UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

Form 10-K

(Mark One)

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1999 or

___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 0F THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 333-77455

TALK CITY, INC.
(Exact name of Registrant as specified in its charter)

                     Delaware                                                            77-0426524
--------------------------------------------------                         ----------------------------------------
          (State or other jurisdiction                                     (I.R.S. Employer Identification No.)
           of incorporation or organization)

          1919 S. Bascom Avenue
          Campbell, California                                                              95008
--------------------------------------------------                                        ----------
    (Address of principal executive offices)                                              (Zip Code)

Registrant's telephone number, including area code: (408) 871-5200 Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

As of March 21, 2000, 24,746,484 shares of Common Stock of Registrant was outstanding. The aggregate market value of the shares held by non- affiliates of the Registrant (based upon the closing price of the Registrant's Common Stock on March 21, 2000 of $8.00 per share) was approximately $207 million.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Act of 1934, which is anticipated to be filed within 120 days after the end of the Registrant's fiscal year ended December 31, 1999, are incorporated by reference in Part III hereof.



TABLE OF CONTENTS

                                                                                                         Page
                                                                                                         ----
PART I
Item 1.               Description of Business                                                              2
Item 2.               Description of Property                                                             34
Item 3.               Legal Proceedings                                                                   34
Item 4.               Submission of Matters to a Vote of Security Holders                                 34


PART II
Item 5.               Market for Registrant's Common Equity and Related Stockholder Matters               34
Item 6.               Selected Consolidated Financial Data                                                37
Item 7.               Management's Discussion and Analysis of Financial Condition                         37
                       and Results of Operations
Item 7A.              Qualitative and Quantitative Disclosures about Market Risk                          44
Item 8.               Financial Statements and Supplementary Data                                         45


PART III
Item 9.               Changes in and Disagreements with Accountants on Accounting                         65
                       and Financial Disclosure
Item 10.              Directors and Executive Officers of the Registrant                                  65
Item 11.              Executive Compensation                                                              65
Item 12.              Security Ownership of Certain Beneficial Owners and Management                      65
Item 13.              Certain Relationships and Related Transactions                                      65


PART IV
Item 14.              Exhibits, Financial Statement Schedule and Reports on Form 8-K                      65


SIGNATURES                                                                                                70


PART I

This section contains forward-looking statements. The outcome of the events described in these forward-looking statements is subject to factors out of our control. You should not rely on these forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements contained in this section.

Item: 1 Business

Talk City (Nasdaq: TCTY) is a leading provider of scalable online communities and Internet-based relationship solutions for businesses and consumers.

Talk City offers businesses a wide range of services that help them develop and expand online interactive dialog with their customers, suppliers and employees. These services include designing fully integrated, customized communities, producing online events, conducting online market research and facilitating online meetings.

For consumers, Talk City operates a network of online communities located at www.talkcity.com. The network includes 20 topical categories, over 50 themed communities, 50 co-branded network participant communities and thousands of user-generated communities. These communities offer services such as moderated chat, home pages, special event production, message boards and online event guides. Talk City has also established partnerships across multiple industries and media forms, including partnerships with major media companies, Internet content companies and Internet service providers. We refer to these companies as our "network participants". Talk City works with these network participants to co-produce, co-brand and co-market community services that leverage the participant's content, brand or customer relationships. By integrating these co- branded services into Talk City's community network, we enjoy exceptional distribution, content and marketing leverage. Our network participants include Cox Interactive Media, Inc., Hearst Communications, Inc., National Broadcasting Company, Inc., WebTV Network, Inc., a wholly-owned subsidiary of Microsoft Corporation, Excite@Home Corporation and AT&T WorldNet Service.

Talk City's community network has achieved critical mass in terms of traffic, registered users and the loyalty of our users. In December 1999, www.talkcity.com had approximately 5.7 million unique visitors according to Internet Profiles Corporation, or I/PRO. As of December 1999, the consumer network had over 4.2 million user registrations. The community network also features the highest ratings of customer usage, compared to other consumer community sites, as measured by Media Metrix' At Home Report. For the period January 1999 to December 1999, users at www.talkcity.com generated higher minutes per usage day and minutes per usage month rankings than Geocities, theglobe.com, and Xoom.com.

Established in 1996, Talk City has been an innovator in Internet-based relationship management, often referred to as 'e-relationships' or 'business communities', and marketing services. We believe the Internet has created a demand for businesses to communicate in real-time, to establish deeper and broader relationships with their customers, to increase market understanding, reduce customer acquisition costs, increase customer retention, and design products and services more closely aligned with customer needs. Talk City responds to this demand by offering its business clients one of the industry's most comprehensive portfolios of e-relationship and business community services, including:

. online event production;
. online focus groups;
. online polls and surveys;

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. moderated chat rooms;
. moderated discussion boards;
. home page community management and technology; and
. online meetings and presentations.

