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SECURITIES AND EXCHANGE COMMISSION

FORM S-1

Under

YELLOWBRIX, INC.

66 Canal Center Plaza, Suite 700

David C. Hoppmann

Copies to:

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, 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 the 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 statement 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 Securities Act 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, please check the following box: [   ]

CALCULATION OF REGISTRATION FEE

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 specifically stating that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED OCTOBER 20, 2000

PROSPECTUS

              Shares

Common Stock

       This is the initial public offering of common stock by YellowBrix, Inc. We are selling           shares of common stock. The estimated initial public offering price is between $          and $     per share.

       Prior to this offering, there has been no public market for our common stock. We have applied to include the shares of our common stock for quotation on the Nasdaq National Market under the symbol YBRX.

       YellowBrix has granted the underwriters an option for a period of 30 days to purchase up to           additional shares of common stock at the offering price, less the underwriting discount.

Investing in our common stock involves a high degree of risk.

       Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

CHASE H&Q

          , 2000

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[Artwork description of graphics on inside front cover and gatefold to follow]

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       We have applied for trademark and service mark protection for our “YellowBrix,” “IntelliClix,” “IndustryWatch,” “NewsReal,” “MultiLinks,” “Contextual Merchandising,” “Contextual eMerchandising” and YellowBrix logo marks. Other trademarks, tradenames and service marks referred to in this prospectus are the property of their respective owners.

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PROSPECTUS SUMMARY

       This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” beginning on page 6 and the financial statements and notes to those financial statements beginning on page F-1 before making an investment decision.

YellowBrix

       YellowBrix is a leading provider of Internet infrastructure services in the contextual commerce and personalized content services markets. Our customers consist of consumer and commercial Web sites and corporate intranets and extranets, collectively, Web sites. Our proprietary technology solution integrates content, commerce and advertising and delivers personalized information to our customers’ users through Web pages, e-mails and wireless devices. Our system uses artificial intelligence, text parsing and linguistic pattern analysis tools to analyze documents and understand their meaning, focus and ultimate relevancy to Web site users. Our technology enhances Web site user experiences through the automated distribution of more personalized content selected from a broader range of choices and may increase our customers’ revenue by providing targeted commerce opportunities. Our services can be provided either individually or as an integrated solution.

       We believe our services will facilitate the growth in electronic commerce and address the fundamental needs of Web sites to improve user experiences and increase revenue streams. Many companies have built vertical Web sites in order to attract users who have common interests and who, therefore, will be attractive to potential advertisers and merchants. Many Web sites, however, have discovered that undifferentiated non-targeted content alone is not a sufficient driver to attract, retain and motivate user interest and that traditional online advertising does not generate sufficient revenues. In addition, corporations are building intranets and extranets in order to communicate and interact more effectively and efficiently with their employees, customers and partners. As a result, Web sites and corporations are searching for a solution that will integrate personalized content and commerce opportunities in an effective manner.

       We believe our services offer our Web site customers the ability to deliver a more personalized, enhanced user experience and to increase revenue streams. Our services provide our customers with an outsourced information infrastructure that features a low cost, flexible and customized solution with a quick implementation process. Our services include:

	•	Contextual commerce. Our contextual commerce services match and distribute highly targeted commerce and advertising opportunities to our customers’ users from a catalogue of over 2.1 million products.
	•	Targeted content. Our targeted content services enable our customers to use our artificial intelligence capability to electronically define and create, almost instantaneously, highly specialized categories of information such as news headlines, articles and press releases for automatic distribution to their end users.
	•	Personalization. Our personalization services facilitate the development of custom start pages for each user and create personalized e-mail newsletters.

       We intend to become the leading provider of customized commerce, content and personalization infrastructure services. To achieve this goal, we plan to:

	•	leverage the online convergence of commerce, content and personalization;
	•	provide additional value added services such as advanced personalization;
	•	develop and expand our strategic alliances and agency relationships;

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	•	further penetrate existing markets and expand into new markets;
	•	maintain and extend our technology and service leadership; and
	•	pursue global expansion using by applying our analysis tools to foreign languages.

       As of August 31, 2000, we had entered into contracts with 156 customers and implemented our services on 97 Web sites, including InfoUSA, Business 2.0 Online/Imagine Media, Monster.com and Network Solutions. Our sales strategy is to pursue opportunities with major accounts through our direct sales force of 58 personnel. In addition, we will penetrate other targeted market segments through multiple indirect distribution channels such as affilliate and agency relationships.

       We were incorporated as a Delaware corporation in October 1997. Our principal executive offices are located at 66 Canal Center Plaza, Suite 700, Alexandria, Virginia 22314. Our telephone number at that address is (703) 548-3300 and our Web address is www.yellowbrix.com . Information contained on our Web site does not constitute part of this prospectus, and you should rely only on the information contained in this prospectus when deciding whether to invest in our common stock.

       This prospectus refers to market research reports prepared by various organizations, which typically do not disclose their underlying limitations or assumptions. You should not rely on these market reports as being necessarily indicative of future developments.

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The Offering

       The above information is as of June 30, 2000 and excludes:

	•	8,927,137 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $2.90;
	•	1,157,200 shares reserved for future grants under our Amended 1998 Stock Option Plan;
	•	1,355,662 shares reserved for future grants under our 2000 Stock Option Plan; and
	•	3,040,189 shares of our common stock reserved for issuance upon the exercise of outstanding warrants at a weighted average exercise price of $3.08 per share.

       Except as otherwise indicated, all pro forma information in this prospectus:

	•	reflects the conversion of our outstanding shares of series A preferred stock into 537,634 shares of our common stock upon the closing of this offering;
	•	assumes the issuance of up to 6,659,717 shares of common stock upon conversion of our outstanding convertible debt upon the closing of this offering;
	•	assumes the issuance of 986,130 shares of our common stock pursuant to anti-dilution rights of certain of our stockholders and warrant holders for no additional cash as a result of the conversion of our outstanding convertible debt upon the closing of this offering;
	•	assumes the issuance of 81,806 shares of our common stock pursuant to anti-dilution rights of certain of our stockholders and warrant holders for no additional cash as a result of the exercise of a warrant issued to Infoseek Corporation;
	•	reflects the amendment and restatement of our certificate of incorporation which increases the number of our authorized common stock to 100,000,000 and the number of our preferred stock to 10,000,000, which will occur before the closing of this offering; and
	•	assumes no exercise of the underwriters’ over-allotment option.

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Summary Financial Data

       The following table is a summary of the financial data for our business. You should read the following summary financial data in conjunction with our financial statements and accompanying notes and with the information under “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

       The pro forma consolidated balance sheet data summarized below gives effect to the conversion of our outstanding shares of series A preferred stock into 537,634 shares of common stock, the issuance of 6,659,717 shares of our common stock upon conversion of our outstanding convertible debt, the issuance of 1,067,936 shares of our common stock pursuant to anti-dilution rights of certain of our stockholders and the exercise of a warrant for the purchase of 1,077,500 shares of common stock valued at $8,620,000. The pro forma as adjusted consolidated balance sheet data summarized below reflects the sale of the common stock offered by us at an assumed initial offering price of $           per share, after deducting underwriting discounts and estimated offering expenses payable by us, and our receipt and application of the net proceeds from the offering.

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RISK FACTORS

       You should carefully consider the risks and uncertainties described below and all other information contained in this prospectus before making an investment decision. Our business, financial condition and results of operations could be severely harmed by any of the following risks. The trading price of our common stock could decline if any of these risks or uncertainties develop into actual events. You may lose all or part of the money you paid to buy our common stock.

Risks Related to Our Business

We have a history of significant operating losses and expect to incur significant losses for the foreseeable future.

       We expect to incur operating losses and negative cash flow for the foreseeable future. We have incurred significant losses since we began our business in 1997. As of June 30, 2000, we had an accumulated deficit of $39.2 million. We incurred net losses of $17.6 million and $11.4 million for the year ended December 31, 1999 and the six months ended June 30, 2000, respectively. We anticipate our losses will continue as we incur additional costs and expenses related to:

	•	sales and marketing activities;
	•	employing additional personnel;
	•	software and service development;
	•	establishing strategic alliances;
	•	stock based arrangements with employees, independent contractors, vendors and strategic alliances;
	•	funding our international expansion; and
	•	increasing the number of our content providers.

       In particular, our operating results will be impacted by the extent we incur non-cash charges associated with stock-based arrangements. Our warrants held by America Online, Inc. and Infoseek Corporation have resulted, and are expected to result in, charges and such charges will fluctuate based upon the trading price of our common stock at the end of each quarter and at the date certain milestones are achieved.

       Our ability to achieve profitability will depend on our ability to generate and sustain substantially higher net sales while maintaining reasonable expense levels. We cannot be certain that if we were to achieve profitability, we would be able to sustain or increase profitability.

Because we have a limited operating history, it will be difficult for you to evaluate our business.

       It is difficult to value our business and evaluate our prospects because of our limited operating history. We were organized in 1997. Accordingly, we have limited financial and operating data that is relevant to our current business. Our business model is unproven, which creates a risk that our performance will not meet the expectations of investors and that the value of our common stock will decline.

The length of our sales and implementation cycle may make our operating results more unpredictable.

       Our average sales and implementation cycle from the time a potential customer is first contacted to the time the customer accepts the services currently ranges from four to eight weeks. Consequently, we may make considerable expenditures before any revenues are realized with respect to a potential customer. In addition, we may experience longer sales and implementation

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Failure to effectively manage our growth and expansion could adversely affect our business and operating results.

       We have grown quickly in the recent past and we anticipate that we will continue to expand. For example, our number of full-time employees increased from 31 on January 1, 2000 to 158 on August 31, 2000. Any failure to manage our growth effectively will result in less efficient operations, which may adversely affect our operating and financial results.

