CONNECT INC, PRE 14A, 1998-04-17

CONNECT INC
PRE 14A, 1998-04-17
PREPACKAGED SOFTWARE

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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

Connect, Inc.
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(Name of Registrant as Specified In Its Charter)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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Notes:

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CONNECT, INC.

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 28, 1998

The Annual Meeting of Stockholders (the "Annual Meeting") of CONNECT, Inc.,
a Delaware corporation (the "Company"), will be held at the principal
executive offices of the Company, located at 515 Ellis Street, Mountain View,
California, on Thursday, May 28, 1998 at 1:00 p.m., local time, for the
following purposes:

1. To elect five directors of the Company to serve until the 1999 Annual
Meeting of Stockholders or until their respective successors are elected
and qualified;

2. To approve an amendment and restatement of the Company's Amended and
Restated Certificate of Incorporation to eliminate references to series
of Preferred Stock which had been previously outstanding.

3. To approve an amendment to the 1996 Stock Option Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
2,000,000 shares.

4. To ratify the appointment of Ernst & Young LLP as the independent
auditors of the Company for the year ending December 31, 1998; and

5. To transact such other business as may properly come before the Annual
Meeting and any adjournment or postponement thereof.

The foregoing items of business, including the nominees for directors, are
more fully described in the Proxy Statement accompanying and made a part of
this Notice.

The Board of Directors has fixed the close of business on April 15, 1998 as
the record date for determining the stockholders entitled to notice of and to
vote at the Annual Meeting and any adjournment(s) or postponement(s) thereof.

All stockholders are cordially invited to attend the Annual Meeting in
person. However, whether or not you expect to attend the Annual Meeting in
person, you are urged to mark, date, sign and return the enclosed proxy card
as promptly as possible in the postage-prepaid envelope provided to ensure
your representation and the presence of a quorum at the Annual Meeting. If you
send in your proxy card and then decide to attend the Annual Meeting to vote
your shares in person, you may still do so. Your proxy is revocable in
accordance with the procedures set forth in the Proxy Statement.

By Order of the Board of Directors,

/s/ JOSEPH G. GIRATA
Joseph G. Girata
Secretary

Mountain View, California
April 28, 1998

IMPORTANT

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. IF A QUORUM IS NOT REACHED, THE COMPANY WILL HAVE THE ADDED
EXPENSE OF RE-ISSUING THESE PROXY MATERIALS. IF YOU ATTEND THE MEETING AND
SO DESIRE, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.

THANK YOU FOR ACTING PROMPTLY.

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CONNECT, INC.

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PROXY STATEMENT

GENERAL

This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors (the "Board") of CONNECT, Inc., a Delaware corporation (the
"Company"), of proxies in the enclosed form for use in voting at the Annual
Meeting of Stockholders (the "Annual Meeting") to be held at the principal
executive offices of the Company, located at 515 Ellis Street, Mountain View,
California, on Thursday, May 28, 1998 at 1:00 p.m., local time, and any
adjournment or postponement thereof.

This Proxy Statement, the enclosed proxy card and the Company's Annual
Report to Stockholders for the year ended December 31, 1997, including
financial statements, were first mailed to stockholders entitled to vote at
the meeting on or about April 28, 1998. The Company's principal executive
offices are located at 515 Ellis Street, Mountain View, California, 94043. The
Company's telephone number at that location is (650) 254-4000.

REVOCABILITY OF PROXIES

Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company (Attention:
Joseph G. Girata) a written notice of revocation or a duly executed proxy
bearing a later date, or by attending the Annual Meeting and voting in person.

RECORD DATE; VOTING SECURITIES

The close of business on April 15, 1998 has been fixed as the record date
(the "Record Date") for determining the holders of shares of Common Stock of
the Company entitled to notice of and to vote at the Annual Meeting. At the
close of business on the Record Date, the Company had approximately 12,862,706
shares of Common Stock outstanding and held of record by approximately 153
stockholders. On February 24, 1998, the stockholders of the Company approved a
one-for-five reverse Common Stock split, pursuant to which every five shares
of Common Stock outstanding as of the close of business on February 26, 1998
became one share of Common Stock (the "Reverse Split"). Except where otherwise
indicated, all share and per share amounts in the Proxy Statement are adjusted
to reflect the Reverse Split.

VOTING AND SOLICITATION

Each outstanding share of Common Stock on the Record Date is entitled to one
vote on all matters, subject to the conditions described below. Votes cast by
proxy or in person at the Annual Meeting will be tabulated by the Inspector of
Elections (the "Inspector") with the assistance of the Company's transfer
agent. The Inspector will also determine whether or not a quorum is present.
Except in certain specific circumstances, the affirmative vote of a majority
of shares present in person or represented by proxy at a duly held meeting at
which a quorum is present is required under Delaware law for approval of
proposals presented to stockholders. In general, Delaware law also provides
that a quorum consists of a majority of the shares entitled to vote and
present in person or represented by proxy. The Inspector will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum and as negative votes for purposes of
determining the approval of any matter submitted to the stockholders for a
vote. Any proxy which is returned using the form of proxy enclosed and which
is not marked as to a particular item will be voted for the election of
directors, for amendment the Company's Certificate of Incorporation, for
ratification of the appointment of the designated independent auditors and as
the proxy holders deem advisable on other matters that may come before the
meeting, as the case may be with respect to the item not marked. If a broker
indicates on the enclosed proxy or its substitute that it does not have
discretionary authority as to certain shares to vote on a particular matter
("broker non-votes"), those shares will not be considered as present with
respect to that matter. The Company

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believes that the tabulation procedures to be followed by the Inspector are
consistent with the general statutory requirements in Delaware concerning
voting of shares and determination of a quorum.

The solicitation of proxies will be conducted by mail and the Company will
bear all attendant costs. These costs will include the expense of preparing
and mailing proxy solicitation materials for the Annual Meeting and
reimbursements paid to brokerage firms and others for their expenses incurred
in forwarding solicitation materials regarding the Annual Meeting to
beneficial owners of the Company's Common Stock. The Company may conduct
further solicitation personally, telephonically or by facsimile through its
officers, directors and employees, none of whom will receive additional
compensation for assisting with the solicitation.

DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING

Proposals of stockholders intended to be presented at the Company's 1999
Annual Meeting of Stockholders must be received by Joseph G. Girata, CONNECT,
Inc., 515 Ellis Street, Mountain View, California, 94043-2242, no later than
December 24, 1998.

PROPOSAL NO. 1

ELECTION OF DIRECTORS

NOMINEES

At the Annual Meeting, the stockholders will elect five directors to serve
until the next Annual Meeting of Stockholders or until their respective
successors are elected and qualified. In the event any nominee is unable or
unwilling to serve as a director at the time of the Annual Meeting, the
proxies may be voted for the balance of those nominees named and for any
substitute nominee designated by the present Board or the proxy holders to
fill such vacancy, or for the balance of the nominees named without nomination
of a substitute, or the Board may be reduced in accordance with the Bylaws of
the Company. The Board has no reason to believe that any of the persons named
below will be unable or unwilling to serve as a nominee or as a director if
elected.

Assuming a quorum is present, the five nominees receiving the highest number
of affirmative votes of shares entitled to be voted for them will be elected
as directors of the Company for the ensuing year. Unless marked otherwise,
proxies received will be voted FOR the election of each of the five nominees
named below. In the event that additional persons are nominated for election
as directors, the proxy holders intend to vote all proxies received by them in
such a manner as will ensure the election of as many of the nominees listed
below as possible, and, in such event, the specific nominees to be voted for
will be determined by the proxy holders.

The names of the nominees, their ages as of December 31, 1997 and certain
other information about them are set forth below:

<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
--------------- --- -------------------- --------
<C> <C> <S> <C>
Gordon J. Bridge.......... 55 Chairman of the Board of Directors 1995
of the Company
Promod Haque.............. 49 Vice President, Norwest Venture 1995
Capital Management, Inc.
Richard H. Lussier........ 60 Retired 1992
Craig D. Norris........... 50 Chief Executive Officer and 1998
President of the Company
Rory T. O'Driscoll........ 33 Principal of BankAmerica Ventures 1995
and Vice President of BA Venture
Partners I
</TABLE>

There are no family relationships among any director, executive officer or
person nominated to become a director of the Company.

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Gordon J. Bridge joined the Company in November 1995 as the Chairman of the
Board of Directors and served as President and Chief Executive Officer of the
Company from April 1997 to April 1998. Currently, he is Chairman of the Board
and, since April 1998, a consultant to the Company. Since November 1995 Mr.
Bridge has also served as the chief business development officer of the
Company. From November 1995 to April 1997, Mr. Bridge was 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 AT&T EasyLink Services, President of 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.S. in Mathematics from Bradley University.

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 and through its managed investment funds a
principal stockholder of the Company, 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 an M.B.A. from Northwestern University.

Richard H. Lussier became a director of the Company in June 1992. Until
September 1996, when Mr. Lussier retired, he was President and Chief Executive
Officer of Siemens Nixdorf Information Systems Inc., a computer company and a
subsidiary of Siemens Nixdorf Informationssysteme AG ("Siemens Nixdorf"). 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 Nixdorf in March 1995. Mr. Lussier holds a B.A. in Economics from
College of the Holy Cross and completed coursework at Boston College Graduate
School of Business.

Craig D. Norris joined the Company in January 1996 as Vice President of
Professional Services. In July 1997 he was promoted to the position of
Executive Vice President of Services and Operations and in April 1998 to the
positions of Chief Executive Officer and President. In addition, in April
1998, Mr. Norris was appointed to the Company's Board of Directors. 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 an M.B.A. from Fairleigh Dickenson University.

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 through its managed investment funds a principal
stockholder of the Company, 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.

MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

During the period from January 1, 1997 through December 31, 1997 (the "last
fiscal year"), the Board met 12 times and acted by unanimous written consent
six times. No director attended fewer than 75% of the aggregate

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number of meetings of the Board and meetings of the committees of the Board on
which he or she serves. The Board has an Audit Committee, a Compensation
Committee and a Financing Committee.

From January 1, 1997 through May 29, 1997, the Audit Committee consisted of
directors Haque and O'Driscoll, two of the Company's non-employee directors.
From May 29, 1997 through February 28, 1998, the Audit Committee has consisted
of directors Welty and O'Driscoll, two of the Company's non-employee
directors. Since February 28, 1998, the Audit Committee has consisted of
directors O'Driscoll and Haque. The Audit Committee held two meetings and
acted by unanimous written consent one time during the last fiscal year. The
Audit Committee 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.

From January 1, 1997 through May 29, 1997, the Compensation Committee
consisted of directors Haque, Weening and Welty. From May 29, 1997 until March
31, 1998, the Compensation Committee consisted of directors Haque, Weening and
Lussier. Currently, the Compensation Committee consists of directors Haque and
Lussier. The Compensation Committee held eight meetings and acted by unanimous
written consent three times during the last fiscal year. Its functions are to
make recommendations concerning salaries and incentive compensation for
employees of the Company and to administer the Company's stock plans and
determine the terms and conditions of stock option grants.

BOARD COMPOSITION

Messrs. Bridge, Haque, Lussier, Weening, Welty and O'Driscoll were elected
by the holders of the Company's Common Stock at the Annual Meeting held in
May, 1997. Mr. Welty resigned from the Board in February 1998 and Mr. Weening
resigned in March 1998. Mr. Norris was appointed to the Board in April 1998.

Commencing at the first annual meeting of stockholders following the annual
meeting of stockholders when the Company shall have had at least 800
stockholders as determined by Sections 301.5, 1600 and 2115 of the California
Corporations Code, the Restated Certificate of Incorporation of the Company
provide that the Board of Directors 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 so determined; 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. The
Company believes that it had 800 stockholders at the time of the 1997 Annual
Meeting. However, the Company did not receive the certification required of
Section 2115 of the California Corporations Code and therefore the staggered-
board and termination of cumulative voting provisions described above did not
take effect.

DIRECTOR COMPENSATION

The Company's nonemployee directors are eligible to receive stock option
grants pursuant to the Company's 1996 Directors' Stock Option Plan (the
"Directors' Plan") and 1996 Stock Option Plan. Except as described below,
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.

The Directors' Plan provides for the grant of nonstatutory stock options to
nonemployee directors of the Company. The Directors' Plan provides that each
person who first becomes a nonemployee director of the Company after the date
of effectiveness of the Company's initial public offering will be granted an
option to purchase 4,000 shares of Common Stock (a "First Option") on the date
on which the optionee first becomes a

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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 1,000 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 three months prior to the date of such Annual Meeting.

Mr. Bridge, Chairman of the Company's Board of Directors, entered into a
consulting relationship with the Company in April 1998 pursuant to which he
receives cash compensation of $18,750 per month. For a full description of the
terms of Mr. Bridge's consulting arrangement with the Company, see "Executive
Compensation--Summary Compensation."

