our purchase of the remaining interest in blaxxun interactive AG as
well as to the acquisition of Cybertown, Inc. during fiscal 1999. Goodwill and
other intangibles are amortized on a straight-line basis over the expected
period to be benefited, from seven to 36 months. Fiscal 1999 also includes a
charge of $195,000 related to in-process research and development attributable
to our acquisition of the remaining interest in blaxxun interactive AG.

     Other expense, net decreased from approximately $1,377,000 to approximately
$77,000. Net interest expense decreased from approximately $1,283,000 to
approximately $103,000. This change was primarily due to additional interest
expense associated with our issuance of a note convertible into Series B
convertible preferred stock in November 1997. This note was issued with a
beneficial conversion feature and repayment premium aggregating approximately
$900,000, which was recognized as interest expense from the date of issuance to
the date the note was first convertible. This was partially offset by higher
interest income on higher average money market account balances. Foreign
exchange gain, net increased approximately $126,000 to approximately $33,000,
primarily due to transaction gains incurred on Deutsche Mark or euro based
account balances.

  Fiscal Years Ended July 31, 1997 and 1998

     During the second half of fiscal year 1997, we decided to significantly
reduce our U.S. operations which had significant impact on the fluctuations
between fiscal years ended July 31, 1998 and 1997.

     Net Revenues.  Net revenues increased from approximately $595,000 during
fiscal 1997 to approximately $1,193,000 in fiscal 1998. Net revenues increased
even though our U.S. sales and marketing operations were significantly reduced
during the latter half of fiscal 1997 and accounted for more than 50% of fiscal
1997 revenues. On a constant dollar basis the increase would have been
approximately $37,000 higher due to the stronger $ compared to the Deutsche
Mark. Revenues to related parties, CMGI related companies, in fiscal 1997 were
$243,000. These figures reflect higher revenues for both Products and
Professional Services as follows:

     - Net revenues of the Product segment increased from approximately $315,000
       to approximately $761,000.

       This increase is primarily due to revenues from two collaborative
       agreements with the European Commission which were awarded during fiscal
       1998. License revenue increased from approximately $294,000 to
       approximately $450,000 based on an increase in both the number of
       licenses sold and the average package size, based on the number of
       concurrent users, of the blaxxun Community Platform.

       Revenues from support and maintenance agreements increased approximately
       $33,000 to $53,000 primarily due to the increase in the platform sales.

     - Net revenues of the Professional Services segment increased from
       approximately $281,000 to approximately $432,000. This increase reflects
       both an increase in average project size and number of customer projects.

     Software Development and Maintenance Costs.  Software development and
maintenance costs decreased from approximately $2,085,000 in fiscal 1997 to
approximately $1,491,000 in fiscal, 1998. The average number of software
development employees decreased to 13 during fiscal 1998 from 17 during fiscal
1997. The decrease is primarily due to the decision to significantly reduce the
U.S. operations by the end of fiscal year 1997. The software development cost of
our different segments during fiscal years ended July 31, 1998 and 1997 were as
follows:

     - Software development and maintenance costs in the Product segment
       decreased from approximately $1,939,000 to approximately $1,200,000
       primarily due to the reduction of our U.S. software development team and
       the in house graphics team based on a decision to outsource these
       functions. In addition, we allocated some of our product engineers to the
       Professional Services segment to transfer our technical product
       leadership into customer reference projects to promote technical
       leadership into market leadership.

                                       32
<PAGE>   38

     - Software development and maintenance costs in the Professional Services
       segment increased from approximately $146,000 to approximately $290,000.
       The increase is primarily due to allocation of product engineers to the
       Professional Services segment as described above.

     Sales and Marketing Expenses.  Sales and marketing expenses decreased from
approximately $2,472,000 in fiscal 1997 to approximately $695,000 in fiscal
1998. The decrease was primarily attributable to a reduction in the average
number of direct sales, pre-sales support and marketing employees from 14 in
fiscal year 1997 to five in fiscal year 1998, as well as a decrease in marketing
programs, including collateral, trade shows and public relations related to
product launch activities. The decrease was primarily due to the significant
reduction of our U.S. sales and marketing team during the end of fiscal 1997.

     Sales and marketing expenses decreased especially in the Product segment
from approximately $2,315,000 to approximately $540,000 while the Professional
Services segment remained almost unchanged.

     General and Administrative Expenses.  General and administrative expenses
decreased from approximately $1,564,000 in fiscal 1997 to approximately $706,000
in fiscal 1998. The decrease was primarily due to a reduction in the average
number of personnel and related costs as well as professional and legal fees due
to the significant reduction of U.S. operations. The average number of general
and administrative employees decreased from 7 during fiscal 1997 to 5 during
fiscal 1998. By July 31, 1997, we accrued for contractual obligations in
connection with the closing of a portion of our U.S. office of approximately
$142,000 primarily for the future lease costs of vacated office space. During
fiscal 1998, the decision was made to vacate additional offices which resulted
in further charge in fiscal 1998 of approximately $92,000.

     Our general and administrative expenses decreased primarily in the Product
segment from approximately $1,465,000 to approximately $548,000 while the
Professional Services segment increased by approximately $59,000.

     Other income, net decreased from income of approximately $174,000 to
expense of approximately $1,377,000 primary due to higher interest costs coupled
with net losses on foreign currency transactions.

     Net interest expense increased by approximately $1,130,000 to approximately
$1,283,000. This increase was primarily due to our issuance of a convertible
note in November 1997 which contained a beneficial conversion feature and
repayment premium aggregating approximately $900,000. The amortization of these
items was recognized as interest expense from the date of issuance to the date
the note was first convertible.

     Foreign exchange gain, net decreased from a gain of approximately $385,000
to a loss of approximately $94,000, primarily due to unrealized transaction
gains incurred on Deutsche Mark based short-term intercompany balances.

                                       33
<PAGE>   39

QUARTERLY RESULTS OF OPERATIONS


     The following table represents our unaudited quarterly operating results
for each quarter of the fiscal years ended July 31, 1999 and 1998 and the first
three quarters of fiscal year ended July 31, 2000. This information has been
derived from our unaudited interim information that, in the opinion of
management, have been prepared on a basis consistent with the financial
statements contained elsewhere in this prospectus and include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair statement
of such information when read in conjunction with our consolidated financial
statements and notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.



<TABLE>
<CAPTION>
                                                                        QUARTER ENDED
                         -----------------------------------------------------------------------------------------------------------
                         OCT. 31   JAN. 31   APR. 30   JUL. 31   OCT. 31   JAN. 31   APR. 30   JUL. 31   OCT. 31   JAN. 31   APR. 30
                          1997      1998      1998      1998      1998      1999      1999      1999      1999      2000      2000
                         -------   -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
<S>                      <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Net revenues:..........   $ 221      287       300       385        402       458       473       513       789     1,251     2,072
Operating expenses:
  Software development
    and maintenance
    costs..............     342      348       383       418        359       497       498       494       741     1,026     1,143
  Sales and
    marketing..........     136      142       178       239        290       372       582       783       889     1,242     1,420
  General and
    administrative.....     140      158       162       246        253       247       278       425       456       479       832
  Amortization of
    goodwill and other
    intangible
    assets.............      --       --        --        --      1,010       815       873       823       862       845       787
                          -----     ----      ----      ----     ------    ------    ------    ------    ------    ------    ------
         Total
           operating
           expenses....     618      648       723       903      1,912     1,931     2,231     2,525     2,948     3,593     4,181
                          -----     ----      ----      ----     ------    ------    ------    ------    ------    ------    ------
         Operating
           loss........    (397)    (361)     (423)     (518)    (1,510)   (1,472)   (1,758)   (2,012)   (2,159)   (2,342)   (2,109)

Other, net.............    (286)    (213)     (472)     (406)      (476)       83        57       259       (74)     (375)     (104)
                          -----     ----      ----      ----     ------    ------    ------    ------    ------    ------    ------

Net loss...............   $(683)    (574)     (895)     (924)    (1,986)   (1,390)   (1,701)   (1,754)   (2,235)   (2,716)   (2,212)
                          =====     ====      ====      ====     ======    ======    ======    ======    ======    ======    ======
</TABLE>


Totals may not add due to rounding differences.


     Our revenues generally increased or remained stable over the 11 quarters
ending April 30, 2000 with the first three quarters in fiscal 2000 showing
significant increases compared to both prior year quarters and previous
quarters.



     Software development and maintenance costs steadily increased over the 11
quarters primarily due to the increase of personnel and related expenses.



     Sales and marketing expenses steadily increased over the 11 quarters
primarily due to the increase of personnel and related expenses as well as
marketing expenses to promote our products and services.



     General and administrative expenses steadily increased over the 11 quarters
primarily due to the increase of personnel and related expenses as well as an
increase of legal and professional fees especially in the last four quarters.
During the quarter ended April 30, 2000 we recognized compensation expense of
approximately $213,000 related to the cash settlement of 17,000 stock options,
on a pre-split basis.



     Amortization of goodwill and other intangible assets started in the quarter
ended October 31, 1998 with the acquisition of a significant portion of the
minority interests in blaxxun interactive AG. In addition, in process research
and development expenses of approximately $195,000 were expensed during this
quarter. The acquisition of Cybertown, Inc. and the remaining portion of the
minority interest in blaxxun interactive AG took place during the third and
fourth quarters of fiscal 1999. Starting with the first quarter of fiscal 2000
amortization is basically steady.


     Other, net significantly fluctuates primarily due to our financing and
investing activities as well as the impact of foreign currency fluctuations over
the various quarters that mainly impacted Deutsche Mark and euro denominated
account balances.

                                       34
<PAGE>   40

     In addition, a variety of factors, many of which are outside of our
control, may affect our future quarterly operating results. These factors
include:

     - the evolution of the market for Virtual Worlds infrastructure for
       commerce, community, and collaboration;

     - market acceptance of our products;

     - our success and timing in developing and introducing new products and
       enhancements to existing products;

     - market acceptance of products developed by competitors;

     - changes in pricing policies by us or our competitors;

     - length of sales cycle;

     - changes in customer buying patterns;

     - market entry by new competitors;

     - general economic conditions; and

     - economic conditions specific to Internet-related industries.

Our limited operating history and the undeveloped nature of the market for
Virtual Worlds infrastructure make predicting future revenue difficult. Our
expense levels are based, in part, on expectations regarding future revenue
increases, and to a large extent such expenses are fixed, particularly in the
short term. There can be no assurance that our expectations regarding future
revenue are accurate. Moreover, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall of revenue in relation to our expectations would likely
cause significant declines in our net income for that period.

     Due to the foregoing factors, our operating results are difficult to
forecast. We believe that period-to-period comparisons of its historical
operating results are not meaningful and should not be relied upon as an
indication of future performance. Also, our operating results may fall below its
expectations or the expectations of securities analysts or investors in some
future quarter. In such event, the market price of our common stock would likely
be materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES


     At April 30, 2000, we had cash and cash equivalents of approximately
$5,300,000. We have funded our operations and investments primarily through net
cash proceeds from private placements of convertible preferred stock and
long-term and convertible notes payable. Since inception through July 31, 1999,
we have raised approximately $12,782,000 from the private issuance of equity
securities. On January 18, 2000, the Board of Directors approved the issuance of
up to 3,400,000 shares of Series F convertible preferred stock. We subsequently
issued 739,000 shares of Series F convertible preferred stock for an aggregate
cash amount of approximately $8,720,000.



     In addition, we have financed our operations through the issuance of
long-term notes payable and convertible notes payable in the aggregate amount of
approximately $4,598,000, $500,000 thereof have been repaid and another $500,000
have been converted into preferred stock. The stated interest rates on these
notes range between six and seven percent and are subject to substantial
repayment premiums ranging from 30% to 35% of the face amount of the respective
note. The holder of the convertible note payable, exercised its conversion
option and subsequently the note was converted into 300,000 shares of Series B
convertible preferred stock on March 29, 2000.



  Nine months ended April 30, 1999 and 2000



     Our operating activities used cash and cash equivalents of approximately
$3,838,000 and $2,191,000 for the nine months ended April 30, 2000 and 1999,
respectively. The use of cash is due to operation of Internet communities,
growth in the number of Professional Services projects, customization and
enhancement of our products, development of new products, and increased software
and development to keep pace with the rapid


                                       35
<PAGE>   41


technology changes in the marketplace. We anticipate that these areas will
continue to utilize significant amounts of cash in the foreseeable future.



     Our investing activities used cash of approximately $1,674,000 and $234,000
for the nine months ended April 30, 2000 and 1999, respectively. This increase
is due to our investments in learnetix, a joint venture with Cornelsen Verlag
GmbH & Co., a German schoolbook publisher, to create and operate an Internet
learning community for young people. Each company has invested approximately
$912,000 primarily related to start-up costs, such as website design,
integration and customization of software to operate the community. learnetix
was launched to the public in November of 1999, however, we expect that
additional funding will be required. In addition, the $609,000 increase in
purchases of equipment from the prior period is due in part to the move into new
office facilities in Munich and San Francisco.



     Financing activities provided cash and cash equivalents of approximately
$7,999,000 and $3,818,000 for the nine months ended April 30, 2000 and 1999,
respectively. We have continued to fund our operations through the issuance of
convertible preferred stock. During the nine month period ended April 30, 2000,
we issued 739,000 shares of Series F convertible preferred stock for
approximately $8,720,000. We issued 150,000 shares of Series C convertible
preferred stock for $804,000 and 375,000 shares of Series E convertible
preferred stock for $3,000,000 during the nine month period ended April 30,
1999. Other uses of investing cash in fiscal year 2000 relate to costs
associated with our planned initial public offering.


  Fiscal Years Ended July 31, 1998 and 1999

     Operating activities used cash and cash equivalents of approximately
$1,951,000 and $3,370,000 during fiscal 1998 and 1999. The increase is
attributed to our growth as well as first time operating costs of Cybertown,
Inc. an Internet community which was acquired during November 1998.

     Our investing activities used cash of approximately $33,000 and $285,000
for fiscal 1998 and 1999. The increase was primarily used for purchase of new
equipment and cash payments related to our acquisition of Cybertown.


     Financing activities provided cash and cash equivalents of approximately
$5,001,000 and $3,819,000 for fiscal 1998 and 1999. During fiscal 1998, we
issued 555,626 shares of Series C preferred stock for cash of approximately
$2,978,000. In addition, we have financed our operations in fiscal 1998 through
long-term notes payable and convertible notes payable in the aggregate amount of
approximately $2,521,000. Our DM1,700,000 unsecured convertible loan was issued
with a beneficial conversion feature and contained a repayment premium of 30% of
the face value of the note. These items resulted in a non-cash charge to
interest expense of $903,643 in fiscal 1998. Additionally, we repaid $500,000 of
a $1,000,000 convertible note payable and converted the remaining $500,000 into
93,284 shares of Series C Convertible Preferred Stock. During fiscal 1999 we
issued 150,000 shares of Series C preferred stock for cash of $804,000 and
375,000 shares of Series E preferred stock for cash of $3,000,000.


  Fiscal Years Ended July 31, 1997 and 1998

     Operating activities used cash and cash equivalents of approximately
$4,650,000 and $1,951,000 during fiscal 1997 and 1998. The decrease from 1997 is
primarily due to the decision to significantly reduce the U.S. operations in the
second half of fiscal 1997.

     Our investing activities used cash of approximately $157,000 and $33,000
for fiscal 1997 and 1998 related primarily to the acquisition of new equipment.

     Financing activities provided cash and cash equivalents of approximately
$2,077,000 and $5,001,000 for fiscal 1997 and 1998. During fiscal 1997, we
entered into a long-term note payable of approximately $1,677,000 and a note
payable of $400,000. The stated interest rate on the note payable was 6% and it
is subject to repayment premiums, 30% of the face amount in most instances. The
note payable had an interest rate of FIBOR plus 4%. The note payable was
replaced by a $1,000,000 convertible loan agreement. During 1998, we repaid
$500,000 and converted $500,000 into 93,284 shares of Series C convertible
preferred stock.


     Our cash capital expenditures and investment in joint venture and business
acquisitions were approximately $2,165,000 from August 1, 1996 through April 30,
2000.


                                       36
<PAGE>   42


     Our cash investments for the nine month period ended April 30, 2000 and
fiscal years 1999, 1998, 1997 were as follows:



<TABLE>
<CAPTION>
                                                         2000        1999      1998       1997
                                                      ----------   --------   -------   --------
<S>                                                   <C>          <C>        <C>       <C>
Investment in joint venture.........................  $  912,464   $     --   $    --   $     --
Business acquisitions...............................          --     94,978        --         --
Software and equipment..............................     763,252    205,738    65,721    122,345
                                                      ----------   --------   -------   --------
                                                      $1,675,696   $300,716   $65,721   $122,345
</TABLE>



     Other capital expenditure plans for the last quarter of fiscal 2000 relate
primarily to the implementation of a SAP based management information system for
all group companies in addition to software and equipment for new hires. We have
no other material commitments other than obligations under the notes payable and
operating leases.


     As of July 31, 1999, we have net operating loss carryforwards of
approximately $3,657,000, of which approximately $1,704,000 relates to our
German operations and approximately $1,953,000 to our U.S. operations. Such
carryforwards are limited in use by the particular entity that generated the
loss and, with respect to the German loss carryforwards, are not subject to an
expiration date. Prior to August 1, 1998, the Company was included as a member
of the CMGI consolidated group for income tax purposes. As such, all U.S.
federal and California state net operating losses and research credits generated
by the Company since inception to July 31, 1998 have been fully utilized by the
CMGI consolidated group and will not be available to the Company in the future.

     Since our inception, our operating expenses have significantly increased.
We anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
and capital expenditures will constitute a material use of our cash resources.
In addition, we may utilize cash resources to fund acquisitions or investments
in businesses, technologies, products or services that are complementary to our
business. We believe that the net proceeds of this offering will be sufficient
to meet our anticipated cash requirements for working capital and capital
expenditures for at least 12 months. Thereafter, if cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to
sell additional equity or debt securities, or obtain additional credit
facilities. The issuance of additional equity or convertible debt securities
could result in additional dilution to our stockholders.


     Foreign Currency Exchange and Interest Rate Exposure.  We are exposed to
market risk related to fluctuations in foreign currency exchange rates. During
fiscal 1998, 1999 and in the nine month period ended April 30, 2000 we generated
98%, 79% and 75%, respectively, of our total revenues through customers located
outside the U.S. with 23%, 53% and 39%, respectively, generated from customers
in Germany. Additionally, a significant portion of our software development
costs are currently denominated in the Deutsche Mark or euro and therefore
subject to foreign currency gains and losses. Our exposure to market risk due to
fluctuations in foreign currency exchange rates relates primarily to the
Deutsche Mark or euro denominated transactions, such as billings to customers in
Germany and Europe. Although we transact business in various foreign countries,
settlement amounts are usually based on U.S. dollars, the Deutsche Mark or euro.
Transaction gains or losses have been significant in the past, and consequently,
significant fluctuation in foreign exchange rates could have a direct material
impact on our financial position, results of operations, or cash flows. From our
inception, we have not engaged in foreign currency hedging activities, although
we may decide to hedge certain currency exposures in the future. We are not a
party to leveraged derivatives and we do not hold or issue derivative
investments for speculative purposes.


     Notwithstanding the foregoing analysis of the direct effects of foreign
currency exchange rate fluctuations on the value of our investments and
accounts, the indirect effects of such fluctuations could have a material
adverse effect on our business, financial condition, and results of operations.
For example, international demand for our products is affected by foreign
currency exchange rates. In addition, interest rate fluctuations may affect the
buying patterns of our customers. Furthermore, interest rate and currency
exchange rate fluctuations have broad influence on the general condition of the
U.S., foreign, and global economies that could have a material adverse effect on
us.

                                       37
<PAGE>   43

     We are exposed to interest rate risks through our debt instruments of our
subsidiary. As of July 31, 1999, we had fixed rate Deutsche Mark denominated
debt of approximately $1,639,000 and $929,000 which are due in 2006 and 2007,
respectively which has certain contingently payable interest based on our
earnings. The fair value of these notes payable was estimated to be
approximately $1,996,000 and $1,202,000, respectively, based on an estimated
market interest rate of 8% for debt of similar risks and no contingent interest
paid. Additionally, as of July 31, 1999, we had a Deutsche Mark denominated
convertible note payable of approximately $1,208,000 due in 2007. Based on
independent third party valuations of the securities that this note could be
exchanged for, the convertible note had a fair value of $2,400,000 as of July
31, 1999.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires companies to record
derivatives on the balance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133, as amended, is effective for our
fiscal 2001 fiscal year beginning on August 1, 2000. The Company has assessed
that, based on the derivative activity during 1999, the adoption of this
statement would not have a significant impact on our financial position at July
31, 1999 and results of operations and liquidity for the year then ended. The
Company will continue to monitor the potential financial impact through the date
of adoption.

YEAR 2000

     We designed our products for use in the year 2000 and beyond and believe
that our products are Y2K compliant. Our business systems were acquired under
the condition that they were Y2K compliant. We did not experience any
significant problems with the Y2K transformation, nor do we expect any problems
in future.

INTRODUCTION OF THE EURO

     On January 1, 1999, the euro was introduced as the common legal currency of
11 member states of the European Economic and Monetary Union, including Germany.
The exchange rates of the national currencies of all members were fixed to the
euro effective January 1, 1999. The Deutsche Mark was fixed at the official
exchange rate of DM1.95583 = 1 euro. Our business systems were acquired under
the condition to be euro compliant and we do not expect any significant costs or
expenses associated with the introduction and use of the euro.

                                       38
<PAGE>   44

                                    BUSINESS

OVERVIEW

     We are a provider of innovative software and services that allow
organizations to develop and operate Virtual Worlds for commerce, community and
collaboration over the Internet. Virtual Worlds are feature rich online
environments where people can come together and, by navigating through the
website:

     - engage in commerce by going shopping and accessing customer service;

     - engage in community by interacting with others, attending events and
       being entertained; and

     - engage in collaboration by participating in cooperation scenarios.

     To address the needs of advanced Virtual Worlds applications, we have
developed a set of products and technologies that we license to our customers
directly and through third party resellers. We believe that our focus on
innovative technology, open technology standards and scalability and
extensibility (ability to easily add features and accommodate additional
volume), support of multiple hardware and software platforms and business
relationships has established us as a leader in the technology behind the
Internet Virtual Worlds market.

     Our Virtual Worlds technologies utilize open standards and enable a variety
of new applications that were not feasible until recently. During the 1990's,
improvements in computer software and hardware performance and Internet
connection technology caused a significant increase in Internet usage. As a
result, several markets, including e-commerce, communities and collaboration,
have grown significantly. We believe that recent improvements in software and
hardware infrastructure, the increasing and broadening use of the Internet by
end users and the convergence of media platforms such as Internet PCs,
televisions and other devices provide opportunities for growing the Virtual
Worlds market, and that our leadership position in Virtual Worlds technology
makes us well suited to pursue those opportunities.

     Our business consists of selling Virtual Worlds technology products like
the blaxxun Community Platform, providing professional services based on our
Virtual Worlds technology, as well as operating selected Internet Communities,
like cybertown.com, learnetix.de and soccercity.de, that use our technology to
create leading Virtual Worlds.

     A number of global companies already use our technology for a variety of
applications. We intend to aggressively expand this customer base and to deepen
and extend relationships with existing customers, third party resellers and
technology collaborators. We also intend to leverage our technology leadership
position by targeting smaller business customers and individuals with new
products incorporating our technology, such as blaxxun3D, the blaxxun Avatar
Studio and the blaxxun Instant Community.

INDUSTRY BACKGROUND

     The growth of the Internet along with advances in Internet technology
continue to encourage increased participation and investment in e-commerce,
online communities and on-line collaboration. These technological advances lower
infrastructure costs, facilitate speed and ease of use, permit greater security
and increase the range of services and applications available on the Internet.

  The Evolution of Technology

     Hardware Evolution.  Hardware devices showed a significant increase in
performance during the past ten years. The speed and efficiency of processors
and the memory capacity of computers has been steadily increasing while the cost
of hardware devices has been dropping. This increase in speed, efficiency and
memory capacity has resulted in a dramatic change in the performance of
relatively inexpensive (costing less than $1,000) end-user devices.

     Recently, additional devices such as mobile phones, televisions with set
top boxes, game consoles and a variety of other web-enabled mobile devices have
gained importance and user acceptance. We believe that these new devices will
lead to a convergence of applications that can be accessed through a variety of
devices

                                       39
<PAGE>   45

and that the use of the Internet and Internet-based applications will continue
to increase at a substantial rate for the foreseeable future.

     Network Infrastructure Evolution.  The Internet and Intranets have created
a network infrastructure that has achieved significant relevance for businesses
and end users in a very short period of time. Availability, cost, access speed,
and other attributes have improved to the point that the Internet has now become
a significant component of the global economy. Broadband connectivity, including
cable modems, DSL, ISDN, and high speed satellite or wireless connections, is
technically feasible and is gaining more and more market share. Jupiter
estimates that by 2003, nearly 23% of online households will access the Internet
over a broadband connection. Already in 2000 there are many users with
sufficient bandwidth to effectively access sites providing advanced multimedia
content.

     Importance of Open Standards.  The quick growth of the Internet was
significantly facilitated by availability of widely utilized open standards,
including HTML, HTTP, XML and various others. Open standards, or publicly
available software applications that allow developers to create products
compatible with other applications utilizing the same standard, enable vendors
to cooperate and to focus on their respective strengths. For customers, open
standards provide higher independence from specific vendor technology and
therefore better protection of their investments in technology. New standards
for three-dimensional applications, VRML and MPEG4, have been established to
facilitate the development of three dimensional applications.

  Growth of Internet Usage

     The Internet has evolved into a global medium that allows millions of
people worldwide to access and retrieve information, interact with each other
and conduct business electronically. A variety of factors have driven the
pervasive adoption of these and other evolving applications, including:

     - the growing numbers of people with access to a personal computer and
       modem at home or at work;

     - the development of the World Wide Web;

     - the increasing reliance by businesses on the Internet and corporate
       Intranets;

     - the introduction of easy-to-use navigation tools and utilities; and

     - the proliferation in the number of available informational, entertainment
       and commercial applications for use on the Internet.

     The Internet has experienced a rapid increase in users worldwide.

  Our Target Markets

     The E-Commerce Market.  The Internet allows marketers to interact
effectively with customers in a scalable and cost effective manner and to obtain
relevant data about purchase interests, preferences and demands. According to
Jupiter, the percentage of Internet users buying goods and services on the
Internet will increase from approximately 22% in 1998 to approximately 36% in
2003 and the total online spending in the U.S. market will increase from
approximately $14.9 billion in 1998 to approximately $78.0 billion in 2003. We
that believe Virtual Worlds can enhance the e-commerce experience by making it
more natural and interactive.

     The Online Communities Market.  The Internet provides a forum for end-users
to publish information and to meet and communicate with other users based on
common interest. Typically, such member-generated content is hosted by community
sites that structure the information, provide tools and facilitate the
communication between members. The online communities market is an important,
end-user driven market and many of the top web sites offer some community
features. Our products serve to enhance and enliven this interactive
communication online.

     The Collaboration Market.  The Internet enables users to effectively
collaborate through e-mail, application sharing, document sharing, instant
messaging, workflow support and many dedicated applications
                                       40
<PAGE>   46

based on these features. Online collaboration can reduce cost and increase
quality of work product. We believe that effective use of collaboration over the
Internet will be a competitive advantage for those companies that are successful
in using this new work tool. Our products and services facilitate collaboration
on the Internet by providing participants with product and data visualization
that can be accessed and modified together as a team. Users can communicate in
real-time about their work and jointly develop ideas and deliveries.

     The blaxxun Solution

     We are a provider of highly innovative software technology that enables
organizations to capitalize on the power of today's end-user devices and to
develop and operate advanced applications that better use the multimedia and
communication capabilities of the Internet. To this end, we have developed the
blaxxun Community Platform, an advanced client/server system that supports
Virtual Worlds for commerce, community and collaboration.

     We also offer additional products that are complementary or derived from
the blaxxun Community Platform. Our blaxxun3D, a Java-based 3D-visualization
product, is well suited for e-commerce and data visualization. Our blaxxun
Avatar Studio supports the easy creation of highly realistic virtual persona
that can be used for the representation of visitors in Virtual Worlds, as well
as for shop assistants and service agents. Our blaxxun Instant Community is an
application product that facilitates very effective development and operation of
online communities.

     Our products are based on open standards, are highly scalable and
extensible and are available for a variety of platforms. We play a key role in
the development of multimedia standards such as VRML, X3D, and MPEG4 through our
participation as a charter member in the Web3D Consortium and as a member in the
MPEG-4 Industry Forum, as well as in the MPEG Konsortium, the relevant standards
groups.

  Our Strategy

     Rapid technological progress has led and continues to lead to dramatic
changes in how business is done and how entertainment is delivered. New software
to facilitate innovative applications is required, however, in order to more
fully utilize the possibilities presented by the Internet.

     Our objective is to be the leading vendor of software infrastructure that
facilitates the development and operation of Virtual Worlds for commerce,
community and collaboration. Our technology leverages the power of modern
end-user devices such as personal computers, television or PDA that are
connected to an increasingly popular Internet and Intranets. Through our
software, web sites can become more lifelike and, we believe, give our customers
an advantage over their competition. With our technology, users have an
experience that is more similar to television than the traditional text-oriented
Internet experience of the past. In addition, we provide technology for
sophisticated interactivity between users, making the applications even more
attractive. Key elements of our strategy include the following:

     Technology Innovation and Leadership.  We have been recognized as an
innovator in software technology. In 1996, we brought one of the first
standards-based multi-user Virtual Worlds system to the market. We also
presented one of the first PC-based NURBS (a highly compressed 3D format)
implementation, that was developed together with Intel. With blaxxun3D, we
introduced one of the first standards-based 3D Java applet worldwide. We believe
that our technology leadership is also confirmed by a variety of awards for our
products such as BYTE's "Best of CeBIT'97" Award for Best Multimedia Software,
1998 WebAward, Comdex Application Award in 1998, the 1998 London International
Advertising Award, the Deutsche Multimedia Award in 1999, the 1999 DigiGlobe
Award, and the Milia D'Or Award in 1999. We intend to continue to invest in our
base technology to ensure that we have the best offering for our customers and
distribution partners. In parallel, we intend to develop application specific
products that make use of our base technology and deliver cost effective
solutions to our customers. Based on our core competencies in scalable server
architectures and multimedia, we intend to be a leader in providing platforms
for a wide variety of Virtual World applications.

