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Business Description This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in these forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Risk Factors." Overview AllAdvantage has built a new Internet communications system that connects our business customers to our members. This system features our Viewbar software--an interactive user interface that resides on our members' computer screens and delivers advertisements to them for our business customers while collecting information about their Internet behavior. Our business customers pay us for delivering advertising through the Viewbar, which can be highly- targeted to our members based on the information we collect. We provide cash compensation to our members for time, on a per hour basis, that they and the members whom they have referred spend browsing the Internet while their Viewbars display advertising. The Viewbar provides our members with portal functionality that simplifies Internet navigation and electronic commerce with our business customers through pop-up category menus, a search field and direct links to over 400 Web sites. By facilitating an exchange of information between our members and our business customers, we serve as an Internet-based information intermediary, or infomediary. From our inception in March 1999 through March 2000, over 6.7 million persons registered to receive our service, of which 6.5 million continue to be registered. We believe, based on our historical member growth and retention rates, that by December 31, 2000, over ten million persons will have registered for our service and continue to be registered as of that date. We launched our Viewbar service in the United States in July 1999. Since our launch, over 2.9 million members have downloaded and used our Viewbar including over 2.0 million members who used the Viewbar during the three months ended March 31, 2000. To date, we have made the Viewbar available to our members in the United States, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. We have opened sales offices in London, Paris, Sydney and Tokyo. From the introduction of our Viewbar in July 1999 through March 2000, we have delivered advertisements for 360 advertisers obtained by our direct sales force and 1,181 additional advertisers obtained through third-party advertising sales organizations. In March 2000, we served over 7.7 billion advertising impressions on our Viewbar. With our members' express permission, we continuously track and collect data about their Internet behavior and demographics through the Viewbar in order to develop highly accurate and detailed personal profiles. While maintaining the privacy of each individual member, we use these profiles to enable our business customers to reach their specific audiences through the Viewbar, allowing them to deliver highly-targeted advertisements to and conduct electronic commerce with our members. Online advertisements may be highly targeted to a specific group of members based on variables such as profiled past behavior, current Internet behavior, demographic data, specific Web sites visited, keywords searched and specific time of day or week. We sell advertisements through our direct sales force and under agreements with third-party advertising sales organizations, to which we pay a commission upon their completion of advertising sales. We believe that, by increasing our membership, our value to businesses increases because we can deliver highly-targeted advertising and marketing messages based on increasingly refined criteria to a large community of members. We also believe that, as more businesses use our services, we can offer increasing benefits to members, thereby enhancing our ability to attract new members. The combination of these benefits to businesses and members has the potential to create a self-perpetuating cycle of increasing membership and increasing value to businesses. Industry Background The Growth of the Internet The Internet has dramatically changed the way that millions of people worldwide share information, communicate and conduct business. International Data Corporation, or IDC, an independent technology research organization, estimates that the total number of Internet users worldwide will grow from approximately 196 million at the end of 1999 to approximately 602 million by the end of 2003. IDC further estimates that worldwide electronic commerce over the Internet will increase from $111 billion in 1999 to $1.6 trillion in 2003. The Growth of Online Advertising and Direct Marketing As the Internet has grown, businesses have devoted increasing portions of their budgets to online advertising and direct marketing. Forrester Research, an independent technology research organization, projects that online advertising expenditures worldwide will increase tenfold from $3.3 billion in 1999 to $33.1 billion in 2004. Currently, online advertising consists primarily of banner advertisements and sponsorships on frequently visited portals and other Web sites. Although these forms of online advertising have generally allowed businesses to create an online awareness of their brands and products, businesses are increasingly demanding the ability to target their desired audience more effectively. Limitations of Current Targeted Online Advertising Methods Targeting online advertisements identifies a specific group of computer users to whom the advertisements are delivered, which we believe increases the likelihood that the computer users receiving the advertisements will find them relevant and, as a result, will positively respond to the advertisements. While targeted online advertising has a number of advantages over traditional advertising, there remain significant challenges to realizing its full potential. The effectiveness of targeted online advertising is currently limited by the lack of precise demographic and Internet behavioral data about consumers. To date, online targeting methods have generally used unverifiable data from surveys and registrations or incomplete Internet behavioral data derived from a single Web site or limited network of Web sites. Further, the effectiveness of existing online delivery methods is limited because users often scroll traditional banner advertisements off of their computer screens or leave a Web site before an advertisement can be served to that site. Consumer Online Privacy and Control of Personal Data Many companies on the Internet are collecting valuable data about consumers without their knowledge or permission. Online consumers are becoming increasingly aware of Internet privacy issues and concerned with the need to control their personal data. According to Forrester Technographics, approximately 67% of Internet users are extremely or very concerned about releasing their personal data. To date, online consumers have had limited ways to control this flow of data or realize any of its value. Market Opportunity We believe that a significant market opportunity exists for an Internet- based infomediary to serve as an effective communication channel between businesses and online consumers. This infomediary would collect consumers' demographic and Internet behavioral data, with their permission, and build detailed profiles from that information. The infomediary would then use these profiles to enable businesses to deliver highly-targeted, one-to-one marketing messages and other products and services to specified consumers. The infomediary, as the trusted custodian of their information, would also empower consumers to realize value from their data while protecting their privacy. AllAdvantage AllAdvantage is an Internet-based infomediary that enables businesses to deliver highly-targeted advertisements to, and conduct electronic commerce with, a large community of profiled members. We connect our business customers with these members through our proprietary communications system. The Viewbar, an interactive communications window that is persistently displayed on our members' computer screens, displays advertising and also contains features such as a search field, pop-up category menus and direct links that facilitate electronic commerce by connecting our members directly to Web sites and services of our business customers. With our members' express permission, we collect their demographic information upon registration and continuously capture data about their