BLAXXUN INTERACTIVE INC, S-1, 2000-04-07

BLAXXUN INTERACTIVE INC
S-1, 2000-04-07

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 2000

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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)
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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. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, $.01 par value per share............. $100,000,000 $26,400
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</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
------------------------
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.

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<PAGE> 2

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectus: one
prospectus will be used in connection with an offering in the United States and
the other prospectus will be used in connection with a concurrent 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 APRIL 7, 2000.

[ ] Shares of
Common Stock

blaxxun interactive, Inc.
[LOGO OF BLAXXUN]
This is an initial public offering of shares of common stock of blaxxun
interactive, Inc. A total of [ ] 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.

Prior to this offering, there has been no public market for our common
stock. It is currently estimated that the initial public offering price will be
between $[ ] and $[ ] per share (between E [ ] and E
[ ] per share at an assumed exchange rate of $[ ] 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 [ ].
------------------------
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>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS BLAXXUN
<S> <C> <C> <C>
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Per Share......................... E[ ] E[ ] E[ ]
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Total............................. E[ ] E[ ] E[ ]
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</TABLE>

Certain stockholders of Blaxxun have granted to the Underwriters a 45-day
option to purchase additional shares of Common Stock, solely to
cover over-allotments, if any. 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 $ , $ ,
$ , and $ , respectively. 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 April 7, 2000
<PAGE> 4

[LOGO]

THE VIRTUAL WORLDS COMPANY
<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

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PAGE
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<S> <C>
Prospectus Summary.......................................... 1
The Offering................................................ 3
Summary Consolidated Financial Data......................... 6
Risk Factors................................................ 8
Special Note Regarding Forward Looking Statements........... 19
How We Intend to Use the Proceeds from this Offering........ 19
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 40
Statutory Information....................................... 50
Management.................................................. 52
Principal and Selling Stockholders.......................... 58
Relationships with blaxxun and Related Transactions......... 60
Description of Capital Stock................................ 62
Shares Eligible for Future Sale............................. 64
The German Equity Market.................................... 65
German Tax Matters.......................................... 66
Underwriting................................................ 69
Legal Matters............................................... 70
Experts..................................................... 71
Where You Can Find Additional Information................... 71
Index to Consolidated Financial Statements.................. F-1
</TABLE>

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Through and including May 2, 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.

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<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
infrastructure and solutions that allow organizations to
develop and operate Virtual Worlds for commerce,
community and collaboration over the Internet. Virtual
Worlds are visually striking online environments where
people can come together and, by navigating through the
website, go shopping, access customer service, interact
with others, attend events, be entertained and
participate 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 standards, scalability, extensibility,
cross-platform support 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. Our strategy is 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.

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

1
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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 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.

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<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:

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

- up to an additional [ ] shares of our common stock, which will be
sold 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 [ ] 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."

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 [ ] 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
Handelsblatt 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 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

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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.

TRANSFER AGENT, REGISTRAR AND PAYING AGENT

Our shares of common stock will be registered and transferred via a
transfer agent in the United States who will register shares in the name of Cede
& Co. The name of this transfer agent and registrar for the common stock is
Boston Equiserve. DG BANK Deutsche Genossenschaftsbank AG, Frankfurt am Main,
will act as the paying agents 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.

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").

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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.

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.

SECURITIES IDENTIFICATION CODES

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

The international securities identification number (ISIN) for the shares of
common stock is [ ].

The common code is [ ].

TRADING SYMBOL FOR THE NEUER MARKT

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

DESIGNATED SPONSORS FOR NEUER MARKT

We have retained DG BANK Deutsche Genossenschaftsbank AG and
[ ] to act as designated sponsors for the shares on Neuer Markt.
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.

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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 Wirtschaftspruefungsgesellschaft Aktiengesellschaft,
independent auditors. The consolidated statement of operations data for the
six-month periods ended January 31, 1999 and 2000, and the consolidated balance
sheet data as of January 31, 2000, are derived from unaudited consolidated
financial statements. The unaudited 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>
SIX MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31,
----------------------------------------- --------------------
1996(4) 1997 1998 1999(5) 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 $ 860 $ 2,040
Operating loss................ (3,243) (5,525) (1,699) (6,752) (2,982) (4,501)
Net loss...................... (3,216) (5,352) (2,211) (7,099) (3,401) (4,951)
Basic and diluted net loss per
share(1)(3)................. $(669.04) (18.51) (24.90) (12.48) (13.04)
Basic and diluted weighted
average common shares
outstanding(1)(3)........... 8,000 119,473 285,093 272,593 379,803
Pro forma basic and diluted
net loss per share(2)(3).... $ (0.45) (0.29)
Pro forma basic and diluted
weighted average common
shares outstanding(2)(3).... 15,863,328 16,988,980
</TABLE>

<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
--------------------------------------- -----------
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 $ 2,271
Working capital.......................... 2,454 (927) 2,077 2,107 489
Total assets............................. 3,614 367 3,592 12,085 10,325
Long-term obligations, less current
portion................................ -- 2,041 3,605 3,497 3,210
Stockholders' equity (deficit)........... $2,783 $(2,706) $(1,356) $ 6,324 $ 3,639
</TABLE>

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(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.

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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) The historic and the pro forma share and per share amounts exclude the
issuance of 300,000 shares of Series B convertible preferred stock in
consideration for the conversion of the unsecured convertible note payable
which was negotiated as of March 29, 2000.

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

(5) During 1999, the Company acquired the remaining interest in blaxxun
interactive AG through the issuance of 1,976,000 shares of Series D
convertible preferred stock.

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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. 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. In addition, we intend to significantly
increase our future product development, sales and marketing, and administrative
expenses over the next several months. 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.

We commenced operations in August 1995 and began selling our products in
fiscal 1997. To date, we have sold primarily the 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, the blaxxun Community Platform SDK and various administration
interfaces. During the second quarter of fiscal 2000, we released blaxxun3D and
blaxxun Avatar Studio. Those products generated $109,000 in revenue as of
January 31, 2000. During March 2000, we released another product, Instant
Community. We anticipate that a substantial portion of our future revenue growth
will come from products recently released or still under development. 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. 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.

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. Virtual Worlds are visually striking online environments where
people can come together and, by navigating through the website, go shopping,
interact with others, be entertained, access customer service, attend events, be
entertained and participate in cooperation scenarios. 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. 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-

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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
market acceptance or achieve market acceptance at a slower rate than we
anticipate, our business, financial condition and results of operations could
suffer materially.

Our products are based on the so-called "open" ISO standards VRML, HTML,
HTTP and XML. VRML standard is a relatively new 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 our
business, financial condition and results of operations.

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, which could harm our business, financial condition and results
of operations.

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

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. 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. 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. The loss of one
or more of our key employees could harm our business, financial condition and
results of operations.

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

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. If we are unable to adequately train and educate our new technical
personnel, our product development and customer service functions may be
adversely effected. 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, financial condition and
results of operations.
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IF WE FAIL TO EXPAND OUR SALES OPERATIONS, WE MAY NOT BE ABLE TO INCREASE
REVENUES FROM THE SALES OF OUR PRODUCTS.

We depend on an effective direct sales force to market our products. As of
January 31, 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 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, which would harm our business,
financial condition and results of operations.

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 heavily upon our indirect sales channels,
which consist of resellers who implement our software into their products. For
fiscal 1998, fiscal 1999 and the six months ended January 31, 2000, 16%, 1% and
7% of our revenues, respectively, were generated through these indirect sales
channels, with approximately 9%, 1% and 3% of revenues, respectively, being
generated through a single third party reseller of our technology. 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, financial condition and results of operations.

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 six months
ended January 31, 2000, represented 47%, 63% and 13% respectively, of our
revenues. Similarly, our accounts receivable are concentrated. As of July 31,
1998, July 31, 1999 and January 31, 2000, 99%, 85% and 36%, 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.