       To effectively manage our growth, we must, among other things:

	•	accurately estimate the number of employees we will require and the areas in which they will be required;
	•	upgrade and expand our office infrastructure so that it is appropriate for our level of activity;
	•	manage expansion into additional geographic areas; and
	•	improve and refine our operating and financial systems.

       We expect to devote considerable resources and management time to improving our operating and financial systems to manage our growth.

We will need to hire additional qualified personnel, which may become difficult, as our business grows.

       Our future success depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, sales and marketing and business development personnel. We intend to hire a significant number of technical, sales and marketing, business development and administrative personnel during the next year. Our services and the industries to which we provide our services are relatively new. As a result, qualified technical personnel with relevant experience to our business are scarce and therefore difficult to recruit. If we do not attract, assimilate and retain a sufficient number of qualified technical, managerial, sales and marketing, business development and administrative personnel, our business could suffer.

Losing major content providers may leave us with insufficient breadth of content to retain and attract customers.

       We do not generate original content and are therefore highly dependent upon third-party content providers. We have arrangements with a limited number of content providers and from September 10, 2000 to October 10, 2000, 71% of our articles were received from two content providers. No other content provider provided more than 10% of our articles during this time period. If we were to lose one of our major content providers and were not able to obtain similar content from another source, our services would be less attractive to customers. In addition, we cannot be certain that we will be able to license content from our current or new providers on favorable terms in the future, if at all. If we are unable to add content providers to our network, we may not be able to attract new customers in sufficient numbers to expand our business.

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We depend on key personnel to manage our business effectively.

       Our future success depends on the continued services of our executive officers and other key personnel such as David Hoppmann, our Chief Executive Officer and President, Jeffrey Massa, our Senior Vice President, Technology and Chief Technology Officer and Jace Wieser, our Senior Vice President, Technology/ Engineering. We do not have any key person life insurance policies covering any of our employees. The loss of the services of any of our executive officers or other key employees could negatively impact our business, financial condition and results of operations.

We rely on Internet-related companies to purchase many of our services.

       A majority of the customers who purchase our services consist of Internet-related companies. Many Internet-related companies have faced or are currently facing problems achieving profitability or attracting financing at commercially reasonable terms, or at all, to enable them to continue in business. If a significant portion of our customers were to face such difficulties, our business would be adversely affected.

If we fail to keep up with rapid technology and competitive changes that affect our business, we will be at a competitive disadvantage.

       Rapidly changing technology, evolving industry standards and customer demands, and frequent new service introductions characterize our market. Our future success depends in significant part on our ability to develop and introduce compelling services on a timely and competitive basis and to improve the performance, content and reliability of our services in response to both the evolving demands of the market and competitive service offerings. Additionally, new Internet or telecommunications technologies may require us to alter our information analysis and distribution technology and/or services so that they do not become obsolete. If our efforts in these areas are not successful or sufficient, we will be at a competitive disadvantage.

We face intense competition that could impair our ability to grow and achieve profitability.

       Our competition varies by service offerings. Currently, while we believe no one company competes with us in all of our service categories, many companies compete with us in individual service categories of contextual commerce, targeted content and personalization markets. Many of our competitors or future competitors have longer operating histories than we do and significantly greater financial, technical and marketing resources.

If the content we distribute is unlawful or causes injury, we may have to pay fines or damages and our reputation may suffer.

       We obtain content and commerce information from third parties. When we integrate and distribute this information over the Internet, we may be liable for the data that is contained in that content based on claims such as defamation, negligence, breach of copyright, patent, trade secret or trademark infringement. Our content provider indemnification rights may be insufficient to satisfy any claims against us.

       In addition, we could be exposed to liability arising from the activities of our customers or their users with respect to the unauthorized duplication of, or insertion of inappropriate material into, the content we supply. Although we carry general liability insurance, our insurance may not cover claims of these types or may be inadequate to protect us for all liability that may be imposed on us.

       In the event we carry incorrect or misleading information, our reputation as a provider of commerce and content could also be harmed, hurting our prospects for future business.

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Changes in laws relating to data collection and use practice and the privacy of Internet users and other individuals could harm our business.

       The U.S. federal and various state governments have recently proposed limitations on the collection and use of information regarding Internet users. In October 1998, the European Union adopted a directive that may limit our collection and use of information regarding Internet users in Europe. In the future, our technology will create user characteristic information partly through the use of “cookies.” Government regulations and the Federal Trade Commission’s privacy initiatives may affect our further refinement of enhanced personalization features. If we are unable to offer distinctive personalization features, our business may not grow as fast as expected.

We may be unable to expand our computer systems quickly enough to support demand for our services.

       Our future success will depend in part on our ability to expand our computer systems rapidly in order to accommodate significant increases in information processing volume. We may be unable to expand the capacity of our existing linguistic data analysis, vector categorization and information distribution systems or develop new systems to enable us to process a larger amount of commerce and content, or to provide our services to a larger number of customers. If we are unable to expand our systems, we may suffer service interruptions that could make our services less attractive to customers.

       We may require additional servers to support our systems infrastructure. Any failure in our system that is not backed up by redundant servers could cause significant delays in our business operations. Due to the time sensitive nature of our distribution service, an interruption of service could be harmful to our business and reputation and could be very damaging to our relationship with that customer.

Protection of our intellectual property is limited and efforts to protect our intellectual property may be inadequate, time-consuming and expensive.

       We regard our intellectual property as critical to our success. The unauthorized use or misappropriation of our patent pending processes, trademarks or other intellectual property could diminish the value of our market position, proprietary rights or reputation. If this were to occur, our business could be materially and adversely affected.

       We rely upon a combination of trademark and copyright law, patent law, trade secret protection and confidentiality and license agreements with our employees, customers and others to protect our proprietary rights. We have received and have filed a number of trademarks and service marks, and have filed a patent application with the United States Patent and Trademark Office. However, registrations and patents may only be granted in selected cases, and there can be no assurance that we will be able to secure these or additional registrations or patents or that these rights will not be challenged. Furthermore, policing and enforcement against the unauthorized use of our intellectual property rights could entail significant expenses and could prove difficult or impossible.

Third parties may claim that we have breached their intellectual property rights, which could divert management’s attention and result in expenses to defend or settle claims.

       Third parties may bring claims of copyright or trademark infringement, patent violation or misappropriation of creative ideas or formats against us with respect to content that we distribute or technology or marketing techniques and terminology that we use. These claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management attention, require us to enter into costly royalty or licensing arrangements or limit our ability to distribute content or prevent us from utilizing important technologies, ideas or formats.

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       In addition, we license some material technology from a limited number of vendors. If we are unable to license technology from these vendors on commercially reasonable terms, or at all, or if their technology infringes on the intellectual property rights of others, our business will suffer.

Our international expansion involves considerable risks and we may face difficulties expanding our operations into international markets.

       As part of our business strategy, we have begun to seek additional opportunities to expand our services into international markets. We believe that such expansion is important to our ability to continue to grow and to market our services. In marketing our services internationally, however, we face new competitors. If our revenues from international operations do not exceed the expense of establishing and maintaining international operations, our business may suffer. To date, we have limited experience in marketing and distributing our services internationally.

       In addition, there are certain difficulties and risks inherent in doing business internationally, such as compliance with regulatory requirements, increased privacy concerns, tariffs and other trade barriers, protection of intellectual property rights, difficulties in staffing and managing international operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates and potentially adverse tax consequences. One or more of such factors could have a material adverse effect on any international operations that we establish and, consequently, on our business, results of operations and financial condition.

We rely on a small number of customers for a significant portion of our revenues.

       We derive a substantial portion of our revenues from a small number of customers. Two companies represented approximately 62% of our revenues for the year ended December 31, 1999 and three companies represented approximately 43% of our revenues for the six months ended June 30, 2000. No other customer was responsible for in excess of 10% of our revenues during these periods. We expect that this will continue in the foreseeable future. If we lose any of these customers, or if any of these customers are unable or unwilling to pay us amounts that they owe us, our financial results will suffer. A customer contract recently expired for CNNfn, which accounted for 50%, and 13% of our total revenues for the year ended December 31, 1999 and for the six months ended June 30, 2000, respectively, and we cannot assure you that a new contract will be signed or that we will continue to provide future services to this customer.

Potential acquisitions and strategic investments may result in increased expenses, difficulties in integrating target companies and diversion of management’s attention.

       Although we are not currently in discussions with any party, we may undertake one or more acquisitions or strategic investments in the near future to expand our range of technology and services and to gain access to new markets. Growth through acquisitions entails many risks, including the following:

	•	our management’s attention may be diverted during the acquisition and integration process;
	•	costs, delays and difficulties of integrating the acquired company’s operations, technologies and personnel into our existing operations, organization and culture;
	•	the adverse impact on earnings of amortizing the acquired company’s intangible assets may be significant, particularly in light of the high valuations of many Internet and other information technology services companies;
	•	new equity securities to pay for acquisitions, which would dilute the holdings of existing stockholders;

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	•	the timing of an acquisition or our failure to meet operating expectations for acquired businesses may impact adversely on our financial condition; and
	•	any undisclosed or potential legal liabilities, or related expenses of an acquired company, including intellectual property, employment and warranty and service liability-related problems.

       If realized, any of these risks could have a material adverse effect on our business, financial condition and operating results.

We may require additional funding for our existing and future operations.

       Although we believe that our cash reserves, including the net proceeds from this offering, and cash flows from operations will be adequate to fund our operations for at least the next 12 months, such sources may be inadequate. Consequently, we may require additional funds during or after such period. Additional financing may not be available on favorable terms or at all. If we raise additional funds by selling stock, the percentage ownership of our then current stockholders will be reduced. If we cannot raise adequate funds to satisfy our capital requirements, we may have to limit our operations significantly. Our future capital requirements depend upon many factors, including, but not limited to:

	•	the rate at which we expand our sales and marketing operations;
	•	the extent to which we develop and upgrade our technology and data network infrastructure;
	•	the occurrence, timing, size and success of acquisitions;
	•	the cash requirements of entities we may acquire;
	•	the rate at which we may expand internationally; and
	•	the response of competitors to our service offerings.

