CONNECT INC, 424B1, 1996-08-15

CONNECT INC
424B1, 1996-08-15
PREPACKAGED SOFTWARE

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<PAGE>

PROSPECTUS

2,400,000 SHARES

[LOGO OF CONNECT (R) APPEARS HERE]

COMMON STOCK

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

All of the shares of Common Stock offered in the United States and Canada
are being sold by CONNECT, Inc. ("CONNECT" or the "Company"). Prior to the
offering, there has been no public market for the Common Stock of the Company.
The initial public offering price is $6.00 per share. See "Underwriting" for a
discussion of the factors considered in determining the initial public
offering price. The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "CNKT." Upon completion of the offering,
affiliates of the Company will beneficially own approximately 70.9% of the
Company's Common Stock.

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

Of the 2,400,000 shares being sold in the offering, certain affiliates of
the Company will purchase an aggregate of 240,000 shares for investment
purposes and not for resale.

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............. $6.00 $0.42 $5.58
- -------------------------------------------------------------------------------
Total(3)............... $14,400,000 $1,008,000 $13,392,000
- -------------------------------------------------------------------------------
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2)Before deducting estimated expenses of $1,275,000 of the offering payable
by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
360,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts
and Commissions and Proceeds to Company will be $16,560,000, $1,159,200
and $15,400,800, respectively. See "Underwriting."

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The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery
of the shares will be made at the offices of Lehman Brothers Inc., New York,
New York on or about August 20, 1996.

------------------
LEHMAN BROTHERS

VOLPE, WELTY & COMPANY

UBS SECURITIES

August 14, 1996
<PAGE>

CONNECT ENABLES THE
VIRTUAL SALES CHANNEL(TM)

[PHOTOGRAPH OF MAN OPERATING
PERSONAL COMPUTER. COMPUTER SCREEN
DISPLAYS THE COMPANY'S ORDERSTREAM PRODUCT.]

[CONNECT LOGO]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>

VIRTUAL SALES CHANNEL (vur choo-al) (salz) (chan al) 1: a sec marketing and
order capture 2: a cost-effective new distribution channel cha operators and
salespersons) 3: designed to complement existing sales and dis

ONESERVER & ORDERSTREAM (wun surver) (or dar strem) 2: industrial-strength
scaleable applications for Internet-based interactive com

THE VIRTUAL SALES CHANNEL COMPLEMENTS EXISTING SALES CHANNELS

<TABLE>
<S> <C> <C>
Buyer [OneServer Logo and Seller*
Web background image
on entire page]

[Photograph of retail shopper] Retailer [photograph of [Time Warner Cable Logo]
storefront]

[Photograph of woman at desk] Distributor [photograph of [Fruit of the Loom Logo]
warehouse scene]

[Photograph of woman using PC] Catalog Sales [photograph of [PhotoDisc Logo]
telephone operator]

[Photograph of two men at PC] Direct Sales [photograph of [Entex Logo]
man using PC and cellular
phone]
</TABLE>

* PhotoDisc and Fruit of the Loom are operating OneServer commercially while
other licensees are in the process of implementing the OneServer software.
<PAGE>

ure Internet-based interactive commerce solution that combines sales,
racterized by minimal staffing and physical infrastructure (e.g. telephone
distribution channels

1: application software packages that enable the virtual sales channel
merce 3: designed for fast time-to-market and low cost of ownership

CONNECT ONESERVER MAKES INTERACTIVE COMMERCE POSSIBLE.

[Icons and associated text connected by arrows]

<TABLE>
<S> <C> <C>
[Icon] [Icon] [Icon]
Five levels Multimedia Three-tiered search
of security protect catalogs expedites selection of
both buyer and seller dynamically desired products from large
adapt to catalogs and multimedia
individual buyer preferences databases
and
purchasing patterns

[Icon] [OneServer Logo] [Icon]
Universal OneServer software enables
browser drag and drop administration
access of site content & user
supports profiles
guests and
registered users

[Icon] [Icon] [Icon]
Online order Enterprise system links Electronic P.O.s and credit
status tracks ensure card processing complete the
purchases integration with existing online purchases
through the channels
delivery cycle and business processes
</TABLE>

[Connect logo]
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including Risk Factors and Financial Statements, including Notes
thereto, appearing elsewhere in this Prospectus.

THE COMPANY

CONNECT designs, develops, markets and supports industrial strength,
scaleable application software for Internet-based interactive commerce.
CONNECT's software and services are designed to reduce the time and overall
cost for businesses to implement and maintain a secure sales, marketing and
order capture capability on the World Wide Web (the "Web"). The Company's
software supports key functions necessary for large-scale interactive commerce,
including user registration, multimedia catalog and content management, dynamic
merchandising, order capture and management, security, payment processing,
enterprise integration and systems administration.

In today's competitive global business environment, companies are seeking to
streamline their business processes in order to lower costs, forge closer
relationships with customers and suppliers and increase market share, revenue
and profits. Traditional approaches to sales, marketing and order capture still
rely heavily on human involvement, paper-based systems, physical infrastructure
and costly advertising and promotion. The Internet is emerging as a powerful
new interactive commerce medium that has the potential to address the
limitations of these traditional approaches by linking businesses directly with
their customers, distributors and suppliers. While the adoption of the Internet
as a medium for interactive commerce is in its early stages, Forrester
Research, Inc. estimates that the market for all Internet-based packaged
applications, including electronic commerce applications (which Forrester
Research, Inc. does not separately estimate), will grow from less than $1.0
million in 1995 to over $1.7 billion in 1999.

CONNECT's core product, OneServer, which was commercially released in
September 1995, is a cross-industry packaged software application for Internet-
based interactive commerce, including sales, marketing and order capture. In
addition, the Company offers OrderStream, its first preconfigured
implementation of OneServer for business-to-business interactive commerce in
selected vertical markets. CONNECT's applications are designed to support large
numbers of purchasers, products and transactions. The Company's object-oriented
software architecture and robust transaction manager tightly integrate
OneServer and OrderStream with a relational database to provide increased
system performance and transaction capacity. The Company and its Solution
Partners offer a broad range of services to implement, support and operate
CONNECT's applications.

The Company's goal is to be the leading provider of packaged application
software for Internet-based interactive commerce. The Company's strategy is to
provide comprehensive software and service solutions that can be implemented
across a broad range of industries. Additionally, in order to expand market
share and establish a leadership position, the Company plans to develop
specific implementations of OneServer, such as OrderStream, targeted at
specific vertical markets.

The Company intends to target corporations planning to deploy large-scale
interactive commerce sites on the Web. As of June 30, 1996, the Company has
licensed OneServer or OrderStream to 11 customers including Ameritech
Corporation, Compaq Computer Corporation, ENTEX Information Services, Inc.,
First Data Corporation, Fruit of the Loom, Inc., PhotoDisc, Inc. and Time
Warner Cable (a division of Time Warner Entertainment, L.P.). Three customers
are operating OneServer commercially, while the other OneServer licensees are
in the process of implementing OneServer applications. Two customers have
licensed OrderStream, neither of which is operating the application
commercially. During the six months ended June 30, 1996, Fruit of the Loom,
Inc. and Time Warner Cable accounted for approximately 25% and 17%,
respectively, of the Company's total revenue. No other customer accounted for
more than 10% of the Company's total revenue during the first six months of
1996.

The Company was incorporated under the laws of the State of California in
April 1987 and was reincorporated in Delaware in July 1996. The Company's
principal executive offices are located at 515 Ellis Street, Mountain View,
California 94043-2242, and its telephone number is (415) 254-4000. CONNECT's
World Wide Web site is located at "www.connectinc.com." Information contained
on the Company's Web site shall not be deemed to be a part of this Prospectus.
As used in this Prospectus, the terms "CONNECT" and the "Company" mean CONNECT,
Inc. CONNECT(R) is a registered service mark of the Company. OneServer,
OrderStream, CONNECT Online and the CONNECT logo and OneServer logo are
trademarks of the Company. This Prospectus also includes trademarks of
companies other than CONNECT.

3
<PAGE>

THE OFFERING

Common Stock offered by the Company..... 2,400,000 shares

Common Stock to be outstanding after
the offering............................ 18,436,742 shares(1)

Nasdaq National Market symbol........... CNKT

Use of proceeds......................... Working capital and general corporate
purposes.

SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 5,794 $17,911
Working capital ......................................... 2,787 14,904
Total assets............................................. 11,922 24,039
Long-term debt........................................... 1,214 1,214
Stockholders' equity .................................... 5,196 17,313
</TABLE>
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(1) Based on the number of shares outstanding as of June 30, 1996, plus 272,750
shares issued in July 1996 in a private placement to a wholly-owned
subsidiary of Fruit of the Loom, Inc., one of the Company's customers.
Excludes (i) an aggregate of 3,037,056 shares subject to outstanding
options as of June 30, 1996 at a weighted average exercise price of $1.78
per share under the Company's 1989 Stock Option Plan and 1996 Stock Option
Plan, (ii) 100,750 shares issuable upon exercise of options granted between
July 1, 1996 and August 12, 1996 at a weighted average exercise price of
$4.80 per share, and (iii) 219,155 shares issuable upon exercise of
warrants outstanding as of June 30, 1996 at a weighted average exercise
price of $3.30 per share (of which the Company expects warrants to purchase
200,236 shares will be exercised immediately prior to completion of the
offering). See "Capitalization," "Management--Stock Plans" and Notes 8 and
14 of Notes to Financial Statements.

(2) Includes a one-time expense of $4.1 million in the first quarter of 1995
from the Company's termination of exclusive distribution rights of its
European distributor. See Note 10 of Notes to Financial Statements.

(3) See Note 2 of Notes to Financial Statements.

(4) As adjusted to give effect to the sale of 2,400,000 shares of Common Stock
at the initial public offering price of $6.00 per share. See "Use of
Proceeds."

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

Except as otherwise noted herein, all information in this Prospectus assumes
(i) the automatic conversion of the Company's outstanding Preferred Stock into
Common Stock upon completion of the offering, and (ii) no exercise of the
Underwriters' over-allotment option.

4
<PAGE>

RISK FACTORS

In addition to the other information contained in this Prospectus, investors
should carefully consider the following risk factors in evaluating an
investment in the Common Stock offered hereby. This Prospectus contains
certain forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from the results discussed in
the forward-looking statements as a result of certain of the risk factors set
forth below and elsewhere in this Prospectus.

RECENT INTRODUCTION OF PRIMARY PRODUCTS; PRODUCT CONCENTRATION

Although the Company was founded in 1987, it recently initiated a new
business strategy focused on providing packaged software applications for
Internet-based interactive commerce. Consequently, the Company is decreasing
its reliance on historical sources of revenue and its current and future
business prospects are dependent upon the successful development, market
acceptance and sales of OneServer, released in September 1995, and
OrderStream, released in June 1996. Accordingly, the Company's business must
be considered in light of the risks, expenses and problems frequently
encountered by companies in an early stage of development, particularly
companies in new and rapidly evolving markets such as the Internet. Such risks
include a lack of acceptance of products and services by target customers, the
development of equal or superior products or services by competitors, the
failure of electronic commerce in general, and Internet-based electronic
commerce in particular, to be broadly adopted, the inability of the Company to
develop and enhance competitive products or to successfully commercialize any
such products, and the inability of the Company to identify, attract, retain
and motivate qualified personnel. There can be no assurance that the Company
will succeed in addressing such risks.

To date, the Company has licensed OneServer to nine customers, three of
which are operating OneServer commercially, while the others are in the
process of implementing the application. OrderStream was released recently and
has been licensed to only two customers, neither of which is operating the
application commercially. The Company expects OneServer, OrderStream and
related services to account for most of its revenues for the foreseeable
future. As a result, factors adversely affecting the pricing of or demand for
OneServer and OrderStream, such as competition, technological change, failure
of the market for Internet-based packaged applications to develop as the
Company anticipates, lack of customer acceptance of OneServer and OrderStream
or failure of the Company to develop and introduce new and enhanced versions
of OneServer and OrderStream on a timely basis, could have a material adverse
effect on its business, operating results and financial condition. Further, if
any of the Company's customers are not able to successfully develop and deploy
interactive commerce applications with OneServer or OrderStream or for any
other reason are not satisfied with its products or services, the Company's
reputation could be damaged, which could have a material adverse effect on its
business, operating results and financial condition.

ACCUMULATED DEFICIT AND ANTICIPATED FUTURE LOSSES

The Company has not realized a profit in any year, and as of June 30, 1996
had an accumulated deficit of approximately $40.0 million. In 1995 and the
first six months of 1996, the Company experienced significant negative cash
flow from operations. The Company's operating expenses and net losses
increased substantially in 1995 and the first six months of 1996 compared to
prior periods primarily as a result of increased research and development
expenses relating to the development of OrderStream and Version 1.2 of
OneServer and increased sales and marketing expenses attributable to the
building of a direct sales force and development of a position in the emerging
Internet-based packaged application software market. The Company anticipates
that operating expenses will continue to increase significantly, resulting in
continuing net losses and negative cash flow from operations for the
foreseeable future. There can be no assurance that the Company can generate
revenue growth, or that any revenue growth that is achieved can be sustained.
To the extent that increases in such operating expenses precede or are not
subsequently followed by increased revenues, the Company's business, results
of operations and financial condition would be materially adversely affected.
There can be no assurance that the Company will ever achieve or sustain
profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

5
<PAGE>

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company has experienced and expects to continue to experience
significant fluctuations in quarterly operating results that may be caused by
many factors including, among others, the number, timing and significance of
product enhancements and new product announcements by the Company or its
competitors, the ability of the Company to develop, introduce and market new
and enhanced versions of the Company's products on a timely basis, the length
of the Company's sales cycle, market acceptance of and demand for the
Company's products, the pace of development of electronic commerce conducted
on the Internet, the mix of the Company's products sold, customer order
deferrals in anticipation of enhancements or new products offered by the
Company or its competitors, nonrenewal of service agreements, software defects
and other product quality problems, the Company's ability to attract and
retain key personnel, the extent of international sales, changes in the level
of operating expenses and general economic conditions. The Company anticipates
that a significant portion of its revenue will be derived from a limited
number of orders placed by large corporations, and the timing of receipt and
fulfillment of any such orders is expected to cause material fluctuations in
the Company's operating results, particularly on a quarterly basis. The
Company expects to recognize the majority of its license revenue in the last
month of each quarter. As a result, any delay in delivery of products at the
end of a quarter could materially adversely affect operating results for that
quarter. In addition, the Company intends, in the near term, to significantly
increase its personnel, including its direct sales force and development team.
The timing of such expansion and the rate at which new sales people become
productive could also cause material fluctuations in the Company's quarterly
operating results. Furthermore, the operating results of many software
companies reflect seasonal trends, and the Company expects to be affected by
such trends in the future.

Due to the foregoing factors, quarterly revenue and operating results are
difficult to forecast. In addition, as a result of the Company's recent shift
in business strategy, the Company's results of operations prior to fiscal 1996
should not be relied upon as indicative of future results. Revenue is also
difficult to forecast because the market for Internet-based packaged
applications software is rapidly evolving and the Company's sales cycle may
vary substantially from customer to customer. Further, the Company's expense
levels are based, in significant part, on the Company's expectations as to
future revenue and are therefore relatively fixed in the short term. If
revenue levels fall below expectations, net income is likely to be
disproportionately adversely affected because a proportionately smaller amount
of the Company's expenses varies with its revenue. There can be no assurance
that the Company will be able to achieve or maintain profitability on a
quarterly or annual basis in the future. Due to all the foregoing factors, in
some future quarter the Company's operating results may be below the
expectations of securities analysts and investors. In such event, the price of
the Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPENDENCE UPON PRODUCT DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE AND
EVOLVING INDUSTRY STANDARDS

The Company's success will depend upon its ability to develop new products
and provide new services that meet changing customer requirements. The market
for the Company's products is characterized by rapidly changing technology,
evolving industry standards and customer requirements, emerging competition
and frequent new product and service introductions. As a result, the Company
may be required to change and improve its products in response to changes in
operating systems, application and networking software, computer and
communications hardware, programming tools and computer language technology.
In particular, the Company's software operates on the HP-UX 10 and Sun Solaris
2.4/2.5 versions of the UNIX operating system. The Company intends to port its
software to the Windows NT operating system from Microsoft Corporation
("Microsoft") in the future due to increasing adoption of Windows NT by the
Company's potential customers. The Company has not begun the development work
necessary to port its software to Windows NT. There can be no assurance that
the Company will be successful in developing and marketing, on a timely basis,
products ported to the Windows NT operating system or any other operating
system. As a result, any shift in the market toward products running on
operating systems other than UNIX, including Windows NT, before the Company
offers versions of its software running on such operating systems, could have
a material adverse effect on the

6
<PAGE>

Company's business, operating results and financial condition. There can be no
assurance that the Company can successfully respond to changing technology,
identify new product opportunities or develop and bring new products and
services to market in a timely manner. The Company has in the past experienced
delays in software development and there can be no assurance that the Company
will not experience delays in connection with its current or future product
development activities. Delays and difficulties associated with new product
introductions or product enhancements could have a material adverse effect on
the Company's business, operating results and financial condition. Failure of
the Company, for technological or other reasons, to develop and introduce new
products and product enhancements and new services on a timely basis that are
compatible with industry standards and that satisfy customer requirements
would have a material adverse effect on the Company's business, operating
results and financial condition.

In addition, the Company or its competitors may announce enhancements to
existing products or services, or new products or services embodying new
technologies, industry standards or customer requirements that have the
potential to supplant or provide lower cost alternatives to the Company's
existing products and services. The introduction of such enhancements or new
products and services could render the Company's existing products and
services obsolete and unmarketable. There can be no assurance that the
announcement or introduction of new products or services by the Company or its
competitors or any change in industry standards will not cause customers to
defer or cancel purchases of existing products or services, which could have a
material adverse effect on the Company's business, operating results and
financial condition.

Furthermore, introduction by the Company of products or services with
reliability, quality or compatibility problems could result in reduced orders,
delays in collecting accounts receivable and additional service costs. The
failure to introduce a new product, service or product enhancement on a timely
basis could delay or hinder market acceptance. Any such event could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Products and Services."

COMPETITION

The market for interactive commerce software is new, rapidly evolving and
intensely competitive. The Company expects competition to intensify in the
future.

The Company competes with vendors of prepackaged electronic commerce
software, vendors of software tools for developing electronic commerce
applications, system integrators and providers of business application
software. In addition, potential customers may elect to develop their own
interactive commerce solutions. The Company's competitors include Open Market,
Inc. ("OMI"), the Illustra Division of Informix Software, Inc. ("Illustra"),
BroadVision, Inc. ("BroadVision"), and Netscape Communications Corporation
("Netscape"). The Company expects additional competition from other emerging
and established companies, including Microsoft and Oracle Corporation
("Oracle"), both of which have announced products for Internet-based
electronic commerce. In addition, in June 1996 Microsoft announced that it has
entered into an agreement to acquire eShop Inc., a provider of software
programming tools for creating electronic commerce applications. The Company's
potential competitors also include a number of successful client/server
applications software companies, such as Baan Company ("Baan"), PeopleSoft,
Inc. ("PeopleSoft") and SAP AG ("SAP"), and electronic data interchange (EDI)
solution vendors, including Sterling Commerce, Inc. ("Sterling Commerce") and
General Electric Information Services Corporation ("GEIS").

Many of these competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than the Company
and thus may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have greater name recognition and more extensive customer bases
that could be leveraged, thereby gaining market share to the Company's
detriment. Such competitors may be able to undertake more extensive
promotional activities, adopt more aggressive pricing policies and offer more
attractive terms to purchasers than the Company and to bundle their products
in a manner that may discourage users from purchasing products offered by the
Company. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to enhance their products. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market

7
<PAGE>

share. There can be no assurance that the Company will be able to compete
effectively with competitors or that the competitive pressures faced by the
Company will not have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Competition."

MANAGEMENT OF RAPIDLY CHANGING BUSINESS; NEW MANAGEMENT TEAM; DEPENDENCE ON
KEY PERSONNEL

The Company's anticipated expansion of operations will place a significant
strain on the Company's managerial, operational and financial resources. To
manage this anticipated expansion, the Company must continue to implement and
improve its operational and financial controls and systems and to expand,
train and manage its employee base. Further, the Company will need to manage
multiple relationships with various customers and other third parties. There
can be no assurance that the Company will be able to implement on a timely
basis the systems, procedures or controls required to support its operations
or that will enable the Company to successfully market its products and
services. The Company's future operating results will also depend on its
ability to expand its sales and marketing organization, establish a
distribution channel to penetrate different and broader markets and expand its
support organization. If the Company is unable to respond effectively to
changing business conditions, its business, operating results and financial
condition would be materially adversely affected.

The Company's performance depends substantially on the performance of its
executive officers and key employees, many of whom have joined the Company in
the past year. Specifically, Patrick D. Quirk, Vice President of Sales, Gordon
J. Bridge, Chairman, Craig D. Norris, Vice President of Professional Services,
Barton S. Foster, Vice President of Marketing, and Joseph G. Girata, Vice
President of Finance and Administration and Chief Financial Officer joined the
Company in July 1995, November 1995, January 1996, March 1996 and June 1996,
respectively. These individuals have not previously worked together and there
can be no assurance that they can successfully integrate as a management team.
The Company's future success also depends on its continuing ability to
identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. The
inability to attract and retain its executive officers and other key technical
and managerial personnel could have a material adverse effect upon the
Company's business, operating results and financial condition. See "Business--
Customers" and "--Employees" and "Management."

UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR ELECTRONIC COMMERCE

The market for Internet-based packaged software applications, including
electronic commerce applications, was less than $1.0 million in 1995,
according to Forrester Research, Inc. ("Forrester Research"). The Company's
future operating results depend upon the development and growth of this new
and rapidly evolving market, which itself is dependent upon acceptance of
electronic commerce and the Internet as an effective sales, marketing and
order capture medium. The acceptance of electronic commerce in general and, in
particular, the Internet as a sales, marketing and order capture medium are
highly uncertain and subject to a number of risks. Critical issues concerning
the commercial use of the Internet (including security, reliability, cost,
ease of use, quality of service and the effect of government regulation)
remain unresolved and may impact the growth of the Internet. If widespread use
of the Internet for commercial transactions does not develop or if the
Internet does not develop as an effective sales, marketing and order capture
medium, the Company's business, operating results and financial condition
would be materially adversely affected.

The adoption of the Internet for sales, marketing, order capture and other
commercial transactions, and the development of a market for packaged
electronic commerce applications require acceptance of new ways of transacting
business and exchanging information. In particular, enterprises that have
already invested substantial resources in other means of transacting business
may be particularly reluctant to adopt a new strategy that may make certain of
their existing personnel and infrastructure obsolete. If the market for
Internet-based packaged applications fails to develop or develops more slowly
than the Company anticipates, or if the Company's products do not achieve
market acceptance, the Company's business, operating results and financial
condition would be materially adversely affected.

8
<PAGE>

RISKS ASSOCIATED WITH COMPLEX SOFTWARE PRODUCTS; LENGTHY SALES AND
IMPLEMENTATION CYCLES

The Company's products are complex and expensive and will generally involve
significant investment decisions by prospective customers. Accordingly, the
license of the Company's software products is often an executive-level
decision by prospective customers and can be expected to require the Company
to engage in a lengthy sales cycle to provide a significant level of education
to prospective customers regarding the use and benefits of the Company's
products. In addition, the implementation of the Company's products involves a
significant commitment of resources by customers over an extended period of
time. As a result, the Company's sales and customer implementation cycles are
subject to a number of significant delays over which it has little or no
control. Although the Company did not experience significant delays in
implementing its applications for the three customers currently commercially
operating OneServer, the Company has limited experience with implementing its
applications, and most of the Company's other OneServer and OrderStream
customers are at an early stage in the process of implementing the
application. The Company believes that rapid implementation is critical to
success in the Internet-based interactive commerce applications market.
Significant delays in implementation, whether or not such delays are within
the Company's control, could materially adversely affect its business,
operating results and financial condition. From time to time, the Company
enters into fixed price arrangements for its implementation services and
currently has three such arrangements. Fixed price arrangements have resulted
in the past, and could in the future result in, losses primarily due to delays
in the implementation process or other complexities associated with completion
of the project. Such losses could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
delays in license transactions due to lengthy sales cycles or delays in
customer production or deployment of a system could have a material adverse
effect on the Company's business, operating results and financial condition
and could be expected to cause the Company's operating results to vary
significantly from quarter to quarter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Marketing and Sales."

The marketability and acceptance of OneServer and OrderStream also will be
highly dependent on the success of initial implementations of these products
by the Company's customers. Problems or delays experienced by the Company's
initial customers in the installation and use of OneServer or OrderStream,
even if such problems or delays are not attributable to the Company or its
products, or a failure of the Company's customers to successfully attract
purchasers to interactive commerce Web sites, could slow the rate of adoption
of the Company's products by other potential customers. Moreover, products as
complex as those offered by the Company may contain undetected errors when
first introduced or when new versions are released. There can be no assurance
that, despite testing by the Company, errors will not occur in current or new
products after commencement of commercial shipments, resulting in adverse
publicity, in loss of or delay in market acceptance, or in claims by the
customer against the Company, which would have a material adverse effect on
the Company's business, operating results and financial condition.

DEPENDENCE UPON SERVICE PROVIDERS

The Company expects that its customers will typically rely on professional
services organizations, such as consulting firms and systems integrators, as
well as design firms to assist with implementation of the Company's products.
If the Company is unable to adequately train a sufficient number of such firms
or if for any reason a large number of such firms support or promote competing
products or technologies, the Company's business, operating results and
financial condition could be materially adversely affected. Many of these
relationships are not subject to formal agreements and none of such providers
are under any obligation to provide services to the Company or its customers.
Failure of the Company to develop and maintain relationships with leading
service providers and design firms could adversely impact the Company's
ability to successfully market, sell and deploy its products, which would have
a material adverse effect on the Company's business, operating results and
financial condition. See "Business--Marketing and Sales," "--Solution
Partners," "--Competition" and "--Proprietary Rights."

DEPENDENCE UPON CERTAIN LICENSES

The Company relies on certain technology that it licenses from third
parties, including a relational database management system from Oracle, a text
search engine from Fulcrum Technologies Inc. ("Fulcrum"), encryption

9
<PAGE>

technology from RSA Data Security, Inc. ("RSA") and other software that is
integrated with internally developed software and used in the Company's
software to perform key functions. Oracle also offers products that are
competitive with those offered by the Company. There can be no assurance that
the Company's third-party technology licenses will continue to be available to
the Company on commercially reasonable terms, or at all. The loss or inability
to maintain any of these technology licenses could result in delays in
introduction of the Company's products and services until equivalent
technology, if available, is identified, licensed and integrated, which could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--Solution Partners" and "--Proprietary
Rights."

RSA is currently in litigation with Cylink Corporation ("Cylink") pursuant
to which Cylink alleges that RSA's encryption technology infringes certain
Cylink patents and asserts that RSA has no right to sublicense such
technology. If it is determined that RSA is unable to sublicense this
technology to the Company, the Company may be deemed to be infringing Cylink's
patent rights. The Company is unable to predict the outcome of the dispute
between RSA and Cylink, but if the Company were deemed to be infringing
Cylink's patent rights, the Company could be required to pay damages to Cylink
and possibly enter into a royalty or licensing agreement with Cylink. Such
royalty or licensing agreement, if required, may not be available on terms
acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Business--Products and Services," "--Technology" and "--Proprietary
Rights."