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

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 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
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software products obsolete. 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, financial
condition and results of operations.

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.

- Other software vendors that address similar customer needs for multimedia
technology, 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 RealNetworks, Microsoft and
Macromedia.

- 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,
Nintendo, Microsoft, Sega, and Sony.

Our Communities 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, TalkCity, Tripod/Lycos, 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.

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

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<PAGE> 17

share, any one of which could materially and adversely affect our business,
operating results and financial condition.

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;

- 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 six month period ended January 31, 2000, we
generated 98%, 79% and 78%, respectively, of our total revenues to customers
located outside of the United States, primarily in Germany. We intend to
substantially expand our international operations and enter new international
markets, which will require significant management attention and financial
resources. 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;

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- 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.

We rely on a combination of copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. We also
enter into confidentiality or license agreements with our employees, consultants
and customers, and control access to and distribution of our software,
documentation and other proprietary information. 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.

In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Although we have never
been involved in any intellectual property litigation, 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 us to significant liability for damages and
invalidation of our proprietary rights. 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. Any
such claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all.

OUR INTERNATIONAL OPERATIONS EXPOSE US TO RISKS ASSOCIATED WITH CURRENCY
FLUCTUATIONS, WHICH MAKES 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 six month period ended January 31, 2000, 80%, 82% and 66%,
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 transaction foreign exchange gains of approximately $33,000 and $34,000
in fiscal 1999 and the six months ended January 31, 2000, respectively. We
believe that a significant
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<PAGE> 19

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. 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
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. 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.

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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 focus is business
applications for Virtual Worlds for the Internet. Our target markets are
commerce, community and collaboration, all of which are new and rapidly
evolving. Our business with respect to these markets 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. 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 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.

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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.
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
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.

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

16
<PAGE> 22

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;

- 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.

17
<PAGE> 23

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

Our officers, directors and affiliated entities own a large percentage 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."

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 [ ], or [ ]%, 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

18
<PAGE> 24

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 [$ ] per share from the assumed initial public offering
price of E[ ] per share ([$ ] 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
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual results.

HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING

We estimate the net proceeds from the sale of the [ ] shares of
common stock offered by us will be approximately E[ ]. This estimate is
based on an assumed public offering price of E[ ] per share, after deducting
the estimated underwriting discounts and commissions and the estimated offering
expenses payable by us in the amount of E[ ] 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. Additionally, we
may decide to repay two long-term notes payable to Technologie
Beteiligungs-Gesellschaft der Deutschen Augleichsbank with a face value of
approximately $2,357,000 at January 31, 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
expect to use the net proceeds primarily for general corporate purposes,
including working capital and expansion of sales and marketing and research and
development activities. 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.

19
<PAGE> 25

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 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.

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.

20
<PAGE> 26

CAPITALIZATION

The following table sets forth our capitalization as of January 31, 2000.
Our capitalization is presented:

- on an actual basis;

- on a pro forma basis to give effect to the recent conversion of all
outstanding shares of convertible preferred stock into 16,649,820 shares
of common stock and the 2:1 stock split effected in connection with the
offering; and

- on a pro forma as adjusted basis, after giving effect to the sale of
[ ] shares of common stock by us at an assumed initial public
offering price of E[ ] per share ($[ ] 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 JANUARY 31, 2000
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable...................................... $ 3,210,111 3,210,111
Stockholders' equity:
Convertible preferred stock...................... 42,674 --
Common stock..................................... 3,806 174,109
Additional paid-in-capital....................... 27,533,464 27,405,835
Deferred compensation............................ (441,728) (441,728)
Accumulated deficit.............................. (22,829,311) (22,829,311)
Cumulative translation adjustment................ (669,903) (669,903)
------------ -----------
Total stockholders' equity....................... 3,639,002 3,639,002
------------ -----------
Total capitalization............................... $ 6,849,113 6,849,113
============ ===========
</TABLE>

Common stock outstanding after this offering excludes [ ] shares
issuable upon exercise of stock options and conversion of convertible promissory
notes outstanding as of January 31, 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.

21
<PAGE> 27

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 [ , 2000], after giving
effect to the conversion of all outstanding shares of our preferred stock into
[ ] shares of common stock upon the closing of this offering was
E[ ] ($[ ]), or E[ ] ($[ ]) per share of common stock.

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

The following table illustrates this per share dilution:

<TABLE>
<CAPTION>
E $
-------- --------
<S> <C> <C>
Assumed public offering price per share.....................
Pro forma net tangible book value per share at [ ,
2000].....................................................
Increase per share attributable to new investors............
Pro forma net tangible book value per share after the
offering..................................................
Dilution per share to new investors.........................
</TABLE>

The following table shows on a pro forma basis at [ , 2000],
after giving effect to the automatic conversion of all outstanding shares of our
preferred stock into a total of [ ] 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......
New investors..............
Total......................
</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 [ ]%, and the number of shares held by new investors will
be increased to [ ] shares or [ ]% of the number of shares to be
outstanding after this offering. See "Principal and Selling Stockholders."

The above information is based on shares outstanding at [April , 2000].

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:

- [ ] shares of common stock issuable upon exercise of outstanding
options (of which options to purchase [ ] shares of common stock
were exercisable at [ , 2000]) under our stock compensation
plans at a weighted average exercise price of $[ ] per share; and

- [ ] 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.

22
<PAGE> 28

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
six-month periods ended January 31, 1999 and 2000, and the consolidated balance
sheet data as of January 31, 2000, are derived from unaudited condensed
consolidated financial statements. The unaudited condensed 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>
SIX MONTHS ENDED
YEARS ENDED JULY 31 JANUARY 31
---------------------------------------- --------------------------
1996(4) 1997 1998 1999(5) 1999 2000
------- -------- ------- --------- ------- ----------------
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:.................... $ -- 595 1,193 1,846 860 2,040
Operating expenses:
Software development and
maintenance................. 1,565 2,085 1,491 1,848 856 1,767
Sales and marketing............ 919 2,472 695 2,027 662 2,131
General and administrative..... 759 1,564 706 1,203 500 935
Amortization of goodwill and
other intangible assets..... -- -- -- 3,521 1,825 1,707
------- -------- ------- --------- ------- ----------

Total operating
expenses............. 3,243 6,121 2,892 8,599 3,842 6,541
------- -------- ------- --------- ------- ----------

Operating loss......... (3,243) (5,525) (1,699) (6,752) (2,982) (4,501)

Other, net....................... 27 174 (512) (345) (418) (449)
------- -------- ------- --------- ------- ----------

Net loss......................... $(3,216) (5,352) (2,211) (7,099) (3,401) (4,951)
======= ======== ======= ========= ======= ==========

Basic and diluted net loss per
share(1)(3).................... $(669.04) (18.51) (24.90) (12.48) (13.04)
======== ======= ========= ======= ==========
Weighted average number of basic
and diluted shares
outstanding(1)(3).............. 8,000 119,473 285,093 272,593 379,803
-------- ------- --------- ------- ----------
Pro forma basic and diluted net
loss per share(2)(3)........... $ (0.45) (0.29)
Pro forma weighted average number
of basic and diluted shares
outstanding(2)(3).............. 15,863,328 16,988,980
</TABLE>

Totals may not add due to rounding differences.

23
<PAGE> 29

<TABLE>
<CAPTION>
JULY 31 JANUARY 31
----------------------------------------- ----------
1996 1997 1998 1999(5) 2000
------ ------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $3,097 $ 28 $ 3,111 $ 3,215 $2,271
Working capital........................ 2,454 (927) 2,077 2,107 489
Total assets........................... 3,614 367 3,592 12,085 10,325
Long-term obligations, less current
portion.............................. -- 2,041 3,605 3,497 3,210
Stockholders' equity (deficit)......... $2,783 $(2,706) $(1,356) $ 6,324 $3,639
</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.