REQUIRED VOTE

The five nominees receiving the highest number of affirmative votes of
shares of the Company's Common Stock present at the Annual meeting in person
or by proxy and entitled to vote shall be elected as directors.

RECOMMENDATION OF THE BOARD

THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF ALL NOMINEES NAMED ABOVE TO
SERVE AS DIRECTORS FOR THE ENSUING YEAR AND UNTIL HIS SUCCESSOR IS DULY
ELECTED AND QUALIFIED.

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PROPOSAL NO. 2

AMENDMENT AND RESTATEMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION

The Board of Directors of the Company has approved the amendment and
restatement of the Company's Amended and Restated Certificate of Incorporation
(the "Existing Certificate"). The amendment and restatement approved by the
Board is in the form attached to this Proxy Statement as Exhibit A. The Board
of Directors of the Company is seeking approval of the Company's stockholders
to amend and restate the Company's Existing Certificate in the form of Exhibit
A to this Proxy Statement.

The amendments to the Existing Certificate include the elimination of
references to the series of Preferred Stock of the Company that existed prior
to the Company's initial public offering in August 1996 (the "Pre-IPO Series
of Preferred Stock"), the elimination of references to the Company's Series A
Preferred Stock, all of the outstanding shares of which were acquired by the
Company on April 1, 1998 (the "Series A Preferred Stock"), and the reduction
in the number of shares of Preferred Stock stated as authorized from
36,140,498 to 3,500,000. The remaining 3,500,000 shares of Preferred Stock
will be available for issuance from time to time in series, the terms of which
may be determined by the Board of Directors of the Company. In connection with
the Company's initial public offering, the shares of Preferred Stock
outstanding at the time were converted into Common Stock. As a result, it is
no longer necessary to maintain in the Existing Certificate references to the
Pre-IPO Series of Preferred Stock. With respect to the Company's Series A
Preferred Stock, the Company acquired all of the outstanding shares of Series
A Preferred Stock on April 1, 1998 and does not intend to reissue any shares
of Series A Preferred Stock. The primary benefit of eliminating references to
the Pre-IPO Series of Preferred Stock and the Series A Preferred Stock is that
the Company's Delaware tax liability will be reduced. Delaware charges an
annual tax on all shares authorized within a certificate of incorporation and
is currently charging a tax to the Company as a result of the existence of the
Pre-IPO Series of Preferred Stock in the Existing Certificate.

APPROVAL REQUIRED

Approval of Proposal No. 2 requires the affirmative vote of a majority of
the outstanding shares of Common Stock of the Company.

RECOMMENDATION OF THE BOARD

THE BOARD RECOMMENDS A VOTE FOR THE AMENDMENT AND RESTATEMENT OF THE
COMPANY'S EXISTING CERTIFICATE.

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PROPOSAL NO. 3

AMENDMENTS TO THE 1996 STOCK OPTION PLAN

At the Annual Meeting, the Company's stockholders are being asked to approve
an amendment to the 1996 Stock Option Plan (the "1996 Option Plan") that would
increase the number of shares of Common Stock reserved for issuance thereunder
by 2,000,000 shares. The following is a summary of principal features of the
1996 Option Plan, but it does not purport to be a complete description of all
provisions of the plan. Any stockholder of the Company who wishes to obtain a
copy of the actual plan document may do so upon written request to the
Company's Chief Financial Officer at the Company's principal offices at 515
Ellis Street, Mountain View, California 94043.

GENERAL

The Company's 1996 Option Plan was adopted by the Board of Directors and
approved by the Company's stockholders in April 1996. At the Annual Meeting of
the Company's Stockholders held on May 29, 1997, the stockholders approved an
amendment to the 1996 Option Plan providing that on the first trading day of
each fiscal year during the period beginning January 1, 1998 and ending
December 31, 2002 the number of shares reserved for issuance under the 1996
Option Plan would be increased by an amount equal to the lesser of: (x) three
percent (3%) of the total number of shares of the Company's Common Stock
issued and outstanding as of the last business day of the immediately
preceding fiscal year, or (y) 140,000 shares. Accordingly, as of January 1998,
an additional 114,000 shares of Common Stock were automatically reserved for
issuance under the 1996 Option Plan. Currently, there are 614,000 shares
reserved for issuance under the plan and, if the stockholders approve this
amendment to reserve an additional 2,000,000 shares, there will be a total of
2,614,000 shares reserved for issuance under the 1996 Option Plan.

The 1996 Option Plan provides for (i) the granting to employees (including
officers and employee directors) of "incentive stock options" ("ISOs") within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code") and (ii) the granting to employees and consultants (including
nonemployee directors) of nonstatutory stock options ("NSOs"). The 1996 Option
Plan is not a qualified deferred compensation plan under Section 401(a) of the
Code, and is not subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended.

As of April 2, 1998, 2,808 shares of Common Stock have been issued upon
exercise of options issued under the 1996 Option Plan, unexercised options for
523,376 shares were outstanding under the 1996 Option Plan and 87,821 shares
remained available for future grants (without taking into account the current
proposed amendment). Shares not purchased under an option prior to its
expiration will be available for future option grants under the 1996 Option
Plan. As of April 2, 1998, the aggregate fair market value of shares subject
to outstanding options under the 1996 Option Plan was approximately $948,880,
based upon the closing price of the Common Stock on The Nasdaq National Market
as of such date. The actual benefits, if any, to the holders of stock options
issued under the 1996 Option Plan are not determinable prior to exercise as
the value, if any, of such stock options to their holders is represented by
the difference between the market price of a share of the Company's Common
Stock on the date of exercise and the exercise price of a holder's stock
option, as set forth below. As of April 2, 1998, the following Named Executive
Officers and directors of the Company have received grants under the 1996
Option Plan: Gordon J. Bridge (164,998 shares), Barton S. Foster (59,499
shares), Joseph G. Girata (125,495 shares), Craig D. Norris (25,000 shares),
Kenneth M. Ross (20,000 shares), Promod Hague (1,000 shares), Richard Lussier
(5,000 shares) and Rory O'Driscoll (1,000 shares). In addition, as of such
date, options to purchase 121,384 shares of Common Stock are held by all
current employees (including officers of the Company but excluding executive
officers).

PURPOSE

The purposes of the 1996 Option Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to give
employees and consultants of the Company a greater personal stake in the

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success of the Company's business, to provide additional incentive to the
employees and consultants of the Company to continue and advance in their
employment and service to the Company and to promote the success of the
Company's business. The Board of Directors does not believe that the shares
currently available for grant under the 1996 Option Plan are sufficient to
attract new employees and retain existing employees. Approval of the increase
in the number of shares reserved for issuance under the 1996 Option Plan at
the 1998 Annual Stockholders Meeting is expected to provide sufficient
additional stock to continue the Company's policy of equity ownership by
employees and consultants as an incentive to contribute to the Company's
success.

ADMINISTRATION

The 1996 Option Plan is administered by the Company's Board of Directors or
a committee of the Board (the "Administrator"). The 1996 Option Plan is
currently being administered exclusively by the Compensation Committee of the
Board of Directors. The Administrator may determine the terms of the options
granted, including the exercise price, the number of shares subject to each
option and the exercisability of the option. The Administrator also has the
full power to select the individuals to whom options will be granted and to
make any combination of grants to any participants. The Administrator's
interpretation and construction of any provision of the 1996 Option Plan are
final and binding upon all participants.

ELIGIBILITY

The 1996 Option Plan provides that ISOs may be granted to employees
(including officers and directors who are also employees) of the Company or
any of its subsidiaries, while NSOs may be granted to employees and
consultants of the Company or any of its subsidiaries. The 1996 Option Plan
does not set either a maximum or minimum number of shares of Common Stock
which may be granted under options to any person, other than the annual per
employee limitation set forth in "Limitation on Grants to Employees," below.
However, no employee may be granted ISOs that first become exercisable in any
calendar year for Common Stock having a total fair market value, determined at
time of grant, in excess of $100,000. To the extent options have been issued
to a person that exceed the $100,000 limit, such excess options are treated as
NSOs. See "Federal Income Tax Aspects of the 1996 Stock Option Plan" below.

TERMS OF OPTIONS

Each option is evidenced by a stock option agreement between the Company and
the optionee. Each option is subject to the following additional terms and
conditions:

(a) Exercise of the Option. The Administrator determines when options may
be exercised. An option is exercised by giving written notice of exercise
to the Company specifying the number of full shares of Common Stock to be
purchased and by tendering of payment of the purchase price. The purchase
price of the shares purchased upon exercise of an option shall be paid in
consideration of such form as is determined by the Administrator, and such
form of consideration may vary for each option. Each optionee should refer
to his or her individual option agreement for information as to the
exercisability and form of consideration applicable to his or her option.

(b) Exercise Price and Consideration. The option exercise price for ISOs
and NSOs may not be less than 100% of the fair market value of the Common
Stock on the date of grant; provided that the exercise price of any ISO or
NSO granted to a person who at the time of the grant owns stock
representing more than 10% of the total combined voting power of all
classes of stock of the Company or any parent or subsidiary may not be less
than 110% of the fair market value of a share of Common Stock on the date
of grant of such option.

The Administrator of the 1996 Option Plan determines the fair market
value of the Common Stock. As long as the Common Stock of the Company is
trading on The Nasdaq National Market ("Nasdaq"), the fair market value of
a share of Common Stock of the Company shall be the closing sales price for
such

8
<PAGE>

stock as quoted on such system on the date of determination (if for a given
day no sales were reported, the closing bid on that day shall be used), as
such price is reported in The Wall Street Journal or such other source the
Administrator deems reliable.

The consideration to be paid for shares issued on exercise of options
granted under the 1996 Option Plan, including the method of payment, is
determined by the Administrator (in the case of ISOs, such determination
shall be made at the time of grant) and may consist entirely of cash;
check; promissory note; shares of Common Stock which have been beneficially
owned by the optionee for at least six months or which were not acquired
directly or indirectly from the Company, with a fair market value on the
exercise date equal to the aggregate exercise price of the shares
purchased; authorization from the Company to retain from the total number
of shares as to which the option is exercised a number of shares having a
fair market value on the exercise date equal to the aggregate exercise
price of the shares issued; or delivery of a properly executed notice and
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds required to pay the exercise price. The
Administrator may also authorize payments by any combination of the above
methods or any other consideration and method of payment permitted by law.

(c) Termination of Status As an Employee or Consultant. In the event of
termination of an optionee's employment or consulting relationship with the
Company for any reason other than death or total and permanent disability,
the optionee may still exercise his or her option to the extent that he or
she was entitled to exercise it at the date of termination, but such
exercise must be made within one month (or such other period of time, not
exceeding three months in the case of an ISO or six months in the case of
an NSO, as is determined by the Administrator, with such determination in
the case of an ISO being made at the time the option is granted) and may
not be made later than the date of expiration of the term of the option as
set out in the option agreement. To the extent an optionee was not entitled
to exercise an option at the date of such termination, or if an optionee
does not exercise such option (which he or she was entitled to exercise)
within the time specified herein, such option shall terminate.

(d) Disability. If an optionee is unable to continue his or her
employment or consulting relationship with the Company as a result of his
or her total and permanent disability, an option may be exercised (to the
extent it was exercisable upon the date of termination) within twelve
months of termination, but an option may not be exercised later than the
date of expiration of the term of the option as set out in the option
agreement. To the extent an optionee was not entitled to exercise an option
at the date of such termination, or if an optionee does not exercise such
option (which he or she was entitled to exercise) within the time specified
herein, such option shall terminate.

(e) Death. If an optionee should die while employed, the optionee's
estate or a person who has acquired the right to exercise the option by
bequest or inheritance may exercise the option at any time within twelve
months (or such other period of time, not exceeding twelve months, as is
determined by the Administrator, with such determination in the case of an
ISO being made at the time of grant of the option) after the date of death
(but not later than the date of expiration of the term of the option as set
out in the option agreement). The option shall be exercisable to the extent
that the right to exercise would have accrued had the optionee continued
living and working as an employee of or consultant to the Company for
another three months (or such other period of time as is determined by the
Administrator) beyond the date of death.

If an optionee should die within one month (or such other period of time,
not to exceed three months, as is determined by the Administrator, with such
determination in the case of an ISO being made at the time of grant of the
option) after terminating his or her employment relationship with the Company,
the optionee's estate or person who has acquired the right to exercise the
option may likewise exercise the option at any time within twelve months after
the date of death, but not later than the date of expiration of the term of
the option as set out in the option agreement. However, in this case, the
option shall be exercisable only to the extent it was exercisable at the date
of termination.