Risks Related to the Internet Industry

If the Internet does not continue to grow in acceptance, we may not be able to meet our business plan.

       Because a majority of our present and anticipated customers are operators of Web sites, demand for our services will depend in large part on continued growth in use of the Internet. There are critical issues concerning the commercial use of the Internet that remain unresolved, such as security and profitability concerns. If the Internet develops more slowly than we expect as a commercial or business medium, demand for our services will be lower than we expect and our business may suffer.

We rely on the Internet system infrastructure.

       Our success depends, in large part, on other companies maintaining the Internet system infrastructure. In particular, we rely on other companies to maintain a reliable network backbone that provides adequate speed, data capacity and security and to develop services that enable reliable Internet access and services. If the Internet continues to experience significant growth in the number of users, frequency of use and amount of data transmitted, the Internet system infrastructure may be unable to support the demands placed on it, and the Internet’s performance or reliability may suffer as a result of this continued growth. In addition, the Internet could lose its commercial viability as a form of media due to delays in the development or adoption of new standards and protocols to process increased levels of Internet activity. Any such degradation of Internet performance or reliability could cause advertisers to reduce their Internet expenditures. If

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Legal uncertainties and government regulation of the Internet could inhibit growth of the Internet and e-commerce.

       Many legal questions relating to the Internet remain unclear and these areas of uncertainty may be resolved in ways that damage our business. It may take years to determine whether and how existing laws governing matters such as intellectual property, trade secrets, personal privacy, libel and taxation apply to the Internet.

       New laws and regulations that apply directly to Internet communications, commerce and advertising are becoming more prevalent. For example, the U.S. Congress has recently passed Internet-related legislation concerning copyrights, taxation, and the online privacy of children. As the use of the Internet and the prevalence of e-commerce grow, there may be calls for further regulation by the Federal Trade Commission or others on issues such as user privacy, pricing, content, taxation, copyrights, distribution and service and services quality. Finally, our distribution arrangements and customer contracts could subject us to the laws of foreign jurisdictions in unpredictable ways.

       These possibilities could affect us adversely in a number of ways. New regulations could make the Internet less attractive to users, resulting in slower growth in its use and acceptance than we expect. Complying with new regulations could result in additional cost to us, which could reduce our margins, or it could leave us at risk of potentially costly legal action. We may be affected indirectly by legislation that fundamentally alters the practicality or cost-effectiveness of utilizing the Internet, including the cost of transmitting over various forms of network architecture, such as telephone networks or cable systems, or the imposition of various forms of taxation on Internet-related activities. Regulators continue to evaluate the best telecommunications policy regarding the transmission of Internet traffic.

Risks Related to this Offering

Our stock price may decline after this offering and may be volatile in the future.

       The market for shares in newly public technology companies is subject to extreme price and volume fluctuations. Our shares will be exposed to these fluctuations. You may not be able to resell any shares you buy from us at or above the initial public offering price due to a number of factors, including:

	•	fluctuations in our operating results due to deviations between actual and expected sales;
	•	announcements of technological innovations, new systems or services, or service enhancements by us or our competitors;
	•	announcement of new or lost customers;
	•	changes in investors’ and securities analysts’ perception or expectations as to our future financial performance or changes in financial estimates of securities analysts; and
	•	the operating and stock price performance of comparable companies.

       In addition, although our common stock will be quoted on the Nasdaq National Market, an active trading market may not develop or sustain itself after this offering.

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We are at risk of securities class action litigation if our stock price becomes volatile.

       In the past, holders of securities have often instituted class action litigation against companies following periods of volatility in the market price of the securities. If we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs defending such litigation and our management’s attention and resources could be diverted from our business.

Management will have broad discretion in the way we use the net proceeds from this offering.

       Our business plan is subject to change based upon changing conditions and opportunities. Our management has significant flexibility in applying the net proceeds we receive from this offering. Because the net proceeds are not required to be allocated to any specific investment or transaction, you cannot determine at this time the value or propriety of our application of the proceeds and you and other stockholders may not agree with our decisions. See “Use of Proceeds” for a more detailed description of how management intends to apply the proceeds of this offering.

You will experience immediate and significant dilution as a result of this offering and may experience further dilution as a result of future equity issuances.

       The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock. Pro forma net tangible book value per share represents the pro forma amount of total tangible assets less total liabilities, divided by the pro forma number of shares of our common stock outstanding immediately after the offering. If you purchase our common stock in this offering, you will incur immediate dilution of approximately $          in the pro forma net tangible book value per share of common stock from the price you pay for our common stock in this offering. We also have outstanding a large number of stock options and warrants with exercise prices significantly below the initial public offering price of the shares. To the extent these options are exercised, there will be further dilution. We intend to continue to grant stock options to our employees as part of our general compensation practices.

Future sales of a substantial amount of our common stock after this offering may cause our stock price to decline.

       Future sales of substantial amounts of our common stock in the public market following this offering or the perception that substantial sales could occur may cause the market price of our common stock to decline. Of the           shares that will be outstanding upon the closing of this offering:

	•	all of the shares offered under this prospectus will be freely tradable in the public market, except as to affiliates;
	•	approximately           additional shares may be sold after the expiration of 180-day lock-up agreements entered into by our officers, directors and certain existing stockholders; and
	•	approximately           additional shares may be sold upon the exercise of stock options and warrants after the expiration of 180-day lock-up agreements.

       You should read “Shares Eligible for Future Sale” for a more detailed discussion of when and how many shares of our common stock may be sold after this offering.

We will continue to be effectively controlled by our executive officers and directors after this offering, and the interests of these stockholders could conflict with your interests.

       Immediately upon completion of this offering, our executive officers and directors and institutions affiliated with them, in the aggregate, will beneficially own approximately      % of our

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Provisions of our governing documents and Delaware law may make it difficult for a third party to acquire us and may delay a change in our control.

       Our certificate of incorporation and bylaws contain anti-takeover provisions, including those listed below, that could make it more difficult for a third party to acquire control of us, even if that change in control would be beneficial to stockholders:

	•	our board of directors has the authority to issue common stock and preferred stock and to determine the price, rights and preferences of any new series of preferred stock without stockholder approval;
	•	our board of directors is divided into three classes, each serving three-year terms;
	•	there are limitations on who can call special meetings of stockholders;
	•	stockholders may only take action without a meeting on the written consent of the holders of shares representing 66 2/3% of our capital stock; and
	•	advance notice is required for nominations of directors and for stockholder proposals.

       In addition, provisions of Delaware law and our stock option plans may also discourage, delay or prevent a change of control of our company or unsolicited acquisition proposals.

The absence of an active public market for our common stock may make it difficult for you to resell your shares at or above the offering price.

       Prior to this offering, there has been no public market for our common stock, and an active market for common stock may not develop. The initial public offering for our common stock was determined by negotiations between us and the representative of the underwriters. This price does not necessarily relate to our book value, assets, past operating results, financial condition or other established criteria of value. Therefore, you may be unable to resell your shares of common stock at or above the initial public offering price.

FORWARD-LOOKING STATEMENTS

       This prospectus includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about YellowBrix including, among other things:

	•	the rapid technological change in our industry;
	•	the intense competition in our industry;
	•	our need to continually develop new or improved services;
	•	our estimates regarding our capital requirements and our needs for additional financing;
	•	anticipated trends in our business;
	•	existing and future regulations affecting our business; and
	•	the risk factors set forth under “Risk Factors” in this prospectus.

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       In addition, in this prospectus, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions, as they related to YellowBrix, our business or our management, are intended to identify forward-looking statements.

       In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

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USE OF PROCEEDS

       Assuming an initial public offering price of $     per share, we will receive net proceeds of approximately $        million, or approximately $        million if the underwriters exercise their over-allotment option in full. This estimate is after deducting underwriting commissions and discounts of approximately $          million, or approximately $        million if the underwriters exercise their over-allotment option in full, and estimated expenses of $        million.

       While we currently do not have any specific plans or proposals for the allocation of the net proceeds of this offering, we currently anticipate using proceeds for working capital of approximately $      million, capital expenditures and purchase of software of approximately $      million, sales and marketing expenses of approximately $      million, product development expenses of approximately $      million and other general corporate expenses of approximately $      million.

       In addition, we may also use a portion of the net proceeds to acquire businesses, assets, technologies or service lines that complement our existing business if these transactions could be effected on terms which we deem to be favorable. We do not have any commitments to make any acquisition and have not allocated a specific amount of the net proceeds for this purpose. Our management will have significant flexibility in applying the net proceeds of the offering.

       Pending any use as described above, we intend to invest the net proceeds in short-term, interest-bearing investment-grade instruments.

DIVIDEND POLICY

       We have never declared nor paid any cash dividends on our capital stock. Our board of directors will determine future declaration and payment of dividends, if any, in light of the then-current conditions, including our earnings, operations, capital requirements, financial condition, restrictions in financing agreements and other relevant factors. It is the current policy of our board of directors to retain any future earnings to finance the development and expansion of the operations of our business. Accordingly, we do not anticipate paying cash dividends on our capital stock in the foreseeable future.