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

(5) During 1999, the Company acquired the remaining interest in blaxxun
interactive AG through the issuance of 1,976,000 shares of Series D
convertible preferred stock.

24
<PAGE> 30

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.

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 $17,878,000. As
of January 31, 2000, we had an accumulated deficit of approximately $22,829,000,
and our net loss for the six months ended January 31, 2000, was approximately
$4,951,000. 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 six months ended January
31, 2000, 13% 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 Commission;

25
<PAGE> 31

- the Professional Services segment includes custom application development
and consulting services;

- the Communities segment includes the operation of Internet communities.

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 $659,000 for fiscal 1998 and 1999, and for the six months ended
January 31, 2000, respectively. Revenue generated from our other products was
approximately $109,000 for the six months ended January 31, 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.
The majority of the product support and maintenance agreements signed during
fiscal 1999 that were renewable by March 31, 2000 have been renewed.

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 13.9% of total net revenues for fiscal 1998 and 1999, and for
the six months ended January 31, 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 $249,000 for
the six months ended January 31, 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 six months period ending January 31,
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 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
26
<PAGE> 32

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
January 31, 2000, total deferred revenues was approximately $393,000.

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 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.

27
<PAGE> 33

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 six months ended January 31,
2000 of approximately $115,000, $79,000, and $367,000, 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 six months ended January 31, 2000 was approximately $35,000,
$41,000, and $63,000, 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 $1,707,000 for the six months period ended January
31, 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.

28
<PAGE> 34

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>
SIX MONTHS ENDED
YEARS ENDED JULY 31 JANUARY 31
------------------------------------------ -------------------
1996(4) 1997 1998 1999(5) 1999 2000
------- -------- ------- ----------- ------ ----------
UNAUDITED
<S> <C> <C> <C> <C> <C> <C>
Net revenues:....................... $ -- 595 1,193 1,846 860 2,040
Operating expenses:
Software development and
maintenance.................... 1,565 2,085 1,491 1,848 856 1,767
Sales and marketing............... 919 2,472 695 2,027 662 2,131
General and administrative........ 759 1,564 706 1,203 500 935
Amortization of goodwill and other
intangible assets.............. -- -- -- 3,521 1,825 1,707
------- -------- ------- ----------- ------ ----------

Total operating
expenses................ 3,243 6,121 2,892 8,599 3,842 6,541
------- -------- ------- ----------- ------ ----------

Operating loss............ (3,243) (5,525) (1,699) (6,752) (2,982) (4,501)
------- -------- ------- ----------- ------ ----------

Other, net.......................... 27 174 (512) (345) (418) (449)
------- -------- ------- ----------- ------ ----------

Net loss............................ $(3,216) (5,352) (2,211) (7,099) (3,401) (4,951)
======= ======== ======= =========== ====== ==========

Basic and diluted net loss per
share(1)(3)....................... $(669.04) (18.51) (24.90) (12.48) (13.04)
Weighted average number of basic and
diluted shares
outstanding(1)(3)................. 8,000 119,473 285,093 272,593 379,803
Pro forma basic and diluted net loss
per share(2)(3)................... $ (0.45) (0.29)
Pro forma weighted average number of
basic and diluted shares
outstanding(2)(3)................. 15,863,328 16,988,980
</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.

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

(5) During 1999, the Company acquired the remaining interest in blaxxun
interactive AG through the issuance of 1,976,000 shares of Series D
convertible preferred stock.

29
<PAGE> 35

Six Months ended January 31, 1999 and 2000

Net Revenues. Net revenues increased from approximately $860,000 in the
six months ended January 31, 1999, to approximately $2,040,000 in the six months
ended January 31, 2000. This increase would have been approximately $107,000
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 six months ended January 31, 2000 were approximately $183,000. We did not
have any related party revenues in the six month period ended January 31, 1999.

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

- Net revenues of the Product segment increased from $515,000 to
approximately $1,086,000.

This increase is primarily due to license revenues which increased from
approximately $278,000 to $768,000 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 $109,000.

Revenues from collaborative co-development agreements with public entities
increased to approximately $284,000 from approximately $209,000 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 $705,000 from approximately $345,000. The increase is
primarily based on increased average project size sold to new customers.

- Net revenues of the Communities segment was approximately $249,000. There
were no revenues in this segment in the six month period ending January
31, 1999. Revenues are composed of advertising and sponsoring
transactions.

Our fixed order backlog as of January 31, 1999 and 2000 was approximately
$394,000 and $4,055,000, respectively, of which approximately $324,000 and
$3,575,000 relates to the Product segment, $70,000 and $305,000 relates to the
Professional Services segment and $0 and $174,500 relates to the Communities
segment. The Product segment order backlog as of January 31, 1999 relates to
purchases of software licenses of $167,000 and $1,162,000, respectively, and
collaborative co-development agreements with public entities of $157,000 and
$2,414,000, respectively. We expect to recognize approximately $1,730,000 during
fiscal 2000 and the remaining $2,325,000 over the next three fiscal years.

Software Development and Maintenance Costs. Software development and
maintenance costs increased from approximately $856,000 in the first half of
fiscal year 1999 to approximately $1,767,000 in the first half of fiscal year
2000. The average number of software development employees increased from 15
during the six months ended January 31, 1999 to 30 during the six months ended
January 31, 2000. We anticipate that software development costs will continue to
increase in absolute terms as we plan to significantly expand our software
development team to maintain our technological lead in the field of Virtual
Worlds. Software development and maintenance costs of our different segments
were as follows:

- Software development and maintenance cost in our Product segment
increased from approximately $569,000 to approximately $943,000 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 $193,000 to approximately $412,000

30
<PAGE> 36

- Software development and maintenance costs in the Communities segment
increased from approximately $94,000 to approximately $412,000 primarily
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 to account for the increased number of
visitors and members.

Sales and Marketing Expenses. Sales and marketing expenses increased from
approximately $662,000 in the first half of fiscal 1999 to approximately
$2,131,000 in the first half of fiscal year 2000. The increase was primarily
attributable to an increase in the average number of direct sales, pre-sales
support and marketing employees from 9 for the six months ended January 31, 1999
to 23 for the six months ended January 31, 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.

Sales and marketing expenses increased in the Product segment from
approximately $11,000 to approximately $1,115,000 and in the Professional
Services segment from approximately $151,000 to approximately $330,000. Sales
and marketing increases in the Product and Professional Services segment mainly
related to personnel costs based on increased level of staff. Sales and
marketing expenses in the Communities segment were approximately $686,000. These
Communities segment expenses relate mainly to personnel costs, with an average
of five 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 by more than 500% from January 1999 to January
2000 to more than 250,000 members. There were no sales and marketing costs in
the period ending January 31, 1999, since the Communities segment was still in
the process of being developed.

General and Administrative Expenses. General and administrative expenses
increased from approximately $500,000 for the six-month period ended January 31,
1999 to approximately $935,000 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 six months period ended January 31, 1999 to 10 during the six month
period ending January 31, 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.

General and administrative expenses increased in the Product segment from
approximately $382,000 to approximately $672,000 and in the Professional
Services segment from approximately $113,000 to approximately $199,000. The
Communities segment increased from approximately $4,000 to approximately
$65,000.

Amortization of goodwill and other intangible assets. Amortization expense
for goodwill and other intangible assets decreased from approximately $1,825,000
for the six months period ended January 31, 1999 to approximately $1,707,000 for
the period end in January 31, 2000 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 $418,000 to approximately
$449,000. Net interest expense decreased from approximately $209,000 to
approximately $167,000, mainly due to lower repayment premium expenses for a
convertible note that was fully accrued in the year ending July 31, 1999 after
the holder of the note exercised the conversion option. Foreign exchange losses,
net was approximately $202,000 in 1999 compared to a gain of approximately
$34,000, 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

31
<PAGE> 37

community. Our equity in losses was approximately $316,000 primarily due to
planned start-up expenses to develop the Internet community. 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,
however did not generate revenue during the six month period ended January 31,
2000.