Internet behavior. Using our proprietary database and profiling system, we then create, and continuously update, an accurate and detailed profile for each of our members. These profiles enable us to deliver highly-targeted advertisements and marketing messages on behalf of our business customers. We compensate our members for time that they, and the members whom they have referred, spend browsing the Internet while using our Viewbar. Benefits to Businesses Accurate and Detailed Member Profiles. We enable businesses to deliver highly-targeted advertising and marketing messages, based on accurate and detailed member profiles, to our large community of members. With our members' express permission, we collect extensive data on their actual browsing behavior across the entire Internet. Because our members must provide us with accurate names and addresses in order to receive payment, we are able to validate this information. With our accurate and continuously updated database of profiles, we enable businesses to continuously refine and optimize their online marketing campaigns. Higher Returns on Their Marketing Investment. Our highly-targeted advertising and marketing messages are designed to generate higher consumer response rates and advertising impact and, as a result, to provide businesses with a higher return on their marketing investments. We offer businesses an effective means of delivering highly-targeted online advertisements and marketing messages based on combinations of the following variables: . profiled behavior, including personal interests and spending habits; . demographic data, including gender, age, street address and zip code; . geography, including local, regional, national or international placement; . specific Web sites or Web site topics, such as sports or travel; . current Internet behavior, such as researching or buying; . keywords searched, such as stocks or golf; and . specific time, including time of day or week. Using combinations of these variables, an advertiser can target a very specific audience. For example, a local car dealership can target its advertising to males, age 25-40, who live in the zip codes near the dealership when they are using the Internet to research sport utility vehicles or browsing related automotive Web sites. Also, a national airline could run a campaign in specific cities where it has excess capacity. With our detailed member profiles, the airline could target members who have frequented travel Web sites within the past month or visited the Web sites of its closest competitors in the same time period. Persistent and Rich Media Advertising. When activated, the Viewbar is always visible on a member's computer screen, regardless of which Web site he or she is viewing or which desktop application he or she is using. Accordingly, businesses can have their advertisements viewed on a persistent basis, without the possibility of their advertisements being scrolled off the screen. In addition, we designed the Viewbar system to send advertisements to members between downloads and uploads of data from the Internet, allowing us to efficiently send more complex and appealing graphics, or rich media, to our members. The Viewbar remains visible throughout a computing session unless the member chooses to minimize or close the Viewbar. Ability to Target Members Viewing Any Web Site. We can deliver advertisements on the Viewbar while our members are viewing any Web site, including sites that are sold out of advertising inventory or do not feature advertising. Rather than separately negotiating for and purchasing advertising space on a number of Web sites, a business can instead purchase advertising on the Viewbar that will be displayed when members view any of those selected Web sites. Media Strategy Expertise. We work with business customers to evaluate, develop, execute, analyze and refine their online marketing campaigns. Because we can collect data on our members' activity across the Internet, we are able to offer customers information that might otherwise be unavailable. We can accurately identify the demographic and behavioral characteristics of those members who have, and those who have not, responded to our advertisers' campaigns. Our media strategy group uses this information to assist our business customers to target their future campaigns more effectively. Platform for Electronic Commerce. Our Viewbar contains features that facilitate electronic commerce between business customers and our members. For example, the Viewbar contains a menu bar that provides links to over 400 sites on which our members may engage in commerce. In addition, each of our active members holds an AllAdvantage cash account. We have recently begun to allow members to use available funds that have accrued in their cash accounts for the direct purchase of goods and services online. Benefits to Members Payments for Using the Internet and for Referrals. Our members are paid for time they spend navigating the Internet while the Viewbar is active on their computer screens. In this way, members are paid for activities they already undertake and are able to share in the value that their personal information has for Internet advertisers and marketers. Members are also paid when other people they have directly or indirectly referred to us become members and use the Internet while their Viewbars are active. Members who accrue a minimum balance can receive the cash they earn in the form of a check we mail to them. In addition, we have recently begun to enable our members to use available funds that have accrued in their accounts to make purchases online. Simplified Internet Navigation. When the Viewbar is active on a member's computer screen, it serves as a persistent and private portal that is always accessible. The Viewbar simplifies navigation of the Internet by featuring a search field and a menu bar that provides direct links to selected Web sites. We believe that our members will find these features easier to use and more convenient than other alternatives. Increased Purchasing Power. We have recently begun to help our members capitalize on the value of our large member base by working with selected vendors to obtain pricing discounts, promotional rewards and other benefits for our members. We provide a vehicle by which consumers receive the benefit of their collective purchasing power, which encourages them to participate actively in the AllAdvantage community and refer other consumers for membership. Relevant Advertising and Electronic Commerce Offers. Each of our members has given us express permission to deliver advertising and marketing messages to him or her through the Viewbar. Our profiling capabilities enable us to deliver these messages in a highly targeted fashion, increasing the likelihood that the member will view and respond to a given message. As we collect additional data regarding the interests, activities and Internet usage patterns of our members over time, we believe we can increase the level of personalization and hence the direct relevance and value of these messages to members. We believe that receiving these highly-targeted messages can be valuable to our members and will be viewed by them as useful and informative. Privacy and Control. We believe we have built a trusted relationship with our members by rigidly maintaining the privacy of their data. We expressly state in our membership agreement that we will never sell or disclose to any third parties our members' personally identifiable information, unless permitted by our members or required by law. Additionally, members can control our tracking of their Internet behavior by turning the Viewbar on and off at any time. Strategy Our objective is to expand our position in the Internet data market, including the information-enabled fields of advertising, electronic commerce, profiling, and data analysis, thereby becoming the leading Internet-based infomediary. Key elements of our strategy include: Build a Premier and Trusted Brand. We believe that building strong brand awareness is fundamental to establishing ourselves as the Internet-based infomediary most trusted by consumers and as the most effective online marketing channel for businesses. We intend to build a premier and trusted brand by consistently delivering value to both businesses and consumers. We also intend to maximize awareness of the AllAdvantage brand by businesses through