DEPENDENCE UPON THE INTERNET INFRASTRUCTURE

The use of the Company's products and services will depend in large part
upon the continued development of the infrastructure for providing Internet
access and services. Because global commerce and online exchange of
information on the Internet is new and evolving, it is difficult to predict
with any assurance whether the Internet will prove to be a viable commercial
marketplace. The Internet has experienced, and is expected to continue to
experience, substantial growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In
addition, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity, or due to increased governmental regulation.
Further, the costs of use of the Internet could increase to a degree which
reduces its attraction as a platform for electronic commerce. As a result,
there can be no assurance that the infrastructure or complementary services
necessary to make the Internet a viable commercial marketplace will be
developed, or, if developed, that the Internet will become a viable commercial
marketplace for products and services such as those offered by the Company. If
the necessary infrastructure or complementary services or facilities are not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's business, operating results and financial condition would be
materially adversely affected.

RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION

To date, the Company has sold its products through a direct sales force. The
Company's ability to achieve revenue growth in the future will depend in large
part upon its success in recruiting and training sufficient direct sales
personnel and establishing and maintaining relationships with distributors,
resellers, systems integrators and other third parties. Although the Company
is currently investing, and plans to continue to invest, significant resources
to expand its sales force and to develop distribution relationships with
third-party distributors and resellers, the Company may at times experience
difficulty in recruiting qualified sales personnel and in establishing
necessary third-party alliances. In addition, as the Company hires new sales
personnel it is anticipated that there will be a delay before such personnel
become productive. There can be no assurance that the Company will be able to
successfully expand its direct sales force or other distribution channels or
that any such expansion will result in an increase in revenues. Any failure by
the Company to expand its direct sales force or other distribution channels
would materially adversely affect the Company's business, operating results
and financial condition. See "Business--CONNECT Strategy" and "--Marketing and
Sales."

10
<PAGE>

RISKS ASSOCIATED WITH SECURITY, SYSTEM DISRUPTIONS AND COMPUTER INFRASTRUCTURE

Despite the implementation in the Company's products of various security
mechanisms, the Company's products may be vulnerable to break-ins and similar
disruptive problems caused by Internet users. The level of security provided
by the Company's products is dependent upon the level of security selected by
the Company's customers and the proper configuration and use of the products'
security mechanisms. Such computer break-ins and other disruptions would
jeopardize the security of information stored in and transmitted through the
computer systems of users of the Company's products, which may result in
significant liability to the Company and may also deter potential customers.
Persistent security problems continue to plague public and private data
networks. Recent break-ins reported in the press and otherwise have included
incidents involving hackers bypassing firewalls by posing as authorized
computers and involving the theft of confidential information. Alleviating
problems caused by third parties may require significant expenditures of
capital and resources by the Company. Such expenditures could have a material
adverse effect on the Company's business, operating results and financial
condition. Moreover, the security and privacy concerns of existing and
potential customers, as well as concerns related to computer viruses, may
inhibit the growth of the Internet marketplace generally, and the Company's
customer base and revenues in particular. There can be no assurance that the
Company's attempts to limit its liability to customers, including liability
arising from a failure of the security feature contained in the Company's
products, through contractual provisions will be enforceable. The Company
currently does not have product liability insurance to protect against these
risks and there can be no assurance that such insurance will be available to
the Company on commercially reasonable terms, or at all.

As part of the Company's services, the Company operates and manages online
networks for certain of its customers on a seven day per week, 24-hour basis,
and provides hosting for certain customers' OneServer applications. These
services depend upon the Company's ability to protect the computer equipment
and the information stored in its data center against damage that may be
caused by fire, earthquakes, power loss, telecommunications failures,
unauthorized entry and other similar events. Any such damage or failure that
causes interruptions in the Company's operations could materially adversely
affect the businesses of the Company's customers, which could expose the
Company to liability for these adverse effects.

DEPENDENCE UPON PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT

The Company relies on trademark, copyright and trade secret laws, employee
and third-party non-disclosure agreements and other methods to protect its
proprietary rights. The Company does not currently have any patents or pending
patent applications. The Company believes that, due to the rapid pace of
technological innovation for Internet products, the Company's ability to
establish and maintain a position of technology leadership in the industry
depends more on the skills of its development personnel, new product
developments, frequent product enhancements, and name recognition than upon
the legal protections afforded its existing technology. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights as
fully as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights in the United States or
abroad will be adequate. There can be no assurance that its agreements with
employees, consultants and others who participate in the development of its
software will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. Furthermore, there can be
no assurance that the Company's efforts to protect its rights through
trademark and copyright laws will not fail to prevent the development and
design by others of products or technology similar to or competitive with
those developed by the Company.

11
<PAGE>

The Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps and there can be no assurance that third
parties will not assert infringement claims against the Company. Any such
claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology, the
Company's business, operating results and financial condition would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."

On March 25, 1996, PhotoDisc, Inc. ("PhotoDisc"), one of the Company's
licensees of OneServer, was sued, along with 21 other defendants including
AGFA Division-Miles Inc. ("AGFA"), Axcis Information Network, Inc. ("Axcis"),
Software Publishing Corporation ("SPC"), and others, in the Federal District
Court in Connecticut, by E-data Corporation ("E-data"). In the litigation
against PhotoDisc, E-data alleges that PhotoDisc is infringing E-data's U.S.
Patent No. 4,528,643 issued July 9, 1985, entitled "System for Reproducing
Information in Material Objects at Point of Sale Location," in connection with
electronic distribution of images on the Internet. E-data has also sued other
defendants including Broderbund Software, Inc. ("Broderbund"), CompuServe Inc.
("CompuServe"), Adobe Systems Incorporated ("Adobe") and others in the Federal
District Court in New York City alleging infringement of the same patent.
PhotoDisc recently tendered the defense of its E-data litigation to the
Company.

The Company is currently reviewing the infringement claims made by E-data
against PhotoDisc. Based upon its initial review of the E-data patent and the
nature of the claims and the Company's indemnity obligations, and after
consultation with counsel, management believes that the resolution of this
matter will not have a material adverse effect on the Company's business,
operating results and financial condition. However, given the early stage of
the litigation and the complex technical issues and uncertainties in patent
litigation, the results of these proceedings, including any potential
settlement, are uncertain and there can be no assurance that E-data will not
prevail in the current litigation or that it will not bring similar claims
against other licensees of the Company. If E-data were to prevail, PhotoDisc
could be required to pay damages to E-data for the infringement of its patent
and enter into a licensing or royalty arrangement in order to continue to
conduct its online business in the same manner. There can be no assurance that
the amount of such damages would not be material or that such license or
royalty arrangement would be available on acceptable terms. Under the terms of
its license with PhotoDisc, the Company may be required to defend against the
E-data claim and to indemnify PhotoDisc for some or all of its losses in
connection with the litigation, any settlement or judgment and any ongoing
license fees or royalties. In addition, whether or not the Company were to
prevail in any defense of PhotoDisc, such litigation could be time consuming
and costly to defend.

LACK OF PRIOR MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained. The initial offering price for the Common Stock to be
sold by the Company has been established by negotiations among the Company and
the Underwriters and may bear no relationship to the price at which the Common
Stock will trade after completion of this offering. See "Underwriting" for
factors considered in determining the offering price. The market price of the
Common Stock could be subject to significant fluctuations in response to
quarter-to-quarter variations in the Company's operating results,
announcements of technological innovations or new products and services by the
Company or its competitors, and other events or factors. For example, any
shortfall in revenue or net income, or increase in losses or expenses from
levels expected by securities analysts, could have an immediate and
significant adverse effect on the market price of the Company's Common Stock.
In addition, the stock market in recent years, and

12
<PAGE>

in particular the market for stocks relating to the Internet, has experienced
extreme price and volume fluctuations that have particularly affected the
market prices of many high technology companies and that have often been
unrelated or disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price for the Common Stock.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES

The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there
are currently few laws or regulations directly applicable to access to, or
commerce on, the Internet. However, due to the increasing popularity and use
of the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy,
pricing and characteristics and quality of products and services. The
Telecommunications Reform Act of 1996 was recently enacted and imposes
criminal penalties on anyone who distributes obscene, lascivious or indecent
communications on the Internet. The adoption of any such laws or regulations
may decrease the growth of the Internet, which could in turn adversely affect
the Company's business, operating results or financial condition. Moreover,
the applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. Further, due to
the encryption technology contained in the Company's products, such products
are subject to U.S. export controls. There can be no assurance that such
export controls, either in their current form or as may be subsequently
enacted, will not delay the introduction of new products or limit the
Company's ability to distribute products outside of the United States or
electronically. While the Company intends to take precautions against unlawful
exportation, the global nature of the Internet makes it difficult to
effectively control the distribution of the Company's products. In addition,
federal or state legislation or regulation may further limit levels of
encryption or authentication technology. Further, various countries regulate
the import of certain encryption technology and have adopted laws relating to
personal privacy issues which could limit the Company's ability to distribute
products in those countries. Any such export or import restrictions, new
legislation or regulation or government enforcement of existing regulations
could have a material adverse impact on the Company's business, operating
results and financial condition.

BROAD LATITUDE AS TO USE OF PROCEEDS

The Company has not designated any specific use for the net proceeds from
the sale of Common Stock described in this Prospectus. Rather, the Company
expects to use the net proceeds primarily for working capital and general
corporate purposes. Consequently, the Board of Directors and management of the
Company will have significant discretion in applying the net proceeds of the
offering. See "Use of Proceeds."

CONTROL BY EXISTING SECURITY HOLDERS

Upon completion of this offering, the Company's officers and directors,
together with entities affiliated with them, will own approximately 70.9% of
the outstanding Common Stock of the Company. Such persons will have sufficient
power to control the outcome of many matters (including the election of
directors, and any merger, consolidation or sale of all or substantially all
of the Company's assets) submitted to the stockholders for approval. As a
result, certain transactions will not be possible without the approval of
these stockholders. These transactions include proxy contests, mergers
involving the Company, tender offers, open-market purchase programs or other
purchases of Common Stock that could give stockholders of the Company the
opportunity to realize a premium over the then-prevailing market price for
their shares of Common Stock. See "Management" and "Principal Stockholders."

ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS

After completion of the offering, the Board of Directors will have the
authority to issue up to 10,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may
have the effect of delaying, deferring

13
<PAGE>

or preventing a change of control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of Common Stock. The Company has no present plans to issue shares of
Preferred Stock. Further, certain provisions of the Company's charter
documents, including provisions eliminating the ability of stockholders to
take action by written consent and limiting the ability of stockholders to
raise matters at a meeting of stockholders without giving advance notice, may
have the effect of delaying or preventing changes in control or management of
the Company, which could have an adverse effect on the market price of the
Company's Common Stock. See "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market after the
offering or the anticipation of such sales could materially affect then
prevailing market prices. Except for 240,000 shares which certain affiliates
of the Company will purchase in the offering, all of the 2,400,000 shares
offered hereby are immediately saleable in the public market. In addition,
approximately 140,419 shares of Common Stock, of which 40,419 shares are
issuable upon exercise of warrants, will be immediately saleable in the public
market. Beginning 180 days after the date of this Prospectus, upon expiration
of pre-existing lock-up agreements and lock-up agreements between the
representatives of the Underwriters and officers, directors and certain
stockholders of the Company, approximately 700,446 additional shares (as well
as an additional 3,137,806 shares and 178,736 shares issuable upon exercise of
outstanding options and warrants, respectively) will be eligible for sale
under Rule 144(k) and Rule 701 under the Securities Act of 1933, as amended
(the "Securities Act") subject in some cases to volume limitations and vesting
provisions, and 3,416,504 shares will be eligible for sale subject to
compliance with the restrictions of Rule 144 under the Securities Act and
subject in some cases to vesting provisions. Any early waiver of the lock-up
agreement by the Underwriters, which, if granted, could permit sales of a
substantial number of shares and could adversely affect the trading price of
the Company's shares, may not be accompanied by an advance public announcement
by the Company. In addition, 12,059,792 total shares will become eligible for
public resale following expiration of the lock-up agreements at various times
over a period of less than two years following the completion of this
offering, subject in some cases to vesting provisions and volume limitations.
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. If enacted, such rule change would cause substantially all of
the remaining shares to be eligible for public resale upon expiration of the
180-day lock-up agreements. Holders of approximately 15,722,384 shares of
outstanding Common Stock also will have the right to include such shares in
any future registration of securities effected by the Company and to require
the Company to register their shares for future sale, subject to certain
exceptions. See "Description of Capital Stock--Registration Rights of Certain
Holders" and "Shares Eligible for Future Sale."

DILUTION

The initial public offering price is substantially higher than the book
value per share of the outstanding Common Stock. Investors purchasing shares
of Common Stock in the offering will therefore incur immediate, substantial
dilution. In addition, investors purchasing shares of Common Stock in the
offering will incur additional dilution to the extent outstanding options and
warrants are exercised. See "Dilution."

14
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,400,000 shares of
Common Stock offered hereby are estimated to be $12,117,000 ($14,125,800 if
the Underwriters' over-allotment option is exercised in full), at an initial
public offering price of $6.00 per share. The Company currently expects to use
the net proceeds for working capital and general corporate purposes. The
working capital purposes for which the offering proceeds will be used include,
among other uses, funding the Company's operations in general and, in
particular, expenditures for product development and marketing.

The Company may from time to time seek to acquire complementary businesses,
products, services or technologies. The Company may use a portion of the net
proceeds for one or more of such transactions, although the Company has no
current plans or agreements with respect to any such transactions. The exact
cost, timing and amount of funds required for specific uses by the Company
cannot be precisely determined at this time. Pending such uses, the Company
intends to invest such funds in short-term, investment grade, interest-bearing
obligations.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future,
but intends instead to retain future earnings for reinvestment in its
business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant.

15
<PAGE>

CAPITALIZATION

The following table sets forth the Company's (i) actual capitalization at
June 30, 1996, (ii) pro forma capitalization after conversion of all
outstanding shares of Preferred Stock into shares of Common Stock upon the
closing of this offering, and (iii) adjusted capitalization as of such date to
give effect to the receipt of the net proceeds from the sale by the Company of
2,400,000 shares of Common Stock offered hereby at the initial public offering
price of $6.00.

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt.............. $ 913 $ 913 $ 913
-------- -------- --------
Long-term debt, less current portion........... 1,214 1,214 1,214
-------- -------- --------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; authorized:
36,140,498 shares
actual, 10,000,000 pro forma and as adjusted;
outstanding:
14,472,899 actual, none pro forma or as
adjusted..................................... 14 -- --
Common Stock, $0.001 par value; authorized:
40,000,000 shares
actual, pro forma and as adjusted;
outstanding: 533,442 actual,
15,763,992 pro forma and 18,163,992 as
adjusted(1).................................. 1 16 18
Additional paid-in capital.................... 45,300 45,299 57,414
Deferred compensation......................... (161) (161) (161)
Accumulated deficit........................... (39,958) (39,958) (39,958)
-------- -------- --------
Total stockholders' equity................... 5,196 5,196 17,313
-------- -------- --------
Total capitalization......................... $ 7,323 $ 7,323 $ 19,440
======== ======== ========
</TABLE>
- --------
(1) Excludes (i) an aggregate of 3,037,056 shares subject to outstanding
options as of June 30, 1996 at a weighted average exercise price of $1.78
per share under the Company's 1989 Stock Option Plan and 1996 Stock Option
Plan, (ii) 219,155 shares issuable upon exercise of warrants outstanding
as of June 30, 1996 at a weighted average exercise price of $3.30 per
share (of which the Company expects warrants to purchase 200,236 shares
will be exercised immediately prior to completion of the offering), (iii)
100,750 shares issuable upon exercise of options granted between July 1,
1996 and August 12, 1996, at a weighted average exercise price of $4.80
per share, (iv) an additional 1,747,303 shares reserved for issuance upon
exercise of options that may be granted subsequent to August 12, 1996
under the 1989 Stock Option Plan and the 1996 Stock Option Plan,
(v) 250,000 shares reserved for issuance upon exercise of options that may
be granted under the 1996 Directors' Stock Option Plan, and (vi) 500,000
shares reserved for issuance under the 1996 Employee Stock Purchase Plan.
Also excludes 272,750 shares issued in July 1996 in a private placement to
a wholly-owned subsidiary of Fruit of the Loom, Inc., one of the Company's
customers. See "Management--Stock Plans," "Certain Relationships and
Related Transactions" and Notes 8 and 14 of Notes to Financial Statements.

16
<PAGE>

DILUTION

The pro forma net tangible book value of the Company as of June 30, 1996 was
approximately $5,200,000 or $0.33 per share of Common Stock. "Net tangible
book value" per share represents the amount of total tangible assets of the
Company reduced by the amount of its total liabilities and divided by the
total number of shares of Common Stock outstanding. After giving effect to the
sale of the 2,400,000 shares of Common Stock offered by the Company at the
initial public offering price of $6.00 per share, and the adjustments set
forth above, the pro forma net tangible book value of the Company as of June
30, 1996 would have been $17,300,000 or $0.95 per share of Common Stock. This
represents an immediate increase in net tangible book value of $0.62 per share
to existing stockholders and an immediate dilution of $5.05 per share to new
investors. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $6.00
Pro forma net tangible book value per share before the
offering..................................................... $0.33
Increase attributable to new investors........................ 0.62
-----
Pro forma net tangible book value after the offering........... 0.95
-----
Dilution per share to new investors............................ $5.05
=====
</TABLE>

The following table summarizes on a pro forma basis as of June 30, 1996, the
differences between the existing stockholders and new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 15,763,992 86.8% $46,293,319 76.3% $2.94
New investors.......... 2,400,000 13.2 14,400,000 23.7 6.00
---------- ----- ----------- -----
Total................. 18,163,992 100.0% $60,693,319 100.0%
========== ===== =========== =====
</TABLE>

The information presented with respect to existing stockholders assumes no
exercise of warrants to purchase 219,555 shares that were outstanding on June
30, 1996 with a weighted average exercise price of $3.30 per share (of which
the Company expects warrants to purchase 200,236 shares will be exercised
immediately prior to completion of the offering) and no exercise of
outstanding options under the 1989 Stock Option Plan or the 1996 Stock Option
Plan. As of June 30, 1996, options to purchase 3,037,056 shares were
outstanding under the Company's 1989 Stock Option Plan and 1996 Stock Option
Plan with a weighted average exercise price of $1.78 per share. In addition,
100,750 shares are issuable upon exercise of options granted between July 1,
1996 and August 12, 1996 with a weighted average exercise price of $4.80 per
share, 1,747,303 shares are reserved for issuance upon exercise of options
that may be granted subsequent to August 12, 1996 under the 1989 Stock Option
Plan and the 1996 Stock Option Plan, 250,000 shares are reserved for issuance
upon exercise of options that may be granted under the 1996 Directors' Stock
Option Plan and 500,000 shares are reserved for issuance under the 1996
Employee Stock Purchase Plan. The issuance of Common Stock under these plans
will result in further dilution to new investors. Also excludes 272,750 shares
issued in July 1996 in a private placement to a wholly-owned subsidiary of
Fruit of the Loom, Inc., one of the Company's customers. See "Management--
Stock Plans," "Certain Relationships and Related Transactions" and Notes 8 and
14 of Notes to Financial Statements.

17
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data is qualified by reference to and
should be read in conjunction with the Financial Statements and related Notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The selected
statement of operations data for the years ended December 31, 1993, 1994 and
1995 and the balance sheet data as of December 31, 1994 and 1995 are derived
from the Financial Statements of the Company which have been audited by Ernst
& Young LLP, independent auditors, and included herein. The selected statement
of operations data for the year ended December 31, 1991 and the balance sheet
data as of December 31, 1991 are derived from unaudited financial statements
not included herein. The selected statement of operations data for the year
ended December 31, 1992 and the balance sheet data at December 31, 1992 and
1993 are derived from audited financial statements not included herein. The
financial data as of June 30, 1996 and for the six months ended June 30, 1995
and 1996 are derived from the Company's unaudited financial statements
included elsewhere in this Prospectus. Historically, results of operations for
any interim period are not necessarily indicative of results to be expected
for the full fiscal year.

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
License................ $ 222 $ 212 $ 1,015 $ 1,627 $ 288 $ 89 $ 1,511
Service................ 2,419 2,617 2,847 6,345 8,285 5,464 2,477
------- ------- ------- ------- -------- ------- -------
Total revenue......... 2,641 2,829 3,862 7,972 8,573 5,553 3,988
Cost of revenue:
License................ 83 68 134 162 140 57 283
Service................ 1,092 1,422 1,641 4,426 5,452 3,376 4,298
------- ------- ------- ------- -------- ------- -------
Total cost of
revenue.............. 1,175 1,490 1,775 4,588 5,592 3,433 4,581
Operating expenses:
Research and
development........... 1,909 1,884 1,573 1,622 4,810 1,508 2,226
Sales and marketing.... 831 607 859 1,355 3,978 1,294 5,108
General and
administrative........ 862 1,539 1,303 1,947 3,330 1,994 1,221
Termination of
distribution rights... -- -- -- -- 4,057 4,057 --
------- ------- ------- ------- -------- ------- -------
Total operating
expenses............. 3,602 4,030 3,735 4,924 16,175 8,853 8,555
------- ------- ------- ------- -------- ------- -------
Loss from operations.... (2,136) (2,691) (1,648) (1,540) (13,194) (6,733) (9,148)
Other income (expense).. (133) (241) (273) (199) (971) (368) 21
------- ------- ------- ------- -------- ------- -------
Loss before income
taxes.................. (2,269) (2,932) (1,921) (1,739) (14,165) (7,101) (9,127)
Provision (benefit) for
income taxes........... -- -- -- 26 (26) -- --
------- ------- ------- ------- -------- ------- -------
Pro forma net loss...... $(2,269) $(2,932) $(1,921) $(1,765) $(14,139) $(7,101) $(9,127)
======= ======= ======= ======= ======== ======= =======
Pro forma net loss per
share.................. $ (0.79) $ (0.40) $ (0.51)
======== ======= =======
Shares used in computing
pro forma
net loss per share..... 17,814 17,811 17,893
======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $ 24 $ 142 $ 64 $ 1,594 $12,929 $ 5,794
Working capital
(deficit)............... (3,338) (2,814) (1,045) (2,786) 11,302 2,787
Total assets............. 738 814 1,743 5,161 18,063 11,922
Long-term debt........... -- 1,125 1,570 1,167 1,636 1,214
Stockholders' equity
(deficit)............... (3,041) (3,724) (1,979) (1,538) 13,318 5,196
</TABLE>

18
<PAGE>

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

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including, but not limited to those discussed in "Risk Factors" and elsewhere
in this Prospectus.

OVERVIEW

CONNECT designs, develops, markets and supports packaged application
software for Internet-based interactive commerce. The Company was founded in
1987 to provide online information services to businesses. During the period
1987 through 1992, the Company's primary business was the operation and
management of a private online service and the licensing of related client
software. In 1993 and 1994, the Company also offered software for creation,
access and operation of custom online systems. In late 1994, the Company began
to shift its focus from providing online services to developing packaged
software applications for Internet-based interactive commerce. During 1994 and
1995, the Company derived a significant portion of its revenue from contract
software development projects with two companies under which the Company
retained ownership of the technology developed. These projects formed the
foundation for the development of OneServer, the Company's core software
application, which was commercially released in September 1995, and
OrderStream, the first preconfigured implementation of OneServer, which was
commercially released in June 1996.

As of June 30, 1996, the Company had licensed OneServer to nine customers,
three of which are operating OneServer commercially, while the others are in
the process of implementing the application. OrderStream has been licensed to
two customers, both of which are in the process of implementing the
application. The Company believes that the majority of its 1996 revenue will
be generated through licenses of OneServer and OrderStream, and the
performance of related services. The Company expects that revenue from the
operation of private online services will constitute a decreasing portion of
the Company's overall revenue in the future. As a result of the recent
transition in the Company's business, the Company's results of operations
prior to fiscal 1996 should not be relied upon as indicative of future
results.

The Company derives revenue from software license fees and services. License
fees primarily consist of revenue from licenses of the Company's application
software. Service revenue consists of fees from implementation (including
customization of licensed software), training, maintenance and support,
contract software development projects, and system hosting and online
services. License revenue is recognized on shipment of the application
software provided there are no significant remaining obligations and
collectability is deemed probable by management. License fees under contracts
requiring significant implementation, including customization, of licensed
application software are recognized on a percentage-of-completion basis.
Revenue from implementation services is recognized as the services are
performed, except for revenue from certain fixed price contracts which is
recognized on a percentage-of-completion basis. Actual costs and gross margins
on fixed price contracts could differ from management's estimates and such
differences could be material to the financial statements.

The Company also enters into maintenance agreements in connection with
licenses of its application software under which revenue is recognized ratably
over the term of the agreement, generally one year. Usage fees related to the
Company's training, system hosting services, private online services and
consulting services are recognized as the services are performed.
Additionally, service revenue from contract software development projects, in
which the Company develops specific technology for its customers, has been
recognized on a percentage-of-completion basis.

The Company has incurred net losses in each fiscal year since inception and,
as of June 30, 1996, had an accumulated deficit of $40.0 million. The
Company's operating expenses have increased substantially since

19
<PAGE>

1994 as the Company made investments related to the development and
introduction of OneServer. To date, all research and development costs have
been expensed as incurred and have not been capitalized because capitalizable
costs have not been material. The Company anticipates that operating expenses
will continue to increase for the foreseeable future as it continues to
develop its technology, increase sales and marketing efforts and establish and
expand distribution channels. Accordingly, the Company expects to incur
additional losses on a quarterly and annual basis for the foreseeable future.

The Company's prospects are dependent upon the successful acceptance of
OneServer and OrderStream by the market, and must be evaluated in light of the
risks and uncertainties frequently encountered by companies dependent upon
such early stage products. In addition, the Company's markets are new and
rapidly evolving, which heightens these risks and uncertainties. To address
these risks, the Company must, among other things, successfully implement its
marketing strategy, respond to competitive developments, continue to develop
and upgrade its products and technologies more rapidly than its competitors,
and commercialize its products and services incorporating these enhanced
technologies. There can be no assurance that the Company will succeed in
addressing any or all of these risks. See "Risk Factors."

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of total revenue, items from
the Company's statements of operations for the periods indicated.

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
License................. 26% 20% 3% 2% 38%
Service................. 74 80 97 98 62
------- ------- -------- ------- -------
Total revenue.......... 100 100 100 100 100
Cost of revenue:
License................. 4 2 2 1 7
Service................. 42 56 63 61 108
------- ------- -------- ------- -------
Total cost of revenue.. 46 58 65 62 115
Operating expenses:
Research and
development............ 41 20 56 27 56
Sales and marketing..... 22 17 47 23 128
General and
administrative......... 34 24 39 36 31
Termination of
distribution rights.... -- -- 47 73 --
------- ------- -------- ------- -------
Total operating
expenses.............. 97 61 189 159 215
------- ------- -------- ------- -------
Loss from operations..... (43) (19) (154) (121) (230)
Other income (expense)... (7) (3) (11) (7) 1
------- ------- -------- ------- -------
Loss before income
taxes................... (50) (22) (165) (128) (229)
Provision (benefit) for
income taxes............ -- -- -- -- --
------- ------- -------- ------- -------
Net loss................. (50)% (22)% (165)% (128)% (229)%
======= ======= ======== ======= =======
Gross margin:
License................. 87% 90% 51% 36% 81%
Service................. 42 30 34 38 (74)
</TABLE>

20
<PAGE>

SIX MONTHS ENDED JUNE 30, 1995 AND 1996

Revenue

License. License revenue increased from $89,000 in the first six months of
1995 to $1.5 million in the first six months of 1996, primarily as a result of
fees from licenses of the Company's OneServer application software which was
first licensed in the fourth quarter of 1995. See "Business--Customers."