Net loss

As a result of the factors identified above, our net loss for the six
months ended January 31, 1999 was approximately $3,401,000 as compared to
approximately $4,951,000 for the comparable period ended January 31, 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 were 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
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.

32
<PAGE> 38

- 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.

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 $512,000 to approximately
$345,000. Net interest expense decreased by approximately $46,000 to
approximately $371,000. This was mainly due to higher interest income on higher
average money market account balances, partly compensated by repayment premiums
accrued for a convertible note after the holder exercised the option to convert
during fiscal 1999. 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.

33
<PAGE> 39

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.

- 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 $512,000 primary due to higher interest costs coupled
with net losses on foreign currency transactions.

34
<PAGE> 40

Net interest expense increased by approximately $265,000 to approximately
$418,000. This was due to additional interest expense on a higher average notes
payable balances for fiscal 1998, due to new loan agreements entered into during
fiscal 1998.

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.

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

Other, net.................... (286) 54 (119) (161) (488) 70 45 28 (74) (375)
----- ---- ---- ---- ------ ------ ------ ------ ------ ------

Net loss...................... $(683) (307) (542) (679) (1,998) (1,403) (1,713) (1,985) (2,235) (2,716)
===== ==== ==== ==== ====== ====== ====== ====== ====== ======
</TABLE>

Totals may not add due to rounding differences.

Our revenues generally increased or remained stable over the 10 quarters
ending January 31, 2000 with the first two 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 10
quarters primarily due to the increase of personnel and related expenses.

Sales and marketing expenses steadily increased over the 10 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 10 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 three quarters.

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 steady.

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<PAGE> 41

Other, net significantly fluctuates primarily due to foreign currency
fluctuations over the various quarters that mainly impacted Deutsche Mark and
euro denominated account balances.

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 January 31, 2000, we had cash and cash equivalents of approximately
$2,271,000. We have funded our operations primarily through net cash proceeds
from private placements of convertible preferred stock and long-term notes
payable 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. 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. From February 1, 2000 to February 29,
2000, 524,000 additional shares of Series F convertible preferred stock were
issued in private placements for cash of $6,183,000.

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 of approximately $853,000 as of
January 31, 2000, exercised its conversion option on April 21, 1999 and
subsequently the note was converted into 300,000 shares of convertible preferred
stock on March 29, 2000.

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<PAGE> 42

Six months ended January 31, 1999 and 2000

Operating activities used cash and cash equivalents of approximately
$1,701,000 and $1,890,000 for the six month periods ended January 31, 1999 and
2000.

Our investing activities used cash of approximately $166,000 and $1,262,000
for the six month periods ended January 31, 1999 and 2000. The increase is
mainly 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. As part of the agreement, each
company invested approximately $602,000 primarily related to start-up cost, such
as website design, integration and customization of software to operate the
community. learnetix was launched to the public in November 1999. In addition,
the increase from the prior year is due in part to purchases and replacements of
office equipment of approximately $458,000 mainly due to the move into new
office facilities in Munich and in San Francisco.

Financing activities provided cash and cash equivalents of approximately
$811,000 and $2,539,000 for the six month periods ending January 31, 1999 and
2000, primarily from the issuance during January 2000 of 215,000 shares of
Series F convertible preferred stock in a private placement for cash of
approximately $2,537,000.

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 and repaid a note payable for $500,000. 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
convertible 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 convertible note had an interest rate of FIBOR plus 4%.
The convertible note was increased by an additional $100,000 and subsequently
converted into 93,284 shares of Series C convertible preferred stock during
fiscal 1998.

Our capital expenditures and investment in joint venture were approximately
$1,475,000 from August 1, 1996 through January 31, 2000.

Other capital expenditure plans for the second half of fiscal 2000 relate
primarily to the implementation of a SAP based management information system for
all group companies in addition to software and

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<PAGE> 43

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 six month period ended January 31, 2000 we
generated 98%, 79% and 78%, respectively of our total revenues through customers
located outside the U.S., primarily 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, we expect that reductions
in the value of such accounts denominated in foreign currencies resulting from a
sudden or 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.

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 $929,000 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.

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RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued accounting
statement 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 DM1.95582 = 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.

RECENT BUSINESS DEVELOPMENT

Our fixed order backlog increased from January 31, 2000 to February 29,
2000 from approximately $4,055,000 to $16,515,000. The Product segment increased
from approximately $3,575,000 to $15,305,000 due to two significant agreements
with value added resellers to market our products. The Professional Services
segment increased from approximately $305,000 to $1,035,000. We expect to
recognize approximately $3,540,000 ($1,730,000 as of January 31, 2000) during
fiscal 2000 and the remaining $12,975,000 ($2,325,000 as of January 31, 2000)
over the next three fiscal years after fiscal 2000, although no assurance can be
given that such amounts will in fact be realized.

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 before a maximum rebate of $1,000,000, included above,
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 a Infomatec Media
AG, a German reseller and technology partner, resulting in an order commitment
of approximately $5,500,000, 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 round of
financing 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 to repurchase the Infomatec shares
if Infomatec fails to meet purchasing benchmarks within the time frames set
forth in the agreement.

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BUSINESS

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 visually
striking online environments where people can come together and, by navigating
through the website, go shopping, interact with others, access customer service,
attend events, get entertained, and participate 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 standards, scalability, extensibility, cross-platform support
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 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,
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<PAGE> 46

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
market estimates, 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 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

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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.

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.

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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.

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.

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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 extend our sales and marketing to more countries 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

- 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).

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<PAGE> 50

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 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.

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<PAGE> 51

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, 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.

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.

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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.

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.

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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, 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.

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

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.

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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 six months ended January
31, 2000, our top three, four and one customers represented 47%, 63% and 13%
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 January 31, 2000, 99%, 85% and 36% 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 72% of our employees hold a university degree. As of January 31,
2000, we had 76 full-time employees, including 28 in sales and marketing, 35 in
research and development, solutions, operations, and technical support, and 13
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 6 months period ending January 31, 2000 and 1999 as
well as number of employees at January 31, 2000 breaks down by geography as
follows:

<TABLE>
<CAPTION>
AVERAGE NUMBER OF EMPLOYEES
------------------------------------------
12 MONTHS ENDING 6 MONTHS ENDING
JULY 31 JANUARY 31 EMPLOYEES AT
-------------------- ---------------- 31-JAN
1997 1998 1999 1999 2000 2000
---- ---- ---- ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Germany.................................. 23 21 29 25 45 54
U.S...................................... 15 2 10 5 18 22
-- -- -- -- -- --
38 23 39 30 63 76
== == == == == ==
</TABLE>

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

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. 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.

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Facilities

Our U.S. headquarters are currently located in a leased facility in San
Francisco, California, consisting of approximately 3,001 square feet under a
three-year lease, which expires in July 2002. 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. We have also
leased offices in Los Angeles, California, Washington, District of Columbia and
Berlin, Germany. 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.

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.

- 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
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<PAGE> 56

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 January 31, 2000, blaxxun interactive AG had an additional paid-in
capital of approximately $3,035,000. As of January 31, 2000, blaxxun interactive
AG had entered into 2 notes payable and 1 convertible note payable of in total
approximately $3,210,000. As of January 31, 2000 we received net intercompany
financing from blaxxun interactive AG of approximately $1,680,000. 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 January 31,
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
January 31, 2000 was approximately $172,000. 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 January 31,
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 January 31, 2000 was approximately $688,000. 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 January 31, 2000, Cybertown, Inc. had an
accumulated deficit of approximately $1,641,000. Intercompany financing to
Cybertown, Inc. amounted to approximately $1,359,000. In fiscal 1999, and the
six months ended January 31, 2000, Cybertown, Inc. had generated net losses of
approximately $875,000 and $766,000, respectively, and paid no dividends to us
for those periods.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Our directors and executive officers, their ages and positions as of March
1, 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.