traditional marketing channels. In addition, we plan to utilize multiple points of contact with consumers, including our Viewbar, Web site, email and direct mail, to increase their brand awareness. Expand our Community of Profiled Members. We believe that expanding our membership increases our attractiveness to businesses. We plan to continue to rely on word-of-mouth referral marketing and may augment this strategy with other marketing campaigns. We also intend to attract additional members by improving member benefits with enhancements to the Viewbar and expanded product and service offerings. If many employers or universities adopt policies that prohibit or discourage our members from using the Viewbar, our membership may decline or our rate of membership growth may slow. We conducted informal surveys in March 2000 of randomly selected A-Plus members and non-A-Plus members in the United States. Those A-Plus members and non-A-Plus members who responded indicated that approximately 81% and approximately 88% of the time, respectively, they browse the Internet with the Viewbar activated at home rather than at work. We cannot assure you that this survey accurately represents the behavior of all of our members or that in the future our members might not use the Internet with the Viewbar relatively more frequently at work. Expand our Business Customer Base. We intend to continue to increase our sales force domestically and internationally in order to expand our worldwide business customer base. We also intend to attract and retain business customers by offering the services of our media strategy group, which assists these customers in utilizing our extensive database to evaluate, develop, execute, analyze and refine their marketing campaigns. We also believe that we will be able to attract business customers located in foreign countries by expanding our membership internationally. To date, we have not incurred significant costs in order to expand our membership and business customers into foreign countries since we have been able to use our domestically located servers in order to provide the Viewbar service to members located in foreign countries and have needed only to establish sales offices in some of those countries. However, we might incur significant costs in the future to expand our membership and business customers in foreign countries. Increase Targeted Advertising Sales. Businesses generally pay higher rates for targeted online advertising than for traditional online advertising. During 1999 and the first quarter of 2000, substantially all of the advertisements we sold were not highly-targeted. As we grow our sales force and media strategy group, we believe that we will be able to increase targeted advertising sales as a percentage of our total advertising sales. We believe that our business customers will experience higher response rates from our increasingly targeted advertisements and that these higher response rates will in turn encourage them to buy more targeted advertising from us. Pursue New Revenue Opportunities. We intend to aggressively pursue new revenue opportunities which utilize our large membership base or the functionality of the Viewbar, including: . Digital Products. We intend to offer businesses the opportunity to sell or rent digital products, such as software, music, games and video, that can be electronically distributed to our members through the Viewbar, and be paid for by debiting members' accounts; . Data Products. We intend to offer businesses the opportunity to purchase reports that will use our extensive, aggregated market data but that will not personally identify members, such as reports on Internet usage patterns or specific Web traffic data; and . Branded and Co-Branded Products and Services. We intend to offer to our member community, merchandise carrying the AllAdvantage brand including branded apparel and sporting goods. We also intend to offer businesses the opportunity to sell products and services bearing their brands and the AllAdvantage brand to our member community. For example, we anticipate offering our members co-branded debit or credit cards and telecommunications services from which we would derive revenues in the form of referral payments and revenue sharing payments made by the service providers. We believe that, in the future, advertisements may be delivered through the Internet to a number of digital devices in addition to computers, including interactive television, Internet-enabled home appliances, hand-held computers, cellular phones, pagers and automobile personal computers. Over time, we may extend our technology to deliver targeted advertisements through some of these emerging digital devices. Enhance Viewbar Functionality and Member Experience. We intend to continue to add functionality to the Viewbar in order to enhance our members' experience. For instance, we recently added pop-up category menus, a search field and direct links to over 400 Web sites to our Viewbar. These features facilitate more convenient Internet navigation and electronic commerce. We intend to develop and acquire additional technology and services that make our members' online experience more relevant and personal. For instance, we intend to allow members to customize their Viewbars to display requested information and options. Enhance our Profiling and Data Analysis Technology. We intend to continue to enhance our proprietary profiling and data analysis technology to maximize the use of our growing database. Our profiling and data analysis technology enables collection of detailed member information from which we can extract aggregated market data to create data products comprised of non-personally identifiable information for sale to our business customers. We intend to continue building increasingly detailed and personalized member profiles. We also intend to continue to enhance our data analysis capabilities in order to plan and execute more effective advertising and marketing campaigns and to provide data products for our business customers. The AllAdvantage Viewbar At the core of our service is our Viewbar, an interactive communications window that appears on each member's computer screen. The Viewbar is the channel through which we gather valuable data about our members' Internet activity and through which we deliver advertising and facilitate electronic commerce. The Viewbar contains a search field and pop-up menus of links that allow members to navigate directly to Web sites and services on the Internet. The current version of our Viewbar, released in April 2000, is depicted below: The following schematic illustrates the Viewbar: Centered on the page is a horizontal screen shot of the Viewbar. Across the top of the Viewbar are depictions of buttons containing the words "Home," "Shop," "News," "Finance," "Entertainment," "Travel," "Sports," "Tech," "Career" and "Concierge". On top of the "Finance" button is an expanded pop-up menu, in the form of a vertical column, containing the following words which read from the top down: "News," "Stocks & Investing" which are highlighted, "Banking," "Credit Cards," "Taxes," "Insurance," and "Loans & Mortgages." To the right and parallel to the highlighted words "Stocks & Investing" is a drop- down menu, in the form of a vertical column, containing the following words which read from the top down: "On-Line Research" and "Research." The following text connected by lines to functional areas of the Viewbar surrounds the depiction of the Viewbar, starting above the depiction of the Viewbar and to the left of the "Finance" button pop-up menu and following anti- clockwise around the entire screen shot of the Viewbar. "Minimizer button for control of use." "Home menu button takes members directly to individual account page, referral center and other areas of our web site." "Choice of seven search engines." "Direct link to our web site homepage www.AllAdvantage.com" "Banner and tile advertising spaces." "Menu Bar with ten channels of detailed link menus." The body of the Viewbar is depicted in three adjoining sections, the section on the left hand side of the Viewbar depicts a search engine with the words "Enter Search Here" presented and an expanded drop-down menu, in the form of a vertical column, containing the following words, which read from the top down: "General Search," which are highlighted, "Stock Quotes," "Weather," "Comparison