Service. Service revenue decreased 55% from $5.5 million in the first six
months of 1995 to $2.5 million in the first six months of 1996. In the first
six months of 1995 service revenue consisted primarily of revenue associated
with contract software development projects with AT&T Corporation ("AT&T") and
Electronic Marketplace Systems, Inc., both of which terminated in June 1995
(the "Development Projects"). Service revenue in the first six months of 1996
consisted primarily of $1.4 million of revenue from private online services
and $1.0 million of revenue from implementation services in connection with
OneServer and OrderStream licenses. The Company expects that service revenue
will decline as a percentage of total revenue due to the Company's focus on
licensing OneServer and OrderStream.

Costs of Revenue

Cost of License. Cost of license revenue includes sublicense fees and
expenses relating to product media, duplication and manuals. Cost of license
revenue increased from $57,000 in the first six months of 1995 to $0.3 million
in the first six months of 1996, and decreased as a percentage of license
revenue from 64% to 19%.

Cost of Service. Cost of service revenue consists of: costs of
implementation services including fees of third-party contract developers and
Company personnel costs; training and customer support costs for OneServer;
costs associated with contract software development projects; and
telecommunications, personnel costs and depreciation related to hosting
services and the operation of the Company's private online service. Cost of
service revenue increased from $3.4 million in the first six months of 1995 to
$4.3 million in the first six months of 1996, and increased as a percentage of
service revenue from 62% to 174%. The cost of service revenue in the first six
months of 1995 was comprised primarily of costs associated with the
Development Projects and the Company's private online service. In the first
six months of 1996, cost of service revenue was impacted by charges totaling
approximately $1.2 million in connection with certain fixed price contract
obligations to implement the Company's software for customers, and costs
associated with the Company's private online service. The contract obligations
related to agreements with two customers under which the Company licensed its
OneServer software and agreed to perform certain implementation services for a
fixed price. The charges recorded related to implementation costs which are
projected to exceed the implementation fees due under the agreements. The
charges were recorded in the first quarter of 1996 in accordance with
generally accepted accounting principles which provide that such charges must
be recorded when they are probable and reasonably estimable. From time to time
the Company may continue to enter into fixed price arrangements for its
implementation services and currently has three arrangements, including the
two described above. Such fixed price arrangements also could result in losses
if there are delays or cost increases in implementation services or
complexities associated with completion of the projects. See "Risk Factors--
Risks Associated with Complex Software Products; Lengthy Sales and
Implementation Cycles."

Operating Expenses

Research and Development. Research and development expenses consist
primarily of personnel and equipment costs. Research and development expenses
increased 48% from $1.5 million in the first six months of 1995 to $2.2
million in the first six months of 1996, and increased as a percentage of
total revenue from 27% to 56%. The increase in research and development
expenses in total dollars and as a percentage of total revenue was
attributable to increased staffing and associated support costs of software
engineers required to expand and enhance the Company's product line, including
development of OneServer and OrderStream. The Company expects research and
development expense to continue to increase in absolute dollars.

21
<PAGE>

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions of sales and marketing personnel, and travel,
marketing and promotional expenses. Sales and marketing expenses increased
295% from $1.3 million in the first six months of 1995 to $5.1 million in the
first six months of 1996, and increased as a percentage of total revenue from
23% to 128%. The increase in sales and marketing expenses in absolute dollars
and as a percentage of revenue was attributable to building a direct sales
force and increasing marketing and promotional activities directed at
developing its position in the emerging Internet-based packaged application
software market. Historically, a large portion of the Company's revenue was
generated without any related commission expense as such revenue was largely
comprised of non-commissioned services. The Company expects sales and
marketing expenses to increase in absolute dollars both as a result of higher
marketing and sales costs related to increased promotional activities and
increased commission expense associated with licenses.

General and Administrative. General and administrative expenses consist
primarily of salaries of financial, administrative and management personnel
and related travel expenses, as well as legal and accounting expenses. General
and administrative expenses decreased 39% from $2.0 million in the first six
months of 1995 to $1.2 million in the first six months of 1996 due primarily
to higher professional service fees in the 1995 period. General and
administrative expenses decreased as a percentage of total revenue from 36% in
the first six months of 1995 to 31% in the first six months of 1996 due to
lower total costs incurred compared to total revenue generated in the latter
period. In the foreseeable future, the Company expects general and
administrative expenses to increase in absolute dollars.

Termination of Distribution Rights. The Company incurred a one-time expense
of $4.1 million in the first six months of 1995 related to its termination of
exclusive European distribution rights of its former European distributor. The
distributor had acquired exclusive rights for distributing certain of the
Company's software and services in Europe. The Company decided to negotiate
the termination of the distributor's rights primarily because the distributor
was not performing to the Company's standards and the Company wanted to
reestablish control over its European distribution channel.

Other Income (Expense)

Other income (expense) consists primarily of interest expense. Net interest
expense, which results principally from interest incurred under notes payable
and capital lease obligations, was $0.3 million in the first six months of
1995.

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Revenue

License. Revenue from licenses was $1.0 million, $1.6 million and $0.3
million in 1993, 1994 and 1995, respectively, representing an increase of 60%
from 1993 to 1994 and a decrease of 82% from 1994 to 1995. The increase in
license revenue from 1993 to 1994 was attributable primarily to an increase in
licenses of the Company's software introduced in 1993 for creation, access and
operation of custom online services. The decrease in license revenue from 1994
to 1995 resulted primarily from a decrease in licenses of such software as the
Company refocused its sales and marketing efforts on OneServer.

Service. Service revenue was $2.8 million, $6.3 million and $8.3 million in
1993, 1994 and 1995, respectively, representing an increase of 123% from 1993
to 1994 and an increase of 31% from 1994 to 1995. Service revenue from online
services in 1993, 1994 and 1995 was $2.7 million, $3.5 million and $3.0
million, respectively. The increase in service revenue from 1993 to 1994 and
1994 to 1995 was attributable primarily to revenue from the Development
Projects. The Development Projects were terminated in June 1995.

Costs of Revenue

Cost of License. Cost of license revenue was $0.1 million, $0.2 million and
$0.1 million in 1993, 1994 and 1995, respectively, representing 13%, 10% and
49% of license revenue for each respective period.

22
<PAGE>

Cost of Service. Cost of service revenue was $1.6 million, $4.4 million and
$5.5 million in 1993, 1994 and 1995, respectively, representing 58%, 70% and
66% of service revenue for each respective period. The increase in cost of
service revenue from 1993 to 1994 was due primarily to costs associated with
the Development Projects. The increase in cost of service revenue from 1994 to
1995 was due primarily to the cost of converting the Company's private online
service from a mainframe to a UNIX-based environment, as well as increased
operating costs of the private online service.

Operating Expenses

Research and Development. Research and development expenses were $1.6
million, $1.6 million and $4.8 million in 1993, 1994 and 1995, respectively,
representing 41%, 20% and 56% of total revenue in each respective period. A
significant portion of the initial development costs related to OneServer were
included in cost of service in 1994 and 1995 as such development was performed
under the Development Projects. The increase in research and development
expenses from 1994 to 1995 was attributable primarily to increased staffing
and associated support costs of software engineers required to develop
OneServer.

Sales and Marketing. Sales and marketing expenses were $0.9 million, $1.4
million and $4.0 million in 1993, 1994 and 1995, respectively, representing
22%, 17% and 47% of total revenue for each respective period. The increase in
sales and marketing expenses in absolute dollars from 1993 to 1994 and 1994 to
1995 was attributable to the Company's investment in building its direct sales
force and related travel expense, increased promotional and marketing
activities and expenses relating to the opening of regional sales offices.

General and Administrative. General and administrative expenses were $1.3
million, $1.9 million and $3.3 million in 1993, 1994 and 1995, respectively,
representing 34%, 24% and 39% of total revenue in each respective period. The
increase in general and administrative expenses in absolute dollars from 1993
to 1994 resulted primarily from the addition of personnel. The increase in
general and administrative expenses from 1994 to 1995 resulted primarily from
the addition of personnel, including two senior executives, and expenses
associated with capital raising activities.

Termination of Distribution Rights. The Company had a one-time expense of
$4.1 million in 1995 from the termination of exclusive European distribution
rights of its European distributor. The distributor had acquired exclusive
rights for distributing certain of the Company's software and services in
Europe. The Company decided to negotiate the termination of the distributor's
rights primarily because the distributor was not performing to the Company's
standards and the Company wanted to reestablish control over its European
distribution channel.

Other Income (Expense)

Net interest expense was $0.3 million, $0.2 million and $1.0 million in
1993, 1994 and 1995, respectively. Interest expense in 1995 consisted
primarily of interest paid on bridge loans from existing stockholders, which
were converted to equity in December 1995.

Income Taxes

The provision (benefit) for income taxes for 1995 reflects a reversal of the
provision for income taxes for 1994 due to the utilization of net operating
loss carrybacks to offset 1994 taxable income. The provision for income taxes
for 1994 arises primarily as a result of the limitation on the utilization of
net operating loss carryforwards under Section 382 of the Internal Revenue
Code. At December 31, 1995, the Company had approximately $7.7 million of
gross deferred tax assets consisting primarily of net operating loss
carryforwards. A valuation allowance has been recorded for the entire deferred
tax asset as a result of uncertainties regarding the realization of the asset
due to the lack of earnings history of the Company. To support the Company's
conclusion that a full allowance was required, management primarily considered
the Company's history of operating losses and expected net losses for the
foreseeable future. The Company will continue to assess the realizability of
the deferred tax assets on actual and forecasted operating results. For
information regarding the Company's provision (benefit) for income taxes and
limitation on net operating losses and credit carryforwards, refer to Note 12
of the Notes to Financial Statements, which information is hereby incorporated
by reference.

23
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited financial information for
each of the last six quarters. The information for each of these quarters
includes all adjustments, consisting only of normal recurring adjustments,
which the Company considers necessary for a fair presentation of this
information when read in conjunction with the Financial Statements and Notes
thereto appearing elsewhere in this Prospectus. The results of operations for
any quarter and any quarter-to-quarter trends are not necessarily indicative
of the results to be expected for any future period.

<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
License................ $ 35 $ 54 $ 34 $ 165 $ 404 $ 1,107
Service................ 3,009 2,455 693 2,128 1,059 1,418
------- ------- ------- -------- ------- -------
Total revenue......... 3,044 2,509 727 2,293 1,463 2,525
Cost of revenue:
Cost of license........ 40 17 41 42 134 149
Cost of service........ 1,913 1,463 842 1,233 2,209 2,089
------- ------- ------- -------- ------- -------
Total cost of
revenue.............. 1,953 1,480 883 1,275 2,343 2,238
Operating expenses:
Research and
development........... 449 1,059 1,834 1,468 1,174 1,052
Sales and marketing.... 590 704 984 1,700 2,480 2,628
General and
administrative........ 693 1,301 774 563 546 675
Termination of
distribution rights... 4,057 -- -- -- -- --
------- ------- ------- -------- ------- -------
Total operating
expenses............. 5,789 3,064 3,592 3,731 4,200 4,355
------- ------- ------- -------- ------- -------
Loss from operations.... (4,698) (2,035) (3,748) (2,713) (5,080) (4,068)
Other income (expense).. (139) (229) (285) (318) 15 6
------- ------- ------- -------- ------- -------
Loss before income
taxes.................. (4,837) (2,264) (4,033) (3,031) (5,065) (4,062)
Benefit for income
taxes.................. -- -- -- (26) -- --
------- ------- ------- -------- ------- -------
Net loss................ $(4,837) $(2,264) $(4,033) $ (3,005) $(5,065) $(4,062)
======= ======= ======= ======== ======= =======
</TABLE>

24
<PAGE>

The following table sets forth the above unaudited quarterly financial
information as a percentage of total revenue:

<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
License................ 1% 2% 5% 7% 28% 44%
Service................ 99 98 95 93 72 56
---- --- ---- ---- ---- ----
Total revenue......... 100 100 100 100 100 100
Cost of revenue:
Cost of license........ 1 1 5 2 9 6
Cost of service........ 63 58 116 54 151 83
---- --- ---- ---- ---- ----
Total cost of
revenue.............. 64 59 121 56 160 89
Operating expenses:
Research and
development........... 15 42 252 64 80 42
Sales and marketing.... 19 28 135 74 170 104
General and
administrative........ 23 52 107 24 37 27
Termination of
distribution rights... 133 -- -- -- -- --
---- --- ---- ---- ---- ----
Total operating
expenses............. 190 122 494 162 287 173
---- --- ---- ---- ---- ----
Loss from operations.... (154) (81) (515) (118) (347) (162)
Other income (expense).. (5) (9) (39) (14) 1 1
---- --- ---- ---- ---- ----
Loss before income
taxes.................. (159) (90) (554) (132) (346) (161)
Benefit for income
taxes.................. -- -- -- (1) -- --
---- --- ---- ---- ---- ----
Net loss................ (159)% (90)% (554)% (131)% (346)% (161)%
==== === ==== ==== ==== ====
</TABLE>

The Company has experienced and expects to continue to experience
significant fluctuations in quarterly operating results that may be caused by
many factors including, among others, the number, timing and significance of
product enhancements and new product announcements by the Company or its
competitors, the ability of the Company to develop, introduce and market new
and enhanced versions of the Company's products
on a timely basis, the length of the Company's sales cycle, market acceptance
of and demand for the Company's products, the pace of development of
electronic commerce conducted on the Internet, the mix of the Company's
products sold, customer order deferrals in anticipation of enhancements or new
products offered by the Company or its competitors, nonrenewal of service
agreements, software defects and other product quality problems, the Company's
ability to attract and retain key personnel, the extent of international
sales, changes in the level of operating expenses and general economic
conditions. The Company anticipates that a significant portion of its revenue
will be derived from a limited number of orders placed by large corporations,
and the timing of receipt and fulfillment of any such orders is expected to
cause material fluctuations in the Company's operating results, particularly
on a quarterly basis. The Company expects to recognize the majority of its
license revenue in the last month of each quarter. As a result, any delay in
delivery of products at the end of a quarter could materially adversely affect
operating results for that quarter. In addition, the Company intends, in the
near term, to significantly increase its personnel, including its direct sales
force. The timing of such expansion and the rate at which new sales people
become productive could also cause material fluctuations in the Company's
quarterly operating results. Furthermore, the operating results of many
software companies reflect seasonal trends, and the Company expects to be
affected by such trends in the future.

25
<PAGE>

part, on the Company's expectations as to future revenue and are therefore
relatively fixed in the short term. If revenue levels fall below expectations,
net income is likely to be disproportionately adversely affected because a
proportionately smaller amount of the Company's expenses varies with its
revenue. There can be no assurance that the Company will be able to achieve or
maintain profitability on a quarterly or annual basis in the future. Due to
all the foregoing factors, in some future quarter the Company's operating
results may be below the expectations of securities analysts and investors. In
such event, the price of the Company's Common Stock would likely be materially
adversely affected. See "Risk Factors--Fluctuations in Quarterly Operating
Results."

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date primarily through the
private sale of equity securities and the use of capitalized leases for
equipment financing. The Company had working capital of $2.8 million at June
30, 1996.

Net cash used in operating activities was $2.0 million in 1993, net cash
generated by operating activities was $1.4 million in 1994 and net cash used
in operating activities in 1995 was $14.9 million. Net cash used in operating
activities in 1995 consisted primarily of net losses plus a decrease in
deferred revenue, offset in part by the issuance of stock in connection with
the termination of the Company's contract with its German distributor. Net
cash used in operating activities in the first six months of 1996 was $6.8
million resulting primarily from a net loss, offset in part by an increase in
accrued liabilities related in part to the $1.2 million charges taken in the
first six months of 1996 and increased bonus accruals.

During 1993, 1994, 1995 and for the six months ended June 30, 1996, the
Company used $0.6 million, $1.6 million, $1.8 million and $0.8 million,
respectively, in investing activities, primarily as a result of the purchase
of furniture and equipment. Net cash provided by financing activities in 1993,
1994 and 1995 was $2.6 million, $1.8 million and $28.0 million, respectively.
Net cash provided by financing activities in 1995 resulted primarily from the
Company's private equity financing in December 1995. Net cash provided by
financing activities was $0.5 million in the first six months of 1996
resulting primarily from a second closing of the Company's private equity
financing in the first quarter of 1996. In addition, in July 1996, the Company
issued in a private placement 272,750 shares of Series G Preferred Stock
(convertible into an equal number of shares of Common Stock upon completion of
the offering) to a wholly-owned subsidiary of Fruit of the Loom, Inc., one of
the Company's customers, for an aggregate purchase price of $3.0 million. See
"Certain Relationships and Related Transactions."

The Company believes that the proceeds from the offering, existing cash
balances and funds that may be generated from operations will be sufficient to
finance the Company's currently anticipated working capital requirements
through the end of 1997. There can be no assurance, however, that the
Company's actual needs will not exceed anticipated levels, or that the Company
will generate sufficient revenue to fund its operations in the absence of
other sources. There also can be no assurance that any additional required
financing will be available through bank borrowings, debt or equity offerings
or otherwise, or that if such financing is available, it will be available on
terms favorable to the Company or its stockholders.

26
<PAGE>

BUSINESS

The following description of the Company's business should be read in
conjunction with the information included elsewhere in this Prospectus. This
description contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from the
results discussed in the forward-looking statements as a result of certain of
the risk factors set forth below and elsewhere in this Prospectus.

OVERVIEW

CONNECT designs, develops, markets and supports industrial strength,
scaleable software applications for Internet-based interactive commerce.
CONNECT application software and services are designed to reduce the time and
overall cost for businesses to implement and maintain a secure sales,
marketing and order capture capability on the World Wide Web (the "Web"). The
Company's software supports key functions necessary for large-scale
interactive commerce, including user registration, multimedia catalog and
content management, dynamic merchandising, order capture and management,
security, payment processing, enterprise integration and systems
administration.

CONNECT's core product, OneServer, is a cross-industry packaged software
application for Internet-based interactive commerce, including sales,
marketing and order capture. In addition, the Company offers OrderStream, its
first preconfigured implementation of OneServer for business-to-business
interactive commerce in selected vertical markets. CONNECT's applications are
designed to support large numbers of purchasers, products and transactions.
The Company's object-oriented software architecture and robust transaction
manager tightly integrate OneServer and OrderStream with a relational database
to provide increased system performance and transaction capacity. The Company
and its Solution Partners offer a broad range of services to implement,
support and operate CONNECT's applications.

INDUSTRY BACKGROUND

In today's competitive global business environment, companies are seeking to
streamline their business processes in order to lower costs, forge closer
relationships with customers and suppliers and increase market share, revenue
and profits. Companies have concentrated their efforts on reengineering and
automating their internally focused business processes such as manufacturing,
product development, finance and administration. However, the traditional
direct and indirect methods that companies use to market and sell products and
to capture customer orders continue to rely heavily on human involvement,
paper-based systems, physical infrastructure and costly advertising and
promotion.

Direct sales methods allow companies to target buyers, customize the sales
process and build close customer relationships, but often require large
investments and result in high fixed operating costs. Multi-tier distribution
methods using resellers, distributors or dealers involve one or more steps
between the original supplier and the customer. These multi-tier distribution
methods often result in substantial product inventory at each step, reduce
control over merchandising and pricing, and limit opportunities to build
value-added relationships with customers. Catalog-based distribution provides
broader coverage at lower cost and offers greater control over merchandising
and pricing. However, catalog-based distribution involves expensive printing
and delivery costs, restricts the form and volume of product information
presented and limits interaction with customers.

Recent Approaches to Automating Sales, Marketing and Order Capture

Many companies have tried to leverage the power of computers and
telecommunications to automate business processes, including sales, marketing
and order capture. These companies have sought to combine the benefits of
direct and indirect sales channels with electronic order capture and
management. Approaches to date have included systems based upon electronic
data interchange (EDI) standards, industry-specific proprietary electronic
commerce systems and packaged enterprise applications. Each of these
approaches, however, has provided only a partial or narrowly focused solution.

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EDI is a set of uniform formats for commercial documents such as invoices
and purchase orders that allows computers to exchange such documents without
human intervention. EDI automates the flow of transaction information among
buyers and sellers and the back-office work associated with transactions.
Systems based on EDI standards have been adopted by a number of companies and
industries in order to link single companies with multiple suppliers or to
automate certain aspects of the distribution process for entire industries.
Widespread adoption of EDI in an industry has required either a dominant buyer
or a critical mass of connected trading partners and, in many industries, has
been hampered by the cost and complexity of implementation. While systems
based on EDI standards have offered advantages over paper-based systems, such
systems have not been designed to support a full range of sales, marketing and
order capture functions.

Several industries have adopted industry-specific information systems to
automate aspects of the sales, marketing and order capture processes. These
custom systems typically have been deployed by industry leaders, and have
included the Sabre reservation system deployed by American Airlines and the
order and inventory management systems deployed by McKesson Corporation and
Baxter International Inc. Such proprietary systems are designed to provide
more revenue and a higher level of customer service by linking companies,
distributors and customers. While these systems have helped solidify customer
relationships and resulted in competitive advantages, they are costly and
difficult to implement and maintain due to custom development costs,
networking costs and the need for proprietary client-side software.

More recently, companies have made large investments to replace their core
business systems with client/server enterprise applications to decrease costs,
increase revenue and improve customer service. Packaged enterprise
applications such as those offered by Baan, PeopleSoft, and SAP support a
range of business functions such as finance, accounting, human resources,
manufacturing and distribution. Although these applications provide
substantial benefits by integrating business functions within an enterprise,
they are not designed to extend outside the enterprise to directly link a
company with its customers, suppliers and other trading partners.

The Internet as an Interactive Commerce Medium

The Internet is emerging as a powerful new medium for interactive commerce,
including sales, marketing and order capture. The Internet has the potential
to address many of the limitations of existing approaches. Key benefits of the
Internet include direct access to millions of users, an open, standards-based
architecture, a global communications infrastructure and the capability to
deliver multimedia content. The Internet provides a cost-effective mechanism
to extend a company's internal systems to directly link to its customers and
trading partners. It also allows a company to establish a global sales and
marketing presence and order capture capability.

The adoption of the Internet as a medium for sales, marketing and order
capture is still in its early stages. To date, companies have used the
Internet primarily to publish marketing materials and company literature in
digital format on the Web. This approach has provided a cost-effective method
of distributing information, but has not significantly enhanced customer
interaction or captured substantial new revenue. Recently, some companies have
established Web sites that allow the purchase and sale of goods and services.
While these sites provide an interactive user experience, they require complex
custom software that is costly and difficult to build and maintain, and in
general, are not designed to scale to support large numbers of purchasers,
products and transactions.

For the Internet to achieve widespread adoption as an interactive commerce
medium, the Company believes Web-based interactive commerce solutions must
support all elements of sales, marketing and order capture from merchandising
through transaction processing. These solutions also must leverage the
multimedia and interactive potential of the Web and integrate with enterprise
systems to leverage companies' technology investments and existing information
resources. Finally, Internet-based solutions need to enable central system
management and provide a high degree of security.

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In order to realize the full potential of Internet-based interactive
commerce, CONNECT believes that companies will require cost-effective,
scaleable and industrial strength software applications that can be rapidly
deployed with minimal customization. In other computing environments, packaged
applications were developed to address these time-to-market and cost concerns.
Similarly, the Company believes that the compelling economics of packaged
software applications compared to custom development will drive the growth of
an Internet-based packaged applications market. Forrester Research estimates
that the market for all Internet-based packaged applications, including
electronic commerce applications, (which Forrester does not separately
estimate), will grow from less than $1.0 million in 1995 to over $1.7 billion
in 1999 (excluding browsers, servers, development tools and applets).

CONNECT SOLUTION

CONNECT offers a comprehensive software and services solution that is
designed to enable businesses to quickly, securely and cost effectively
implement an Internet-based interactive commerce capability. This sales,
marketing and order capture channel complements existing sales channels and
enables customers to seek to capture new revenue by leveraging the
capabilities of the Internet. CONNECT refers to this complementary new channel
as the Virtual Sales Channel.

[DIGITIZED ARTWORK OF THE CONNECT SOLUTION]

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<PAGE>

. Faster Time to Market. The Company believes that rapid implementation is
critical to success in the Internet-based interactive commerce
applications market. The Company's software incorporates key functions
designed to permit rapid implementation, including user registration,
advertising, multimedia catalog and content management, dynamic
merchandising, browsing and searching, order capture, order management,
usage tracking, security, payment processing, enterprise integration, and
system administration. OneServer's HTML (Hypertext Markup Language)
template engine and business object architecture minimize the need for
custom software code, allowing rapid implementation to meet a company's
specific requirements. To further accelerate time to market, the Company
intends to develop a series of preconfigured implementations of OneServer
tailored to meet the interactive commerce requirements of selected
vertical markets. The Company's first such application, OrderStream, was
commercially released in June 1996.

. Lower Cost of Ownership. CONNECT's solution is designed to reduce the
overall cost of deploying and maintaining an Internet-based interactive
commerce application. The Company's open architecture, pre-built
functions and integrated approach limit custom coding, thereby reducing
implementation and ongoing maintenance costs.

. Industrial Strength, Scaleable Applications. The Company's applications
are designed to support large numbers of purchasers, products and
transactions and are based on a foundation of industry-standard
technology. The Company's software can be integrated with existing
enterprise systems and business processes, offers state-of-the-art
security and supports the critical requirements for high capacity
interactive commerce.

CONNECT STRATEGY

The Company's goal is to be the leading provider of packaged applications
software for Internet-based interactive commerce. The key elements of the
Company's strategy are as follows:

Provide Comprehensive Solutions. The Company's strategy is to provide the
software and services necessary for businesses to quickly, securely and cost-
effectively implement an Internet-based interactive commerce channel.
CONNECT's application software provides the broad range of functions necessary
for interactive commerce including marketing, merchandising, sales, order
management, administration and integration with enterprise systems. The
Company's comprehensive solution complements customers' existing sales
channels.

Target Large Corporations in Selected Vertical Markets. In order to expand
market share and establish a leadership position, the Company plans to target
specific vertical markets. The Company has identified a number of market
segments that it believes have a current need for packaged Internet-based
interactive commerce applications, including: (i) business-to-business
suppliers such as resellers and distributors of computer hardware and
software, electronic components and office equipment and supplies; (ii)
consumer retailers, such as specialty and direct mail retailers and general
merchandisers; and (iii) industries employing multi-tier distribution
including apparel, food and beverage and consumer appliance and electronics
manufacturers. The Company intends to leverage existing customer relationships
in order to expand its business into each of these areas. In addition, the
Company intends to develop a series of preconfigured implementations of
OneServer, tailored to meet the specific requirements of these vertical
markets. OrderStream, the first such application, targets catalog-based
business-to-business suppliers.