To the extent an optionee was not entitled to exercise an option at the date
of such termination, or if an optionee does not exercise such option (which he
or she was entitled to exercise) within the time specified herein, such option
shall terminate.

9
<PAGE>

(f) Term of Options. The term of an option is determined by the specific
option agreement. ISOs may not have a term of more than ten years.
Furthermore, the maximum term for an option granted to an optionee who
immediately before the grant of such option owns more than 10% of the total
combined voting power of all classes of stock of the Company or any parent
or subsidiary is five years. No option may be exercised by any person after
its term expires.

(g) Limitation on Grants to Employees. Subject to adjustment as provided
in the 1996 Option Plan, the maximum number of shares which may be subject
to options granted to any one employee under the 1996 Option Plan during
any fiscal year of the Company is 200,000 shares.

(h) Option Not Transferable. An option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution. An option is
exercisable during the optionee's lifetime only by the optionee and in the
event of the optionee's death, by a person who acquires the right to
exercise the option by bequest or inheritance or by reason of the death of
the optionee.

(i) Acceleration of Options. In the event of a sale of all or
substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the option shall be assumed or an
equivalent option substituted by the successor corporation unless the
administrator decides, in lieu of such assumption or substitution, to
accelerate the vesting of the option to make it exercisable as to some or
all of the shares subject to the option, including shares which would not
otherwise be exercisable. In the event of such acceleration of the option,
the optionee shall have 15 days from the date of notice of the option's
acceleration to exercise all or a portion of the option, and the option
will terminate upon the expiration of such period.

(j) Other Provisions. The option agreement may contain other terms,
provisions and conditions as may be determined by the Administrator as long
as they are consistent with the 1996 Option Plan.

ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

In the event any change such as a stock split or dividend is made in the
Company's capitalization that results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment shall be made in the exercise price, the
number of shares subject to each outstanding option and the limitation on
grants to employees, as well as in the number of shares available for issuance
under the 1996 Option Plan. In the event of the proposed dissolution or
liquidation of the Company, each option will terminate immediately prior to
the consummation of such proposed action unless otherwise provided by the
Administrator. The Administrator may declare that any option shall terminate
as of a date fixed by the Administrator and give each optionee the right to
exercise his or her option as to all or any part of the shares subject to the
option, including shares as to which the option would not otherwise be
exercisable.

AMENDMENT AND TERMINATION

The Board may amend the 1996 Option Plan at any time or from time to time or
may terminate it without approval of the stockholders, except that stockholder
approval is required for any amendment to the 1996 Option Plan that increases
the number of shares which may be issued under the 1996 Option Plan, modifies
the standards of eligibility, changes the limitation on grants to employees or
effects other changes which would require stockholder approval to qualify
options granted under the 1996 Option Plan as ISOs under Section 422 of the
Code or as performance-based compensation under Section 162(m) of the Code.
However, no action by the Board or stockholders may alter or impair any option
previously granted under the 1996 Option Plan, unless mutually agreed
otherwise between the optionee and the Board in a writing signed by the
optionee and the Company. The 1996 Option Plan shall terminate in 2006. Any
options outstanding at that time under the 1996 Option Plan shall remain
outstanding until they expire their own terms.

10
<PAGE>

FEDERAL INCOME TAX ASPECTS OF THE 1996 OPTION PLAN

The following is a brief summary of the United States federal income tax
consequences of transactions under the 1996 Option Plan based on federal
securities and income tax laws in effect as of the date of this Proxy (which
laws could change at any time hereafter). This summary is not intended to be
exhaustive and does not discuss the tax consequences of a participant's death
or provisions of the income tax laws of any municipality, state or other
country in which an optionee may reside. This summary does not purport to be
complete. The Company advises all optionees to consult their own tax advisors
concerning tax implications of option grants and exercises, and the
disposition of shares acquired upon such exercise, under the 1996 Option Plan.

Options granted under the 1996 Option Plan may be either ISOs, which are
intended to qualify for the special tax treatment provided by Section 422 of
the Code, or NSOs, which will not qualify for such treatment. If an option
granted under the 1996 Option Plan is an ISO, the optionee will recognize no
income upon grant of the ISO and incur no regular tax liability upon its
exercise, although the exercise of an ISO may give rise to alternative minimum
tax (see discussion below). The Company will not be allowed a deduction for
federal income tax purposes as a result of the exercise of an ISO regardless
of the applicability of the alternative minimum tax. Upon the sale or exchange
of the shares more than two years after grant of the ISO and more than one
year after receipt of the shares by the optionee, any gain will be treated as
long-term capital gain. If both of these holding periods are not satisfied (a
"disqualifying disposition"), the optionee will recognize ordinary income
equal to the difference between the exercise price and the lower of the fair
market value of the stock at the date of the option exercise or the sale price
of the stock. The Company will be entitled to a deduction in the same amount
as the ordinary income recognized by the optionee. Any gain recognized on such
a disqualifying disposition of the shares in excess of the amount treated as
ordinary income will be characterized as long-term capital gain if the sale
occurs more than one year after exercise of the option or as short-term
capital gain if the sale is made earlier. For individual taxpayers, the
current U.S. federal income tax rate on long-term capital gains is
alternatively 28% (in the case of shares held more than one year but less than
18 months after exercise) or 20% (in the case of shares held more than 18
months after exercise). Capital losses for individual taxpayers are allowed in
full against capital gains plus $3,000 of other income.

All options which do not qualify as ISOs are referred to as NSOs. An
optionee will not recognize any taxable income at the time he or she is
granted an NSO. However, upon its exercise, the optionee will recognize
ordinary income for tax purposes measured by the excess of the then fair
market value of the shares over the exercise price. In certain circumstances,
where the shares are subject to a substantial risk of forfeiture when
acquired, the date of taxation may be deferred unless the optionee files an
election with the Internal Revenue Service under Section 83(b) of the Code.
The income recognized by an optionee who is also an employee of the Company
will be subject to income and employment tax withholding by the Company by
payment in cash by the optionee or out of the optionee's current earnings.
Upon sale of such shares by the optionee, any difference between the sales
price and the exercise price, to the extent not recognized as ordinary income
as provided above, will be treated as capital gain or loss, and will qualify
for long-term capital gain or loss treatment if the shares have been held for
more than one year.

ALTERNATIVE MINIMUM TAX

As noted above, the exercise of an ISO may subject the optionee to the
alternative minimum tax ("AMT") under Section 55 of the Code. The AMT is
calculated for federal tax purposes by applying a tax rate of 26% to
alternative minimum taxable income up to $175,000 ($87,500 for married
taxpayers filing separately) and 28% to alternative minimum income above such
amount. Alternative minimum taxable income for federal tax purposes is equal
to (i) taxable income adjusted for certain items, plus (ii) items of tax
preference less (iii) an exclusion of $45,000 for joint returns, $33,750 for
unmarried individual returns and $22,500 in the case of married taxpayers
filing separately (which exemption amounts are phased out for upper-income
taxpayers). Alternative minimum tax will be due if the tax determined under
the foregoing formula exceeds the taxpayer's regular tax for the year.

11
<PAGE>

In computing alternative minimum taxable income, shares purchased upon
exercise of an ISO are treated as if they had been acquired by the optionee
pursuant to an NSO, as described above. Because the AMT rules are complex and
their effects depend upon the personal circumstances of each taxpayer, an
optionee should consult his or her own tax advisor prior to exercising an
incentive stock option. If an optionee pays AMT, the amount of such AMT may be
carried forward as a credit against any subsequent year's regular tax in
excess of the AMT.

REQUIRED VOTE

The foregoing amendment of the 1996 Stock Option Plan requires the
affirmative vote of the holders of a majority of the shares of the Company's
Common Stock present at the Annual Meeting in person or by proxy and entitled
to vote.

RECOMMENDATION OF THE BOARD

THE BOARD RECOMMENDS A VOTE FOR THE AMENDMENT OF THE 1996 STOCK OPTION PLAN
TO INCREASE THE NUMBER OF SHARES RESERVED FOR ISSUANCE THEREUNDER BY 2,000,000
SHARES AS DESCRIBED ABOVE.

PROPOSAL NO. 4

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

Ernst & Young LLP has served as the Company's independent auditors since
1992 and has been appointed by the Board to continue as the Company's
independent auditors for the fiscal year ending December 31, 1998. In the
event that ratification of this selection of auditors is not approved by a
majority of the shares of Common Stock voting at the Annual Meeting in person
or by proxy, the Board will reconsider its selection of auditors.

A representative of Ernst & Young LLP is expected to be present at the
Annual Meeting. This representative will have an opportunity to make a
statement and will be available to respond to appropriate questions.

REQUIRED VOTE

The ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ended December 31, 1998 requires the
affirmative vote of the holders of a majority of the shares of the Company's
Common Stock present at the Annual Meeting in person or by proxy and entitled
to vote.

RECOMMENDATION OF THE BOARD

THE BOARD RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF ERNST &
YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE YEAR ENDING DECEMBER
31, 1998.

12
<PAGE>

EXECUTIVE OFFICERS

The following table sets forth certain information with respect to the
executive officers of the Company, including their ages as of December 31,
1997:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Gordon J. Bridge........ 55 President, Chief Executive Officer and Chairman
of the Board
Joseph G. Girata........ 53 Vice President of Finance and Administration,
Chief Financial Officer and Secretary
Kenneth M. Ross......... 44 Chief Technical Officer and Executive Vice
President of Development
Barton S. Foster........ 33 Executive Vice President of Sales and Marketing
Craig D. Norris......... 50 Executive Vice President of Services and
Operations
</TABLE>

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 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, was promoted to Vice President of Sales and Marketing in July 1997
and resigned from that position in April 1998. 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

13
<PAGE>

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 an M.B.A. from
the Harvard University Graduate School of Business.

14
<PAGE>

STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information that has been provided to the
Company with respect to beneficial ownership of shares of the Company's Common
Stock as of April 2, 1998 for (i) each person who is known by the Company to
own beneficially more than 5% of the outstanding shares of Common Stock, (ii)
the persons who served as the Company's Chief Executive Officer during the
fiscal year ended December 31, 1997 and the Company's other four most highly
paid executive officers who earned in excess of $100,000 during such fiscal
year (collectively, the "Named Executive Officers"), (iii) each director of
the Company and (iv) all directors and executive officers of the Company as a
group. All share numbers in the table reflect the Reverse Split.

<TABLE>
<CAPTION>
SHARES PERCENT OF SHARES
BENEFICIALLY BENEFICIALLY OWNED
NAME AND ADDRESS (1) OWNED (2) (2)
-------------------- ------------ ------------------
<S> <C> <C>
Combination Inc................................ 1,072,817 8.3%
c/o ISCC
310 Madison Avenue, Suite 501
New York, NY 10017
Norwest Equity Partners V (3).................. 1,481,608 11.5
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
Entities affiliated with Stark Investments (4). 1,831,372 14.2
1500 W. Market Street, Suite 200
Mequon, WI 53092
BankAmerica Ventures (5)....................... 1,289,827 10.0
950 Tower Lane, Suite 700
Foster City, CA 94404
Elliot Bossen.................................. 1,048,195 8.1
3100 Tower Blvd., Suite 1104
Durham, NC 27707
Entities affiliated with Special Situations 2,045,951 15.9
Fund, L.P. (6)................................
133 East 53rd St.
New York, NY 10022
Quaestus Management Corporation (7)............ 1,108,890 8.6
330 E. Kilbourn Avenue
Milwaukee, WI 53202
Gordon J. Bridge (8)........................... 93,892 *
Barton S. Foster (9)........................... 28,054 *
Joseph G. Girata (10).......................... 22,095 *
Promod Haque (3)............................... 1,481,608 11.5
Thomas P. Kehler (11).......................... 45,879 *
Richard H. Lussier (12)........................ 8,931 *
Craig D. Norris (13)........................... 20,450 *
Rory T. O'Driscoll (5)......................... 1,289,827 10.0
Kenneth M. Ross (14)........................... 40,304 *
All directors and executive officers as a group 3,031,041 23.2
(9 persons) (15)..............................
</TABLE>
- --------
* Less than 1%.
(1) Unless otherwise indicated, the address of each of the named individuals
is: c/o CONNECT, Inc., 515 Ellis Street, Mountain View, CA 94043.
(2) 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 options currently
exercisable or exercisable within 60 days after April 2, 1998 are deemed
outstanding for computing the percentage ownership of the person or
entity holding such securities, but are not deemed