Shopping," "Merchant Reviews" and "Product Reviews". To the right and parallel to the words "General Search" is a drop-down menu, in the form of a vertical column, containing the following words which read from the top down: "Ask Jeeves," "Direct Hit," "Excite," "Go.com," "Google," "GoTo" and "LookSmart." The center section of the Viewbar depicts the Viewbar's banner advertising space with AllAdvantage's logo presented and the section on the right hand side of the Viewbar depicts the Viewbar's tile advertising space and presents the following text: "ALLPLAY-TM-Channel Advantage-TM-" The Viewbar can be downloaded from our Web site in Windows 95, Windows 98, Windows NT 4.x and Macintosh 8.6 and 9.0 formats. Once a member downloads, installs and launches the Viewbar, it opens a two-way communications channel between the member's computer and AllAdvantage. The Viewbar appears on the user's screen automatically when the computer is turned on, and its default position is at the bottom of the screen. A member can move the Viewbar to any part of the computer screen, and it remains visible throughout a computing session unless minimized or closed. We control the type of content and the frequency with which that content is displayed through the Viewbar, based on a member's unique profile and Internet browsing behavior. The Viewbar has the following interactive features: . The Menu Bar. Along the top of the Viewbar there is a menu bar currently containing eight category menus. The menu bar may be opened or closed at the option of the member. Each menu contains direct links to select Web sites. The current Viewbar features more than 400 direct links that may be sold to sponsors in the future. We intend to increase the number of category menus and links on the menu bar. . The Search Field. On the left side of the Viewbar is a text box that members can use to search the Internet. An expandable menu button from this search text box allows users to choose the search engine of their choice. We currently offer six sponsored search engine options. Members can type in their search criteria or a specific Web site address in the search text box, even while using a non-Internet application. This activates the member's Internet browser, which displays the search results or takes the member to the Web site address entered. We entered into non-exclusive contractual arrangements with Ask Jeeves and LookSmart in October 1999, with Direct Hit, Excite, and Go.com in November 1999, with GoTo.com in March 2000, and with Google in April 2000. Under these arrangements, the search engines of these companies are made available on the Viewbar. Under these arrangements, each of which generally has a term of one year, we earn revenue based on the number of searches run by our members using the applicable search engine. Our arrangements with Ask Jeeves, Direct Hit and LookSmart provide that we are obligated to deliver a minimum number of searches by our members within specified time periods; otherwise we will be required to refund prorated portions of advance payments made by these companies or these companies will not be obligated to make continuing installment payments to us under these arrangements. While we have generated revenues under each of these arrangements, other than the one with Google, to date the revenues generated have not been material in amount. . Advertising Windows. To the right of the search field are spaces to which we deliver a standard-sized and a tile-sized advertisement, both of which we change several times a minute. AllAdvantage Membership Services Member Payments Members earn money for time they spend navigating the Internet while the Viewbar is active on their computer screens. Members are paid only after reaching a minimum cumulative account balance that we have established for each country, presently $30 in the United States. Time for which a member is eligible for payment is capped at a maximum number of hours per month that we have established for each country, currently 15 hours in the United States. In addition to earning money from their own Internet use, members are paid, at a lesser rate, when other members they have directly or indirectly referred to us use the Internet while their Viewbars are active. We currently limit payment for referrals to five levels removed from the original referring member. The amount paid to a member for his or her referrals' usage is based on an hourly rate and is also limited by the number of hours of Internet usage of the original referring member, as a percentage of the maximum number of payable hours for the referring member's country. As an example, if member A refers member B, who in turn refers member C, who in turn refers member D, who in turn refers member E, who in turn refers member F, who refers in turn member G, then member A will be eligible to accrue payment at the applicable referral rate for Internet browsing done in a given month by members B through F, but not member G. If United States member A actively browses the Internet with the Viewbar active for six hours in a given month, 40% of the United States maximum payable hours, then member A will accrue payment at the direct member rate for those six hours. Additionally, even if in that month members B through F each actively browse the Internet with the Viewbar active for over 40% of these respective maximum payable hours, then member A will accrue only 40% worth of the maximum possible referral payments for each such referral. Our membership agreement specifies that we may alter the member payment structure at any time. The payment structure described in this prospectus reflects the changes we implemented effective June 1, 2000. Under our previous payment structure, our members who used our service in the first quarter of 2000 accrued an average of $6.49 per month through the use of our Viewbar. Had our current payment structure been in place at that time, the average monthly accrual would have been approximately $4.54. Users register without charge at our Web site by providing their name, gender, street address, email address and age. Because we verify name and address information through the payment process, we believe we have highly accurate personal data. Web Site Our Web site, www.alladvantage.com, contains: . information about AllAdvantage and our Viewbar; . a download area for new Viewbar versions and digital products; . password-protected access to member referral and account pages; . information and tools to aid members in referring new members; and . specialized community pages for A-Plus members, a designation for members with 20 or more referrals, which presently allows these members to communicate with each other using computer message boards, provides information about members with a high number of referrals and provides other information about AllAdvantage events. The member account page, the most frequently visited page on our Web site, is continuously updated to reflect member earnings and referrals. Many of our members repeatedly visit their account pages over the course of a day. In each month of the fourth quarter of 1999, PC Data ranked our Web site as one of the 20 most visited Web sites, measured by the number of unique users. Specialized Member Offers We have recently begun to provide our members with third-party product and service offerings that are generally not available elsewhere. For example, we currently offer our members the ability to rent anti-virus software on a monthly basis over the Internet, payable through direct deductions from their individual AllAdvantage accounts. We intend to further leverage the value of our large membership base and digital distribution channel through the Viewbar to obtain additional specialized third-party product and service offerings. Customer Service We provide customer service to our members through our community and member services departments. Our community department supports the member community, communicating with members through email about new features and services. Our member services department answers email queries from members about topics such as Viewbar functionality, technology and usage and member accounts. AllAdvantage Business Services Advertising We offer business customers the opportunity to purchase advertising on the Viewbar. Customers may purchase standard-sized and also tile-sized advertisements. Business customers may purchase either traditional