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<PAGE>   47

     Leveraging our Technology Leadership Position.  We intend to develop and
market new products based on our Virtual Worlds technology. With products such
as blaxxun Avatar Studio and blaxxun Instant Community we will seek to provide
solutions to smaller business customers and individuals that help them take full
advantage of Virtual Worlds e-commerce, communities and collaboration.

     Continued Focus on Open Standards.  We intend to continue to use and
contribute to open standards in order to accelerate market growth and to enable
us to cooperate with various industry participants. We are a charter member in
the Web3D Consortium, a standard-setting body for 3D Internet technologies. The
other charter members of the consortium are Apple Computer Corporation,
Panasonic/Matsushita Electric, Microsoft Corporation, Silicon Graphics, Inc.,
Superscape plc and Sony. In 1999, we licensed certain technology to the Web3D
Consortium as Community Source for use by academic and non-commercial ventures.
We believe that this will allow technology innovators to use our technology as a
base for technological innovation, strengthen our reputation as a leading
producer of Virtual Worlds technology and help establish our technology as the
mainstream standard in Virtual Worlds technology.

     Strategic Relationships with other Key Players.  To enhance the
development, acceptance and marketing of our products, we have entered into
strategic relationships with technology vendors, original equipment
manufacturers, and sales and marketing sources. We are in technical cooperation
with companies such as Canal Plus Multimedia S.A., ELSA AG, Intel Corporation,
Parallel Graphics and Superscape plc. With Canal Plus Multimedia S.A., we
cooperate on joint product development (e.g. blaxxun Avatar Studio). With ELSA
AG, we work together on distribution of software and optimization of our
software for ELSA AG's 3D hardware. With Intel Corporation we developed advanced
3D compression technology and optimizations for new processor generations.
Parallel Graphics develops OEM technology for us, which gets included in our
product bundles. With Superscape plc we integrated our multi-user and
communication technology with their 3D technology. We have developed value added
resale relationships with companies such as Amdahl Deutschland GmbH, General
Investment Bankers S.A., Infomatec Media AG, Okupi Ltd., Silicon Artists S.A.,
Siemens AG and Suny Telecom Ltd. General Investment Bankers S.A. is our value
added reseller for Latin America with a fixed order commitment over the period
from February 2000 to July 31, 2003 of $6 million. In conjunction with Infomatec
Media AG, we have agreed to provide our Virtual Worlds technology for an online
trading application for Hornblower Fischer AG. In addition we have agreed to
integrate blaxxun community technology with Infomatec's JBT
Virtual-Cruiser-System for interactive TV applications. Infomatec Media AG has
also agreed to market blaxxun products as a value added reseller with an order
commitment of approximately $5,500,000 to be realized from March 2000 through
July 31, 2002. In conjunction with Siemens AG we developed innovative portal
applications for customers such as Bank Austria AG. In addition, with Okupi Ltd.
we developed applications for British TV/Internet customers. Silicon Artist
S.A., Hitech Media and Suny Telecom Ltd. are value added resellers for Spain,
Korea and Israel, respectively. We are also involved in several collaborative
research and co-development agreements with the European Commission with
companies such as British Broadcasting Corporation plc, BMW AG, British
Telecommunications plc, Canal Plus Multimedia S.A., Deutsche Telekom AG, France
Telecom S.A., Intershop Communications GmbH, Italtel SPA, Pixelpark MMK AG,
Siemens AG, Swisscom AG, Telecom Italia s.r.l., and Telenor AS. We will continue
to maintain and establish key strategic relationships such as these with
organizations that have complementary technology, appropriate sales channels or
relevant intellectual property rights.

     Convergence of Platforms.  We were and are involved in cross media projects
in which customers from the television market extend their offerings also to the
Internet. TerranetCafe was such a project where a Virtual World on the web was
used in parallel with a weekly television series. Internet users and television
viewers were able to interact, mediated by moderators in the television series.
Simsalagrimm is a media brand that is based on Grimm's Fairy Tales. The
television cartoon content is broadcasted in more than 90 countries and, based
on our technology, an interactive parallel world is accessible on the Internet.
We intend to continue to make our technology available on a wide range of
end-user devices to maximize the market for our customers and to position our
existing technology to new application areas. With the increasing convergence of
the Internet, television and mobile industries, we believe that these new
applications will provide significant opportunities for us and our existing and
future customers.

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<PAGE>   48

     Integration with Existing Systems.  We intend to integrate our products
with those of other leading providers of commerce, community and collaboration
solutions. By integrating our products, we plan to enable customers who already
have other systems in use to easily upgrade to take advantage of the additional
benefits of our products.

     Global Expansion.  Currently, we have a sales and marketing team in the
United States and in Germany, and we sell to customers in 18 countries. We plan
to expand our sales and marketing team in the United States and also to extend
our sales and marketing into significant European markets such as the United
Kingdom, France, Spain, Italy, Benelux and Scandinavia and also to enter the
Asian markets, especially Japan. We plan to effect this expansion through
subsidiaries, joint ventures and strategic alliances. We believe that the global
reach of our existing network of strategic relationships will help us expand to
new markets. Our technology can be tailored to support new languages and other
local features relatively easily and thus, we believe, it is well suited for a
global market.

  Products

     blaxxun Community Platform.  The blaxxun Community Platform is our core
product and has been under continuous development since 1995. Currently, the
fourth generation of the product is available. The blaxxun Community Platform is
a sophisticated client/server product that consists of the blaxxun Community
Server, the clients blaxxun Contact and blaxxun3D, the blaxxun Community
Platform SDK and various administration interfaces.

     With our blaxxun Community Platform, we pursue a strategy of offering all
Virtual World features in pre-integrated form. This ensures that the
applications are based on a stable, tested environment and also keeps the
integration cost low for our customers. Our Community Platform is a highly
modular and extensible system and includes the following features:

     - Place Management

     - Member and Guest Management

     - Registration and Authentication

     - Member Directory

     - 2D and 3D Avatars

     - 2D and 3D Navigation and Interaction

     - Real-time Text Chat

     - Instant Messaging/Pager

     - Friends/Buddy List

     - Member Roles

     - Message Boards/Calendars

     - Incentive Programs

     - Text-to-Speech

     - Interest Club Management

     - Access Rights

     - Voting and Decision Making

     - Agents

     - Distributed Objects

     - Member Homes
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<PAGE>   49

     - Avatar Libraries

     Since our technology is based on open standards, our customers and partners
can choose from a variety of third party products for the development of their
applications. We provide the integration interfaces to bring everything together
and an SDK (software development kit) for extension and integration with other
products (e.g. shopping, personalization, member management, document
management, enterprise software).

     Our customers install the blaxxun Community Server either on their own
hardware or have it operated by a hosting partner or application service
provider (ASP). Our Community Server co-exists with other software services and
is available for a variety of operating systems, including Linux, Windows NT and
others.

     A specific strength of the blaxxun architecture is its high scalability.
The system is designed for millions of users and can scale very well just by
adding more server hardware and bandwidth. In addition to their ability to
handle high-loads, the efficiencies in our products allow customers to use less
hardware and bandwidth than they might need running other high-load
applications. We believe that enabling our customers to save significantly on
hardware and bandwidth, and providing a very low total cost of ownership for
high-load solutions, allows us to charge premium prices for our Community Server
product.

     With the blaxxun Community Server comes an extensive administration
interface that enables the operator of the blaxxun-based application to monitor
usage statistics and to analyze traffic patterns, resource requirements, and
many other details. This helps our customers to effectively fine-tune their
applications and thus achieve even greater efficiencies.

     The services of the blaxxun Community Server can be accessed by a variety
of client-side interfaces, ranging from simple HTML to Java applets and an
ActiveX plugin. This variety enables our customers to set their applications up
so that all virtually interested users can access them, independent of their
available hardware and bandwidth. Users with older hardware or bad Internet
connections can use the simpler applications with reduced features. Users with
state-of-the-art equipment can enjoy the whole multimedia presentation and
feature set. Our multimedia plugin is based on Microsoft's DirectX architecture
and also supports OpenGL. Thus, basically all rendering standards are supported.
Through integration with RealNetwork's RealPlayer, our customers get an
integrated multimedia platform with 2D, 3D, audio and video support.

     Our customers license the blaxxun Community Platform, with fees based on
the expected usage volume. This volume can be increased through payment of
additional license fees. Thus, we participate in the success of our customers
and have aligned our interests with those of our customers. Through this
licensing model and together with our service offerings, we seek to establish a
close relationship with our customers, provide them continuously with
state-of-the-art technology and provide us with recurring revenue from our
customers.

     blaxxun3D.  blaxxun3D, launched in January 2000, is a small (55 KB) and
powerful Java applet for Internet-based 3D. Since it is 100% Java-based, it can
run on a wide variety of platforms. Our customers license blaxxun3D and put the
Java applet onto a web page. This process requires relatively little technical
expertise for our customers. More importantly, there are no technical or
installation requirements for the visitor to the site. Just by visiting the web
page, the end user automatically sees a dynamic 3D model that can be manipulated
in customer-defined ways. We believe blaxxun3D is becoming an integral part of
e-commerce and data visualization, with three-dimensional images helping web
site visitors to better understand a product or data. We believe that better
understanding of a product or data can help increase the purchase volume of a
product or reduce the time to analyze data.

     blaxxun3D supports open standards such as VRML and X3D. This means that
third party development tools can be used and that artists, who would be
familiar with these standards, can immediately produce 3D content.

     blaxxun Avatar Studio.  blaxxun Avatar Studio, launched in November 1999,
is an innovative product that enables users to create and modify a 3D persona.
With an easy-to-use interface, users can start with a male or female 3D model
and change the whole look of the body, face, hair, and skin. The product
includes a

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<PAGE>   50

library of clothing that can be changed with a few clicks and modified with
colors and textures. Finally, a simple animation editor helps to create
realistic animations in just a few minutes.

     With blaxxun Avatar Studio, users can very easily create a realistic
graphical persona. This persona can then be used as one's representation in
Virtual Worlds. Avatars can also be used as shop assistants or service agents
that help potential purchasers to faster understand the e-commerce offering or
other information.

     In addition to providing an intuitive interface, blaxxun Avatar Studio
produces very compact results. Avatars created using blaxxun Avatar Studio
generally consume five to ten times less bandwidth than avatars which are
designed manually using tools from various places. These manually-designed
avatars, because of their larger size, are not as well suited for high-traffic
Virtual Worlds as avatars created using blaxxun Avatar Studio. Additionally, the
quality of the blaxxun Avatar Studio created persona is comparable to the
results of mid-end and high-end tools that are generally many times more
expensive. Ease of use, low bandwidth consumption and low expense are an
important part of what we believe makes blaxxun Avatar Studio a superior
product.

     We have created a product that is advantageous to its users and developed a
selling strategy that is advantageous to us. Generally, we license the product
to corporate customers in large volumes and these corporate customers then
distribute the product to their end-users. This strategy allows us to quickly
reach a wide audience with our product, while keeping our distribution and
administrative costs to a minimum.


     blaxxun Instant Community.  blaxxun Instant Community, launched in March
2000, is an application product for quick creation of 3D communities. The
product includes a subset of the Community Platform features and also some
simplified authoring and development tools. With the included templates and
development wizards (helper software that enables our customers to more quickly
create an application that can then be fine-tuned and extended as desired), a 3D
community can be developed and set up in a relatively short time frame.


     We sell blaxxun Instant Community through a network of strategic alliances.
We expect our resellers to add value through web site integration, content
development or hosting of the application. Our value added resellers get an
easy-to-use product that enables them to make their customer sites more
compelling and interactive. Often, the existing web site or corporate identity
of the end customer has to be taken into account, which is supported by blaxxun
Instant Community. Thus, web development agencies and Internet service providers
are among our target customers for this product.

     Similar to the Community Platform, our customers can increase the "power"
of their application by purchasing a bigger license from us. This opportunity
for increased power allows for growth of a customer's site using blaxxun Instant
Community without requiring any changes to the existing 3D community or
interrupting service.

     As part of our Product segment, we supplement our product offerings with
technical product support and maintenance. These services include several levels
of support including software updates, telephone and email technical support.
The majority of our Community Platform customers enter into maintenance and
support agreements that includes licensed blaxxun products. Support and
maintenance arrangements generally do not provide for specified upgrade rights
and provide technical support and the right to unspecified upgrades on an
if-and-when-available basis.

     Our collaborative agreements with public entities, attributable to our
Product segment, relate to research and co-development projects that are
generally between one and three years in duration. Since inception, we have
entered into eight contracts that support our product development strategy.
Partners in these projects are, among others, British Broadcasting Corporation
plc, BMW AG, British Telecommunications plc. Canal Plus Multimedia S.A.,
Deutsche Telekom AG, Franco Telecom S.A., Intershop Communications GmbH, Italtel
SPA, Pixelpark-MMK AG, Siemens AG, Swisscom AG, Telecom Italia s.r.l., and
Telenor AS.

     Products under development.  We are currently developing an e-commerce
product which we expect to release in the next twelve months. This product,
which will incorporate features from the blaxxun Community

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<PAGE>   51

Platform, is designed to address specific customer needs for three dimensional
visualization of products as well as online customer service features with
intelligent agents and real customer service personnel.

  Professional Services

     Our Professional Services Group supports customers in the business planning
stage and helps them to effectively design the application, determine cost and
resource requirements and optimize their business model. This group also
provides fee-based consulting services designed to allow the seamless
integration of our products into the software systems of our customers, as well
as custom application development, by which we add additional and customized
features and functionality to our product base.

  Communities

     In addition to our core business of product development and vending, we
also make strategic investments in Internet communities that are based on our
products. We believe that these investments have several strategic advantages
for us and our customers and will provide us with additional revenue growth
and/or profitability. We get very quick feedback from these communities about
market requirements and preferences and they provide us with a platform to test
how new features are accepted by the market. This feedback helps us to
continuously improve our technology.

     Current Internet communities are as follows:

     Cybertown.  Cybertown, a state of the art 3D community, was launched in
California in 1995. After operating Cybertown as a joint venture to test and
develop our technology, we acquired Cybertown in November 1998. Cybertown is one
of today's biggest Virtual Worlds. In March 2000, Cybertown had over 300,000
registered members who had 2,200 clubs. There are now over 600,000 visitors per
month. The average length of visit has grown from 17 minutes in mid 1999 to 33
minutes at year end 1999. The daily busy period activity level has grown from
113 concurrent members in mid-May 1999 to between 300 and 340 by December 1999.
From February 1999 to February 2000, Cybertown achieved member growth of about
500%. We believe that Cybertown is one of the biggest and most active special
interest communities worldwide.

     Cybertown is positioned as a Science Fiction community that has attractive
demographics (about 75% of users are 25 years or younger). Cybertown generates
revenues through advertising (3D advertising showed a click-through rate of 4.3%
on this site compared to an average 0.5% click-through rate for 2D banner
advertising), sponsoring (companies can sponsor 3D locations or certain
features) and e-commerce.

     Cybertown members can select a traditional or futuristic avatar, visit a
large number of multimedia locations (e.g. a shopping mall with 3D products or
an entertainment theater where they can watch videos), establish their own
customizable 3D home in one of many topic neighborhoods, and participate in a
wide variety of community activities. Cybertown includes thousands of
member-managed interest clubs and has an effective delegation model in place,
where thousands of very active members have taken over responsibility for
certain tasks in Cybertown. The average visit time is over 30 minutes, compared
to significantly lower average visit times on traditional web sites.

     Cybertown has established a number of strategic relationships with
companies that provide features, traffic or content to Cybertown. Several
companies have joined with Cybertown to build on its appealing demographics and
active community participation. Theses include Hallmark Entertainment Network, a
Hallmark Cards subsidiary that delivers television service to more than 60
countries, NextPlanetOver.com, the online destination with the widest selection
of entertainment products, SETI Institute, an organization for scientific
research into life in the universe that has 1.6 million users, Virtock
Technologies, Inc., which discounts its Spazz3D VRML animation editor for
Cybertown members and Centropolis Interactive, a Sony-based new media company
that is focused on the science fiction market. In addition, Cybertown has been
chosen to participate in the Intel WebOutfitter Service promotion of the Pentium
III.

     We believe that Cybertown will continue to grow and continue to be one of
the most innovative and active Virtual Worlds.

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<PAGE>   52

     Learnetix(TM).  Learnetix is a 50% joint venture between blaxxun and
Cornelsen, a leading school book publisher in Germany. Learnetix is positioned
as an education community, where blaxxun provides technology and community
operation know-how and Cornelsen provides high-quality content and certain
marketing channels. Students between 10 and 20 years can become members of this
community and participate in a variety of educational and social activities.
Initially, quality content for Mathematics, English and German is offered.
Members can learn alone, together as groups, or in 1:1 situations with tutors. A
network of qualified teachers is available for the members and daily homework
assistance is offered as a premium service. 2D and 3D communication places are
available and members can create own interest clubs or join existing clubs
(already over 1,000 clubs were established by March, 2000), where they can
maintain information and exchange views through real-time chat and message
boards.

     Learnetix was launched during November 1999 and as of March, 2000 had
already attracted over 15,000 registered members.

     SoccerCity(TM).  SoccerCity is a blaxxun subsidiary that develops,
maintains, operates, and markets a soccer community on the Internet. SoccerCity
was launched in November 1999. blaxxun intends to find strategic relationships
to support content and marketing channels for SoccerCity.

     Competition

     The Virtual Worlds technology market is competitive, subject to rapid
change and significantly affected by new product introductions and other
activities of industry participants. We compete with various providers of
multimedia communication solutions, including RealNetworks, Inc. and Macromedia,
Inc. We expect additional competition from other established and emerging
companies. Furthermore, our competitors may combine with each other, and other
companies may enter our markets by acquiring or entering into strategic
relationships with our competitors. Many of our current and potential
competitors have longer operating histories, significantly greater financial,
technical, product development and marketing resources, greater name recognition
and larger customer bases than we do. Our present or future competitors may be
able to develop products comparable or superior to those we offer, adapt more
quickly than we do to new technologies, evolving industry trends or customer
requirements, or devote greater resources to the development, promotion and sale
of their products than we do. We may not be able to compete effectively in our
markets, competition may intensify and our inability to compete successfully
against our current and future competitors may cause us to experience price
reductions, reduced gross margins and loss of market share, any one of which
could materially and adversely affect our business, operating results and
financial condition.

     We offer products that we believe are highly innovative. We are not aware
of any competitive product that currently has a similar scope of features and
similar strengths in terms of scalability, standards-compliance, extensibility,
cross-platform support, and customer base. However, due to the wide scope of our
products, we face competition or potential competition in various areas. Our
sources of principal competition include:

     - Other software vendors that address similar customer needs for rich media
       environments, such as streaming video which customers may utilize for
       commerce and community uses, and that may have a larger market share or
       greater name recognition and resources than us, including vendors of
       audio, video, and 2D animation technologies, such as Macromedia,
       Microsoft and RealNetworks.

     - Other software vendors that address partial areas of our scope, and that
       may have a larger market share or greater name recognition and resources
       than us, including vendors of web based 3D technologies, such as Adobe,
       Computer Associates, MetaCreations and Superscape.

     - Other application vendors that address partial areas of our scope, and
       that may have a larger market share or greater name recognition and
       resources than us, including vendors of proprietary virtual world
       technologies, such as ActiveWorlds, Cryo Interactive, and Worlds.com.

     - Potentially, vendors of game technologies, such as Electronic Arts,
       Microsoft, Nintendo, Sega and Sony.

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<PAGE>   53

     Our community investments also face competition from various directions,
including:

     - Traditional general-interest communities that have areas that compete
       with the special interest of our communities, including companies such as
       GeoCities/Yahoo, Tripod/Lycos, TalkCity and Xoom/ NBC.

     - Portal and information sites that address a similar target audience as
       our communities, including CBS Sportsline and Sport1.de for Soccercity,
       various education sites for Learnetix, and various science fiction sites
       for Cybertown.

     Customers

     We have licensed our products to customers in the U.S., Europe, Asia, Latin
America, Middle East and other geographies. Our customers, located in Germany,
the United States and 16 other countries, represent a broad spectrum of
enterprises within diverse sectors, including media, online, telecommunication,
finance, industry, technology and retail. Our strategy is to maintain and
enhance our existing customer relationships and to broaden our customer base by
adding sales staff and expanding to new territories.


     Historically, we have received a significant portion of our revenues from a
limited number of sales and license agreements as well as from the sale of
customer support, maintenance, training services and software upgrades to our
existing customers. For fiscal 1998 and 1999 and the nine months ended April 30,
2000, our top three, four and one customers represented 47%, 63% and 11%
respectively, of our revenues. As a result of this revenue concentration, our
accounts receivable are also concentrated. As of July 31, 1998 and July 31, 1999
and April 30, 2000, 99%, 85% and 57% respectively of our accounts receivable
were also owed by our top six, four and three customers. We believe that a
customer's decision to license its technology is relatively discretionary and,
for large-scale users, generally involves a significant commitment of capital
resources. Therefore, any downturn in the economy or in the business of our
current or potential customers could have a material adverse effect on our
revenues Additionally, we can not assure you that a sufficient number of our
customers will continue to enter into or renew existing support, maintenance and
upgrade contracts or that revenues from those contracts will continue to be
significant. The loss of a material portion of such revenues would likely have a
material adverse effect on our financial condition.


     Employees


     We consider our qualified and highly motivated employees a key success
factor. Our future success will depend in part on our ability to attract, retain
and motivate highly qualified personnel. See "Risk Factors" on page 12.
Approximately 73% of our employees hold a university degree. As of April 30,
2000, we had 93 full-time employees, including 34 in sales and marketing, 43 in
research and development, solutions, operations, and technical support, and 16
in general and administration. From time to time, we also employ independent
contractors to support our Products, Professional Services and Communities
segments. None of our employees are represented by a union. We believe our
relationship with our employees is good. Our average number of employees for
fiscal 1997 to 1999 and the nine months period ending April 30, 2000 and 1999 as
well as number of employees at April 30, 2000 breaks down by geography as
follows:



<TABLE>
<CAPTION>
                                                  AVERAGE NUMBER OF EMPLOYEES
                                           ------------------------------------------
                                             12 MONTHS ENDING        9 MONTHS ENDING      EMPLOYEES
                                                 JULY 31                 APRIL 30        ------------
                                           --------------------      ----------------    AT APRIL 30
                                           1997    1998    1999      1999       2000         2000
                                           ----    ----    ----      -----      -----    ------------
<S>                                        <C>     <C>     <C>       <C>        <C>      <C>
Germany..................................   23      21      29        27         51           67
U.S......................................   15       2      10         6         20           26
                                            --      --      --        --         --           --
                                            38      23      39        33         71           93
                                            ==      ==      ==        ==         ==           ==
</TABLE>


     For further information regarding employee counts, see our comments in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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     Proprietary Rights and Licensing

     Our success and ability to compete is dependent upon our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
trademarks, trade secrets and copyright law, and contractual restrictions of our
customers, partners and employees, management contractors and consultants to
protect the proprietary aspects of our technology. In Germany, we have
registered as a trademark the blaxxun logo and have applied for registration of
the logo in the United States, Japan, Switzerland and the European Community.
Additionally, we have trademark applications pending in the United States,
Japan, Switzerland and the European Community for blaxxun, blaxxun Contact, The
Virtual Worlds Company, blaxxun Instant Community and blaxxun3D. In the United
States we have several registered trademarks and trade names, including
Cybertown, CyberCells, CyberGenes, CyberHub, CyberKit, CyberSockets and
CyberTwin.

     We also license from a third party certain proprietary speech synthesis
technology and related software which we incorporate into our client
applications and on which we pay royalties. If we are unable to protect our
intellectual property rights, competitors may be able to use our technology or
trademarks, which could weaken our competitive position, reduce our revenues and
increase costs. See "Risk Factors" on page 12.

     Facilities

     Our U.S. headquarters are currently located at 1550 Bryant Street, a leased
facility in San Francisco, California, consisting of approximately 3,001 square
feet under a three-year lease, which expires in July 2002. The monthly rentals
owed by us under the Bryant Street lease are approximately $9,000. Our European
headquarters is currently located in Munich, Germany, consisting of
approximately 18,320 square feet under a five-year lease, which expires in
September 2004. Under the Munich lease, we have monthly rental payments of
approximately $30,000. We have also leased offices in Los Angeles, California,
Washington, District of Columbia and Berlin, Germany the leases for which are
terminable upon no more than three months notice. We own no real estate.

     Legal Proceedings

     We are not aware of any legal or arbitration proceedings, pending or
threatened, which could have a material adverse effect on our financial
position, nor have any such proceedings been initiated in the previous two
years.

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<PAGE>   55

                             STATUTORY INFORMATION

     We were incorporated in the United States of America under the laws of the
State of Delaware on July 27, 1995 and commenced operations in August 1995. Our
initial stockholder was CMGI@Ventures, Inc.. For information regarding the
initial stockholders, see "Management."

     The following diagram displays the structure of the blaxxun entities:

[BLAXXUN INTERACTIVE, INC. FLOW CHART]


     In this group of companies, we act as the entity which operates the U.S.
portion of our business, and as a holding company coordinates the business
activities of and provides financing to our two wholly owned subsidiaries,
blaxxun interactive AG and Cybertown, Inc. blaxxun interactive AG coordinates
the business activities and provides financing to its 100% owned subsidiaries
SoccerCity-Verwaltungsgesellschaft mbH and SoccerCity GmbH & Co. KG as well as
to the 50% owned affiliate Lernland Verwaltungsgesellschaft mbH and Lernland
GmbH & Co. KG. The book value of blaxxun interactive AG's interest in SoccerCity
Verwaltungsgesellschaft mbH, SoccerCity GmbH & Co. KG, Lernland
Verwaltungsgesellschaft mbH and Lernland GmbH & Co. KG as of April 30, 2000 is
approximately $23,000, $0, $13,000 and $294,000, respectively. The book value of
blaxxun interactive, Inc.'s interest in blaxxun interactive AG and Cybertown,
Inc. as of April 30, 2000 is approximately $14,060,000 and $2,150,000,
respectively.


     - blaxxun interactive AG, Munich, Germany

     blaxxun interactive AG, a company organized under the laws of Germany is
registered in the trade register of the lower court of Munich under registration
number HRB 113 609. blaxxun interactive AG currently has a registered share
capital of Deutsche Mark 120,000.

     blaxxun interactive AG is, as our European headquarters, our European sales
and service organization and research and development competent center. During
fiscal 1996 we acquired a 50.5% interest in blaxxun interactive AG upon its
formation for approximately $37,000 in cash. Effective August 11, 1997, we
increased our interest in blaxxun interactive AG by 8.25% to 58.75% through a
$500,000 capital contribution. On August 10, 1998, we acquired another 38.17% of
the outstanding common stock of blaxxun interactive AG in exchange for 1,829,631
shares of Series D convertible preferred stock of the Company. The Series D
convertible preferred stock was valued by an independent consultant at $5.36 per
share, or a total consideration of approximately $9,807,000. On June 30, 1999,
we acquired the remaining shares of blaxxun interactive AG in exchange for
146,369 shares of Series D convertible preferred stock of the Company. The
Series D convertible preferred shares were valued by an independent consultant
at $8.00 per share, or a total consideration of approximately $1,171,000.


     As of April 30, 2000, blaxxun interactive AG had an additional paid-in
capital of approximately $3,035,000. As of April 30, 2000, blaxxun interactive
AG had entered into 2 notes payable of in total approximately $2,186,000. As of
April 30, 2000 net intercompany financing to blaxxun interactive AG was

                                       50
<PAGE>   56


approximately $1,957,000. In fiscal 1999 blaxxun interactive AG had generated a
net loss of approximately $1,677,000. Up to now no dividends were paid to us.


     - SoccerCity-Verwaltungs GmbH, Munich, Germany and SoccerCity GmbH & Co.
       KG, Munich, Germany.


     SoccerCity-Verwaltungsgesellschaft mbH (SoccerCity GmbH), a Company
organized under the law of Germany is registered in the trade register of the
lower court of Munich under registration number HRB 127 087. SoccerCity GmbH was
founded by blaxxun interactive AG on September 7, 1999. SoccerCity GmbH
currently has a registered share capital of euro 25,000. blaxxun interactive AG
owns all of SoccerCity GmbH's shares. Stockholder's equity as of April 30, 2000
was euro 25,000. SoccerCity GmbH manages the business of SoccerCity GmbH & Co.
KG.



     SoccerCity GmbH & Co. KG (SoccerCity KG), a Company organized under the law
of Germany is registered in the trade register of the lower court of Munich
under registration number HRA 75 112. SoccerCity KG was founded on September 7,
1999 and is 100% owned by blaxxun interactive AG. Accumulated deficit as of
April 30, 2000 was approximately $495,000. SoccerCity KG operates the Internet
community soccercity.de.


     - Lernland Verwaltungsgesellschaft mbH, Berlin, Germany and Lernland GmbH &
       Co. KG, Berlin, Germany


     Lernland Verwaltungsgesellschaft mbH (Lernland GmbH), a Company organized
under the law of Germany is registered in the trade register of the lower court
of Charlottenburg under registration number HRB 70 162. Lernland GmbH was
founded as a 50% joint venture of blaxxun interactive AG and Cornelsen-Verlag
GmbH & Co. on September 17, 1999. Lernland GmbH currently has a registered share
capital of euro 25,000. Lernland GmbH's stockholder's equity as of April 30,
2000 was euro 25,000. Lernland GmbH manages the business of Lernland GmbH & Co.
KG.