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<PAGE>

Exploit Technology Leadership. The Company believes its significant
technology base is one of its core competitive differentiators. The Company
plans to continue to invest significant resources to maintain its technology
leadership position and to provide industry-leading interactive commerce
solutions. The Company's software applications integrate a powerful
transaction manager, object-oriented architecture and sophisticated HTML
template engine with an industry standard relational database management
system. The Company believes it was among the first to integrate a
comprehensive client/server architecture with Web-based technology. For
example, in addition to universal browser support, OneServer's architecture
supports client software developed with standard tools such as Java, Visual
Basic and C/C++. In addition, the Company will continue to support and
integrate relevant Internet and client/server software standards as they
emerge.

Leverage Third-Party Providers. A key element of the Company's strategy is
to continue to expand its strategic relationships with third-party software,
service and hardware providers. The Company believes that such relationships
increase the visibility of its application software in the marketplace and
enable the Company to supplement its core products and services to provide a
comprehensive solution to customers. As part of this strategy, the Company
integrates into its software applications certain software from Oracle,
Fulcrum and RSA. Solution Partners also include platform providers such as
hardware companies, solution enhancement providers such as software companies,
professional service providers to assist with development and implementation
of the CONNECT solution, and design firms that participate in Web site
development.

Expand Sales and Distribution Capability. The Company intends to expand its
sales and distribution infrastructure domestically and internationally to
increase sales coverage and capture market share. The Company plans to
leverage its direct sales efforts by pursuing sales prospects generated by
Solution Partners and by selling through value-added resellers, as well as
establishing other indirect sales channels.

PRODUCTS AND SERVICES

OneServer

CONNECT's core product, OneServer, is a software application for Internet-
based interactive commerce. OneServer integrates the key features and
functions necessary to implement a Virtual Sales Channel. CONNECT's customers
license OneServer and, using the Company's professional services capabilities
or those of a Solution Partner, tailor OneServer to the specific needs of
their businesses. OneServer is designed to enable CONNECT's customers to
quickly, securely and cost-effectively implement an Internet-based sales,
marketing, and order capture capability. For sellers, benefits include more
control over order execution, customer specific promotions, better product and
pricing information and tighter relationships with purchasers. The key
business benefits for purchasers include expedited purchasing, lower cost and
24-hour availability.

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OneServer Version 1.0 was commercially released in September 1995, and
Version 1.2 was commercially released in June 1996. OneServer has been
licensed to nine customers, three of which have implemented OneServer
commercially. OneServer offers the following key functionality:

[DIGITIZED ARTWORK OF ONESERVER FUNCTIONALITY]

The Company has licensed its OneServer software to customers for fees
ranging from approximately $100,000 to approximately $800,000. Fees for
professional services and annual fees for maintenance and support are
additional. The amount of revenue derived from a particular sale depends upon
a number of factors including the number of computer processors, complexity of
the customer application supported, amount of necessary customization and
other factors.

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OrderStream

OrderStream is a preconfigured implementation of OneServer tailored for
business-to-business interactive commerce in selected vertical markets. These
vertical markets include resellers and distributors of computer hardware and
software, electronic components and office equipment and supplies. OrderStream
includes pre-built OneServer business objects and a set of preconfigured HTML
templates (Web pages) designed to support the specific requirements of these
markets. OrderStream was commercially released in June 1996. OrderStream has
been licensed to two customers, neither of which is operating OrderStream
commercially.

OrderStream includes the following features in addition to those provided by
its OneServer foundation:

<TABLE>
<CAPTION>
BUSINESS PROCESS ADDITIONAL ORDERSTREAM FUNCTIONALITY
--------------------------------------------------------------------------------
<S> <C>
Marketing and
Merchandising . Customer-specific catalog and pricing
. Feature-specific product search
. Automated catalog creation and update through
bulk data importation
. User interface screens for catalog, SKU and
product management
. Seller-branded product catalogs
. Custom product designations (e.g., preferred
items and required approvals)
--------------------------------------------------------------------------------
Sales and Order Management . Real-time inventory availability checking
. User interface screens for customer service and
order capture
. Order review, routing, approval and rejection
. Order status tracking
. Purchase controls by buyer, frequency and dollar
amount
--------------------------------------------------------------------------------
Administration and . OrderStream-specific APIs (e.g., inventory
Integration availability and order status)
. Electronic data interchange (EDI)
</TABLE>

The Company licenses OrderStream at a premium to OneServer license fees.
Each OrderStream license includes a OneServer run-time sublicense. As with
OneServer, the Company charges separately for professional services and annual
fees for maintenance and support. The amount of revenue derived from a
particular sale depends on a number of factors, including the number of
computer processors, complexity of the customer application supported, amount
of necessary customization and other factors.

Services

The Company provides a full range of services to support the licensing of
its software applications. These services include project implementation and
training, maintenance and support, system hosting and online services. To
retain its focus on technology and software development, the Company leverages
its own capabilities through relationships with leading third-party providers
of systems integration and design services. The Company believes that the
quality and breadth of these services are an important competitive advantage.

Implementation and Training. The Company offers fee-based services to help
customers design and implement OneServer and OrderStream applications. The
Company and its Solution Partners work closely with customers to clarify the
project business case, define project scope and establish a project plan and
schedule. In addition, the Company offers fee-based education and training on
the use of its products to customers and third-party implementation partners.

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<PAGE>

Maintenance and Support. The Company provides software maintenance including
product updates and technical support to its customers and Solutions Partners.
The Company offers two levels of support which differ in the hours that the
customer may access support personnel. Fees charged depend upon the support
level and size of the customer's application.

Hosting Services. CONNECT offers system hosting services for its customers'
OneServer and OrderStream applications. These services include installing the
application on a remote server located at CONNECT's headquarters or a Solution
Partner's site, maintaining and administering the database, and other system
management services. The Company provides these services on a fee basis to
customers who do not want to operate and manage their own Internet-based
applications. The Company is actively recruiting Solutions Partners to provide
such hosting services.

Online Services. Since 1988, the Company has provided private online
services to various businesses and other organizations. These services include
e-mail, user forums and access to public and private information resources and
are marketed under the CONNECT Online brand name. These services may be
accessed by registered users through the Web or proprietary client software.
As of June 30, 1996, approximately 15,000 users in multiple organizations were
using these services.

Licensing and Third-Party Software

The Company typically provides its software products to its customers under
nonexclusive object code licenses. Generally, CONNECT sublicenses to its
customers third-party software integrated in the Company's software, including
a relational database management system from Oracle, a text search engine from
Fulcrum and encryption technology from RSA. The Company's customers also may
obtain such licenses directly from such third-party software vendors. See
"Risk Factors--Dependence upon Certain Licenses."

CUSTOMERS

As of June 30, 1996, CONNECT had licensed OneServer or OrderStream to the
following customers: Ameritech Corporation; ARI Network Services, Inc.; Compaq
Computer Corporation; ENTEX Information Services ("ENTEX"); Evergreen, Inc.;
First Data Corporation; Fruit of the Loom, Inc. ("Fruit of the Loom");
PhotoDisc; Reader's Digest; Time Warner Cable; and World Merchandise Exchange
("Womex"). Three customers are operating OneServer commercially, while the
other OneServer licensees are in the process of implementing OneServer
applications. The Company commenced marketing its OrderStream product in May
1996 and released it commercially in June 1996. The OrderStream product has
been licensed to two customers, neither of which is operating OrderStream
commercially.

Below are examples of how customers are using or expect to use CONNECT's
application software and services to create Internet-based sales, marketing
and order capture capability. These customers also have retained certain of
CONNECT's Solution Partners to assist with systems integration and user
interface design.

PhotoDisc. PhotoDisc is a leading distributor of digital stock photography
for the marketing, publishing and multimedia markets. In October 1995,
PhotoDisc introduced PhotoDisc Online, a custom application based on OneServer
that supports a fully-automated sales and distribution channel over the
Internet for its digital photographs. The application features a searchable
database of more than 15,000 images representing 60,000 individual resolutions
organized in multiple catalogs. PhotoDisc customers may browse individual
catalogs, or search by categories or text description in each or all catalogs.
Customers can select, download and license photos and images. Purchases can be
made online using a PhotoDisc account or by credit card. The system also
provides for promotional campaigns and new customer registration. PhotoDisc
Online was launched in October 1995. The PhotoDisc site has won multiple
awards, including USA Today Web Site of the Week and a NewMedia INVISION Gold
Award. The Company and PhotoDisc have entered into a software license
agreement pursuant to which PhotoDisc received a non-exclusive, non-
transferable, perpetual license to use OneServer on a designated platform in
exchange for paying certain one-time license fees to CONNECT. The agreement
also provides for additional fees to be paid for optional training, software
support and other professional services.

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<PAGE>

Fruit of the Loom. Fruit of the Loom, a leading apparel manufacturer,
selected OneServer as the platform to implement a secure Web-based order
management application for its Activewear Division. Fruit of the Loom intends
to establish Web sites and order management applications built on OneServer
for 45 of its largest distributors. These Web sites are designed to enable
30,000 screen shops to order Fruit of the Loom and other apparel makers'
products from these distributors 24 hours a day, seven days a week. The
application is intended to support complex, multi-line orders and inventory
checks; recommend substitutions for out-of-stock items; conduct a multi-
warehouse search by zip code; and incorporate customer-specific considerations
based on customer profiles and buying histories. The system is being designed
to capture incremental revenue and more closely link Fruit of the Loom to its
distributors. Fruit of the Loom's application has operated commercially since
June 15, 1996. See "Certain Relationships and Related Transactions." The
Company and Fruit of the Loom have entered into a software license agreement
pursuant to which Fruit of the Loom received a non-exclusive, non-
transferable, perpetual license to use OneServer on a designated platform in
exchange for paying certain one-time license fees to CONNECT. The agreement
also provides for additional fees to be paid for optional training, software
support and other professional services.

ENTEX Information Services. ENTEX Information Services is a provider of
computer and network products and related services. In a major initiative to
provide additional value-added services to its corporate customers, ENTEX has
retained CONNECT to develop a virtual sales channel for its customers using a
pre-release version of the Company's OrderStream product. ENTEX will provide
information on its 20,000 computer and technology products over the Internet,
enabling ENTEX's business customers to directly order products and services.
The ENTEX application will provide online catalogs tailored to each customer.
The application automates ENTEX's order capture and provides services that
assist ENTEX's customers in managing the purchase process. ENTEX expects to
launch the application in late 1996. The Company and ENTEX have entered into a
software license agreement pursuant to which ENTEX received a non-exclusive,
non-transferable, perpetual license to use OrderStream on a designated
platform in exchange for paying certain one-time license fees to CONNECT. The
agreement also provides that for a fixed fee CONNECT will perform
implementation services for ENTEX in connection with ENTEX's deployment of
OrderStream. The agreement provides for additional fees to be paid for
optional training, software support and other professional services.

Time Warner Cable Programming, Digital Marketing Group--DreamShop. Time
Warner Cable is using the OneServer application to develop an advanced
transactional platform that supports DreamShop, Time Warner Cable's upscale
digital shopping mall. The DreamShop platform expects to relaunch with 20 to
25 merchants, including Eddie Bauer, Sharper Image and Spiegel, with plans to
expand. The new DreamShop will allow consumers to shop for products from
multiple retailers and to purchase the products online in a single
transaction. Time Warner Cable expects to launch the DreamShop transactional
platform in September 1996. The Company and Time Warner Cable have entered
into a software development and license agreement pursuant to which Time
Warner Cable received a non-exclusive, non-transferable, perpetual license to
use OneServer on a designated platform in exchange for paying certain one-time
license fees to Connect. The agreement also provides that for a fixed fee
Connect will perform implementation and custom software development services
for Time Warner Cable in connection with the deployment of DreamShop. The
agreement provides for additional fees to be paid for optional training,
software support and other professional services.

There can be no assurance that the applications that have not yet been
implemented will be deployed on a timely basis. Delays on implementation could
have an adverse effect on the Company's revenues and results of operations.
See "Risk Factors--Risks Associated with Complex Software Products; Lengthy
Sales and Implementation Cycles."

During 1995, AT&T accounted for 52% of the Company's revenue pursuant to a
contract software development project. During the first six months of 1996,
Fruit of the Loom, Time Warner Cable and HandsNet, Inc., accounted for 25%,
17% and 11%, respectively, of the Company's revenue. No other customer
accounted for more than 10% of the Company's revenue in any such period.

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<PAGE>

TECHNOLOGY

The Company's technology represents a third generation software architecture
based on the Company's experience in the online services market. The Company's
software architecture is comprised of six tightly integrated layers:

[DIGITIZED ARTWORK OF MULTI-LAYER ARCHITECTURE]

Client Support. OneServer works with leading Web browsers and supports
HTML and Web standards such as HTTP (Hypertext Transfer Protocol) and SSL
(Secure Sockets Layer), an encryption-based security protocol. In addition,
for more complex applications, OneServer supports Microsoft's Visual Basic
and Visual C++ programming languages, as well as Sun Microsystems' Java, a
network-specific programming language.

HTML Template Engine. The OneServer HTML Template Engine separates the
management of database content from the presentation format. The HTML
Template Engine combined with the Object Manager reduces the amount of
custom code and CGI (Common Gateway Interface, a standard for interfacing
external applications with information servers) scripting needed to
dynamically create HTML pages, thereby improving time to market, lowering
maintenance costs and improving system performance.

Transaction Manager. OneServer's Transaction Manager offers robust
security and authentication protection. The Transaction Manager features
multi-processing and multi-threading, thereby enabling OneServer and
OrderStream to scale across multiple processors to accommodate large
numbers of purchasers, products and transactions. In addition, the
Transaction Manager ensures application-wide data consistency regardless of
data type (e.g., text, graphic and structured), and includes the Company's
RAMP (Reprioritizable Asynchronous Multi-threaded Protocol), a
client/server protocol for handling transactions, as well as a transaction
dispatcher and monitor.

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<PAGE>

Business Objects. OneServer includes pre-packaged business functionality
or objects designed for use in interactive commerce. Customers can extend
these objects or build new objects quickly and easily to match precise
business requirements. The pre-packaged objects support common sales and
marketing and other business functions including user registration,
advertising, multimedia catalog and content management, dynamic
merchandising, browsing and searching, order management, security and
authorization, transaction processing, enterprise integration and system
administration.

Object Manager. The OneServer Object Manager defines and manages objects
thereby extending the capabilities of the Oracle 7 database to handle
custom and predefined objects, including multimedia objects. These
capabilities are designed to allow customers to create robust, complex and
flexible data models. The Object Manager hides storage and access
complexities, allowing the customer to focus on automating business
processes. The Object Manager allows objects to be extended by inheriting
characteristics from multiple parent objects, reducing data redundancies
and extraneous coding requirements. An object's attributes can be accessed
through the Internet-based URL reference instead of custom code.

Industry Standard Technology. OneServer incorporates industry-leading
technology as part of its architecture, including the Oracle 7 relational
database management system, the Fulcrum text search engine and RSA
encryption. The tight integration between the Oracle 7 database and
OneServer results in increased system performance and transaction capacity.
The Company's software applications run on the HP-UX 10 and Sun Solaris
2.4/2.5 versions of the UNIX operating system.

MARKETING AND SALES

CONNECT's marketing efforts are focused on increasing awareness of CONNECT
and its products in selected target markets, and positioning CONNECT as a
leading interactive commerce software provider. CONNECT marketing programs
have three primary goals: market education and awareness, sales effectiveness
and product management. The Company's market education and awareness
activities include seminars, speaking engagements and sponsorship of market
studies by leading industry analysts. In addition, CONNECT utilizes direct
mail, public relations, trade shows, telemarketing and innovative sales tools
to disseminate its marketing message and improve sales effectiveness.
CONNECT's product management staff works with customers and industry experts
to ensure that the Company's products will satisfy market requirements.

The Company currently sells its products and related services using two
channels: a direct sales model and a "leveraged" direct sales model (using
leads referred by Solution Partners). The Company's selling efforts generally
focus on senior level executives in large corporations. The Company intends to
expand distribution of its OneServer product in the future to include indirect
sales channels, such as value-added resellers (VARs). In addition, the Company
engages in joint marketing efforts with Fruit of the Loom.

The Company markets and sells its products and services through an
organization consisting of 32 employees as of June 30, 1996, based at the
Company's corporate office in Mountain View, California, and offices in Lisle,
Illinois and Stamford, Connecticut. Currently, all international sales
activity is coordinated through the Company's headquarters.

SOLUTION PARTNERS

A key element of the Company's strategy is to continue to expand its
strategic alliances with Solution Partners. The Company believes that such
relationships promote the visibility of the OneServer application and enable
the Company to supplement its core products and services to provide a complete
solution. The Company's Solution Partners can be segmented into the following
four categories:

Technology Providers. CONNECT has incorporated industry-leading software
into its products. The Company licenses and resells software from Oracle
(relational database management system), Fulcrum (text search engine) and RSA
(encryption). The Company also engages in joint marketing activities with
other technology companies, including Hewlett-Packard and Sun Microsystems.

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<PAGE>

Solution Enhancement. CONNECT is working with other companies that offer
additional complementary solution elements. These include First Data
Corporation (payment processing), CyberCash, Inc. (payment processing),
Verisign, Inc. (authentication), Brio Technology, Inc. (reporting tools),
Media Share (content management tools) and BBN Planet Corporation (Internet
access).

Professional Services. CONNECT works with a group of leading professional
services organizations to assist customers in implementing OneServer and
OrderStream. These organizations include Cambridge Technology Partners,
ClearSystems, Inc. Computer Sciences Corporation, Compuware Corporation,
Logica plc, Sage Solutions, Inc. and Sapient Technologies, Inc. These
providers perform services such as business process reengineering and
integration, database design and application development.

Creative Partners. CONNECT works with organizations that specialize in the
creative aspects of developing Web sites. These organizations include CKS
Partners Ltd., Eagle River Interactive Inc., Poppe Tyson Advertising & Public
Relations, Ikonic Interactive Inc., Organic Online, Studio Archetype (formerly
Clement Mok Designs, Inc.) and Thomas Nicholson. These firms frequently are an
important initial contact point for companies exploring interactive commerce
applications and are important sources of referrals for the Company.

RESEARCH AND DEVELOPMENT

Since inception, the Company has made substantial investments in research
and product development. The Company spent $1.6 million in 1993, $1.6 million
in 1994, $4.8 million in 1995 and $2.2 million in the first six months of
1996, and expects to increase research and development expenses in 1996. The
Company's current software products have been developed primarily by its
internal product development staff. A significant portion of the Company's
development efforts during 1994 and 1995 were performed under the Development
Projects. In general, under these Development Projects the Company retained
ownership of the technology being developed subject, in certain cases, to
nonexclusive licenses granted to the Company's customers. The Company's
research and development efforts are currently focused primarily on adding
functionality to the Company's OneServer application and developing new
implementations of OneServer for selected vertical markets. The Company's
research and development staff consisted of 32 employees as of June 30, 1996.
In the future, the Company intends to increase its development staff. The
level of research and development costs will vary, however, depending upon the
amount of development work being performed by the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

The Company's success will depend upon its ability to develop new products
and provide new services that meet changing customer requirements. The market
for the Company's products is characterized by rapidly changing technology,
evolving industry standards and customer requirements, emerging competition
and frequent new product and service introductions. As a result, the Company
may be required to change and improve its products in response to changes in
operating systems, application and networking software, computer and
communications hardware, programming tools and computer language technology.
There can be no assurance that the Company can successfully respond to
changing technology, identify new product opportunities or develop and bring
new products and services to market in a timely manner. Failure of the
Company, for technological or other reasons, to develop and introduce new
products and product enhancements and new services that are compatible with
industry standards and that satisfy customer requirements would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Dependence upon Product Development;
Risks of Technological Change and Evolving Industry Standards."

COMPETITION

The market for interactive commerce software is new, rapidly evolving and
intensely competitive. The Company expects competition to intensify in the
future.

38
<PAGE>

software. In addition, potential customers may elect to develop their own
interactive commerce solutions. The Company's competitors include OMI,
Illustra, BroadVision and Netscape. The Company expects additional competition
from other emerging and established companies, including Microsoft and Oracle,
both of which have announced products for Internet-based electronic commerce.
In addition, in June 1996 Microsoft announced that it has entered into an
agreement to acquire eShop Inc., a provider of software programming tools for
creating electronic commerce applications. The Company's potential competitors
also include a number of successful client/server applications software
companies, such as Baan, PeopleSoft and SAP, and EDI solution vendors,
including Sterling Commerce and GEIS.

The Company believes that rapid implementation of software applications is
critical to success in the Internet-based interactive commerce applications
market. The Company has a limited history in implementing its products and
there can be no assurance that the Company will be able to meet customer needs
and expectations in this regard. Additional competitive factors affecting the
market for the Company's services and software products include vendor and
product reputation, architecture, functionality and features, ease of use,
time-to-market, quality of support, product quality, performance and price.
Based on these factors, the Company believes that it has competed effectively
to date. In order to be successful in the future, the Company must continue to
respond promptly and effectively to the challenges of technical change and
competitors' innovations. Performance in these areas will, in turn, depend
upon the Company's ability to attract and retain highly qualified technical
and sales personnel in a competitive market for experienced and talented
software developers, sales representatives and managers.

PROPRIETARY RIGHTS

39
<PAGE>

in the development of its software will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
Furthermore, there can be no assurance that the Company's efforts to protect
its rights through trademark and copyright laws will not fail to prevent the
development and design by others of products or technology similar to or
competitive with those developed by the Company.

On March 25, 1996, PhotoDisc, one of the Company's licensees of OneServer,
was sued, along with 21 other defendants including AGFA, Axcis, SPC and
others, in the Federal District Court in Connecticut, by E-data. In the
litigation against PhotoDisc, E-data alleges that PhotoDisc is infringing E-
data's U.S. Patent No. 4,528,643 issued July 9, 1985, entitled "System for
Reproducing Information in Material Objects at Point of Sale Location," in
connection with electronic distribution of images on the Internet. E-data has
also sued other defendants including Broderbund, CompuServe, Adobe and others
in the Federal District Court in New York City. PhotoDisc recently tendered
the defense of its E-data litigation to the Company.

The Company is currently reviewing the infringement claims made by E-data
against PhotoDisc. Based upon its initial review of the E-data patent and the
nature of the claims and the Company's indemnity obligations, and after
consultation with counsel, management believes that the resolution of this
matter will not have a material adverse effect on the Company's business,
operating results and financial condition. However, given the early stage of
the litigation and the complex technical issues and uncertainties in patent
litigation, the results of these proceedings, including any potential
settlement, are uncertain and there can be no assurance that E-data will not
prevail in the current litigation or that it will not bring similar claims
against other licensees of the Company. If E-data were to prevail, PhotoDisc
could be required to pay damages to E-data for the infringement of its patent
and enter into a licensing or royalty arrangement in order to continue to
conduct its business in the same manner. There can be no assurance that the
amount of such damages would not be material or that such license or royalty
arrangement would be available on acceptable terms. Under the terms of its
license with PhotoDisc, the Company may be required to defend against the E-
data claim and to indemnify PhotoDisc for some or all of its losses in
connection with the litigation, any settlement or judgement and any ongoing
license or royalty fees. In addition, whether or not the Company were to
prevail in any defense of PhotoDisc, such litigation could be time consuming
and costly to defend.

The Company relies in part on certain technology which it licenses from
third parties, including encryption technology from RSA. RSA is currently in
litigation with Cylink pursuant to which Cylink alleges that RSA's encryption
technology infringes certain Cylink patents and asserts that RSA has no right
to sublicense such technology. If it is determined that RSA is unable to
sublicense this technology to the Company, the Company may be deemed to be
infringing Cylink's patent rights. The Company is unable to predict the
outcome of the dispute between RSA and Cylink, but if the Company were deemed
to be infringing Cylink's patent rights, the Company could be required to pay
damages to Cylink and possibly enter into a royalty or licensing agreement
with Cylink. Such royalty or licensing agreement, if required, may not be
available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition. See "Risk Factors--Dependence upon Proprietary Rights;
Risks of Infringement."

40
<PAGE>

EMPLOYEES

At June 30, 1996, CONNECT employed 130 people full time, of whom 32 were
involved in sales and marketing, 37 were involved in services, 32 were
involved in research and development and 29 were involved in finance,
administration and operations. The Company has not experienced any work
stoppages and considers its employee relations to be good.

FACILITIES

The Company is headquartered in Mountain View, California, where it leases
an aggregate of approximately 30,000 square feet of space which houses
administrative, sales and marketing, customer service and product development
activities. The Company's field operations occupy leased facilities in Lisle,
Illinois (an aggregate of approximately 2,000 square feet) and Stamford,
Connecticut (an aggregate of approximately 2,700 square feet). The Company
believes that its existing facilities are adequate to meet current needs, but
that the Company may need to lease additional space in 1997. There can be no
assurance additional space will be available on reasonable terms.

41
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company as of August 12, 1996:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Gordon J. Bridge 53 Chairman of the Board and
Director
Thomas P. Kehler 49 President, Chief Executive
Officer and Director
Joseph G. Girata 52 Vice President of Finance and
Administration, Chief Financial
Officer and Secretary
Kenneth M. Ross 43 Chief Technical Officer and
Executive Vice President of
Development
Barton S. Foster 31 Vice President of Marketing
Paul A. Lansky 53 Vice President of Operations
Craig D. Norris 48 Vice President of Professional
Services
Patrick D. Quirk 39 Vice President of Sales
Promod Haque(1)(2) 48 Director
Richard H. Lussier 58 Director
Terry R. McGowan 49 Director
Rory T. O'Driscoll(1) 31 Director
Richard W. Weening(2) 50 Director
William B. Welty(2) 54 Director
</TABLE>
- --------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.

Gordon J. Bridge joined the Company in November 1995 as the Chairman of the
Board of Directors. Since November 1995 Mr. Bridge has also served as the
chief business development officer of the Company. Mr. Bridge is also an
Executive Vice President and director of Quaestus Management Corporation
("Quaestus"), a venture capital investment and private equity fund management
company, which funds, collectively, are a principal stockholder of the
Company, although Mr. Bridge does not hold an equity interest in the Quaestus
funds. From 1988 to 1995, Mr. Bridge held executive management positions with
AT&T Corporation, a telecommunications company, including President of AT&T
Computer Systems, President of EasyLink Services, President of AT&T Consumer
Interactive Services and most recently Vice President, Corporate Strategy
responsible for Emerging Services and Products. Prior to joining AT&T
Corporation in 1988, he served for 23 years with IBM Corporation in various
positions, including Vice President of Marketing and Vice President of U.S.
Sales. Mr. Bridge is a director of ARI Network Services, Inc., an electronic
commerce services provider. Mr. Bridge holds a B.A. in Mathematics from
Bradley University.

Thomas P. Kehler joined the Company in July 1992 as the President and Chief
Executive Officer and a member of the Board of Directors. Prior to joining the
Company, from January 1986 to October 1991 he was Chairman and Chief Executive
Officer of IntelliCorp, a software company. Prior to his employment with
IntelliCorp, Mr. Kehler was a manager with Texas Instruments Incorporated, an
electronics manufacturer. Mr. Kehler holds a B.S.E.E., a M.S.E.E. and a Ph.D.
in Electrical Engineering/Applied Physics from Drexel University.