15
<PAGE>

outstanding for computing the percentage ownership of any other person or
entity. To the Company's knowledge, the persons named in this 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 except as indicated in the other footnotes to this
table. Applicable percentage of beneficial ownership is based on 12,862,711
shares of Common Stock outstanding as of April 2, 1998.
(3) Promod Haque is a Vice President of Norwest Venture Capital Management,
Inc. ("Norwest") and a general partner of two general partnerships that
are the general partners of Norwest. Mr. Haque disclaims beneficial
ownership of the shares held by such entities except to the extent of his
proportionate partnership interest therein. Some of this information was
determined from a Schedule 13G dated February 3, 1998, as filed by
Norwest.
(4) Includes 915,686 shares held by Shepherd Investments International, Ltd.
and 915,686 shares held by Stark International.
(5) Includes 1,160,844 shares held by BankAmerica Ventures and 128,983 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.
(6) Includes 227,045 shares held by Special Situations Cayman Fund L.P.,
627,456 shares held by Special Situations Fund III, 999,346 shares held
by Special Situations Private Equity Fund L.P. and 192,104 shares held by
Special Situations Technology Fund L.P.
(7) Includes 850,623 shares held by Network Partners, 2,561 shares held by
Quaestus Limited Partnership and 185,826 shares held by Quaestus Partner
Fund.
(8) Includes 79,824 shares issuable upon exercise of stock options
exercisable within 60 days of April 2, 1998. 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.
(9) Includes 26,554 shares issuable upon exercise of stock options
exercisable within 60 days of April 2, 1998. 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 21,729 shares issuable upon exercise of stock options
exercisable within 60 days of April 2, 1998. 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 39,529 shares issuable upon exercise of stock options
exercisable on April 2, 1998, none of which are subject to repurchase by
the Company. In April 1997, Mr. Kehler resigned from his position as
President and Chief Executive Officer. Although he will continue to be
employed by the Company through April 1998, he is no longer an executive
officer of the Company.
(12) Includes 6,931 shares issuable upon exercise of stock options exercisable
within 60 days of April 2, 1998. 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.
(13) Includes 18,450 shares issuable upon exercise of stock options
exercisable within 60 days of April 2, 1998. 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.
(14) Includes 36,304 shares issuable upon exercise of stock options
exercisable within 60 days of April 2, 1998. 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
<PAGE>

(15) Includes 229,321 shares issuable upon exercise of stock options
exercisable within 60 days of April 2, 1998. 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.

EXECUTIVE COMPENSATION

The following table sets forth certain summary information regarding
compensation paid by the Company for services rendered during the fiscal years
ended December 31, 1997, 1996 and 1995 to the Named Executive Officers. All
share numbers in the table reflect the Reverse Split.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
--------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION OPTIONS
- --------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gordon J. Bridge (2)....... 1997 $206,251 $45,000 -- 79,999
President, Chief
Executive Officer 1996 150,000 87,344 -- 30,000
and Chairman of the Board 1995 -- -- -- --
Barton S. Foster (3)....... 1997 159,583 53,266 -- 19,999
Executive Vice President
of Sales 1996 110,981 21,875 15,000(4) --
and Marketing 1995 -- -- -- --
Joseph G. Girata........... 1997 145,000 24,034 -- 50,248(5)
Vice President of Finance
and Administration, 1996 78,526 5,907 -- 35,000(6)
Chief Financial Officer
and Secretary 1995 -- -- -- --
Craig D. Norris (7)........ 1997 150,000 16,250 $8,522(8) 15,000
Executive Vice President
of 1996 140,000 46,020 -- 29,000
Services and Organization 1995 -- -- -- --
Kenneth M. Ross............ 1997 180,090 26,250 -- 10,000
Chief Technical Officer
and 1996 173,540 25,000 -- 25,000
Executive Vice President
of Development 1995 135,000 14,070(9) -- --
Thomas P. Kehler (10)...... 1997 217,307 6,250 -- --
Former President and 1996 200,000 27,083 -- 75,000
Chief Executive Officer 1995 198,520 -- -- --
</TABLE>
- --------
(1) Includes bonuses paid in January 1998 based upon the individual's
performance in 1997.
(2) In April 1997, Mr. Bridge was appointed President and Chief Executive
Officer of the Company. He resigned from such positions in April 1998.
Mr. Bridge continues to serve as the Company's Chairman of the Board, a
position he has held since November 1995.
(3) Mr. Foster resigned as an officer of the Company in April 1998.
(4) Represents amounts paid as signing bonus in 1996.
(5) Includes a grant of a new option to purchase 10,000 shares and a grant of
options to purchase 40,248 shares of Common Stock that was made pursuant
to a repricing program whereby outstanding options for an equal number of
shares having higher exercise prices were canceled and new options having
an exercise price of $8.125 issued in their place. The vesting terms of
such repriced options did not change. See "Ten-Year Option Repricings"
and "Compensation Committee Report on Executive Compensation -- Stock
Options" for further details on this repricing.

17
<PAGE>

(6) Represents 35,000 shares of Common Stock issuable upon exercise of an
option with an original purchase price of $48 per share, which option was
exchanged in September 1996 for a new option to purchase 35,000 shares
with an exercise price of $30.625 per share. See "Ten-Year Option
Repricings" and "Compensation Committee Report on Executive Compensation
-- Stock Options" for further details on this repricing.
(7) Mr. Norris became Chief Executive Officer and President of the Company
in April 1998.
(8) Represents amounts paid as commissions in fiscal 1997.
(9) Represents 1994 bonus paid in January 1995.
(10) In April 1997, Mr. Kehler resigned from his position as President and
Chief Executive Officer and is no longer an executive officer of the
Company.

In connection with Mr. Bridge's appointment in April 1997 as the Company's
Chief Executive Officer and President, Mr. Bridge and the Company entered into
an agreement (the "1997 Letter") providing that Mr. Bridge would receive an
annual salary for fiscal 1997 of $225,000 and be eligible to receive a bonus,
based on the achievement of certain financial objectives, of up to $285,000.
Actual amounts paid to Mr. Bridge during 1997 are as reflected in the Summary
Compensation Table. In addition, pursuant to the 1997 Letter, Mr. Bridge was
granted an option to purchase 79,999 shares of the Company's Common Stock at
an exercise price of $6.25 per share, the fair market value of such stock on
the grant date. Pursuant to the terms of this option, 12.5% of the shares
issuable upon exercise of the option were to vest in October 1997, with the
remainder of the shares vesting in equal monthly installments thereafter
through the fourth anniversary of the grant date. In July 1997, the
Compensation Committee of the Board of Directors amended the vesting terms of
this option grant to Mr. Bridge such that 16.67% of the shares issuable on
exercise became vested in October 1997, with the remainder of the Shares
vesting in equal monthly installments thereafter through the third anniversary
of the grant date. The 1997 Letter also provided that the Company would loan
Mr. Bridge $150,000 pursuant to a full recourse, three-year promissory note to
which interest at the then-current minimum applicable federal rate would
apply. The 1997 Letter provides that, should the Company terminate Mr. Bridge
without cause, he would be entitled to continue working as a consultant to the
Company for a period of one year following such termination and that the
option described above would continue to vest through such consultancy period.
In addition, the 1997 Letter provides that certain performance objectives set
forth in stock option agreements relating to options to purchase an aggregate
of 30,000 shares issued to Mr. Bridge in January 1996 and April 1996 had been
achieved and that, pursuant to the terms of such option agreements, the
vesting schedules for the options converted from a 72-month to a 48-month
schedule.

In January 1998, the Company and Mr. Bridge entered into an agreement (the
"1998 Letter") pursuant to which Mr. Bridge would receive an annual salary for
fiscal 1998 of $225,000 and be eligible to receive a performance bonus, based
upon the Company's achievement of certain financial objectives, of up to
$200,000. In addition, Mr. Bridge would be eligible to receive a strategic
bonus, payable upon the achievement of certain strategic objectives set by the
Board of Directors, of up to $500,000 during fiscal 1998. Mr. Bridge was
granted an option to purchase 79,999 shares of the Company's Common Stock in
January 1998 pursuant to the 1998 Letter, which options were to vest in equal
monthly installments over a three-year period. The 1998 Letter also provides
that, in the event the Company is acquired or merges with another corporation
during 1998, the Company would forgive its loan to Mr. Bridge in the principal
amount of $150,000 plus all accrued interest.

In April 1998, Mr. Bridge resigned his positions as Company's Chief
Executive Officer and President. He continues to serve as its Chairman of the
Board. In connection with his resignation as Chief Executive Officer and
President and pursuant to the 1997 Letter, Mr. Bridge entered into an
agreement with the Company whereby he will remain as a consultant to the
Company and continue to serve as its Chairman of the Board through March 1999.
Pursuant to this agreement, Mr. Bridge will receive through March 1999 an
amount equal to his regular monthly salary prior to his resignation ($18,750),
acceleration of the exercisability of certain options to purchase 69,000
shares of the Company's Common Stock, continued vesting of other unvested
options and reimbursement for certain business expenses associated with his
consulting relationship. If the Company meets certain financial goals for
fiscal 1998, Mr. Bridge will be entitled to receive a bonus payment in January
1999 equal to the bonus he received for the first quarter of 1998 ($23,125).
In addition, the Company has agreed to forgive 50% of the

18
<PAGE>

total principal and outstanding interest of the loan described above in
exchange for Mr. Bridge's remaining a consultant to the Company and, if Mr.
Bridge achieves certain specified goals prior to April 1999, he may be
entitled to forgiveness of the remainder of outstanding principal and interest
on his loan. Finally, should the Company be acquired prior to April 1999, the
vesting schedules of any unvested options held by Mr. Bridge would be
accelerated to make them fully exercisable upon the closing of such
transaction.

In April 1998, the Company entered into an employment letter with Craig
Norris in connection with his appointment as the Company's President and Chief
Executive Officer. Pursuant to the terms of this letter agreement, Mr. Norris
will receive an annual salary of $225,000 for 1998 and will be eligible for a
bonus, payable upon the Company's achievement of certain quarterly and annual
financial objectives, of up to $150,000. The employment letter also provides
that Mr. Norris will be eligible to receive a strategic bonus, payable upon
the achievement of certain strategic objectives set by the Board of Directors,
of up to $[500,000] during fiscal 1998. In addition, Mr. Norris will receive
an option to purchase [200,000] shares of Common Stock contingent upon
approval of the Company's stockholders of the increase in the number of shares
reserved for issuance under the Company's 1996 Option Plan at the 1998 Annual
Meeting of Stockholders.

Mr. Norris and the other executive officers of the Company are entitled to
cash and option acceleration benefits relating to a change of control of the
Company pursuant to Change of Control Agreements between such officers and the
Company, which agreements are described in "Certain Relationships and Related
Transactions" below.

OPTION GRANTS IN LAST FISCAL YEAR

The following table provides certain information with respect to stock
options granted to the Named Executive Officers in the last fiscal year. In
addition, as required by Securities and Exchange Commission rules, the table
sets forth the hypothetical gains that would exist for the options based on
assumed rates of annual compound stock price appreciation during the option
term. Unless otherwise indicated, the Company does not issue stock
appreciation rights. All share numbers in the table reflect the Reverse Split.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE OR PRICE APPRECIATION
UNDERLYING GRANTED TO BASE PRICE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR(1) ($/SH) DATE 5% ($) 10% ($)
---- ----------- ---------------- ----------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Gordon J. Bridge (3).... 79,999(4) 14.82% $ 6.25 4/28/07 $ 314,440 $ 796,859
Barton S. Foster........ 19,999(5) 3.70% $15.00 5/29/07 188,657 478,097
Joseph G. Girata........ 10,000(6) 1.85% $11.25 7/22/07 70,750 179,295
34,999(7) 6.48% $8.125 6/6/06 674,072 1,708,241
5,249(7) 0.97% $8.125 9/9/06 105,220 266,650
Craig D. Norris......... 15,000(8) 2.78% $11.25 7/22/07 106,125 268,943
Kenneth M. Ross......... 10,000(9) 1.85% $11.25 7/22/07 70,750 179,295
Thomas P. Kehler (10)... -- -- -- -- -- --
</TABLE>
- --------
(1) Based on options to purchase an aggregate of 539,974 shares granted to
employees (including employee directors) during the fiscal year ended
December 31, 1997. The foregoing total excludes options granted to
consultants and nonemployee directors. There were no stock appreciation
rights granted during 1997.
(2) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately
prior to the expiration of their terms, assuming the specified compounded
rates of appreciation of the market price per share from the date of
grant to the end of the option term. Actual gains, if any, on stock
option exercise are dependent upon a number of factors, including the
future performance of the Common Stock and the timing of option
exercises, as well as the optionee's continued employment through the
vesting period. There can be no assurance that the amounts reflected in
this table will be achieved.

19
<PAGE>

(3) In April 1997, Mr. Bridge was appointed President and Chief Executive
Officer of the Company. He resigned from such positions in April 1998.
Mr. Bridge continues to serve as the Company's Chairman of the Board, a
position he has held since November 1995.