Many of Talk City's business clients choose to integrate these services into a comprehensive business community for its customers, or what we refer to as a "Customized Community." Some of Talk City's business clients include American Airlines, British Airways, H&R Block, Hewlett-Packard, Kemper Funds, Microsoft, Novell, Procter & Gamble and Starbucks.

Talk City's business services have established strong momentum in the marketplace. We have exceeded our forecasted revenue growth in this sector of our business in 1999. In addition, Talk City's business services have obtained broad acceptance across multiple industries, from financial services and retail to entertainment and automotive.

We began providing online community services in April 1996 as LiveWorld Productions, Inc. and changed our name to Talk City, Inc. in August 1998. Since April 1996, our operating activities have been focused on building our business services client base, developing our business services product line, expanding our audience, establishing relationships with our network participants, developing programs and content and building our infrastructure.

Industry Background

The Continuing Growth and Evolution of the Internet

The Internet is an increasingly significant global communications medium, enabling millions of people to directly interact, share information and conduct business electronically. Published industry reports, including McKinsey & Company and International Data Corporation, estimate that the number of Web users worldwide will increase from 131 million at the end of 1999 to more than 500 million by the year 2003. Jupiter Communications estimates that the number of Internet connected households in the United States will grow from approximately 29 million at the end of 1998 to approximately 57 million by the end of 2002. In addition, the Internet is increasingly being recognized as a convenient and useful tool for customer relationship management for businesses. The Yankee Group estimates that the worldwide customer relationship management market will grow from $3 billion in 2000 to $7.1 billion in 2003.

The Internet also provides businesses and advertisers with an attractive means of selling and marketing products and services. According to International Data Corporation, worldwide consumer commerce revenue on the Internet is expected to increase from $14.9 billion at the end of 1998 to more than $177 billion in 2003. As the Internet audience grows and the demographics of the Web continue to evolve toward mainstream consumers, advertisers are also expected to significantly increase Internet spending. Jupiter Communications estimates that the amount of advertising dollars spent on the Internet will increase from approximately $1.9 billion in 1998 to approximately $7.7 billion by 2002, a compounded annual growth rate of 42%.

The Importance of Online Customer Relationship Management and Online Communities

Businesses of all types and in all industries are realizing the great benefits, in cost, time and customer retention, of managing their customer relationships online. They are realizing that, in the "new economy," goods and services must be more than simply personalized to meet the unique, individual needs of consumers. These companies need real-time, customer support 24 hours per day, seven days per

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week, response and dialog, and they understand that the Internet is a convenient, affordable and efficient medium for providing these services.

Companies are realizing they need to strategically manage online customer relationships, and that online community services are an effective tool to meet this need. In addition, companies with strong brands, loyal customers and relevant content are particularly well-positioned to organize online communities for their customers. The more passionate a company's customers are about their common interest, whether it be music, children, a profession or a favorite television show, the greater the opportunity for that company to migrate its customers into a robust online community. For example, a media company with a popular television show can earn the loyalty of its fans by organizing an online community in which fans can talk about the show, attend live chat events with the stars, read about missed episodes and buy licensed merchandise at a discount.

Online communities represent a significant opportunity for businesses to deepen their relationship with existing customers or expand their markets by doing the following:

. reducing customer acquisition, education and support costs;
. increasing customer satisfaction, loyalty and retention;
. capitalizing on the propensity of customers to buy their products or services;
. enhancing businesses' ability to target customers and understand their individual needs;
. reducing fixed capital costs;
. broadening geographic reach; and
. providing an opportunity to minimize the use of middlemen such as retailers, wholesalers, distributors and brokers.

Online communities can also provide significant benefits to consumers, such as:

. satisfying consumers' basic social need for communication in a convenient manner that is not limited by the same time and geographic constraints;
. serving as a venue for group meetings and events;
. enabling people to interact on focused topics of interest;
. allowing consumers to obtain increased product and services information while protecting their privacy; and
. aggregating consumer buying power and helping them to obtain lower prices from vendors.

Finally, online communities represent an increasingly attractive opportunity for advertisers because their participants:

. can be segmented and targeted by their membership profiles and by the discussion topics they select;
. have favorable usage patterns characterized by extended and frequent visits to the site; and
. are loyal to their online community and associated brands, products and services.

Shortcomings of Existing Online Customer Relationship Management and Communities

To date, many businesses and advertisers have been unable to capitalize on the benefits of online customer relationship management and communities.

Most businesses are unable to hire and retain employees with the specialized skills required to produce online events, host online discussions, manage user interests and profiles and execute the many

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other tasks associated with providing interactive services or effectively managing an online community. In addition, most businesses lack the capability to build a scalable technology platform to provide a range of interactive services and support an online community and do not wish to incur the substantial costs of developing this capability. Further, many businesses find it difficult to migrate their traditional customer bases into online communities.