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CAPITALIZATION

       The following table sets forth our capitalization as of June 30, 2000 on a pro forma as adjusted basis to reflect the sale of     shares of common stock in this offering at an assumed initial public offering price of $     per share, after deducting commissions and other estimated offering expenses and the application of the estimated net proceeds, on an actual basis and on a pro forma basis after giving effect to the:

	•	automatic conversion of all outstanding shares of our series A preferred stock into 537,634 shares of our common stock upon the closing of this offering;
	•	issuance of up to 6,659,717 shares of common stock upon conversion of our outstanding convertible debt upon the closing of this offering;
	•	issuance of 986,130 shares of our common stock pursuant to anti-dilution rights of certain of our stockholders and warrant holders for no additional cash consideration as a result of the conversion of our outstanding convertible debt upon the closing of this offering;
	•	issuance of 81,806 shares of our common stock pursuant to antidilution rights of certain of our stockholders and warrant holders for no additional consideration as a result of the exercise of a warrant issued to Infoseek Corporation; and
	•	exercise of a warrant issued to Infoseek for the purchase of 1,077,500 shares of common stock with an exercise price of $0.001 per share with an assumed value of $8,620,000 as of the date the warrant vests.

       The table should be read in conjunction with our financial statements and the related notes, which are included elsewhere in this prospectus.

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DILUTION

       Our pro forma net tangible book value on June 30, 2000 was approximately $12,405,478 or $0.60 per share. Pro forma net tangible book value is total assets minus liabilities minus intangible assets. Pro forma net tangible book value per share is pro forma net tangible book value divided by the total pro forma number of shares outstanding before the offering.

       The adjustments to net tangible book value made to determine pro forma net tangible book value per share are the following:

	•	the automatic conversion of all outstanding shares of our series A preferred stock into 537,634 shares of our common stock upon the closing of this offering;
	•	the issuance of up to 6,659,717 shares of common stock upon the conversion of our outstanding convertible debt upon the closing of this offering;
	•	the issuance of 986,130 shares of our common stock pursuant to anti-dilution rights of certain of our stockholders and warrant holders for no additional consideration as a result of the conversion of the outstanding convertible debt;
	•	the issuance of 81,806 shares of our common stock pursuant to anti-dilution rights of certain of our stockholders and warrant holders for no additional consideration as a result of the exercise of a warrant issued to Infoseek Corporation;
	•	the exercise of a warrant issued to Infoseek for the purchase of 1,077,500 shares of common stock with an exercise price of $0.001 per share with an assumed value of $8,620,000 as of the date the warrant vests;

       The adjustments to as adjusted pro forma net tangible book value reflect the sale and issuance of       shares of common stock in the offering at an assumed initial public offering price of $     per share, after deducting commissions and other estimated offering expenses and the application of the estimated net proceeds.

       The following table sets forth on a pro forma as adjusted basis as of June 30, 2000, the increase in pro forma net tangible book value of $     per share and the dilution (the difference between the offering price per share and net tangible book value per share) to new investors:

       The following table sets forth, as of June 30, 2000, on the pro forma basis described above, the number of shares of capital stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors who purchase shares of common stock in this offering, before deducting the estimates underwriting discounts and commissions and offering expenses.

       If the underwriters exercise their over-allotment option in full, the number of shares held by new investors will be increased to           or      % of the total number of shares of common stock outstanding after the offering. In that case, the shares held by      would represent      % of the total number of shares of common stock to be outstanding after the offering.

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SELECTED FINANCIAL DATA

       The following selected financial data as of and for the period from October 1, 1997 (inception) to December 31, 1997 and for years ended December 31, 1998 and 1999 are derived from our financial statements, which have been audited by Ernst & Young LLP, independent auditors. The following selected financial data as of and for the six months ended June 30, 1999 and June 30, 2000 are derived from our unaudited financial statements which, in our opinion, include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for fair presentation of our financial position and results of operations for those periods. The data should be read in conjunction with the financial statements, related notes and other financial information included elsewhere in this prospectus. Our historical results are not necessarily indicative of future results. The results of operations for the six months ended June 30, 2000 are not necessarily indicative of the results to be realized for the year ending December 31, 2000.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

       The following discussion should be read in conjunction with “Selected Financial Data” and our financial statements and the notes to those financial statements included elsewhere in this prospectus. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors,” “Forward Looking Statements,” “Business” and elsewhere in this prospectus.

Overview

       YellowBrix is a leading provider of Internet infrastructure services in the contextual commerce and personalized content services markets. Our customers consist of consumer and commercial Web sites and corporate intranets and extranets, collectively, Web sites. Our proprietary technology solution integrates commerce and content and delivers personalized information to our customers’ users through Web pages, e-mails and wireless devices. During the six months ended June 30, 2000, we increased the number of customers that had implemented our services from 18 to 73, an increase of 306%.

       We commenced operations in the fourth quarter of 1997. On December 11, 1997, we acquired intellectual property and other assets of Infoseek Corporation pursuant to an asset acquisition agreement for $1.0 million in cash, 850,000 shares of our common stock and a warrant to purchase 1,077,500 shares of our common stock. In the first quarter of 1998, we began to generate revenue from our IndustryWatch service. IndustryWatch analyzes, categorizes and distributes news and information. Revenues from IndustryWatch remained insignificant until the fourth quarter of 1998, when we altered our business model from a primarily ad-share model to a new model based on implementation fees and monthly service charges. During the second quarter of 2000, we introduced IntelliClix, an automated contextual commerce service, for which we charge customers an implementation fee in addition to a per transaction fee. We anticipate that our revenue model will continue to evolve in the future as we introduce additional new services. For example, we recently introduced our e-mail and newsletter services for which we charge customers on a monthly per person basis.

       As part of the consideration for the assets acquired from Infoseek, we issued a warrant to Infoseek to purchase 1,077,500 shares of our common stock at an exercise price of $0.001 per share. The warrant expires ten years from the date of issue, and is subject to a vesting schedule that was dependent upon our attaining predefined revenue and operating income targets prior to December 31, 1999, which we did not meet. However, if the QIP Investors sell a portion of their shares at a profit over and above a predetermined rate of return or if an IPO occurs and certain returns on investment are achieved by the QIP Investors, the warrant will vest automatically. In the event that the warrant vests, we anticipate that we may record an estimated expense of $8.6 million.

       On April 7, 2000, we entered into an interactive services agreement whereby we provide America Online, Inc., or AOL, with customized contextual commerce and content services for their small business Web site. Under this agreement, we design, create, edit, manage, review, update and maintain a customized site for AOL, and AOL provides us with at least one hundred million page impressions on its network. The agreement provides for YellowBrix and AOL to share advertising revenue and IntelliClix transaction revenue from AOL’s small business Web site. This agreement terminates on October 4, 2001. Upon fulfillment of certain of AOL commitments, AOL has the right to extend this agreement for an additional one year period on the later of the termination or the date when AOL has fulfilled certain of its commitments.

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       We have agreed to pay AOL an aggregate of $3.0 million in an initial up front payment of $1.5 million and 5 quarterly installments of $300,000 each, $1.8 million of which has been paid as of August 31, 2000. We have also granted AOL a warrant to purchase up to 832,691 shares of our common stock at an exercise price of $3.72 per share, of which 277,563 shares have vested as of September 30, 2000. The remainder will vest upon achievement of two additional revenue payment milestones from AOL to us resulting from site activity. The value of the shares underlying the second and third milestones will be measured when it becomes probable that the vesting targets will be met. At each subsequent reporting date, until the achievement of the AOL warrant revenue milestone, YellowBrix will revalue the warrant using the Black-Scholes option pricing model and will record any increases or decreases in the value of the warrant. The value of the warrant will be amortized ratably over the term of the agreement. In addition to amortization of the initial fair value of this warrant, which totaled $741,000, we expect that future changes in the trading price of our common stock at the end of each quarter and at the date certain milestones are achieved, will cause additional substantial changes in the ultimate amount of such amortization.

       A customer contract recently expired for CNNfn, which accounted for 13% and 50% of our total revenues for the six months ended June 30, 2000 and for the year ended December 31, 1999, respectively. There is a possibility that this contract will not be renewed.

Revenues

       We generate revenues primarily from monthly service fees and implementation fees charged to customers for our services. The amount of the service and implementation fees is calculated based on the type and breadth of the services provided. Other revenues are generated from contextual commerce revenue share agreements, per person monthly charges for e-mail and newsletter services, custom consulting projects, and ad-share agreements. Revenues from service fees and implementation fees are deferred and recognized in the periods our services are implemented and accepted by the customer. Throughout 1998, the majority of our customers were converted from a primarily ad-share model to a monthly service model. However, certain customers continued under the ad-share model, in which revenues are recognized in the month they are received. We share such advertising and sponsorship revenues with our customers, based upon individually negotiated agreements. We record advertising revenues net of agency commissions and fees.

Expenses

   Cost of Revenues

       Our cost of revenues consists of flat monthly fees to content providers for access to their content and fees to merchandise suppliers for access to their product inventory. Cost of revenues also includes fees related to the management of our data centers and certain commissions paid as a result of our strategic alliances and agency agreements.

   Sales and Marketing

       Our sales and marketing expenses include salaries, benefits, commissions, advertising, sponsorship, and other marketing communication costs.

   Research and Development

       Research and development expenses include salaries, benefits, bonuses, and other employee related costs for all development and engineering employees. Also included in research and development are the costs of independent contractors and consultants and software licenses. Currently, all research and development costs are expensed as incurred.

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   General and Administrative

       General and administrative expenses consist of personnel and related costs of the corporate development, finance and administrative departments. General and administrative expenses also include production related facility and telecommunication costs, professional fees and other general office costs.

   Depreciation and Amortization

       Depreciation and amortization expenses consist of the costs associated with depreciation of our fixed assets and amortization of our intangible assets.

   Stock and Warrant Based Non-Cash Expenses

       Stock and warrant based non-cash expenses include all non-cash charges related to the issuance of equity, including stock options, warrants, and other securities. Most of the expenses in this category are related to warrants issued to vendors and consultants valued using the Black-Scholes option pricing model.