     Lernland GmbH & Co. KG (Lernland KG), a Company organized under the law of
Germany is registered in the trade register of the lower court of Charlottenburg
under registration number HRA 30 610. Lernland KG was founded on September 17,
1999 and is 50% owned by blaxxun interactive AG. Lernland KG's accumulated
deficit as of April 30, 2000 was approximately $1,044,000. Lernland KG operates
the Internet community learnetix. de.


     - Cybertown, Inc., Los Angeles, California, U.S.A.

     Cybertown, Inc., a Delaware corporation, operates our online community
cybertown.com. Cybertown, Inc. was incorporated in the State of Delaware on
August 21, 1996. In November of 1998, we purchased all shares of Cybertown,
Inc., making Cybertown, Inc. a wholly owned subsidiary of blaxxun interactive,
Inc.


     Cybertown, Inc. currently has no nominal share capital. We own all of
Cybertown, Inc.'s shares. As of April 30, 2000, Cybertown, Inc. had an
accumulated deficit of approximately $2,151,000 Intercompany financing to
Cybertown, Inc. amounted to approximately $80,000. In fiscal 1999, and the nine
months ended April 30, 2000, Cybertown, Inc. had generated net losses of
approximately $875,000 and $1,276,000, respectively, and paid no dividends to us
for those periods.


                                       51
<PAGE>   57

                                   MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS


     Our directors and executive officers, their ages and positions as of April
30, 2000 are as follows:


<TABLE>
<CAPTION>
NAME                               AGE                           POSITION
----                               ---                           --------
<S>                                <C>    <C>
Franz Buchenberger...............  40     President, Chief Executive Officer and Director
Bernd-Michael Habermeyer.........  41     Chief Financial Officer and Vice President, Finance and
                                          Administration
Walter Schwartz..................  51     Chief Operating Officer, U.S.
Elmar Merget.....................  39     Vice President, Research and Development
Engelbert Woelfl.................  39     Vice President, Sales and Business
                                          Development -- Europe
Guy Bradley......................  36     Director
Heydan von Frankenberg...........  47     Director
Francois Stieger.................  50     Director
</TABLE>

     Franz Buchenberger.  Mr. Buchenberger co-founded blaxxun interactive in
1995. He has served as President and Chief Executive Officer and as a Director
since inception. After receiving his Masters in Computer Science from the
Technical University of Munich in 1985, Mr. Buchenberger spent ten years at
Softlab GmbH, a European developer of software engineering technology for large
project teams. While he was with Softlab, Mr. Buchenberger worked in a number of
positions, including system architect, development manager, product manager,
marketing manager and strategic planner.

     Bernd-Michael Habermeyer.  Mr. Habermeyer co-founded blaxxun interactive in
1995 and has served as Chief Financial Officer and Vice President of Finance and
Administration since inception. Prior to joining blaxxun, Mr. Habermeyer spent
10 years with KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft
Wirtschaftsprufungsgesellschaft (1985-1991, 1993-1995) and KPMG Peat Marwick LLP
(1991-1993), since 1993 as a senior manager. Mr. Habermeyer holds an MBA from
the University of Munich (since 1985), is qualified as "Steuerberater" (German
tax advisor) (since 1988) and as "Wirtschaftspruefer" (German CPA) (since 1990).

     Walter Schwartz.  Mr. Schwartz has served as the Chief Operating Officer in
the U.S. since May 1999. From 1997 to May, 1999, Mr. Schwartz was a corporate
consultant on business development and enterprise software acquisition. From
1996 to 1997, Mr. Schwartz was Chief Operating Officer of Black Sun Interactive,
Inc. From 1991 to 1996, Mr. Schwartz was employed by Micrografx, Inc. in various
positions including Marketing Manager and Development Center Director. Prior to
that, Mr. Schwartz held various management and consulting positions with Digital
Research Incorporated, Xerox Corporation and IBM Corporation. Mr. Schwartz holds
a BS in Industrial Engineering and an MBA in Marketing from Cornell University.

     Elmar Merget.  Mr. Merget has served as Vice President of Research and
Development since February 1999. Before joining blaxxun in 1999, Mr. Merget was
President of Software System Merget GmbH, a company that specializes in
consulting and developing document management and E-commerce systems. Prior to
1990, Mr. Merget held various management positions at AKM Software Beratung und
Entwicklungs GmbH in Munich. Mr. Merget holds a degree in computer science from
Fachhochschule Wurzburg.

     Engelbert Woelfl.  Mr. Woelfl has served as Vice President of Sales and
Business Development in Europe since April 1998. Before joining blaxxun, Mr.
Woelfl was a Vice President at Interchip AG, where he was responsible for sales
and business development. Interchip AG is a German supplier of system management
software products. Mr. Woelfl created the sales organization of Interchip AG and
developed its sales and marketing strategies. Mr. Woelfl holds a degree in
economics from the Fachhochschule Munich.

                                       52
<PAGE>   58

     Guy Bradley.  Mr. Bradley has been a Director of blaxxun since 1995. Mr.
Bradley has been a general partner of CMGI@Ventures, Inc., (CMGI) an internet
focused venture capital company, since January 1995. He was Director of
International Sales and Marketing for Booklink, Inc., a subsidiary of CMGI, Inc.
from August 1994 to December 1994. Mr. Bradley attended Princeton University
where he received a BA in Comparative Literature. Mr. Bradley also serves on the
boards of Silknet, Inc., Domania Inc., Idapta, Inc., ThingWorld.com LLC, OneCore
Financial Network, Inc., WebCT, Inc., Koz.com, Inc. and Virtual Ink Corporation.

     Heydan von Frankenberg.  Mr. von Frankenberg has been a Director of blaxxun
since 1996. He is currently Chief Executive Officer of D.C.S. Dialog
Communication Systems Aktiengesellschaft. Prior to that, he was Chief Executive
Officer of ERM Equity Research and Management Aktiengesellschaft fuer
Beteiligungsberatung (ERM). Prior to founding ERM in 1995, Mr. von Frankenberg
developed HKM Hypo Kapital Beteiligungs Management GmbH, the investment division
of Bayerische Hypotheken und Wechselbank. In the seven years before that, he was
Chief Operating Officer of Meissner & Wurst GmbH & Co. KG. Mr. Frankenberger
holds a jurisdiction degree from the University of Munich.

     Francois Stieger.  Mr. Stieger has been a Director of blaxxun since
December 1997. Mr. Stieger has served as Vice President and General Manager of
European Operations for BroadVision, Inc. since January, 1996. Before joining
BroadVision, Inc. Mr. Stieger was the Senior Vice President of Europe and the
Middle East for Openvision Technologies, Inc. which is a supplier of distributed
system management products and services. Mr. Stieger graduated from the
Technology Institute of the University of Strasbourg in France.


     Our directors and officers and six of our founders, Franz Buchenberger,
Bernd-Michael Habermeyer, Robert Schoeller, Peter Graf, Kristof Nast-Kolb and
Thilo Schwerdfeger, can be contacted through one of our two executive offices in
San Francisco, California and Munich, Germany. Mr. Buchenberger is our CEO and
President, Mr. Habermeyer is our Chief Financial Officer, Mr. Schoeller is our
Chief Technology Officer, and Messrs. Graf, Nast-Kolb and Schwerdfeger are
directors of engineering. Another of our founders, Rainer Heigenmoser, is no
longer an employee, but can be reached at Bichl 16, 83075, Bad Feilnbach,
Germany. Another of our founders, Robert Rockwell, is deceased.


BOARD COMPOSITION

     Upon closing of the Offering, our Certificate of Incorporation will provide
for a classified Board of Directors divided into three classes, with each class
having a different term of office. The term of Class I Directors will expire at
the annual meeting of stockholders to be held in 2001, the term of Class II
Directors will expire at the annual meeting of stockholders to be held in 2002
and the term of Class III Directors will expire at the annual meeting of
stockholders to be held in 2003. Currently, Mr. von Frankenberg is the sole
Class I Director, Mr. Stieger is the sole Class II Director and Messrs.
Buchenberger and Bradley are Class III Directors. At each annual meeting of
stockholders, beginning with the 2001 annual meeting, the successors to
Directors whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following election and
until their successors have been duly elected and qualified, or until their
earlier resignation or removal, if any. To the extent there is an increase or
reduction in the number of Directors, increase or decrease in directorships
resulting therefrom will be distributed among the classes so that, as nearly as
possible, each class will consist of an equal number of Directors. There are no
family relationships among any of our directors, officers or key employees.

BOARD COMMITTEES

     The compensation committee currently consists of three members, Guy
Bradley, Heydan von Frankenberg and Francois Stieger.

     The compensation committee:

     - reviews and approves the compensation and benefits for our executive
       officers and grants stock options under our stock option plans; and

     - makes recommendations to the board of directors regarding these matters.
                                       53
<PAGE>   59

     The audit committee consists of three members: Guy Bradley, Heydan von
Frankenberg and Francois Stieger.

     The audit committee:

     - makes recommendations to the board of directors regarding the selection
       of independent auditors;

     - reviews the results and scope of the audit and other services provided by
       our independent auditors; and

     - reviews and evaluates our audit and control functions.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     No executive officer of blaxxun serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving on blaxxun's board of directors or compensation committee.

DIRECTOR COMPENSATION

     We do not currently compensate in cash our directors for their service as
members of the board of directors, except for reimbursement of reasonable travel
expenses relating to attendance at board and committee meetings. Under our 1996
Stock Plan, 1999 Stock Plan and 2000 Stock Plan, non-employee directors are
eligible to receive stock option grants at the discretion of the board of
directors. Francois Stieger received an option to purchase 80,000 shares under
the 1996 Stock Plan. See "Stock Plans" for more information regarding these
plans.

LIMITATION OF LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS

     Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Section 145 of the
Delaware General Corporation Law provides that a director of a corporation will
not be personally liable for monetary damages for breach of the individual's
fiduciary duties as a director except for:

     - liability for any breach of the director's duty of loyalty to blaxxun or
       to its stockholders,

     - liability for acts or omissions not in good faith or that involve
       intentional misconduct or a knowing violation of law.

     - liability for unlawful payments of dividends or unlawful stock
       repurchases or redemptions as provided in Section 174 of the Delaware
       General Corporation Law, or

     - liability for any transaction from which a director derives an improper
       personal benefit.

     Our bylaws provide that blaxxun will indemnify its directors and executive
officers and may indemnify its officers, employees and other agents to the full
extent permitted by law. We believe that indemnification under our bylaws covers
at least negligence and gross negligence on the part of an indemnified party.
Our bylaws also permit us to advance expenses incurred by an indemnified party
in connection with the defense of any action or proceeding arising out of the
party's status or service as a director, officer, employee or other agent of
blaxxun upon an undertaking by the indemnified party to repay these advances if
it is ultimately determined that the party is not entitled to indemnification.

     We have entered into agreements to indemnify our directors and executive
officers in addition to the indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for any and all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (subject to our reasonable
approval) incurred by any such person in any action or proceeding, including any
action by or in the right of us, arising out of their services as our director
or executive officer, including any of our subsidiaries or any other company or
enterprise to which the person provides services at our request. We believe that
these provisions and agreements are necessary to attract and retain qualified
persons as directors and executive officers.

                                       54
<PAGE>   60

     We believe that the indemnification provisions of our amended and restated
certificate of incorporation and bylaws are necessary to attract and retain
qualified persons as directors and officers.

     At present we are not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of blaxxun where
indemnification will be required or permitted. Furthermore, we are not aware of
any threatened litigation or proceeding that might result in a claim for
indemnification.

EXECUTIVE COMPENSATION

     The following table sets forth the compensation earned for services
rendered to us in all capacities for the fiscal year ended July 31, 1999 by our
Chief Executive Officer and our next most highly compensated executive officers
during the fiscal year ended July 31, 1999. None of our other executive officers
received more than $100,000 in cash compensation during the fiscal year ended
July 31, 1999. The total aggregate compensation for all executive officers for
the fiscal year ended July 31, 1999 was $358,308.

                       SUMMARY ANNUAL COMPENSATION TABLE

<TABLE>
<CAPTION>
                                            ANNUAL COMPENSATION                LONG-TERM COMPENSATION AWARDS
                                  ----------------------------------------   ---------------------------------
                                                                               SECURITIES
                                                            OTHER ANNUAL       UNDERLYING         ALL OTHER
NAME AND PRINCIPAL POSITION       SALARY($)    BONUS($)    COMPENSATION($)   OPTIONS/SARS(#)   COMPENSATION($)
---------------------------       ---------    --------    ---------------   ---------------   ---------------
<S>                               <C>          <C>         <C>               <C>               <C>
Franz Buchenberger..............   89,266(a)    18,045(a)        --                --                --
President, Chief Executive
Officer and Chairman
Bernd-Michael Habermeyer........   89,266(a)    18,045(a)        --                --                --
Chief Financial Officer
</TABLE>

---------------
(a) entire amount converted from Deutsche Mark based on an exchange rate of DM
    1.77 to the dollar, the average exchange rate for fiscal year 1999.

                       OPTION GRANTS IN LAST FISCAL YEAR

     The Company issued no stock options and no stock appreciation rights in the
year ended July 31, 1999, to any of the Company's executive officers named in
the Summary Compensation Table above.

                  AGGREGATE OPTION EXERCISES AND OPTION VALUES

     The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by each of the
executive officers named in the Summary Compensation Table as of July 31, 1999.
The value realized represents the difference between the fair market value of
the shares as of July 31, 1999, based on the assumed fair market value of $2.58,
as determined by an independent valuation company, per share and the exercise
price of the option. The value of the in-the money options is based on the
initial public offering price of E[          ] ($10.50 at an exchange rate
reported by the Wall Street Journal for                , 2000 of $     per euro
per share), minus the per share exercise price, multiplied by the number of
shares underlying the option.

                                       55
<PAGE>   61

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

<TABLE>
<CAPTION>
                                                                  NUMBER OF SECURITIES                VALUE OF UNEXERCISED
                                                            UNDERLYING UNEXERCISED OPTIONS AT        IN-THE-MONEY OPTIONS AT
                                 SHARES                               JULY 31, 1999                       JULY 31, 1999
                                ACQUIRED         VALUE      ---------------------------------   ---------------------------------
NAME                         ON EXERCISE(#)   REALIZED($)   EXERCISABLE(#)   UNEXERCISABLE(#)   EXERCISABLE($)   UNEXERCISABLE($)
----                         --------------   -----------   --------------   ----------------   --------------   ----------------
<S>                          <C>              <C>           <C>              <C>                <C>              <C>
Franz Buchenberger.........          --             --          26,086             --              273,773             --
President, Chief Executive
Officer and Chairman
Bernd-Michael Habermeyer...      26,086         33,521              --             --                   --             --
Chief Financial Officer
</TABLE>

INCENTIVE STOCK PLANS

  2000 Stock Plan

     Our 2000 Stock Plan was adopted by the board of directors and approved by
our stockholders in March 2000. A total of 6,000,000 shares of common stock have
been reserved for issuance under the 2000 Stock Plan, all of which will be
available for future grant. The purposes of the 2000 Stock Plan are to attract
and retain the best available personnel to blaxxun, to provide additional
incentives to our employees, directors and consultants and to promote the
success of our business. The 2000 Stock Plan provides for the grant of incentive
stock options to employees, including officers and directors, and non statutory
stock options and stock purchase rights to employees, consultants and including
non-employee directors. If not terminated earlier, the 2000 Stock Plan will
terminate in March 2010.

     Options granted under our 2000 Stock Plan usually vest over service periods
determined to be appropriate by our compensation committee or Board of
Directors. Options may be granted, however, with no vesting requirements.

     The 2000 Stock Plan may be administered by the board of directors or a
committee of the board. The administrator determines the terms of options and
stock purchase rights granted under the 2000 Stock Plan, including the number of
shares subject to the award, restrictions on shares covered by grants, exercise
or purchase price, term and exercisability. The administrator also determines
when, to whom and what type of grants are made. However, in the aggregate, under
the 2000 Stock Plan, each eligible employee may be granted incentive stock
options only to the extent that such options do not first become exercisable
during any calendar year in a manner which entitles the employee to purchase
more than $100,000 in fair market value of common stock in that year.

     The exercise price of all stock options is determined by the administrator
at the time of grant. The exercise price of incentive stock options must be at
least equal to the fair market value of the common stock on the date of grant.
The exercise price of any incentive stock option granted to an optionee who owns
stock representing more than 10% of the total combined voting power of all
classes of outstanding capital stock of blaxxun or any parent or subsidiary
corporation of blaxxun must equal at least 110% of the fair market value of the
common stock on the date of grant.

     The administrator determines the term of options, which may not exceed 10
years or five years in the case of an incentive stock option granted to a 10%
stockholder. Generally, no option may be transferred by the optionee other than
by will or the laws of descent or distribution.

     In addition to stock options, the administrator may issue to employees,
directors and consultants stock purchase rights under the 2000 Stock Plan. The
administrator determines the number of shares, price, terms, conditions and
restrictions related to a grant of stock purchase rights.

     If we sell all or substantially all of our assets, merge with another
corporation, recapitalize or engage in specified reorganizations, the 2000 Stock
Plan provides that blaxxun will take one or more of the following actions: (i)
make appropriate provision for the continuation of the options by substituting
on an equitable basis for the shares then subject to such options the
consideration payable with respect to the outstanding shares of common stock in
connection with an acquisition, (ii) accelerate the date of exercise of such
options or of any installment of any such options, (iii) upon written notice to
the optionees, provide that all options

                                       56
<PAGE>   62

must be exercised, to the extent then exercisable, within a specified number of
days of the date of the notice, at the end of which time the options terminate,
(iv) terminate all options in exchange for a cash payment equal to the excess of
the fair market value of the shares subject to the options, to the extent then
exercisable, over the exercise price thereof, or (v) if securities of another
corporation are issued with respect to the outstanding shares of common stock,
entitle optionees to receive the substituted securities upon exercise. Upon
liquidation or dissolution, the options will automatically be terminated. The
administrator has the authority to amend or terminate the 2000 Stock Plan as
long as the amendment or termination does not adversely affect any outstanding
option or stock purchase right and provided that stockholder approval will be
obtained to the extent it is required by applicable law.

  1999 Stock Plan


     Our 1999 Stock Plan was adopted by the board of directors and approved by
our stockholders in March 1999. A total of 2,000,000 shares of common stock have
been reserved for issuance under the 1999 Stock Plan. As of April 30, 2000
options to purchase 1,241,768 shares of common stock were outstanding and
758,232 shares were available for future grant. Our executive officers received
no grants under the 1999 Stock Plan. The purposes of the 1999 Stock Plan are to
attract and retain the best available personnel to blaxxun, to provide
additional incentives to our employees, directors and consultants and to promote
the success of our business. If not terminated earlier, the 1999 Stock Plan will
terminate in March 2009. In all other respects, the 1999 Stock Plan is
substantially the same as the 2000 Stock Plan described above.


  1996 Stock Plan

     Our 1996 Stock Plan was adopted by the board of directors and approved by
our stockholders in May 1996. A total of 2,128,000 shares of common stock have
been reserved for issuance under the 1996 Stock Plan. As of January 31, 2000
options to purchase 1,366,894 shares of common stock were outstanding and no
shares were available for future grant. Our executive officers and directors
currently hold the following options under the 1996 Stock Plan: Franz
Buchenberger -- 526,086; Bernd-Michael Habermeyer -- 250,000; Walter
Schwartz -- 100,000; Elmar Merget -- 120,000; Engelbert Woelfl -- 82,000 and
Francois Stieger -- 48,334. The purposes of the 1996 Stock Plan are to attract
and retain the best available personnel to blaxxun, to provide additional
incentives to our employees, directors and consultants and to promote the
success of our business. If not terminated earlier, the 1996 Stock Plan will
terminate in 2006. In all other respects, the 1996 Stock Plan is substantially
the same as the 2000 Stock Plan described above.

                                       57
<PAGE>   63

                       PRINCIPAL AND SELLING STOCKHOLDERS


     The following table sets forth information regarding the beneficial
ownership of our common stock as of June 8, 2000, and as adjusted to reflect the
sale of the common stock offered hereby by:


     - each person who is known by us to own beneficially more than 5% of the
       outstanding shares of our capital stock;

     - each of our directors;

     - the named executive officers; and

     - all directors and executive officers as a group.


     Percentage of ownership is calculated as required by the Securities and
Exchange Commission. Except as indicated in the footnotes to this table, the
persons named in the table have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them. The table below
includes the number of shares underlying options which are exercisable within 60
days from June 8, 2000. For purposes of calculating each person's or group's
percentage ownership, stock options exercisable within 60 days after June 8,
2000 are included for that person or group, but not the stock options of any
other person or group. The information in the columns "After the Offering" and
"Number of Shares to be Sold" assumes exercise in full of the underwriters
over-allotment option. Unless otherwise indicated, the address of each of the
beneficial owners identified is Elsenheimerstrasse 61, Munich, Germany. After
the offering, the 8,100,000 shares sold pursuant to this prospectus (assuming
exercise in full of the underwriters' over-allotment option) will be freely
tradeable without restriction.



<TABLE>
<CAPTION>
                                                        NUMBER OF SHARES                     PERCENTAGE
                                                       BENEFICIALLY OWNED                    OF SHARES
                                              -------------------------------------         OUTSTANDING
                                                                         NUMBER OF    ------------------------
                                              BEFORE THE    AFTER THE    SHARES TO    BEFORE THE    AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER           OFFERING    OFFERING(1)   BE SOLD(1)    OFFERING    OFFERING(1)
------------------------------------          ----------   -----------   ----------   ----------   -----------
<S>                                           <C>          <C>           <C>          <C>          <C>
Franz Buchenberger(2).......................  1,625,224     1,515,477      109,747        8.1          5.6
Bernd-Michael Habermeyer(3).................    825,644       777,708       47,936        4.1          2.9
Walter Schwartz(4)..........................     62,792        62,792           --          *            *
Engelbert Wolfl(5)..........................     58,000        58,000           --          *            *
Elmar Merget(6).............................     40,830        40,830           --          *            *
Heydan von Frankenberg(7)...................         --            --           --         --           --
Guy Bradley(8)..............................         --            --           --         --           --
Francois Stieger(9).........................     65,000        65,000           --          *            *
All Directors and Executive Officers as a
  Group (8 persons, including the
  above)(10)................................  2,677,490     2,567,743      109,747       13.4          9.3
5% STOCKHOLDERS
CMGI@Ventures, Inc.(11).....................  9,306,568     9,107,531      199,037       46.5         34.0
</TABLE>


                                       58
<PAGE>   64


<TABLE>
<CAPTION>
                                                        NUMBER OF SHARES                     PERCENTAGE
                                                       BENEFICIALLY OWNED                    OF SHARES
                                              -------------------------------------         OUTSTANDING
                                                                         NUMBER OF    ------------------------
                                              BEFORE THE    AFTER THE    SHARES TO    BEFORE THE    AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER           OFFERING    OFFERING(1)   BE SOLD(1)    OFFERING    OFFERING(1)
------------------------------------          ----------   -----------   ----------   ----------   -----------
<S>                                           <C>          <C>           <C>          <C>          <C>
OTHER SELLING SHAREHOLDERS
EBIT Eigenkapital Beteiligungsgesellschaft
  fur innovative Technologieunternehmen
  Gesellschaft burgerlichen Rechts..........    800,000       730,018       69,982        4.2          2.7
Bayern Kapital Riskokapitalbeteiligungs
  GmbH......................................    600,000       555,013       44,987        3.1          2.1
Kling, Jelko, Dr. Dehmel
  Wertpapierdienstleistungs AG..............    560,000       260,000      300,000        2.9          1.0
Graf, Peter(12).............................    342,044       309,306       32,738        1.8          1.2
Rockwell, Claudia...........................    315,926       292,238       23,688        1.7          1.1
Heigenmoser, Rainer.........................    313,028       289,558       23,470        1.6          1.1
Nast-Kolb, Kristof(13)......................    337,938       305,200       32,738        1.8          1.1
Schoeller, Robert(14).......................    337,938       305,200       32,738        1.8          1.1
Schwerdfeger, Thilo(15).....................    337,214       304,476       32,738        1.8          1.1
Grahn, Holger(16)...........................    324,654       306,001       18,653        1.7            *
Malek, Moni.................................    186,568       172,579       13,989          *            *
Metz, Thomas................................    185,000       171,129       13,871          *            *
blaxxun Beteiligungsgesellschaft
  burgerlichen Rechts mit
  Haftungsbeschrankung......................    177,400       164,099       13,301          *            *
Guericke, Konstantin........................    138,542       128,154       10,388          *            *
blaxxun Vermoegensverwaltungsgesellschaft
  burgerlichen Rechts mit
  Haftungsbeschrankung......................     94,000        74,000       20,000          *            *
Piel, Siegfried.............................     87,500        47,500       40,000          *            *
Rockliff, Tony(17)..........................     84,000        46,500       10,000          *            *
Baudar, Pascal(18)..........................     55,834        27,500       10,000          *            *
</TABLE>


---------------
  *   Less than one percent

 (1)  Assuming exercise of the underwriters' over-allotment option.


 (2)  The percentages for this shareholder include 161,502 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000. It also includes 659,452 shares held by his family.



 (3)  The percentages for this shareholder include 67,708 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000. It also includes 310,000 shares held by his family.



 (4)  The percentages for this shareholder include 33,334 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000.



 (5)  The percentages for this shareholder include 64,000 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000.



 (6)  The percentages for this shareholder include 40,830 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000.



 (7)  The address of this beneficial owner is Cicerostr. 21, 10709 Berlin,
      Germany. The numbers and percentages for this shareholder excludes 800,000
      shares (before the offering) owned by EBIT Eigenkapital
      Beteiligungsgesellschaft fur innovative Technologieunternehmen
      Gesellschaft burger-

                                       59
<PAGE>   65


      lichen Rechts mit Haftungsbeschrankung and 94,000 shares (before the
      offering) owned by blaxxun Vermogensverwaltungsgesellschaft burgerlichen
      Rechts mit Haftungsbeschrankung to which Mr. von Frankenberg may be deemed
      beneficial owner and to which Mr. von Frankenberg disclaims beneficial
      ownership except to the extent of his direct pecuniary interest. Mr. von
      Frankenberg is Chief Executive Officer of these two entities.



 (8)  The address of this beneficial owner is c/o CMGI@Ventures, 100 Brickstone
      Square, 5th Floor, Andover, MA 01810. The numbers and percentages for this
      shareholder excludes 9,306,568 shares (before the offering) owned by
      CMGI@Ventures to which Mr. Bradley may be deemed beneficial owner and as
      to which Mr. Bradley disclaims beneficial ownership except to the extent
      of his direct pecuniary interest. Mr. Bradley is a general partner of
      CMGI@Ventures and a member of our board of directors.



 (9)  The percentages for this shareholder include 33,334 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000.



(10)  Includes 9,306,568 shares (before the offering) owned by CMGI@Ventures of
      which Mr. Bradley, a director, may be deemed beneficial owner of as to
      which Mr. Bradley disclaims beneficial ownership, except to the extent of
      his direct pecuniary interest.


(11)  The address of this beneficial owner is 100 Brickstone Square, 5th Floor,
      Andover, MA 01810.


(12)  The percentages for this shareholder include 49,306 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000.



(13)  The percentages for this shareholder include 45,200 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000.



(14)  The percentages for this shareholder include 45,200 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000.



(15)  The percentages for this shareholder include 44,476 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000.



(16)  The percentages for this shareholder include 75,874 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000.



(17)  The percentages for this shareholder include 27,500 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000.



(18)  The percentages for this shareholder include 18,334 shares issuable upon
      exercise of options exercisable by the shareholder within sixty (60) days
      of June 8, 2000.


     Assuming the underwriters' over-allotment option is exercised, 8,100,000
shares, or 31%, of the outstanding common stock will be available for purchase
by public investors. Of this 31% of our outstanding common stock available for
purchase by public investors, up to 350,000 shares, or 1.3% will be allocated to
the Company's friends and family program.

                                       60
<PAGE>   66

              RELATIONSHIPS WITH BLAXXUN AND RELATED TRANSACTIONS

     Stock option grants to directors and executive officers of blaxxun are
described under the captions "Management -- Board Compensation" and
"-- Executive Compensation."


     Since August 1, 1997, we have issued shares of our convertible preferred
stock to investors in private placement transactions as follows. Between July
and October of 1998 we issued a total of 798,910 shares, on a pre-split basis,
of Series C convertible preferred stock at $5.36 per share. CMGI@Ventures, Inc.,
purchased 93,284 shares, on a pre-split basis, of Series C convertible preferred
stock. CMGI@Ventures, Inc. is an entity affiliated with Guy Bradley, one of our
directors, and is also a 5% stockholder. blaxxun
Vermogensverwaltungsgesellschaft burgerlichen Rechts mit Haftungsbeschrankung
(blaxxun Vermogensverwaltung) purchased 47,000 shares, on a pre-split basis, of
Series C convertible preferred stock. blaxxun Vermogensverwaltung is an entity
affiliated with Heydan von Frankenberg, one of our directors. See "Principal
Stockholders" for more information on these affiliates.



     Between October 1998 and June 1999, we issued 1,976,000 shares, on a
pre-split basis, of Series D convertible preferred stock to individuals in
connection with our acquisition of the minority interests of blaxxun interactive
AG. The following table summarizes the shares of convertible preferred stock, on
a pre-split basis, issued to our executive officers in connection with this
acquisition. In connection with this transaction, blaxxun entered into a
Stockholder's Agreement, dated September 1, 1998, with certain of its
stockholders.