Many mainstream consumers find existing community sites unsatisfactory. First, many community sites lack a friendly and welcoming atmosphere. Second, chat rooms on many existing community sites sometimes include participants who behave in obnoxious or inappropriate ways, with no practical recourse for users to object and stop such behavior. As a result, mainstream consumers, particularly parents of young children, are often reluctant to participate or allow their children to participate in the community. Third, many community sites lack structured programming, which makes it difficult for newcomers to find community programming that meets their needs and desires.

While advertisers have begun to promote their products on community sites, several factors have limited their use of community sites as a marketing vehicle. Advertisers are concerned that consumers might associate the advertisers' brand with inappropriate behavior that may sometimes occur within community Web sites. In addition, some Internet programming is so generic that it is difficult for advertisers to focus on their targeted audiences.

The Talk City Solution

We have created one of the industry's broadest portfolios of online customer relationship management and community services that meet the needs of our business clients, consumers, advertisers and network participants. Key elements of our solution include the following:

Online Interactive Services for Businesses. We provide businesses with the tools, resources and infrastructure required to manage customer relationships online. These tools help businesses to attract, retain, support and sell their products and services to current or potential customers. Our business services range from online events and market research to fully integrated, customized communities. Our business services offer several key advantages. First, our services allow businesses to interact closely and frequently with their customers, all at a fraction of the cost and time of traditional customer relationship services. Second, our services help businesses learn more about their customers through focus groups, market research and online polls. Third, our interactive services provide an easily deployed and cost-effective solution, enabling our business clients to leverage our technology infrastructure. Fourth, our experienced moderators enable businesses to direct the flow of interaction and our trained city standards advisors help to manage the environment in which businesses' brands and products are discussed. Finally, our critical mass of users provides a foundation upon which our business clients can build their own audience.

Clean Well Lighted Environment. We have structured our community as a clean well lighted environment that is attractive to businesses, users, network participants and advertisers. By ''clean and well lighted,'' we mean that our site is family-oriented, welcoming and friendly. We strive to maintain the family-oriented nature of our service by enforcing a set of published behavior standards. These standards are maintained by our trained city standards advisors. These city standards advisors can be called upon at any time by our users to resolve issues relating to standards violations. The friendly tone of our service is further maintained by our network of over 2,000 community leaders and moderators who personify the friendly culture and serve as role models for all users.

Extensive Community Network. We have created an extensive network of community sites which spans multiple industries and media forms and provides us with exceptional distribution and marketing

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leverage. The Talk City community consists of three types of network participants: major media companies, Internet service providers and Internet content companies. This extensive community provides us with one of the largest distributed and integrated networks of community services on the Internet.

Critical Mass. Our network of consumer community sites at www.talkcity.com has achieved critical mass in terms of traffic, registered users and the loyalty of our users. In December 1999, we had approximately 5.7 million unique visitors according to I/PRO. As of December 1999, we had over 4.2 million user registrations. We believe the strong loyalty of our users and engaging nature of our programming are reflected by the significant amount of time that users spend on our site. For every month from January 1999 to December 1999,

www.talkcity.com outranked our community site competitors on metrics commonly associated with customer loyalty, or "stickiness," according to Media Metrix. In each of those months, www.talkcity.com outperformed these competitors in the segments of minutes per usage day and minutes per usage month rankings.

Through our broad portfolio of customer relationship and community services, we believe our business services and online community network are able to provide significant benefits to businesses, consumers, advertisers and network participants, as summarized below:

Customers                                             Benefits
---------                                             --------
Businesses                           . Online community-based marketing, sales and support solutions
                                     . Professional production and moderated environment
                                     . Reduced customer acquisition and maintenance costs

Consumers                            . Welcoming and friendly culture to meet people of shared
                                       interests
                                     . Family-oriented environment
                                     . Variety of interactive programming

Advertisers                          . Positive, effective branding venue
                                     . Segmented, targetable and mainstream audience
                                     . Loyal, engaged viewers

Network Participants                 . Professional production and moderated environment
                                     . Critical mass of traffic and variety of programming
                                     . Co-branding and customization of community services

Strategy

Our objective is to be the leading Internet provider of online customer relationship solutions and high quality online communities. Key elements of our strategy include the following:

Expand Business Services. We intend to increase the revenues we generate from our business services by:

. acquiring and investing in companies that increase our ability to help businesses constructively interact with and understand their customers;
. aggressively increasing the number of personnel dedicated to selling and implementing our business services, including personnel with expertise in specific industries;

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. focusing on selling long-term customized communities which integrate a wide range of our business services;
. creating specialized solutions for targeted business needs, such as ecommerce, customer support and customer retention; and
. enhancing the functionality and usability of our business services products.