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.

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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.

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.

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.

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<PAGE> 59

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 tight 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.

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.

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<PAGE> 60

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 Finacial 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 $2.58,
as determined by an independent valuation company, per share and the exercise
price of the option. The value of the in-the money options is based on the
initial public offering price of E[ ] ($[ ] 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.

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......... -- -- 13,043 -- --
President, Chief Executive
Officer and Chairman
Bernd-Michael Habermeyer... 13,043 33,521 -- -- -- --
Chief Finacial 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
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<PAGE> 61

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 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 January 31, 2000
options to purchase 1,163,882 shares of common stock were outstanding

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<PAGE> 62

and 836,118 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.

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<PAGE> 63

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of our common stock as of [ , 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 March 31, 2000. For purposes of calculating each person's or group's
percentage ownership, stock options exercisable within 60 days after March 31,
2000 are included for that person or group, but not the stock options of any
other person or group. Unless otherwise indicated, the address of each of the
beneficial owners identified is Elsenheimerstrasse 61, Munich, Germany. After
the offering, the [ ] shares sold pursuant to this prospectus 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 BE SOLD OFFERING OFFERING
- ------------------------------------ ----------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Franz Buchenberger(1)........................ 1,593,976 8.2
Bernd-Michael Habermeyer(2).................. 810,020 4.2
Walter Schwartz(3)........................... 56,540 *
Engelbert Wolfl(4)........................... 52,000 *
Elmar Merget(5).............................. 33,330 *
Heydan von Frankenberg(6).................... -- -- -- --
Guy Bradley(7)............................... --
Francois Stieger(8).......................... 59,566 *
All Directors and Executive Officers as a
Group (8 persons, including the
above)(9).................................. 2,605,432 13.4
5% STOCKHOLDERS
CMGI@Ventures, Inc.(10)...................... 9,306,568 47.9
ALL OTHER SELLING SHAREHOLDERS
</TABLE>

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

(1) The percentages for this shareholder include 130,254 shares issuable upon
exercise of options exercisable by the shareholder within sixty (60) days
of March 31, 2000. It also includes 659,452 shares held by his spouse
Ingrid Buchenberger.

(2) The percentages for this shareholder include 52,084 shares issuable upon
exercise of options exercisable by the shareholder within sixty (60) days
of March 31, 2000.

(3) The percentages for this shareholder include 27,082 shares issuable upon
exercise of options exercisable by the shareholder within sixty (60) days
of March 31, 2000.

(4) The percentages for this shareholder include 38,000 shares issuable upon
exercise of options exercisable by the shareholder within sixty (60) days
of March 31, 2000.

(5) The percentages for this shareholder include 33,330 shares issuable upon
exercise of options exercisable by the shareholder within sixty (60) days
of March 31, 2000.

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<PAGE> 64

(6) The address of this beneficial owner is Cicerostr. 21, 10709 Berlin,
Germany. The numbers and percentages for this shareholder excludes 800,000
shares owned by EBIT Eigenkapital Beteiligungsgesellschaft fur innovative
Technologieunternehmen Gesellschaft burgerlichen Rechts mit
Haftungsbeschrankung and 94,000 shares 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.

(7) 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 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.

(8) The percentages for this shareholder include 27,900 shares issuable upon
exercise of options exercisable by the shareholder within sixty (60) days
of March 31, 2000.

(9) Includes 9,306,568 shares 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.

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

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<PAGE> 65

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 of Series C convertible
preferred stock at $5.36 per share. CMGI@Ventures, Inc., purchased 93,284 shares
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 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 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 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, (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

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<PAGE> 66

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.

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<PAGE> 67

DESCRIPTION OF CAPITAL STOCK

Upon completion of the offering, our authorized capital stock will consist
of shares of common stock, $.01 par value per share, of which
shares will be outstanding, and shares of preferred stock,
$.01 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 and is qualified in its entirety by the provisions of the certificate
of Incorporation and bylaws, copies of which have been filed as exhibits to this
registration Statement of which this prospectus is a part.

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.

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 (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

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<PAGE> 68

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 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 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

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<PAGE> 69

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.

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
[ ] shares of common stock. Of these shares, the [ ] shares
offered hereby ([ ] 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
[ ] 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 [ ] 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, [ ] 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 ([ ] 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

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<PAGE> 70

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
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.

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<PAGE> 71

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.

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 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
"[ ]" 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.

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

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<PAGE> 72

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.

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 Halbeinkunffteverfahrem.

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

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<PAGE> 73

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 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.

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<PAGE> 74

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..................... [ ]

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 [ ]
additional shares from blaxxun 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. If all of the shares are not sold at the
initial public offering price, the representatives may change the offering price
and the other selling terms.

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 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.
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<PAGE> 75

At blaxxun's request, the underwriters have reserved up to [ ]
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.

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 Market of the Frankfurt Stock
Exchange under the symbol "[ ]," 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
Market

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 $[ ].

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 [ ] individuals that
blaxxun had designated as potential purchasers of up to [ ] shares of
common stock in this offering through a directed share program.

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.

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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.

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<PAGE> 77

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 FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at January 31, 2000
and July 31, 1999...................................... F-26
Condensed Consolidated Statements of Operations for the
Six Months ended January 31, 2000 and 1999............. F-27
Condensed Consolidated Statements of Stockholders' Equity
for the Six Months ended January 31, 2000 and 1999..... F-28
Condensed Consolidated Statements of Cash Flows for the
Six Months ended January 31, 2000 and 1999............. F-29
Notes to Condensed Consolidated Financial Statements...... F-30
</TABLE>

F-1
<PAGE> 78

BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 1999, 1998 AND 1997

(WITH INDEPENDENT AUDITORS' REPORT THEREON)

F-2
<PAGE> 79

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> 80

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................................ 1,879,855 1,229,570 855,868
Deferred revenues............................... 61,189 31,481 --
------------ ------------ -----------
Total current liabilities............... 2,263,434 1,344,063 1,031,967
Notes payable..................................... 3,497,459 3,604,618 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...................... 24,630,190 9,731,391 6,109,587
Deferred compensation........................... (137,515) (99,358) (19,762)
Accumulated deficit............................. (17,878,298) (10,779,233) (8,568,356)
Cumulative translation adjustment............... (334,537) (226,179) (236,379)
------------ ------------ -----------
Total stockholders' equity (deficit).... 6,324,153 (1,356,202) (2,705,805)
------------ ------------ -----------
$ 12,085,046 3,592,479 366,851
============ ============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.
F-4
<PAGE> 81

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.................................... (483,378) (431,585) (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)................ (345,313) (511,502) 173,726
----------- ---------- ----------
Loss before taxes........................... (7,097,465) (2,210,077) (5,351,545)
Franchise tax expense................................. 1,600 800 800
----------- ---------- ----------
Net loss.............................................. $(7,099,065) (2,210,877) (5,352,345)
=========== ========== ==========
Basic and diluted net loss per share.................. $ (24.90) (18.51) (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> 82

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
Accumulated translation adjustment...... -- -- -- -- -- --
Net loss................................ -- -- -- -- -- --
------- ------ --------- --------- ------- -----------
BALANCE AS OF JULY 31, 1998............. 166,299 1,663 1,551,410 5,608,910 15,514 9,731,391
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 $24,630,190
======= ====== ========= ========= ======= ===========

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
Accumulated translation adjustment...... -- -- 10,200 10,200 10,200
Net loss................................ -- (2,210,877) -- (2,210,877) (2,210,877)
--------- ------------ --------- ----------- -----------
BALANCE AS OF JULY 31, 1998............. (99,358) (10,779,233) (226,179) (1,356,202) (2,200,677)
===========
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...... -- -- (108,358) (108,358) (108,358)
Net loss................................ -- (7,099,065) -- (7,099,065) (7,099,065)
--------- ------------ --------- ----------- -----------
BALANCE AS OF JULY 31, 1999............. $(137,515) $(17,878,298) $(334,537) $ 6,324,153 $(7,207,423)
========= ============ ========= =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 83

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.................................................. $(7,099,065) (2,210,877) (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
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..................................... 697,649 360,819 439,168
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) provided by 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 --
=========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.
F-7
<PAGE> 84

BLAXXUN INTERACTIVE, INC.
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.