(4) This option was granted in April 1997. Pursuant to its terms, as amended
in July 1997, 16.67% of the shares issuable under such option vested six
months after the grant date, with the remaining shares vesting in equal
monthly installments thereafter through the third anniversary of the
grant date. Mr. Bridge is entitled to acceleration of this option upon
certain change of control transactions pursuant to his consulting
arrangement with the Company. See description of this consulting
arrangement in the text following the Summary Compensation table.

(5) This option was granted in May 1997. Pursuant to its terms, 16.67% of the
shares issuable under such option vests six months after the grant date,
with the remaining shares vesting in equal monthly installments
thereafter through the third anniversary of the grant date. As a result
of Mr. Foster's resignation in April 1998, this option will expire if not
exercised prior to August 15, 1998.

(6) This option was granted in July 1997. Pursuant to its terms, 16.67% of
the shares issuable under such option vests six months after the grant
date, with the remaining shares vesting in equal monthly installments
thereafter through the third anniversary of the grant date. Mr. Girata is
entitled to acceleration of this option and all other options held by him
upon certain change of control transactions pursuant to a Change of
Control Agreement between Mr. Girata and the Company. See "Certain
Relationships and Related Transactions."

(7) Options to purchase an aggregate of 40,248 shares of Common Stock were
issued to Mr. Girata in April 1997 in connection with the Company's
repricing of certain of its outstanding options. Mr. Girata's option had
an exercise price of $8.125 per share and vested under the same schedules
as applied to the canceled options. See "Ten-Year Option Repricings" and
"Compensation Committee Report on Executive Compensation -- Stock
Options" for further details on this repricing.

(8) This option was granted in July 1997. Pursuant to its terms, 16.67% of
the shares issuable under such option vests six months after the grant
date, with the remaining shares vesting in equal monthly installments
thereafter through the third anniversary of the grant date. Mr. Norris is
entitled to acceleration of this option upon certain change of control
transactions pursuant to a Change of Control Agreement between Mr. Norris
and the Company. See "Certain Relationships and Related Transactions."

(9) This option was granted in July 1997. Pursuant to its terms, 16.67% of
the shares issuable under such option vests six months after the grant
date, with the remaining shares vesting in equal monthly installments
thereafter through the third anniversary of the grant date. Mr. Ross is
entitled to acceleration of this option upon certain change of control
transactions pursuant to a Change of Control Agreement between Mr. Ross
and the Company. See "Certain Relationships and Related Transactions."

(10) In April 1997, Mr. Kehler resigned from his position as President and
Chief Executive Officer and is no longer an executive officer of the
Company.

20
<PAGE>

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

The following table sets forth certain information with respect to stock
options exercised by the Named Executive Officers during the last fiscal year.
In addition, the table sets forth the number of shares covered by stock
options as of December 31, 1997, and the value of "in-the-money" stock
options, which represents the positive spread between the exercise price of a
stock option and the market price of the shares subject to such option on
December 31, 1997. All share numbers and per share prices in the table reflect
the Reverse Split.

<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT IN-THE-MONEY
SHARES VALUE FISCAL YEAR END(#) OPTIONS AT
ACQUIRED ON REALIZED EXERCISABLE/ FISCAL YEAR END($)
NAME EXERCISE(#) ($)(1) UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
---- ----------- -------- ------------------ ----------------------------
<S> <C> <C> <C> <C>
Gordon J. Bridge (3).... 14,069 $ 0 57,430/157,499 $0/$0
Barton S. Foster........ 1,500 $ 35,000 22,418/35,581 $0/$0
Joseph G. Girata........ -- -- 18,380/31,868 $0/$0
Craig D. Norris......... 2,000 $ 45,938 15,387/26,613 $0/$0
Kenneth M. Ross......... 4,000 $104,177 33,344/21,355 $7,064/$0
Thomas P. Kehler (4).... 18,080 $236,297 39,529/0 $6,139/$0
</TABLE>
- --------
(1) This amount represents the market value of the underlying securities on
the exercise date minus the exercise price of such options.
(2) Based on the $4.22 per share closing price of the Company's Common Stock
on The Nasdaq National Market on December 31, 1997, less the exercise
prices.
(3) In April 1997, Mr. Bridge was appointed President and Chief Executive
Officer of the Company. He resigned from such positions in April 1998. Mr.
Bridge continues to serve as Chairman of the Board, a position he has held
since November 1995.
(4) In April 1997, Mr. Kehler resigned from his position as President and
Chief Executive Officer and is no longer an executive officer of the
Company.

21
<PAGE>

TEN-YEAR OPTION REPRICINGS

In order to reincentivize its employees, the Board of Directors of the
Company, upon recommendation of the Compensation Committee, approved in April
1997 an option repricing program pursuant to which employees could surrender
options granted by the Company between May 1996 and March 1997 having exercise
prices greater than $15.00 per share and receive in the place of such
surrendered options new options having an exercise price of $8.125 per share,
the fair market value of the Company's stock on the date of Board approval.
The new options issued pursuant to this repricing program were subject to the
same vesting provisions as the surrendered options. The following table sets
forth certain information as of December 31, 1997 with respect to the
repricing of certain stock options held by the Company's executive officers
since the Company's initial public offering. All share numbers and per share
prices in the table reflect the Reverse Split.

<TABLE>
<CAPTION>
NUMBER OF MARKET LENGTH OF
SECURITIES PRICE OF EXERCISE ORIGINAL
UNDERLYING STOCK AT PRICE AT OPTION TERM
OPTIONS TIME OF TIME OF NEW REMAINING AT
REPRICED OR REPRICING OR REPRICING OR EXERCISE DATE OF
AMENDED AMENDMENT AMENDMENT PRICE REPRICING OR
NAME DATE (#) ($) ($) ($) AMENDMENT
---- ------- ----------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph G. Girata........ 4/14/97 13,060 8.125 30.625 8.125 110 mos.
4/14/97 21,939 8.125 30.625 8.125 110 mos.
4/14/97 4,391 8.125 31.875 8.125 113 mos.
4/14/97 858 8.125 31.875 8.125 113 mos.
9/10/96(1) 35,000 30.625 48.00 30.625 117 mos.
Victor L. Fischer(2).... 4/14/97 19,999 8.125 31.875 8.125 113 mos.
</TABLE>
- --------
(1) This option grant to Mr. Girata was done pursuant to a repricing program
approved by the Compensation Committee of the Board of Directors in
September 1996 which allowed employees to surrender outstanding options
with exercise prices of $48.00 per share or greater and to receive in the
place of such surrendered options new options with an exercise price of
$30.625 per share, the fair market value of the Company's stock on the
date the repricing program was approved. The new options are subject to
the same vesting schedule as the surrendered options.
(2) Mr. Fischer resigned from his position as an executive officer of the
Company in January 1998.

Notwithstanding anything to the contrary set forth in any of the Company's
filings under the Securities Act of 1933 or the Securities Exchange Act of
1934 that might incorporate future filings, including this Proxy Statement, in
whole or in part, the following Compensation Committee Report and Stock
Performance Graph shall not be deemed to be incorporated by reference into any
such filings.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The following is a report of the Compensation Committee of the Board of
Directors (the "Committee") describing the compensation policies applicable to
the Company's executive officers (including the Named Executive Officers)
during the fiscal year ended December 31, 1997. The Committee is responsible
for establishing and monitoring the general compensation policies and
compensation plans of the Company, as well as the specific compensation levels
for executive officers. The Committee also administers the Company's stock
plans and determines the terms and conditions of stock option grants.
Executive officers who are also directors have not participated in
deliberations or decisions involving their own compensation.

General Policies

The Company's compensation policies are designed to link the executive
officers' compensation to the annual and long-term performance of the Company
and to provide compensation that is competitive with the compensation paid to
other executives in the industry and that will attract and retain superior
talent and reward

22
<PAGE>

performance. The compensation mix reflects a balance of annual cash payments,
consisting of annual base salary payments and incentive bonus payments, and
long-term stock-based incentives in the form of stock options. The emphasis in
incentive compensation is placed on the more strategic stock-based options
which more closely align the financial interests of the Company's employees
with those of its stockholders.

Base Salaries

The salary component of executive compensation is based on the executive's
level of responsibility for meeting Company objectives and performance, and
comparable to similar positions in the Company and to comparable companies.
Base salaries for executives are reviewed and adjusted at least annually based
on information regarding competitive salaries, the results of industry
compensation surveys, individual experience and performance.

Cash Bonuses

The Company's incentive program for executive officers provides direct
financial incentives in the form of cash bonuses. For fiscal 1997, specific
individual performance was taken into account in determining bonuses,
including meeting Company goals and individual performance objectives. During
1997, the Compensation Committee re-evaluated its executive bonus structure
and approved a new bonus policy for fiscal 1998 which bases executive bonuses
entirely on Company financial performance and eliminates the individual
objectives component of bonus calculation.

Stock Options

The Company's 1996 Stock Option Plan provides for the issuance of stock
options to officers and employees of the Company to purchase shares of the
Company's Common Stock at an exercise price equal to the fair market value of
such stock on the date of grant. The Company's stock options typically vest
over a 48-month period.

The Company's compensation policies recognize the importance of stock
ownership by senior executives and stock options are an integral part of each
executive's compensation. The Committee believes that the opportunity for
stock appreciation through stock options which vest over time promotes the
relationship between long-term interests of executive officers and
stockholders. The size of specific grants takes into account the executive
officer's salary and the number of options previously granted to the officer,
as well as his or her contributions to the Company's success.

In order to reincentivize certain Company employees, and as more fully
detailed in the Ten-Year Option Repricings table set forth above, on April 14,
1997 the Board of Directors approved a repricing program pursuant to which
options granted by the Company between May 1996 and March 1997 having exercise
prices equal to or greater than $15.00 per share were repriced to an exercise
price of $8.125 per share. Stock options to purchase a total of 166,708 shares
of the Company's Common Stock were issued pursuant to this repricing program.
Two executive officers of the Company (one of whose employment has since
terminated with the Company) participated in the repricing, as reflected in
the "Ten-Year Option Repricings" table. The Company has previously undertaken
one other option repricing program since its initial public offering. In
September 1996, options having exercises prices equal to or greater than
$48.00 per share were repriced to $30.625 per share. Stock options to purchase
a total of 86,130 shares of Common Stock were issued pursuant to this
repricing program. One executive officer participated in the 1996 repricing
program, as reflected in the "Ten-Year Option Repricings" table. In each of
the repricing programs implemented in 1996 and 1997, the new options granted
were subject to the same vesting terms as the surrendered options.

Compensation of the Chief Executive Officer

Thomas P. Kehler served as the Company's President and Chief Executive
Officer (the "CEO") from July 1992 to April 1997. Upon Mr. Kehler's
resignation as an executive officer of the Company in April 1997, Gordon J.
Bridge was appointed the Company's President and CEO. He resigned such
positions in April 1998, at which

23
<PAGE>

time Craig Norris, previously the Company's Executive Vice President of
Services and Operations, was appointed as the Company's CEO and President. At
the time Mr. Bridge was appointed CEO in April 1997, he entered into the 1997
Letter with the Company, the terms of which are described in more detail above
in the disclosure relating to the Summary Compensation Table. The factors
discussed above in this Report under the headings "Base Salaries," "Cash
Bonuses", and "Stock Options" were also applied in establishing the amount of
Mr. Bridge's compensation as CEO, including his salary and the stock option
grant made pursuant to the terms of the 1997 Letter. In addition, in
determining Mr. Bridge's 1997 compensation the Committee considered a number
of factors, including competitive market compensation packages, Mr. Bridge's
past performance at the Company and the responsibilities he was undertaking in
assuming the position of CEO. Based on its survey data and informal
information reviewed by the Committee, the Committee believes that the base
salary level for the CEO is commensurate with salaries paid to chief executive
officers of comparable companies engaged in similar industries.

Deductibility of Executive Compensation

The Committee has considered the impact of Section 162(m) of the Internal
Revenue Code adopted under the Omnibus Budget Reconciliation Act of 1993,
which section disallows a deduction for any publicly held corporation for
individual compensation exceeding $1 million in any taxable year for the CEO
and four other most highly compensated executive officers, unless such
compensation meets the requirements for the "performance-based" exception to
the general rule. Since the cash compensation paid by the Company to each of
its executive officers is expected to be below $1 million and the Committee
believes that options granted under the Company's 1996 Stock Option Plan will
meet the requirements for qualifying as performance-based, the Committee
believes that this section will not affect the tax deductions available to the
Company. It will be the Committee's policy to qualify, to the extent
reasonable, the executive officers' compensation for deductibility under
applicable tax law. However, the Company may from time to time pay
compensation to its executive officers that may not be deductible.