Drive Sponsorship and Advertising Revenues. To increase our sponsorship and advertising sales revenues, we intend to:

. increase the number of our sales personnel and focus their efforts on longer term, high value sponsorship deals;
. sell more advertisements targeted to high-value demographic groups within our audience;
. align advertiser offerings more precisely with users' interests; market Talk City sponsorship benefits to the advertising community; and
. focus on selling integrated sponsorships.

Increase Usage of Consumer Community Services. We intend to significantly increase the amount of time our users spend on our site, the frequency with which they return, and the ease with which users can invite friends and family to join them. We plan to do this by increasing the number of community services available to our users, especially in the area of group or "club" functionality, as well as new chat and home page technologies. We intend to make it easier for people to engage their friends and family in www.talkcity.com activities by developing more public clubs and online activities.

Increase Involvement and Number of Our Network Participants. We intend to increase the involvement and number of our network participants by:

. adding account executives to help manage and further develop our relationships with our network participants;
. increasing the number of major media companies, Internet service providers and Internet content companies;
. rolling out community services for our major media participants, online properties; and
. increasing the number of tools and services we offer our network participants.

Business Services

We provide businesses with a broad portfolio of e-relationship and community services. These services include designing fully integrated customized communities, producing online events and conducting online market research. These services help our business clients develop and expand online relationships with their employees, customers and suppliers.

Customized Community

Many businesses have the assets needed to build an online community, such as strong brands, loyal customers and relevant content, but lack the skills to operate a community effectively. We help these businesses deploy such assets to build and organize online communities, improving their relationship marketing and support. Customized communities are tailored to complement a client's specific products, brands and targeted audience, and typically include customized sets of one or more of the following:

chats;
message boards;

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. home pages; and
. surveys and events.

For example, we created customized communities for Hewlett-Packard that improve communication and customer support relations between customers who have recently purchased Hewlett-Packard products.

Online Events

We utilize our professional production capabilities and our moderator network to produce online events for business clients. Businesses use online events to introduce new products, educate customers, make sales and marketing presentations and communicate with and train employees. These online events enable businesses to reach local, national and international audiences through the Internet with real-time, two-way interaction, combining text chat and message boards with graphics, audio and visual aids. For example, we managed special online discussions with presidential and senatorial candidates Al Gore, John McCain and Hillary Clinton for iVillage's special election programming.

Market Research

The combination of Talk City's online market research technologies with our large, moderated online community gives us a unique opportunity to offer one of the most reliable online market research services to our business clients. In January 2000, Talk City acquired Research Connections, Inc. ("RCI"), a leading online market research firm. We believe RCI will strengthen our business services product portfolio as it will provide us with a unique source of primary market research and analysis of the Internet's growing population. Some of RCI's clients include IBM, Medscape.com, Fidelity Investments, Microsoft Corporation and AT&T, as well as several major advertising and marketing research firms.

RCI will complement our current market research services, such as online focus groups, polls and quantitative surveys. Together, our services enable business clients to generate new ideas, receive customer feedback and test product concepts, advertising and Web sites on a national basis with rapid turnaround. We are able to deliver focus groups and surveys based upon our ability to deliver the requisite demographics of participants, the skill of our trained community leaders and moderators in eliciting meaningful comments from all participants in the group and our expertise in developing and analyzing effective survey content.

We believe that our services produce the desired results for our business clients on a more cost-effective basis than is generally achievable through traditional methods. We have developed a specific set of online methodologies and tools to provide these market research services. Examples of business clients which use our market research services includes Coca-Cola, Toyota and Starbucks.

Network Participants

Overview

As of December 31, 1999, our community included 31 network participants with whom we produce co-branded versions of Talk City for their 50 Internet sites. By building our service as a distributed and integrated community with many network participants, we have created a network model which we believe will continue to build on its own momentum. Through our network participants, we are able to acquire new users and traffic cost-effectively, utilize our network participants' content and programming expertise and access their personnel and celebrity talent. Simultaneously, by increasing our usage, brand

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identity and programming expertise, there is more incentive for additional network participants to join our community and promote our brand.

With most of our network participants, we co-produce a custom link from the participant's site into a customized view of our entire community. Each participant version of Talk City is tailored to that particular participant, co- branded with the participant's brand and co-marketed to promote our joint programming. Network participants are given the flexibility to tailor or promote any elements of our service they want featured on the joint site. The network participant's user base has full access to our service, and each network participant's users have access to the other participants' users. In many cases, we have a revenue sharing agreement with the network participant in which we are generally responsible for selling advertising for the joint services and the resulting revenue is shared with the participant, thus providing a financial incentive for both parties to make the joint services successful. Our network participants consist of three types of companies: major media, Internet service providers and Internet content.