<TABLE>
<CAPTION>
                                                                                     SERIES D
NAME                                                      TITLE                   PREFERRED STOCK
----                                                      -----                   ---------------
<S>                                      <C>                                      <C>
Franz Buchenberger(1)..................  President, CEO and Chairman of the           731,861
                                         Board
Bernd-Michael Habermeyer...............  CFO and Vice President of Finance and        365,925
                                         Administration
</TABLE>

---------------
(1) Includes 329,726 shares held by Ingrid Buchenberger

     CMGI@Ventures and its affiliated companies have provided us primarily with
human resource services during the years ended July 31, 1999 and 1998 for which
$59,706 and $46,223, respectively, in fees were charged. In fiscal 1998 it also
includes interest expense. On September 11, 1997, the Company entered into a
convertible loan agreement with CMGI@Ventures and ERM Equity Research and
Management Aktiengesellschaft fur Beteiligungsberatung for which total
borrowings would not exceed $1,000,000. As of July 31, 1997, the Company had
borrowed $400,000 in anticipation of the agreement. During the fiscal year 1998,
the Company borrowed an additional $600,000. Borrowings under this agreement
mature on December 31, 2007 and are secured by certain assets of the Company.
The interest rate was equal to FIBOR plus 4%. In June 1998, $500,000 of the note
was converted into 93,284 shares of Series C Convertible Preferred Stock based
on the terms of the Series C Convertible Preferred Stock Purchase Agreement,
dated June 24, 1998. In July 1998, the remaining $500,000 was repaid. Upon
conversion and repayment this loan agreement was cancelled.

     No other director, executive officer, 5% stockholder or person or entity
associated with any director, executive officer or 5% stockholder participated
in any of these private placement transactions.

EMPLOYMENT AGREEMENTS

     We entered into an employment agreement with Walter Schwartz, our Chief
Operating Officer U.S., on May 1, 1999. The agreement provides that Mr. Schwartz
is entitled to a base salary of $100,000 per year. In addition, Mr. Schwartz is
entitled to receive a bonus subject to the achievement of certain performance
criteria. Mr. Schwartz is also entitled to customary employee benefits. Mr.
Schwartz's employment agreement may be terminated by blaxxun at any time.

     Messrs. Buchenberger, Habermeyer, Merget and Woelfl have each entered into
blaxxun interactive's standard form employment agreement. These agreements
provide that (i) the employee will not engage in any other occupation, (ii) the
employee will not have any right to bestow advantages on himself or an
affiliate,

                                       61
<PAGE>   67

(iii) either party may terminate upon three months' written notice, (iv) the
employees receive base salaries (currently Deutsche Mark 170,000 for Mr.
Buchenberger and Mr. Habermeyer; Deutsche Mark 120,000 for Mr. Woelfl; and
Deutsche Mark 130,000 for Mr. Merget), plus bonuses to be set each July and (v)
the employee is entitled to 30 days paid leave annually. In addition, each of
the employees has entered into our standard form non-disclosure agreement.

OTHER TRANSACTIONS WITH MANAGEMENT

     Our executive officers receive compensation, bonuses and other benefits
under various employee benefit plan arrangements maintained by us and our
subsidiaries for all or substantially all of our employees.

                                       62
<PAGE>   68

                          DESCRIPTION OF CAPITAL STOCK


     Upon completion of the offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $.005 par value per share, of which
26,125,592 shares will be outstanding, and 1,000,000 shares of preferred stock,
$.005 par value per share, none of which will be outstanding. The following
description of our capital stock and certain provisions of our restated
certificate of incorporation, or the certificate of incorporation, and bylaws is
a summary of the material provisions of our capital stock. The certificate of
incorporation and bylaws of blaxxun have been filed as exhibits to this
registration Statement of which this prospectus is a part. Our board of
directors is expected to authorize, on June 19, 2000, the issuance of the shares
to be sold in this offering. Prior to completion of this offering, our
certificate of incorporation will be amended to increase our total number of
authorized shares and common stock to 100,000,000.


COMMON STOCK

     Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of the stockholders, including the election of
directors. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. The certificate of incorporation
does not provide for cumulative voting for the election of directors. Holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the board of directors out of funds legally
available therefor, and shall be entitled to receive, pro rata, all assets of
blaxxun available for distribution to such holders upon liquidation. Holders of
common stock have no preemptive, subscription or redemption rights.

PREFERRED STOCK


     We are authorized to issue "blank check" preferred stock, which may be
issued from time to time in one or more series upon authorization by our board
of directors. The board of directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences and
any other rights, preferences, privileges and restrictions applicable to each
series of the preferred stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of common stock and, under certain circumstances, make it more difficult
for a third party to gain control of blaxxun, discourage bids for our common
stock at a premium or otherwise adversely affect the market price of our common
stock. We currently have no plans to issue any preferred stock. In the event
that we should issue preferred stock, such stock cannot be admitted for trading
on the Neuer Markt.


CERTAIN CERTIFICATE OF INCORPORATION, BYLAW AND STATUTORY ANTI-TAKEOVER
PROVISIONS AFFECTING STOCKHOLDERS

     Classified Board.  Our board of directors is divided into three classes,
each of which, after a transitional period, will serve for three years, with one
class being elected each year. Removal of a member of the board of directors
with or without cause requires a majority vote of the board of directors or of
the stockholders. A majority of the remaining directors then in office, though
less than a quorum, and the stockholders, are empowered to fill any vacancy on
the board of directors. A majority vote of the stockholders is required to
alter, amend or repeal the foregoing provisions.

     Section 203 of Delaware Law.  We are subject to the "business combination"
statute of the Delaware General Corporation Law. In general, this statute
prohibits a publicly held Delaware corporation from engaging in various
"business combination" transactions with any "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless (a) the transaction is approved by
the board of directors prior to the date the interested stockholder obtained
such status, (b) upon consummation of the transaction which resulted in the
shareholder becoming an "interested stockholder," the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by (x) persons who are directors and
also officers and

                                       63
<PAGE>   69

(y) employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (c) on or subsequent to such date the
"business combination" is approved by the board of directors and authorized at
an annual or special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to a stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within the previous three years, did own) 15% or more of a corporation's voting
stock. By virtue of our decision not to elect out of the statute's provisions,
the statute applies to us. None of our current stockholders is an "interested
stockholder" because their acquisition of shares was approved by our board of
directors. The statute could prohibit or delay the accomplishment of mergers or
other takeover or change in control attempts with respect to us and,
accordingly, may discourage attempts to acquire us.

     Directors Liability.  The certificate of incorporation provides that no
director shall be personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director notwithstanding any provision
of law imposing such liability, provided that, to the extent provided by
applicable law, the certificate of incorporation shall not eliminate the
liability of a director for (a) any breach of the director's duty of loyalty to
us or our stockholders, (b) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) acts or omissions in
respect of certain unlawful dividend payments or stock redemptions or
repurchases or (d) any transaction from which such director derives improper
personal benefit. The effect of this provision is to eliminate the rights of
blaxxun and our stockholders (through stockholders' derivative suits against
blaxxun) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described in
clauses (a) through (d) above. The limitations summarized above, however, do not
affect the ability of blaxxun or our stockholders to seek non-monetary based
remedies, such as an injunction or rescission, against a director for breach of
his fiduciary duty nor would such limitations limit liability under the Federal
securities laws. Our bylaws provide that we shall, to the extent permitted by
Delaware law, as amended from time to time, indemnify and advance expenses to
the currently acting and former directors, officers, employees and agents of
blaxxun or of another corporation, partnership, joint venture, trust or other
enterprise if serving at our request arising in connection with their acting in
such capacities.

     Certain provisions described above may also have the effect of delaying
stockholder actions with respect to certain business combinations and the
election of new members to our board of directors. As such, the provisions could
have the effect of discouraging open market purchases of our common stock
because they may be considered disadvantageous by a stockholder who desires to
participate in a business combination with us or elect a new director to our
board.

GERMAN TAKE-OVER CODE

     To date, Germany has not enacted legislation concerning public offers for
publicly traded companies. However, the Stock Exchange Expert Commission at the
German Federal Ministry of Finance (Borsensachverstandigenkommission beim
Bundesministerium der Finanzen) has issued the German Take-Over Code
(Ubernahmekodex) as a voluntary regulatory framework governing public take-over
bids for domestic stock corporations that are quoted on domestic stock
exchanges. As a prerequisite to the admission for trading of our shares of
common stock on the Neuer Markt, we are required to comply with the German
Take-Over Code. Consequently, if we intend to merge with and acquire a publicly
traded German stock corporation, we must (i) notify German regulatory
authorities and the public of the offer, (ii) provide disclosures to the target
company's stockholders, (iii) treat stockholders equally in an offer, and (iv)
comply with other regulatory requirements.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

     We have entered into a registration rights agreement with all of our
preferred stock holders. Pursuant to this agreement, after the closing of this
offering, and subject to restrictions on transfer between these
                                       64
<PAGE>   70

stockholders and the underwriters, the holders of at least 3,659,564 of the
registrable securities then outstanding may require us to use our best efforts
to register all of the registrable securities for resale to the public. The
preferred stockholders are entitled, if we register any of our common stock for
our own account or for the account of other security preferred stockholders, to
include their shares in such registration. The preferred stockholders may also
require us to register all or a portion of their shares in a registration
statement on Form S-3 when we are eligible to use that form, provided that the
proposed aggregate price to the public of any offering is at least $1,000,000.
We will bear all fees, costs and expenses of these registrations, other than
underwriting discounts and commissions.

     All of the registration rights described above are subject to conditions
and limitations, among them the right of the underwriters in any underwritten
offering to: (i) limit the number of shares of common stock to be included in a
registration and (ii) require a lockup agreement for up to 180 days from the
initial public offering or up to 90 days for any subsequent offering.

DEVELOPMENTS

     Immediately prior to the consummation of this offering, all outstanding
shares of the Registrant's preferred stock will convert to common stock.
Additionally, upon the consummation of this offering, the Registrant will effect
a two-for-one split of the outstanding common stock in which every one
outstanding share of common stock will be split, by way of dividend, into two
shares of common stock.

HISTORICAL SALES

     In May 1996, we issued and sold shares of Series B convertible preferred
stock convertible into an aggregate of 800,000 shares of common stock to one
investor for an aggregate purchase price of $2,000,000.

     In August 1996, we issued an aggregate of 16,000 shares of common stock to
one person in exchange for technology valued on that date at an aggregate of
$4,000.

     In August 1997, we issued an aggregate of 146,370 shares of common stock to
one person in exchange for technology valued on that date at an aggregate of
$36,593.

     In June 1998 and October 1998, we issued and sold shares of Series C
convertible preferred stock convertible into an aggregate of 1,597,820 shares of
common stock to seven investors for an aggregate purchase price of $4,282,156.

     In November 1998, we issued an aggregate of 100,000 shares of common stock
at an aggregate purchase price of $50,000 to seven individuals in exchange for a
portion of their equity interests in Cybertown, Inc., a wholly owned subsidiary
of ours.

     In August of 1998 and June of 1999, we issued shares of Series D
convertible preferred stock convertible into an aggregate of 3,952,000 shares of
common stock to nine employees in exchange for their minority interests in the
blaxxun interactive AG, our wholly-owned subsidiary.

     In March of 1999, we issued and sold shares of Series E convertible
preferred stock convertible into an aggregate of 750,000 shares of common stock
to five investors for an aggregate purchase price of $3,000,000.

     From July 31, 1996 to January 31, 2000, we issued to our employees,
officers, directors and consultants options to purchase an aggregate of
3,194,292 shares of our common stock, at exercise prices ranging from $.0065 per
share to $5.00 per share and an aggregate of 498,736 shares of our common stock
at purchase prices ranging from $0.0065 per share to $0.50 per share.

     In January and February of 2000, we issued and sold shares of Series F
convertible preferred Stock convertible into an aggregate of 1,478,000 shares of
common stock to ten investors for an aggregate purchase price of $8,720,200.


     In March 2000, we issued shares of Series B convertible preferred stock
upon conversion of a convertible note, convertible into an aggregate of 600,000
shares of common stock.


                                       65
<PAGE>   71

     Upon the consummation of this offering, no shares of preferred stock will
be outstanding and no series of preferred stock will be designated. Thus, no
shares of preferred stock will be registered on the Neuer Markt.

TAXPAYER IDENTIFICATION NUMBER

     Our U.S. Employer Identification Number is 04-3284474.

                        SHARES ELIGIBLE FOR FUTURE SALE


     Upon completion of this offering, blaxxun will have outstanding 26,125,592
shares of common stock. Of these shares, the 7,000,000 shares offered hereby
(8,100,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradable without restriction or further registration under
the Securities Act, unless purchased by "affiliates" of blaxxun as that term is
defined in Rule 144 described below. The remaining 19,125,592 shares of common
stock outstanding upon closing of the offering will, subject to the lock-up
agreements described in the next paragraph, be eligible for immediate resale in
Germany. In the United States, these shares will also be subject to Rule 144 of
the Securities Act, as described below.


     Our officers, directors, stockholders and optionholders have agreed not to
sell or otherwise dispose of any of their shares of common stock for a period of
at least six months after the date on which our shares have been admitted for
trading on the Frankfurt Stock Exchange's Neuer Markt. Our officers, directors
and significant stockholders have further agreed not to sell or otherwise
dispose of any shares of common stock for a period of at least six months
directly following the aforementioned six months period without the prior
written approval of DG BANK Deutsche Genossenschaftsbank AG, Frankfurt am Main,
acting on behalf of the underwriters. When the lock-up agreements expire or, in
the case of approval by DG BANK Deutsche Genossenschaftsbank AG, Frankfurt am
Main, on neither of which we may have influence, at any point prior to such
expiry, these shares and the shares underlying the options will become eligible
for sale.


     For U.S. securities laws purposes, the 19,125,592 outstanding shares of
common stock owned by the stockholders which are not sold pursuant to this
offering are deemed "restricted shares" under Rule 144 of the Securities Act.
These shares may not be resold, except pursuant to an effective registration
statement or an applicable exemption from registration. The holders of the
restricted shares may sell those shares relying on the exemptions from
registration under Rule 144 and Rule 701 of the Securities Act. UPON EXPIRATION
OF THE LOCK-UP PERIODS DESCRIBED ABOVE, 17,877,764 SHARES WILL BE ELIGIBLE FOR
IMMEDIATE RESALE UNDER RULES 144 AND 701.


     In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
restricted shares for at least one year from the later of the date those
restricted shares were acquired from blaxxun and (if applicable) the date they
were acquired from an affiliate, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the then
outstanding shares of common stock (261,256 shares based on the number of shares
to be outstanding after this offering) or the average weekly trading volume in
the public market in the United States (combined volume on all markets in the
United States) during the four calendar weeks preceding the sale. Sales under
Rule 144 are also subject to certain requirements as to the manner and notice of
sale and the availability of public information concerning blaxxun. Affiliates
may sell shares which are not restricted shares in accordance with the foregoing
volume limitations and other restrictions, but without regard to the one-year
holding period. All sales of restricted shares held by affiliates of blaxxun
must be sold under Rule 144, subject to the foregoing volume limitations and
other restrictions. Further, under Rule 144(k), if a period of at least two
years has elapsed between the later of the date restricted shares were acquired
from blaxxun or an affiliate of blaxxun, a holder of the restricted shares who
is not an affiliate of blaxxun at the time of the sale and has not been an
affiliate of blaxxun for at least three months prior to the sale would be
entitled to sell the shares immediately without regard to the volume limitations
or other conditions described above.

     Rule 701 under the Securities Act provides an exemption from the
registration requirements of the Securities Act for offers and sales of
securities issued pursuant to certain compensatory benefit plans or written

                                       66
<PAGE>   72

contracts of a company not subject to the reporting requirements of Sections 13
or 15(d) of the Securities Exchange Act of 1934, as amended, referred to in this
prospectus as the Exchange Act. Any employee, officer or director of or
consultant to blaxxun who acquired shares of common stock from blaxxun prior to
this offering or on exercise of a stock option granted prior to this offering is
entitled to rely on the resale provisions of Rule 701, which permit
non-affiliates to sell such shares without having to comply with the public
information, holding period, volume limitation, or notice requirements of Rule
144 and permit affiliates to sell their Rule 701 shares without having to comply
with the holding period requirements of Rule 144 commencing, in each case, 90
days after the date of this prospectus.

     The holders of an aggregate of 18,297,820 shares of common stock or their
transferees are entitled to rights with respect to the registration of these
shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights of Certain Holders."

     Prior to this offering, there has not been any public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect the prevailing market prices and impair blaxxun's
ability to raise capital through the sale of equity securities.

                            THE GERMAN EQUITY MARKET

GERMAN SECURITIES LAWS

     As a United States company offering securities on a German stock exchange,
we are subject to various laws and regulations in both jurisdictions. Some of
these laws and regulations, in turn, can affect the ability of holders of our
securities to transfer or sell our securities.

     At present, Germany does not restrict the export or import of capital,
except for investments in Iraq and Libya in accordance with applicable
resolutions adopted by the United Nations and the European Union. However, for
statistical purposes only, every individual or corporation residing in Germany
must report to the German Central Bank (Deutsche Bundesbank), subject only to
immaterial exceptions, any payment received from or made to an individual or a
corporation not a resident of Germany if such payment exceeds DM5,000 (E2,550 or
the equivalent in a foreign currency). In addition, residents of Germany must
report any claims against or any liabilities payable to non-residents if such
claims or liabilities, in the aggregate, exceed DM3.0 million (E1.53 million, or
the equivalent in a foreign currency) during any one month. Residents must also
report any direct investment outside Germany if such investment exceeds
DM100,000 (E51,000, or the equivalent in a foreign currency).

     There are no limitations on the right of non-resident owners to hold or
vote the shares imposed by German law or our certificate of incorporation or
bylaws.

THE FRANKFURT STOCK EXCHANGE AND THE NEUER MARKT

     The Frankfurt Stock Exchange is the most significant of the eight German
stock exchanges and accounted for approximately 78% of the turnover in traded
shares in Germany in 1998. The aggregate annual turnover of the Frankfurt Stock
Exchange in 1999 of approximately E4,078 billion, based on the Frankfurt Stock
Exchange's practice of separately recording the sale and purchase components
involved in any trade, for both equity and debt instruments, made it the fourth
largest stock exchange in the world behind the New York Stock Exchange, London
and Tokyo in terms of turnover.

     The Neuer Markt segment of the Frankfurt Stock Exchange is a new trading
segment that was launched in March 1997. It is designed for innovative, small to
mid-size companies in high growth industries or in traditional industries that
have an international orientation and that are willing to provide active
investor relations. Issuers are requested to provide investors on an ongoing
basis with information such as annual and quarterly reports, including cash flow
statements, and a corporate action timetable. This information is required to be
submitted in English and German as well as in electronic form, thus enabling the
stock exchange to disseminate corporate information via the Internet.

                                       67
<PAGE>   73

TRADING ON THE NEUER MARKT

     Trading of shares listed on the Neuer Markt takes place on the floor of the
stock exchange, but is computer-aided. Shares listed on the Neuer Markt can also
be traded on a computer-aided system called Xetra. Trading takes place on every
business day between 8:30 a.m. and 5:00 p.m., Frankfurt time. Trading within the
Xetra system is done by banks and securities dealers who have been admitted to
trading on at least one of Germany's stock exchanges. Xetra is integrated into
the Frankfurt Stock Exchange and is subject to its rules and regulations.

     Markets in listed securities are generally of the auction type, but listed
securities also change hands in inter-bank dealer markets off the Frankfurt
Stock Exchange. Price formation is determined by open bid by state-appointed
specialists (amtliche Makler) who are themselves exchange members, but who do
not, as a rule, deal with the public. Prices of shares traded on the Neuer Markt
are displayed continuously during trading hours. At the half-way point of each
trading day, a single standard quotation is determined for all shares. The
members' association of the Frankfurt Stock Exchange publishes a daily list of
prices which contains the standard prices of all traded securities, as well as
their highest and lowest quotations during the past year.

     Transactions on the Frankfurt Stock Exchange, including transactions within
the Xetra system, are settled on the second business day following trading.
Transactions off the Frankfurt Stock Exchange, for large volumes or if one of
the parties is foreign, are generally also settled on the second business day
following trading, unless the parties have agreed upon a different date.
Following a recent amendment to the conditions of German banks for securities
trading (Sonderbedingungen fur Wertpapiergeschafte), customers' orders to buy or
sell listed securities must be executed on a stock exchange, unless the customer
instructs otherwise. Trading can be suspended by the Frankfurt Stock Exchange if
orderly stock exchange trading is temporarily endangered or if a suspension is
in the public interest.

     A specific feature of the Neuer Markt is the introduction of the obligatory
"Designated Sponsor" or, an entity admitted for trading at the Frankfurt Stock
Exchange which provides additional liquidity by quoting prices for the buying
and selling of shares on request. Each issuer on the Neuer Markt is required to
nominate at least two Designated Sponsors which will not only ensure that there
is sufficient liquidity for its shares, but also serve as consultants on all
stock market related matters for the issuer. It is expected that DG Bank
Deutsche Genossenschaftsbank, AG and Merck Finck & Co. will be our Designated
Sponsors.

     The shares have been admitted for listing on the Neuer Markt. It is
expected that trading in the Shares on the Neuer Markt under the symbol "BXX"
will commence on or about [            ], 2000. The Neuer Markt is still a
relatively new market. Accordingly, there can be no assurance that an active
trading market for the shares will develop on the Neuer Markt or that the Neuer
Markt will not experience problems in settlement or clearance as trading
develops. Any such delays or problems could adversely affect the market price of
the shares. Persons proposing to trade the shares on the Neuer Markt should
inform themselves about the potential costs of such trading.

PRICE RANGE, NUMBER OF SHARES, DELIVERY AND PAYMENTS

     The initial public offering price payable by investors for the shares
offered will be determined in a book-building procedure conducted by the
underwriters according to customary practice in the Federal Republic of Germany.
We expect the price range within which investors may offer to purchase shares
will be fixed on [          ], 2000, and published in the Borsenzeitung on
[          ], 2000. We anticipate that the period of time within which investors
may offer to purchase shares will be from [          ], 2000 to [          ],
2000. We expect to determine, along with the underwriters, the final purchase
price per share on [          ], 2000, and to publish that purchase price in the
Borsenzeitung on [          ], 2000. We anticipate that beginning on
[          ], 2000, investors who placed orders with an underwriter may inquire
from such underwriter the number of shares allotted to them. It is currently
expected that the purchase price for shares offered will be payable by investors
on [          ], 2000, against delivery of such allotted shares in book entry
form. The share certificates representing the offered shares will be deposited
by us and the selling shareholders, respectively, with The Depository Trust
Company of New York. The Depository Trust
                                       68
<PAGE>   74

Company's nominee, Cede & Co., will be the registered owner of such shares. At
the closing of the offering, The Depository Trust Company will electronically
deposit the offered shares in the account of Clearstream Banking AG with The
Depository Trust Company in book entry form for the benefit of DG BANK Deutsche
Genossenschaftsbank AG for the account of the underwriters, and DG BANK Deutsche
Genossenschaftsbank AG will thereby acquire beneficial ownership of the shares.
Thereafter, DG BANK Deutsche Genossenschaftsbank AG will electronically
transfer, in book entry form, beneficial ownership of the shares to the
purchasers of the shares through their brokers and other financial institutions
that are Clearstream Banking AG participants. Clearstream Banking AG will not
hold any certificates for common stock. Certificates representing shares of
common stock held through Clearstream Banking AG will not be issued unless such
shares are withdrawn from Clearstream Banking AG, in which case the shares will
not be eligible to trade on a German exchange unless such shares are
re-deposited with The Depository Trust Company for credit to Clearstream Banking
AG's account with The Depository Trust Company.

CLEARING AND TRANSFERABILITY OF THE SHARES

     Shares transferred from the Depository Trust Company to Clearstream Banking
AG may be freely transferred among market participants through the Clearstream
Banking AG clearing system. The shares to be offered and listed for trading on
the Frankfurt Stock Exchange's Neuer Markt are registered shares. Accordingly,
stockholders holding share certificates who desire to transfer their shares
outside The Depository Trust Company/Clearstream Banking AG clearing system may
effect the transfer by submitting to our transfer agent their share
certificates, and the transfer agent will issue a new certificate in the name of
the transferee. If stockholders holding share certificates wish to transfer
their shares to The Depository Trust Company/Clearstream Banking AG clearing
system, the stockholders must submit their share certificates to our transfer
agent, and the transfer agent will register the shares in the name of Cede & Co.
These shares will be credited to the account of Clearstream Banking AG at The
Depository Trust Company. Upon registration of the shares with The Depository
Trust Company for the benefit of Clearstream Banking AG and fulfillment of any
other requirements of The Depository Trust Company or Clearstream Banking AG,
beneficial ownership of the shares may be transferred through the Clearstream
Banking AG system.

NOTICES

     We will publish any notices to stockholders in the German Federal Gazette
(Bundesanzeiger) and in the Borsen-Zeitung.

PAYING AGENT


     DG BANK Deutsche Genossenschaftsbank AG, Frankfurt am Main, will act as the
paying agent in Germany.


VOTING RIGHTS

     Each share of common stock entitles its holder to one vote at all of our
shareholder's meetings.

     Neither Cede & Co. as the registered owner of the shares of common stock
being offered hereunder, nor The Depository Trust Company, will exercise any
voting rights in connection with such shares. Pursuant to the procedures
generally applied by The Depository Trust Company, The Depository Trust Company
will provide an omnibus proxy to us after each record date for our shareholders'
meetings. Insofar as shares of common stock are held through the clearing system
of Clearstream Banking AG, such proxy will be for the benefit of Clearstream
Banking AG. Clearstream Banking AG will inform the beneficial owners of shares
held through Clearstream Banking AG via the respective Clearstream Banking AG
participants. Clearstream Banking AG will exercise voting rights pursuant to the
instructions of the beneficial owners of the shares and its general business
conditions. You should contact your securities account-carrying bank or broker
to inquire about any fees that may be charged for the services rendered to you
by such account-carrier in connection with your voting rights.

                                       69
<PAGE>   75

DIVIDEND RIGHTS

     Each of the holders of our common stock will be eligible to receive
dividends if and when declared by our Board of Directors. To date, we have not
paid any cash dividends on our shares of common stock. We intend to retain
future earnings to fund growth of our business and do not anticipate paying any
cash dividends on shares of common stock in the foreseeable future. (See
"Dividend Policy").

     We will initially make payments of dividends, if any, or any other payments
to shareholders who hold shares of common stock on the relevant record date
through the clearing system of Clearstream Banking AG to Cede & Co. as The
Depository Trust Company's nominee. The Depository Trust Company will credit
such amounts to an account of Clearstream Banking AG, who will then distribute
such payments to the beneficial owners who hold shares of common stock with
participants of Clearstream Banking AG. Payments of The Depository Trust Company
and Clearstream Banking AG are subject to the decrees, procedures and laws in
effect at the time of the respective payment. Our dividends will be paid in U.S.
dollars; however, participants of Clearstream Banking AG may elect to receive
dividends and other payments on the shares either in U.S. dollars or euros. You
should contact your securities account-carrying bank or broker to inquire about
any fees that may be charged by such account-carrier for the distribution of our
dividends or any other payments to you.

SECURITIES IDENTIFICATION CODES

     The German securities code number (WKN) for the shares of common stock is
938 019.

     The international securities identification number (ISIN) for the shares of
common stock is U.S. 0934 7U 1060.

     The common code is 11148760.

                               GERMAN TAX MATTERS

     The following is a summary of certain tax matters arising under German tax
law in force at the date of this prospectus. The summary does not purport to be
a comprehensive description of all of the tax considerations which may be
relevant as to the decision to acquire shares of common stock. The summary is
based on the tax laws of Germany in effect on the date of this prospectus, which
may be subject to changes, possibly with retroactive effect. The summary does
not address aspects of German taxation other than taxation of dividends, capital
gains taxation and gift and inheritance taxation, and does not address all
aspects of such German taxation. The summary does not consider any specific
facts or circumstances that may apply to a particular purchaser. The summary
assumes that the stockholder is subject to unlimited German income taxation and
is referred to as a German holder. Prospective investors should consult their
professional advisors as to the tax consequences of the acquisition, holding and
disposal of the shares of common stock, including in particular, the effect of
tax laws of any other jurisdiction.

INCOME TAXATION OF DIVIDENDS

     Any dividends distributed to German holders are, in principle, fully
subject to German income tax (Einkommenssteuer) including a solidarity surcharge
(Solidaritatszuschlag) and possibly church tax (Kirchensteuer). An individual
German holder will be entitled to a deduction of income-related expenses
(Werbungskosten) to be proved to the tax authorities or alternatively to a fixed
allowance of DM 100 per calendar year, and a tax exemption known as a savers
exemption of DM3,000 per calendar year in relation to his or her total income
from capital investments including dividends.

     Dividend withholding tax levied in the United States in accordance with the
U.S./German Double Taxation Treaty of August 29, 1989 can be credited against
the German income tax liability of the German holder. Alternatively, a German
holder may deduct the total amount of U.S. withholding tax from his or her
German taxable income. This tax credit or deduction is not available if the
savers exemption mentioned above is available to the German holder.

                                       70
<PAGE>   76

     A German corporation that has beneficial title to at least 10% of the
shares in a U.S. corporation is entitled to a reduction or refund of U.S. tax in
excess of 5%, and all other German holders are entitled to a refund or reduction
of U.S. tax in excess of 15% if the treaty applies. If the shares are held by
German holders through a partnership, the dividends, including the withholding
tax credit are allocated to the partners according to their interest in the
partnership.

     German holders that are corporate investors, or a German corporate holder,
holding at least 10% of the outstanding shares of common stock, and to whom the
Treaty applies, are exempt from German corporation tax in relation to dividends
received, and cannot claim any credit for, or deduction of, foreign withholding
taxes in Germany. Such dividends will be placed in the so-called EK01 equity
basket of the corporate investor. Upon distribution of dividends out of the EK01
equity basket to its stockholders, the German corporate holder does not need to
establish the corporation tax distribution burden, which presently is 30% plus
the solidarity surcharge at a rate of 5.5% of the corporation tax distribution
burden.

     In addition, distributions to a German holder are subject to German
withholding tax at a rate of 25%, plus solidarity surcharge at a rate of 5.5%
thereon, resulting in an effective withholding tax rate of 26.37%.