Joseph G. Girata joined the Company in June 1996 as Vice President of
Finance and Administration and Chief Financial Officer. Prior to joining the
Company, Mr. Girata was an independent consultant from September 1995 to June
1996. From September 1994 to August 1995, Mr. Girata was Vice President and
Chief Financial Officer of Wind River Systems, Inc., a software company, and
from October 1989 to August 1994, he was Senior

42
<PAGE>

Vice President and Chief Financial Officer of Walker Interactive Systems,
Inc., a software company. In addition, Mr. Girata has held executive financial
management positions with Data Design Associates, a software company, Atlantic
Financial, a thrift institution holding company, and Signetics Corporation, a
semiconductor company. Mr. Girata holds a B.S. in Finance from California
State University, Hayward and is a Certified Public Accountant.

Kenneth M. Ross joined the Company in July 1993 as Chief Technical Officer
and Executive Vice President of Development. From January 1991 to September
1991, Mr. Ross served as Executive Vice President of Development and
Engineering and as a director at Hunter Systems, a software applications
company, and from September 1991 to July 1993, he was Vice President of
Development and Operations and General Manager of the Software Publishing
Division of Woodside Technologies/UNIX Central, a developer and distributor of
UNIX software tools and utilities. Mr. Ross also held senior management
positions at IntelliCorp from 1983 to 1987, and from 1988 to 1991, he held
several director-level software development management roles at Oracle
Corporation, a software company ("Oracle"). Mr. Ross holds a B.S. in
Mathematics from Massachusetts Institute of Technology and a Ph.D. in
Linguistics from the University of Massachusetts at Amherst.

Barton S. Foster joined the Company in March 1996 as Vice President of
Marketing. Prior to joining the Company, Mr. Foster held various management
positions with Oracle, from July 1994 to March 1996, including Vice President,
Applications and Industry Marketing and Director, Applications Business
Development. Prior to joining Oracle, Mr. Foster held various positions with
Booz, Allen & Hamilton, a management consulting firm, from 1987 to 1994. Mr.
Foster holds a B.A. in Economics and Political Science from Stanford
University and a M.B.A. from the Harvard University Graduate School of
Business.

Paul A. Lansky became Vice President of Operations of the Company in March
1996, after joining the Company in September 1994 as Vice President of Sales.
In addition, from July 1995 to November 1995, Mr. Lansky served as Vice
President of Professional Services, and from December 1995 to March 1996, he
was Vice President of Strategic Accounts of the Company. Prior to joining the
Company, he held various sales management positions with other software
companies, including Vice President of Highland Digital, from June 1994 to
August 1994, and Executive Vice President of Highland Software from April 1992
to March 1994. From September 1991 to March 1992, Mr. Lansky served as Vice
President of Sales of BusinessWise, Inc., a software company. Mr. Lansky holds
a B.S. in Electrical Engineering from the University of Michigan and a M.B.A.
from Wayne State University.

Craig D. Norris joined the Company in January 1996 as Vice President of
Professional Services. Prior to joining the Company, Mr. Norris was a
management consultant with Gemini Consulting Inc., a consulting firm, from
October 1992 to December 1995. From October 1988 to October 1992, Mr. Norris
was Vice President, West Area at Cap Gemini America, a consulting firm. Mr.
Norris holds a B.A. in Economics from Macalester College and a M.B.A. from
Fairleigh Dickenson University.

Patrick D. Quirk joined the Company in July 1995 as Vice President of Sales.
Prior to joining the Company, from May 1993 to May 1995, Mr. Quirk was Vice
President of the Americas at Avalon Software, Inc. From April 1989 to May
1993, Mr. Quirk held several positions with Oracle, including Group Sales
Manager. Prior to his employment with Oracle, from January 1983 to April 1989,
Mr. Quirk was a Global Sales manager of the Yield Management Systems division
of Control Data Corporation, a computer hardware and software company. Mr.
Quirk holds a B.S. in Industrial Engineering from the University of Wisconsin-
Madison.

Promod Haque became a member of the Board of Directors of the Company in
December 1995. Mr. Haque joined Norwest Venture Capital Management, Inc., a
venture capital investment firm, in November 1990 and currently serves as its
Vice President. He is also a partner of two general partnerships that are the
general partners of Norwest Equity Partners V, L.P., a principal stockholder
of the Company. Mr. Haque currently serves as a director of Forte Software,
Inc., Raster Graphics, Inc., Transaction Systems Architects, Inc., Optical
Sensors, Inc., Prism Solutions, Inc. and several privately held companies. Mr.
Haque holds a B.S.E.E. from the University of Delhi, India, and a Ph.D.E.E.
and a M.B.A. from Northwestern University.

43
<PAGE>

Richard H. Lussier became a director of the Company in June 1992. Mr.
Lussier is President and Chief Executive Officer of Siemens Nixdorf
Information Systems Inc., a computer company and a subsidiary of Siemens
Nixdorf Informationssysteme AG ("Siemens"). From November 1986 to March 1995
he was Chairman and Chief Executive Officer of Pyramid Technology Corporation,
a computer company, which was acquired by Siemens in March 1995. Mr. Lussier
holds a B.A. in Economics from College of the Holy Cross and completed
coursework from Boston College Graduate School of Business.

Terry R. McGowan became a director of the Company in May 1993. Since May
1995, Mr. McGowan has been Chief Executive Officer of Action Technologies,
Inc., a software company. From September 1991 to May 1995, he was a management
consultant to computer software companies in the areas of strategy, sales,
marketing and business operations, and from 1984 to September 1991, Mr.
McGowan was employed by KnowledgeWare, Inc., an application development tools
software company. Mr. McGowan served as Vice President of Sales and Marketing
of KnowledgeWare, Inc. until 1985 and then as President and Chief Operating
Officer until his departure in September 1991. Mr. McGowan also is a member of
the Board of Directors of Boole & Babbage, Inc., a software company. Mr.
McGowan holds a B.S. in Political Science and Economics from the University of
Southern Mississippi.

Rory T. O'Driscoll became a member of the Board of Directors of the Company
in December 1995. Mr. O'Driscoll is a Principal of BankAmerica Ventures, a
venture capital firm, and a General Partner of BA Venture Partners I. Prior to
joining BankAmerica Ventures in September 1993, Mr. O'Driscoll served in the
Corporate Development department of BankAmerica Corporation from March 1992 to
September 1993. Before his employment with BankAmerica Corporation, he worked
as a financial advisor to a number of privately-held companies in the United
Kingdom from March 1991 to December 1991. Mr. O'Driscoll also serves as a
director of several private companies. Mr. O'Driscoll holds a B.Sc. in
Economics from the London School of Economics.

Richard W. Weening became a member of the Board of Directors of the Company
in March 1992. Since 1990, Mr. Weening has served as Chief Executive Officer
and Chairman of Quaestus. Previously, from 1981 to 1989, Mr. Weening was
President and Chief Executive Officer of AgriData Resources Inc., a business
information magazine and newsletter publishing company, and from 1972 to 1985,
he was President and Publisher of Raintree Publishers Inc., a multimedia
educational publishing company. In addition, Mr. Weening is currently
President and Chief Executive Officer of RPI Holdings Inc. ("RPI"), the
managing general partner of Quaestus Limited Partnership, a principal
stockholder of the Company. Mr. Weening currently serves as Chairman of the
Board and a director of ARI Network Services, Inc., and several other private
information services and media companies. Mr. Weening holds a B.A. in
Economics and Philosophy from St. John's University.

William B. Welty became a member of the Board of Directors of the Company in
July 1994. Since August 1988, Mr. Welty has been a stockholder of the General
Partner of Volpe, Welty & Company, an investment banking firm, and since
January 1993, has been the Chief Executive Officer of Volpe Welty Asset
Management, L.L.C. Mr. Welty is also a member of the Board of Directors of
Macromedia, Inc., a multimedia software company. Mr. Welty is also a director
of Action Technologies, Inc. and several other private companies. Mr. Welty
holds a B.S. in Industrial Engineering and a B.S. in Business Administration
from Iowa State University.

BOARD COMPOSITION

Mr. Kehler was elected by the holders of the Company's Common Stock pursuant
to the Company's Restated Certificate of Incorporation. Messrs. Bridge, Haque,
Lussier, McGowan, Weening, Welty and O'Driscoll were elected by the holders of
the Company's Preferred Stock pursuant to the Company's Restated Certificate
of Incorporation and a certain Amended Stockholders Agreement dated as of July
3, 1996. See "Certain Relationships and Related Transactions."

44
<PAGE>

will provide for the Board of Directors to be divided into two classes, each
with staggered two-year terms: Class I, whose term will expire at the annual
meeting following the annual meeting of stockholders when the Company shall
have had at least 800 stockholders; and Class II, whose term will expire at
the annual meeting the following year. As a result, only one class of
directors will be elected at each annual meeting of stockholders of the
Company, with the other class continuing for the remainder of its respective
two-year term. Upon the division of the Board of Directors into two classes,
stockholders shall no longer have cumulative voting rights and the Company's
stockholders representing a majority of the shares of Common Stock outstanding
will be able to elect all of the directors. These provisions in the Company's
Restated Certificate of Incorporation may have the effect of delaying or
preventing changes in control or management of the Company. See "Description
of Capital Stock--Delaware Anti-Takeover Law and Certain Charter Provisions."

The officers of the Company are appointed annually and serve at the
discretion of the Board of Directors. Each of the Company's officers and
directors, other than nonemployee directors, devotes substantially full time
to the affairs of the Company. The Company's nonemployee directors devote such
time to the affairs of the Company as is necessary to discharge their duties.

BOARD COMMITTEES

The Compensation Committee of the Board of Directors makes recommendations
concerning salaries and incentive compensation for employees of the Company
and administers the Company's stock plans and determines the terms and
conditions of stock option grants. The Audit Committee of the Board of
Directors reviews the results and scope of the audit and other services
provided by the Company's independent auditors and supervises the Company's
finance and accounting functions.

DIRECTOR COMPENSATION

The Company's non-employee directors will be eligible to receive stock
option grants pursuant to the Company's 1996 Directors' Stock Option Plan and
1996 Stock Option Plan. Directors do not otherwise receive compensation for
their service as directors, except that non-employee directors are reimbursed
for out-of-pocket expenses incurred in connection with attendance at meetings
of the Board of Directors and its committees. See "--Stock Plans--1996
Directors' Stock Option Plan."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The following transactions have occurred between the Company and members of
the Company's Compensation Committee, or their affiliates:

Gordon J. Bridge, the Chairman of the Board of Directors, is Executive Vice
President and a director of Quaestus, and Richard W. Weening, a director of
the Company, is President, Chief Executive Officer and a director of Quaestus.
In addition, Charles Wright, a former director of the Company, is Vice
President and a director of Quaestus. Quaestus is the managing general partner
of Quaestus Partner Fund and Network Partners. In addition, RPI Holdings,
Inc., of which Mr. Weening is the President and Chief Executive Officer, is
the managing general partner of Quaestus Limited Partnership, ("QLP") which,
collectively with Quaestus Partner Fund and Network Partners, is the principal
stockholder of the Company. Quaestus is the manager of QLP pursuant to a
contractual agreement with RPI.

William B. Welty, a director of the Company, is a stockholder of the General
Partner of Volpe, Welty & Company, one of the representatives of the
Underwriters, and a General Partner of Volpe, Welty & Company Hybrid Fund I,
Volpe, Welty & Company Hybrid Fund II and Volpe, Welty & Company Hybrid Fund I
SLP (collectively the "Volpe, Welty Funds"), which are collectively a
principal stockholder of the Company.

Since the beginning of the fiscal year ended December 31, 1993, the Company
has issued to Quaestus Partner Fund, Network Partners and QLP (collectively,
the "Quaestus Funds") shares of Series D, Series E and

45
<PAGE>

Series F Preferred Stock which are convertible into an aggregate of 1,703,762
shares, 320,000 shares and 2,803,010 shares, respectively, of Common Stock.
During the same period, the Company has issued to the Volpe, Welty Funds
shares of Series E and Series F Preferred Stock which are convertible into an
aggregate of 319,999 shares and 2,132,151 shares, respectively, of Common
Stock.

On June 10, 1994, the Company issued to QLP, Mr. Weening and other
individuals affiliated with QLP, warrants which are exercisable for Series E
Preferred Stock convertible into an aggregate of 84,000 shares of Common Stock
at an exercise price of $3.13 (on an as-converted basis) for services rendered
in connection with the Company's private placement of Series E Preferred
Stock.

From March 1995 to November 1995, the Company issued Convertible
Subordinated Secured Notes to Network Partners and the Volpe, Welty Funds in
the aggregate principal amounts of $6,599,100 and $5,401,000, respectively.
The outstanding principal amount and accrued interest under such notes were
converted into shares of Series F Preferred Stock on December 27, 1995. In
connection with the Note Purchase Agreement dated March 10, 1995, pursuant to
which these notes were issued, an aggregate of $128,982 in commitment fees was
paid to Quaestus and Volpe, Welty & Company.

On March 9, 1992, the Company entered into a consulting agreement with QLP,
pursuant to which personnel of QLP would provide up to ten hours per week of
business and financial planning consulting services. This agreement provides
for the payment of a monthly fee of $6,500 plus reimbursement of out-of-pocket
expenses, and terminates on March 31, 1997 unless terminated earlier by QLP.
Any services performed by personnel of QLP in the capacity of a member of the
Board of Directors of the Company do not constitute services rendered under
the agreement. This agreement has been assigned by QLP to Quaestus, its
manager, and services under the agreement have been and are performed by
personnel of Quaestus. During the year ended 1995, the Company paid $184,500
for additional consulting services rendered by Quaestus, in addition to
amounts owed pursuant to the agreement.

In December 1995, the Company issued to Volpe, Welty & Company a warrant to
purchase 56,818 shares of Common Stock at an exercise price of $2.64 per share
and paid a placement fee of $375,000 for services rendered in connection with
the Company's private placement of Series F Preferred Stock in December 1995.

On February 6, 1996, the Company entered into a software license agreement
with ARI, pursuant to which ARI will pay an aggregate of $97,287 in license
fees to the Company. Messrs. Bridge and Weening both serve as directors of
ARI.

Promod Haque, a director of the Company, is a Vice President of Norwest
Venture Capital Management, Inc. and a general partner of two general
partnerships that are the general partners of Norwest Equity Partners V,
L.L.P. Norwest Equity Partners V, L.L.P. and certain of its affiliated
entities will purchase an aggregate of 100,000 shares in this offering. See
"Certain Relationships and Related Transactions."

46
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth all compensation paid to the Company's Chief
Executive Officer and the Company's four other most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000
during the year ended December 31, 1995 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
--------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Thomas P. Kehler
President and Chief
Executive Officer........... $ 198,520 -- -- --
Michael Muller (1)
General Manager of Corporate
Online Services............. 134,420 -- -- --
Kenneth M. Ross
Chief Technical Officer and
Executive Vice President of
Development................. 135,000 $14,020(2) -- --
Paul A. Lansky
Vice President of
Operations.................. 118,560 -- -- --
Kathleen Gladney (3)
Vice President of
Operations.................. 100,000 11,645(2) -- --
</TABLE>
- --------
(1) As a result of management changes subsequent to December 31, 1995, Mr.
Muller remains an employee of the Company but is no longer an executive
officer of the Company.
(2) Represents 1994 bonus paid in January 1995.
(3) Ms. Gladney resigned from the Company in February 1996.

During the year ended December 31, 1995, no stock options were granted to
the Named Executive Officers. Subsequent to December 31, 1995, the Company has
granted options to the Named Executive Officers as follows (all of the options
described below are immediately exercisable for all option shares; however,
any shares issuable upon exercise of such options are subject to vesting
provisions):

In January 1996 and April 1996, the Company issued to Thomas P. Kehler and
Paul A. Lansky, respectively, options to purchase 375,000 shares and 15,000
shares, respectively, in each case at an exercise price
of $0.50 per share. Pursuant to the terms of these options, 16.7% of the
shares issuable under such options vest on the first anniversary of the grant
date, with the remaining shares vesting in equal monthly installments over the
following five years thereafter. However, the vesting schedule of each such
option may be accelerated to a four year vesting schedule upon the achievement
of certain performance objectives.

In January 1996 and April 1996, the Company issued to Kenneth M. Ross
options to purchase 75,000 shares and 50,000 shares, respectively, in each
case at an exercise price of $0.50 per share. Pursuant to the terms of these
options, 25% of the shares issuable under such options vest on the first
anniversary of the grant date, with the remaining shares vesting in equal
monthly installments over the following three years thereafter.

In addition, subsequent to December 31, 1995, the Company has granted
options to certain executive officers who are not named in the Summary
Compensation Table above. In January 1996, the Company granted options to
purchase 95,000 shares and 125,000 shares to Craig D. Norris, Vice President
of Professional Services, and Patrick D. Quirk, Vice President of Sales,
respectively, each at an exercise price of $0.50 per share. In April 1996, the
Company granted an option to purchase 50,000 shares to Mr. Norris at an
exercise price of $0.50 per share. Pursuant to the terms of such options,
2.78% of the shares issuable under such options vest in equal monthly
installments following the grant date. In June 1996, the Company issued an
option to purchase 175,000 shares at

47
<PAGE>

an exercise price of $9.60 per share to Joseph G. Girata, Vice President of
Finance and Administration and Chief Financial Officer. Of the shares issuable
under such option 25% vest on the first anniversary of the vesting
commencement date, with the remaining shares vesting in equal monthly
installments over the three years thereafter. In addition, in April 1996, the
Company granted an option to purchase 197,500 shares to Barton S. Foster, Vice
President of Marketing, at an exercise price of $0.50 per share. 6.25% of the
shares issuable under Mr. Foster's option vest three months following the
grant date, with the remaining shares vesting in equal monthly installments
over the following 45 months.

In January 1996 and April 1996, the Company issued to Gordon J. Bridge,
Chairman of the Board, options to purchase 125,000 shares and 25,000 shares,
respectively, each at an exercise price of $0.50 per share. Pursuant to the
terms of these options, 16.67% of the shares issuable upon exercise of each
such option vest on the first anniversary of the grant date, with the
remaining shares vesting in equal monthly installments over the following five
years; provided, however, that such vesting schedules may be accelerated to a
total of four years upon the achievement of certain performance objectives.

In June 1996, Henry V. Morgan, the former Executive Vice President of
Finance and Administration and Chief Financial Officer of the Company,
resigned as an officer of the Company pursuant to an agreement between the
Company and Mr. Morgan. Under this agreement, Mr. Morgan's employment with the
Company shall terminate no later than November 15, 1996. In addition, the
Company has agreed to accelerate vesting with respect to 15,000 option shares
held by Mr. Morgan, provided that such accelerated options shall be forfeited
if Mr. Morgan voluntarily terminates his employment prior to August 15, 1996.
If Mr. Morgan is an employee of the Company on August 15, 1996, vesting shall
accelerate on an additional 5,000 option shares. However, for each month or
portion thereof that Mr. Morgan remains an employee of the Company after
August 15, 1996, 1,667 of the 5,000 additional accelerated option shares shall
be canceled or forfeited.

The following table sets forth certain information as of December 31, 1995
and for the year then ended with respect to stock options exercised by the
Named Executive Officers.

AGGREGATED OPTIONS IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
YEAR-END YEAR-END(1)
SHARES ---------------- ----------------
ACQUIRED VALUE EXERCISABLE / EXERCISABLE /
NAME ON EXERCISE REALIZED(1) UNEXERCISABLE(2) UNEXERCISABLE(2)
---- ----------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Thomas P. Kehler........ 20,000 $6,000 203,615/0 $43,908/$0
Michael Muller(3)....... -- -- 0/0 0/ 0
Kenneth M. Ross......... -- -- 118,499/0 24,390/ 0
Paul A. Lansky.......... -- -- 37,000/0 0/ 0
Kathleen Gladney(4)..... -- -- 42,500/0 6,339/ 0
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the underlying
securities at year-end, minus the exercise price. The fair market value of
the Company's Common Stock as of such date was determined to be $0.50 per
share based upon a number of factors, including the Company's book value,
historical and projected financial results, prices of recent sales of the
Company's Preferred Stock, and the status and uncertainties associated
with recent and planned product introductions. The Company did not find it
practicable to, and did not attempt to, assign relative weights to the
factors underlying this determination.
(2) These stock options, which were granted under the 1989 Stock Option Plan,
are immediately exercisable for all option shares; however, any shares
purchased upon exercise of such options are subject to repurchase by the
Company at the original exercise price per share upon the termination of
the optionee's employment with the Company. The vesting schedule for each
option is determined by the Administrator of the 1989 Stock Option Plan.

48
<PAGE>

(3) As a result of management changes subsequent to December 31, 1995, Mr.
Muller remains an employee of the Company but is no longer an executive
officer of the Company.
(4) Ms. Gladney resigned from the Company in February 1996.

STOCK PLANS

1989 Stock Option Plan

The Company's 1989 Stock Option Plan (the "1989 Option Plan") provides for
the granting to employees (including officers and employee directors) of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and for the granting to
employees and consultants (including nonemployee directors) of nonstatutory
stock options. 2,700,000 shares of Common Stock have been authorized for
issuance under the 1989 Option Plan. The 1989 Option Plan is administered by
the Board of Directors or a committee of the Board (the "Administrator"). As
of August 12, 1996 options to purchase a total of 316,052 shares of Common
Stock had been exercised and options to purchase a total of 2,284,056 shares
were outstanding. The Company does not intend to issue any additional options
under the 1989 Option Plan. The term of a stock option may not exceed ten
years. Options granted to each employee, consultant or director under the 1989
Option Plan generally are immediately exercisable, and the shares purchasable
under such options are subject to repurchase by the Company at their original
exercise price, which repurchase rights lapse in a series of installments
determined by the Administrator, which generally are at the rate of 25% of the
total number of shares one year from the date of grant, and approximately
2.08% each month thereafter, subject to continued service as an employee,
consultant or director. The exercise price of all incentive stock options
granted under the 1989 Option Plan must be at least equal to the fair market
value of the Common Stock of the Company on the date of grant. The exercise
price of all nonstatutory stock options must equal at least 85% of the fair
market value of the Common Stock on the date of grant. The exercise price of
any incentive stock option granted to an optionee who owns stock representing
more than 10% of the voting power of the Company's outstanding capital stock
(a "10% Stockholder") must equal at least 110% of the fair market value of the
Common Stock on the date of grant. Payment of the exercise price may be made
in cash, promissory notes or other consideration determined by the Board of
Directors or a committee of the Board of Directors. If the Company
consolidates or merges with or into another corporation, each option shall be
assumed or an equivalent option substituted by the successor corporation,
unless the Board of Directors makes the option fully exercisable in lieu of
such assumption or substitution in which case each option will be fully
exercisable for 15 days from the date of notice of such acceleration. The
Board of Directors or a committee thereof may terminate or amend the 1989
Option Plan at any time.

1996 Stock Option Plan

The Company's 1996 Stock Option Plan (the "1996 Option Plan") was adopted by
the Board of Directors and stockholders in April 1996. An aggregate of
2,500,000 shares of the Company's Common Stock are reserved for issuance under
the 1996 Option Plan. As of August 12, 1996 no options issued under the 1996
Option Plan had been exercised and options to purchase a total of 853,750 were
outstanding.

The purposes of the 1996 Option Plan are to attract and retain the best
available personnel for positions of substantial responsibility to the
Company, to provide such persons with additional incentive and to promote the
success of the Company's business. The 1996 Option Plan provides for the
granting to employees (including officers and employee directors) of
"incentive stock options" within the meaning of Section 422 of the Code, and
for the granting to employees, non-employee directors and consultants of
nonstatutory stock options. However, to the extent an optionee would have the
right in any calendar year to exercise for the first time one or more
incentive stock options for shares having an aggregate fair market value
(under all plans of the Company and determined for each share as of the date
the option to purchase the share was granted) in excess of $100,000, any such
excess options shall be treated as nonstatutory stock options. The 1996 Option
Plan provides that the maximum number of shares which may be granted to any
optionee during any fiscal year shall be 1,000,000, subject to adjustment as
provided in the 1996 Option Plan.

49
<PAGE>

The 1996 Option Plan may be administered by the Board of Directors or a
committee of the Board (the "Administrator"). The Administrator determines the
terms of options granted under the 1996 Option Plan, including the number of
shares subject to the option, exercise price, term and exercisability. The
exercise price of all incentive stock options granted under the 1996 Option
Plan must be at least equal to the fair market value of the Common Stock of
the Company on the date of grant. The exercise price of any incentive stock
option granted to an optionee who owns stock representing more than 10% of the
voting power of the Company's outstanding capital stock (a "10% Stockholder")
must equal at least 110% of the fair market value of the Common Stock on the
date of grant. Payment of the exercise price may be made in cash, promissory
notes or other consideration determined by the Administrator.

The Administrator determines the term of options. The term of an incentive
stock option may not exceed ten years, or five years in the case of a 10%
Stockholder. No option may be transferred by the optionee other than by will
or the laws of descent or distribution. Each option may be exercised during
the lifetime of the optionee only by such optionee. The Administrator
determines when options become exercisable. Options granted to each employee
under the Stock Option Plan generally are immediately exercisable, and the
shares purchasable under such options are subject to repurchase by the Company
at their original exercise price, which repurchase rights lapse in a series of
installments determined by the Administrator, which generally are at the rate
of 25% of the total number of shares one year from the date of grant, and
approximately 2.08% each month thereafter.

If the Company consolidates or merges with or into another corporation, then
each option will be assumed or an equivalent option substituted by the
successor corporation, unless the Administrator determines, in the exercise of
its sole discretion, that each option will accelerate in connection with such
transaction, in which case each option will be exercisable for 30 days from
notice of such acceleration. The Administrator has the authority to amend or
terminate the 1996 Option Plan as long as such action does not adversely
affect any outstanding option and provided that stockholder approval may be
required to the extent necessary for the 1996 Option Plan to be qualified
under Rule 16b-3 of the Securities Exchange Act of 1934 and certain provisions
of the Code. If not terminated earlier, the 1996 Option Plan will terminate in
2006.

1996 Employee Stock Purchase Plan

The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in June 1996 and was approved by the
Company's stockholders in June 1996. A total of 500,000 shares of Common Stock
has been reserved for issuance under the Purchase Plan. The Purchase Plan,
which is intended to qualify under Section 423 of the Code, generally will be
implemented in a series of offering periods of 24 months duration with new
offering periods (other than the first offering period) commencing on or about
February 16 and August 16 of each year. Each offering period will consist of
four consecutive purchase periods of six months duration, with the last day of
each period being designated a purchase date. The first such offering period
is expected to commence on the effective date of this offering and continue
through August 15, 1998, with the first purchase date occurring on February
15, 1997, and subsequent purchase dates to occur every six months thereafter.
The Purchase Plan will be administered by the Board of Directors or by a
committee appointed by the Board. Employees (including officers and employee
directors) of the Company, or of any majority owned subsidiary designated by
the Board, are eligible to participate if they are employed by the Company or
any such subsidiary for at least 20 hours per week and more than five months
per year. The Purchase Plan permits eligible employees to purchase Common
Stock through payroll deductions, which may not exceed 10% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
the Company's Common Stock at the beginning of the offering period or the
purchase date. If the fair market value of the Common Stock on a purchase date
is less than the fair market value at the beginning of the offering period, a
new 24-month offering period will automatically begin on the first business
day following the purchase date with a new fair market value. Employees may
end their participation in the offering at any time during the offering
period, and participation ends automatically on termination of employment with
the Company. In addition, participants may decrease their level of payroll
deductions once during an offering period.