Results of Operations

       The table below shows operating data, as a percentage of revenues, for the periods indicated:

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Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999

       Revenues. Total revenues, for the six months ended June 30, 2000, were $3.0 million as compared to $827,000 for the same period in 1999. This reflects an increase of 264% between the two periods due to an increase of the number of our customers from 12 to 73 as well as a greater proportion of customers paying a monthly recurring fee for our targeted content services. Three of our customers accounted for approximately 43% of total revenues for the six months ended June 30, 2000 and one customer accounted for approximately 58% of total revenues for the six months ended June 30, 1999. Revenues from enhanced services such as personalization and contextual commerce were insignificant during the first half of 2000.

       Cost of Revenues. Cost of revenues, for the six months ended June 30, 2000, was $1.1 million, as compared to $262,000 for the same period in 1999. This reflects an increase of 306% between the two periods. As a percentage of revenues, cost of revenues increased to 35% for the six months ended June 30, 2000 from 32% for the six months ended June 30, 1999. This increase was due primarily to costs for additional content sources and fees related to the addition of our West Coast data center.

       Sales and Marketing. Sales and marketing expenses, for the six months ended June 30, 2000, were $4.5 million, as compared to $2.3 million for the same period in 1999. This reflects an increase of 95% between the two periods due to growth in our sales force from 8 salespeople to 32 salespeople.

       Research and Development. Research and development expenses, for the six months ended June 30, 2000, were $1.8 million, as compared to $814,000 for the same period in 1999. This reflects an increase of 120% between the two periods due to an increase in the number of research and development personnel, the cost of independent contractors and the amortization of certain software maintenance agreements.

       General and Administrative. General and administrative expenses, for the six months ended June 30, 2000, were $2.2 million, as compared to $1.5 million for the same period in 1999. This reflects an increase of 48% between the two periods due to increased rent, utilities, professional and telecommunications expenses incurred to support our growth.

       Depreciation and Amortization. Depreciation and amortization expenses, for the six months ended June 30, 2000, were $185,000, as compared with $87,000 for the same period in 1999. This reflects an increase of 112% between the two periods due to additional software license and server costs and investments in our internal business information systems.

       Stock and Warrant Based Non-Cash Expenses. Stock and warrant based non-cash expenses, for the six months ended June 30, 2000, were $4.4 million, as compared to $26,000 for the same period in 1999. This increase was due to warrants issued to vendors and contractors in lieu of, or in addition to, cash payments and to the modification of certain provisions of a stock option agreement issued to a former employee. The majority of these expenses are related to warrants issued pursuant to certain contractor agreements for the six months ended June 30, 2000.

       Other Income and Expenses. Total other income and expenses, including interest income, interest expense and beneficial interest expense, for the six months ended June 30, 2000 were $213,000 as compared to $4.4 million for the same period in 1999. Interest income for the six months ended June 30, 2000 was $140,000 as compared to $2,000 for the same period in 1999. This increase reflects a higher average balance of interest-bearing cash and cash equivalents for the period ended June 30, 2000 as compared to the same period 1999. Interest expense for the six months ended June 30, 2000 was $353,000 as compared to $255,000 for the same period in 1999. This increase was due to an increase in indebtedness. Beneficial interest expense is a non-cash expense related to the conversion feature of the QIP loan. See “Liquidity and Capital Resources.” No beneficial interest expense was recorded for the six months ended June 30, 2000, as compared to $4.1 million for the same period in 1999 due to the fact that convertible indebtedness was

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Year Ended December 31, 1998 Compared with Year Ended December 31, 1999

       Revenues. Total revenues, for the year ended December 31, 1999, were $2.8 million as compared to $168,000 for the same period in 1998. This increase was due to an increase in the number of customers as well as a fundamental shift in our business model, from a primarily ad-share model, to a new model, based on implementation fees and monthly service charges. Revenues from enhanced services such as personalization and contextual commerce, were insignificant during 1998 and 1999.

       Cost of Revenues. Cost of revenues, for the year ended December 31, 1999, was $545,000, as compared to $426,000 for the same period in 1998. This reflects an increase of 28% between the two periods due primarily to price increases from existing content suppliers and costs incurred from adding new content.

       Sales and Marketing. Sales and marketing expenses, for the year ended December 31, 1999, were $4.5 million, as compared to $2.2 million for the same period in 1998. This reflects an increase of 107% between the two periods primarily due to a co-branding agreement with CNNfn entered into during 1999.

       Research and Development. Research and development expenses, for the year ended December 31, 1999, were $2.1 million, as compared to $1.8 million for the same period in 1998. This reflects an increase of 22% between the two periods due to an increase in the number of research and development personnel.

       General and Administrative. General and administrative expenses, for the year ended December 31, 1999, were $3.0 million, as compared to $3.5 million for the same period in 1998. This reflects a decrease of 14% between the two periods due to increased efficiencies in the administrative areas.

       Depreciation and Amortization. Depreciation and amortization expenses, for the year ended December 31, 1999, were $174,000, as compared to $1.4 million for the same period in 1998. This reflects a decrease of approximately 88% between the two periods due to the completion in 1998 of the one year amortization period of a substantial portion of the intangible assets acquired from Infoseek.

       Stock and Warrant Based Non-Cash Expenses. Stock and warrant based non-cash expenses, for the twelve months ended December 31, 1999 were $1.7 million as compared to $49,000 for the same period in 1998. The majority of these expenses were due to a warrant issued to an independent contractor employed by us.

       Other Income and Expenses. Total other income and expenses, including interest income, interest expense and beneficial interest expense, for the year ended December 31, 1999, were $8.4 million as compared to $182,000 for the same period in 1998. Interest income, for the year ended December 31, 1999, was $20,000 as compared to $38,000 for the same period in 1998. This decrease reflects a lower average balance of interest-bearing cash and cash equivalents for the year ended December 31, 1999 as compared to the same period in 1998. Interest expense, for the year ended December 31, 1999, was $558,000 as compared to $220,000 for the same period in 1998. This increase was due to an increase in indebtedness. Total beneficial interest expense was $7.9 million for the year ended December 31, 1999. No beneficial interest expense was recorded for the year ended December 31, 1998. The beneficial interest expense recorded in 1999 was a non-cash expense related to the conversion feature of the QIP indebtedness. See “Liquidity and Capital Resources.”

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October 10, 1997 (Inception) to December 31, 1997

       We commenced operations on October 10, 1997. Revenues for the three months ended December 31, 1997 amounted to less than $35,000. Expenses for the period amounted to less than $900,000. We do not believe this period is meaningful for purposes of comparing to other financial periods. We have therefore excluded financial information for this period from our discussion above.

   Quarterly Results of Operations

       The following tables present unaudited quarterly operating results in dollars and as a percentage of revenues. We believe this information reflects all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of this information in accordance with generally accepted accounting principles. The results for any quarter are not necessarily indicative of results for any future period.

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Analysis of 1999 Quarterly Results

       Revenues increased from $195,000 in the first quarter to $968,000 in the fourth quarter due to an increase in the number of customers who implemented our services. Revenues decreased by $82,000 from the third quarter to the fourth quarter due to a substantial decrease in advertising revenue generated from CNNfn. Cost of revenues increased from $126,000 in the first quarter to $148,000 in the fourth quarter due to an increase in costs for additional content sources. Sales and marketing expenses increased from $376,000 in the first quarter to $1.2 million in the fourth quarter due to the increase in our direct sales force, as well as a marketing campaign in the fourth quarter. Sales and marketing expenses in the second quarter were $2.0 million primarily due to an expense relating to a co-branding agreement with CNNfn. Research and development expenses increased from $342,000 in the first quarter to $730,000 in the fourth quarter due to an increase in the number of research and development personnel, the cost of independent contractors, and the amortization of certain software maintenance. General and administrative expenses decreased from $822,000 in the first quarter to $681,000 in the second quarter due to increased operational efficiencies across most administrative areas. These expenses increased from $683,000 in the third quarter to $848,000 in the fourth quarter due to bad debt expenses and professional fees related to audit and legal fees. Stock and warrant based non-cash expenses increased from $7,000 in the second quarter to $1.3 million in the fourth quarter due to warrants issued to vendors and contractors in lieu of, or in addition to, cash payments and to the modification of certain provisions of stock option agreements issued to employees.

Liquidity and Capital Resources

       Since our inception in 1997, we have financed our operations and capital expenditures through the sale of equity and debt securities and leases for capital equipment, which totaled approximately $37.0 million in aggregate net proceeds through June 30, 2000. In October 1997, we sold 3,250,000 shares of common stock for $3.0 million to the QIP investors. In November 1999, we sold 593,000 shares of our common stock for $3.5 million to certain investors. In the spring of 2000, we sold 4,841,000 shares of our common stock for an aggregate purchase price of $18.0 million. In May 2000, we sold 200,000 shares of our series A convertible preferred stock for an aggregate purchase price of $2.0 million. In 1998 and 1999, we borrowed $1.2 million and $2.65 million respectively from the QIP Investors pursuant to demand promissory notes and security agreements. In March 2000, we executed a bridge note in favor of QIP to repay a term loan and line of credit in the amount of $4.0 million. We have granted QIP conversion rights on all of our outstanding debt to them. Upon the closing of this offering, the QIP investors will convert the principal amount of these notes in shares of our common stock and all accrued interest thereon will be paid in cash. As of June 30, 2000, we had cash and cash equivalents of $9.6 million.

       Net cash used in operating activities, for the six months ended June 30, 2000, was $9.2 million, as compared to $1.6 million for the same period in 1999. The net cash used in operating activities for the six months ended June 30, 2000 resulted primarily from net losses of $11.4 million, an increase in trade accounts receivable of $1.0 million, a decrease of accounts payable of $1.1 million, and an increase of $2.2 million in other current assets. The decrease in accounts payable was primarily due to a payment to CNNfn under our original distribution agreement. The increase in prepaid expenses was due to an initial payment to AOL under our interactive services agreement, and a one-year advance payment to InfoUSA in connection with our content agreement. This was offset by substantial non-cash expenses related to warrants issued to certain vendors and contractors, an increase in deferred revenue, and an increase in accrued expenses.