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> 85
BLAXXUN INTERACTIVE, INC.
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, from seven to
thirty-six months.

F-9
<PAGE> 86
BLAXXUN INTERACTIVE, INC.
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 Standards No.
123, Accounting for Stock-Based Compensation. As such, compensation expense is
recorded
F-10
<PAGE> 87
BLAXXUN INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.................................. $(7,099,065) $(2,210,877) $(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............ $ (24.90) $ (18.51) $ (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 beginning August 1, 2000.
The Company has assessed that, based on the derivative activity during 1999, the

F-11
<PAGE> 88
BLAXXUN INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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> 89
BLAXXUN INTERACTIVE, INC.
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.......................... $ 791,676 409,526 152,162
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
---------- --------- -------
$1,879,855 1,229,570 855,868
========== ========= =======
</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> 90
BLAXXUN INTERACTIVE, INC.
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> 91
BLAXXUN INTERACTIVE, INC.
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.

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> 92
BLAXXUN INTERACTIVE, INC.
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> 93
BLAXXUN INTERACTIVE, INC.
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................................. $(7,099,065) (2,210,877) (5,352,345)
Effect of 1996 Plan......................... (51,982) (140,796) (293,001)
----------- ---------- ----------
Pro forma................................... $(7,151,047) (2,351,673) (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> 94
BLAXXUN INTERACTIVE, INC.
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....................................... (1,642,186) (1,231,532) (618,313)
----------- ---------- ----------
Loss before income taxes...................... $(7,097,465) (2,210,077) (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> 95
BLAXXUN INTERACTIVE, INC.
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................. 1,693,371 472,058 360,598
Others........................................... 544 272 272
----------- -------- --------
Total deferred tax assets........................ 1,929,557 585,469 516,265
Less valuation allowance......................... (1,926,902) (582,613) (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, $582,613 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 $1,344,289 and $168,122, respectively.

At July 31, 1999, 1998 and 1997, the Company had total net operating loss
carryforwards of $3,656,778, $878,085 and $670,756, respectively, of which
$1,703,868, $878,085 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> 96
BLAXXUN INTERACTIVE, INC.
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................................ $(2,413,138) (751,426) (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................ (324,496) (243,351) (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)..................................... 929,012 957,477 --
---------- --------- ---------
$3,497,459 3,604,618 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.

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

F-20
<PAGE> 97
BLAXXUN INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 case the Company generates net
income. The maximum variable interest per annum is 10% of the face value of the
note. 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 120 months. The repayment premium is 30% of the face value of the
note. The Company is accruing as part of interest expense a repayment premium,
assuming repayment of the note after 120 months. 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 its option to convert the note into convertible preferred shares of
the Company. Due to differing interpretations of the conversion formula, the
respective parties entered into negotiations of a final conversion formula. As
of July 31, 1999 the holder of the note and the Company continue to negotiate
the final 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 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.

F-21
<PAGE> 98
BLAXXUN INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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.................. $3,497,459 5,598,172 3,604,618 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.

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.

F-22
<PAGE> 99
BLAXXUN INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.... (3,325,792) (3,325,792)
Write-off of in process
research and development... (195,000) (195,000)
Interest, net................. (371,494)
----------
Net loss before taxes......... $ (7,097,465)
==========
</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............ (417,981)
----------
Net loss before taxes.... $ (2,210,077)
==========
</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> 100
BLAXXUN INTERACTIVE, INC.
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.

F-24
<PAGE> 101
BLAXXUN INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. 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 each company invested $601,846. 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 ($278,689). Accrued interest through the effective date of the
conversion will be paid in cash.

F-25
<PAGE> 102

BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
AT JANUARY 31, 2000 AND JULY 31, 1999

<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
2000 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,270,643 3,214,681
Accounts receivable, less allowance for doubtful accounts
of $24,714 and $66,917 at January 31, 2000 and July 31,
1999, respectively..................................... 832,092 762,976
Projects in progress...................................... 628,265 248,373
Prepaid expenses and other current assets................. 234,116 144,625
------------ -----------
Total current assets.............................. 3,965,116 4,370,655
Equipment, net.............................................. 569,306 210,006
Goodwill and other intangible assets, net................... 5,229,002 7,455,128
Investment in associated company............................ 236,879 --
Other assets................................................ 324,815 49,257
------------ -----------
$ 10,325,118 12,085,046
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 765,757 322,390
Accrued expenses.......................................... 2,317,317 1,879,855
Deferred revenues......................................... 392,931 61,189
------------ -----------
Total current liabilities......................... 3,476,005 2,263,434
Notes payable............................................... 3,210,111 3,497,459
Commitments
Stockholders' equity:
Convertible preferred stock, $0.01 par value; 4,267,410
and 4,052,410, shares issued and outstanding as of
January 31, 2000 and July 31, 1999 (aggregate
liquidation value of $27,222,559 and $25,230,054 at
January 31, 2000 and as of July 31, 1999,
respectively).......................................... 42,674 40,524
Common stock, $0.01 par value; 20,000,000 authorized as of
January 31, 2000 and 10,500,000 authorized as of July
31, 1999; 380,553 and 378,886 issued and outstanding as
of January 31, 2000 and as of July 31, 1999,
respectively........................................... 3,806 3,789
Additional paid-in-capital................................ 27,533,464 24,630,190
Deferred compensation..................................... (441,728) (137,515)
Accumulated deficit....................................... (22,829,311) (17,878,298)
Cumulative translation adjustment......................... (669,903) (334,537)
------------ -----------
Total stockholders' equity........................ 3,639,002 6,324,153
------------ -----------
$ 10,325,118 12,085,046
============ ===========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.
F-26
<PAGE> 103

BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JANUARY 31, 2000 AND 1999

<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Revenues:
License................................................... $ 767,550 277,814
Service................................................... 1,272,329 582,285
----------- ----------
2,039,879 860,099
Operating expenses:
Software development and maintenance...................... 1,766,876 855,717
Sales and marketing....................................... 2,131,385 662,129
General and administrative................................ 934,956 499,677
Amortization of goodwill and other intangible assets...... 1,707,403 1,824,750
----------- ----------
6,540,620 3,842,273
----------- ----------
Operating loss.................................... (4,500,741) (2,982,174)
Other income (expense):
Interest income........................................... 32,041 54,199
Interest expense.......................................... (199,132) (263,624)
Loss on disposal of assets................................ -- (6,452)
Equity in loss of joint venture........................... (316,387) --
Foreign exchange, net..................................... 34,006 (202,177)
----------- ----------
Total other expenses, net......................... (449,472) (418,054)
----------- ----------
Loss before taxes................................. (4,950,213) (3,400,228)
Franchise tax expense....................................... 800 800
----------- ----------
Net loss.................................................... $(4,951,013) (3,401,028)
=========== ==========
Basic and diluted net loss per share........................ $ (13.04) (17.78)
=========== ==========
Weighted average number of basic and diluted shares
outstanding............................................... 379,803 191,299
=========== ==========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.
F-27
<PAGE> 104

BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JANUARY 31, 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 24,630,190 (137,515)
Issuance of common
stock upon the
exercise of stock
options............ 1,667 17 -- -- -- 1,650 --
Deferred compensation
related to grant of
stock options...... -- -- -- -- -- 366,774 (366,774)
Amortization of
deferred
compensation....... -- -- -- -- -- -- 62,561
Issuance of Series F
convertible
preferred stock.... -- -- 215,000 215,000 2,150 2,534,850 --
Accumulated
translation
adjustment......... -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- --
------- ------ --------- --------- ------- ----------- ---------
Balance as of January
31, 2000........... 380,553 $3,806 4,267,410 8,324,910 $42,674 $27,533,464 $(441,728)
======= ====== ========= ========= ======= =========== =========

CUMULATIVE TOTAL
ACCUMULATED TRANSLATION STOCKHOLDERS' COMPREHENSIVE
DEFICIT ADJUSTMENT EQUITY LOSS
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance as of July
31, 1999........... (17,878,298) (334,537) 6,324,153 --
Issuance of common
stock upon the
exercise of stock
options............ -- -- 1,667 --
Deferred compensation
related to grant of
stock options...... -- -- -- --
Amortization of
deferred
compensation....... -- -- 62,561 --
Issuance of Series F
convertible
preferred stock.... -- -- 2,537,000 --
Accumulated
translation
adjustment......... -- (335,366) (335,366) (335,366)
Net loss............. (4,951,013) -- (4,951,013) (4,951,013)
------------ --------- ---------- -----------
Balance as of January
31, 2000........... $(22,829,311) $(669,903) $3,639,002 $(5,286,379)
============ ========= ========== ===========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

F-28
<PAGE> 105

BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JANUARY 31, 2000 AND 1999

<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,951,013) (3,401,028)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 98,602 63,111
Amortization of goodwill and other intangible assets... 1,707,403 1,824,750
Amortization of deferred compensation.................. 62,561 40,520
Loss on sale of assets................................. -- 6,452
Equity in loss of joint venture........................ 316,387 --
Changes in assets and liabilities:
Accounts receivable.................................. (32,100) (176,847)
Projects in progress................................. (379,892) (261,484)
Prepaid expenses and other current assets............ (89,491) (44,003)
Accounts payable..................................... 469,367 107,785
Accrued expenses..................................... 576,792 154,413
Deferred revenues.................................... 331,742 (14,474)
----------- ----------
Net cash used in operating activities............. (1,889,642) (1,700,805)
----------- ----------
Cash flows from investing activities:
Investment in joint venture............................... (528,144) --
Acquisition cost, net of cash acquired.................... -- (94,978)
Additions to equipment.................................... (457,902) (85,258)
Proceeds from sale of assets.............................. -- 18,825
Other..................................................... (275,558) (4,545)
----------- ----------
Net cash used in investing activities............. (1,261,604) (165,956)
----------- ----------
Cash flows from by financing activities:
Proceeds from issuance of preferred stock................. 2,537,000 804,000
Proceeds from issuance of common stock.................... 1,667 7,486
----------- ----------
Net cash provided by financing activities......... 2,538,667 811,486
----------- ----------
Effect of exchange rate changes on cash..................... (331,459) 130,032
----------- ----------
Net decrease in cash and cash equivalents................... (944,038) (925,243)
Cash and cash equivalents at beginning of period............ 3,214,681 3,111,002
----------- ----------
Cash and cash equivalents at end of period.................. $ 2,270,643 2,185,759
=========== ==========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 79,521 114,931
=========== ==========
Income taxes paid......................................... $ 800 800
=========== ==========
Non-cash financing and investing activities:
Deferred compensation related to stock option issuances... $ 366,774 108,000
=========== ==========
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
=========== ==========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.
F-29
<PAGE> 106

BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000

(1) THE COMPANY AND BASIS OF PRESENTATION

The Company

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 six months ended January 31, 2000,
the weighted average number of shares at January 31, 2000, would have increased
by 1,247,028 for stock options (not assuming the effects of applying the
treasury stock method).

F-30
<PAGE> 107
BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

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 SIX MONTHS ENDED
JANUARY 31
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Numerator:
Net loss................................................ $(4,951,013) $(3,401,028)
Denominator:
Weighted average number of basic and diluted shares
outstanding.......................................... 379,803 191,299
----------- -----------
Basic and diluted loss per share.......................... $ (13.04) $ (17.78)
=========== ===========
</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
8,114,688 and 7,412,728 at January 31, 2000 and 1999, respectively.

(3) BALANCE SHEET COMPONENTS

(a) Other Assets

The Company has deferred $209,155 in incremental costs directly
attributable to the Company's proposed initial public offering of common stock.
These costs are included in other assets at January 31, 2000.

(b) Accrued expenses

Accrued expenses consisted of the following as of:

<TABLE>
<CAPTION>
JANUARY 31 JULY 31,
2000 1999
----------- ---------
<S> <C> <C>
Accrued interest expense.................................... $ 847,235 791,676
Compensation and benefits................................... 844,541 557,673
Outstanding invoices........................................ 375,735 287,605
Professional fees........................................... 228,739 211,042
Other....................................................... 21,067 31,859
---------- ---------
$2,317,317 1,879,855
========== =========
</TABLE>

(4) 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. 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
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.

F-31
<PAGE> 108
BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

(5) STOCK PLANS

During August and September 1999, the Company granted 732,450 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 December 21, 1999, the Company granted 50,720 additional
stock options at exercise prices between $5.00 and $10.00. The Company has
recorded deferred compensation expense during the six months ended January 31,
2000, of $366,774 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 six months ended January 31, 2000, was $62,561.

(6) INVESTMENT IN JOINT VENTURE

During the first six months of fiscal year 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. As part of the agreement each company has invested
$601,846. The Company has sold technology and has provided other software
customization and administrative services to the joint venture totaling
approximately $316,605 through January 31, 2000. The Company has eliminated 50%
of this revenue, related expenses and profit in these condensed consolidated
financial statements.

(7) 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 six months ended January
31, 1999, the Communities segment operations consisted solely of Cybertown, an
Internet entertainment website. As of January 31, 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.

F-32
<PAGE> 109
BLAXXUN INTERACTIVE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 six months ended January 31, 2000 and 1999
are as follows:

<TABLE>
<CAPTION>
PROFESSIONAL CORPORATE AND
2000 PRODUCTS SERVICES COMMUNITIES RECONCILIATION CONSOLIDATED
- ---- ----------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues....................... $ 1,086,189 705,023 248,667 -- 2,039,879
EBITA (loss)....................... (1,623,068) (222,085) (914,179) -- (2,759,332)
Losses on investment in joint
venture.......................... -- -- (316,387) -- (316,387)
Amortization of goodwill and other
intangible assets................ (1,707,403)
Interest, net...................... (167,091)
----------
Net loss before taxes.............. $ (4,950,213)
==========
</TABLE>

<TABLE>
<CAPTION>
PROFESSIONAL CORPORATE AND
1999 PRODUCTS SERVICES COMMUNITIES RECONCILIATION CONSOLIDATED
- ---- ----------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net Revenues....................... $ 515,399 344,700 -- -- 860,099
EBITA (loss)....................... (1,071,511) (195,894) (98,648) -- (1,366,053)
Amortization of goodwill and other
intangible assets................ (1,824,750)
Interest, net...................... (209,425)
----------
Net loss before taxes.............. $ (3,400,228)
==========
</TABLE>

(8) SUBSEQUENT EVENTS

On March 30, 2000, the 2000 Stock Plan was adopted by the Board of
Directors. 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 4,
2000, no options have been granted under this plan.