50
<PAGE>

The Purchase Plan provides that in the event of a merger of the Company with
or into another corporation or a sale of substantially all of the Company's
assets, each right to purchase stock under the plan will be assumed or an
equivalent right substituted by the successor corporation unless the Board of
Directors shortens the offering period so that employees' rights to purchase
stock under the plan are exercised prior to the merger or sale of assets. The
Board of Directors has the power to amend or terminate the Purchase Plan as
long as such action does not adversely affect any outstanding rights to
purchase stock thereunder and provided that stockholder approval may be
required to the extent necessary for the Purchase Plan to be qualified under
Rule 16b-3 of the Securities Exchange Act of 1934 and certain provisions of
the Code. If not terminated earlier, the Purchase Plan will have a term of 20
years.

1996 Directors' Stock Option Plan

The 1996 Directors' Stock Option Plan (the "Directors' Plan") was adopted by
the Board of Directors in June 1996 and was approved by the Company's
stockholders in June 1996. A total of 250,000 shares of Common Stock has been
reserved for issuance under the Directors' Plan. The Directors' Plan provides
for the grant of nonstatutory stock options to nonemployee directors of the
Company. The Directors' Plan is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the Board of Directors.

The Directors' Plan provides that each person who first becomes a
nonemployee director of the Company after the date of effectiveness of this
offering will be granted an option to purchase 20,000 shares of Common Stock
(a "First Option") on the date on which the optionee first becomes a
nonemployee director of the Company. Thereafter, on the date of each Annual
Meeting of the Company's stockholders following which a nonemployee director
is serving on the Board of Directors, each such nonemployee director will be
granted an option to purchase 5,000 shares of Common Stock, provided that on
such date, he or she shall have served on the Company's Board of Directors for
at least six months prior to the date of such Annual Meeting.

The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any grant and the method
of making a grant. No option granted under the Directors' Plan is transferable
by the optionee other than by will or the laws of descent or distribution or
pursuant to a qualified domestic relations order (as defined in the Code), and
each option is exercisable, during the lifetime of the optionee, only by such
optionee. The Directors' Plan provides that each First Option granted
thereunder becomes exercisable in equal installments on the first four
anniversaries of the grant date and that each subsequent option becomes
exercisable in full on the first anniversary of the date of grant. The
exercise price of all stock options granted under the Directors' Plan will be
equal to the fair market value of a share of the Company's Common Stock on the
date of grant of the option, which is defined to be the closing price of the
Company's Common Stock on the Nasdaq National Market on such date. Options
granted under the Directors' Plan have a term of 10 years.

In the event of the dissolution or liquidation of the Company, a sale of all
or substantially all of the assets of the Company, the merger of the Company
with or into another corporation in which more than 50% of the shares of the
Company entitled to vote are exchanged, each nonemployee director shall have
either (i) a reasonable time within which to exercise the option, including
any part of the option that would not otherwise be exercisable, prior to the
effectiveness of such dissolution, liquidation, sale, merger or
reorganization, at the end of which time the option shall terminate, or (ii)
the right to exercise the option, including any part that would not otherwise
be exercisable, or receive a substitute option with comparable terms, as to an
equivalent number of shares of stock of the corporation succeeding the Company
or acquiring its business by reason of such dissolution, liquidation, sale,
merger or reorganization. The Board of Directors may amend or terminate the
Directors' Plan; provided, however, that no such action may adversely affect
any outstanding option, and the provisions regarding the grant of options
under the plan may be amended only once in any six-month period, other than to
comport with changes in the tax laws or the Employee Retirement Income
Security Act of 1974, as amended. If not terminated earlier, the Directors'
Plan will have a term of 10 years.

51
<PAGE>

Repricing of Options Granted under 1989 Stock Option Plan

On December 14, 1995, the Board of Directors approved the repricing of
certain options outstanding under the 1989 Stock Option Plan. Pursuant to this
option repricing program, the Company offered to all optionees (including
executive officers and directors) holding outstanding options under the
Company's 1989 Stock Option Plan the opportunity to exchange options with an
exercise price exceeding $0.50 per share for new stock options with an
exercise price of $0.50 per share (which was the fair market value per share
of the Company's Common Stock as determined by the Board of Directors on the
date of the Board of Director's action). All other terms of the new stock
options remained substantially the same as the surrendered options (including
number of shares, vesting and expiration date). Options representing an
aggregate of 386,018 shares of Common Stock were repriced pursuant to this
program.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

In connection with the reincorporation of the Company in Delaware, the
Company has adopted provisions in its Restated Certificate of Incorporation
that limit the liability of its directors for monetary damages arising from a
breach of their fiduciary duty as directors to the fullest extent permitted by
the Delaware General Corporation Law. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission. The limitation of monetary liability also does not apply to
liabilities arising under the federal securities laws.

The Company's Bylaws provide that the Company will indemnify its directors
and officers under certain circumstances, including circumstances in which
indemnification may otherwise be discretionary under Delaware law. The Company
intends to enter into indemnification agreements with its officers and
directors containing provisions which are in some respects broader than the
specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require the Company, among
other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a
culpable nature) and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted.

EMPLOYMENT AGREEMENTS

On October 19, 1995, the Company entered into a letter agreement with Gordon
J. Bridge to offer Mr. Bridge the position of Chairman of the Board of
Directors, which provides that Mr. Bridge will receive an annual base salary
of $150,000 and an option to purchase 195,000 shares of Common Stock of the
Company for his services as Chairman of the Board of Directors and business
development services. This agreement also provides that, in the event that Mr.
Bridge is terminated by the Company from such position without cause, he will
receive one year's salary plus any bonuses that the Compensation Committee
determines are due to him. On January 1, 1996 and April 24, 1996, Mr. Bridge
was granted additional options of 125,000 shares and 25,000 shares,
respectively. If such termination occurs prior to November 1, 1996, 50% of the
unvested portion of such options to purchase an aggregate of 345,000 shares
will become vested, and if such termination occurs on or after November 1,
1996, 100% of the unvested portion of such stock options will become vested.
In addition, in the event of a change of control of the Company, 100% of the
unvested portion of such options to purchase an aggregate of 345,000 shares
will become vested.

52
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain stock option grants to directors and executive officers of the
Company are described herein under the caption "Management--Executive
Compensation."

The Company's Restated Certificate of Incorporation filed in connection with
the reincorporation of the Company in Delaware provides that the holders of
the Company's Common Stock, voting together as a single class, have the right
to elect two members of the Company's Board of Directors, and the holders of
the Company's Preferred Stock, voting together as a single class, have the
right to elect the remaining eight members of the Company's Board of
Directors. Pursuant to its terms, this provision will expire upon the
completion of the offering. Pursuant to the terms of an Amended Stockholders
Agreement dated as of July 3, 1996 among the Company and certain of its
principal stockholders (the "Stockholders Agreement'), such stockholders have
agreed to cast their votes in any election of directors so as to maintain on
the Board of Directors at all times three directors designated by entities
affiliated with Quaestus Management Corporation and one director designated by
each of the following: entities affiliated with Volpe, Welty & Company,
entities affiliated with BankAmerica Ventures, Norwest Equity Partners, V,
21st Century Communications Partners, L.P. and Michael Muller. Pursuant to its
terms, the Stockholders Agreement will automatically terminate upon the
closing of this offering.

Since the beginning of the fiscal year ended December 31, 1993, the Company
issued, in private placement transactions (collectively, the "Private
Placement Transactions"), shares of Preferred Stock as follows: shares of
Series D Preferred Stock at $2.14 per share in April 1993, July 1993 and
October 1993, convertible into an aggregate of 1,775,253 shares of Common
Stock; shares of Series E Preferred Stock at $3.13 per share in June 1994 and
March 1995, convertible into an aggregate of 899,999 shares of Common Stock;
shares of Series F Preferred Stock at $2.64 per share of Common Stock in
December 1995 and January 1996, convertible into an aggregate of 11,090,612
shares of Common Stock; and shares of Series G Preferred Stock at $11.00 per
share in July 1996, convertible into an aggregate of 272,750 shares of Common
Stock.

The following table summarizes the shares of Preferred Stock purchased by
executive officers, directors and 5% stockholders of the Company and persons
and entities associated with them in the Private Placement Transactions. The
share and per share data below assume the reincorporation of the Company in
Delaware and the automatic conversion of the Company's outstanding Preferred
Stock into Common Stock upon completion of the offering.

<TABLE>
<CAPTION>
SERIES D SERIES E SERIES F
PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK
--------- --------- ---------
ENTITIES AFFILIATED WITH DIRECTORS
<S> <C> <C> <C>
Entities affiliated with BankAmerica Ventures
(Rory T. O'Driscoll)(1)........................ -- -- 1,136,363
Norwest Equity Partners, V (Promod Haque)....... -- -- 1,818,182
Entities affiliated with Quaestus Management
Corporation
(Gordon J. Bridge, Richard W. Weening)(2)...... 1,703,762 320,000 2,803,010
Entities affiliated with Volpe, Welty & Company
(William B. Welty)(3).......................... -- 319,999 2,132,151
<CAPTION>
OTHER 5% STOCKHOLDERS
<S> <C> <C> <C>
RRE Connect Investors, L.P...................... -- -- 1,174,242
Entities affiliated with 21st Century
Communications Partnerships(4)................. -- -- 1,515,150
Michael Muller(5)............................... 71,491 64,000 360,000
</TABLE>
- --------
(1) Includes shares held by BankAmerica Ventures and BA Venture Partners I.
(2) Includes shares held by Quaestus Limited Partnership, Quaestus Partner
Fund and Network Partners.
(3) Includes shares held by Volpe, Welty & Company Hybrid Fund I, Volpe, Welty
& Company Hybrid Fund II and Volpe, Welty & Company Hybrid Fund I SLP.

53
<PAGE>

(4) Includes shares held by 21st Century Communications Partners, L.P., 21st
Century Communications T-E Partners, L.P. and 21st Century Foreign
Communications Partners, L.P.
(5) Includes shares held by Muller Family Trust, Muller Children's Trust,
Muller Family Partners, L.P., Muller Capital, L.P., Erik M. Muller,
Kristofer M. Muller and Marissa J. Muller.

The Company has entered into a number of relationships and transactions with
the entities affiliated with Quaestus Management Corporation and Volpe, Welty
& Company, set forth in the table above. Such relationships and transactions
are described in "Management--Compensation Committee Interlocks and Insider
Participation."

On January 16, 1996 the Board of Directors granted to Thomas P. Kehler, the
Company's President and Chief Executive Officer, and to Gordon J. Bridge, the
Chairman of the Board of Directors, options to purchase 375,000 shares and
125,000 shares, respectively, of Common Stock, each at an exercise price of
$0.50 per share. Pursuant to the terms of these options, 16.67% of the shares
issuable upon exercise of such options vest on the first anniversary of the
grant date, with the remaining shares vesting in equal monthly installments
over the following five years; provided, however, that such vesting schedules
may be accelerated to a total of four years upon the achievement of certain
performance objectives. In addition, on April 24, 1996 the Board of Directors
granted to Mr. Bridge an option to purchase an additional 25,000 shares at an
exercise price of $0.50 per share, with the same vesting provisions as the
foregoing options.

On December 22, 1995 and January 12, 1996 the Company entered into a
software license agreement and software maintenance agreement, respectively,
with First Data Resources ("FDR"), a wholly-owned subsidiary of First Data
Corporation, pursuant to which FDR will pay an aggregate of approximately
$217,280 in software license and maintenance fees. First Data Corporation is a
limited partner of RRE Connect Investors, L.P., a principal stockholder of the
Company.

In connection with the resignation in June 1996 of Henry V. Morgan, the
former Executive Vice President of Finance and Administration and Chief
Financial Officer of the Company, the Company has entered into an agreement
with Mr. Morgan providing for the accelerated vesting of certain stock options
held by Mr. Morgan. See "Management--Executive Compensation."

In July 1996, the Company issued in a private placement 272,750 shares of
Series G Preferred Stock (convertible into an equal number of shares of Common
Stock upon completion of the offering) to a wholly-owned subsidiary of Fruit
of the Loom, one of the Company's customers, for an aggregate purchase price
of $3.0 million.

In addition, BankAmerica Ventures and Norwest Equity Partners V, L.L.P. and
their affiliated entities, and entities affiliated with 21st Century
Communications Partnerships will purchase an aggregate of 240,000 shares in
this offering.

The Company has entered into indemnification agreements with its officers
and directors containing provisions which may require the Company, among other
things, to indemnify its officers and directors against certain liabilities
that may arise by reason of their status or service as officers or directors
(other than liabilities arising from willful misconduct of a culpable nature)
and to advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified.

54
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of August 12, 1996, and
as adjusted to reflect the sale by the Company of the shares offered hereby
and conversion of all outstanding shares of Preferred Stock into shares of
Common Stock upon completion of this offering: (i) by each person known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) by each director of the Company who beneficially owns shares of
Common Stock, (iii) by each of the officers of the Company named under
"Management--Summary Compensation Table," and (iv) by all officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED(1)
------------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OFFERING OFFERING
- --------------------------------------- --------------------- -------- ----------
<S> <C> <C> <C>
Entities affiliated with
Quaestus Management
Corporation(3)............... 6,239,630 37.9% 33.1%
330 E. Kilbourn Avenue
Milwaukee, WI 53202
Entities affiliated with
Volpe, Welty & Company(4).... 2,508,968 15.6% 13.6%
One Maritime Plaza
San Francisco, CA 94111
Norwest Equity Partners V,
L.L.P.(5).................... 1,818,182 11.3% 9.9%
245 Lytton Ave.
Suite 250
Palo Alto, CA 94301
Entities affiliated with 21st
Century Communications
Partnerships(6).............. 1,515,150 9.4% 8.2%
GM Building
767 Fifth Avenue
New York, NY 10153
Michael Muller(7)............. 1,179,099 7.4% 6.4%
RRE Connect Investors, L.P. .. 1,174,242 7.3% 6.4%
126 East 56th St., 22nd Floor
New York, NY 10022
Entities affiliated with
BankAmerica Ventures(8)...... 1,136,363 7.1% 6.2%
950 Tower Lane, Suite 700
Foster City, CA 94404
Gordon J. Bridge(9)........... 345,000 2.1% 1.8%
Promod Haque(5)............... 1,818,182 11.3% 9.9%
Thomas P. Kehler(10).......... 609,864 3.7% 3.2%
Paul A. Lansky(11)............ 56,500 * *
Kathleen Gladney(12).......... 18,988 * *
Richard H. Lussier(13)........ 38,732 * *
Terry R. McGowan(14).......... 39,857 * *
Rory T. O'Driscoll(8)......... 1,136,363 7.1% 6.2%
Kenneth M. Ross(15)........... 243,499 1.5% 1.3%
Richard W. Weening(16)........ 5,884,955 36.5% 31.8%
William B. Welty(4)........... 2,508,968 15.6% 13.6%
All officers and directors as
a group (16 persons)(17).... 14,610,958 80.3% 70.9%
</TABLE>
- --------
* Less than 1%.

55
<PAGE>

(1) Applicable percentage of beneficial ownership is based on 16,036,742
shares of Common Stock outstanding as of August 12, 1996 and 18,436,742
shares of Common Stock outstanding after the completion of the offering,
together with applicable options and warrants for such stockholder.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power. Shares of Common Stock subject to the warrants and
options currently exercisable, or exercisable within 60 days after August
12, 1996, are deemed outstanding for computing the percentage ownership
of the person holding such options, but are not deemed outstanding for
computing the percentage ownership of any other person. Does not reflect
an aggregate of 240,000 shares to be purchased in this offering by
BankAmerica Ventures and Norwest Equity Partners V, L.L.P. and their
affiliated entities and entities affiliated with 21st Century
Communications Partnerships. Unless otherwise indicated, the address of
each of the named individuals is: c/o CONNECT, Inc., 515 Ellis Street,
Mountain View, CA 94043.

(2) To the Company's knowledge, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable and the information contained in the footnotes to this
table.

(3) Includes 4,718,135 shares held by Network Partners, 6,774 shares held by
Quaestus Limited Partnership and 1,094,047 shares held by Quaestus
Partner Fund. Also includes 40,000 shares, 1,999 shares, 345,000 shares,
23,100 shares, 3,375 shares and 6,300 shares issuable upon exercise of
options or warrants held by Network Partners, Quaestus Limited
Partnership, Gordon J. Bridge, Richard W. Weening, Charles Wright and
Terrence J. Leahy, respectively, exercisable within 60 days of August 12,
1996. Mr. Weening is President and Chief Executive Officer and a director
of Quaestus Management Corporation, and Mr. Bridge is Executive Vice
President and a director of Quaestus Management Corporation. Mr. Wright,
a former director of the Company, and Mr. Leahy are both Vice Presidents
and Directors of Quaestus Management Corporation. Quaestus Management
Corporation is the managing general partner of Network Partners and
Quaestus Partner Fund. In addition, Mr. Weening is the President and
Chief Executive Officer of RPI Holdings, Inc., the managing general
partner of Quaestus Limited Partnership, which is managed by Quaestus
Management Corporation. Mr. Weening disclaims beneficial ownership of the
shares held by such entities, except to the extent of his proportionate
interest therein. Mr. Bridge disclaims any beneficial ownership of the
shares held by such entities.

(4) Includes 1,888,707 shares held by Volpe, Welty & Company Hybrid Fund I,
197,946 shares held by Volpe, Welty & Company Hybrid Fund II and 365,497
shares held by Volpe, Welty & Company Hybrid Fund I SLP (collectively,
the "Volpe, Welty Funds"). Also includes 56,818 shares issuable upon
exercise of a warrant to purchase Common Stock held by Volpe, Welty &
Company. William B. Welty is a stockholder of the General Partner of
Volpe, Welty & Company and the fund manager and a general partner of the
Volpe, Welty Funds. Mr. Welty disclaims beneficial ownership of the
shares held by such entities except to the extent of his proportionate
partnership interest therein.

(5) Includes 1,818,182 shares held by Norwest Equity Partners V, L.L.P.
Promod Haque is a Vice President of Norwest Venture Capital Management,
Inc. and a general partner of two general partnerships that are the
general partners of Norwest Equity Partners V, L.L.P. Mr. Haque disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate partnership interest therein.

(6) Includes 1,027,272 shares held by 21st Century Communications Partners,
L.P., 349,621 shares held by 21st Century Communications T-E Partners,
L.P. and 138,257 shares held by 21st Century Foreign Communications
Partners, L.P.

(7) Includes 35,953 shares, 15,357 shares and 15,357 shares held by Michael
Muller's children, Erik M. Muller, Kristofer M. Muller and Marissa J.
Muller, respectively. Mr. Muller disclaims beneficial ownership of such
shares. Also includes 285,491 shares and 83,341 shares held by the Muller
Family Trust and the Muller Children's Trust, respectively, for both of
which Mr. Muller is co-trustee, and 406,100 shares and 337,500 shares
held by Muller Family Partners, L.P. and Muller Capital, L.P.,
respectively, for both of which Mr. Muller is a general partner. Mr.
Muller disclaims beneficial ownership of the shares held by such entities
except to the extent of his proportionate partnership interest in Muller
Family Partners, L.P. and Muller Capital, L.P.

56
<PAGE>

(8) Includes 1,022,727 shares held by BankAmerica Ventures and 113,636 shares
held by BA Venture Partners I. Rory T. O'Driscoll is a Principal of
BankAmerica Ventures and a General Partner of BA Venture Partners I. Mr.
O'Driscoll disclaims beneficial ownership of the shares held by such
entities except to the extent of his proportionate general partnership
interest in BA Venture Partners I.

(9) Includes 345,000 shares issuable upon exercise of stock options
exercisable within 60 days of August 12, 1996. A portion of the shares
issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time.

(10) Includes 31,250 shares issued upon exercise of stock options and 578,614
shares issuable upon exercise of stock options exercisable within 60 days
of August 12, 1996. A portion of the shares issued or issuable upon
exercise of stock options is subject to repurchase by the Company at the
original exercise price in the event of termination of employment, which
repurchase right lapses over time.

(11) Includes 4,500 shares issued upon exercise of stock options and 52,000
shares issuable upon exercise of stock options exercisable within 60 days
of August 12, 1996. A portion of the shares issued or issuable upon
exercise of stock options is subject to repurchase by the Company at the
original exercise price in the event of termination of employment, which
repurchase right lapses over time.

(12) Includes 18,988 shares issued upon exercise of stock options. Ms. Gladney
resigned from the Company in February 1996.

(13) Includes 38,732 shares issuable upon exercise of stock options
exercisable within 60 days of August 12, 1996. A portion of the shares
issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination as a director, which repurchase right lapses over time.

(14) Includes 2,469 shares held directly and 39,857 shares issuable upon
exercise of stock options exercisable within 60 days of August 12, 1996.
A portion of the shares issued or issuable upon exercise of stock options
is subject to repurchase by the Company at the original exercise price in
the event of termination as a director, which repurchase right lapses
over time.

(15) Includes 243,499 shares issuable upon exercise of stock options
exercisable within 60 days of August 12, 1996. A portion of the shares
issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time.

(16) Includes 718,135 shares held by Network Partners, 6,774 shares held by
Quaestus Limited Partnership and 1,094,947 shares held by Quaestus
Partner Fund. Also includes 23,100 shares, 40,000 shares and 1,999 shares
issuable upon exercise of warrants held by Mr. Weening, Network Partners
and Quaestus Limited Partnership, respectively. Mr. Weening disclaims
beneficial ownership of the shares held by the Quaestus Funds, except to
the extent of his proportionate interest therein.

(17) Includes 177,500 shares issued upon exercise of stock options and
1,996,077 shares issuable upon exercise of stock options exercisable
within 60 days of August 12, 1996. A portion of the shares issued or
issuable upon exercise of stock options is subject to repurchase by the
Company at the original exercise price in the event of termination of
employment, which repurchase right lapses over time. Also includes
121,917 shares issuable upon exercise of warrants.

57
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Following the closing of the sale of the shares offered hereby, the
authorized capital stock of the Company will consist of 40,000,000 shares of
Common Stock, $0.001 par value per share, and 10,000,000 shares of Preferred
Stock, $0.001 par value per share. As of August 12, 1996, there were
16,036,742 shares held by 122 record holders of the Company's Common Stock
assuming no exercise of options or warrants after August 12, 1996.

COMMON STOCK

Upon completion of the offering, the holders of Common Stock are entitled to
one vote per share on all matters to be voted upon by the stockholders.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior rights of Preferred Stock, if
any, then outstanding. The Common Stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund
provisions available to the Common Stock. All outstanding shares of Common
Stock are fully paid and non-assessable.

PREFERRED STOCK

Upon completion of the offering, the Company will have 10,000,000 authorized
shares of "blank check" Preferred Stock with such designations, rights and
preferences as may be determined from time to time by the Board of Directors,
without any further vote or action by the stockholders. The rights of the
holders of the Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights, senior to
the Common Stock, and as a result, the issuance of such Preferred Stock could
have a material adverse effect on the market value of the Common Stock.
Although the Company has no present intention to issue any additional shares
of its Preferred Stock, there can be no assurance that the Company will not do
so in the future. See "Delaware Anti-Takeover Law and Certain Charter
Provisions."

WARRANTS

As of August 12, 1996, warrants to purchase 219,155 shares of the Company's
Common Stock were outstanding at a weighted average exercise price of $3.30
per share. These warrants, which were issued primarily in connection with
certain financing transactions, expire on various dates from October 1, 1997
to June 30, 1999. In addition, of these warrants, warrants to purchase an
aggregate of 120,621 shares will terminate upon the completion of the offering
unless exercised prior to closing. The Company expects that substantially all
of these warrants will be exercised.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

The holders of approximately 15,722,384 shares of Common Stock (the
"Registrable Securities") or their transferees are entitled to certain rights
with respect to the registration of such shares under the Securities Act.
These rights are provided under the terms of agreements between the Company
and the holders of Registrable Securities. If at any time, the Company
registers any of its Common Stock, the holders of Registrable Securities are
entitled to include their shares of Common Stock in the registration. A
holder's right to include shares in an underwritten registration is subject to
the ability of the underwriters to limit the number of shares included in the
offering. All registration expenses must be borne by the Company and all
selling expenses relating to Registrable Securities must be borne by the
holders of the securities being registered. In addition, such holders may
require the Company to use its best efforts to file a registration statement
under the Securities Act at the Company's expense with respect to their shares
of Common Stock, subject to certain limitations.

58
<PAGE>

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

Certain provisions of Delaware law and the Company's Restated Certificate of
Incorporation could make more difficult the acquisition of the Company by
means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of the Company to first
negotiate with the Company. The Company believes that the benefits of
increased protection of the Company's potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure
the Company outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in an
improvement of their terms.

The Company will be subject to the provisions of Section 203 of the Delaware
law. In general, the statute prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved
in a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior,
did own) 15% or more of the corporation's voting stock. This provisions may
have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the Company's stockholders.

Commencing at the first annual meeting of stockholders following the annual
meeting of stockholders when the Company shall have had at least 800
stockholders, the Restated Certificate of Incorporation of the Company will
provide for the Board of Directors to be divided into two classes, with
staggered two-year terms. As a result, only one class of directors will be
elected at each annual meeting of stockholders of the Company, with the other
class continuing for the remainder of its respective two-year term.
Thereafter, stockholders shall no longer have cumulative voting rights and the
Company's stockholders representing a majority of the shares of Common Stock
outstanding will be able to elect all of the directors. The classification of
the Board of Directors and elimination of cumulative voting make it more
difficult for the Company's existing stockholders to replace the Board of
Directors as well as for another party to obtain control of the Company by
replacing the Board of Directors. Since the Board of Directors has the power
to retain and discharge officers of the Company, these provisions could also
make it more difficult for existing stockholders or another party to effect a
change in management. See "Management."

Upon completion of the offering, the Company's Restated Certificate of
Incorporation will provide that stockholder action can be taken only at an
annual or special meeting of stockholders and may not be taken by written
consent. The Bylaws provide that special meetings of stockholders can be
called only by the Board of Directors, the Chairman of the Board, if any, the
President of the Company and holders of 10% of the votes entitled to be cast
at a meeting. Moreover, the business permitted to be conducted at any special
meeting of stockholders is limited to the business brought before the meeting
by the Board of Directors, the Chairman of the Board, if any, the President of
the Company or any such 10% holder. The Bylaws set forth an advance notice
procedure with regard to the nomination, other than by or at the direction of
the Board of Directors, of candidates for election as directors and with
regard to business to be brought before a meeting of stockholders of the
Company.

The Company's Restated Certificate of Incorporation contains a provision
requiring the affirmative vote of the holders of at least two-thirds of the
voting stock of the Company to amend the foregoing provisions of the Restated
Certificate of Incorporation and Bylaws.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation. Its telephone number is (800) 835-8778.

59
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 18,436,742 shares of
Common Stock outstanding, assuming no exercise of options or warrants after
August 12, 1996. Of these shares, the 2,400,000 shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 of the Securities Act. The remaining 16,036,742 shares
outstanding upon completion of this offering will be "restricted securities"
as that term is defined under Rule 144 (the "Restricted Shares"). Sales of
Restricted Shares in the public market, or the availability of such shares for
sale, could adversely affect the market price of the Common Stock.