     German holders that are corporate investors holding less than 10% of our
shares will be entitled to a tax credit for U.S. withholding taxes.


     On February 9, 2000 the German Government published a draft tax reform
bill. Income tax cuts contained in this draft bill would become effective in the
year 2001. German holders who are natural persons would pay income tax at their
personal income tax rate on the amount of 50% of the dividends distributed by
the Company under a so-called Halbeinkunfteverfahren. Dividends derived by a
German holder in the legal form of a corporation would be tax exempt in Germany.
If such tax exempt dividends were in turn distributed to a German holder of a
corporation who is a natural person, the distribution would be taxable at the
individual level under the Halbeinkunfteverfahren.


CAPITAL GAINS TAX

     Capital gains on the disposal of shares held as a private asset of a German
holder are only taxable if the disposal is (i) effected within a twelve-month
period after their acquisition or (ii) upon expiration of this speculation
period, if the stockholder at any time during the five years preceding the
disposal, directly or indirectly, held an interest of 10% or above in a company.

     Capital gains resulting from the disposal of shares of common stock by a
stockholder who is not tax resident in Germany are not subject to German capital
gains tax unless the shares of common stock are part of the business property of
a permanent establishment or a fixed place of business of the stockholder
located in Germany.

GIFT AND INHERITANCE TAXES

     Shares held by a person resident in Germany are subject to German
inheritance and gift tax upon transfer by reason of death or as a gift, based on
the market value at the time of the death or donation, respectively. Transfers
of shares of common stock held by a person who is not a tax resident in Germany
are not subject to German inheritance and gift tax, unless:

     - the shares of common stock are part of the business property of a
       permanent establishment or a fixed place of business of the stockholder
       located in Germany; or

     - the heir, donee or beneficiary is tax resident in Germany or, if of
       German nationality, has been resident in Germany within the five-year
       period prior to the death or the gift (certain public officials resident
       abroad are also covered).

TRADE TAX

     A holder who is not tax resident in Germany will not be subject to German
trade tax with respect to the shares of common stock, unless the shares of
common stock are part of the business property of a permanent
                                       71
<PAGE>   77

establishment or a fixed place of business of the stockholder located in
Germany. If a German resident taxpayer elects to deduct the foreign withholding
taxes from his taxable income in Germany such deduction would not be accepted
for computing his taxable income for trade tax purposes.

     The trade tax on income is levied at rates varying from 13 - 20%. Trade tax
qualifies for a deductible business expense for income tax purposes in Germany.

OTHER GERMAN TAXES

     There are no German transfer, stamp or other similar taxes which would
apply to the sale or transfer of the shares of common stock.


     CERTAIN UNITED STATES TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS



     There are federal income and estate tax consequences related to the
ownership and disposition of our common stock by a non-U.S. holder. A non-U.S.
holder is any person or entity that, for United States federal income tax
purposes, is either a non-resident individual, or other corporation organized or
created under non-U.S. law corporation, an estate that is not on its worldwide
income or a trust that is either not subject to primary supervision over its
administration by a United States court or not subject to the control of a U.S.
person with respect to substantial trust decisions. Partnerships organized
outside of the United States and their partners should consult their own tax
advisors about the consequences of holding our common stock, as the tax
treatment with respect to foreign partnerships and their partners is complex.



     Individuals, may, in certain cases, be deemed to be resident aliens, as
opposed to non-resident aliens, by virtue of being present in the United States
for at least 31 days in the calendar year and for an aggregate of at least 183
days during a three-year period ending in the current calendar year (counting
for such purposes, all of the days present in the current year, one-third of the
days present in the immediately preceding year, and one-sixth of the days
present in the second preceding year). Resident aliens are generally subject to
United States federal income tax as if they were United States citizens.



     This summary does not discuss all United States federal income tax
considerations that may be relevant to non-U.S. holders in light of their
particular circumstances or to non-U.S. holders that may be subject to special
treatment under United States federal income tax laws. This summary assumes that
non-U.S. holders hold their stock as capital assets. Furthermore, this summary
does not discuss aspects of United States federal income taxation that may be
applicable to holders of options to purchase our common stock, nor does it
address any aspects of non-U.S. taxation or United States state or local
taxation. This summary is based on current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), existing, temporary and proposed
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change, possibly with
retroactive effect.



THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND SHOULD
NOT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR
SHAREHOLDER. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
UNITED STATES FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF THE
DESCRIBED TRANSACTIONS IN THEIR PARTICULAR CIRCUMSTANCES.



DIVIDENDS



     We have never declared or paid cash dividends on our capital stock. We
currently anticipate that we will retain all available funds for use in our
business and do not anticipate paying any cash dividends in the foreseeable
future.



     In the event that dividends are paid on shares of our common stock,
dividends paid to a non-U.S. holder of our common stock generally will be
subject to United States withholding tax at a 30% rate, unless an applicable
income tax treaty provides for a lower withholding rate. Currently, the
applicable United States


                                       72
<PAGE>   78


Treasury regulations presume, absent actual knowledge to the contrary, that
dividends paid to an address in a foreign country are paid to a resident of such
country for purposes of the 30% withholding tax. However, recently finalized
United States Treasury regulations provide that in the case of dividends paid
after December 31, 2000, United States backup withholding tax at a 31% rate will
be imposed on dividends paid to non-U.S. holders if the certification or
documentary evidence procedures and requirements set forth in such regulations
are not satisfied directly or through an intermediary. Further, in order to
claim the benefit of an applicable income tax treaty rate for dividends paid
after December 31, 2000, a non-U.S. holder must comply with certification
requirements set forth in the recently finalized United States Treasury
regulations.



     The 30% withholding tax does not apply to dividends paid to a non-U.S.
holder that provides a Form 4224 or, after December 31, 2000, a Form W-8ECI,
certifying that the dividends are effectively connected with the non-U.S.
holder's conduct of a trade or business within the United States. Instead, the
effectively connected dividends will generally be subject to regular United
States income tax as if the non-U.S. holder were a United States resident. If
the non-U.S. holder is eligible for the benefits of a tax treaty between the
United States and the holder's country of residence, any effectively connected
income will be subject to United States federal income tax only if it is
attributable to a permanent establishment in the United States mainlined by the
holder. A non-U.S. corporation receiving effectively connected dividends may
also be subject to an additional "branch profits tax" imposed at a rate of 30%
(or a lower treaty rate) on an earnings amount that is net of the regular tax. A
non-U.S. holder may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund along with the required information with the
Internal Revenue Service ("IRS").



GAIN ON DISPOSITION OF COMMON STOCK



     A non-U.S. holder generally will not be subject to United States federal
income or withholding tax requirements in respect of gain recognized on a
disposition of common stock unless:



        (a) the gain is effectively connected with the conduct of a trade or
     business of the non-U.S. holder within the United States or of a
     partnership, trust or estate in which the non-U.S. holder is a partner or
     beneficiary within the United States and, if certain tax treaties apply, is
     attributable to a permanent establishment of the non-U.S. holder, within
     the United States;



        (b) the non-U.S. holder is an individual who holds our common stock as a
     capital asset within the meaning of Section 1221 of the Internal Revenue
     Code, is present in the United States for 183 or more days in the taxable
     year of the disposition and meets certain other tax law requirements;



        (c) the non-U.S. holder is a United States expatriate required to pay
     tax pursuant to the provisions of United States tax law; or



        (d) we are or have been a "United States real property holding
     corporation" for federal income tax purposes at any time during the shorter
     of the five-year period preceding such disposition or the period that the
     non-U.S. holder holds our common stock.



     We believe that we are not, have not been and do not anticipate becoming, a
United States real property holding corporation for United States federal income
tax purposes.



     A non-U.S. holder who is an individual and is described in clause (a) or
(c) above will be required to pay tax on the net gain derived from a sale of our
common stock at regular graduated United States federal income tax rates.
Further, a non-U.S. holder who is an individual and who is described in clause
(b) above generally will be subject to a flat 30% tax on the gain derived from a
sale. A non-U.S. holder that is a corporation and that is described in clause
(a) above generally will be required to pay tax on its net gain at regular
graduated United States federal income tax rates. Such non-U.S. holder may also
have to pay a branch profits tax.


                                       73
<PAGE>   79


FEDERAL ESTATE TAX



     For United States federal estate tax purposes, an individual's gross estate
will include our common stock owned, or treated as owned, by an individual.
Generally, this will be the case regardless whether or not such individual was a
United States citizen or a United States resident. This general rule of
inclusion may be limited by an applicable estate tax or other treaty.



INFORMATION REPORTING AND BACKUP WITHHOLDING TAX



     Under United States Treasury regulations, we must report annually to the
Internal Revenue Service and to each non-U.S. holder the amount of dividends
paid to such holder and the tax withheld with respect to such dividends. These
information reporting requirements apply whether withholding is required. Copies
of the information returns reporting such dividends and withholding may also be
made available to the tax authorities in the country in which the non-U.S.
holder is a resident under the provisions of an applicable income tax treaty or
agreement. U.S. information reporting and backup withholding generally will not
apply to a payment of proceeds of a disposition of common stock where the
transaction is effected outside the United States through a non-U.S. office of a
non-U.S. broker. However, information reporting requirements, but not backup
withholding, generally will apply to such a payment to certain brokers with
certain U.S. connections.



     The tax liability of persons subject to backup withholding will be reduced
by the amount of tax withheld. When withholding results in an overpayment of
taxes, a refund may be obtained if the required information is furnished to the
IRS.


                                       74
<PAGE>   80

                                  UNDERWRITING

     blaxxun has entered into a German underwriting agreement with DG BANK and
Deutsche Genossenschaftsbank AG, as the lead German underwriters. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table.

<TABLE>
<CAPTION>
                                                              NUMBER OF
UNDERWRITERS                                                   SHARES
------------                                                  ---------
<S>                                                           <C>
DG BANK Deutsche Genossenschaftsbank AG.....................  [       ]
Merck Finck & Co............................................  [       ]
VEM Virtuelles Emissionshaus AG.............................  [       ]

Total.......................................................  [       ]
</TABLE>


     If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to 1,100,000 additional
shares from certain selling shareholders to cover such sales. They may exercise
that option for 45 days. If any shares are purchased pursuant to this option,
the underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.


     The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by blaxxun and the selling
stockholders. Such amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase additional shares.

<TABLE>
<CAPTION>
                                                                   PAID BY BLAXXUN
                                                            ------------------------------
                                                            NO EXERCISE      FULL EXERCISE
                                                            -----------      -------------
<S>                                                         <C>              <C>
Per Share.................................................   [       ]         [       ]
Total.....................................................   [       ]         [       ]
</TABLE>

<TABLE>
<CAPTION>
                                                            PAID BY THE SELLING STOCKHOLDERS
                                                            --------------------------------
                                                            NO EXERCISE       FULL EXERCISE
                                                            ------------      --------------
<S>                                                         <C>               <C>
Per Share.................................................   [       ]          [       ]
Total.....................................................   [       ]          [       ]
</TABLE>

     Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $     per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $          per share
from the initial public offering price.

     blaxxun has agreed with the underwriters not to dispose of or hedge any of
its common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 360 days after the date of this prospectus, except with the
prior written consent of the representatives. This agreement does not apply to
any existing employees benefit plans. See "Shares Available for Future Sale" for
a discussion of transfer restrictions.

     Our officers, our board of directors, our stockholders and optionholders
have warranted to the Deutsche Borse AG and have agreed with the underwriters
not to dispose of or hedge any of their common stock or securities convertible
into or exchangeable for shares of common stock during the six months from the
date of this prospectus continuing through the first six months after the date
of admission of the shares of common stock to the regulated market (Geregelter
Markt) with trading on the Neuer Markt of the Frankfurt Stock Exchange. In
addition, our officers, directors and our significant stockholders have agreed
with the underwriters not to dispose of or hedge any common stock or securities
convertible into or exchangeable for

                                       75
<PAGE>   81

shares of common stock during the six-month period from the end of the first
six-month lock-up period, except with the prior written consent of DG BANK
Deutsche Genossenschaftsbank AG acting on behalf of the underwriters. See
"Shares Available for Future Sale" for a discussion of certain transfer
restrictions. These lockups will be effected through stop transfer instructions
given to our Transfer Agent.

     At blaxxun's request, the underwriters have reserved up to 350,000 shares
of the common stock offered hereby for sale, at the initial public offering
price, to employees, customers and other friends of blaxxun through a directed
share program. The number of shares available for sale to the general public
will be reduced to the extent these persons purchase the reserved shares. There
can be no assurance that any of the reserved shares will be so purchased. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same basis as other shares offered hereby. Shares
purchased through this directed share program will be subject to a minimum
lock-up of three months. This lock-up will be effected through stop-transfer
instructions given to our Transfer Agent.


     The underwriters and one current stockholder, Franz Buchenberger have
entered into a stock lending arrangement. Under this arrangement, the
stockholder has agreed to lend the underwriters a total of 1,100,000 shares of
common stock for the 45-day period during which the underwriters have an
over-allotment option to purchase shares of common stock from us.


     Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among blaxxun and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be blaxxun's historical performance, estimates of the business
potential and earnings prospects of blaxxun, an assessment of blaxxun's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.


     The common stock is expected to be admitted to the Regulated Market
(Geregelter Markt) for trading on the Neuer Markt of the Frankfurt Stock
Exchange under the symbol "BXX," on             , 2000. Trading of the common
stock is expected to commence             , 2000.


     In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while this offering is in progress.

     The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

     These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be completed on the Neuer
Markt.

     The underwriters may not confirm sales to discretionary accounts without
the prior written approval of the customer.


     blaxxun estimates that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $2,000,000.



     blaxxun has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. In
addition, DG Bank has agreed to indemnify both blaxxun and the other
underwriters for liabilities arising out of the distribution of written
materials that were provided to approximately 350 individuals that blaxxun had
designated as potential purchasers of up to 350,000 shares of common stock in
this offering through a directed share program.


                                       76
<PAGE>   82

                                 LEGAL MATTERS

     The validity of the common stock offered hereby will be passed upon for us
by Hutchins, Wheeler & Dittmar, A Professional Corporation, Boston,
Massachusetts. Certain matters of German law will be passed upon for the
underwriters by Bruckhaus Westrick Heller Lober.

                                    EXPERTS

     The consolidated financial statements of blaxxun interactive, Inc. and
subsidiaries as of and for each the years ended July 31, 1997, 1998 and 1999,
have been included herein and in the registration statement in reliance upon the
report of KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft
Wirtschaftsprufungsgesellschaft, Elektrastrasse 6, 81925 Munich, Germany
independent accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.

                      WHERE YOU CAN FIND MORE INFORMATION

     Publicly available documents pertaining to this offering and to which we
refer in this prospectus, as well as future annual interim reports that we
prepare, may be inspected during customary business hours at the offices of
blaxxun AG, Elsenheimerstrasse 61, 80687 Munich, Germany and at the offices of
DG BANK Deutsche Genossenschaftsbank AG, Am Platz der Republik, 60265 Frankfurt
am Main, Germany.

     In addition, we have filed a registration statement on Form S-1 with the
Securities and Exchange Commission, or SEC, for the common stock we are offering
by this prospectus. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules thereto. For
further information with respect to us and our common stock, we make reference
to the registration statement and to the exhibits and schedules filed therewith.
Statements contained in this prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference. A copy of the registration statement may be
inspected by anyone without charge at the SEC's principal office in Washington,
D.C., and copies of all or any part of the registration statement may be
obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain fees prescribed by the SEC.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. The SEC maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of the web site
is http://www.sec.gov. Upon completion of the offering, we will be subject to
the information reporting requirements of the Securities Exchange Act of 1934,
as amended and, in accordance therewith, will file reports, proxy statements and
other information with the SEC.

     We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and quarterly
reports for the first three fiscal quarters of each fiscal year containing
unaudited interim financial information.

                                       77
<PAGE>   83

                         INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
AUDITED FINANCIAL STATEMENTS
  Report of Independent Public Accountants..................   F-3
  Consolidated Balance Sheets as of July 31, 1999, 1998 and
     1997...................................................   F-4
  Consolidated Statements of Operations for Years ended July
     31, 1999, 1998 and 1997................................   F-5
  Consolidated Statements of Stockholders' Equity (Deficit)
     for Years ended July 31, 1999, 1998 and 1997...........   F-6
  Consolidated Statements of Cash Flows for Years ended July
     31, 1999, 1998 and 1997................................   F-7
  Notes to Consolidated Financial Statements................   F-8
UNAUDITED INTERIM FINANCIAL STATEMENTS
  Condensed Consolidated Balance Sheets at April 30, 2000
     and July 31, 1999......................................  F-26
  Condensed Consolidated Statements of Operations for the
     Nine Months ended April 30, 2000 and 1999..............  F-27
  Condensed Consolidated Statements of Stockholders' Equity
     for the Nine Months ended April 30, 2000 and 1999......  F-28
  Condensed Consolidated Statements of Cash Flows for the
     Nine Months ended April 30, 2000 and 1999..............  F-29
  Notes to Condensed Consolidated Financial Statements......  F-30
</TABLE>


                                       F-1
<PAGE>   84

                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS

                          JULY 31, 1999, 1998 AND 1997

                  (WITH INDEPENDENT AUDITORS' REPORT THEREON)

                                       F-2
<PAGE>   85

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
blaxxun interactive, Inc.:

     We have audited the accompanying consolidated balance sheets of blaxxun
interactive, Inc. and subsidiaries as of July 31, 1999, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
blaxxun interactive, Inc. and subsidiaries as of July 31, 1999, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
then ended, in conformity with generally accepted accounting principles in the
United States of America.

                                          /s/ KPMG Deutsche
                                          Treuhand-Gesellschaft
                                          Aktiengesellschaft
                                          Wirtschaftsprufungsgesellschaft

Munich, Germany

November 3, 1999,
except as to paragraph 2 and 3
of Note 11, which is as of February 29, 2000, and
paragraph 6 of Note 11, which is as of March 29, 2000

                                       F-3
<PAGE>   86

                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                          JULY 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                        1999            1998           1997
                                                    ------------    ------------    -----------
<S>                                                 <C>             <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents.......................  $  3,214,681       3,111,002         27,575
  Accounts receivable, less allowance for doubtful
     accounts of $66,917, $44,917 and $0 in 1999,
     1998 and 1997, respectively..................       762,976         158,048          1,245
  Projects in progress............................       248,373          82,013             --
  Prepaid expenses and other current assets.......       144,625          69,991         76,571
                                                    ------------    ------------    -----------
          Total current assets....................     4,370,655       3,421,054        105,391
Equipment, net....................................       210,006         125,115        182,054
Goodwill and other intangible assets, net.........     7,455,128              --             --
Other assets......................................        49,257          46,310         79,406
                                                    ------------    ------------    -----------
                                                    $ 12,085,046       3,592,479        366,851
                                                    ============    ============    ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable................................  $    322,390          83,012        176,099
  Accrued expenses................................     1,573,008       1,191,271        855,868
  Deferred revenues...............................        61,189          31,481             --
                                                    ------------    ------------    -----------
          Total current liabilities...............     1,956,587       1,305,764      1,031,967
Notes payable.....................................     3,776,163       3,891,861      2,040,689
Commitments (Note 3)
Stockholders' equity (deficit):
  Convertible preferred stock, $0.01 par value;
     4,052,410, 1,551,410 and 902,500 shares
     issued and outstanding as of July 31, 1999,
     1998 and 1997, respectively, (aggregate
     liquidation value of $25,230,054, $10,240,042
     and $6,424,250 as of July 31, 1999, 1998 and
     1997, respectively)..........................        40,524          15,514          9,025
  Common stock, $0.01 par value; 10,500,000
     authorized as of July 31, 1999 and 10,000,000
     shares authorized as of July 31, 1998 and
     1997; 378,886, 166,299 and 8,000 issued and
     outstanding as of July 31, 1999, 1998 and
     1997, respectively...........................         3,789           1,663             80
  Additional paid-in-capital......................    25,250,500      10,351,701      6,109,587
  Deferred compensation...........................      (137,515)        (99,358)       (19,762)
  Accumulated deficit.............................   (18,475,094)    (11,644,577)    (8,568,356)
  Cumulative translation adjustment...............      (329,908)       (230,089)      (236,379)
                                                    ------------    ------------    -----------
          Total stockholders' equity (deficit)....     6,352,296      (1,605,146)    (2,705,805)
                                                    ------------    ------------    -----------
                                                    $ 12,085,046       3,592,479        366,851
                                                    ============    ============    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       F-4
<PAGE>   87

                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    YEARS ENDED JULY 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                           1999           1998          1997
                                                        -----------    ----------    ----------
<S>                                                     <C>            <C>           <C>
Revenues:
  License.............................................  $   649,139       450,241       293,805
  Service.............................................    1,197,299       742,960       301,601
                                                        -----------    ----------    ----------
                                                          1,846,438     1,193,201       595,406
Operating expenses:
  Software development and maintenance................    1,847,581     1,490,567     2,085,475
  Sales and marketing.................................    2,027,442       694,766     2,471,696
  General and administrative..........................    1,202,775       706,443     1,563,506
  Amortization of goodwill and other intangible
     assets...........................................    3,520,792            --            --
                                                        -----------    ----------    ----------
                                                          8,598,590     2,891,776     6,120,677
                                                        -----------    ----------    ----------
          Operating loss..............................   (6,752,152)   (1,698,575)   (5,525,271)
Other income (expense):
  Interest income.....................................      111,884        13,604        48,625
  Interest expense....................................     (214,830)   (1,296,929)     (201,594)
  Loss on disposal of assets..........................       (6,452)           --       (93,741)
  Minority interest...................................           --            --        35,666
  Foreign exchange, net...............................       32,633       (93,521)      384,770
                                                        -----------    ----------    ----------
          Total other income (expense)................      (76,765)   (1,376,846)      173,726
                                                        -----------    ----------    ----------
          Loss before taxes...........................   (6,828,917)   (3,075,421)   (5,351,545)
Franchise tax expense.................................        1,600           800           800
                                                        -----------    ----------    ----------
Net loss..............................................  $(6,830,517)   (3,076,221)   (5,352,345)
                                                        ===========    ==========    ==========
Basic and diluted net loss per share..................  $    (23.96)       (25.75)      (669.04)
                                                        ===========    ==========    ==========
Weighted average number of basic and diluted shares
  outstanding.........................................      285,093       119,473         8,000
                                                        ===========    ==========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       F-5
<PAGE>   88

                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                    YEARS ENDED JULY 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
                                                                        PREFERRED STOCK
                                                            ----------------------------------------
                                           COMMON STOCK       SHARES           SHARES
                                          ---------------   ISSUED AND    CONVERTIBLE INTO               ADDITIONAL
                                          SHARES   AMOUNT   OUTSTANDING     COMMON STOCK     AMOUNT    PAID-IN CAPITAL
                                          -------  ------   -----------   ----------------   -------   ---------------
<S>                                       <C>      <C>      <C>           <C>                <C>       <C>
BALANCE AS OF JULY 31, 1996.............       --  $  --       902,500       4,960,000       $ 9,025     $ 6,038,969
Issuance of common stock in connection
  with acquisition of software
  technology............................    8,000     80            --              --            --           3,920
Deferred compensation related to grant
  of stock options......................       --     --            --              --            --         127,577
Deferred compensation related to
  canceled stock options................       --     --            --              --            --         (60,879)
Amortization of deferred compensation...       --     --            --              --            --              --
Accumulated translation adjustment......       --     --            --              --            --              --
Net loss................................       --     --            --              --            --              --
                                          -------  ------    ---------       ---------       -------     -----------
BALANCE AS OF JULY 31, 1997.............    8,000     80       902,500       4,960,000         9,025       6,109,587
Issuance of common stock in connection
  with acquisition of software
  technology............................   73,185    732            --              --            --          35,861
Issuance of common stock under stock
  option plan...........................   85,114    851            --              --            --            (501)
Deferred compensation related to grant
  of stock options......................       --     --            --              --            --         114,778
Amortization of deferred compensation...       --     --            --              --            --              --
Issuance of Series C convertible
  preferred stock.......................       --     --       648,910         648,910         6,489       3,471,666
Intrinsic value of beneficial conversion
  feature on convertible loan...........       --     --            --              --            --         620,310
Accumulated translation adjustment......       --     --            --              --            --              --
Net loss................................       --     --            --              --            --              --
                                          -------  ------    ---------       ---------       -------     -----------
BALANCE AS OF JULY 31, 1998.............  166,299  1,663     1,551,410       5,608,910        15,514      10,351,701
Issuance of common stock in connection
  with acquisition of company...........   50,000    500            --              --            --          49,500
Issuance of common stock under stock
  option plan...........................  162,587  1,626            --              --            --          13,360
Deferred compensation related to grant
  of stock options......................       --     --            --              --            --          79,175
Amortization of deferred compensation...       --     --            --              --            --              --
Issuance of Series C convertible
  preferred stock.......................       --     --       150,000         150,000         1,500         802,500
Issuance of Series D convertible
  preferred stock.......................       --     --     1,976,000       1,976,000        19,760      10,958,014
Issuance of Series E convertible
  preferred stock.......................       --     --       375,000         375,000         3,750       2,996,250
Accumulated translation adjustment......       --     --            --              --            --              --
Net loss................................       --     --            --              --            --              --
                                          -------  ------    ---------       ---------       -------     -----------
BALANCE AS OF JULY 31, 1999.............  378,886  $3,789    4,052,410       8,109,910       $40,524     $25,250,500
                                          =======  ======    =========       =========       =======     ===========

<CAPTION>

                                                                        CUMULATIVE         TOTAL
                                            DEFERRED     ACCUMULATED    TRANSLATION    STOCKHOLDERS'     COMPREHENSIVE
                                          COMPENSATION     DEFICIT      ADJUSTMENT    EQUITY (DEFICIT)       LOSS
                                          ------------   ------------   -----------   ----------------   -------------
<S>                                       <C>            <C>            <C>           <C>                <C>
BALANCE AS OF JULY 31, 1996.............   $ (44,793)    $ (3,216,011)   $  (3,901)     $ 2,783,289       $
Issuance of common stock in connection
  with acquisition of software
  technology............................          --               --           --            4,000
Deferred compensation related to grant
  of stock options......................    (127,577)              --           --               --
Deferred compensation related to
  canceled stock options................      60,879               --           --               --
Amortization of deferred compensation...      91,729               --           --           91,729
Accumulated translation adjustment......          --               --     (232,478)        (232,478)         (232,478)
Net loss................................          --       (5,352,345)          --       (5,352,345)       (5,352,345)
                                           ---------     ------------    ---------      -----------       -----------
BALANCE AS OF JULY 31, 1997.............     (19,762)      (8,568,356)    (236,379)      (2,705,805)       (5,584,823)
                                                                                                          ===========
Issuance of common stock in connection
  with acquisition of software
  technology............................          --               --           --           36,593
Issuance of common stock under stock
  option plan...........................          --               --           --              350
Deferred compensation related to grant
  of stock options......................    (114,778)              --           --               --
Amortization of deferred compensation...      35,182               --           --           35,182
Issuance of Series C convertible
  preferred stock.......................          --               --           --        3,478,155
Intrinsic value of beneficial conversion
  feature on convertible loan...........          --               --           --          620,310
Accumulated translation adjustment......          --               --        6,290            6,290             6,290
Net loss................................          --       (3,076,221)          --       (3,076,221)       (3,076,221)
                                           ---------     ------------    ---------      -----------       -----------
BALANCE AS OF JULY 31, 1998.............     (99,358)     (11,644,577)    (230,089)      (1,605,146)       (3,069,931)
                                                                                                          ===========
Issuance of common stock in connection
  with acquisition of company...........          --               --           --           50,000
Issuance of common stock under stock
  option plan...........................          --               --           --           14,986
Deferred compensation related to grant
  of stock options......................     (79,175)              --           --               --
Amortization of deferred compensation...      41,018               --           --           41,018
Issuance of Series C convertible
  preferred stock.......................          --               --           --          804,000
Issuance of Series D convertible
  preferred stock.......................          --               --           --       10,977,774
Issuance of Series E convertible
  preferred stock.......................          --               --           --        3,000,000
Accumulated translation adjustment......          --               --      (99,819)         (99,819)          (99,819)
Net loss................................          --       (6,830,517)          --       (6,830,517)       (6,830,517)
                                           ---------     ------------    ---------      -----------       -----------
BALANCE AS OF JULY 31, 1999.............   $(137,515)    $(18,475,094)   $(329,908)     $ 6,352,296       $(6,930,336)
                                           =========     ============    =========      ===========       ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-6
<PAGE>   89

                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                    YEARS ENDED JULY 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                 1999           1998          1997
                                                              -----------    ----------    ----------
<S>                                                           <C>            <C>           <C>
Cash flows from operating activities:
  Net loss..................................................  $(6,830,517)   (3,076,221)   (5,352,345)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization..........................       88,671       125,163       159,247
     Amortization of goodwill and other intangible assets...    3,520,792            --            --
     Amortization of deferred compensation..................       41,018        35,182        91,729
     Amortization of beneficial conversion feature and
      prepayment premium on convertible loan................           --       903,643            --
     Loss on disposal of assets.............................        6,452            --        93,741
     Other..................................................           --        35,861            --
     Minority interest in loss of subsidiary................           --            --       (35,666)
     Changes in assets and liabilities:
       Accounts receivable..................................     (624,807)     (157,340)       (1,245)
       Projects in progress.................................     (166,360)           --            --
       Prepaid expenses and other current assets............      (74,634)      (75,433)       75,440
       Accounts payable.....................................      210,685       (96,320)     (120,162)
       Accrued expenses.....................................      429,101       322,520       439,168
       Deferred revenues....................................       29,708        31,481            --
                                                              -----------    ----------    ----------
          Net cash used in operating activities.............   (3,369,891)   (1,951,464)   (4,650,093)
                                                              -----------    ----------    ----------
Cash flows from investing activities:
  Acquisition, net of cash acquired.........................      (94,978)           --            --
  Additions to equipment....................................     (205,738)      (65,721)     (122,345)
  Proceeds from sale of assets..............................       18,825            --        40,596
  Change in other assets....................................       (2,947)       33,096       (75,406)
                                                              -----------    ----------    ----------
          Net cash used in investing activities.............     (284,838)      (32,625)     (157,155)
                                                              -----------    ----------    ----------
Cash flows from financing activities:
  Proceeds from issuance of notes payable...................           --     2,521,447     2,076,727
  Repayment of notes payable................................           --      (500,000)           --
  Proceeds from issuance of preferred stock.................    3,804,000     2,978,155            --
  Proceeds from issuance of common stock....................       14,986         1,082            --
                                                              -----------    ----------    ----------
          Net cash provided by financing activities.........    3,818,986     5,000,684     2,076,727
                                                              -----------    ----------    ----------
Effect of exchange rate changes on cash.....................      (60,578)       66,832      (338,995)
                                                              -----------    ----------    ----------
Net increase (decrease) in cash and cash equivalents........      103,679     3,083,427    (3,069,516)
Cash and cash equivalents at beginning of period............    3,111,002        27,575     3,097,091
                                                              -----------    ----------    ----------
Cash and cash equivalents at end of period..................  $ 3,214,681     3,111,002        27,575
                                                              ===========    ==========    ==========
Supplemental disclosure of cash flow information:
  Interest paid.............................................  $   226,185       192,190        60,000
                                                              ===========    ==========    ==========
  Franchise taxes paid......................................  $     1,600           800           800
                                                              ===========    ==========    ==========
Non-cash financing and investing activities:
  Deferred compensation related to stock option issuances...  $    79,175       114,778       127,577
                                                              ===========    ==========    ==========
  Issuance of common stock in connection with acquisition of
     software technology....................................  $        --        35,861         4,000
                                                              ===========    ==========    ==========
  Issuance of common stock in connection with acquisition of
     company................................................  $    50,000            --            --
                                                              ===========    ==========    ==========
  Issuance of preferred stock in connection with acquisition
     of minority interests..................................  $10,977,774            --            --
                                                              ===========    ==========    ==========
  Conversion of note payable into preferred stock...........  $        --       500,000            --
                                                              ===========    ==========    ==========
  Intrinsic value of beneficial conversion feature on
     convertible loan.......................................  $        --       620,310            --
                                                              ===========    ==========    ==========
  Recognition of prepayment premium on convertible loan.....  $        --       283,333            --
                                                              ===========    ==========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       F-7
<PAGE>   90

                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

  (a) Business Description

     blaxxun interactive, Inc. (the "Company") develops and licenses technology
products for virtual worlds on the Internet. The Company has developed software
for servers and technology for multimedia web site environments, which are
intended to provide a more realistic experience on the Internet.