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 terms which provide for the
issuance of 300,000 shares of Series B convertible preferred stock in
consideration of the principal balance of the note of Deutsche Mark 1,700,000
($929,012) and the repayment premium of Deutsche Mark 510,000 ($278,689) Accrued
interest through the effective date of the conversion will be paid in cash.

F-33
<PAGE> 110

[ALTERNATE PAGES FOR THE GERMAN PROSPECTUS]

[GERMAN VERSION OF THE COVER PAGE]

INSIDE FRONT COVER

INSIDE BACK COVER

A-1
<PAGE> 111
[ALTERNATE PAGES FOR THE GERMAN PROSPECTUS]

PRELIMINARY OFFERING CIRCULAR OF [APRIL 7], 2000

for

[ ] SHARES OF COMMON STOCK

with a par value of $0.01 per share
to be newly issued by blaxxun interactive, Inc.

and
up to

[ ] SHARES OF COMMON STOCK

with a par value of $0.01 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) [ ]

BLAXXUN INTERACTIVE, INC.

Wilmington, Delaware, California, U.S.A.

A-2
<PAGE> 112
[ALTERNATE PAGES FOR THE GERMAN PROSPECTUS]

AS WELL AS

COMPANY REPORT 1999

for the admission of

[ ] SHARES OF COMMON STOCK

with a par value of $0.01 per share (all Shares of Common Stock outstanding
at the point of time of admission),

German Securities Identification Number (WKN) [ ]

BLAXXUN INTERACTIVE, INC.

to the Regulated Market (Geregelter Markt) with trading on the Neuer Markt
of the Frankfurt Stock Exchange

A-3
<PAGE> 113
[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 [ ]
shares of common stock being offered by us, each share having a par value of
$0.01, $[ ]in the aggregate, and [ ] 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 $0.01, $[ ] 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
[ ] shares of common stock.

The shares of common stock offered by us will be new shares, each with a
par value of $0.01, 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 [ ] shares, assuming conversion of all
outstanding shares of preferred stock into shares of common stock, to
[ ] 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, Frankfurt am Main and
[ ], [ ] and [ ] 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 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

A-4
<PAGE> 114
[ALTERNATE PAGES FOR THE GERMAN PROSPECTUS]

in general and administration expenses due to the additional costs for
accounting and reporting and to prepare the internal systems for further growth.

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 March 2000
blaxxun interactive, Inc.

A-5
<PAGE> 115

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.....................................
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............................................... $ 163,600
----------
Total............................................. $1,000,000
==========
</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> 116

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, 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 investor for an aggregate purchase price of
$2,000,000.

3. In August 1996, the Registrant 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.

4. In August 1997, the Registrant 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.

5. In June 1998 and October 1998, 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 investors for an
aggregate purchase price of $4,282,156.

6. In November 1998, the Registrant 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 the Registrant.

7. In August of 1998 and June of 1999, the Registrant 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, Registrant's wholly-owned
subsidiary.

8. In March of 1999, 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 investors for an aggregate purchase price of
$3,000,000.

9. 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.

10. In January and February of 2000, 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 investors for an
aggregate purchase price of $8,720,200.

11. In March 2000, 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).

II-2
<PAGE> 117

(d) All of the foregoing information gives effect to the two-for-one split
of the Registrant's common stock to be effected upon the consummation of this
offering. The issuances described in Item 15(a)(1) above were or will be exempt
from registration under Section 2(3) of the Securities Act on the basis that
such transactions did not involve a "sale" of securities. The issuances of
securities described in Items 15(a)(2) through 15(a)(8) and in Item 15(a)(10)
above were deemed to be exempt from the registration requirements of the
Securities Act in reliance on Section 4(2) thereof as transactions by an issuer
not involving a public offering. The issuances of stock and options to purchase
stock described in Item 15(a)(9) above were deemed to be exempt from the
registration requirements of the Securities Act in reliance on Rule 701
promulgated under Section 3(b) of the Securities Act as transactions by an
issuer pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. In addition, such issuances were
deemed to be exempt from registration under Section 4(2) of the Securities Act
as transactions by an issuer not involving a public offering. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
securities issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.

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
10.7* Agreement with Infomatec Media AG.
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)
23.3* Consent of Bruckhaus
24.1 Power of Attorney (included on page II-4)
27.1 Financial Data Schedule
</TABLE>

- ---------------
* To be filed by amendment

II-3
<PAGE> 118

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.

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> 119

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Munich, Germany, on April 7, 2000.

BLAXXUN INTERACTIVE, INC.

By: /s/ FRANZ BUCHENBERGER
------------------------------------
Franz Buchenberger, President

We, the undersigned officers and directors of blaxxun interactive, Inc.,
hereby severally constitute and appoint Franz Buchenberger, to sign for us and
in our names in the capacities indicated below, the Registration Statement on
Form S-1 filed herewith and any and all pre-effective and post-effective
amendments to said Registration Statement, and, in connection with any
registration of additional securities pursuant to Rule 462(b) under the
Securities Act of 1933, to sign any abbreviated registration statement and any
and all amendments thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, in each case, with the Securities and
Exchange Commission, and generally to do all such things in our names and on our
behalf in our capacities with the provisions of the Securities Act of 1933, as
amended, and all requirements of the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Act of 1933, as amended,
this 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 and Chief Executive Officer April 7, 2000
- ------------------------------------------------ and Chairman of the Board (Principal
Franz Buchenberger Executive Officer and Principal
Financial Officer)

/s/ GUY BRADLEY Director April 7, 2000
- ------------------------------------------------
Guy Bradley

/s/ HEYDAN VON FRANKENBERG Director April 7, 2000
- ------------------------------------------------
Heydan von Frankenberg

/s/ FRANCOIS STIEGER Director April 7, 2000
- ------------------------------------------------
Francois Stieger
</TABLE>

II-5
<PAGE> 120

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
10.7* Agreement with Infomatec Media AG
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)
23.3* Consent of Bruckhaus
24.1 Power of Attorney (included on page II-4)
27.1 Financial Data Schedule
</TABLE>

- ---------------
* To be filed by amendment

<PAGE> 1
Exhibit 21.1

21.1 blaxxun interactive AG, a company organized under the laws of
Germany, is a wholly-owned subsidiary of the Registrant.

21.2 Cybertown, Inc. a corporation formed under the laws of Delaware, is a
wholly-owned subsidiary of the Registrant.

21.3 SoccerCity -- Verwaltungsgesellschaft mbH, a company organized under the
laws of Germany, is a wholly owned subsidiary of blaxxun interactive AG,
which is a wholly owned subsidiary of the Registrant.

21.4 SoccerCity GmbH & Co. KG, a company organized under the laws of Germany,
is a wholly owned subsidiary of blaxxun interactive AG, which is a wholly
owned subsidiary of the Registrant.

21.5 Lernland Verwaltungsgesellschaft mbH, a company organized under the laws
of Germany, is a 50% owned subsidiary of blaxxun interactive AG which is
a wholly owned subsidiary of the Registrant.

21.6 Lernland GmbH & Co. KG, a company organized under the laws of Germany,
is a 50% owned subsidiary of blaxxun interactive AG which is a wholly
owned subsidiary of the Registrant.

<PAGE> 1
Exhibit 23.1

[KPMG logo]

The Board of Directors
blaxxun interactive, Inc.
1550 Bryant Street, Suite 770
San Francisco, CA 94103
U.S.A.

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

We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.

KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft

/s/ KPMG Deutsche Treuhand-Gesellschaft AG

Munich, Germany
April 6, 2000

<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLAR

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-1-1998
<PERIOD-END> JUL-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,214,681
<SECURITIES> 0
<RECEIVABLES> 762,976
<ALLOWANCES> 66,917
<INVENTORY> 0
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0
40,524
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</TABLE>