COMPENSATION COMMITTEE:
Promod Haque
Richard Lussier

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors currently consists of
Promod Haque and Richard Lussier. From January 1, 1997 through May 29, 1997,
the Compensation Committee consisted of directors Hague, Weening and Welty and
from May 29, 1997 through March 31, 1998, it consisted of directors Hague,
Weening and Lussier. The following transactions have occurred between the
Company and directors who were members of the Company's Compensation Committee
during 1997 or their affiliates:

Gordon J. Bridge, the Chairman of the Board of Directors, was an Executive
Vice President and a director of Quaestus until April 1997, and Richard W.
Weening, a former director of the Company, is President, Chief Executive
Officer and a director of Quaestus. Quaestus is the managing general partner
of Quaestus Partner Fund and Network Partners. In addition, RPI Holdings, Inc.
("RPI"), 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 a principal
stockholder of the Company. Quaestus is the manager of QLP pursuant to a
contractual agreement with RPI.

Until March 1997, William B. Welty, a former director of the Company, was a
stockholder of an affiliate of Volpe, Welty & Company LLC, an investment
banking firm (now Volpe Brown Whelan & Company LLC). Volpe, Welty & Company
acted as one of the managing underwriters of the Company's initial public
offering of Common Stock in August 1996, for which it received customary
underwriters' compensation in the form of discounts and commissions. Volpe
Brown Whelan & Company LLC is a market maker in the Company's Common Stock.

24
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain stock option grants to directors and executive officers of the
Company are described herein under the caption "Executive Compensation."
Certain transactions and relationships between the Company and directors of
the Company are described herein under the caption "Compensation Committee
Interlocks and Insider Participation."

In connection with Mr. Kehler's resignation as President and Chief Executive
Officer of the Company in April 1997, the Company and Mr. Kehler entered into
an agreement pursuant to which Mr. Kehler would remain as an employee of the
Company until April 8, 1998 and would receive an annual salary of $50,000. In
addition, the Company agreed to pay to Mr. Kehler a lump sum severance payment
of $100,000 and release 25,000 shares of Common Stock from the Company's
repurchase rights under the 1989 Stock Option Plan, in addition to those
shares already vested at the time of such agreement. Mr. Kehler's remaining
options continued to vest in accordance with their terms through August 31,
1997.

In April 1998, Mr. Foster resigned his position as Executive Vice President
of Sales and Marketing. Pursuant to the terms of an agreement between Mr.
Foster and the Company in connection with his resignation, Mr. Foster will
remain as a consultant to the Company through July 1998, during which time he
will receive an amount equal to his regular monthly salary prior to his
resignation ($14,167) and continued vesting of unvested options and health
benefits through July 1998. In addition, pursuant to the terms of this
release, the Company has agreed to forgive accrued interest on, and a portion
of the principal of, a $30,000 loan to Mr. Foster, which principal amount to
be forgiven will not exceed $10,000.

Mr. Bridge entered into the 1997 Letter and the 1998 Letter with the
Company, which letters governed the terms of his employment relationship with
the Company for fiscal years 1997 and 1998, respectively. The 1998 Letter has
been superseded by Mr. Bridge's consulting arrangement with the Company in
April 1998. Pursuant to the 1997 Letter, the Company in April 1997 loaned Mr.
Bridge $150,000 pursuant to a three-year, full recourse promissory note which
is subject to interest, compounded annually, at the rate of 5.91%. The total
amount of principal and accrued interest on such note as of April 2, 1998 is
approximately $159,279. In exchange for Mr. Bridge's remaining a consultant to
the Company for the twelve-month period from April 1998 to April 1999, the
Company has agreed to forgive 50% of the total principal and outstanding
interest of this loan and, if Mr. Bridge achieves certain specified goals
prior to April 1999, he may be entitled to forgiveness of the remainder of
outstanding principal and interest on his loan. Other material terms of each
of the 1997 Letter, the 1998 Letter and Mr. Bridge's consulting relationship
with the Company are described in the disclosure relating to the Summary
Compensation Table above.

In June 1997, the Company entered into Change of Control Agreements with
each of Gordon Bridge, Josesph Girata, Barton Foster, Craig Norris and Kenneth
Ross. In April 1998, pursuant to Mr. Bridge's resignation as Chief Executive
Officer and President of the Company and Mr. Foster's resignation as Executive
Vice President of Sales and Marketing, their Change of Control Agreements were
terminated. As of April 1998, it is intended that Lucille Hoger, the Company's
newly appointed Vice President of Professional Services, will enter into a
Change of Control Agreement and that each of Mr. Girata's, Mr. Norris's and
Mr. Ross's Change of Control Agreements will be amended. Pursuant to the terms
of the Change of Control Agreements, each executive officer will be entitled
to a cash payment equal to 2.99 times such officer's total compensation during
fiscal year 1997 upon certain change of control transactions involving the
Company (generally, a merger or acquisition of the Company). Such cash
payments are subject to reduction in certain circumstances and would be
reduced to zero if the Company's valuation at the time of the change of
control transaction was equal to or less than $25 million. Each executive
officer would also be entitled to acceleration of vesting of all options held
by him or her in the event of a hostile takeover of the Company. In addition,
if such officer were to be terminated involuntarily within two years of a
change of control, he or she would be entitled for a period of twelve months
following such termination to continuation of his or her monthly salary,
payment on a monthly basis of one-twelfth of the performance bonus to which he
or she would have been entitled assuming full achievement of all

25
<PAGE>

performance objectives of the Company for such year, acceleration of vesting
of all stock options held at the time of termination, certain benefits under
the Company's health and other benefit plans, and outplacement services not to
exceed $15,000.

On November 18, 1997, Quaestus Management Corporation ("Quaestus"), an
entity with which Richard W. Weening, a former director of the Company, is
affiliated, was issued an $80,000 principal amount convertible note by the
Company and a warrant to purchase 26,666 shares of the Company's Common Stock.
On February 26, 1998, the note was converted into 40,000 shares of the
Company's Series A Preferred Stock. On April 1, 1998, all of the shares of
Series A Preferred Stock held by Quaestus plus accrued but unpaid dividends
thereon were converted into 69,880 shares of the Company's Common Stock and
the warrant held by Quaestus was canceled. Mr. Weening disclaims beneficial
ownership of the securities held by Quaestus, except to the extent of his
proportionate interest therein.

On November 18, 1997, BankAmerica Ventures and BankAmerica Venture Partners
I (collectively "BankAmerica"), entities with which Rory T. O'Driscoll, a
director of the Company, is affiliated, were issued convertible notes by the
Company in the aggregate principal amount of $1,200,000 and warrants to
purchase an aggregate of 399,990 shares of the Company's Common Stock. On
February 26, 1998, the notes plus the accrued interest thereon were converted
into 608,219 shares of the Company's Series A Preferred Stock. On April 1,
1998, all of the shares of Series A Preferred Stock held by BankAmerica plus
accrued but unpaid dividends thereon were converted into 1,062,555 shares of
the Company's Common Stock and the warrants held by BankAmerica were canceled.
Mr. O'Driscoll disclaims beneficial ownership of the securities held by
BankAmerica, except to the extent of his proportionate interest therein.

On November 18, 1997, Norwest Equity Partners V, L.L.P. ("Norwest"), an
entity with which Promod Haque, a director of the Company, is affiliated, was
issued a $1,240,000 principal amount convertible note by the Company and a
warrant to purchase 413,323 shares of the Company's Common Stock. On February
26, 1998, the note plus the accrued interest thereon was converted into
628,493 shares of the Company's Series A Preferred. On April 1, 1998, all of
the shares of Series A Preferred Stock held by Norwest plus accrued but unpaid
dividends thereon were converted into 1,097,972 shares of the Company's Common
Stock and the warrants held by Norwest was canceled. Mr. Haque disclaims
beneficial ownership of the securities held by Norwest, except to the extent
of his proportionate interest therein.

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.

26
<PAGE>

STOCK PERFORMANCE GRAPH

The following graph compares the cumulative total shareholder return for the
Company's stock since August 15, 1996 to the cumulative return over such
period of (i) the Nasdaq Market Index and (ii) the MG Computer Software, Data
Processing Index (provided by Media General Financial Services, Inc.). The
graph assumes that $100 was invested in the Common Stock of the Company on
August 15, 1996, the date on which the Company completed its initial public
offering of Common Stock and the Company's stock was first registered under
Section 12 of the Securities Exchange Act of 1934, and on August 15, 1996 for
each of the comparative indices. The graph further assumes that such amount
was initially invested in the Common Stock of the Company at a per share price
of $30.00, the price to which such stock was first offered to the public by
the Company on that date of its initial public offering, and assumes
reinvestment of any dividends. The stock price performance on the following
graph is not necessarily indicative of future stock price performance.

[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
8/15/96* 12/31/96 12/31/97
-------- -------- --------
<S> <C> <C> <C>
CONNECT, Inc......................................... 100 102 14
Nasdaq Market Index.................................. 100 112 137
MG Computer Software, Data Processing Index.......... 100 110 136
</TABLE>
- --------
* Assumes $100 invested at 8/15/96 in Common Stock of the Company and in each
of the comparative indices.

27
<PAGE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who own more than 10% of the Company's Common
Stock (collectively, "Reporting Persons") to file with the Securities and
Exchange Commission ("SEC") initial reports of ownership and changes in
ownership of the Company's Common Stock. Reporting Persons are required by SEC
regulations to furnish the Company with copies of all Section 16(a) reports
they file. To the Company's knowledge, based solely on its review of the
copies of such reports received or written representations from certain
Reporting Persons that no other reports were required, the Company believes
that during its fiscal year ended December 31, 1997, all Reporting Persons
complied with all applicable filing requirements.

OTHER MATTERS

The Board of Directors knows of no other business which will be presented to
the Annual Meeting. If any other business is properly brought before the
Annual Meeting, proxies in the enclosed form will be voted in respect thereof
as the proxy holders deem advisable.

It is important that the proxies be returned promptly and that your shares
be represented. Stockholders are urged to mark, date, execute and promptly
return the accompanying proxy card in the enclosed envelope.

BY ORDER OF THE BOARD OF DIRECTORS

April 28, 1998
Mountain View, California

28
<PAGE>

EXHIBIT A

SECOND AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF CONNECT, INC.

ARTICLE I

The name of the Corporation is CONNECT, Inc.

ARTICLE II

The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, County of New Castle. The name of its
registered agent at such address is The Prentice-Hall Corporation System, Inc.

ARTICLE III

STOCK

The corporation is authorized to issue two classes of shares to be
designated respectively "Preferred Stock," $0.001 par value per share, and
"Common Stock," $0.001 par value per share. The total number of shares of
Preferred Stock authorized is 3,500,000 and the total number of shares of
Common Stock authorized is 60,000,000. The Preferred Stock may be issued from
time to time in one or more series.

Subject to the restrictions prescribed by law, the Board of Directors is
authorized to fix by resolution or resolutions the number of shares of any
series of Preferred Stock and to determine or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and, within the limits and restrictions stated in
any resolution or resolutions of the Board of Directors originally fixing the
number of shares constituting any series of Preferred Stock, to increase (but
not above the total number of authorized shares of Preferred Stock) or
decrease (but not below the number of shares of any such series then
outstanding) the number of shares of any such series subsequent to the issue
of shares of that series.

The authority of the Board of Directors with respect to each series of
Preferred Stock shall include, but not be limited to, determination of the
following:

(a) the number of shares constituting that series and the distinctive
designation of that series;

(b) the dividend rate on the shares of that series, whether dividends shall
be cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of that series;

(c) whether that series shall have voting rights in addition to the voting
rights provided by law, and if so, the terms of such voting rights;

(d) whether that series shall have conversion privileges, and if so, the
terms and conditions of such privileges, including provision for adjustment
of the conversion rate in such events as the Board of Directors shall
determine;

(e) whether or not the shares of that series shall be redeemable, and if so,
the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per

1
<PAGE>

share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;

(f) whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and if so, the terms in the amount of
such sinking funds;

(g) the rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the corporation, and
the relative rights of priority, if any, of payment of shares of that
series; and

(h) any other relative rights, preferences and limitations of that series.

ARTICLE IV

The purpose of the Corporation is to engage in any lawful act or activity for
which corporations may now or hereafter be organized under the General
Corporation Law of Delaware.

ARTICLE V

The Corporation is to have perpetual existence.

ARTICLE VI

In furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to make, adopt, alter, amend or
repeal the Bylaws of the Corporation, subject to the right of the stockholders
entitled to vote with respect thereto to amend or repeal Bylaws made by the
Board of Directors as provided for in this Amended and Restated Certificate of
Incorporation. The affirmative vote of 66-2/3% of the total number of votes of
the then outstanding shares of capital stock of this Corporation entitled to
vote generally in the election of directors, voting together as a single class,
shall be required for the adoption, amendment or repeal of the following
sections of the Corporation's Bylaws: 2.3 (Special Meeting), 2.5 (Advance
Notice of Stockholder Nominees) and 2.6 (Advance Notice of Stockholder
Business) by the stockholders of this Corporation.