       Net cash used in investing activities, for the six months ended June 30, 2000, was $1.2 million, as compared to $233,000 for the same period in 1999. The net cash used in investing activities for the six months ended June 30, 2000 was primarily due to the purchase of computers, software, networking equipment and office equipment and furniture.

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       Net cash provided by financing activities, for the six months ended June 30, 2000, was $18.2 million, as compared to $1.8 million for the same period in 1999. Net cash provided by financing activities in the six months ended June 30, 2000 was provided substantially by net proceeds generated from our offerings of capital stock, which together totaled $17.9 million, net of $2.1 million in expenses, and to a lesser extent by officer loans.

       As of June 30, 2000, our principal commitments consisted of obligations outstanding under a series of capital leases of computer and networking equipment and our facility leases. We operate from leased premises in Alexandria, VA, San Francisco, CA, and Newport Beach, CA. Our current aggregate annual rental obligations under these leases are approximately $1.1 million for 2000 and $2.1 million for 2001. We have leased capital equipment under certain lease lines entered into during 1998 and 1999. Borrowings under these lines of credit are secured by the assets purchased, and bear interest at various rates.

       We anticipate that the net proceeds of this offering, together with our current cash and cash equivalents, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. However, our future capital requirements will depend upon many factors, including the sale of our services, the timing of research and development and the expansion of our sales and marketing efforts. We may need to raise additional funds in order to support our growth, to expand our operations, to develop new and enhance existing services, to respond to competitive pressures or to acquire complementary products, businesses or technologies. If we need to raise additional funds, we will likely do so through the issuance and sale of equity securities. If this were to occur, the percentage ownership of our stockholders could be reduced, our stockholders may experience additional dilution and such securities may have rights, preferences or privileges senior to those of our stockholders. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance services or products or otherwise respond to competitive pressures would be significantly limited. Our business, results of operations and financial condition could be materially adversely affected by such limitations.

Market Risk

       Our investments are exposed to changes in interest rates primarily on our investments in certain held-to-maturity securities. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate derivative instruments to manage exposure to interest rate change. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair market value of interest sensitive financial instruments we held at June 30, 2000.

Recent SEC Interpretations

       In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”(“SAB No. 101”). Effective October 1, 2000, SAB No. 101 summarizes certain areas of the Staff’s views in applying generally accepted accounting principles to revenue recognition in financial statements. We believe that our current revenue recognition principles comply with SAB No. 101.

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BUSINESS

Overview

       YellowBrix is a leading provider of Internet infrastructure services in the contextual commerce and personalized content services markets. Our customers consist of consumer and commercial Web sites and corporate intranets and extranets, collectively, Web sites. Our proprietary technology solution integrates content, commerce and advertising and delivers personalized information to our customers’ users through Web pages, e-mails and wireless devices. Our outsourced hosted Internet services provide an easy to implement, cost-effective solution that allows Web sites to focus on their core competencies. Our technology enhances Web site user experiences through the automated distribution of more personalized content selected from a broader range of choices and may increase their revenue generation by providing targeted commerce opportunities. Our services can be provided either individually or as an integrated solution.

       Our services include:

	•	Contextual commerce. Our contextual commerce services match and distribute highly targeted commerce and advertising opportunities to our customers’ users from a catalogue of over 2.1 million products.
	•	Targeted content. Our targeted content services enable our customers to use our artificial intelligence capability to electronically define and create, almost instantaneously, highly specialized categories of information such as news headlines, articles and press releases for automatic distribution to their end users.
	•	Personalization. Our personalization services facilitate the development of custom start pages for each user and create personalized e-mail newsletters.

       Our core technology uses artificial intelligence, text parsing and linguistic pattern analysis tools to analyze documents and to understand their meaning, focus and ultimate relevancy to Web site users. This knowledge enables us to more efficiently and effectively create content channels and automatically distribute news and information through Web sites, e-mails and wireless devices. In addition, we are able to discern user preferences through their interactions with our customers’ Web sites and disseminate, almost instantaneously, personalized commerce opportunities. We plan to implement advanced personalization features and leverage customer utility data from our network of Web sites.

       As of August 31, 2000, we had entered into contracts with 156 customers and implemented our solutions on 97 Web sites, including Business 2.0 Online/Imagine Media, InfoUSA, Monster.com, and Network Solutions. We typically enter into one year contracts with our customers and receive an implementation fee, a fixed monthly service fee, and with our contextual commerce service, transaction-based fees. We have created an expansive network of relationships that allows us to access over 2.1 million commerce products and 2,500 publications providing access to approximately 60,000 news stories and press releases each day.

Industry Background

   Rapid Growth of the Internet

       The Internet has emerged as a global medium encompassing communication and commerce, and has grown to include multiple platforms including broadband and wireless devices. International Data Corporation, or IDC, estimates the number of Web users worldwide will increase from approximately 245 million in 1999 to more than 640 million by the end of 2003. IDC also estimates that the number of Web pages available for viewing will grow from 2.2 billion in 1999 to 4.3 billion in 2000, and will exceed 16.5 billion in 2003. As the number of users has increased, the Internet has become an effective means to market services, helping to fuel its growth as a commercial medium.

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   Proliferation of Vertical Web Sites

       Individual Web sites have recognized the need to differentiate themselves in order to attract Web users amid the growing number of online offerings. In response to this more competitive environment, a new category of Web sites has developed as vertical communities, which are designed to target specific interest groups more directly. These vertical Web sites aim to become the respective single access point for content and commerce within an industry or affinity group. By narrowing their focus on groups with a common interest, these vertical Web sites seek to attract an audience that is desirable to merchants and advertisers. Vertical Web sites represent one of the fastest growing segments of the Internet and are projected to attract a greater portion of commerce and advertising dollars than general portal sites. According to Forrester Research, the share of Internet advertising revenue generated by vertical and niche Web sites will grow from 35% in 1999 to 57% in 2004.

   Proliferation of Corporate Online Presence

       In an increasingly competitive environment, corporations are recognizing the need to communicate and interact effectively and efficiently with their customers, partners and employees. The benefits and related cost savings of online communications, via corporate intranets and extranets, are potentially significant for corporations. As a result, corporations are focusing significant time, capital and resources on developing their online capabilities. IDC estimates that corporate intranet and extranet spending will exceed $45.8 billion in 2000. Additionally, small businesses are seeking an online presence to leverage their sales and marketing capabilities. IDC expects that the number of U.S. small businesses with home pages will reach 4.5 million by 2003.

   Convergence of Commerce and Content

       Many Web sites have found over time that online advertising and content alone are not sufficient to attract, retain and motivate users in a way that translates into increased revenue opportunities. According to Nielsen/ NetRatings, during the month of September 2000, the average home Internet user spent 50 seconds on a Web site and click through rates for the top banner advertisements averaged just under 0.44%. As a result, Web sites are recognizing the need to move toward the integration of commerce and content in order to enhance the utility and desirability of their Web sites.

   Growth of Personalization

       Personalization represents the opportunity for Web sites to deliver customized relevant content, commerce and advertising opportunities to individual users in an automated manner. The foundation for such delivery can be derived from a user-specified profile or a profile based on contextual analysis of currently viewed content, known demographics, experience expressed through the past activity of the user and other data. In addition, the criteria for presenting the information may be either user or Web site defined. According to the Appian Personalization Report, the Web personalization market is expected to grow from approximately $1.4 billion by the end of 2000 to $5.3 billion in 2003. This trend towards personalization will improve user experiences through more customized presentations of relevant information and Web site performance through increased frequency and duration of site visits, click through rates and sales conversions.

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   Remaining Challenges to Web sites

       Despite the advantages to be gained through improved personalization and tightly integrated content and commerce offerings, to date many Web sites and corporations have been unable to successfully implement solutions that effectively enhance user experiences and increase revenues. Web sites are faced with building the solutions internally or finding a desirable third party provider. Developing and maintaining a solution internally is difficult because:

	•	the time and expense associated with updating, maintaining and managing the infrastructure is significant and delays the delivery of services to the target market;
	•	contracting with multiple content providers is difficult and inefficient;
	•	the technology is very complex; and
	•	additional internal technical personnel is costly.

       While Web sites can meet some of their needs by utilizing multiple vendors, this may be more costly, increase delivery times and present technology integration issues. To date, we believe no other company provides a comprehensive, flexible and customized Internet infrastructure solution integrating contextual commerce, content and personalization services.

The YellowBrix Solution

       We provide our customers with a comprehensive Internet infrastructure solution that integrates commerce, content and personalization, and provides users with a highly personal experience. Our services can be deployed individually or in an integrated package that is specifically designed to complement the Web sites, intranets or extranets of our customers. Our core patent pending technology can, with limited human intervention, determine the context, meaning and relevancy of information which can then be used to integrate and link elements from disparate sources such as news feeds, commerce catalogues or advertising inventories. Through our proprietary technology, we generate a hosted Web page service that combines the look and feel of each customer’s Web site. Our service offerings can be distributed through Web pages, e-mails and wireless devices.

       Our solution offers the following benefits to our customers:

	•	Enhanced user experience. We believe our solution enhances user experiences by tailoring and integrating the presentation of commerce and content on Web sites. Web sites can select from our inventory of 525 unique channels or use our artificial intelligence capability to create and define their own customized channels. By providing continuously updated information specific to a Web site’s focus, we enable our customers to meet the information needs of their targeted audiences, thereby enhancing their users’ experiences on those sites. Our personalization service enables our customers to offer their users the ability to create customized home pages that are designed to increase the frequency and duration of Web site visits. We can also offer our customers personalized e-mail services enabling them to distribute daily newsletters and notifications of news, articles and stories, in conjunction with relevant commerce opportunities, that are targeted to their own user base.
	•	Increased revenue streams. We believe we can increase our customers’ revenue streams not only by providing contextually relevant content which drives more page views with longer durations, but also by presenting users with buying opportunities that match the users’ interests. By analyzing the content being reviewed by Web site users and, in the future, utilizing our individual profiles and network database of effective presentation metrics, we are able to present relevant real-time commerce and advertising information to the users. As a result, we believe click through rates and conversion rates for Web sites will increase significantly beyond existing averages.