     The blaxxun(TM) Community Platform is a multi-user server product. The
blaxxun Community Platform provides the basis for the Company's family of client
products (blaxxun Contact(TM) and blaxxun3D(TM)) and developer packages that are
the basis for custom solutions and packaged applications. These products also
enable customers to create virtual worlds on the Internet. The Company invests
in selected online communities, based on the blaxxun(TM) Community Platform,
such as Cybertown (www.cybertown.com), a science fiction community.

     The Company conducts its business within three business segments: Products,
Professional Services and Communities.

     The Company was incorporated under the laws of the State of Delaware in
July 1995. The Company's wholly owned subsidiaries are blaxxun interactive AG,
incorporated under the laws of Germany and Cybertown, Inc., a company
incorporated in the State of Delaware (together the "Subsidiaries"). U.S.
principle executive offices are located in San Francisco and European executive
offices are located in Munich, Germany.

     The Company is subject to a number of risks, including, but not limited to
rapid technology changes, dependence on certain significant customers and
changes in the exchange rate between the U.S. dollar and the Deutsche Mark or
euro. The future viability of the Company is dependent upon its ability to
develop or acquire new technologies which may require substantial investments.
Portions of such investments might not be recoverable if development efforts are
not successful or fail to gain commercial market acceptance. These investments
are dependent upon the Company's ability to generate sufficient cash flows from
operations in the future or to raise additional capital through other means.

  (b) Principles of Consolidation and Basis of Presentation

     The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America. The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.

  (c) Revenue Recognition

     The Company generates revenue from: product licensing fees; post-contract
support and maintenance; and collaborative software co-development agreements
with public entities, primarily the European Commission (Product segment);
solutions to modify, customize and integrate the software (Professional Services
segment;) and from the operation of Internet communities (Communities segment).

     The Company recognizes revenues in accordance with AICPA Statement of
Position (SOP) 97-2, Software Revenue Recognition. Product license fee revenues
are recognized when the following criteria have been met: persuasive evidence of
an arrangement exists; delivery has occurred; the fee is fixed or determinable;
and collectibility is probable. Revenue from multiple element software
arrangements are allocated to each element of the arrangement based on the
relative fair value of each element. Advance payments received in excess of
amounts earned are recorded as deferred income.

                                       F-8
<PAGE>   91
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Revenues from post-contract customer support and maintenance services are
recognized ratably over the term of the support period, typically twelve months.
Revenue from Professional Services is recognized when earned based upon the
performance requirements of the respective agreements. These agreements are
generally less than one year. Revenues from the operation of Internet
communities are recognized as the services are performed.

     Barter transactions are recognized when services have been received or used
and are reported at the estimated fair value of the services received. No
revenue was recognized from barter transactions during any of the three years
ended July 31, 1999. During fiscal 1999, Cybertown entered one barter
transaction, however, the fair value of the transaction was not determinable
and, therefore, no revenue or expense was recognized.

     Public Entity Agreements

     The Company has been awarded co-development agreements with public
entities, primarily the European Commission. These agreements typically call for
the collaboration of the Company and others on the development of a specified
software technology. Revenue under collaborative co-development agreements
typically consist of research and co-development milestone payments. Revenue is
earned upon the attainment milestones, which is determined when the public
entity agrees that the required results stipulated in the contract have been
met. The Company does not have an obligation to refund, nor does there exist the
presumption of an obligation to refund, ongoing research and co-development
payments.

     The Company's collaborative agreements with the European Commission are
generally three years in length, are classified as product revenues and have
accounted for 19%, 21% and 0% of total revenues in 1999, 1998 and 1997,
respectively. Such revenues approximate one half of the aggregate research and
development expenses and applicable overhead costs incurred by the Company. As
part of the long-term agreements, the European Commission acquires the right to
internally use and purchase, on favorable terms, the products that are developed
as a result of research and development activities. The collaborators retain the
rights to market the products developed.

  (d) Cash and Cash Equivalents

     Cash and cash equivalents consist of cash on deposit with banks and
investments with maturities of three months or less at the time of acquisition.

  (e) Projects in Process

     Projects in process includes costs incurred on collaborative software
co-development agreements and contracts to modify, customize and integrate
software. These costs primarily include direct labor, allocated overhead and any
cost of materials or other specified contract costs.

  (f) Equipment

     Equipment are stated at cost and depreciated on a straight-line basis over
their estimated useful lives, generally three years.

  (g) Goodwill and other Intangible Assets

     The excess of purchase price over the fair value of net assets acquired is
capitalized as goodwill. Goodwill and other intangible assets are amortized on a
straight-line basis over the expected period to be benefited, which is
thirty-six months for goodwill and from seven to thirty-six months for other
intangible assets.

                                       F-9
<PAGE>   92
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (h) Impairment of Long-lived Assets

     The Company reviews long-lived assets, including intangible assets, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Estimated fair value is generally based on either appraised value or
measured by undiscounted estimated future cash flows. Considerable management
judgment is necessary to estimate undiscounted future cash flows.

  (i) Capitalized Software

     Costs incurred in the research and development of new software products are
expensed as incurred until technological feasibility in the form of a working
model has been established. As of July 31, 1999, all costs incurred between
technological feasibility and the first shipment of product have been
insignificant, and, accordingly, no costs have been capitalized.

  (j) Software Development and Maintenance

     Software development and maintenance consists of costs incurred under
co-development contracts; post-contract support and maintenance; and product
research and development.

  (k) Income Taxes

     Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years that those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

  (l) Foreign Currency Translation

     The reporting currency for the consolidated financial statements is the
U.S. dollar. The financial statements of blaxxun interactive AG are measured
using the local currency Deutsche Mark (DM) as the functional currency. Assets
and liabilities of the blaxxun interactive AG are translated to U.S. dollars at
year-end exchange rates, and revenues and expenses are translated at average
rates prevailing during the year. Differences arising from the translation of
assets and liabilities in comparison with the translation of previous periods
are included in other comprehensive income and are reported as a separate
component of stockholders' equity (deficit). Foreign currency transaction gains
and losses are included in results of operations.

     On January 1, 1999, certain member nations of the European Economic and
Monetary Union (EMU) adopted a common currency, the euro. The exchange rates of
the national currencies of all EMU members, including the DM, were fixed to the
euro effective January 1, 1999. This change to the euro is not expected to
significantly impact the Company.

  (m) Stock-Based Compensation

     The Company accounts for its stock-based compensation arrangements using
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25 (APB 25); Accounting for Stock Issued to Employees, and applies the pro forma
disclosure requirements under Statement of Financial Accounting
                                      F-10
<PAGE>   93
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Standards No. 123, Accounting for Stock-Based Compensation. As such,
compensation expense is recorded when, at the date of grant, the intrinsic value
of the underlying common stock exceeds the exercise price for stock options.

  (n) Basic and Diluted Earnings (Loss) per Share

     Basic earnings (loss) per share is based upon the weighted average number
of common shares outstanding during the period. Diluted earnings (loss) per
share is based upon the weighted average number of common shares outstanding
during the period plus additional weighted average common equivalent shares
outstanding during the period, computed using the "if-converted method". Common
equivalent shares have been excluded from the computation of diluted loss per
share, as their effect would have been anti-dilutive in each period presented.
Had the Company reported net income for the fiscal year ended July 31, 1999, the
weighted average number of shares outstanding at July 31, 1999 would have
increased by 446,019 for stock options (not assuming the effects of applying the
treasury stock method).

     The reconciliation of the numerators and denominators of the basic and
diluted loss per share computations for the Company's reported net loss is as
follows:

<TABLE>
<CAPTION>
                                                  BASIC AND DILUTED LOSS PER SHARE
                                                    FOR THE YEARS ENDED JULY 31,
                                              -----------------------------------------
                                                 1999           1998           1997
                                              -----------    -----------    -----------
<S>                                           <C>            <C>            <C>
Numerator:
  Net loss..................................  $(6,830,517)   $(3,076,221)   $(5,352,345)
Denominator:
  Weighted average number of basic and
     diluted shares outstanding.............      285,093        119,473          8,000
                                              -----------    -----------    -----------
Basic and diluted loss per share............  $    (23.96)   $    (25.75)   $   (669.04)
                                              ===========    ===========    ===========
</TABLE>

     As described in Note 4, conversion of all preferred stock will occur upon
the completion of a qualified public offering of the Company's common stock. Had
these shares been converted, the weighted average number of shares would have
increased by 7,646,572, 5,021,286, and 4,960,000 at July 31, 1999, 1998 and
1997, respectively.

  (o) Use of Estimates

     The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates.

  (p) Reclassifications

     Certain prior year amounts have been reclassified to conform to the 1999
presentation.

  (q) New Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains and losses resulting from changes in
the value of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133, as
amended, is effective for the Company's fiscal year

                                      F-11
<PAGE>   94
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

beginning August 1, 2000. The Company has assessed that, based on the derivative
activity during 1999, the adoption of this statement would not have had a
significant impact on its financial position at July 31, 1999 and results of
operations and liquidity for the year then ended. The Company will continue to
monitor the potential financial impact through the date of adoption.

(2) BALANCE SHEET COMPONENTS

  (a) Accounts Receivable

     Included in accounts receivable at July 31, 1999 are $647,348 receivables
from four customers. As of July 31, 1998 six customers accounted for $156,994 of
accounts receivable. The Company did not have a concentration of accounts
receivable at July 31, 1997.

  (b) Equipment

     Equipment consisted of the following as of July 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                       1999        1998        1997
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Purchased software.................................  $125,668      98,340      71,439
Computers and equipment............................   528,267     437,976     397,204
Furniture and fixtures.............................     8,093      10,283       9,732
                                                     --------    --------    --------
                                                      662,028     546,599     478,375
Less accumulated depreciation......................  (452,022)   (421,484)   (296,321)
                                                     --------    --------    --------
                                                     $210,006     125,115     182,054
                                                     ========    ========    ========
</TABLE>

     Depreciation and amortization expense for equipment amounted to $88,671,
$125,163 and $159,247 for the years ended July 31, 1999, 1998 and 1997,
respectively.

  (c) Goodwill and Other Intangible Assets

     Goodwill and other intangible assets consisted of the following as of July
31, 1999:

<TABLE>
<CAPTION>
                                                                 1999
                                                              -----------
<S>                                                           <C>
Goodwill....................................................  $10,575,920
Less accumulated amortization...............................   (3,247,459)
                                                              -----------
  Goodwill, net.............................................    7,328,461
                                                              -----------
Other intangible assets.....................................      205,000
Less accumulated amortization...............................      (78,333)
                                                              -----------
  Other intangible assets, net..............................      126,667
                                                              -----------
Goodwill and other intangible assets, net...................  $ 7,455,128
                                                              ===========
</TABLE>

     Other intangible assets include an assembled workforce and licensing
agreements related to the purchase of the remaining interest in blaxxun
interactive AG. See Note 6 -- Acquisitions for additional discussion.
Amortization expense for intangible assets amounted to $3,325,792 for the year
ended July 31, 1999.

                                      F-12
<PAGE>   95
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (d) Accrued Expenses

     Accrued expenses as of July 31, 1999, 1998 and 1997, consisted of the
following:

<TABLE>
<CAPTION>
                                                       1999         1998        1997
                                                    ----------    ---------    -------
<S>                                                 <C>           <C>          <C>
Accrued interest expense..........................  $  484,829      371,227    152,162
Compensation and benefits.........................     557,673      330,519    201,191
Outstanding invoices..............................     287,605      192,261    132,018
Professional fees.................................     211,042      165,770     98,813
Losses from contractual obligations...............          --       92,068    142,034
Trademark claim...................................          --           --    124,690
Other.............................................      31,859       39,426      4,960
                                                    ----------    ---------    -------
                                                    $1,573,008    1,191,271    855,868
                                                    ==========    =========    =======
</TABLE>

     Accrued interest expense includes a pro rata portion of the expected
repayment premiums of long-term notes payable. See Note 8.

(3) COMMITMENTS

     The Company leases its facilities and certain other equipment under
operating lease agreements expiring through 2004.

     Future minimum lease payments are as follows:

<TABLE>
<CAPTION>
YEAR ENDING JULY 31:
--------------------
<S>                                                           <C>
  2000......................................................  $  582,753
  2001......................................................     467,840
  2002......................................................     461,873
  2003......................................................     353,837
  2004......................................................     353,837
                                                              ----------
                                                              $2,220,140
                                                              ==========
</TABLE>

     Rent expense was $102,706, $121,178 and $340,305 for the years ended July
31, 1999, 1998 and 1997, respectively.

(4) STOCKHOLDERS' EQUITY (DEFICIT)

  (a) Common Stock

     Common stock outstanding as of July 31, 1999, 1998 and 1997 consisted of
378,886, 166,299 and 8,000 shares, par value $0.01.

     On March 17, 1999, the Board of Directors of the Company approved an
increase in the authorized number of shares of common stock from 10,000,000 to
10,500,000.

                                      F-13
<PAGE>   96
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (b) Convertible Preferred Stock

     Convertible preferred stock, par value $0.01 per share, as of July 31, 1999
consisted of the following issuances:

<TABLE>
<CAPTION>
                                              SHARES ISSUED     CONVERTIBLE
                                                   AND         INTO SHARES OF    LIQUIDATION
                                               OUTSTANDING      COMMON STOCK     PREFERENCE
                                              -------------    --------------    -----------
<S>                                           <C>              <C>               <C>
Series A
  Series A-1................................      200,000         1,814,925      $ 1,215,506
  Series A-2................................      135,000         1,225,075        1,186,566
  Series A-3................................      167,500         1,520,000        2,344,191
                                                ---------         ---------      -----------
                                                  502,500         4,560,000        4,746,263
Series B....................................      400,000           400,000        2,336,473
Series C....................................      798,910           798,910        4,503,459
Series D....................................    1,976,000         1,976,000       10,591,360
Series E....................................      375,000           375,000        3,052,500
                                                ---------         ---------      -----------
                                                4,052,410         8,109,910      $25,230,055
                                                =========         =========      ===========
</TABLE>

     Preferred stock as of July 31, 1998 consisted of the following convertible
preferred stock, par value $0.01 per share:

<TABLE>
<CAPTION>
                                              SHARES ISSUED     CONVERTIBLE
                                                   AND         INTO SHARES OF    LIQUIDATION
                                               OUTSTANDING      COMMON STOCK     PREFERENCE
                                              -------------    --------------    -----------
<S>                                           <C>              <C>               <C>
Series A
  Series A-1................................      200,000         1,814,925      $ 1,157,625
  Series A-2................................      135,000         1,225,075        1,130,063
  Series A-3................................      167,500         1,520,000        2,232,563
                                                ---------         ---------      -----------
                                                  502,500         4,560,000        4,520,251
Series B....................................      400,000           400,000        2,225,213
Series C....................................      648,910           648,910        3,494,580
                                                ---------         ---------      -----------
                                                1,551,410         5,608,910      $10,240,044
                                                =========         =========      ===========
</TABLE>

     Preferred stock as of July 31, 1997 consisted of the following convertible
preferred stock, par value $0.01 per share:

<TABLE>
<CAPTION>
                                               SHARES ISSUED     CONVERTIBLE
                                                    AND         INTO SHARES OF    LIQUIDATION
                                                OUTSTANDING      COMMON STOCK     PREFERENCE
                                               -------------    --------------    -----------
<S>                                            <C>              <C>               <C>
Series A
  Series A-1.................................     200,000          1,814,925      $1,102,500
  Series A-2.................................     135,000          1,225,075       1,076,250
  Series A-3.................................     167,500          1,520,000       2,126,250
                                                  -------          ---------      ----------
                                                  502,500          4,560,000       4,305,000
Series B.....................................     400,000            400,000       2,119,250
                                                  -------          ---------      ----------
                                                  902,500          4,960,000      $6,424,250
                                                  =======          =========      ==========
</TABLE>

                                      F-14
<PAGE>   97
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Holders of the preferred stock are entitled to one vote for each share of
common stock into which such shares may be converted.

     Each share of Series A, B, C, D and E preferred stock is convertible into
common stock at the option of the holder, subject to certain adjustments. All
outstanding shares of preferred stock will automatically convert to common stock
upon the completion of an underwritten public offering of the Company's common
stock in which the aggregate gross proceeds equal or exceed $10,000,000. The
Company has reserved a sufficient number of shares of common stock to permit
conversion of the preferred stock in accordance with the respective terms.

     During fiscal 1998 the Company issued 555,626 shares of Series C
convertible preferred stock for cash of $2,978,155. Additionally a note payable
for $500,000 was converted into 93,284 shares of Series C convertible preferred
stock. See Note 8.

     During fiscal 1999 the Company issued 150,000 shares of Series C
convertible preferred stock for cash of $804,000 and 375,000 shares of Series E
convertible preferred stock for cash of $3,000,000. Additionally, during fiscal
1999, the Company issued 1,976,000 shares of Series D convertible preferred
stock in conjunction with the acquisition of the minority interests in blaxxun
interactive AG, as more fully disclosed in Note 6.

     In the event of liquidation, the preferred stock has preference over the
common stock in the amounts of $0.55, $0.82, $1.32, $5.00, $5.36, $5.36 and
$8.00 (adjusted to an as converted basis) per share for Series A-1, A-2, A-3, B,
C, D and E convertible preferred stock, respectively, plus an amount of 5% of
the liquidation preference for such shares of preferred stock compounded per
annum (excluding Series D convertible preferred stock), plus declared but unpaid
dividends, subject to certain adjustments. No dividends have been declared
during the three years until July 31, 1999. The Series D convertible preferred
stock is subordinate in liquidation preference to the Series A, B, C and E
convertible preferred stock.

  (c) Stock Plans

     During 1996, the Company adopted the 1996 Stock Plan (the "1996 Plan").
Pursuant to the 1996 Plan, 1,064,000 shares of the Company's common stock have
been reserved for issuance. The 1996 Plan provides for the grant of incentive
stock options, non-qualified stock options and stock awards to employees of the
Company. Under the 1996 Plan, incentive stock options shall not be granted at
less than the fair market value per share of common stock on the date of grant
and all other options to purchase shares of common stock may be granted at an
exercise price determined by the Compensation Committee of the Board of
Directors or, in the absence of such a committee, by the Board of Directors and
such exercise price shall not be less than the minimum legal consideration
required under the laws of the State of Delaware. Employee options expire 10
years from the date granted and generally vest over service periods ranging up
to 48 months.

     During 1999, the Company adopted the 1999 Stock Plan (the "1999 Plan").
Pursuant to the 1999 Plan, 1,000,000 shares of the Company's common stock have
been reserved for issuance. The 1999 Plan provides for the grant of incentive
stock options, non-qualified stock options and stock awards to current and
future employees of the Company. The terms and conditions under the 1999 Plan
are consistent with the 1996 Plan. No options under the 1999 Plan were granted
during the fiscal year ended July 31, 1999.

                                      F-15
<PAGE>   98
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Changes in outstanding options under the Company's 1996 Plan are as
follows:

<TABLE>
<CAPTION>
                                                         NUMBER OF
                                                          OPTIONS            RANGE OF
                                                        OUTSTANDING       EXERCISE PRICE
                                                     -----------------    --------------
<S>                                                  <C>                  <C>
Balance as of July 31, 1996........................       264,936         $       0.0013
  Options granted..................................       373,611          0.0013 - 1.00
  Options canceled.................................      (329,757)         0.0013 - 1.00
                                                         --------         --------------
Balance as of July 31, 1997........................       308,790         $0.0013 - 0.50
  Options granted..................................       265,585            0.01 - 0.50
  Options exercised................................       (85,114)         0.0013 - 0.50
  Options canceled.................................       (42,471)         0.0013 - 0.50
                                                         --------         --------------
Balance as of July 31, 1998........................       446,790         $  0.01 - 0.50
  Options granted..................................       225,500            0.01 - 3.00
  Options exercised................................      (162,587)           0.01 - 0.50
  Options canceled.................................       (27,818)           0.01 - 2.00
                                                         --------         --------------
Balance as of July 31, 1999........................       481,885         $  0.01 - 3.00
                                                         ========         ==============
</TABLE>

<TABLE>
<CAPTION>
                                                     OPTIONS OUTSTANDING
                               ----------------------------------------------------------------
                                   NUMBER                                            NUMBER
                               OUTSTANDING AT                                    OUTSTANDING AT
                               JULY 31, 1998    GRANTED   EXERCISED   CANCELED   JULY 31, 1999
                               --------------   -------   ---------   --------   --------------
<S>                            <C>              <C>       <C>         <C>        <C>
Exercise price $0.01.........     255,990        50,000   (135,108)    (1,750)      169,132
Exercise price $0.50.........     190,800         4,700    (27,479)    (4,084)      163,937
Exercise price $1.50.........          --        43,500         --    (20,333)       23,167
Exercise price $2.00.........          --        43,300         --     (1,651)       41,649
Exercise price $2.50.........          --         2,000         --         --         2,000
Exercise price $3.00.........          --        82,000         --         --        82,000
                                  -------       -------   --------    -------       -------
                                  446,790       225,500   (162,587)   (27,818)      481,885
                                  =======       =======   ========    =======       =======
</TABLE>

     The weighted average grant date fair value of options granted during the
year ended July 31, 1999 was $1.94.

     The following table provides summary information about the Company's stock
options outstanding and stock options exercisable at July 31, 1999:

<TABLE>
<CAPTION>
                                            WEIGHTED        WEIGHTED                       WEIGHTED
                                             AVERAGE        AVERAGE       EXERCISABLE      AVERAGE
RANGE OF               OUTSTANDING AT      CONTRACTUAL      EXERCISE      AT JULY 31,      EXERCISE
EXERCISE PRICE         JULY 31, 1999          LIFE           PRICE           1999           PRICE
--------------         --------------      -----------      --------      -----------      --------
<S>                    <C>                 <C>              <C>           <C>              <C>
$0.01 - $1.00             333,069              8.5           $0.25          157,652         $0.14
$1.00 - $2.00              64,816              9.4            1.64            7,944          1.46
$2.00 - $3.00              84,000              9.7            2.99                0             0
                          -------              ---           -----          -------         -----
                          481,885              8.8           $0.92          165,596         $0.20
                          =======              ===           =====          =======         =====
</TABLE>

     As of July 31, 1999, 1998 and 1997, there was an aggregate 1,203,229,
450,911 and 747,210 additional shares available for grant under the 1996 and
1999 Plans.

     The Company accounts for stock-based compensation using the intrinsic value
method prescribed by APB No. 25, Accounting for Stock Issued to Employees, under
which no compensation cost for stock options

                                      F-16
<PAGE>   99
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

is recognized for stock option awards granted at or above fair market value. The
Company has recorded deferred compensation expense during the years ended July
31, 1999, 1998 and 1997 of $79,175, $114,778 and $127,577, respectively, for the
difference between the grant price and the estimated fair value of the Company's
stock as of the date of grant. This amount is being amortized over the vesting
period, generally ranging up to 48 months, of the individual option grants on a
straight-line basis, determined separately for each portion of the options that
vest in each year. Deferred compensation expense amortized during the years
ended July 31, 1999, 1998 and 1997 was $41,018, $35,182 and $91,729,
respectively.

     Had the Company determined compensation cost based on the fair value at the
grant date under SFAS No. 123, the Company's net loss would have been increased
to the pro-forma amounts indicated below.

<TABLE>
<CAPTION>
                                                   1999           1998          1997
                                                -----------    ----------    ----------
<S>                                             <C>            <C>           <C>
Net Loss:
  As reported.................................  $(6,830,517)   (3,076,221)   (5,352,345)
  Effect of 1996 Plan.........................      (51,982)     (140,796)     (293,001)
                                                -----------    ----------    ----------
  Pro forma...................................  $(6,882,499)   (3,217,017)   (5,645,346)
                                                ===========    ==========    ==========
</TABLE>

     The fair value of stock options is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: 1999 risk free interest rate of 5.9%, an expected dividend yield of
0.0%, and an expected life of 7 years; 1998 risk free interest rate of 6.3%, an
expected dividend yield of 0.0%, and an expected life of 7 years; 1997 risk free
interest rate of 6.42% and an expected life of 10 years.

     Pro forma results reflect only options granted in 1999, 1998 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts referred
to above because compensation cost is reflected over the vesting period of the
options.

(5) RELATED PARTY TRANSACTIONS

     CMGI@Ventures (CMGI) and affiliated companies have provided the Company
with services during the years ended July 31, 1999, 1998 and 1997 for which
$59,706, $46,223 and $60,007, respectively, in fees were charged. CMGI is a
related party by virtue of its ownership of the Company's entire Series A
convertible preferred stock, and 93,284 shares of Series C convertible preferred
stock. Based on the Company's outstanding common and preferred shares as of July
31, 1999, CMGI's financial interest reflected a 56.46% voting interest in the
Company.

     In addition, the Company recognized revenues of $243,000 with CMGI-related
companies in the year ended July 31, 1997. The Company did not have related
party revenues in the years ended July 31, 1999 and 1998.

(6) ACQUISITIONS

     During fiscal 1996, the Company acquired a 50.5% interest in blaxxun
interactive AG upon its formation for $36,973 in cash. Effective August 11,
1997, the Company increased its interest in blaxxun interactive AG by 8.25% to
58.75% through a $500,000 capital contribution. Since the financial interest of
the minority shareholders was reduced to zero during 1997, all financial results
of blaxxun interactive AG since that date have been 100% consolidated by the
Company.

     On August 10, 1998, the Company acquired 458 shares of blaxxun interactive
AG in exchange for 1,829,631 shares of Series D convertible preferred stock of
the Company. The Series D convertible preferred stock was valued by an
independent consultant at $5.36 per share, or total consideration of $9,806,822.
The acquisition represented 38.17% of the outstanding common stock of blaxxun
interactive AG.

                                      F-17
<PAGE>   100
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On June 30, 1999, the Company acquired the remaining shares of blaxxun
interactive AG in exchange for 146,369 shares of Series D convertible preferred
stock of the Company. The Series D convertible preferred shares were valued by
an independent consultant at $8.00 per share, or total consideration of
$1,170,952.

     The Company accounted for the acquisitions of the minority interests using
the purchase method of accounting. During 1999, the Company incurred a charge
immediately following the acquisition for purchased research and development
costs. The charge of $195,000, included in amortization expense, represents the
fair value of the technologies acquired for use in the Company's own development
efforts. The Company determined the amount of the purchase price to be allocated
to in-process research and development based upon an independent third party
valuation. The technological feasibility of the products being developed had not
been established as of the date of the acquisition and, if unsuccessful, had no
alternative future use in research and development activities or otherwise. The
purchase price was also allocated to identifiable intangible assets including an
assembled work force ($190,000); licensing agreements ($15,000) and goodwill
($10,577,774). These intangible assets are being amortized over periods ranging
from seven to 36 months.

     On October 31, 1998, the Company acquired all the shares of Cybertown, Inc.
in exchange for 50,000 shares of common stock of the Company. The shares were
valued at $1.00 per share. In addition, the Company paid a cash consideration of
$100,000 and assumed net liabilities of $ 32,386.

     On August 20, 1997, the Company acquired substantially all of the
technology rights of GLView, a VRML browser for 73,185 shares of common stock,
which had a fair value of $36,593.

     In August 1996, the Company acquired substantially all of the technology
rights and assets of Attic Graphics, Inc. for $5,000 in cash and 8,000 shares of
common stock.