For the year ended December 31, 1999, approximately 40% of our advertising and sponsorship revenues were based on volume driven by our network participants. The volume is considered to be "driven" by a network participant if the user comes to our sites via the participant's site. For this period, none of our network participants drove user volume responsible for more than 6% of our advertising and sponsorship revenues, except WebTV Network which was responsible for approximately 28% of our advertising and sponsorship revenues for the period. For the quarter ended December 31, 1999, none of our network participants drove user volume responsible for more than 9% of our advertising and sponsorship revenues, except WebTV Network which was responsible for approximately 23% of our revenues for the quarter.

Major Media Companies

Cox Interactive Media Web sites. In August 1998, we established our relationship with Cox Interactive Media. We provide our interactive services, including chat, home page creation capabilities and message boards, for a number of Cox Interactive Media destinations including the following:

AccessArizona.com           GoPBI.com
AccessAtlanta.com           GreatOutdoors.scom
ActiveDayton.com            HamptonRoads.com
Austin360.com               Insidecentralflorida.com
BayInsider.com              OCNow.com
Fastball.com                RealPittsburgh.com
GoBig12.com                 SanDiegoInsider.com
GoCarolinas.com             SECAction.com

The agreement with Cox Interactive Media is for an initial term of three years with automatic additional two-year terms, with the initial renewal term at the discretion of Cox, unless either party notifies the other in writing of its election to have the agreement expire at least 60 days in advance of the end of the then-current term. Pursuant to our agreement with Cox, we share the expenses and revenues arising under the agreement according to mutually agreed upon percentages.

Hearst. In September 1998, we established our relationship with the Hearst New Media and Technology division of Hearst Communications. We provide interactive services for the following Hearst-related sites:

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. William Morrow Books--We co-produce a weekly chat series called "BookSpeak" which brings William Morrow authors online to interact with the HomeArts' audience.
. Victoria Magazine--We provide the chat services for the editors and readers of Victoria Magazine.
. CosmoGirl--We provide the chat services for the CosmoGirl Web site.

In addition to the above online co-branding and promotion, we receive discounted advertising in various Hearst magazines. The community services agreement with Hearst is for an initial three-year term with automatic additional two-year terms unless either party notifies the other in writing of its election to have the agreement expire at least 60 days in advance of the end of the then-current term. Pursuant to our agreement with Hearst, we share the expenses and revenues arising under the agreement according to mutually agreed upon percentages.

NBC and affiliates. In 1999 and 1998, we entered into various agreements with NBC and its affiliated companies pursuant to which we provide our interactive services, on a local and national basis, to the following Web sites operated by NBC:

. NBC.com--We provide general and featured celebrity chats for NBC daytime and prime time programming, such as "Just Shoot Me," "Frasier" and "Days of Our Lives."
. TNBC--We provide our chat service for NBC's teen oriented programming, including television shows such as "Saved by the Bell" and "Hang Time."
. NBC Interactive Neighborhood--We provide the capability to host locally- oriented chats to several of NBC's 200 local affiliate television stations.

Our agreement with NBC, which covers CNBC.com, TNBC and NBC.com, is for an initial three-year term with an automatic extension for a two-year period unless either party notifies the other in writing of its election to have the agreement expire at least 60 days in advance of the end of the then-current term. Our agreement covering NBC Interactive Neighborhood is for a two-year term. The parties have agreed to negotiate a possible extension of an additional one or two-year term. Either party may terminate the agreement at any time and for any reason in its sole discretion by providing the other party with 60 days prior written notice. Pursuant to our agreements with NBC, we share the expenses and resulting revenues arising under the agreements according to mutually agreed upon percentages. In addition, NBC provided us with advertising in 1999 and 1998 on various NBC television programs in connection with the advertising agreements signed with NBC.

Internet Service Providers

Our Internet service provider participants direct their users to Talk City as their primary community offering. Pursuant to written agreements with these participants, we share the costs and revenues associated with promoting and providing the services and attracting the users. Our Internet service provider participants include Excite@Home, BellSouth.Net, Concentric Network, WebTV Network, 2Trom.com and Sprint Canada. These participants enable us to reach a substantial number of additional users.

Internet Content Companies

We also provide community services for online Internet content sites. Our Internet content participants operate a Web service that typically focuses on a particular topic or subject. They work with us to provide their users with our community offerings. Our Internet content participants bring audiences of shared interests or demographic groups into our community. Pursuant to the agreements with each of

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our Internet content participants, we share the expenses and revenues arising under the agreement with the respective participant. Specifically, we share the associated costs of creating content, integrating information on our respective sites and promoting the services. We include the following within our group of Internet content participants:

Internet Content Participant                           Co-Branded Service
----------------------------                           ------------------
@Music..................................   A music site for which we provide always open chat rooms
                                           to discuss numerous music topics

Auto OnRamp.............................   An auto site for which we provide chat on topics such as
                                           classic and muscle cars

CheckOut.com............................   A music, video and game site for which we provide our
                                           community services