ARTICLE VII

The number of directors which shall constitute the whole Board of Directors
of the Corporation shall be as specified in the Bylaws of the Corporation.

ARTICLE VIII

The election of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.

ARTICLE IX

Meetings of stockholders may be held within or without the State of Delaware,
as the Bylaws may provide. The books of the Corporation may be kept (subject to
any provision contained in the statute) outside the State of Delaware at such
place or places as may be designated from time to time by the Board of
Directors or in the Bylaws of the Corporation.

2
<PAGE>

ARTICLE X

If at any time this Corporation shall have a class of stock registered
pursuant to the provisions of the Securities Exchange Act of 1934, for so long
as such class is so registered, any action by the stockholders of such class
must be taken at an annual or special meeting of stockholders and may not be
taken by written consent. This provision shall supersede any provision to the
contrary in the Bylaws of the Corporation.

ARTICLE XI

Advance notice of new business and stockholder nominations for the election
of directors shall be given in the manner and to the extent provided in the
Bylaws of the Corporation.

ARTICLE XII

Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or the Bylaws (and notwithstanding the fact that
a lesser percentage may be specified by law, this Amended and Restated
Certificate of Incorporation or the Bylaws of this Corporation), the
affirmative vote of 66-2/3% of the total number of the then outstanding shares
of capital stock of this Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
amend or repeal, or to adopt any provision inconsistent with the purpose or
intent of, Articles VI through XIV. Notice of any such proposed amendment,
repeal or adoption, shall be contained in the notice of the meeting at which
it is to be considered. Subject to the provisions set forth herein, this
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Amended and Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.

ARTICLE XIII

To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or as may hereafter be amended, a director of the Corporation
shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. Neither any
amendment nor repeal of this Article XIII, nor the adoption of any provision
of this Amended and Restated Certificate of Incorporation inconsistent with
this Article XIII, shall eliminate or reduce the effect of this Article XIII
in respect of any matter occurring, or any cause of action, suit or claim
that, but for this Article XIII, would accrue or arise, prior to such
amendment, repeal or adoption of any inconsistent provision.

ARTICLE XIV

"Listing Event" as used in this Amended and Restated Certificate of
Incorporation shall mean the Corporation becoming a "Listed Corporation"
within the meaning of Section 301.5 of the California Corporations Code. For
the management of the business and for the conduct of the affairs of the
Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, its directors and its stockholders or any class
thereof, as the case may be, it is further provided that, effective upon the
occurrence of the Listing Event:

(i) The number of directors which shall constitute the entire Board of
Directors, and the number of directors in each class, shall be fixed
exclusively by one or more resolutions adopted from time to time by the
Board of Directors. Until changed by a resolution of the Board of
Directors, Class I shall consist of five directors, each of whom shall be
designated by the Board of Directors, and Class II shall consist of five
directors, each of whom shall be designated by the Board of Directors.

3
<PAGE>

The Board of Directors shall be divided into two classes, designated as
Class I and Class II, respectively. Directors shall be assigned to each
class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the
Listing Event, the terms of office of the Class I directors shall expire
and Class I directors shall be elected for a full term of two years. At the
second annual meeting of stockholders following the Listing Event, the term
of office of the Class II directors shall expire and Class II directors
shall be elected for a full term of two years. At each succeeding annual
meeting of stockholders, directors shall be elected for a full term of two
years to succeed the directors of the class whose terms expire at such
annual meeting.

Notwithstanding the foregoing provisions of this Article, each director
shall serve until his or her successor is duly elected and qualified or
until his or her death, resignation, or removal. No decrease in the number
of directors constituting the Board of Directors shall shorten the term of
any incumbent director.

Any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal, or other causes shall be filled by either (i)
the affirmative vote of the holders of a majority of the voting power of
the then-outstanding shares of voting stock of the corporation entitled to
vote generally in the election of directors (the "Voting Stock") voting
together as a single class; or (ii) by the affirmative vote of a majority
of the remaining directors then in office, even though less than a quorum
of the Board of Directors. Newly created directorships resulting from any
increase in the number of directors shall, unless the Board of Directors
determines by resolution that any such newly created directorship shall be
filled by the stockholders, be filled only by the affirmative vote of the
directors then in office, even though less than a quorum of the Board of
Directors. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred
and until such director's successor shall have been elected and qualified.

(ii) There shall be no right with respect to shares of stock of the
Corporation to cumulate votes in the election of directors.

(iii) Any director, or the entire Board of Directors, may be removed from
office at any time (i) with cause by the affirmative vote of the holders of
at least a majority of the voting power of the then-outstanding shares of
the Voting Stock, voting together as a single class; or (ii) without cause
by the affirmative vote of the holders of at least 66 2/3% of the voting
power of the then-outstanding shares of the Voting Stock.

4
<PAGE>

CONNECT, INC.

1996 STOCK OPTION PLAN

(AS AMENDED ON MAY 29, 1997)

1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.

Options granted hereunder may be either Incentive Stock Options (as
defined under Section 422 of the Code) or Nonstatutory Stock Options, at the
discretion of the Board and as reflected in the terms of the written option
agreement.

2. DEFINITIONS. As used herein, the following definitions shall apply:
-----------

(a) "Administrator" shall mean the Board or any of its Committees
-------------
appointed pursuant to Section 4 of the Plan.

(b) "Affiliate" shall mean an entity other than a Subsidiary (as
---------
defined below) in which the Company owns an equity interest.

(d) "Board" shall mean the Board of Directors of the Company.
-----

(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----

(f) "Committee" shall mean the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) of the Plan, if one is appointed.

(g) "Common Stock" shall mean the Common Stock of the Company.
------------

(h) "Company" shall mean CONNECT, Inc., a Delaware corporation
-------
(formerly, CONNECT, Inc., a California corporation).

(i) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.

(j) "Continuous Status as an Employee or Consultant" shall mean the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Administrator; provided that once the Company
--------
registers any class of any equity security pursuant to Section 12 of the
Exchange Act, such leave is for a period of not more than 90 days or
reemployment upon the expiration of such
<PAGE>

leave is guaranteed by contract or statute. For purposes of this Plan, a change
in status from an Employee to a Consultant or from a Consultant to an Employee
will not constitute a termination of employment.

(k) "Director" shall mean a member of the Board.
--------

(l) "Employee" shall mean any person (including any Named Executive,
--------
Officer or Director) employed by the Company or any Parent, Subsidiary or
Affiliate of the Company. The payment by the Company of a director's fee to a
Director shall not be sufficient to constitute "employment" of such Director by
the Company.

(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.

(n) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:

(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock as quoted on such system on the date of determination (if
for a given day no sales were reported, the closing bid on that day shall be
used), as such price is reported in The Wall Street Journal or such other source
as the Administrator deems reliable;

(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the bid and asked prices for the Common Stock or;

(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.

(o) "Incentive Stock Option" shall mean an Option intended to qualify
----------------------
as an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.

(p) "Named Executive" shall mean any individual who, on the last day
---------------
of the Company's fiscal year, is the chief executive officer of the Company (or
is acting in such capacity) or among the four highest compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.

(q) "Nonstatutory Stock Option" shall mean an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.

-2-
<PAGE>

(r) "Officer" shall mean a person who is an officer of the Company
-------
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.

(s) "Option" shall mean a stock option granted pursuant to the Plan.
------

(t) "Optioned Stock" shall mean the Common Stock subject to an
--------------
Option.

(u) "Optionee" shall mean an Employee or Consultant who receives an
--------
Option.

(v) "Parent" shall mean a "parent corporation," whether now or
------
hereafter existing, as defined in Section 424(e) of the Code.

(w) "Plan" shall mean this 1996 Stock Option Plan.
----

(x) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange
----------
Act as the same may be amended from time to time, or any successor provision.

(y) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 14 of the Plan.

(z) "Subsidiary" shall mean a "subsidiary corporation," whether now
----------
or hereafter existing, as defined in Section 424(f) of the Code.

3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14 of
-------------------------
the Plan, the maximum aggregate number of shares that may be optioned and sold
under the Plan is 2,614,000 shares (adjusted to reflect the Delaware
reincorporation) of Common Stock. On the first trading day of each fiscal year
during the period beginning January 1, 1998 and ending December 31, 2002, the
maximum aggregate number of shares that may be optioned and sold under the Plan
shall be increased by an amount equal to the lesser of: (x) three percent (3%)
of the total number of shares of the Company's Common Stock issued and
outstanding as of the last business day of the immediately preceding fiscal
year, or (y) 140,000 shares. The Shares may be authorized, but unissued, or
reacquired Common Stock.

If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares that were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. Notwithstanding any other provision of the Plan, shares
issued under the Plan and later repurchased by the Company shall not become
available for future grant under the Plan.

4. ADMINISTRATION OF THE PLAN.
--------------------------

(a) COMPOSITION OF ADMINISTRATOR.
----------------------------

(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule
------------------------------
16b-3, and by the legal requirements relating to the administration of incentive
stock option plans, if any, of applicable securities laws and the Code
(collectively, the "Applicable Laws"), the Plan may (but
---------------

-3-
<PAGE>

need not) be administered by different administrative bodies with respect to
Directors, Officers who are not directors and Employees who are neither
Directors nor Officers.

(ii) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS.
-----------------------------------------------------
With respect to grants of Options to Employees or Consultants who are also
Officers or Directors of the Company, the Plan shall be administered by (A) the
Board, if the Board may administer the Plan in compliance with Rule 16b-3 as it
applies to a plan intended to qualify thereunder as a discretionary plan and
Section 162(m) of the Code as it applies so as to qualify grants of Options to
Named Executives as performance-based compensation, or (B) a Committee
designated by the Board to administer the Plan, which Committee shall be
constituted in such a manner as to permit the Plan to comply with Rule 16b-3 as
it applies to a plan intended to qualify thereunder as a discretionary plan, to
qualify grants of Options to Named Executives as performance-based compensation
under Section 162(m) of the Code and otherwise so as to satisfy the Applicable
Laws.

(iii) ADMINISTRATION WITH RESPECT TO OTHER PERSONS. With
--------------------------------------------
respect to grants of Options to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A) the
Board or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws.

(iv) GENERAL. If a Committee has been appointed pursuant to
-------
subsection (ii) or (iii) of this Section 4(a), such Committee shall continue to
serve in its designated capacity until otherwise directed by the Board. From
time to time the Board may increase the size of any Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies (however caused) and remove
all members of a Committee and thereafter directly administer the Plan, all to
the extent permitted by the Applicable Laws and, in the case of a Committee
appointed under subsection (ii), to the extent permitted by Rule 16b-3 as it
applies to a plan intended to qualify thereunder as a discretionary plan, and to
the extent required under Section 162(m) of the Code to qualify grants of
Options to Named Executives as performance-based compensation.

(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:

(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(m) of the Plan;

(ii) to select the Employees and Consultants to whom Options
may from time to time be granted hereunder;

(iii) to determine whether and to what extent Options are
granted hereunder;

-4-
<PAGE>

(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;

(v) to approve forms of agreement for use under the Plan;

(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;

(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted.

(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.

5. ELIGIBILITY.
-----------

(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options may be granted
--------------------
to Employees and Consultants. Incentive Stock Options may be granted only to
Employees, provided, however, that Employees of an Affiliate shall not be
-------- -------
eligible to receive Incentive Stock Options. An Employee or Consultant who has
been granted an Option may, if he or she is otherwise eligible, be granted an
additional Option or Options.

(b) TYPE OF OPTION. Each Option shall be designated in the written
--------------
option agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Incentive Stock
Options are exercisable for the first time by an Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 5(b), Incentive Stock Options shall be taken into
account in the order in which they were granted, and the Fair Market Value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.

(c) NO EMPLOYMENT RIGHTS. The Plan shall not confer upon any Optionee
--------------------
any right with respect to continuation of employment or consulting relationship
with the Company, nor shall it interfere in any way with his or her right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.

6. TERM OF PLAN. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 20 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 16 of the Plan.

7. TERM OF OPTION. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that in the case of an Incentive Stock
-------- -------
Option, the term shall be

-5-
<PAGE>

no more than ten (10) years from the date of grant thereof or such shorter term
as may be provided in the Option Agreement. However, in the case of an Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.

8. LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as provided
---------------------------------
in this Plan, the maximum number of Shares which may be subject to options
granted to any one Employee under this Plan for any fiscal year of the Company
shall be 200,000 shares (adjusted to reflect the one-for-five reverse stock
split).