online advertisements or highly-targeted advertisements tailored to one or a combination of the individual member's demographics or Internet behavior. These variables may include profiled behavior, age, gender, address, geography, current Web activity or site, keywords, or time of day. To date, traditional advertising sold by third-party advertising sales organizations has generated a significant portion of our total advertising revenues and accounted for a significant portion of the advertising impressions delivered to our Viewbar. As we increase our internal sales force, we intend to generate an increasing proportion of our revenues from targeted advertising. Media Strategy We offer business customers extensive media strategy services, which include evaluating, developing, executing and refining online marketing campaigns. We provide detailed reports that include data valuable to customers for their online and offline marketing campaigns. Because we collect data about our members' behavior wherever they go on the Internet, we are able to offer business customers information that might otherwise be unavailable or might require time-intensive and inefficient marketing campaigns. Because the Viewbar provides a persistent one-to-one marketing channel from advertisers to our members, we provide true one-stop shopping for our business customers' online media plans. Digital Products The Viewbar is designed to serve as a digital distribution channel that our business customers may use to distribute software, music, games, video and other digital products directly to our members. For example, we currently offer our members the opportunity to download and rent anti-virus software from Network Associates, for which we charge members a monthly fee that is deducted automatically from their AllAdvantage member account. Electronic Commerce The current Viewbar contains over 400 direct links to specific Web sites which we intend to sell. The menu bar containing these links is organized into categories such as shopping, news, finance, travel and technology. Business customers may pay to sponsor these links to their own Web sites and services. For example, a finance-related Web site can sponsor a link in the finance menu, so that their Web site is always one click away from our members. In addition, businesses may sponsor the search field on the Viewbar. The tile portion of the Viewbar and specific pages on the AllAdvantage Web site are also available for sponsorship, thereby providing businesses with multiple channels through which they may communicate with our members. We have entered into agreements with businesses where we receive fees based on the number of members who sign up for their services, purchase their products or satisfy other performance criteria. We generally receive an exclusivity fee or other advance payment or fee in these arrangements. An example is our agreement with NetCreations, whereby NetCreations will deliver permission-based email services to our members. In return for our agreement to grant NetCreations exclusive rights to provide those services to our customers, NetCreations paid an exclusivity fee to us at the outset of our contractual relationship. As members sign up for NetCreations and receive permission-based emails, we also receive payments for each email that is delivered to our members. AllAdvantage Business Customers From the introduction of our Viewbar in July 1999 through March 2000, we have delivered advertisements for 360 advertisers obtained by our direct sales force and 1,181 additional advertisers obtained through third-party advertising sales organizations. Our agreements with our business customers include provisions which require us to deliver to the Viewbar specified levels of advertising for a specified time period. In return, those business customers pay us for advertising delivered. We have entered into agreements with DoubleClick and 24/7 Media under which they sell Viewbar advertising on behalf of AllAdvantage. Our agreement with 24/7 Media was terminated effective May 1, 2000. Our agreement with DoubleClick is non-exclusive and requires that we provide a minimum amount of monthly advertising to DoubleClick, that we maintain our Web site at a level of quality no less than the level existing when the agreement was entered into and that we pay a commission to DoubleClick for completed sales. This agreement expires after two years or earlier if a customer advance for future revenues provided by DoubleClick no longer remains outstanding. This agreement may be terminated earlier by DoubleClick if the average monthly click-through rate on our advertisements falls below a stated minimum, if the time our advertisements are displayed on the Viewbar fall below a stated minimum, if we terminate our agreement to use DoubleClick to serve our advertisements, if we are acquired by a competitor of DoubleClick, if we breach the agreement or if we are determined to be insolvent or bankrupt. 24/7 Media sold advertisements that accounted for 12% and 19% of our revenues for the three months ended March 31, 2000 and for the period from inception, March 24, 1999, to December 31, 1999, respectively, and DoubleClick sold advertisements that accounted for 3% of our revenues for both the three months ended March 31, 2000 and the period from inception, March 24, 1999, to December 31, 1999. Additionally, our sales of advertisements to Overstock.com accounted for approximately 17% of our revenues for the three months ended March 31, 2000. Sales and Marketing Customer Acquisition We acquire business customers through our direct sales force and through third-party advertising sales organizations. As of March 31, 2000, our sales and marketing organization included 233 employees and contractors located in the following metropolitan areas: Atlanta, Austin, Baltimore, Boston, Boulder, Charlotte, Chicago, Cincinnati, Cleveland, Dallas, Detroit, Houston, London, Los Angeles, Louisville, Miami, Minneapolis, New York, Oklahoma City, Paris, Philadelphia, San Diego, San Francisco, Seattle, St. Louis, Sydney, Tokyo and Washington, D.C. Our sales organization develops and maintains relationships with leading advertisers and advertising agencies globally. We also have entered into relationships with third-party advertising sales organizations in order to augment the efforts of our sales personnel and accelerate the expansion of our business internationally. We use a variety of methods to build awareness of the AllAdvantage brand and our service offerings within our target market and to establish credibility and leadership in the marketplace. These methods include marketing materials, advertising, press coverage and other public relations efforts, direct marketing, trade shows, seminars and conferences, relationships with recognized industry analysts and the AllAdvantage Web site. We expect to increase our business marketing activities in the future. Member Acquisition Since our inception, we have relied on word-of-mouth marketing to attract the vast majority of our members. We employ a referral marketing system that rewards members for referring other members to our service. Members derive increased benefits from our service, such as referral payments and greater purchasing power, as more members join, thereby motivating members to work to further increase our membership base. Between the launch of our Web site in March 1999 and March 31, 2000, over 6.7 million users registered to receive our service, of which 6.5 million are currently registered. In addition, as of March 31, 2000, over 1.4 million of our members had successfully referred at least one new member to our service, and our over 125,000 A-Plus members had each referred 20 or more members to our service. We may supplement our word-of- mouth member marketing efforts in the future with more traditional marketing campaigns. Technology As of March 31, 2000, our technology organization included 177 employees and contractors. We have developed and continue to expand our proprietary software architecture that enables us to detect and catalog our members' Internet-usage behavior, create member profiles based on their browsing behavior, improve the delivery of dynamic, targeted advertisements, and update and maintain members' online accounts. This software architecture includes the following components: Viewbar. The Viewbar, which is downloaded by each member from our Web