All directors and officers and certain other stockholders of the Company
have agreed with the Underwriters that, for a period of 180 days after the
effective date of the registration statement, they will not offer to sell or
otherwise sell, dispose of or grant rights with respect to any shares of
Common Stock, now owned or hereafter acquired directly by such holders or with
respect to which they have the power of disposition, otherwise than with the
prior written consent of Lehman Brothers Inc. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
will not be salable until the agreements expire. Any early waiver of the lock-
up agreement by the underwriters, which, if granted, could permit sales of a
substantial number of shares and could adversely affect the trading price of
the Company's shares, may not be accompanied by an advance public announcement
by the Company. See "Underwriting."

Taking into account the lock-up agreements, the number of shares that will
be available for sale in the public market under the provisions of Rules 144,
144(k) and 701, including certain shares issuable upon exercise of warrants,
will be as follows: (i) approximately 140,419 Restricted Shares, of which
40,419 shares are issuable upon exercise of warrants, will be eligible for
sale immediately after the effective date of the registration statement, (ii)
approximately 3,876,950 additional Restricted Shares and 240,000 shares which
certain affiliates of the Company will purchase in the offering (as well as an
additional 3,137,806 shares and 178,736 shares issuable upon exercise of
outstanding options and warrants, respectively) will be eligible for sale
beginning 180 days after the effective date of the registration statement,
subject in some cases to certain volume limitations and vesting provisions,
and (iii) the remaining 12,059,792 Restricted Shares will become eligible for
public resale following expiration of the lock-up agreements at various times
over a period of less than two years following the completion of this
offering, subject in some cases to vesting provisions and volume and manner of
sale limitations.

The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule
changes will be enacted. If enacted, such rule change would cause
substantially all of the remaining shares to be eligible for public resale
upon expiration of the 180-day lock-up agreements.

Beginning 90 days after the effective date of the registration statement,
certain shares issued or issuable upon exercise of options granted by the
Company prior to the effective date of the registration statement will also be
eligible for sale in the public market pursuant to Rule 701 under the
Securities Act, subject to pre-existing lockup agreements. In general, Rule
701 permits resales of shares issued pursuant to certain compensatory benefit
plans and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirements, contained in Rule 144.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least two years, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. In addition, a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned for at least three years the
shares proposed to be sold, would be entitled to

60
<PAGE>

sell such shares under Rule 144(k) without regard to the requirements
described above. The Company is unable to estimate accurately the number of
Restricted Shares that will be sold under Rule 144 since this will depend in
part on the market price for the Common Stock, the personal circumstances of
the seller and other factors.

In connection with the offering, the Company intends to file a registration
statement under the Securities Act covering approximately 5,135,109 shares of
Common Stock subject to outstanding options or reserved for issuance under the
1989 and 1996 Option Plans and the Directors' Plan and 500,000 shares of
Common Stock reserved for issuance under the Purchase Plan. Such registration
statement is expected to be filed approximately 180 days after the completion
of this offering. Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations and the lapsing of the
Company's repurchase options, be available for sale in the open market, except
to the extent that such shares are subject to vesting restrictions with the
Company or the contractual restrictions described above. Pursuant to Rule 144
and upon expiration of the two-year holding period, an additional 132,536
shares of Common Stock will be available for sale upon the exercise of
warrants outstanding. As of August 12, 1996, options to purchase 2,284,056
shares were issued and outstanding under the 1989 Option Plan, options to
purchase 853,750 shares were issued and outstanding under the 1996 Option
Plan, no options were granted under the Directors' Plan, and no shares had
been issued under the Purchase Plan. See "Management--Stock Plans."

61
<PAGE>

UNDERWRITING

Under the terms of, and subject to the conditions contained in, the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement (the "Registration Statement") of which this Prospectus
forms a part, the Underwriters named below (the "Underwriters"), for whom
Lehman Brothers Inc., Volpe, Welty & Company and UBS Securities LLC are acting
as representatives (the "Representatives"), have severally agreed to purchase
from the Company, and the Company has agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite the name of each
such Underwriter below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc. ............................................. 525,000
Volpe, Welty & Company............................................ 525,000
UBS Securities LLC................................................ 525,000
Bear, Stearns & Co. Inc. ......................................... 70,000
Alex. Brown & Sons Incorporated................................... 70,000
Deutsche Morgan Grenfell/C.J. Lawrence Inc. ...................... 70,000
Everen Securities, Inc. .......................................... 70,000
Hambrecht & Quist LLC............................................. 70,000
Montgomery Securities............................................. 70,000
Morgan Stanley & Co. Incorporated................................. 70,000
Robertson, Stephens & Company LLC................................. 70,000
Sound View Financial Group, Inc. ................................. 70,000
Cowen & Company................................................... 39,000
Gabelli & Company, Inc. .......................................... 39,000
Gerard Klauer Mattison & Co., LLC................................. 39,000
Josephthal Lyon & Ross Incorporated............................... 39,000
The Robinson-Humphrey Company, Inc. .............................. 39,000
---------
Total.......................................................... 2,400,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
to purchase shares of Common Stock are subject to certain conditions, and that
if any of the foregoing shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all the shares of Common
Stock agreed to be purchased by the Underwriters must be so purchased.

The Company has been advised that the Underwriters propose to offer the
shares of Common Stock directly to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to certain selected
dealers (who may include the Underwriters) at such public offering price less
a selling concession not in excess of $0.22 per share. The selected dealers
may reallow a concession not in excess of $0.10 per share to certain brokers
and dealers. After the initial public offering, the public offering price, the
concession to selected dealers and reallowance may be changed by the
Underwriters.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the Underwriters may be required to make in respect thereof.

The Company has granted to the Underwriters an option to purchase up to an
aggregate of 360,000 additional shares of Common Stock, respectively,
exercisable solely to cover over-allotments, at the offering price to the
public less the underwriting discounts and commissions, shown on the cover
page of this Prospectus. Such option may be exercised at any time until 30
days after the date of the Underwriting Agreement. To the extent that the
option is exercised, each Underwriter will be committed, subject to certain
conditions, to purchase a number of the additional shares of Common Stock
proportionate to such Underwriter's initial commitment as indicated in the
preceding tables.

62
<PAGE>

Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price has been negotiated among the Company and the
Underwriters. The primary factors considered in determining the initial public
offering price of the Common Stock, in addition to prevailing market
conditions, were the Company's historical performance and capital structure,
estimates of business potential and earnings prospects of the Company, an
assessment of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.

Holders of 16,036,742 shares of Common Stock of the Company have agreed that
they will not, subject to certain limited exceptions, directly or indirectly,
offer, sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for any such shares
for a period of 180 days after the effective date of the offering without the
prior written consent of the Representatives. The Company has agreed to refrain
from releasing any stockholder from such lock-up agreements without the prior
written consent of Lehman Brothers Inc. on behalf of the Representatives. The
Representatives reserve the right to release any or all of such stockholders
from their obligations under such lock-up agreements at any time without
notice. Any such release would increase the number of shares available for sale
into the public market, which could have a material adverse effect on the price
of the Common Stock. In addition, the Company has agreed that it will not,
subject to certain limited exceptions, directly or indirectly, offer, sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for such shares without the prior written consent of the
Representatives for 180 days after the effective date of the offering. The
Representatives currently do not intend to release any shares from the lock-up
arrangements set forth above.

The Representatives have informed the Company that they do not intend to
confirm sales of Common Stock offered hereby to any accounts over which they
exercise discretionary authority.

Of the 2,400,000 shares being sold in this offering, certain affiliates of
the Company will purchase an aggregate of 240,000 shares for investment
purposes and not for resale.

William B. Welty, a director of the Company, is affiliated with Volpe, Welty
& Company, a Representative and a principal Underwriter of this offering. In
addition, as more fully set forth in "Certain Relationships and Related
Transactions," Volpe, Welty & Company holds a warrant to purchase 56,818 shares
of the Company's Common Stock, and the Volpe, Welty Funds hold an aggregate of
319,999 shares of Series E Preferred Stock and 2,132,151 shares of Series F
Preferred Stock, respectively. As a result of such affiliations with the
Company, Volpe, Welty & Company may be deemed to be an "affiliate" of the
Company within the meaning of Rule 2720 of the Conduct Rules of the National
Association of Securities Dealers, Inc. ("Rule 2720"). Consequently, this
offering will be conducted in accordance with the provisions of Rule 2720 and
the initial public offering price is no higher than that recommended by a
"qualified independent underwriter" as defined therein. In accordance with the
requirements of Rule 2720, Lehman Brothers Inc., another principal Underwriter
of this offering (the "Independent Underwriter"), served in such role and
recommended a price in compliance with such requirements. The Independent
Underwriter in its role of "qualified independent underwriter" has performed
due diligence investigations and reviewed and participated in the preparation
of this Prospectus and the Registration Statement of which this Prospectus
forms a part. The Independent Underwriter will not receive any additional fees
for serving as a "qualified independent underwriter" in connection with this
offering. Further, in accordance with Rule 2720, the Underwriters will comply
with the suitability requirements of subsection (k) of such Rule 2720 and will
not make sales of shares of Common Stock offered hereby to customers'
discretionary accounts without the prior specific written approval of such
customers.

LEGAL MATTERS

Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Venture Law Group, A
Professional Corporation, Menlo Park, California. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Palo Alto,
California.

63
<PAGE>

EXPERTS

The financial statements of CONNECT at December 31, 1994 and 1995, and for
each of the three years in the period ended December 31, 1995 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the 1933 Act with
respect to the shares of Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements contained
in this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and in each instance, if such
contract or document is filed as an exhibit, reference is made to the copy of
such document filed as an exhibit to the Registration Statement. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Room 1228,
Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in
New York, New York and Chicago, Illinois, at prescribed rates.

64
<PAGE>

CONNECT, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-8
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
CONNECT, Inc.

We have audited the accompanying balance sheets of CONNECT, Inc. as of
December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity and cash flows for the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CONNECT, Inc., at December
31, 1994 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.

Ernst & Young LLP

San Jose, California
February 23, 1996,
except for Note 14, as to which the date is
July 15, 1996

F-2
<PAGE>

CONNECT, INC.

BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
-------------------------- JUNE 30, JUNE 30,
1994 1995 1996 1996
------------ ------------ ------------ -------------
ASSETS (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equiva-
lents................ $ 1,593,871 $ 12,928,911 $ 5,794,317
Accounts receivable,
net.................. 728,945 1,009,624 1,658,180
Prepaid expenses and
other current as-
sets................. 347,316 471,819 846,027
Deferred tax assets... 77,000 -- --
------------ ------------ ------------
Total current assets.... 2,747,132 14,410,354 8,298,524
Property and equipment,
net.................... 2,146,184 3,263,030 3,298,990
Deposits and other as-
sets................... 267,763 389,145 324,171
------------ ------------ ------------
Total assets........ $ 5,161,079 $ 18,062,529 $ 11,921,685
============ ============ ============
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current liabilities:
Notes payable......... $ 193,565 $ 194,938 $ 79,463
Notes payable to
stockholders......... 126,350 -- --
Accounts payable...... 756,668 621,806 1,899,170
Accrued payroll and
related expenses..... 237,634 305,772 733,044
Other accrued liabili-
ties................. 499,656 708,211 1,574,789
Deferred revenue...... 2,985,818 422,984 391,338
Current portion of
extended vendor
liabilities.......... 419,565 252,192 253,394
Obligations under cap-
ital leases.......... 313,389 602,292 580,147
------------ ------------ ------------
Total current liabili-
ties................... 5,532,645 3,108,195 5,511,345
Notes payable......... 115,822 67,009 37,675
Long-term portion of
extended vendor
liabilities.......... 803,963 656,269 544,519
Long-term obligations
under capital
leases............... 246,852 912,902 632,009
Commitments and contin-
gencies
Stockholders' equity:
Preferred stock (pro
forma):
Authorized shares--
10,000,000 -- -- -- $ --
Issued and
outstanding--none...
Convertible preferred
stock:
Authorized shares--
55,544,540 (none pro
forma)
Issued and
outstanding shares--
3,148,464,
14,112,899 and
14,472,899
(unaudited) at
December 31, 1994
and 1995 and June
30, 1996,
respectively, with
an aggregate
liquidation
preference at June
30, 1996 of
$70,758,674 (none
issued and
outstanding pro
forma).............. 8,059,888 37,041,259 37,979,108 --
Common stock:
Authorized shares--
50,000,000,
(40,000,000 pro
forma)
Issued and
outstanding shares--
369,985, 398,624 and
533,442 (unaudited)
at December 31, 1994
and 1995 and June
30, 1996,
respectively ($.001
par value,
15,763,992 shares
pro forma).......... 7,093,557 7,107,474 7,335,905 15,764
Additional paid-in
capital (pro forma).. -- -- -- 45,299,249
Deferred compensa-
tion................. -- -- (161,088) (161,088)
Accumulated deficit... (16,691,648) (30,830,579) (39,957,788) (39,957,788)
------------ ------------ ------------ ------------
Total stockholders' eq-
uity (deficit)......... (1,538,203) 13,318,154 5,196,137 $ 5,196,137
------------ ------------ ------------ ============
Total liabilities and
stockholders' equity... $ 5,161,079 $ 18,062,529 $ 11,921,685
============ ============ ============
</TABLE>

See accompanying notes.

F-3
<PAGE>

CONNECT, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License............... $ 1,014,687 $ 1,627,294 $ 287,471 $ 89,759 $ 1,511,299
Service............... 2,847,246 6,344,746 8,285,427 5,462,854 2,477,497
----------- ----------- ------------ ----------- -----------
Total revenue....... 3,861,933 7,972,040 8,572,898 5,552,613 3,988,796
Cost of revenue:
License............... 134,260 162,471 139,961 56,635 283,062
Service............... 1,640,888 4,425,893 5,451,893 3,376,449 4,298,305
----------- ----------- ------------ ----------- -----------
Total cost of
revenue............ 1,775,148 4,588,364 5,591,854 3,433,084 4,581,367
Operating expenses:
Research and
development.......... 1,573,090 1,622,081 4,810,166 1,507,780 2,226,049
Sales and marketing... 858,740 1,354,844 3,978,361 1,294,006 5,108,332
General and
administrative....... 1,303,134 1,946,731 3,329,400 1,993,863 1,221,308
Termination of
distribution rights.. -- -- 4,057,292 4,057,292 --
----------- ----------- ------------ ----------- -----------
Total operating
expenses........... 3,734,964 4,923,656 16,175,219 8,852,941 8,555,689
----------- ----------- ------------ ----------- -----------
Loss from operations.... (1,648,179) (1,539,980) (13,194,175) (6,733,412) (9,148,260)
Interest expense........ (205,459) (239,943) (1,002,761) (343,842) (181,320)
Interest income and
other income (expense),
net.................... (66,945) 41,388 32,005 (23,533) 202,371
----------- ----------- ------------ ----------- -----------
Loss before income
taxes.................. (1,920,583) (1,738,535) (14,164,931) (7,100,787) (9,127,209)
Provision (benefit) for
income taxes........... -- 26,000 (26,000) -- --
----------- ----------- ------------ ----------- -----------
Net loss................ $(1,920,583) $(1,764,535) $(14,138,931) $(7,100,787) $(9,127,209)
=========== =========== ============ =========== ===========
Pro forma net loss per
share.................. $ (0.79) $ (0.40) $ (0.51)
============ =========== ===========
Shares used in computing
pro forma
net loss per share..... 17,813,739 17,811,348 17,892,545
============ =========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE>

CONNECT, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
---------------------- ------------------ DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT EQUITY (DEFICIT)
---------- ----------- ------- ---------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... 1,118,080 $ 2,248,713 213,222 $7,034,217 $ -- $(13,006,530) $ (3,723,600)
Issuance of Series D
preferred stock for
cash................... 244,231 635,000 -- -- -- -- 635,000
Exercise of employee
stock options.......... -- -- 26,302 5,989 -- -- 5,989
Conversion of notes
payable to stockholders
to Series D preferred
stock, net of issuance
costs of $2,681........ 1,157,581 3,007,030 -- -- -- -- 3,007,030
Common stock issued for
services............... -- -- 6,538 17,000 -- -- 17,000
Net loss................ -- -- -- -- -- (1,920,583) (1,920,583)
---------- ----------- ------- ---------- --------- ------------ ------------
Balance at December 31,
1993................... 2,519,892 5,890,743 246,062 7,057,206 -- (14,927,113) (1,979,164)
Issuance of Series E
preferred stock for
cash................... 437,715 1,532,001 -- -- -- -- 1,532,001
Exercise of employee
stock options.......... -- -- 123,923 36,351 -- -- 36,351
Conversion of notes
payable to stockholders
to Series E preferred
stock, net of issuance
costs of $30,856....... 190,857 637,144 -- -- -- -- 637,144
Net loss................ -- -- -- -- -- (1,764,535) (1,764,535)
---------- ----------- ------- ---------- --------- ------------ ------------
Balance at December 31,
1994................... 3,148,464 8,059,888 369,985 7,093,557 -- (16,691,648) (1,538,203)
Conversion of notes
payable to stockholders
and accrued interest
for Series D preferred
stock.................. 58,821 152,933 -- -- -- -- 152,933
Termination of
distribution rights
settled in Series E
preferred stock........ 175,000 1,417,500 -- -- -- -- 1,417,500
Issuance of Series F
preferred stock for
cash and notes, net of
issuance costs of
$917,888............... 10,730,614 27,410,938 -- -- -- -- 27,410,938
Exercise of employee
stock options and
other.................. -- 28,639 13,917 -- -- 13,917
Net loss................ -- -- -- -- -- (14,138,931) (14,138,931)
---------- ----------- ------- ---------- --------- ------------ ------------
Balance at December 31,
1995................... 14,112,899 37,041,259 398,624 7,107,474 -- (30,830,579) 13,318,154
Issuance of Series F
preferred stock for
cash (unaudited)....... 360,000 937,849 -- -- -- -- 937,849
Exercise of employee
stock options
(unaudited)............ -- -- 134,818 58,998 -- -- 58,998
Deferred compensation
related to grant of
stock options
(unaudited)............ -- -- -- 169,433 (169,433) -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- 8,345 -- 8,345
Net loss (unaudited).... -- -- -- -- -- (9,127,209) (9,127,209)
---------- ----------- ------- ---------- --------- ------------ ------------
Balance at June 30, 1996
(unaudited)............ 14,472,899 $37,979,108 533,442 $7,335,905 $(161,088) $(39,957,788) $ 5,196,137
========== =========== ======= ========== ========= ============ ============
</TABLE>

See accompanying notes.

F-5
<PAGE>

CONNECT, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(1,920,583) $(1,764,535) $(14,138,931) $(7,100,787) $(9,127,209)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 279,787 473,351 987,829 512,977 808,315
Amortization of
deferred
compensation......... -- -- -- -- 8,345
Common stock issued
for services......... 17,000 -- -- -- --
Termination of
distribution rights
settled in Series E
preferred stock...... -- -- 1,417,500 1,417,500 --
Deferred income tax... -- (77,000) 77,000 77,000 --
Changes in assets and
liabilities:
Accounts
receivable......... (405,746) 77,059 (280,679) 222,701 (648,556)
Prepaid expenses and
other current as-
sets............... (179,588) (111,038) (124,503) 1,065 (374,208)
Deposits and other
assets............. -- (173,263) (215,882) 4,158 64,974
Accounts payable,
accrued payroll and
related expenses,
other accrued
liabilities, and
extended vendor
liabilities........ 63,268 65,162 (52,153) 1,242,118 2,460,666
Deferred revenue.... 98,628 2,887,190 (2,562,834) (2,756,385) (31,646)
----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in) operating
activities............. (2,047,234) 1,376,926 (14,892,653) (6,379,653) (6,839,319)
INVESTING ACTIVITIES
Purchases of property
and equipment.......... (38,588) (1,627,126) (1,772,591) (1,043,037) (830,272)
Purchase of equipment
for sale and
leaseback.............. (609,229) -- -- -- --
----------- ----------- ------------ ----------- -----------
Net cash used in
investing activities... (647,817) (1,627,126) (1,772,591) (1,043,037) (830,272)
FINANCING ACTIVITIES
Proceeds from sale and
leaseback of equipment
at net book value...... 573,657 -- 1,197,393 1,197,393 --
Proceeds from issuance
of common stock........ 5,989 36,351 13,917 13,041 58,998
Proceeds from issuance
of preferred stock..... 635,000 1,532,001 28,328,826 -- 937,849
Issuance costs
associated with
conversion of notes
payable and issuance of
preferred stock........ (2,681) (30,856) (917,888) -- --
</TABLE>

See accompanying notes.

F-6
<PAGE>

CONNECT, INC.

STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Proceeds from issuance
of notes payable
converted into Series E
preferred stock........ $ -- $ 668,000 $ -- $ -- $ --
Proceeds from issuance
of notes payable....... 2,163,509 43,090 133,534 5,200,790 --
Repayment of principal
on notes payable....... (654,058) (149,677) (180,974) (107,609) (144,809)
Repayment of principal
under capital lease
obligations............ (103,796) (318,987) (574,524) (364,937) (317,041)
---------- ---------- ----------- ----------- -----------
Net cash provided by
financing activities... 2,617,620 1,779,922 28,000,284 5,938,678 534,997
---------- ---------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (77,431) 1,529,722 11,335,040 (1,484,012) (7,134,594)
Cash and cash
equivalents at
beginning of period.... 141,580 64,149 1,593,871 1,593,871 12,928,911
---------- ---------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 64,149 $1,593,871 $12,928,911 $ 109,859 $ 5,794,317
========== ========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Cash paid during the
year for interest...... $ 241,777 $ 239,943 $ 373,948 $ 343,842 $ 180,579
Cash paid for income
taxes.................. $ -- $ 8,500 $ -- $ -- $ --
SUPPLEMENTAL NONCASH
INVESTING AND FINANCING
INFORMATION
Notes payable to
stockholders, including
$40,116 of accrued
interest, converted
into Series D preferred
stock.................. $3,009,711 $ -- $ -- $ -- $ --
Notes payable to
stockholders, including
$26,583 of accrued
interest, converted
into Series D preferred
stock.................. $ -- -- $ 152,933 $ 152,933 $ --
Incurrence of capital
lease obligations...... $ 627,071 $ 355,955 $ 332,084 $ 332,084 $ 14,003
</TABLE>

See accompanying notes.

F-7
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)

1. ORGANIZATION

CONNECT, Inc. (the "Company") was incorporated in the state of California in
April 1987. The Company designs, develops, markets, and supports industrial
strength, scaleable software applications for Internet-based interactive
commerce. The Company's application software and support services are designed
to reduce the time and overall cost for businesses to implement and maintain a
secure sales, marketing and order capture capability on the World Wide Web.
The Company's software supports key functions necessary for large-scale
interactive commerce, including user registration, multimedia catalog and
content management, dynamic merchandising, order capture and management,
security, payment processing, enterprise integration and systems
administration.

The Company has recently initiated a new business strategy focused on
providing packaged software applications for Internet-based interactive
commerce. As a result, the Company is decreasing its reliance on historical
sources of revenue and its current and future business prospects are dependent
upon the successful development, market acceptance and sales of two recently
developed products. The Company's business must be considered in light of the
risks, expenses and problems frequently encountered by companies in an early
stage of development, particularly companies in new and rapidly evolving
markets such as the Internet. Specifically, such risks include the lack of
acceptance of the Company's products and services by its target customers,
development of equal or superior products or services by competitors, the
failure of electronic commerce in general, and Internet-based electronic
commerce in particular, to be broadly adopted as a sales, marketing and
distribution medium, the Company's inability to develop and enhance
competitive products or to successfully commercialize any such products, and
the inability to identify, attract, retain and motivate qualified personnel.
There can be no assurance that the Company will succeed in addressing such
risks.

Basis of Presentation

For the year ended December 31, 1995 and six months ended June 30, 1996, the
Company had net losses of approximately $14,139,000 and $9,127,000,
respectively, and has incurred substantial losses to date.

The Company plans to raise additional funds through public or private equity
financings or other sources. However, there can be no assurance that such
funds will be available or available on terms favorable to the Company or its
stockholders.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Interim Financial Information

The financial statements at June 30, 1996 and for the six months ended June
30, 1995 and 1996 are unaudited but include all adjustments (consisting only
of normal recurring adjustments) that the Company considers necessary for a
fair presentation of financial position and operating results. Operating
results for the six months ended June 30, 1996 are not necessarily indicative
of the results that may be expected for any future periods.

F-8
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)

Concentration of Credit Risk

The Company licenses products and provides services to a variety of
customers. The Company generally does not perform credit evaluations or require
collateral on individual customer service or license transactions that involve
relatively small amounts. However, credit worthiness on larger service or
license transactions are evaluated on a case-by-case basis. At December 31,
1994, 1995, and June 30, 1996, the Company had an allowance for potential
credit losses of approximately $174,000, $320,000 and $372,000, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity
(at the date of purchase) of three months or less to be the equivalent of cash
for the purpose of the balance sheet presentation and statement of cash flows.
The Company has classified all debt securities as available-for-sale.
Available-for-sale securities are carried at an amount which approximates fair
value. Unrealized gains and losses, if material, are reported in a separate
component of stockholders' equity. Realized gains and losses and declines in
value judged to be other-than-temporary are included in interest expense, net.

All available-for-sale securities mature in three months or less and are
included in cash and cash equivalents. Available for sale securities at
December 31, 1994 and 1995, and June 30, 1996, totaled $999,773, $12,314,990
and $4,859,448, respectively, and are comprised of certain U.S. government
obligations. At December 31, 1994 and 1995 and at June 30, 1996, gross
unrealized gains and losses were not significant. There were no gross realized
gains or losses on available-for-sale securities for the year ended December
31, 1994, 1995, and for the six months ended June 30, 1995 and 1996.

Property and Equipment

Property and equipment are stated at cost and are depreciated on a straight-
line basis over their estimated useful lives of three to seven years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful life of the improvements.

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Computer equipment........................ $2,063,044 $2,184,932 $2,061,781
Equipment under capital leases............ 979,562 2,589,818 3,484,704
Furniture and fixtures.................... 130,741 173,206 201,884
Leasehold improvements.................... 70,256 400,322 444,184
---------- ---------- ----------
3,243,603 5,348,278 6,192,553
Accumulated depreciation and amortiza-
tion..................................... 1,097,419 2,085,248 2,893,563
---------- ---------- ----------
$2,146,184 $3,263,030 $3,298,990
========== ========== ==========
</TABLE>

Revenue Recognition and Deferred Revenue

F-9
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)

implementation (including customization of licensed software products),
training, maintenance and support, contract software development projects, and
system hosting and online services.

The Company's revenue recognition policy is in compliance with the
provisions of the American Institute of Certified Public Accountants'
Statements of Position 91-1, "Software Revenue Recognition."

License Revenue

The Company licenses application software to end-users under non-cancelable
license agreements. License revenue is recognized on shipment of the
application software provided there are no significant remaining obligations
and collectability is deemed probable by management. License fees under
contracts requiring significant implementation, including customization, of
licensed software products are recognized on the percentage-of-completion
method based on the ratio of incurred costs to total estimated costs. Actual
costs and gross margins on such contracts could differ from management's
estimates and such differences could be material to the financial statements.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined.