9. OPTION EXERCISE PRICE AND CONSIDERATION.
---------------------------------------

(a) EXERCISE PRICE. The per Share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be such price as is determined by
the Administrator, but shall be subject to the following:

(i) In the case of an Incentive Stock Option

(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant; or

(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.

(ii) In the case of a Nonstatutory Stock Option

(A) granted to an Employee who, at the time of the grant
of such Nonstatutory Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant; or

(B) granted to a person who, at the time of the grant of
such Option, is a Named Executive of the Company, the per share Exercise Price
shall be no less than 100% of the Fair Market Value on the date of grant; or

(C) granted to any person other than a Named Executive,
the per Share exercise price shall be no less than 85% of the Fair Market Value
per Share on the date of grant.

(iii) Notwithstanding anything to the contrary in subsections
9(a)(i) or 9(a)(ii) above, in the case of an Option granted on or after the
effective date of registration of any class of equity security of the Company
pursuant to Section 12 of the Exchange Act and prior to

-6-
<PAGE>

six months after the termination of such registration, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.

(b) PERMISSIBLE CONSIDERATION. The consideration to be paid for the
-------------------------
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant) and may consist entirely of
(1) cash, (2) check, (3) promissory note, (4) other Shares that (x) in the case
of Shares acquired upon exercise of an Option either have been owned by the
Optionee for more than six months on the date of surrender or were not acquired,
directly or indirectly, from the Company, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (5) authorization from the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (6) delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds required to pay the exercise price, (7) any
combination of the foregoing methods of payment, or (8) such other consideration
and method of payment for the issuance of Shares to the extent permitted under
Applicable Laws. In making its determination as to the type of consideration to
accept, the Administrator shall consider if acceptance of such consideration may
be reasonably expected to benefit the Company.

10. EXERCISE OF OPTION.
------------------

(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.

An Option may not be exercised for a fraction of a Share.

An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.

-7-
<PAGE>

Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.

(b) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the event
--------------------------------------------------
of termination of an Optionee's Continuous Status as an Employee or Consultant,
such Optionee may, but only within one (1) month (or such other period of time,
not exceeding three (3) months in the case of an Incentive Stock Option or six
(6) months in the case of a Nonstatutory Stock Option, as is determined by the
Administrator, with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option) after the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement), exercise his or her Option to
the extent that he or she was entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of such termination, or if the optionee does not exercise
such Option (which he or she was entitled to exercise) within the time specified
herein, the Option shall terminate.

(c) DISABILITY OF OPTIONEE. Notwithstanding Section 10(b) above, in
----------------------
the event of termination of an Optionee's Continuous Status as an Employee or
Consultant as a result of his or her disability, he or she may, but only within
twelve (12) months from the date of such termination (but in no event later than
the date of expiration of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent he or she was entitled to
exercise it at the date of such termination. To the extent that he or she was
not entitled to exercise the Option at the date of termination, or if he does
not exercise such Option (which he was entitled to exercise) within the time
specified herein, the Option shall terminate.

(d) DEATH OF OPTIONEE. In the event of the death of an Optionee:
-----------------

(i) during the term of the Option who is at the time of his
death an Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of the
Option, the Option may be exercised, at any time within twelve (12) months (or
such other period of time, not exceeding twelve (12) months, as is determined by
the Administrator, with such determination in the case of an Incentive Stock
Option being made at the time of grant of the Option) following the date of
death (but in no event later than the date of expiration of the term of such
Option as set forth in the Option Agreement), by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance
but only to the extent of the right to exercise that would have accrued had the
Optionee continued living and remained in Continuous Status as an Employee or
Consultant three (3) months (or such other period of time as is determined by
the Administrator as provided above) after the date of death, subject to the
limitation set forth in Section 5(b); or

(ii) within one (1) month (or such other period of time not
exceeding three (3) months as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) after the termination of Continuous Status as an Employee
or Consultant, the Option may be exercised, at any time

-8-
<PAGE>

within twelve (12) months following the date of death (but in no event later
than the date of expiration of the term of such Option as set forth in the
Option Agreement), by the Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of termination.

(e) RULE 16B-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.

11. WITHHOLDING TAXES. As a condition to the exercise of Options granted
-----------------
hereunder, the Optionee shall make such arrangements as the Administrator may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise, receipt or
vesting of such Option. The Company shall not be required to issue any Shares
under the Plan until such obligations are satisfied.

12. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of Optionee's current
compensation, or (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a fair market value equal to the amount required to be withheld. For this
purpose, the fair market value of the Shares to be withheld shall be determined
on the date that the amount of tax to be withheld is to be determined (the "Tax
---
Date").
- ----

Any surrender by an Officer or Director of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.

All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:

(a) the election must be made on or prior to the applicable Tax Date;

-9-
<PAGE>

(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;

(d) if the Optionee is an Officer or Director, the election must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.

In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.

13. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution. The designation of a
beneficiary by an Optionee will not constitute a transfer. An Option may be
exercised, during the lifetime of the Optionee, only by the Optionee or a
transferee permitted by this Section 13.

14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
------------------------------------------------------------------

(a) ADJUSTMENT. Subject to any required action by the stockholders of
----------
the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of shares of Common Stock that have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, the maximum number of shares of Common Stock for which Options may be
granted to any employee under Section 8 of the Plan, and the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Administrator, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.

(b) CORPORATE TRANSACTIONS. In the event of the proposed dissolution
----------------------
or liquidation of the Company, the Option will terminate immediately prior to
the consummation of

-10-
<PAGE>

such proposed action, unless otherwise provided by the Administrator. The
Administrator may, in the exercise of its sole discretion in such instances,
declare that any Option shall terminate as of a date fixed by the Administrator
and give each Optionee the right to exercise his or her Option as to all or any
part of the Optioned Stock, including Shares as to which the Option would not
otherwise be exercisable. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the Option shall be assumed or an equivalent
option shall be substituted by such successor corporation or a parent or
subsidiary of such successor corporation, unless the Administrator determines,
in the exercise of its sole discretion and in lieu of such assumption or
substitution, that the Optionee shall have the right to exercise the Option as
to some or all of the Optioned Stock, including Shares as to which the Option
would not otherwise be exercisable. If the Administrator makes an Option
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator shall notify the Optionee that the Option
shall be exercisable for a period of fifteen (15) days from the date of such
notice, and the Option will terminate upon the expiration of such period.

15. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.

16. AMENDMENT AND TERMINATION OF THE PLAN.
-------------------------------------

(a) AMENDMENT AND TERMINATION. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval of
the stockholders of the Company in the manner described in Section 20 of the
Plan:

(i) any increase in the number of Shares subject to the Plan,
other than an adjustment under Section 14 of the Plan;

(ii) any change in the designation of the class of persons
eligible to be granted Options;

(iii) any change in the limitation on grants to employees as
described in Section 8 of the Plan or other changes which would
require stockholder approval to qualify options granted hereunder as
performance-based compensation under Section 162(m) of the Code; or

(iv) any revision or amendment requiring stockholder approval
in order to preserve the qualification of the Plan under Rule 16b-3.

(b) STOCKHOLDER APPROVAL. If any amendment requiring stockholder
--------------------
approval under Section 13(a) of the Plan is made subsequent to the first
registration of any class

-11-
<PAGE>

of equity securities by the Company under Section 12 of the Exchange Act, such
stockholder approval shall be solicited as described in Section 20 of the Plan.

(c) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.

17. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.

As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.

18. RESERVATION OF SHARES. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.

19. OPTION AGREEMENT. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.

20. STOCKHOLDER APPROVAL.
--------------------

(a) Stockholder approval of the Plan shall be obtained within twelve
(12) months before or after the date the Plan is adopted, provided that neither
the grant nor the exercise of Options hereunder shall be contingent on obtaining
such approval. In the event stockholder approval is not obtained in accordance
with this Section 20(a), Options designated as Incentive Stock Options shall
instead be treated as Nonstatutory Stock Options. Stockholder approval shall be
obtained in the manner and to the degree required under applicable federal and
state law and the rules of any stock exchange upon which the Shares are listed.

(b) In the event that the Company registers any class of equity
securities pursuant to Section 12 of the Exchange Act, any required approval of
the stockholders

-12-
<PAGE>

of the Company obtained after such registration shall be solicited substantially
in accordance with Section 14(a) of the Exchange Act and the rules and
regulations promulgated thereunder.

(c) If any required approval by the stockholders of the Plan itself or
of any amendment thereto is solicited at any time otherwise than in the manner
described in Section 20(b) hereof, then the Company shall, at or prior to the
first annual meeting of stockholders held subsequent to the later of (1) the
first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an
officer or director after such registration, do the following:

(i) furnish in writing to the holders entitled to vote for the
Plan substantially the same information that would be required (if proxies to be
voted with respect to approval or disapproval of the Plan or amendment were then
being solicited) by the rules and regulations in effect under Section 14(a) of
the Exchange Act at the time such information is furnished; and

(ii) file with, or mail for filing to, the Securities and
Exchange Commission four copies of the written information referred to in
subsection (i) hereof not later than the date on which such information is first
sent or given to stockholders.

21. INFORMATION TO OPTIONEES. The Company shall provide financial
------------------------
statements at least annually to each Optionee during the period such Optionee
has one or more Options outstanding, and in the case of an individual who
acquired Shares pursuant to the Plan, during the period such individual owns
such Shares. The Company shall not be required to provide such information if
the issuance of Options under the Plan is limited to key employees whose duties
in connection with the Company assure their access to equivalent information.

-13-
<PAGE>

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

CONNECT, INC.

1998 ANNUAL MEETING OF STOCKHOLDERS

P The undersigned stockholder of CONNECT, Inc., a Delaware
corporation, (the "Company") hereby acknowledges receipt of the Notice
R of Annual Meeting of Stockholders and Proxy Statement, each dated April
28, 1998, and hereby appoints Craig D. Norris, Gordon J. Bridge and
O Joseph G. Girata, or any of them, as proxies and attorneys-in-fact
with full power to each of substitution, on behalf and in the name of
X the undersigned, to represent the undersigned at the 1998 Annual Meeting
of Stockholders of CONNECT, Inc. to be held on May 28, 1998, at
Y adjournment(s) or postponement(s) thereof, and to vote all shares of
Common stock that the undersigned would be entitled to vote if then and
there personally present, on the matters set forth below:

PROPOSAL NO. 1 - ELECTION OF DIRECTORS

[_] For all nominees [_] Withhold authority for
listed below all nominees listed below

If you wish to withhold authority for any individual nominee(s),
----------------------------------------------------------------
strike a line through his name or their names in the list below:
---------------------------------------------------------------

Gordon J. Bridge Richard H. Lussier Rory T. O'Driscoll
Promod Haque Craig D. Norris

PROPOSAL NO. 2 - AMENDMENT AND RESTATEMENT OF COMPANY'S CERTIFICATE OF
INCORPORATION

To approve and ratify an amendment and restatement of the
Company's Amended and Restated Certificate of Incorporation to
eliminate references to series of Preferred Stock which had been
previously outstanding.

[_] FOR [_] AGAINST [_] ABSTAIN

PROPOSAL NO. 3 - AMENDMENT OF 1996 STOCK OPTION PLAN

To approve and ratify an amendment to the Company's 1996 Stock
Option Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 2,000,000 shares.

[_] FOR [_] AGAINST [_] ABSTAIN

CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE
SIDE
<PAGE>

NOTE: This Proxy should be marked, dated, signed by the stockholder(s) exactly
as his or her name appears hereon, and returned in the enclosed envelope.

PROPOSAL NO. 4 - APPOINTMENT OF INDEPENDENT AUDITORS

To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1998.

[_] FOR [_] AGAINST [_] ABSTAIN

in their discretion, upon such other matter or matters which may properly come
before the meeting or any postponement(s) or adjournment(s) thereof.]

THIS PROXY WILL BE VOTED AS DIRECTED AND AS SAID PROXIES DEEM ADVISABLE ON SUCH
OTHER MATTERS AS MAY COME BEFORE THE MEETING OR ANY POSTPONEMENT(S) OR
ADJOURNMENT(S) THEREOF. WITH RESPECT TO THE ELECTION OF DIRECTORS, IF NO
CONTRARY OBJECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE NOMINEES
LISTED ABOVE.

DATED: _____________________, 1998

________________________________________
Printed name(s) exactly as shown on
Stock Certificate

________________________________________
(Signature)

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD USING THE ENCLOSED ENVELOPE.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee, or guardian, please give full title as such. If a corporation, please
sign in full corporate name by the President or other authorized officer. If a
partnership, please sign in partnership name by an authorized person. THIS PROXY
WILL BE VOTED FOR THE ELECTION OF THE DIRECTORS LISTED ABOVE AND FOR THE OTHER
PROPOSALS IF NO SPECIFICATION IS MADE.