Donna Wick Radio Show...................   A radio and Internet inspirational radio show, hosted by
                                           Donna Wick, for which we provide chat rooms for
                                           listeners to chat during live broadcasts

Girl Geeks?.............................   We provide the community services for this site which is
                                           devoted to exploring women and technology issues

Hispanic Online.........................   An Internet site for the Hispanic market for which we
                                           provide chat and special events production for featured
                                           guests

Learfield Communications.................  We provide chat rooms for their Gamecruiser site, the
                                           official Internet broadcast site for 13 of the nations'
                                           top college athletic programs, for listeners to chat
                                           during live broadcasts

Lifetime Television......................  An Internet site complementing Lifetime Television
                                           Networks for which we provide our community services for
                                           various shows and special events

The Lottery Channel......................  An Internet site for lottery players nationwide for
                                           which we provide chat for lottery players to discuss strategies
                                           and share winning stories

NetNoir..................................  An Internet site for the African American market for
                                           which we provide chat and special events production for
                                           featured guests

Religions and Spirituality...............  We provide our community services for users to explore
                                           world religions, spiritual traditions and exchange ideas

Riffage.com..............................  A music site for which we provide our community services

Sony Music...............................  A music site for which we provide our community services


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Transformations..........................  An Internet site geared towards self help, support and
                                           recovery issues for which we provide our community
                                           services

UKMax.com................................  An Internet site focused on the United Kingdom for which
                                           we provide our community services

Virtual Communities......................  A geographically-oriented Web site, currently focused on
                                           Ireland and Jerusalem, for which we provide our
                                           community services

Women Online Worldwide...................  An Internet site geared towards celebrating the spirit of
                                           womankind for which we provide chat on a variety of
                                           women-related topics

Zapa Digital Arts........................  An Internet site which provides our users with tools and
                                           accessories for home page creation

Consumer Community Service

We believe that quality community services must be planned and proactively managed. In order to accomplish this, we provide active role models through our network of trained community leaders and moderators. In addition, we produce a variety of programming through our live events, topical categories and themed communities, all within the established culture, tone and standards of our community.

Our Moderator Network

A key element of our programming is our network of over 2,000 trained community leaders and moderators who work together to enhance our culture. The moderators range in age from 14 to 77 and are located all over the United States and in multiple countries around the world. Our moderators supervise chats as well as our message boards, home pages and audience content. These leaders and moderators facilitate interaction in our communities by using proprietary tools to draw users into conversation and encourage them to express their ideas. Our moderator network is essentially a community in itself, with a centralized set of goals, guiding principles and management. Community leaders and moderators become well acquainted with one another and this camaraderie helps to form a strong foundation of goodwill and high-spirited commitment.

City Standards Advisors. Our city standards advisors form a separate group within the moderator network. These individuals are our response-based standards maintenance team, handling behavior problems, such as profanity or obscenity, and answering calls from users who believe that standards violations are occurring in their chat rooms or in one-on-one conversations with other users. City standards advisors have the power to remove participants from our actual servers, as opposed to leaders or moderators who can only remove offenders from the respective chat rooms which they are supervising or moderating at the time. At least one city standard advisor is on duty on our service at all times. At peak times, there are typically six city standards advisors to ensure our clean well lighted community is maintained.

Recruitment. Our current network of moderators serves as our primary recruiter for new community leaders and moderators. Our community leaders and moderators are continually seeking good conversationalists and articulate users on our service. They frequently post notices and, in many cases,

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approach promising candidates to direct them to a Web site to learn about and potentially apply for a community leader or moderator position. This recruiting provides us with a steady stream of potential new community leaders and moderators to our training program. There are currently thousands of people on the waiting list to join our moderator network.

Training and Quality Assurance. Our training consists of online training sessions and an on-the-job apprenticeship within our community. Candidates participate in a five session series of two hour classes held in chat rooms. These training sessions focus on the principles and mechanics of moderating and the maintaining of our behavior standards. Four teams of three trainers each run the ongoing training program. Candidates who complete the program are provided with an ongoing mentor to provide further guidance as necessary. A quality assurance team systematically reviews the performance of our leaders and moderators. In addition, most of our themed communities hold regular meetings to discuss such issues as new chat topics requested by users, behavioral or cultural challenges or moderator policy revisions.

Volunteers. Most people volunteer as trained community leaders or moderators because they enjoy being moderators. They like chatting with people and often have a personality that enjoys helping others, welcoming them and providing a pleasant context for conversation. They may also enjoy the recognition they receive in a community leadership position. Often they are passionately committed to some interest or issue, such as crafts or health, and enjoy being in a position to share their expertise or interest with others. Volunteers do not receive any compensation or incentives, financial or otherwise.