site, runs on the member's computer and displays advertisements supplied by the advertising server. The Viewbar communicates continuously with our central servers, keeping member earnings and profile information current and enabling customization of advertising displayed on the Viewbar based on the most recent profiles. The Viewbar is a client application programmed in C++ and designed to be portable between operating systems. Different versions of our Viewbar currently operate on the Windows 95, Windows 98, Windows NT 4.x and Macintosh 8.6 and 9.0 operating systems. Profiling Server. The profiling server collects data about each member's actual Internet browsing behavior. This server gathers data describing the sites visited, and the frequency and duration of these visits. This server is also used to infer additional Internet behavior data regarding each member. This information is transmitted to the member profile server and subsequently used to target advertising on the Viewbar. Member Profile Server. The member profile server stores the member data we use to target advertisements and marketing messages. The member data consists of demographic and Internet behavioral information. The member profile server enables members to authenticate themselves to our system and transmit their data through the Viewbar. The member profile server also maintains the information about each of our members' referrals. Advertising Server. The advertising server determines which advertisements are shown to a particular member at a particular moment. Advertisements can be served based on targeting information provided to the advertising server by the member's Viewbar and the member profile server, as well as the specific targeting criteria associated with a particular marketing campaign. This server maintains data regarding available advertising inventory and provides reports on the delivery of advertisements. The server technology is provided to us by DoubleClick. Payment Server. The payment server monitors the time members spend browsing the Internet while the Viewbar is active. Based on this information, the payment server computes each member's earnings, maintains an account for each member, and computes the amount to be paid to each member based on the member's browsing time and that of the members whom they have referred. Web Server. The Web server supports the AllAdvantage Web site. We have designed and constructed our software and related technology infrastructure to comply with industry-standard security specifications, and we utilize a broad range of monitoring and assessment tools to ensure the security of our systems. We have designed our system to be reliable and to permit our technology infrastructure to be expanded to meet increased usage demands, and we believe the various components of our technology architecture have the ability to scale well beyond their current configuration. We actively monitor our systems to ensure that we have substantial available capacity. We house our technology within the GlobalCenter facilities located in Sunnyvale, California, and by the end of the second quarter of 2000 we intend to have a second hosting site operational at GlobalCenter's facilities in Herndon, Virginia. Our information technology infrastructure is built upon a number of hardware and software components from well-known technology vendors, including: . Intel-based servers for our Web site, running Microsoft's NT operating system; . Sun Microsystems servers for our other servers, running Sun's Solaris operating system; . high-availability storage equipment from EMC; . firewalls and network routing equipment from Cisco; and . Oracle database software to manage the large amounts of data we collect about our members' Internet usage activities. Product Development We consider our product functionality and architecture to be one of our competitive advantages. To this end, we expect to make during at least the next 12 months material expenditures on research and development to continue to make our service more attractive to new and current members. We believe that, in order to meet this goal, we will need to regularly improve and extend the functionality of our Viewbar and related systems, which include a profiling server, a payment server and a Web server. To this end, we currently have software developers and engineers working in a number of areas, including: . database and server systems development; . Web development; . client software development; . software testing; and . systems support. Our software developers rely on state-of-the-art development tools and development environments. The January 2000 release of our Viewbar was enhanced to include search capability, electronic commerce menus and an auto-update feature, which allows the Viewbar to update itself automatically with new or upgraded components. The auto-update capability enables us to update members' Viewbars transparently without disrupting online activity. We believe that this capability, when combined with the Viewbar's modular design and ability to support several operating systems, enables us to deploy rapidly to our members new products and software components that may be created by third-party developers. Our ability to centrally update the Viewbar and the server-side Web and database systems facilitates rapid adjustments to all product components based on consumer demand and business needs. Privacy Policy We believe that concerns regarding online privacy raised by consumer advocates, legislatures and the media will increase as commercial usage of the Internet increases. Foreign, federal and state laws increasingly may regulate our use of personal information regarding our members. We have a stringent privacy policy concerning how we use information about our members and the extent to which others may have access to this information. We have a chief privacy officer who oversees the creation and implementation of and compliance with our privacy policy. We use information about our members for internal purposes, such as to target advertisements and other communications to our members, to improve our marketing and promotional efforts and to improve our service and Web site. We do not give, sell, rent, share or trade any identifiable personal information regarding our members to any third party, except as required by law or expressly permitted by a member. We do, however, sell summaries of generalized market data to our advertisers and other interested parties, but we do not disclose indentifiable personal information to these parties. In contrast to other companies on the Web that collect personal data without the knowledge or permission of the Internet user, we have a permission-based relationship with every one of our members. Competition We compete for business customers and members. Competition for business customers The market for online advertising and marketing is extremely competitive. We believe that the principal competitive factors in the online advertising market are: . the ability to target users based on specific demographic and inferred behavioral criteria; . brand recognition; . size and characteristics of membership base; . breadth and depth of reporting and other services; . reliability and quality of data and technology infrastructure; . pricing; and . technical expertise. There is substantial competition for Internet-based advertising revenues generally, and the amount of available advertising space on the Internet is increasing at a significant rate. We believe our most direct competitors for Internet advertising and sponsorship revenues will be providers of targeted online advertisements. We will also compete for those revenues with major Internet service providers, content providers, large Web publishers, Web search engines and portal companies, Internet advertising providers, content aggregation companies, and various other companies that facilitate Internet advertising. We may also face competition from traditional direct marketing companies that may seek to offer online products or services. Many of these companies have longer operating histories, greater name recognition, larger user bases and significantly greater financial, technical, sales and marketing resources than we do. This may allow them to respond more quickly than we can to new or emerging technologies and changes in advertiser requirements. It may also allow them to devote greater resources than we can to the development, promotion and sale of their products and services. These competitors may also engage in more extensive research and development, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to existing and potential employees, strategic partners and advertisers. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products or services to address the needs of our prospective business customers. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share. We face significant competition from traditional media, such as television, radio, cable and print, for a share of advertisers' total advertising budgets. Businesses may be reluctant to devote a significant portion of their advertising budgets to Internet advertising if they perceive the Internet to be a limited or ineffective advertising medium. Competition for members Since space on a computer screen is limited, we believe our most direct competitors for members are companies that offer Internet services or compensation to consumers who allow a portion of their computer screen to be dedicated to the applications or services of those companies. We believe that over 50 other companies have announced that they offer or will offer users cash compensation to browse the Internet if they dedicate a portion of their computer screen. If our competitors were to offer more attractive benefits than we do, such as higher compensation, better functionality or greater aggregated purchasing power, then our membership could decline, possibly reducing our revenues. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their services to address the needs of our current or prospective members. If we are unable to compete successfully, our business may fail. Intellectual Property We rely on a combination of patent, copyright, trademark, trade secret and contract law to protect our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties have copied, and may attempt to copy in the future or otherwise obtain and use our intellectual property. Monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our intellectual property in the future. We have two U.S. copyright registrations. We have pending U.S. patent and pending U.S. and foreign trademark applications. We cannot assure you that our pending patent or trademark applications will be granted. Even if they are granted, our patents, copyrights and trademarks may be successfully challenged by others or invalidated. We cannot assure you that any of our proprietary rights will be viable or of value since the validity, enforceability and scope of protection of proprietary rights in Internet-related industries are uncertain and evolving. If our trademark applications are not approved because third parties successfully challenge our right to use these trademarks, our use of these trademarks would be restricted unless we were to enter into arrangements with the third-party owners, which might not be possible on reasonable terms. We also seek to protect our proprietary rights through trade secret and contract law. We generally enter into confidentiality or license agreements with our employees and consultants, and control access to and distribution of our technologies, documentation and other proprietary information. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, unauthorized parties may attempt to obtain, use or disclose our technologies. We cannot assure you that the steps we have taken will prevent misappropriation of our technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States. Our business activities may infringe the proprietary rights of others, and, from time to time, we have received, and may continue to receive, claims of infringement against us. We have received notices from two third parties regarding their Internet business model patents. Third parties may assert claims against us for infringement of their proprietary rights and these claims may be successful. In addition, a number of third-party owners of patents claim to hold patents that cover various forms of online transactions or online technology generally. As with other online service providers, third parties could assert patent claims against us based upon our services or technologies. Litigation may be necessary to determine the validity and scope of the proprietary rights of others. Any litigation could subject us to significant liability for damages and attorneys' fees, invalidation of our proprietary rights, or injunctions or other court orders that would prevent us from using specific technologies or engaging in specific business activities. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management's time and attention from our business. Any potential intellectual property litigation could also force us to do one or more of the following: . cease using key aspects of our technology that incorporate the challenged intellectual property; . make significant changes to the structure and operation of our business; . create new brands for our services and establish recognition of those new brands; . design around a third party's patent; or . license technology from a third party. Implementation of any of these alternatives could be costly and time- consuming and might not be possible at all. Accordingly, an adverse determination in any litigation to which we are a party would harm our business. Governmental Regulation Overview The services we provide are subject to regulation by various federal, state and foreign governmental authorities. Federal and state laws may, for example, mandate protection of consumer privacy and regulate online content generally. The laws relating to our business and operations are evolving. A number of legislative and regulatory proposals under consideration by federal, state, local and foreign governments may lead to additional laws or regulations concerning online content, user privacy, taxation, parental consent for access by their minor children, access charges, liability for third-party activities, bulk e-mail, or spam, encryption standards, online sales of goods and services, domain name registration and use, copyright infringement and other intellectual property issues. The adoption of new laws or the application of existing laws may decrease the growth in the use of the Internet. As Internet financial services activities grow, new laws and regulations adopted to cover these activities could affect our operations. These results could decrease the demand for our services or increase our cost of doing business, either of which would harm our business. Foreign Laws and Jurisdiction. It is not clear the extent to which we are, or may in the future be, subject to regulatory activity of foreign jurisdictions. We could be held to be subject to the laws or regulations of foreign jurisdictions because of the location of our members, our presence on the Internet or the impact or effects of our operations. We could also be held subject to foreign laws or regulations because of possible future activities that specifically target or are based in other countries. The possible application of foreign laws and regulations could include a wide range of subjects. The application of foreign laws and regulations to Internet and online activity has only limited precedents abroad and is an evolving area of law. It is not clear how existing foreign laws and regulations might be applied to our activities. Regulation of Content and Access; Membership Program Prohibition and restriction of Internet content and access could dampen the growth of Internet use, decrease the acceptance of the Internet as a communications and commercial medium or expose us to liability. A variety of restrictions on content and access, primarily relating to children, have been enacted or proposed. The Children's Online Protection Act of 1998, for example, prohibits, and imposes criminal penalties and civil liability on anyone engaged in the business of, selling or transferring, by means of the World Wide Web, material that is harmful to minors, unless access to this material is blocked to persons under 17 years of age. However, some courts have found portions of this act to be unconstitutional. In addition, the Federal Telecommunications Act of 1996 imposes fines on any entity that knowingly permits any telecommunications facility under its control to be used to make obscene or indecent material available to minors via an interactive computer