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	•	Outsourced information infrastructure. We provide customers with an automated, outsourced and fully managed solution that requires limited human intervention on the part of our customers. We manage the provisioning, hosting and support of our services 24 hours per day, seven days a week. We assign an account manager to oversee the implementation and ongoing use of our services on the customer’s Web site throughout the full life cycle of our relationship with the customer.
	•	Flexible and customized solution. Our technology solution can be easily adapted to the needs of individual Web sites. We utilize our artificial intelligence capability to analyze the information, enabling us to create new, customized and highly focused content channels to meet the needs of Web sites. We are then able to automatically provide targeted content through these channels. In addition, certain of our services allow customers to continually customize our commerce and content solution, including the ability to insert their own products into our catalogue.
	•	Decreased infrastructure costs and quick implementation. Our single-sourced solution allows our customers to avoid the time and expense associated with maintaining additional internal technical staff, editorial staff, or contracting with multiple content providers, enabling them to focus on their core business. Due to our template-based solution and our dedicated implementation team, our services are easy to implement and easy to use with limited ongoing effort required by the customer. In addition, our solution is reliable and fully scalable so that it can grow with the needs of our customers. Our fixed price model allows our customers to accurately predict the monthly costs for our services.

Our Strategy

       Our objective is to become the leading provider of customized commerce, content and personalization infrastructure services. The following are the key elements of our strategy to achieve this objective:

	•	Leverage the convergence of commerce, content and personalization. Our ability to integrate commerce, content and personalization services provides us with a significant competitive advantage. Web sites benefit from an integrated solution that not only provides a comprehensive information package, but also works in concert with the sites to increase their functionality. In addition, our future service enhancements will gather data from our different services and leverage our personalization capability across our service line and customer base, enhancing the effectiveness of each service.
	•	Provide additional value added services. We seek to develop and actively market additional commerce and content services with broad appeal to our existing and new customers. These new services will allow us to leverage our existing deployment of services to customers and increase the value and functionality of our solution. For example, we have developed and implemented new services that put more control in our customers’ hands, allowing them to create and structure commerce and content delivery for their sites. In addition, we plan to enhance our personalization services through the development of individual-specific analysis and personalization functions, and the creation of a database of presentation analysis and information from our network of customer relationships.
	•	Develop and expand strategic relationships. We intend to continue to develop strategic relationships to improve our distribution capabilities, enhance our solutions and services and augment our sales and marketing efforts. For added distribution channels, we have and will continue to partner with established industry organizations to help promote our services. We may also partner with Web design companies, online advertising companies, or outsourced e-mail distribution companies to increase the utilization of our services. During the past three months, we have signed affiliate and agency agreements with Exodus, Commission Junction and Camp6 to increase the utilization of

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		our services. We have also entered into a strategic relationship to enhance the catalogue of commerce products we provide and have signed an agreement whereby we are paid for including items in our commerce catalogue.
	•	Further penetrate existing markets and expand into new markets. We have developed expanded distribution mechanisms and new service offerings which enable us to target virtually all segments of the Web site market. We will continue to target vertical Web sites, industry exchanges and corporate intranets and extranets. We believe these types of Web sites are particularly well suited to our service offerings due to their need to enhance their Web site by blending internal information with relevant industry-specific news and commerce opportunities.
	•	Maintain and extend technology and service leadership. We believe that we are currently a technology leader in providing contextual analysis based commerce, content and personalization services to our customers. We intend to introduce additional personalization services as well as enhance our ability to distribute audio and video information to our customers’ users through Web pages, e-mails and wireless devices. By responding to changing customer needs and evolving technologies and standards, we intend to become the leading source for services that build and enhance our Web site customers’ relationships with their users. For example, our learned behavior service will work with our contextual analytical abilities to enable our customers to deliver information to users based on the user’s past viewing decisions.
	•	Pursue global expansion opportunities. We intend to capitalize on what we perceive to be a significant opportunity for our solution in international markets. We have adapted our core technology to contextually analyze content in foreign languages such as Spanish, Dutch, German, French, Italian, Finnish and Swedish, positioning us to deliver relevant news and information to a broader market. We also plan to expand internationally and may evaluate strategic alliances, joint ventures, acquisitions or other international opportunities.

Our Services

       Our services address the information and presentation needs of commercial and consumer Web sites, and corporate intranets and extranets. As a result, we believe that we are well positioned to participate in the worldwide growth of the Web without regard to its composition, and in new emerging forms of commerce and content distribution including video, audio and wireless.

       Our core technology can, with limited human intervention, determine the context, meaning and relevancy of information and categorize it into existing or customer created categories. This information is almost instantaneously distributed through Web pages, e-mails and wireless devices. Our services are offered on a hosted basis and reflect our customer’s own look and feel.

       Our services are primarily offered on a monthly subscription basis. Our principal content information solutions and personalization capabilities generate initial implementation fees and monthly recurring service fees that are based on the type of service provided. Our contextual commerce services generate implementation fees as well as recurring transaction fees. We offer additional value-added services such as newsletter and industry brief e-mail services, which are priced depending on the number of enrolled Web site customers, and enriched targeted content such as executive summaries and detailed corporate profiles, which include an initial installation fee and monthly recurring services fees. We also receive solution specific implementation fees for the creation of custom categories and other specialized services. The following is a description of our services.

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   Contextual Commerce

       IntelliClix™. Our automated contextual commerce service, IntelliClix, analyzes articles requested by Web site users and presents the users with related commerce and advertising opportunities almost instantaneously. Our customers can take advantage of our outsourced merchandise relationships which currently consist of a catalogue of over 2.1 million products or can integrate their own inventory to display relevant commerce opportunities. Web sites can also utilize IntelliClix in conjunction with our e-mail service to create new revenue opportunities. We also plan to leverage our IntelliClix technology across various other platforms including chat rooms, wireless and other networked applications. We believe that our IntelliClix information input and distribution process can also be reversed to enable us to match and deliver content to products and services offered on commerce-focused Web sites. Our IntelliClix service can be used individually or can be bundled with our other targeted content services.

       Commerce Dashboard. We have created a commerce dashboard to allow our customers more daily control over the management of their commerce programs. Our commerce dashboard provides our customers with the ability to tailor IntelliClix to meet the Web site’s individual needs. The commerce dashboard allows merchants to submit product inventory, determine service presentation and update promotional items. It also allows the Web site to:

	•	establish certain business parameters for the display of merchandise;
	•	select among closely matched services;
	•	monitor and track click through and sales conversion activity; and
	•	adjust these parameters based on revenue and profitability performance.

       In the future, our customers will be able to compare their commerce metrics against standards established through the aggregation of information across our network of Web sites.

   Targeted Content

       Core Targeted Content. Our core targeted content services enable our customers to utilize our artificial intelligence capability to define and create highly targeted categories of information, on an almost instantaneous basis, that can be integrated with our large and growing library of categories for distribution to their end users. The following is a description of each of our core targeted content services which can provide our customers with text and pictorial information:

	IndustryWatch™. IndustryWatch is our primary service that consolidates news and information from thousands of published sources as well as company and financial information. This service also includes our Executive Summary and MultiLinks features. Customers can utilize up to 150 channels which are either customer created or selected from our existing 525 topic categories. IndustryWatch uses contextual analysis of community and category based content to categorize the information into industry-specific categories, and then presents the information to users on each Web site.
	SmartNews™. Our SmartNews combines our IndustryWatch and StartPage services with our newsletter and personalized e-mail features to create a fully integrated service offering.
	NewsReal™. Our NewsReal service is a scaled down version of our IndustryWatch service and enables our customers to utilize up to 35 custom or existing topic categories.
	NewsMaker™. Our NewsMaker service was introduced in October 2000. NewsMaker represents a low-cost, entry-level content delivery system that distributes news, information and contextual advertisements to customers. This self-publishing service is designed to provide customers with a quick, inexpensive way to improve their Web sites using targeted content on their sites.

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       Enhanced Targeted Content Features. We augment our core targeted content services with a variety of features designed to enhance the utility of our customers’ Web sites and promote higher frequency and longer duration of user visits to Web sites. The following is a summary of the enhanced features:

	Executive Summary™. Our Executive Summary technology provides users with the ability to easily scroll over a headline and review the top three relevant sentences within the story, providing the user with the relevant information quickly and efficiently. Executive Summary is bundled with our SmartNews and IndustryWatch services and offered as a premium addition to our NewsReal service.
	MultiLinks™. Our proprietary MultiLinks technology provides the user with greater detail on the information contained in the publication that the user is reading. MultiLinks connects the user directly to current business intelligence about companies and people in the news, and includes vital information such as financial and competitor information, the latest stock quote or earnings announcement or other news releases. All of this information is contained on the site without sending the user to another page.
	Content Dashboard. For customers who want greater control over their Web sites, our content dashboard enables Web sites to track and monitor all activities, and improve information presentation. Our content dashboard provides customers with the ability to:

	•	prioritize, rewrite and delete headlines;
	•	add and publish stories to categories almost instantaneously;
	•	utilize advanced search features to create new information categories on demand;
	•	incorporate a feature to find similar information that allows customers to quickly isolate related stories from archives to add to the customer’s categories; and
	•	publish images and photos on the Web site.