Compensation. Over 300 of our approximately 2,000 trained community leaders and moderators are compensated for their services. The remainder are volunteers. Compensated leaders and moderators sign an independent contractor agreement with us which includes a full nondisclosure agreement. These agreements are terminable by either party upon 30 days' prior written notice. Our compensated trained community leaders and moderators are either paid per hour or receive a flat fee per month depending upon whether such leaders or moderators oversee an entire themed community.

Programming

We provide our community with an extensive series of live events, 20 topical categories and over 50 themed communities as described below.

Live Events. We operate one of the most extensive series of live events on the Internet, attended by audiences ranging in size from several dozen people to many thousands. The following are examples of high-traffic events which we produced or co-produced with our network participants and clients in 1999:

Nick Carter of the Backstreet Boys                    GRAMMY awards (NARA and IBM)
(Zoog Disney)                                         John McCain, Al Gore, Hillary Clinton (iVillage)
Eric von Detten (actor)  (ABC)                        Premier of "The 60s" (NBC.com)
Britney Spears (Zoog Disney)                          Mark McGwire and Howard Schultz (Starbucks)
Hanson (ZoogDisney)                                   Liam Neeson (LucasFilm)
Susan Lucci--(ABC)                                    Garth Brooks (NBC)
Christina Aguilera (Zoog Disney)

Topical Categories. Our 20 topical categories and over 50 themed communities all offer moderated chats, message boards, home pages, special events production and discussion groups. The topical categories may include professional editorial content or graphical presentation, or they may be co-produced with our network participants. Our topical categories are organized as follows:

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Ages: 20s to Seniors                   Computing and Technology            Movies, TV and Radio
Numerous chat rooms based              ComputerTalk                        Movie City
on particular ages (20s, 30s, 40s)     MacTalk                             TV Forum
Senior-Citizens                        New2Internet                        NBC.com
                                       New2TalkCity                        NBC Interactive Neighborhoods
Art and Books                          New2WebTV
Art City                                                                   Music
Books Forum                            Ethnic and Lifestyle                @Music
Science Fiction                        LifeStyles
                                       Hispanic Online                     News and Sports
Auto                                   Latino Chat                         News Talk
AutoOnRamp                             NetNoir                             TCSports
                                       Trefpunt                            Sailing Forum
Business Finance                       Deutschland
Business City Center                   Israeli Cafe                        Romance and Social
                                                                           City Pub
Cities and Travel                      Games                               Courtship Corner
Canada                                 Fantasy Forum                       Talk City Personals
Women Together                         Games Galore                        Town Talk
Cox Interactive Media sites
India                                  Health and Wellness                 Spirituality
Local                                  Transformations                     Jesus Cafe
Travel Forum                           Wellness Forum                      Religions and Spiritualities
Europe International
                                       Home and Family                     Teen
Collectibles and Hobbies               Animal Forum                        The InSite
Collectibles                           EduCenter                           CosmoGIRL!
Hobbies                                Hobbies                             Teen Talk
                                       Parent Center                       TNBC MaxChat
College                                Hearst New Media &                  Youth Online
College Connection                     Technology sites
                                       Science Visions                     Women
                                                                           Women Together
                                       Kids                                Women Online Worldwide
                                       KidszKorner

In addition, our community provides programming in multiple languages, including English, Filipino, French, German, several dialects of Hindi, Italian, Spanish and Vietnamese. We believe the global nature of our programming creates an around-the-clock friendly environment and a diversity of subject matter which further increases its value and interest to the entire audience.

Applications and Features

We offer a wide range of applications and features through which our users interact and our programming is created. These include:

. chat--primarily text chat;
. group tools--allowing people to invite friends and family into a virtual club with shared chat, message boards, calendars;
. audio chat--the user's words are heard aloud by other users;

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. avatar--graphical figures or characters on the computer screen are used to represent the participating users;
. instant messaging--private chats between users;
. auditoriums--large scale chat events that can handle thousands of users simultaneously and provide for a more structured question and answer format than a standard chat room;
. message boards--topical areas of the service in which a user can display a text message on the screen for others to read;
. home pages--personalized Web sites created by users within our themed communities;
. polls;
. email;
. search; and
. calendars--features over 3,000 events and activities on our service each month and serves as an important programming tool for our users.

Established Culture

Our programming and services are offered within our clean well lighted environment which is focused on positive and respectful behavior between people and intended to create a friendly and welcoming environment for family-oriented audiences. As new users come to our service, they participate in the moderated or supervised areas and see and learn the positive culture and behavior standards from our trained community leaders and moderators. We believe that when users have become familiar with the culture of our service, they tend to maintain that culture even when participating in unmoderated, but supervised, areas of our community.

Sales And Marketing

Sales

We concentrate our sales efforts on, and derive our revenues from, our business services and advertising and sponsorships.