service. Numerous states have adopted or are currently considering similar types of legislation. In addition, laws have been proposed that would require Internet service providers to supply, at cost, filtering technologies to limit or block the ability of minors to access unsuitable materials on the Internet. Federal and state consumer protection laws, including the Federal Trade Commission Act, generally prohibit unfair or deceptive acts or practices and impose civil and criminal liability for violations. Because of these content restrictions and potential liability to us for materials carried on or disseminated through our systems, we may be required to implement measures to reduce our exposure to liability. These measures might require the expenditure of substantial resources or the discontinuation of our product or service offerings that subject us to this liability. In addition, our business model requires that we pay our members cash for their Viewbar usage and that of their referrals. Any regulatory challenge or limitation asserted or implied regarding these payments could significantly harm our business. Further, we could incur substantial costs in defending against any of these claims and we might be required to pay large judgments or settlements or alter our business practices. In addition, our liability insurance might not cover potential claims relating to the services we provide or might not be adequate to indemnify us for all liabilities that could be imposed on us. User Privacy Issues Internet user privacy has become an issue both in the United States and abroad. The Federal Trade Commission has recently started a proceeding against an Internet server regarding the manner in which personal information is collected from users and provided to third parties. Some commentators, privacy advocates and government bodies have recommended limitations on, or taken actions to limit, the use of personal information by those collecting this information. For example, the Children's Online Privacy Protection Act of 1998 and the regulations published by the Federal Trade Commission require, among other things, that online operators obtain verifiable parental consent for the collection, use or disclosure of personal information from children. We cannot predict how courts and the Federal Trade Commission will interpret and apply these new rules or whether we may need to make changes to our operations to comply with them. Congress has recently enacted the Gramm-Leach-Bliley Act, which contains provisions protecting the privacy of consumer non-public personal information collected by financial institutions. We may be deemed a financial institution under the Gramm-Leach-Bliley Act. If so, we may be required to amend our privacy policy and consumer authorizations and disclosures to comply with this or other laws or regulations. Federal regulations implementing the statute are being developed. Rights in Member Data Our ability to sell targeted advertising depends on our ability to use personal information collected from our members. We collect, with member consent, various forms of data from and about our members, and market or otherwise use that data. Although we attempt to protect, based on trade secret law, copyright law and license agreements, among other means, the information we collect, we cannot be certain that these means will be sufficient to maintain the integrity or value of information collected. Also, some of the data that we obtain and use may be derived in part from information contained on Web sites operated by other parties. Although we endeavor not to violate any of the proprietary rights of others in collecting or obtaining this information, the law relating to ownership of information contained on Web sites and in electronic and online databases is still developing, and third parties may assert claims against us based on this data acquisition. New laws relating to the protection of information contained in databases have been proposed and are under consideration in the United States and in foreign countries. A new law could impose obstacles to our rights to collect data or give rise to claims by third-party owners of data. It is not possible to predict whether legislation will pass, what provisions it might contain, or the scope of its possible impact on our business activities. We cannot assure you that our current information collection procedures and disclosure policies will be found to be in compliance with existing or future laws or regulations. Our failure to comply with existing laws, including those of foreign countries, or the adoption of new laws or regulations that require us to change the way we conduct our business, could make it cost-prohibitive to operate our business, and prevent us from pursuing our business strategies including the sale of targeted advertising. Internet Taxation The tax treatment of activities on or relating to the Internet is currently unsettled. A number of proposals have been made at the federal, state and local levels, and by foreign governments, that could impose taxes on the online purchase and sale of services and other Internet activities. The Internet Tax Freedom Act of 1998 has generally imposed a moratorium through October 2001 on the imposition of some kinds of consumer-related taxes, other than sales or use taxes, in connection with Internet access and Internet- related sales in the United States. Future laws imposing taxes or other regulations on commerce over the Internet could, however, substantially impair the growth of Internet commerce and as a result make it cost-prohibitive to operate our business. The Workforce Investment Act of 1998 Section 508 of the Workforce Investment Act of 1998 requires that all Web sites operated by a federal agency, as well as those operated by anyone doing business with the federal government, modify their Web sites to make them accessible to those who are handicapped. There are proposals to extend this act to all Web sites, which could increase our costs and make our service less attractive to the non-handicapped. Employees As of March 31, 2000, we had 587 employees, contract-to-hire personnel and independent contractors--233 in sales and marketing, 84 in member services and community, 177 in product development and information systems and operations, and 93 in finance and administration. We plan to hire substantial numbers of additional personnel in all areas of our business, particularly in sales and marketing. We have never had a work stoppage, and no employees are represented under any collective bargaining agreement. Our business and future success depend on the efforts and abilities of our senior management and other key personnel and our ability to attract, retain and motivate highly skilled technical, managerial, sales and marketing personnel. Competition for qualified personnel is intense, particularly in our location in Silicon Valley, California, due to a number of factors, including the high concentration of established and emerging growth technology companies. As a result, we may be unable to attract qualified personnel. We may also be unable to retain the employees we currently employ. Facilities Our principal administrative, marketing and technology operations are located in two facilities comprising 63,000 square feet in Hayward, California. The lease for one of these spaces expires on December 31, 2000 and the lease for the other space expires on December 31, 2001. As of March 31, 2000, we also had leased facilities in Atlanta, Austin, Baltimore, Boston, Boulder, Chicago, Cincinnati, Cleveland, Dallas, Detroit, Houston, London, Los Angeles, Louisville, Miami, Minneapolis, New York, Oklahoma City, Paris, Philadelphia, San Francisco, Seattle, St. Louis, Sydney, Tokyo and Washington D.C. We have entered into a lease agreement for a 135,000 square foot facility in South San Francisco, California, which will replace our current facilities in Hayward, California. We expect to occupy the new facility in the first quarter of 2001. We continually evaluate our facilities requirements, and believe that we must lease additional facilities in the next 12 months to accommodate our plans to expand our sales, marketing, media strategy and technology organizations. We cannot assure you that these facilities will be available on reasonable terms or at all. Legal Proceedings We are not a party to any material legal proceedings.