Service Revenue

Fees for implementation services are recognized as the services are
performed, except for such fees under fixed price contracts which are
recognized on the percentage-of-completion method as noted above. A provision
for estimated losses of $1,223,000 was made in the period ended June 30, 1996
in connection with certain fixed price contracts entered into during the
period of which $867,000 is included in other accrued liabilities at June 30,
1996. At December 31, 1994, 1995, and at June 30, 1996, the Company had an
excess of billings over costs incurred and estimated earnings on uncompleted
implementation services of approximately $0, $295,000, and $200,000,
respectively, which is included in deferred revenue.

Revenue from contract software development projects, in which the Company
developed specific technology for its customers, has been recognized on the
percentage-of-completion method based on the ratio of incurred costs to total
estimated costs. The Company entered into two such contracts in 1994 for the
development of certain technology. These contracts were terminated in 1995.
The Company recognized service revenue in connection with these contracts of
approximately $2,551,000 and $4,867,000 for the years ended December 31, 1994
and 1995, respectively. Related cost of service revenue in connection with
these contracts was approximately $1,725,000 and $1,615,000, for the years
ended December 31, 1994 and 1995, respectively. At December 31, 1994 and 1995,
the Company had an excess of billings over costs incurred and estimated
earnings on the two uncompleted contract software development projects of
approximately $2,590,000 and $0, respectively, which is included in deferred
revenue.

Deferred Revenue

Deferred revenue includes billings or collections in excess of revenue
recognized on development arrangements, deferred maintenance, and other
payments received in advance of services to be performed.

F-10
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)

Research and Development

Research and development expenditures are generally charged to operations as
incurred. The Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent
to the establishment of technological feasibility. Based on the Company's
product development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between the
completion of the working model and the point at which the product is ready
for general release have been insignificant. Accordingly, the Company has
charged all such costs to research and development expenses in the
accompanying statements of operations.

Advertising and Promotion Costs

The Company's policy is to expense advertising and promotion costs as they
are incurred. The Company's advertising and promotion expenses were
approximately $0, $238,706, and $372,000, in 1993, 1994, and 1995,
respectively, and $164,763 and $499,480 for the six months ended June 30, 1995
and 1996, respectively.

Income Taxes

Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

Net Loss Per Share

Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from convertible preferred stock (using the if-converted method) and from
stock options and warrants (using the treasury stock method) have been
included in the computation when dilutive. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued by the Company at prices below the assumed public offering price
during the twelve-month period prior to the offering have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method at the assumed initial public offering price.) The
difference between primary and fully diluted earnings per share is not
material for all periods presented.

Per share information calculated on the above noted basis is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net loss................ $ (0.14) $ (0.13) $ (1.03) $ (0.52) $ (0.66)
========== ========== ========== ========== ==========
Shares used in computing
net loss per share..... 13,515,192 13,593,574 13,667,081 13,664,690 13,745,887
========== ========== ========== ========== ==========
</TABLE>

F-11
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)

Pro Forma Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity

Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from
convertible preferred stock that will automatically convert upon the closing
of the Company's initial public offering (using the if-converted method). If
the offering contemplated by this Prospectus is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into an aggregate of 15,230,550 shares of common
stock, based on the number of shares of convertible preferred stock
outstanding at June 30, 1996.

Unaudited pro forma stockholders' equity at June 30, 1996, as adjusted for
the assumed conversion of the convertible preferred stock, is disclosed on the
balance sheet.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company will be required to adopt SFAS 123 in the year
ending December 31, 1996. It is the Company's intention to continue to account
for employee stock options in accordance with Accounting Principles Board
Opinion No. 25 and to adopt the "disclosure only" alternative described in
SFAS 123.

3. NOTES PAYABLE

The Company has a $450,000 promissory note with a financing company.
Principal and interest are payable monthly over three years, and the note
matures on August 1, 1996. The note bears interest at the rate of 20.2%. At
December 31, 1994, 1995, and at June 30, 1996, the principal outstanding was
$266,297, $108,056, and $14,675 respectively. The note is guaranteed by a
stockholder and officer of the Company.

The Company has three additional notes payable with remaining principal
balances outstanding of $32,450, $23,863, and $97,578 at December 31, 1995 and
$7,316, $18,739 and $76,408 outstanding at June 30, 1996. These unsecured
notes bear interest at 9.19%, 11%, and 11% and mature on December 16, 1996,
December 15, 1997, and March 1, 1998, respectively.

4. EXTENDED VENDOR LIABILITIES

During 1992 and 1993, the Company renegotiated payment terms with a number
of its largest vendors. The resulting agreements bear interest at rates
ranging from 0% to 8%, and certain of the repayment agreements extend beyond
one year.

In April 1994, the Company terminated its service and license agreement with
a vendor, resulting in a reduction of $253,656 in extended vendor liabilities.
In addition, the repayment terms for certain amounts due the vendor were
extended from three to five years. Beginning in December 1994, the total
liability due the vendor of $1,000,000 will be due in monthly installments,
plus interest, at an annual rate of 6% through November 1999.

F-12
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)

Principal payments due in each calendar year as of December 31, 1995 and
June 30, 1996 relating to the above agreements are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
1996................................................... $252,192 $141,644
1997................................................... 256,468 256,468
1998................................................... 212,624 212,624
1999................................................... 187,177 187,177
-------- --------
$908,461 $797,913
======== ========
</TABLE>

5. COMMITMENTS AND CONTINGENCIES

Operating Leases

The lease agreement for the Company's primary facility expires December 9,
1999. At December 31, 1995 and June 30, 1996, the future minimum lease
payments related to operating lease agreements are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
1996................................................. $ 392,317 $ 206,045
1997................................................. 400,334 411,338
1998................................................. 317,891 328,895
1999................................................. 308,125 319,129
---------- ----------
$1,418,667 $1,265,407
========== ==========
</TABLE>

Rental expense charged to operations for the years ended December 31, 1993,
1994, and 1995, were approximately $240,300, $307,058, $317,690, respectively,
and $193,438 and $183,591 for the six months ended June 30, 1995 and 1996,
respectively.

Capital Leases

The Company leases certain equipment under capital leases having terms of 36
to 42 months. Accumulated depreciation on these assets was approximately
$231,000, $988,848 and $1,245,039 at December 31, 1994, 1995, and June 30,
1996, respectively.

The following is a schedule by year of future minimum lease payments under
capital leases as of December 31, 1995 and June 30, 1996:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
1996................................................ $ 852,132 $ 426,066
1997................................................ 707,896 707,896
1998................................................ 384,650 384,650
---------- ----------
Total minimum lease payments........................ 1,944,678 1,518,612
Amount representing interest........................ 429,484 306,456
---------- ----------
1,515,194 1,212,156
Less current portion................................ 602,292 580,147
---------- ----------
$ 912,902 $ 632,009
========== ==========
</TABLE>

F-13
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Contingencies

On March 25, 1996, one of the Company's licensees of OneServer (the
Customer) was sued, along with 21 other defendants in the Federal District
Court in Connecticut, by E-data Corporation ("E-data"), in which E-data
alleges that each defendant is infringing E-data's U.S. patent in connection
with electronic distribution of images on the Internet. The Customer recently
tendered the defense of this litigation to the Company. The Company is
currently reviewing the infringement claims made by E-data against the
Customer. Based upon its initial review of the E-data patent and the nature of
the claims and the Company's indemnity obligations, and after consultation
with counsel, management believes that the resolution of this matter will not
have a material adverse on the Company's business, operating results and
financial condition. However, given the early stage of the litigation and the
complex technical issues and uncertainties in patent litigation, the results
of these proceedings, including any potential settlement, are uncertain and
there can be no assurance that E-data will not prevail in the current
litigation or that it will not bring similar claims against other licensees of
the Company. If E-data were to prevail, the Customer could be required to pay
damages to E-data for the infringement of its patent and enter into a
licensing or royalty arrangement. There can be no assurance that the amount of
such damages would not be material or that such license or royalty arrangement
would be available on acceptable terms. Under the terms of its license with
the Customer, the Company may be required to defend against the E-data claim
and to indemnify the Customer for some or all of its losses in connection with
the litigation and any settlement or judgement, including ongoing license
fees. In addition, whether or not the Company were to prevail in any defense
of the Customer, such litigation could be time consuming and costly to defend.

The Company relies in part on certain technology which it licenses from
third parties, including encryption technology from RSA Data Security, Inc.
("RSA"). RSA is currently in litigation with Cylink Corporation ("Cylink")
pursuant to which Cylink alleges that RSA's encryption technology infringes
certain Cylink patents and asserts that RSA has no right to sublicense such
technology. If it is determined that RSA is unable to sublicense this
technology to the Company, the Company may be deemed to be infringing Cylink's
patent rights. The Company is unable to predict the outcome of the dispute
between RSA and Cylink, but if the Company were deemed to be infringing
Cylink's patent rights, the Company could be required to pay damages to Cylink
and possibly enter into a royalty or licensing agreement with Cylink. Such
royalty or licensing agreement, if required, may not be available on terms
acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.

F-14
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)

6. CONVERTIBLE PREFERRED STOCK

Convertible preferred stock consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Authorized shares--55,544,540
Series C preferred stock:
Authorized shares--2,240,130
Issued and outstanding shares--1,118,080
(Aggregate liquidation preference at June
30, 1996--$3,018,081).................... $2,248,713 $ 2,248,713 $ 2,248,713
Series D preferred stock:
Authorized shares--2,921,266
Issued and outstanding shares--1,401,812
at December 31, 1994 and 1,460,633 at
December 31, 1995 and June 30, 1996
(Aggregate liquidation preference at June
30, 1996--$4,766,257).................... 3,642,030 3,794,963 3,794,963
Series E preferred stock:
Authorized shares--1,757,144
Issued and outstanding shares--628,572 at
December 31, 1994, and 803,572 at
December 31, 1995 and June 30, 1996
(Aggregate liquidation preference at June
30, 1996--$3,261,578).................... 2,169,145 3,586,645 3,586,645
Series F preferred stock:
Authorized shares--24,313,000 and
22,181,228 at December 31, 1995 and June
30, 1996, respectively
Issued and outstanding shares--10,730,614
and 11,090,614 at December 31, 1995 and
June 30, 1996, respectively
(Aggregate liquidation preference at June
30, 1996--$59,712,758)................... -- 27,410,938 28,348,787
Series F-a preferred stock:
Authorized shares--24,313,000 and
22,181,228 at December 31, 1995 and June
30, 1996, respectively
Issued and outstanding shares--none....... -- -- --
---------- ----------- -----------
Convertible preferred stock................. $8,059,888 $37,041,259 $37,979,108
========== =========== ===========
</TABLE>

Commencing January 1, 1996, the holders of Series C, D, E, and F convertible
preferred stock are entitled to receive cumulative dividends, when and if
declared by the Board of Directors, out of legally available funds, at a per
annum rate of $0.16 per share for Series C preferred stock, $0.208 per share
for Series D preferred stock, $0.28 per share for Series E preferred stock,
and $0.212 per share for Series F preferred stock, payable before any
dividends may be paid on common stock. Such dividends shall accumulate
quarterly on each share whether or not earned or declared.
<TABLE>
<S> <C>
---
</TABLE>

F-15
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)

The preferred stock is convertible at any time to common stock by
multiplying the number of preferred shares outstanding with the conversion
ratio in effect for such series. As of December 31, 1995, the conversion ratio
for Series C, D, E, and F is 1.31, 1.22, 1.12, and 1.00, respectively. The
conversion price may also be adjusted if there are changes in capitalization
or certain subsequent sales of stock occur at prices per share lower than the
conversion price of the Series C, D, E, and F preferred stock in effect at the
time of such sale. The conversion of Series C, D, E, and F preferred stock is
automatic upon an underwritten public offering of the Company's common stock,
subject to certain minimum aggregate gross proceeds. As of December 31, 1995
and June 30, 1996, an adequate amount of shares of common stock have been
reserved for issuance upon conversion. Preferred stockholders are entitled to
vote in the same manner and with the same effect as if their stock had been
converted into common stock.

In the event of liquidation, the preferred stockholders are entitled to a
per share liquidation preference distribution of $2.62 per share for Series C
preferred stock, $3.16 per share for Series D preferred stock, $3.92 per share
for Series E preferred stock, and $5.28 per share for Series F preferred
stock, plus all accumulated and unpaid dividends.

7. EMPLOYEE BENEFIT PLAN

The Company maintains an employee savings plan that qualifies under Section
401(k) of the Internal Revenue Code (the "Code") for all of its full-time
employees. The plan allows employees to make specified percentage pretax
contributions up to the maximum dollar limitation prescribed by the Code. The
Company has the option to contribute to the plan; however, there have been no
contributions to date.

8. STOCK OPTION PLAN

The Company has a 1989 Stock Option Plan (the "Plan") under which the
committee, as appointed by the Board of Directors, may grant incentive or
nonqualified stock options. The Plan authorizes the issuance of up to
2,700,000 shares of common stock. Options are generally granted at an exercise
price of no less than the fair value per share of the common stock on the date
of grant as determined by the Board of Directors. The options issued under the
Plan are immediately exercisable; however, shares acquired pursuant to the
exercise of these options generally vest over four years, expiring no later
than ten years from the date of grant. Unvested shares may be repurchased by
the Company at the original purchase price.

F-16
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)

The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
In February 1996, the Company offered to each employee with stock options
having an exercise price greater than $0.50 per share the opportunity to amend
the terms of such options and reduce the exercise price to $0.50 per share (an
amount not less than fair market value, as deemed by the Board of Directors,
as of the offer date). The new options will have the same vesting terms as the
surrendered options. Options representing 386,018 shares of common stock were
repriced, and have been included in option grants and cancellations in the
period ended June 30, 1996. A summary of the activity under the Plan is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------
AVAILABLE NUMBER OF PRICE
FOR GRANT SHARES PER SHARE
---------- --------- --------------
<S> <C> <C> <C>
Balance at December 31, 1992.......... 440,067 246,881 $0.20 - $ 2.00
Options granted..................... (298,159) 298,159 $0.20 - $ 0.26
Options exercised................... -- (26,302) $0.20 - $ 2.00
Options canceled.................... 45,462 (45,463) $0.20 - $ 2.00
---------- --------- --------------
Balance at December 31, 1993.......... 187,370 473,275 $0.20 - $ 2.00
Additional shares reserved.......... 164,000
Options granted..................... (397,651) 397,651 $0.26 - $ 4.00
Options exercised................... -- (123,923) $0.20 - $ 0.70
Options canceled.................... 99,981 (99,981) $0.20 - $ 2.00
---------- --------- --------------
Balance at December 31, 1994.......... 53,700 647,022 $0.20 - $ 4.00
Additional shares reserved.......... 1,845,000
Options granted..................... (475,500) 475,500 $0.50 - $13.00
Options exercised................... -- (25,795) $0.20 - $ 4.00
Options canceled.................... 59,595 (59,595) $0.26 - $13.00
---------- --------- --------------
Balance at December 31, 1995.......... 1,482,795 1,037,132 $0.20 - $13.00
Additional shares reserved.......... 2,500,000
Options granted..................... (2,677,218) 2,677,218 $0.50 - $10.80
Options exercised................... -- (134,818) $0.20 - $ 0.50
Options canceled.................... 542,476 (542,476) $0.20 - $13.00
---------- --------- --------------
Balance at June 30, 1996.............. 1,848,053 3,037,056 $0.20 - $10.80
========== ========= ==============
</TABLE>

At December 31, 1995 and June 30, 1996, options to purchase 358,354 and
480,295 common shares, respectively, were vested and unexercised.
Additionally, at December 31, 1995 and June 30, 1996, 34,184 and 74,592
shares, respectively, from exercised options were subject to repurchase by the
Company.

In connection with certain of the Company's stock options granted in 1996,
the Company has recorded deferred compensation expense of $169,433 for the
difference between the option grant price and the deemed fair value of the
Company's common stock at the date of grant. The amount is being amortized
over the vesting period of the individual options, generally a 48 month
period. Deferred compensation expense recognized for the six months ended June
30, 1996 was $8,345.

F-17
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
9. STOCK WARRANTS

In October 1992, the Company issued a warrant to purchase 13,919 shares of
common stock at $4.12 per share to bank in connection with a note payable that
was paid in 1993. The warrant expires October 15, 1997.

In November 1992, the Company issued a warrant to an investor to purchase
1,985 shares of Series C preferred stock (which may be converted into 2,600
shares of common stock) at $2.00 per share in exchange for certain services
related to the issuance of Series C preferred stock. The warrant expires
November 30, 1997.

In December 1992, the Company issued a warrant to a vendor to purchase 5,000
shares of common stock at $20.00 per share. The warrant expires October 1,
1997.

In June 1994, the Company issued a warrant to purchase 75,000 shares of
Series E preferred stock, (which may be converted into 84,000 shares of common
stock), at $3.50 per share to certain officers/stockholders in exchange for
services rendered in conjunction with the issuance of Series E preferred
stock. The warrant expires June 30, 1999.

In December 1995, the Company issued warrants to purchase 113,636 shares of
common stock at $2.64 per share to certain stockholders in exchange for
services rendered in conjunction with the issuance of Series F preferred
stock. The warrants expire on December 27, 2000.

10. TERMINATION OF DISTRIBUTION RIGHTS

In December 1994, the Company signed an agreement that provided the Company
the option to terminate the marketing and distribution rights of its European
distributor. In connection with this option agreement, the Company paid its
European distributor a nonrefundable $250,000 fee which the Company expensed
in 1994. The Company exercised its option on March 13, 1995 and paid its
European distributor approximately $2,640,000 in cash and issued 175,000
shares of its Series E preferred stock. Due to impairment of the net
realizable value of the European distribution rights, the Company expensed all
payments made in connection with the transaction in 1995. The amount paid was
negotiated between the Company and its European distributor on an arm's-length
basis. The Company received an opinion from an independent financial advisor
as to the fair market value of the shares of Series E preferred stock at the
time of the negotiation to support its determination as to the value of the
amount paid.

11. MAJOR CUSTOMERS

Customers comprising 10% or greater of the Company's revenue are summarized
as follows:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------
1993 1994 1995 1995 1996
-------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Company A................... -- 22% 52% 64% --
Company B................... 10% 12% -- -- --
Company C................... -- 12% * * --
Company D................... * * * * 11%
Company E................... -- -- -- -- 17%
Company F................... -- -- -- -- 25%
</TABLE>

* Revenue less than 10%.

F-18
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)

12. INCOME TAXES

The components of the provision (benefit) for income taxes are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1993 1994 1995
------ -------- --------
<S> <C> <C> <C>
Federal:
Current........................................ $ -- $ 94,000 $(94,000)
Deferred....................................... -- (77,000) 77,000
------ -------- --------
-- 17,000 (17,000)
State:
Current........................................ -- 9,000 (9,000)
------ -------- --------
9,000 (9,000)
------ -------- --------
Provision (benefit) for income taxes............. $ -- $ 26,000 $(26,000)
====== ======== ========
</TABLE>

A reconciliation of the provision (benefit) for income taxes between the
Company's effective tax rate and the U.S. statutory rate is as follows:

<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Tax at federal statutory rate............ $(653,000) $(591,000) $(4,958,000)
State taxes.............................. -- 9,000 (9,000)
Losses not currently benefited........... 653,000 608,000 4,941,000
--------- --------- -----------
Provision (benefit) for income taxes..... $ -- $ 26,000 $ (26,000)
========= ========= ===========
</TABLE>

The components of deferred income taxes consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 1,088,000 $ 5,425,000
Research credit carryforwards.................... 167,000 167,000
Deferred revenue................................. 1,000,000 195,000
Depreciation and amortization.................... 183,000 1,561,000
Other............................................ 167,000 314,000
----------- -----------
Total deferred tax assets.......................... 2,605,000 7,662,000
Valuation allowance................................ (2,528,000) (7,662,000)
----------- -----------
Total net deferred taxes........................... $ 77,000 $ --
=========== ===========
</TABLE>

F-19
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)

The valuation allowance increased by $228,000 in 1994 and $5,134,000 in
1995. A valuation allowance has been recorded for the entire deferred tax
asset as a result of uncertainties regarding the realization of the asset due
to the lack of earnings history of the Company. To support the Company's
conclusion that a full allowance was required, management primarily considered
the Company's history of operating losses and expected net losses for the
foreseeable future. The Company will continue to assess the realizability of
the deferred tax assets on actual and forecasted operating results.

At December 31, 1995, the Company had available federal net operating loss
carryforwards of approximately $15,500,000, which will expire in 2007 through
2009, if not utilized. Also available at December 31, 1995 are federal
research credit carryforwards of approximately $167,000, which will expire in
2007 through 2009, if not utilized. The Company's issuance of Series E
preferred stock in June 1994 was considered to have caused a change in
ownership for the purpose of the limitation on the utilization of net
operating loss and research credit carryforwards as set forth in the Internal
Revenue Code. Accordingly, $3,800,000 of the Company's net operating losses
and the deduction equivalent of $477,000 in research credit carryforwards will
be subject to an annual limitation of approximately $360,000 per year. The
Company's issuance of Series F preferred stock in December 1995 also may have
caused a change in ownership so as to limit the Company's entire net operating
loss of $15,500,000 to an annual limitation of approximately $540,000 per
year. As a result, approximately $7,400,000 of the Company's net operating
loss and all research credit carryforwards may expire unutilized. In addition,
the Company's issuance of Series C preferred stock in 1992 resulted in a
change in ownership that virtually eliminated the future utilization of
federal net operating losses and research credits at the time of approximately
$7,200,000 and $106,000, respectively.

13. RELATED PARTY TRANSACTIONS

In November 1993, $2,969,595 of notes payable to stockholders were converted
into Series D preferred stock. Accrued interest outstanding on the notes
payable of $40,116 was also converted into Series D preferred stock.

In June 1994, $668,000 of notes payable to stockholders were converted into
Series E preferred stock. There was no accrued interest outstanding relating
to these notes at the time of conversion.

For the year ended December 31, 1994, the Company earned license revenue of
approximately $900,000 from a related party, of which approximately $10,000 is
included in the accounts receivable balance at December 31, 1994.

During 1995, $126,350 of notes payable to a stockholder were converted into
Series D preferred stock. Accrued interest outstanding on the notes payable of
$26,583 was also converted into Series D preferred stock.

The Company incurred approximately $132,640, $75,226, $262,500, in
consulting and other fees to officers and/or stockholders for the years ended
December 31, 1993, 1994, and 1995, respectively and $258,500 and $0 for the
six months ended June 30, 1995 and 1996, respectively.

F-20
<PAGE>

CONNECT, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)

14. SUBSEQUENT EVENTS

In April and June 1996, subject to stockholder approval, the Board of
Directors approved (i) the adoption of the 1996 Stock Option Plan pursuant to
which 2,500,000 shares of the Company's common stock have been reserved for
future issuance, (ii) the reincorporation of the Company in Delaware pursuant
to which (a) each two shares of outstanding common stock will be exchanged for
one common share of the Company's Delaware successor (b) each two shares of
outstanding convertible preferred stock will be exchanged for one preferred
share of the same series of the Company's Delaware successor, (c) all
outstanding options and warrants to purchase two shares of common stock or
preferred stock will become options or warrants to purchase one share of the
Company's Delaware successor's common stock or preferred stock, respectively,
at two times the exercise price per share, (d) the authorized number of common
stock will be reduced to 40,000,000 shares, (e) the authorized number of
convertible preferred stock will be reduced to 26,140,498 shares, and (f) the
authorization of an additional 10,000,000 shares of preferred stock that is
not designated in by series and with respect to which the Board of Directors
has the authority to fix the rights, preferences, privileges and restrictions,
(iii) the adoption of the 1996 Employee Stock Purchase Plan pursuant to which
500,000 shares of the Company's common stock have been reserved for future
issuance, and (iv) the adoption of the 1996 Directors' Stock Option Plan
pursuant to which 250,000 shares of the Company's common stock have been
reserved for future issuance. The reincorporation of the Company and related
actions were completed in July 1996.

In addition, the Board of Directors authorized management of the Company to
file a Registration Statement with the Securities and Exchange Commission
covering the proposed sale of shares of its common stock to the public. Upon
completion of this proposed sale, all outstanding shares of the Company's
convertible preferred stock will automatically convert into common stock.
Unaudited pro forma stockholders' equity, as adjusted for the assumed
conversion of the convertible preferred stock, is disclosed in the
accompanying unaudited pro forma balance sheet.

On July 3, 1996, the Company issued 272,750 shares of Series G convertible
preferred stock to a customer of the Company for approximately $3,000,000. The
holders of Series G convertible preferred stock are entitled to receive
cumulative dividends at a per annum rate of $0.88 per share. The Series G
preferred stock conversion ratio is 1.00 and in the event of liquidation,
Series G preferred stockholders are entitled to a liquidation preference of
$22.00 per share.

F-21
<PAGE>

HOW CONNECT ONESERVER WORKS.

JAVA SUPPORT

[PRODUCT TECHNICAL ARCHITECTURE LAYOUT, INCLUDING THE FOLLOWING TEXT ELEMENTS]:
CUSTOM CLIENT
SUPPORT

WEB PAGE
PRESENTATION
SEPARATED FROM
CONTENT

FLEXIBLE USAGE
TRACKING AND
ANALYSIS

ENTERPRISE
SYSTEM
LINKS

INDUSTRIAL
STRENGTH CORE

UNIVERSAL
BROWSER
ACCESS

INDUSTRY
STANDARDS
SUPPORT

HIGH-
PERFORMANCE
SCALABLE
TRANSACTION
MODEL

ADAPTABLE
BUSINESS
OBJECT
MODEL
WWW BROWSERS
HTTP, SSL, ETC.
TCP/IP
FUTURE
LISTENER
S-HTTP
LISTENER
SSL LISTENER
HTTP LISTENER
COMMON
GATEWAY INTERFACE
PERL
API
C/C++
API

DATA TRANSACTIONS
JAVA APPLETS

THE INTERNET

HTML TEMPLATE ENGINE

RAMP (REPRIORITIZABLE ASYNCHRONOUS MULTI-THREADED PROTOCOL)

TRANSACTION DISPATCHER
TRANSACTION MONITOR
TRACKING
TRANSACTIONS
DYNAMIC BUSINESS MODEL
OBJECT MANAGER

UNIX OPERATING SYSTEM
CUSTOM CLIENTS
CLIENT CODE
(C, C++ OR VB)
VB API(VBX)
CLASS API (C++)
RAMP API (C)
NETWORK LAYER

RAMP
LISTENER

USAGE TRACKING
SERVICE
EXTERNAL
TRANSACTION SYSTEM

CUSTOM TRANSACTIONS

ORACLE 7 RDBMS
THE ONESERVER PRODUCT ARCHITECTURE.
UNIX FILE SYSTEM
RSA ENCRYPTION
FULCRUM TEXT SEARCH
<PAGE>

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 27
Management............................................................... 42
Certain Relationships and Related Transactions........................... 53
Principal Stockholders................................................... 55
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 62
Legal Matters............................................................ 63
Experts.................................................................. 64
Additional Information................................................... 64
Index to Financial Statements............................................ F-1
</TABLE>

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UNTIL SEPTEMBER 8, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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2,400,000 SHARES

LOGO
[LOGO OF CONNECT(R) APPEARS HERE]

COMMON STOCK

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PROSPECTUS
August 14, 1996

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LEHMAN BROTHERS

VOLPE, WELTY & COMPANY

UBS SECURITIES

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