   Personalization

       E-mail Services. Our suite of e-mail services allows our customers to provide their users with the ability to select which categories of information to receive in their e-mail newsletters and daily e-mails as well as to provide links to additional or related information on the Web site. These services also allow our customers to deliver contextual-based news and commerce opportunities through multiple delivery platforms including wireless devices such as mobile phones, pagers and handheld Internet access devices. Our customers can imbed our IntelliClix service offerings directly into e-mails, enabling them to generate additional revenue streams from their established user base. We also offer customized, self-publishing e-mail newsletter services.

       StartPage™. StartPage allows Web site users to create customized home pages integrating our content which includes headline and local news and information, weather, stock portfolio, horoscopes, company and directory information, delivered into an individualized user interface. We believe the advantage of the StartPage service is that it allows our customers to automatically customize the user’s Web page by integrating content and information into a comprehensive and personalized page.

       Learned Behavior. We anticipate the release of our learned behavior service by the end of the second quarter of 2001. This service will work in conjunction with our existing services to help personalize the delivery of commerce and content to individual users. Our learned behavior service will create a profile that is continually updated based on the viewing history of the Web site user, enabling Web sites to engage their users with one-to-one marketing. Utilization of this service will enable us to analyze user activity for our customers, building on our existing contextual matching technology. We believe that this service will protect the privacy of Web site users by creating

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Our Technology

   Core Technology

       Our core technology enables us to read and analyze the context and meaning of articles and commerce descriptions in both text and pictorial formats, categorize information, and distribute information through Web sites, e-mails or wireless devices. Our services are based on proprietary advanced artificial intelligence capability and linguistic analysis, text categorization, and information presentation software that incorporates third-party analysis and management tools. The utilization and integration of these technology techniques provides us with an enhanced ability to derive an in-depth understanding of the meaning, relevance and ultimate classification of text. This knowledge enables us to more efficiently and effectively create content channels and automatically distribute news and information to Web sites and present Web site users with relevant commerce opportunities matched to currently viewed content or an analysis of content they have demonstrated an interest in through prior activity.

   Content Data Collection

       Our proprietary content administration system enables us to manage the acquisition and aggregation of electronic data. Our system can be expanded by increasing the number of servers we utilize. Currently, our system can receive data in the form of text or pictures, and we anticipate expanding our service to also encompass video and audio data.

   Commerce and Advertising Data Collection

       Our automated data processing system has also been adapted to handle commerce and advertising information. This information is stored either as plain text or XML tagged data. We have access to a catalogue of 2.1 million products. Our storage and processing capability can be expanded to meet our business needs.

   Data Analysis

       Our proprietary system uses artificial intelligence, text parsing and linguistic pattern analysis tools to analyze documents to determine their meaning, focus and relevancy to Web site users. The artificial intelligence capability utilizes vectoring techniques to create a mathematical value for content, commerce products and advertisements. This mathematical value represents the meaning and focus of the information and is utilized in determining its relevance to established content channels or customized content channels requested by our customers.

   Data Utilization

       We are able to compare, almost instantaneously, the characteristics of an article against the characteristics of our pre-defined or customer-defined content and commerce channels. This allows us to more effectively and efficiently provide news and information to Web sites. The storage and content classification portion of our system works with Oracle’s database storage software to create a reliable and efficient information provision solution. Our automated, flexible system also enables us to create new content categories for our customers using full-text analysis of sample articles. For example, the artificial intelligence capability can use sample articles provided by our customers to enable us to create the appropriate vector characteristics of this new content channel. As of August 31, 2000, we had created over 325 new custom channels for our customers.

       We have adapted our contextual content analysis and vector-based categorization engine to match commerce opportunities and advertising descriptions with relevant content. Our IntelliClix

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   Data Distribution

       The modular structure of our technology system allows us to provide our customers with information through different media. We can either adapt parts of our technology system or attach new software components to work with different architectures or software versions to provide information to our customers. Currently, we are providing data through Web based, wireless and e-mail distribution systems. In the future, we anticipate the ability to distribute audio and video content that more fully utilize broadband capabilities.

   Advantages of Our Technology System

       Our technology provides numerous competitive advantages. Our analysis, classification and distribution system is an automated, outsourced infrastructure solution. Our flexible technology system is able to work with multiple distribution media and platforms as well as software packages and Web hosting solutions. In addition, our services and systems are scalable and load-balanced and, therefore, are capable of operating across multiple servers and systems.

Customers

       As of August 31, 2000, we had entered into contracts with 156 customers and implemented our services on 97 Web sites. Our customers include Web-based businesses and corporate customers whose business models encompass both offline and online components. The following is a representative list of our August 2000 customers:

       Our contracts with our customers typically have one-year terms. CNNfn, InfoUSA and Network Solutions accounted for approximately 13%, 17% and 13%, respectively, of our revenues for the six months ended June 30, 2000 and, CNNfn and Network Solutions accounted for approximately 50% and 12%, respectively, of our revenues for the fiscal year ended December 31, 1999.

Research and Development

       Our Chief Technology Officer, Jeff Massa, worked with artificial intelligence and contextual analysis technology while at the Executive Office of the President of the National Security Council, NSC. The intelligence community utilized artificial intelligence and contextual analysis technology to implement real-time analysis, filtering and categorization of information. Upon leaving the NSC, Mr. Massa worked with third party vendors to assist in the commercialization of a similar technology. The YellowBrix technology capability developed from this work.

       Since our inception, we have continued to focus our efforts on enhancing our contextual analysis, vector categorization and artificial intelligence capability and applying these technologies to our commerce, content and personalization services. We believe that strong product development capabilities are essential to enhancing our core proprietary technologies, developing new applications for our technology and maintaining our competitive advantage. We have invested and intend to continue to invest a significant amount of human and financial resources in our research

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       We have hired and will continue to actively recruit key computer scientists, engineers, PhDs, and software developers with expertise and degrees in the areas of computer science, electrical engineering, software engineering, information sciences and applied mathematics, and have complemented these individuals by hiring senior management with extensive backgrounds in the real-time processing and information distribution industries. Our research and development expenses totaled $1.8 million for the six month period ended June 30, 2000 and $2.1 for the year ended December 31, 1999.

Sales and Marketing

       Our sales strategy is to pursue opportunities with major accounts through our direct sales force, and to penetrate various targeted market segments through multiple indirect distribution channels such as affiliate and agency agreements. We employ 58 direct sales personnel in three offices located in Alexandria, Virginia, Newport Beach, California and San Francisco, California. The direct sales force is organized into four territorial groups each of which is managed by one director. We generate leads from contacts made through seminars, conferences, trade shows, customers and ongoing public relations and advertising programs. We intend to increase the size of our direct sales force and to establish additional sales offices domestically and internationally.

       We complement our direct sales force by actively pursuing two types of business development relationships designed to establish multiple indirect distribution channels.

	•	Affiliate Agreements. In an effort to penetrate new market segments, we seek to develop alliances with a wide variety of other Internet companies including consultants, Web design firms, trade associations, hardware and software providers, and other firms dedicated to assisting companies in establishing and maintaining a presence on the Internet. These alliances work in conjunction with our direct sales force by generating qualified sales opportunities. These are intended to increase geographic sales coverage and to address specific industry segments and large corporate customers. As of August 31, 2000, we had entered into two affiliate agreements.
	•	Agency agreements. In order to leverage our internal direct sales force, we entered into agency agreements with broadband access providers. These companies utilize their sales force and customer relationships to find new market opportunities for our services. We typically pay our agents a commission for new customers that they provide to us. As of August 31, 2000, we had entered into five agency agreements.

       We conduct a variety of programs to stimulate market demand for our services, including public relations, advertising, trade shows and collateral development. These programs are focused on our target markets and are designed to create awareness and generate sales leads.

       As of August 31, 2000, we employed 89 persons dedicated to sales and marketing. We intend to hire additional sales people as we expand.

Customer Service and Management

       We believe that a high level of customer service and support is critical to the successful sales and marketing of our services and to customer retention. In August 2000, we established the account manager program to provide our customers with a single point of contact that will support the account through its full life cycle. The account manager is responsible for working with the customer through the implementation process to ensure customer expectation and satisfaction levels are met. Our service management team works with customers in customizing content

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       As of August 31, 2000, our service management team consisted of 11 employees managing three distinct areas: service design/development, client services and content management. The team is engaged in activities encompassing the complete service lifecycle from the development and launch of new services to the implementation, maintenance and subsequent management of customer Web sites.

Supplier Relationships

       As of August 31, 2000, we were able to access over 2,500 publications and to receive up to 60,000 news stories daily through our contractual relationships with 12 content providers. Our content providers range from traditional news syndication services to specialized media sources. They include APWire, Bell & Howell, InfoUSA, Knight-Ridder, Media General, NewsBytes, Reality Online and UPI. Our distribution contracts with content providers typically provide for a monthly flat fee for certain redistribution rights. Since the inception of our business, we have not had any difficulty renewing such contracts on commercially reasonable terms.

       In addition, we have merchandise supplier relationships with E-Commerce Solutions, iConomy and a variety of small merchants that give us access and use of over 2.1 million products to provide targeted commercial opportunities throughout our IntelliClix service network.

       We offer our network of suppliers the ability to increase their brand exposure while generating revenue. The pricing on our commerce relationships varies, but all revenues obtained for the parties are based on a share of the transaction. We continue to pursue and secure long-standing relationships with suppliers for the benefit of our entire network.

Competition

       Our competition varies by service offerings. Currently, while we believe no one company competes with us in all of our service categories, many companies compete with us in the individual service categories of contextual commerce, targeted content and personalization. Our main competitors in our targeted markets include:

	•	Contextual commerce: Blue Martini Software, Escalate, Net Perceptions and Trapezo.
	•	Targeted content: Dow Jones, InfoSpace, iSyndicate, NewsEdge, Nexis and ScreamingMedia.
	•	Personalization: Art Technology Group, Blue Martini Software, BroadVision, Interwoven, Open Market and Vignette.