(7) INCOME TAXES

     Loss before income taxes is attributable to the following geographic
locations for the fiscal years ended July 31:

<TABLE>
<CAPTION>
                                                   1999           1998          1997
                                                -----------    ----------    ----------
<S>                                             <C>            <C>           <C>
United States.................................  $(5,455,279)     (978,545)   (4,733,232)
Germany.......................................   (1,373,638)   (2,096,876)     (618,313)
                                                -----------    ----------    ----------
Loss before taxes.............................  $(6,828,917)   (3,075,421)   (5,351,545)
                                                ===========    ==========    ==========
</TABLE>

     Income tax expense for the years ended July 31, consisted of the following:

<TABLE>
<CAPTION>
                                                               1999     1998    1997
                                                              ------    ----    ----
<S>                                                           <C>       <C>     <C>
Current:
  United States.............................................  $1,600    800     800
  Germany...................................................      --     --      --
                                                              ------    ---     ---
                                                               1,600    800     800
                                                              ------    ---     ---
Deferred:
  United States.............................................      --     --      --
  Germany...................................................      --     --      --
                                                              ------    ---     ---
                                                              $1,600    800     800
                                                              ======    ===     ===
</TABLE>

                                      F-18
<PAGE>   101
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at July 31, are
presented below:

<TABLE>
<CAPTION>
                                                      1999          1998        1997
                                                   -----------    --------    --------
<S>                                                <C>            <C>         <C>
Accrued expenses.................................  $   178,414       2,142          --
Deferred start-up costs..........................       57,228     110,997     155,395
Net operating loss carryforwards.................    1,693,371     616,430     360,598
Others...........................................          544         272         272
                                                   -----------    --------    --------
Total deferred tax assets........................    1,929,557     729,841     516,265
Less valuation allowance.........................   (1,926,902)   (726,985)   (414,491)
                                                   -----------    --------    --------
Total deferred tax assets less valuation
  allowance......................................        2,655       2,856     101,774
                                                   -----------    --------    --------
Deferred tax liabilities.........................       (2,655)     (2,856)   (101,774)
Total deferred tax liabilities...................       (2,655)     (2,856)   (101,774)
                                                   -----------    --------    --------
Net deferred tax.................................           --          --          --
                                                   ===========    ========    ========
</TABLE>

     The acquisitions of blaxxun interactive AG and Cybertown, Inc. were
structured as a tax-free exchange of stock, therefore, the difference between
recognized fair values of acquired net assets and their historical tax bases are
not deductible for tax purposes.

     The Company computes its income tax provision on a separate return basis.
Prior to August 1, 1998 the Company was included as a member of the CMGI
consolidated group for income tax purposes. As such, all U.S. federal and
California state net operating losses and research credits generated by the
Company since inception to July 31, 1998 have been fully utilized by the CMGI
consolidated group and will not be available to the Company in the future.

     Based on the available objective evidence, management believes it is more
likely than not that the net deferred tax assets will not be fully realizable,
therefore, management has established a valuation allowance for a portion of
deferred tax assets. The valuation allowance for deferred tax assets was
$1,926,902, $726,985 and $414,491 as of July 31, 1999, 1998, and 1997,
respectively. The net change in the valuation allowance for the year ended July
31, 1999 and 1998 was an increase of $1,199,917 and $312,494, respectively.

     At July 31, 1999, 1998 and 1997, the Company had total net operating loss
carryforwards of $3,656,778, $1,146,633 and $670,756, respectively, of which
$1,703,868, $1,146,633 and $670,756 related to its German operations and
$1,952,910, $0 and $0 to its U.S. operations, respectively. The net operating
loss carryforwards are available to reduce future income subject to income
taxes. The U.S. net operating loss carryforwards expire in 2019 and the German
net loss carryforwards are not subject to an expiration date.

     U.S. tax laws impose substantial restrictions on the utilization of net
operating loss and credit carryforwards in the event of an "ownership change"
for tax purposes, as defined in Section 382 of the Internal Revenue Code. German
tax regulations impose similar restrictions. The Company has not yet determined
whether an ownership change occurred due to significant stock transactions in
each of the reporting years disclosed. If an ownership change occurred,
utilization of the net operating loss carryforwards could be reduced
significantly.

                                      F-19
<PAGE>   102
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table presents the principal reasons for the difference
between the effective tax rate and the United States federal statutory income
tax rate of 34% for the years ended July 31:

<TABLE>
<CAPTION>
                                                   1999           1998          1997
                                                -----------    ----------    ----------
<S>                                             <C>            <C>           <C>
Computed "expected" income tax (benefit)
expense at the United States federal statutory
income tax rate...............................  $(2,321,832)   (1,045,643)   (1,819,525)
Increase (decrease) in taxes resulting from:
  State and local income tax expense..........        1,600           800           800
  Losses for which tax benefit was not
     utilized.................................    1,493,214       662,072       332,405
  Losses transferred to CMGI consolidated
     group....................................           --       317,830     1,605,468
  Goodwill amortization.......................    1,207,333
  Foreign tax rate differential...............     (415,802)       50,866      (122,179)
  Nondeductible expenses......................       37,087        14,875         3,831
                                                -----------    ----------    ----------
Provision for income taxes....................  $     1,600           800           800
                                                -----------    ----------    ----------
Effective income tax rate.....................        (0.02)%       (0.04)%       (0.01)%
                                                ===========    ==========    ==========
</TABLE>

(8) NOTES PAYABLE

     Notes payable consisted of the following as of July 31, 1999, 1998 and
1997:

<TABLE>
<CAPTION>
                                                      1999         1998         1997
                                                   ----------    ---------    ---------
<S>                                                <C>           <C>          <C>
Unsecured convertible note due 2007..............  $       --           --      400,000
Unsecured DM 3,000,000 note due 2006
  (Note I).......................................   1,639,435    1,689,664    1,640,689
Unsecured DM 1,700,000 note due 2007
  (Note II)......................................     929,012      957,477           --
Unsecured DM 1,700,000 convertible note due 2007
  (Note III).....................................   1,207,716    1,244,720           --
                                                   ----------    ---------    ---------
                                                   $3,776,163    3,891,861    2,040,689
                                                   ==========    =========    =========
</TABLE>

     On July 24, 1996, blaxxun interactive AG entered into an unsecured loan
agreement due on July 31, 2006 for which total borrowings cannot exceed
DM3,000,000 (Note I). Interest includes both a fixed and variable component
depending on the amount of borrowings and the schedule of repayment. The fixed
interest rate is 6% per annum payable in arrears on March 31 and September 30.
For the variable interest portion of Note I, see discussion of Note II below.
The original issue discount is 1% of the face value of the note, payable at the
time of issuance which the Company is amortizing on a straight-line basis over
60 months. A repayment premium of 15% of the face value of the note is payable
in case of repayment by July 29, 1998. The repayment premium is 30% in case of
repayment from July 30, 1998 to July 30, 2001. The repayment premium increases
by 6% each year after July 31, 2001. The maximum repayment premium is 60% in
case of repayment by July 31, 2006. The Company is accruing, as part of interest
expense, a repayment premium assuming repayment of the note prior to July 30,
2001. The Company can call and repay the note on a half-year-basis on June 30
and December 31 by giving three months prior notice. The issuance of the note
required a long-term loan from the Company to blaxxun interactive AG of
DM3,000,000 (the "Intercompany Loan"). The holder of the note can terminate the
note in certain circumstances, including in the case of repayment of the
Intercompany Loan.

                                      F-20
<PAGE>   103
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On August 26, 1997, blaxxun interactive AG entered into an unsecured loan
agreement due on December 31, 2007 for which total borrowings cannot exceed
DM1,700,000 (Note II). Interest includes both a fixed and variable component
depending on the amount of borrowings and the schedule of repayment. The fixed
interest rate is 7% per annum payable in arrears on May 31 and November 30. For
Notes I and II combined, variable interest is computed at 9% of the Company's
net income, if any. The original issue discount is 1% of the face value of the
note, payable at the time of issuance which the Company is amortizing on a
straight-line basis over 60 months. A repayment premium of 15% of the face value
of the note is payable in case of repayment by August 25, 1999. The repayment
premium is 35% in case of repayment from August 26, 1999 to August 25, 2002. The
repayment premium increases by 7% each year after August 26, 2002. The maximum
repayment premium is 70% in case of repayment by December 31, 2007. The Company
is accruing a repayment premium as part of interest expense, assuming repayment
of the note prior to August 25, 2002. The Company can call and repay the note on
a half-year-basis on June 30 and December 31 by giving three months prior
notice. Issuance of the note required a long-term loan or equity financing from
the Company to blaxxun interactive AG of DM1,700,000 (the "Intercompany
Financing"). The holder of the note can terminate the note in certain
circumstances, including in the case of repayment of the Intercompany Financing.

     On November 24, 1997, blaxxun interactive AG entered into an unsecured
convertible loan agreement due on December 31, 2007 for which total borrowings
cannot exceed DM1,700,000 (Note III). Interest includes both a fixed and
variable component depending on the amount of borrowings and the schedule of
repayment. The fixed interest rate is 6.75% per annum payable quarterly in
arrears on March 31, June 30, September 30 and December 31. Variable interest is
8% of the Company's net income, if any. The minimum variable interest is 4% per
annum of the face value of the note, payable in the case the Company generates
net income. The maximum variable interest per annum is 10% of the face value of
the note. The loan agreement contains a repayment premium of 30% of the face
value of the note or DM510,000. The note is convertible into Series B
convertible preferred stock based on a formula which considers subsequent
financings by the Company through June 30, 1998. As a result the convertible
note was issued with a beneficial conversion feature with an intrinsic value of
approximately $620,310, which was allocated to additional paid-in-capital.
During fiscal 1998 the Company amortized $903,643, representing the value of the
beneficial conversion feature and the repayment premium, to interest expense
over the period from the date of issuance to June 30, 1998, the first date the
loan was convertible. The Company can call and repay the note on a
half-year-basis on June 30 and December 31 by giving 3 months prior notice.
Issuance of the note required a long-term loan or equity financing from the
Company to blaxxun interactive AG of DM 1,700,000. This is the same loan as
mentioned above (the "Intercompany Financing"). The holder of the note can
terminate the note in certain circumstances, including in case of repayment of
the Intercompany Financing. On April 21, 1999, the holder of the note exercised
the conversion option. The note was not converted at July 31, 1999, due to the
parties clarifying one component of the conversion formula. The Company has
continued to accrue interest on this obligation through July 31, 1999, pending
completion of the negotiations.

     The loan agreements contain various covenants, including that the holder of
the note can terminate the note in case of repayment of the Intercompany
Financing and Intercompany Loan. The Company was in compliance with such
agreements at July 31, 1999, 1998 and 1997.

     On September 11, 1997, the Company entered into a convertible loan
agreement with CMG@Ventures and ERM Equity Research and Management
Aktiengesellschaft fur Beteiligungsberatung for which total borrowings would not
exceed $1,000,000. As of July 31, 1997, the Company had borrowed $400,000 in
anticipation of the agreement. During the fiscal year 1998, the Company borrowed
an additional $600,000. Borrowings under this agreement mature on December 31,
2007 and are secured by certain assets of the Company. The interest rate was
equal to FIBOR plus 4%. In June 1998, $500,000 of the note was converted into
93,284 shares of Series C convertible preferred stock based on the terms of the
Series C Convertible

                                      F-21
<PAGE>   104
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Preferred Stock Purchase agreement, dated June 24, 1998. In July 1998, the
remaining $500,000 was repaid. Upon conversion and repayment this loan agreement
was cancelled.

(9) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following table presents the carrying amounts and fair values of the
Company's financial instruments at July 31, 1999, 1998 and 1997. FASB Statement
No. 107, Disclosures about Fair Value of Financial Instruments, defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.

<TABLE>
<CAPTION>
                                          1999                    1998                    1997
                                 ----------------------   ---------------------   ---------------------
                                  CARRYING      FAIR      CARRYING      FAIR      CARRYING      FAIR
                                   AMOUNT       VALUE      AMOUNT       VALUE      AMOUNT       VALUE
                                 ----------   ---------   ---------   ---------   ---------   ---------
<S>                              <C>          <C>         <C>         <C>         <C>         <C>
Notes payable..................  $3,776,163   5,598,172   3,891,861   4,798,626   2,040,689   2,295,649
</TABLE>

  Estimation of Fair Values

     The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments.

     Short-term financial instruments are valued at their carrying amounts
included in the statement of financial position, which are reasonable estimates
of fair value due to the relatively short period to maturity of the instruments.
This approach applies to cash and cash equivalents, receivables, and accounts
payable.

     Notes payable are valued at their present value of estimated future cash
flows using a discount rate commensurate with the risks involved and assuming no
variable interest due based on the Company's net income. Notes payable
convertible into preferred stock are valued as if conversion on the balance
sheet date using the fair value of preferred securities derived from an
independent third party valuation.

(10) BUSINESS SEGMENTS

     In fiscal 1999, the Company adopted SFAS 131, Disclosures about Segments of
an Enterprise and Related Information.

     Starting in fiscal 1999, the Company conducts its business within three
business segments: Products, Professional Services and Communities. The Products
segment develops, markets and licenses the Company's technology products for
virtual worlds on the Internet; provides post-contract support and maintenance;
and enters into collaborative co-development agreements for the development of
specific technological applications. In the Professional Services segment, the
Company supports customers in the design, customization and integration of the
Company's technology products into the software systems of their customers. The
Communities segment operates selected online communities, based on blaxxun's
technology. During 1999, the operations of the Communities segment consisted
solely of Cybertown, an Internet entertainment website.

     The Company's Chief Executive Officer is its Chief Operating Decision Maker
("CODM"). The CODM evaluates the performance of its segments based on revenues
and EBITA ("earnings before interest, taxes and amortization of goodwill and
other intangible assets"). Based on the nature of the Company's business, assets
are not reported internally on a segment by segment basis. In addition, the CODM
does not allocate resources based on segment assets. Therefore, segment assets
have not been presented by segment in the accompanying schedules. There are no
differences between the accounting policies used to measure profit and loss for
segments and those used on a consolidated basis. Inter-segment transactions are
recorded at the estimated fair value of the transaction. Revenues are allocated
to countries based on the location of the customer.

                                      F-22
<PAGE>   105
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     EBITA should not be construed as an alternative to net earnings determined
in accordance with generally accepted accounting principles or to cash flow from
operations, investing activities or financing activities or as a measure of cash
flows. Because EBITA is not calculated consistently by all companies, the
presentation herein may not be comparable to other similarly titled measures of
other companies.

  Business segments:

<TABLE>
<CAPTION>
                                                PROFESSIONAL                 CORPORATE AND
1999                               PRODUCTS       SERVICES     COMMUNITIES   RECONCILIATION   CONSOLIDATED
----                              -----------   ------------   -----------   --------------   ------------
<S>                               <C>           <C>            <C>           <C>              <C>
  Revenues......................  $ 1,156,222      726,864            --          (36,648)      1,846,438
  EBITA (loss)..................   (2,256,615)     (84,571)     (863,993)              --      (3,205,179)
  Amortization of goodwill and
     other intangible assets....                                               (3,520,792)     (3,520,792)
  Interest, net.................                                                                 (102,946)
                                                                                               ----------
  Net loss before taxes.........  $                                                            (6,828,917)
                                                                                               ==========
</TABLE>

<TABLE>
<CAPTION>
                                           PROFESSIONAL                 CORPORATE AND
1998                          PRODUCTS       SERVICES     COMMUNITIES   RECONCILIATION   CONSOLIDATED
----                         -----------   ------------   -----------   --------------   ------------
<S>                          <C>           <C>            <C>           <C>              <C>
  Revenues.................  $   761,266      431,935         --             --            1,193,201
  EBITA (loss).............   (1,586,405)    (205,691)        --             --           (1,792,096)
  Interest, net............                                                               (1,283,325)
                                                                                          ----------
  Net loss before taxes....  $                                                            (3,075,421)
                                                                                          ==========
</TABLE>

<TABLE>
<CAPTION>
                                           PROFESSIONAL                 CORPORATE AND
1997                          PRODUCTS       SERVICES     COMMUNITIES   RECONCILIATION   CONSOLIDATED
----                         -----------   ------------   -----------   --------------   ------------
<S>                          <C>           <C>            <C>           <C>              <C>
  Net revenues.............  $   314,551      280,855         --             --              595,406
  EBITA (loss).............   (5,231,887)      33,311         --             --           (5,198,576)
  Interest, net............                                                                 (152,969)
                                                                                          ----------
  Net loss before taxes....  $                                                            (5,351,545)
                                                                                          ==========
</TABLE>

  Consolidated net revenue by geographic area:

<TABLE>
<CAPTION>
1999                                                          CONSOLIDATED
----                                                          ------------
<S>                                                           <C>
  Germany...................................................     973,456
  United States.............................................     380,498
  Belgium...................................................     294,134
  Other.....................................................     198,350
                                                               ---------
                                                               1,846,438
                                                               =========
</TABLE>

<TABLE>
<CAPTION>
1998                                                          CONSOLIDATED
----                                                          ------------
<S>                                                           <C>
  Belgium...................................................     276,798
  Germany...................................................     268,900
  Canada....................................................     159,375
  United Kingdom............................................     259,906
  Other.....................................................     228,222
                                                               ---------
                                                               1,193,201
                                                               =========
</TABLE>

                                      F-23
<PAGE>   106
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                            1997                                CONSOLIDATED
                            ----                                ------------
<S>                                                             <C>
  United States.............................................      $312,838
  Germany...................................................       282,568
                                                                  --------
                                                                  $595,406
                                                                  ========
</TABLE>

     Long-lived assets by country:

<TABLE>
<CAPTION>
1999                                                GERMANY       U.S.      CONSOLIDATED
----                                               ----------    -------    ------------
<S>                                                <C>           <C>        <C>
  Net equipment..................................  $  157,432     52,574       210,006
  Goodwill and other intangible assets, net......   7,316,379    138,749     7,455,128
  Other long-lived assets........................      24,581     24,676        49,257
                                                   ----------    -------     ---------
                                                   $7,498,392    215,999     7,714,391
                                                   ==========    =======     =========
</TABLE>

<TABLE>
<CAPTION>
1998                                                GERMANY       U.S.      CONSOLIDATED
----                                               ----------    -------    ------------
<S>                                                <C>           <C>        <C>
  Net equipment..................................  $   87,897     37,218       125,115
  Other long-lived assets........................      25,334     20,976        46,310
                                                   ----------    -------     ---------
                                                   $  113,231     58,194       171,425
                                                   ==========    =======     =========
</TABLE>

<TABLE>
<CAPTION>
1997                                                GERMANY       U.S.      CONSOLIDATED
----                                               ----------    -------    ------------
<S>                                                <C>           <C>        <C>
  Net equipment..................................  $  138,578     43,476       182,054
  Other long-lived assets........................      24,337     55,069        79,406
                                                   ----------    -------     ---------
                                                   $  162,915     98,545       261,460
                                                   ==========    =======     =========
</TABLE>

     Approximately 63%, 47% and 56% of total revenues were generated with four,
three and two significant customers during fiscal 1999, 1998 and 1997,
respectively. The revenue amounts from significant customers were derived from
the Products and Professional Services business segments and are as follows:

<TABLE>
<CAPTION>
                                                         1999        1998       1997
                                                      ----------    -------    -------
<S>                                                   <C>           <C>        <C>
Customer A..........................................  $  321,740    254,767         --
Customer B..........................................     322,720         --         --
Customer C..........................................     268,000         --         --
Customer D..........................................     258,425         --         --
Customer E..........................................          --    176,824         --
Customer F..........................................          --    131,725
Customer G..........................................          --         --    213,200
Customer H..........................................          --         --    120,000
                                                      ----------    -------    -------
                                                      $1,170,885    563,316    333,200
                                                      ==========    =======    =======
</TABLE>

(11) SUBSEQUENT EVENTS

     During August and September 1999, the Company granted an aggregate 732,450
stock options to employees at an exercise price of $3 which was in excess of the
fair value of the options of $2.58 based on an independent valuation. During the
period from October 1, 1999 to December 21, 1999, the Company granted 50,720
additional stock options at exercise prices between $5.00 and $10.00.

     On January 18, 2000, the Board of Directors of the Company approved an
increase in the authorized number of shares of common stock from 10,500,000 to
20,000,000.
                                      F-24
<PAGE>   107
                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Additionally, on January 18, 2000, the Board of Directors approved the
issuance of 3,400,000 shares of Series F convertible preferred stock. On January
28, 2000, 215,000 shares of Series F convertible preferred stock were issued in
a private placement for cash of $2,537,000. Through February 29, 2000, 524,000
additional shares of Series F convertible preferred stock were issued in private
placements for cash of $6,183,200. In the event of liquidation, the Series F
preferred stock has preference over the common stock in the amount of $11.80
(adjusted to an as converted basis) per share. In addition, each share would
receive an amount of 5% of the liquidation preference for such shares of
preferred stock compounded per annum, plus declared but unpaid dividends,
subject to certain adjustments. Each share of Series F preferred stock is
convertible into one share of common stock at the option of the holder.

     During September 1999, the Company entered into a 50% joint venture with
Cornelsen Verlag GmbH & Co. ("Cornelsen"), a German schoolbook publisher, to
create and operate learnetix.de, an Internet learning community for young
people. As part of the agreement the Company invested a net $528,144. The
Company has sold technology and has provided other software customization
services to the joint venture totaling approximately $316,605 through January
31, 2000.

     In addition, the Company founded SoccerCity GmbH & Co. KG and
SoccerCity-Verwaltungsgesellschaft mbH, which operates soccercity.de, an
Internet soccer community.

     As described in Note 8, the holder of the unsecured convertible note
payable exercised the conversion right on April 21, 1999. On March 29, 2000, the
Company and the holder of the note reached agreement as to the conversion terms
which provide for the issuance of 300,000 shares of Series B convertible
preferred stock in consideration for the principal balance of the note of
Deutsche Mark 1,700,000 ($929,012) and the repayment premium of Deutsche Mark
510,000 ($278,704). Accrued interest through the effective date of the
conversion will be paid in cash.

                                      F-25
<PAGE>   108


                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES



                     CONDENSED CONSOLIDATED BALANCE SHEETS



                      AT APRIL 30, 2000 AND JULY 31, 1999



<TABLE>
<CAPTION>
                                                                 APRIL 30,      JULY 31,
                                                                   2000           1999
                                                                -----------    -----------
                                                                (UNAUDITED)
<S>                                                             <C>            <C>
ASSETS
Current Assets:
  Cash and cash equivalents.................................    $ 5,299,995    $ 3,214,681
  Accounts receivable, less allowance for doubtful accounts
     of $212,635 and $66,917 at April 30, 2000 and July 31,
     1999, respectively.....................................      1,147,393        762,976
  Projects in progress......................................        864,232        248,373
  Prepaid expenses and other current assets.................        208,482        144,625
                                                                -----------    -----------
          Total current assets..............................      7,520,102      4,370,655
Equipment, net..............................................        749,023        210,006
Goodwill and other intangible assets, net...................      4,087,962      7,455,128
Investment in joint venture.................................        294,223             --
Other assets................................................        828,080         49,257
                                                                -----------    -----------
                                                                $13,479,390    $12,085,046
                                                                ===========    ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $   516,355    $   322,390
  Accrued expenses..........................................      2,029,900      1,573,008
  Deferred revenue..........................................        605,229         61,189
                                                                -----------    -----------
          Total current liabilities.........................      3,151,484      1,956,587
Notes payable...............................................      2,186,047      3,776,163
Commitments
Stockholders' equity:
  Convertible preferred stock, $0.01 par value; 5,091,410
     and 4,052,410, shares issued and outstanding as of
     April 30, 2000 and July 31, 1999 (aggregate liquidation
     value of $35,171,426 and $25,230,054 at April 30, 2000
     and as of July 31, 1999, respectively).................         50,914         40,524
  Common stock, $0.01 par value; 20,000,000 authorized as of
     April 30, 2000 and 10,500,000 authorized as of July 31,
     1999; 396,886 and 378,886 issued and outstanding as of
     April 30, 2000 and as of July 31, 1999, respectively...          3,969          3,789
  Additional paid-in-capital................................     35,233,909     25,250,500
  Deferred compensation.....................................       (241,545)      (137,515)
  Accumulated deficit.......................................    (25,637,698)   (18,475,094)
  Cumulative translation adjustment.........................     (1,267,690)      (329,908)
                                                                -----------    -----------
          Total stockholders' equity........................      8,141,859      6,352,296
                                                                -----------    -----------
                                                                $13,479,390    $12,085,046
                                                                ===========    ===========
</TABLE>



See accompanying notes to unaudited condensed consolidated financial statements

                                      F-26
<PAGE>   109


                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES



          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


               FOR THE NINE MONTHS ENDED APRIL 30, 2000 AND 1999



<TABLE>
<CAPTION>
                                                                 2000           1999
                                                              -----------    ----------
<S>                                                           <C>            <C>
Revenues:
  License...................................................  $ 1,976,080       833,954
  Service...................................................    2,136,084       499,082
                                                              -----------    ----------
                                                                4,112,164     1,333,036
Operating expenses:
  Software development and maintenance......................    2,909,744     1,354,279
  Sales and marketing.......................................    3,551,064     1,244,131
  General and administrative................................    1,767,386       778,306
  Amortization of goodwill and other intangible assets......    2,493,714     2,698,163
                                                              -----------    ----------
                                                               10,721,908     6,074,879
                                                              -----------    ----------
          Operating loss....................................   (6,609,744)   (4,741,843)
Other income (expense):
  Interest income...........................................       67,482        79,760
  Interest expense..........................................     (294,501)     (346,436)
  Loss on disposal of assets................................           --        (6,452)
  Equity in loss of joint venture...........................     (474,288)           --
  Foreign exchange, net.....................................      151,247       (60,492)
                                                              -----------    ----------
          Total other expenses, net.........................     (550,060)     (333,620)
                                                              -----------    ----------
          Loss before taxes.................................   (7,159,804)   (5,075,463)
Franchise tax expense.......................................        2,800         1,200
                                                              -----------    ----------
Net loss....................................................  $(7,162,604)   (5,076,663)
                                                              ===========    ==========
Basic and diluted net loss per share........................  $    (18.73)       (20.00)
                                                              ===========    ==========
Weighted average number of basic and diluted shares
  outstanding...............................................      382,345       253,828
                                                              ===========    ==========
</TABLE>



See accompanying notes to unaudited condensed consolidated financial statements.


                                      F-27
<PAGE>   110


                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES



     CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)


                    FOR THE NINE MONTHS ENDED APRIL 30, 2000


<TABLE>
<CAPTION>
                                                         PREFERRED STOCK
                                          ----------------------------------------------
                         COMMON STOCK                       SHARES CONVERTIBLE             ADDITIONAL
                       ----------------    SHARES ISSUED           INTO                      PAID-IN       DEFERRED
                       SHARES    AMOUNT   AND OUTSTANDING      COMMON STOCK      AMOUNT      CAPITAL     COMPENSATION
                       -------   ------   ---------------   ------------------   -------   -----------   ------------
<S>                    <C>       <C>      <C>               <C>                  <C>       <C>           <C>
Balance as of July
  31, 1999...........  378,886   $3,789      4,052,410          8,109,910        $40,524   $25,250,500    $(137,515)
Issuance of common
  stock upon the
  exercise of stock
  options............   18,000      180             --                 --             --         9,653           --
Deferred compensation
  related to grant of
  stock options......       --       --             --                 --             --       183,264     (183,246)
Amortization of
  deferred
  compensation.......       --       --             --                 --             --            --       79,234
Issuance of Series F
  convertible
  preferred stock....       --       --        739,000            739,000          7,390     8,712,810           --
Conversion of debt to
  Series B
  convertible
  preferred stock....       --       --        300,000            300,000          3,000     1,077,682           --
Accumulated
  translation
  adjustment.........       --       --             --                 --             --            --           --
Net loss.............       --       --             --                 --             --            --           --
                       -------   ------      ---------          ---------        -------   -----------    ---------
Balance as of April
  30, 2000...........  386,866   $3,969      5,091,410          9,148,910        $50,914   $35,233,909    $(241,545)
                       =======   ======      =========          =========        =======   ===========    =========

<CAPTION>

                                      CUMULATIVE        TOTAL
                       ACCUMULATED    TRANSLATION   STOCKHOLDERS'   COMPREHENSIVE
                         DEFICIT      ADJUSTMENT       EQUITY           LOSS
                       ------------   -----------   -------------   -------------
<S>                    <C>            <C>           <C>             <C>
Balance as of July
  31, 1999...........  $(18,475,094)  $  (329,908)   $6,352,296
Issuance of common
  stock upon the
  exercise of stock
  options............            --            --         9,833
Deferred compensation
  related to grant of
  stock options......            --            --            --
Amortization of
  deferred
  compensation.......            --            --        79,234
Issuance of Series F
  convertible
  preferred stock....            --            --     8,720,200
Conversion of debt to
  Series B
  convertible
  preferred stock....            --            --     1,080,682
Accumulated
  translation
  adjustment.........            --      (937,782)     (937,782)        (937,782)
Net loss.............    (7,162,604)           --    (7,162,604)      (7,162,604)
                       ------------   -----------    ----------      -----------
Balance as of April
  30, 2000...........  $(25,637,698)  $(1,267,690)   $8,141,859      $(8,100,386)
                       ============   ===========    ==========      ===========
</TABLE>



See accompanying notes to unaudited condensed consolidated financial statements.


                                      F-28
<PAGE>   111


                   BLAXXUM INTERACTIVE, INC. AND SUBSIDIARIES



          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


               FOR THE NINE MONTHS ENDED APRIL 30, 2000 AND 1999



<TABLE>
<CAPTION>
                                                                 2000           1999
                                                              -----------    -----------
<S>                                                           <C>            <C>
Cash flows from operating activities:
  Net loss..................................................  $(7,162,604)    (5,076,663)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization.........................      168,924         63,848
      Amortization of goodwill and other intangible
       assets...............................................    2,493,714      2,698,163
      Amortization of deferred compensation.................       79,234         30,763
      Loss on sale of assets................................           --          6,452
      Increase in provision for doubtful accounts...........      145,718         (2,877)
      Equity in loss of joint venture.......................      474,288             --
      Exchange (gain)/loss..................................     (151,247)        60,492
      Changes in assets and liabilities:
        Accounts receivable.................................     (630,666)      (495,863)
        Projects in progress................................     (715,154)       (10,138)
        Prepaid expenses and other current assets...........      (41,771)       (33,777)
        Accounts payable....................................      247,247        143,290
        Accrued expenses....................................      656,354        444,716
        Deferred revenues...................................      598,006        (19,224)
                                                              -----------    -----------
          Net cash used in operating activities.............   (3,837,957)    (2,190,818)
                                                              -----------    -----------
Cash flows from investing activities:
  Investment in joint venture...............................     (912,444)            --
  Return of investment in joint venture.....................       85,231             --
  Acquisition cost, net of cash acquired....................           --        (94,976)
  Additions to equipment....................................     (763,252)      (154,159)
  Proceeds from sale of assets..............................           --         18,825
  Other.....................................................      (83,621)        (3,700)
                                                              -----------    -----------
          Net cash used in investing activities.............   (1,674,086)      (234,010)
                                                              -----------    -----------
Cash flows from by financing activities:
  Proceeds from issuance of preferred stock.................    8,720,200      3,804,000
  Proceeds from issuance of common stock....................        9,833         14,096
  Other.....................................................     (731,527)            --
          Net cash provided by financing activities.........    7,998,506      3,818,096
                                                              -----------    -----------
Effect of exchange rate changes on cash.....................     (401,149)      (131,326)
                                                              -----------    -----------
Net decrease in cash and cash equivalents...................    2,085,314      1,261,942
Cash and cash equivalents at beginning of period............    3,214,681      3,111,002
                                                              -----------    -----------
Cash and cash equivalents at end of period..................  $ 5,299,995      4,372,944
                                                              ===========    ===========
Supplemental disclosure of cash flow information:
  Interest paid.............................................  $   158,909        178,880
                                                              ===========    ===========
  Franchise taxes paid......................................  $       800          1,200
                                                              ===========    ===========
Non-cash financing and investment activities:
  Deferred compensation related to stock option issuances...  $   183,264         59,381
                                                              ===========    ===========
  Issuance of common stock in connection with acquisition of
    company.................................................  $        --         50,000
                                                              ===========    ===========
  Issuance of preferred stock in connection with acquisition
    of minority interests...................................  $        --      9,806,822
                                                              ===========    ===========
  Conversion of note payable into preferred stock...........  $ 1,080,682             --
                                                              ===========    ===========
</TABLE>



See accompanying notes to unaudited condensed consolidated financial statements.

                                      F-29
<PAGE>   112


                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES



         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(1) THE COMPANY AND BASIS OF PRESENTATION



  The Company



     blaxxun interactive, Inc. (the "Company") develops and licenses technology
products for virtual worlds on the Internet. The Company has developed software
and technology for multimedia web site environments, which are intended to
provide a more realistic experience on the Internet.



     The Company conducts its business within three segments: Products,
Professional Services, and Communities.



     The Company is subject to a number of risks, including, but not limited to
rapid technology changes, dependance on certain significant customers and
changes in the exchange rate between the U.S. dollar and the Deutsche Mark or
euro. The future viability of the Company is dependent upon its ability to
develop and acquire new technologies which may require substantial investments.
Portions of such investments might not be recoverable if development efforts are
not successful or fail to gain commercial market acceptance. These investments
are dependent upon the Company's ability to generate sufficient cash flows from
operations in the future or to raise additional capital through other means.



  Principles of Consolidation and Basis of Presentation



     The accompanying unaudited interim condensed consolidated financial
statements of blaxxun interactive, Inc. and subsidiaries have been prepared in
accordance with the principles of consolidation and accounting policies stated
in the July 31, 1999 consolidated financial statements. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the Securities and Exchange Commission rules and
regulations. The accompanying financial statements should be read in conjunction
with the audited consolidated financial statements for the years ended July 31,
1999, 1998 and 1997.



     The condensed consolidated financial statements include all companies in
which the Company has legal control. All intercompany transactions and balances
have been eliminated. The equity method of accounting is used for the investment
in joint venture (50% owned).



     In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position, results of operations and cash flows of the
interim periods presented. All such adjustments are of a normal recurring
nature. The results of operations for any interim period are not necessarily
indicative of the results for the full fiscal year.



(2) BASIC AND DILUTED EARNINGS (LOSS) PER SHARE



     Basic earnings (loss) per share is based upon the weighted average number
of common shares outstanding during the period. Diluted earnings (loss) per
share is based upon the weighted average number of common shares outstanding
during the period plus additional weighted average common equivalent shares
outstanding during the period, computed using the "if-converted method". Common
equivalent shares have been excluded from the computation of diluted loss per
share, as their effect would have been anti-dilutive in each period presented.
Had the Company reported net income for the nine months ended April 30, 2000,
the weighted average number of shares at April 30, 2000, would have increased by
1,155,314 for stock options (not assuming the effects of applying the treasury
stock method).


                                      F-30
<PAGE>   113

                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES



 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



     The reconciliation of the numerators and denominators of the basic and
diluted loss per share computations for the Company's reported net loss is as
follows:



<TABLE>
<CAPTION>
                                                            BASIC AND DILUTED LOSS PER SHARE
                                                               FOR THE NINE MONTHS ENDED
                                                                        APRIL 30
                                                            --------------------------------
                                                                 2000              1999
                                                            --------------    --------------
<S>                                                         <C>               <C>
Numerator:
  Net loss................................................   $(7,162,604)      $(5,076,663)
Denominator:
  Weighted average number of basic and diluted shares
     outstanding..........................................       382,345           253,828
                                                             -----------       -----------
Basic and diluted loss per share..........................   $    (18.73)      $    (20.00)
                                                             ===========       ===========
</TABLE>



     The conversion of all preferred stock will occur upon the completion of a
qualified public offering of the Company's common stock. Had these shares been
converted the weighted average number of shares would have increased by
8,316,347 and 7,524,110 at April 30, 2000 and 1999, respectively.



(3) BALANCE SHEET COMPONENTS



  (a) Other Assets



     The Company has deferred $731,527 in incremental costs directly
attributable to the Company's proposed initial public offering of common stock.
These costs are included in other assets at April 30, 2000.



  (b) Accrued expenses



     Accrued expenses consisted of the following as of:



<TABLE>
<CAPTION>
                                                              APRIL 30,     JULY 31,
                                                                 2000         1999
                                                              ----------    ---------
<S>                                                           <C>           <C>
Accrued interest expense....................................  $  446,366      484,829
Compensation and benefits...................................     898,953      557,673
Outstanding invoices........................................     444,069      287,605
Professional fees...........................................     220,511      211,042
Other.......................................................      20,001       31,859
                                                              ----------    ---------
                                                              $2,029,900    1,573,008
                                                              ==========    =========
</TABLE>



     Accrued interest expense includes a pro rata portion of the expected
repayment premiums of long-term notes payable.



(4) NOTES PAYABLE



     The holder of the unsecured convertible note payable exercised the
conversion right whereby the note was converted into 300,000 shares of Series B
convertible preferred stock in consideration of the principal balance of the
note of Deutsche Mark 1,700,000 ($831,294) and the repayment premium of Deutsche
Mark 510,000 ($249,388).


                                      F-31
<PAGE>   114

                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES



 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



(5) STOCKHOLDERS' EQUITY



     On January 18, 2000, the Board of Directors of the Company approved an
increase in the authorized number of shares of common stock from 10,500,000 to
20,000,000



     Additionally, on January 18, 2000, the Board of Directors approved the
issuance of 3,400,000 shares of Series F convertible preferred stock. The
Company subsequently issued 739,000 shares of Series F convertible preferred
stock in private placements for cash of $8,720,200. In the event of liquidation,
the Series F convertible preferred stock has preference over the common stock in
the amount of $11.80 (adjusted to an as converted basis) per share. In addition,
each share would receive an amount of 5% of the liquidation preference for such
shares of preferred stock compounded per annum, plus declared but unpaid
dividends, subject to certain adjustments. Each share of Series F convertible
preferred stock is convertible into one share of common stock at the option of
the holder.



     All outstanding shares of preferred stock will automatically convert to
common stock upon the completion of an underwritten public offering of the
Company's common stock in which the aggregate gross proceeds equal or exceed
$10,000,000. The Company has reserved a sufficient number of shares of common
stock to permit conversion of the preferred stock in accordance with the
respective terms.



(6) STOCK PLANS



     During August and September 1999, the Company granted 732,850 stock options
to employees at an exercise price of $3 which was in excess of fair value of
options of $2.58 based on an independent valuation. During the period from
October 1, 1999 to April 30, 2000, the Company granted 180,720 additional stock
options at exercise prices between $5.00 and $14.00. The Company has recorded
deferred compensation expense during the nine months ended April 30, 2000, of
$183,264 for the difference between the grant price and the estimated fair value
of the Company's stock as of the date of grant. Deferred compensation expense
amortized during the nine months ended April 30, 2000, was $79,234.



     On March 22, 2000, an employee exercised his option to purchase 33,333
shares of the Company's common stock pursuant to the terms of the Company's
Stock Plan. The Company settled 17,000 of these options for cash. As a result,
the Company recorded the $212,500 cash settlement as compensation expense at the
settlement date.



     On March 30, 2000, the 2000 Stock Plan was adopted by the Board of
Directors and is pending stockholders' approval. Approximately 3,000,000 shares
of common stock have been reserved for issuance under the 2000 Stock Plan.
Options granted under the Plan will vest over service periods as determined by
the Board of Directors. The exercise price of the options granted will be
determined by the administrator at the time of grant. The exercise price of
incentive stock options must be at least equal to the fair market value of the
common stock on the date of grant. As of April 30, 2000, no options have been
granted under this plan.



(7) INVESTMENT IN JOINT VENTURE



     During fiscal 2000, the Company entered into a 50% joint venture with
Cornelsen Verlag GmbH & Co. ("Cornelsen"), a German schoolbook publisher, to
create and operate learnetix.de, an Internet learning community for young
people. Through April 30, 2000 each company has invested approximately $912,000.
The Company has sold technology and has provided other software customization
and administrative services to the joint venture totaling approximately $488,000
through April 30, 2000. The Company has eliminated 50% of this revenue, related
expenses and profit in these condensed consolidated financial statements.


                                      F-32
<PAGE>   115

                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES



 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



(8) BUSINESS SEGMENTS



     In fiscal 1999, the Company adopted SFAS 131, Disclosures about Segments of
an Enterprise and Related Information.



     Starting in fiscal 1999, the Company conducts its business within three
industry segments: Products, Professional Services, and Communities. The
Products segment develops, markets and licenses the Company's technology
products for virtual worlds on the Internet; provides post-contract support and
maintenance; and enters into collaborative co-development agreements for the
development of specific technological applications. In the Professional Services
segment, the Company supports customers in the design, customization and
integration of the Company's technology products into the software systems of
their customers. The Communities segment operates and invests in selected online
communities, based on blaxxun's technology. During the nine months ended April
30, 1999, the Communities segment operations consisted solely of Cybertown, an
Internet entertainment website. As of April 30, 2000, the Communities segment
operated Cybertown, Soccercity and learnetix.



     The Company's Chief Executive Officer is its Chief Operating Decision maker
("CODM"). The CODM evaluates the performance of its segments based on revenues
and EBITA ("earnings before interest, taxes and amortization of goodwill and
other intangible assets"). Based on the nature of the Company's business, assets
are not reported internally on a segment by segment basis. In addition, the CODM
does not allocate resources based on segment assets. Therefore, segment assets
have not been presented by segment in the accompanying schedules. There are no
significant differences between the accounting policies used to measure profit
and loss for segments and measurements of reportable segment assets and those
used on a consolidated basis. Inter-segment transactions are recorded at the
estimated fair value of the transaction.



     EBITA should not be construed as an alternative to net earnings determined
in accordance with generally accepted accounting principles or to cash flow from
operations, investing activities or financing activities or as a measure of cash
flow. Because EBITA is not calculated consistently by all companies, the
presentation herein may not be comparable to other similarly titled measures of
other companies.



     Selected segment data for the nine months ended April 30, 2000 and 1999 are
as follows:



<TABLE>
<CAPTION>
                                                                                 CORPORATE
                                                  PROFESSIONAL                      AND
2000                                 PRODUCTS       SERVICES     COMMUNITIES   RECONCILIATION   CONSOLIDATED
----                                -----------   ------------   -----------   --------------   ------------
<S>                                 <C>           <C>            <C>           <C>              <C>
Net revenues......................  $ 2,717,741    1,702,666        386,827       (695,070)        4,112,164
EBITA (loss)......................   (2,208,411)     226,775     (1,897,916)       (85,231)       (3,964,783)
Equity in loss of joint venture...           --           --       (474,288)            --          (474,288)
Amortization of goodwill and other
  intangible assets...............                                                                (2,493,714)
Interest, net.....................                                                                  (227,019)
                                                                                                ------------
Net loss before taxes.............                                                              $ (7,159,804)
                                                                                                ============
</TABLE>


                                      F-33
<PAGE>   116

                   BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES



 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



<TABLE>
<CAPTION>
                                                                                 CORPORATE
                                                  PROFESSIONAL                      AND
1999                                 PRODUCTS       SERVICES     COMMUNITIES   RECONCILIATION   CONSOLIDATED
----                                -----------   ------------   -----------   --------------   ------------
<S>                                 <C>           <C>            <C>           <C>              <C>
Net Revenues......................  $   833,954      499,082            --              --         1,333,036
EBITA (loss)......................   (1,594,076)    (221,384)     (295,164)             --        (2,110,624)
Amortization of goodwill and other
  intangible assets...............                                                                (2,698,163)
Interest, net.....................                                                                  (266,676)
                                                                                                ------------
Net loss before taxes.............                                                              $ (5,075,463)
                                                                                                ============
</TABLE>


                                      F-34
<PAGE>   117

                  [ALTERNATE PAGES FOR THE GERMAN PROSPECTUS]

                PRELIMINARY OFFERING CIRCULAR OF [MAY   ], 2000

                                      for

                        7,000,000 SHARES OF COMMON STOCK


                      with a par value of $0.005 per share

                to be newly issued by blaxxun interactive, Inc.

                                      and
                                     up to

                        1,100,000 SHARES OF COMMON STOCK


                      with a par value of $0.005 per share

           to be sold by certain current shareholders, pursuant to an
                        over-allotment option granted to
                    DG BANK Deutsche Genossenschaftsbank AG

                    each such offered Share of Common Stock
             eligible to receive dividends, if any, for fiscal 2000

             German Securities Identification Number (WKN) 938,019

                                       of

                           BLAXXUN INTERACTIVE, INC.

                       San Francisco, California, U.S.A.

                                       A-1
<PAGE>   118
                  [ALTERNATE PAGES FOR THE GERMAN PROSPECTUS]

                                   AS WELL AS

                              COMPANY REPORT 1999

                              for the admission of

                       26,125,592 SHARES OF COMMON STOCK


  with a par value of $0.005 per share (all Shares of Common Stock outstanding

                      at the point of time of admission),

             German Securities Identification Number (WKN) 938,019

                                       of

                           BLAXXUN INTERACTIVE, INC.

   to the Regulated Market (Geregelter Markt) with trading on the Neuer Markt
                        of the Frankfurt Stock Exchange.

                                       A-2
<PAGE>   119
                  [ALTERNATE PAGES FOR THE GERMAN PROSPECTUS]

                              GENERAL INFORMATION

SUBJECT OF THIS PROSPECTUS


     This prospectus will be filed with the U.S. Securities and Exchange
Commission but will not be used as a sales or listing prospectus in the United
States. In the Federal Republic of Germany, this prospectus will be filed with
the Frankfurt Stock Exchange and will serve (i) as a preliminary sales
prospectus (Verkaufsprospekt) in relation to the sale of the 7,000,000 shares of
common stock being offered by us, each share having a par value of $0.005,
$[               ]in the aggregate, and 1,100,000 shares of common stock from
holdings of certain current shareholders under the terms of an over-allotment
option we have granted to the underwriters, each share having a par value of
$0.005, $[               ] in the aggregate, and (ii) as a company report
(Unternehmensbericht) that will be used to list on the Frankfurt Stock
Exchange's Neuer Markt our entire issued and outstanding share capital of
26,125,592 shares of common stock.



     The shares of common stock offered by us will be new shares, each with a
par value of $0.005, issued pursuant to a resolution of our board of directors
passed on [               ], subject to approval by our pricing committee, which
is expected to take place immediately prior to the offering. As a result of this
offering, the number of our issued and outstanding shares of common stock will
be increased from 19,125,592 shares, assuming conversion of all outstanding
shares of preferred stock into shares of common stock, to 26,125,592 shares
through the issuance of new shares. Our current stockholders will have no
preemptive or other subscription rights to the newly issued shares of common
stock. The conversion and redesignation will occur immediately prior to the
consummation of this offering. See "Description of Capital Stock."


RESPONSIBILITY FOR THE CONTENTS OF THIS PROSPECTUS

     Pursuant to Section 13 of the German Securities Selling Prospectus Act
(Verkaufsprospektgesetz), and in connection with Sections 45 and 77 of the
German Stock Exchange Act (Borsengesetz), we, together with the underwriters, DG
BANK and Deutsche Genossenschaftsbank AG, VEM Virtuelles Emissionshaus AG and
Merck Finck & Co. take responsibility for the contents of this preliminary
prospectus and company report and hereby state that, to the best of our
knowledge, the information contained in this preliminary prospectus and company
report is correct, and no material information has been omitted. In making an
investment decision, you must rely on your own examination of our company and
the terms of the offering, including the merits and risks involved. See
"Business" and "Risk Factors."

     Pursuant to Section 10 of the German Securities Selling Prospectus Act,
this prospectus is published on a preliminary basis and will be supplemented in
the future. Any supplements and terms of the offering that have been omitted in
this preliminary prospectus will be published in Germany in conformity with the
provisions of the German Selling Securities Prospectus Act. The company report
will also be published in supplemented form after admission of the shares to
exchange trading in the Federal Republic of Germany.

                        RECENT DEVELOPMENTS AND OUTLOOK


     We believe that sales of our Community Platform Product line will continue
to grow and that sales of our blaxxun3D and blaxxun Avatar Studio will become
more significant sources of revenue in fiscal 2000. However, as blaxxun3D and
Avatar Studio are new products, we have no meaningful financial data or market
experience on which to base our beliefs concerning these products.


     As our business expands, we will likely encounter significantly increasing
operating expenses in the areas of research and development, sales and
marketing, and general and administration. Accordingly, we expect to incur
significant operating losses for the foreseeable future. We may also increase
research and development expenses for new customization software, if necessary.
As a publicly-traded company, we may face an increase in general and
administration expenses due to the additional costs for accounting and reporting
and to prepare the internal systems for further growth.

                                       A-3
<PAGE>   120
                  [ALTERNATE PAGES FOR THE GERMAN PROSPECTUS]

     Our future operating results will depend on many factors, including,
without limitation, the level and pace of acceptance of our current and new
products and the continuous growth and development of the Internet. The success
of blaxxun is subject to numerous risks, many of which are beyond our control,
described in "Risk Factors" beginning on page 7.


San Francisco, CA June 2000

blaxxun interactive, Inc.

                                       A-4
<PAGE>   121

                PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

     The estimated expenses (other than the underwriting discount) payable in
connection with the sale of the common stock offered hereby are as follows, all
of which will be paid by the Company:

<TABLE>
<CAPTION>
                                                                AMOUNT
                                                              ----------
<S>                                                           <C>
SEC Registration fee........................................  $   26,400
Neuer Markt Listing fee.....................................  $    6,200
NASD filing fees............................................  $        0
Blue Sky fees and expenses..................................  $        0
Printing expenses...........................................  $  300,000
Legal fees and expenses.....................................  $  300,000
Accounting fees and expenses................................  $  200,000
Transfer agent and registrar fees and expenses..............  $   10,000
Miscellaneous...............................................  $1,157,400
                                                              ----------
          Total.............................................  $2,000,000
                                                              ==========
</TABLE>

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS

     Section 145 of the General Corporation Law of the State of Delaware
provides as follows:

     A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact the he is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent or another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interest of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.

     A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorney's fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and a manner he
reasonably believed to in or not opposed to the best interest of the corporation
and except that no indemnification shall be made in respect to any claim, issue
or matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.

     In addition, pursuant to our certificate of incorporation and bylaws, we
shall indemnify our directors and officers against expenses (including judgments
or amounts paid in settlement) incurred in any action, civil or

                                      II-1
<PAGE>   122

criminal, to which any such person is a party by reason of any alleged act or
failure to act in his capacity as such, except as to a matter as to which such
director or officer shall have been finally adjudged not to have acted in good
faith in the reasonable belief that his action was in the best interest of the
corporation.

     The underwriting agreement between blaxxun and the underwriters of this
offering provides that the underwriters are obligated, under certain
circumstances, to indemnify our directors, officers and controlling persons
against certain liabilities, including liabilities under the Securities Act.
Reference is made to the form of Underwriting Agreement filed at Exhibit 1.1
hereto.

     We maintain directors and officers liability insurance for the benefit of
our directors and certain of our officers.

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES

     (a) Since July 31, 1996, the Registrant has issued and sold (without
payment of any selling commission to any person) the following unregistered
securities:

         1. Upon the consummation of this offering, the Registrant will effect a
     two-for-one split of the outstanding common stock in which every one
     outstanding share of common stock will be split, by way of dividend, into
     two shares of common stock.

         2. In May 1996, in reliance on Section 4(2) of the Securities Act of
     1933, the Registrant issued and sold shares of Series B convertible
     preferred stock convertible into an aggregate of 800,000 shares of common
     stock to one sophisticated, accredited investor for an aggregate purchase
     price of $2,000,000.

         3. In August 1996, in reliance on Section 4(2) of the Securities Act of
     1933, the Registrant issued an aggregate of 16,000 shares of common stock
     to one sophisticated, accredited person in exchange for technology valued
     on that date at an aggregate of $4,000.

         4. In August 1997, in reliance on Section 4(2) of the Securities Act of
     1933, the Registrant issued an aggregate of 146,370 shares of common stock
     to one sophisticated, accredited person in exchange for technology valued
     on that date at an aggregate of $36,593.

         5. In June 1998 and October 1998, in reliance on Section 4(2) of the
     Securities Act of 1933, the Registrant issued and sold shares of Series C
     convertible preferred stock convertible into an aggregate of 1,597,820
     shares of common stock to seven sophisticated, accredited investors for an
     aggregate purchase price of $4,282,156.

         6. In November 1998, in reliance on Section 4(2) of the Securities Act
     of 1933, the Registrant issued an aggregate of 100,000 shares of common
     stock at an aggregate purchase price of $50,000 to seven sophisticated,
     accredited individuals in exchange for a portion of their equity interests
     in Cybertown, Inc., a wholly owned subsidiary of the Registrant.

         7. In August of 1998 and June of 1999, in reliance on Section 4(2) of
     the Securities Act of 1933, the Registrant issued shares of Series D
     convertible preferred stock convertible into an aggregate of 3,952,000
     shares of common stock to nine sophisticated, accredited employees in
     exchange for their minority interests in the blaxxun interactive AG,
     Registrant's wholly-owned subsidiary.

         8. In March of 1999, in reliance on Section 4(2) of the Securities Act
     of 1933, the Registrant issued and sold shares of Series E convertible
     preferred stock convertible into an aggregate of 750,000 shares of common
     stock to five sophisticated, accredited investors for an aggregate purchase
     price of $3,000,000.

         9. From July 31, 1996 to January 31, 2000, under our 1996 and 1999
     stock option plans and in reliance on Section 701 of the Securities Act of
     1933, we issued to our employees, officers, directors and consultants
     options to purchase an aggregate of 3,194,292 shares of our common stock,
     at exercise prices ranging from $.0065 per share to $5.00 per share and an
     aggregate of 498,736 shares of our common stock at purchase prices ranging
     from $0.0065 per share to $0.50 per share.

                                      II-2
<PAGE>   123

        10. In January and February of 2000, in reliance on Section 4(2) of the
     Securities Act of 1933, the Registrant issued and sold shares of Series F
     convertible preferred Stock convertible into an aggregate of 1,478,000
     shares of common stock to ten sophisticated, accredited investors for an
     aggregate purchase price of $8,720,200.

        11. In March 2000, in reliance on Section 4(2) of the Securities Act of
     1933, the Registrant issued 600,000 shares of Series B convertible
     preferred stock upon conversion of a convertible note.

     (b) There were no underwritten offerings employed in connection with any of
the transactions described in Item 15(a).

     (c) The consideration received for each of the above transactions was
described in the relevant subsection of (a).

ITEM 16.  EXHIBITS


<TABLE>
<CAPTION>
  NO.                       DESCRIPTION OF DOCUMENTS
  ---                       ------------------------
<C>       <S>
  1.1*    Form of Underwriting Agreement
  3.1     Form of Amended and Restated Certificate of Incorporation of
          the Registrant
  3.2**   Form of Amended and Restated Bylaws of the Registrant
  5.1*    Opinion of Hutchins, Wheeler & Dittmar, A Professional
          Corporation
 10.1**   Amended and Restated Registration Rights Agreement, dated as
          of January 2000 among the Registrant and certain of its
          stockholders.
 10.2**   Stockholders Agreement, dated September 1998 among the
          Registrant and certain of its stockholders.
 10.3**   1996 Stock Option Plan
 10.4**   1999 Stock Option Plan
 10.5**   2000 Stock Option Plan
 10.6**   Agreement with General Investment Bankers (confidential
          treatment requested)
 10.7**   Agreement with Infomatec Media AG (confidential treatment
          requested).
 10.8**   Employment Agreement with Mr. Buchenberger
 10.9**   Employment Agreement with Mr. Habermeyer
 10.10**  Employment Agreement with Mr. Schwartz
 10.11**  Employment Agreement with Mr. Merget
 10.12**  Employment Agreement with Mr. Woelfl
 21.1**   Subsidiaries
 23.1     Consent of KPMG Deutsche Treuhand-Gesellschaft
          Aktiengesellschaft Wirtschaftspruefungsgesellschaft
 23.2     Consent of Hutchins, Wheeler & Dittmar, A Professional
          Corporation (included in Exhibit 5.1)
 24.1**   Power of Attorney
 27.1**   Financial Data Schedule
</TABLE>


---------------
* To be filed by amendment


** Previously filed


     All other schedules for which provisions are made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.

                                      II-3
<PAGE>   124

ITEM 17.  UNDERTAKINGS

     The undersigned registrant hereby undertakes to provide to the underwriters
at the closing of this offering specified in the underwriting agreement
certificates in such denomination and registered in such names as required by
the underwriters to permit proper delivery to each purchaser.

     The undersigned registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (2) for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

                                      II-4
<PAGE>   125

                                   SIGNATURES


     Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in Munich, Germany, on June 9,
2000.


                                          BLAXXUN INTERACTIVE, INC.

                                          By:    /s/ FRANZ BUCHENBERGER
                                            ------------------------------------
                                               Franz Buchenberger, President
                                                and Chief Executive Officer

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


<TABLE>
<CAPTION>
                   SIGNATURE                                      TITLE                       DATE
                   ---------                                      -----                       ----
<C>                                               <S>                                     <C>
             /s/ FRANZ BUCHENBERGER               President, Chief Executive Officer and  June 9, 2000
------------------------------------------------    Chairman of the Board (Principal
               Franz Buchenberger                   Executive Officer)

          /s/ BERND-MICHAEL HABERMEYER            Chief Financial Officer and Vice        June 9, 2000
------------------------------------------------    President of Finance and
            Bernd-Michael Habermeyer                Administration (Principal Financial
                                                    Officer)

                       *                          Director                                June 9, 2000
------------------------------------------------
                  Guy Bradley

                       *                          Director                                June 9, 2000
------------------------------------------------
             Heydan von Frankenberg

                       *                          Director                                June 9, 2000
------------------------------------------------
                Francois Stieger

*By: /s/ FRANZ BUCHENBERGER
------------------------------------------------
     Franz Buchenberger
     Attorney-in-fact
</TABLE>


                                      II-5
<PAGE>   126

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
  NO.                       DESCRIPTION OF DOCUMENTS
  ---                       ------------------------
<C>       <S>
  1.1*    Form of Underwriting Agreement
  3.1     Form of Amended and Restated Certificate of Incorporation of
          the Registrant
  3.2**   Form of Amended and Restated Bylaws of the Registrant
  5.1*    Opinion of Hutchins, Wheeler & Dittmar, A Professional
          Corporation
 10.1**   Amended and Restated Registration Rights Agreement, dated as
          of January 2000 among the Registrant and certain of its
          stockholders.
 10.2**   Stockholders Agreement, dated September 1998 among the
          Registrant and certain of its stockholders.
 10.3**   1996 Stock Option Plan
 10.4**   1999 Stock Option Plan
 10.5**   2000 Stock Option Plan
 10.6**   General Agreement with General Investment Bankers
          (confidential treatment requested)
 10.7**   Agreement with Infomatec Media AG (confidential treatment
          requested)
 10.8**   Employment Agreement with Mr. Buchenberger
 10.9**   Employment Agreement with Mr. Habermeyer
 10.10**  Employment Agreement with Mr. Schwartz
 10.11**  Employment Agreement with Mr. Merget
 10.12**  Employment Agreement with Mr. Woelfl
 21.1**   Subsidiaries
 23.1     Consent of KPMG Deutsche Treuhand-Gesellschaft
          Aktiengesellschaft Wirtschaftspruefungsgesellschaft
 23.2*    Consent of Hutchins, Wheeler & Dittmar, A Professional
          Corporation (included in Exhibit 5.1)
 24.1**   Power of Attorney
 27.1**   Financial Data Schedule
</TABLE>


---------------
* To be filed by amendment

** Previously filed


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