Business Services. Sales of our business services are generated by our internal sales force. Our business services are generally part of the client's corporate strategy and are often incorporated into the client's primary business plan. As a result, we generally work with the senior management of our business clients and their agencies who possess broad budget authority rather than media buyers within the organization. This results in a close strategic working relationship between us and the client and enhances the prospects for long-term account relationships and repeat revenues.

Sponsorships and Advertising. We believe our clean well lighted community and loyal, mainstream audience presents attractive opportunities to our sponsors and advertisers. Our sales force works with our sponsors and advertisers to provide them with information on our users' demographics and interests so that the efforts of our advertising clients are aligned with the topical area or community of their choice. Sponsorships are designed to support broad marketing objectives, including brand promotion, awareness, product introductions and the integration of advertising with content. Our sponsorship and advertising clients enter into short-term agreements pursuant to which they generally receive a guaranteed number of impressions. On a limited basis, we also utilize a third- party service to sell advertising on our Web sites.

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Marketing

We employ targeted marketing activities primarily to build recognition for our business services offerings and increase advertising and sponsorship opportunities, but also to leverage our users' loyalty and strong usage pattern to cost-effectively increase user traffic and usage on our consumer network.

Business Services Testimonial and Brand Awareness Promotion. We aggressively promote our business services offerings through national advertising in major business print and broadcast media. This campaign, called the "We Helped" campaign, focuses on highlighting our business clients success stories, such as with Hewlett-Packard, Kemper Funds and Kraft Foods. Our direct mail activity also focuses on educating the marketplace about our capabilities through our success story examples. These promotions drive traffic to our interactive Web site, www.business.talkcity.com, which offers potential clients online demonstrations and explanations of our capabilities.

Traditional Marketing. Our traditional marketing programs include a mixture of television, magazine and newspaper media, direct mail and participation in and sponsorship of Internet trade shows and advertising associations. Our advertisements are published in selected magazines owned by Hearst, such as Cosmopolitan and Good Housekeeping. In addition, NBC provided us with advertising on their television network. Both Hearst and NBC provide us the flexibility to specifically target advertisements to television shows or magazines attractive to our users.

The Hearst and NBC advertising is currently paid for through noncash in-kind investments. In total, this in-kind program includes $7.2 million of television commercials and print advertisements valued at rates discounted from the rate card to be incurred from 1998 through 2001.

Network Participant Co-Branding and Ingredient Branding. "Branding" describes the process by which our community services are offered on our network participants' Web sites in exchange for featured co-branding or ingredient branding of the Talk City brand name on the Internet and in traditional media forums. For example, when an NBC.com user clicks on "NBC Talk City," the user is instantly presented with an NBC co-branded view of www.talkcity.com. While this co-branded site focuses on NBC-specific programming, such as a chat about its sitcom "Friends," the NBC.com user has access to our community and programming as well.

Viral Community Growth. To date, the majority of our user base growth has resulted from word-of-mouth recommendations within our community. This greatly reduces our cost of new customer acquisition, allowing us to focus our marketing efforts directly on revenue-producing activities. We extend this marketplace advantage by making it easy for users to invite friends and family to join them on the service, through group tools functionality, or friend-finder functionality, among others activities.

Operating Infrastructure

Our operating infrastructure has been designed and implemented to support the delivery of millions of page views per day. Web pages are generated and delivered, in response to end-users requests, by any one of over 140 Web and applications servers. Key attributes of this infrastructure include the ability to support growth, performance and service availability.

Our servers run on the Sun Solaris and Microsoft NT operating systems and use Netscape Enterprise and Apache server software. We also use NetApp file servers for personal home pages and a variety of Web-based applications software to provide our services. In addition, we contract with CommTouch, Inc. to provide HTML-based email, One&Only Network to provide personals, TelePost to provide online conferencing services, and MyPoints to provide affinity rewards programs. We have developed a variety

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of proprietary software, including tools for event production and community moderating, chat proxy servers, template systems to support dynamic pages and monitoring and reporting systems.

We maintain all of our production servers at the Sunnyvale, California facility of Frontier Global Center. Our operations are dependent upon Frontier Global Center's ability to protect its systems against damage from fire, earthquakes, power loss, telecommunications failure, break-ins and other similar events.

Our data is copied to backup tapes on a nightly basis. We keep all of our production servers behind firewalls for security purposes and do not allow outside access, at the operating systems level, except via special secure channels. Strict password management and physical security measures are followed. Computer security response team alerts are read, and, where appropriate, recommended action is taken to address security risks and vulnerabilities.

Our Web sites must accommodate a high volume of traffic and deliver frequently updated information. Components of our Web sites have in the past suffered outages or experienced slower response times because of equipment or software downtime.

Competition

The market for business services, users and Internet advertising is new and rapidly evolving, and competition across all these areas is intense and is expected to increase significantly in the future. With no substantial barriers to entry, we expect that competition will intensify.

We believe that the primary competitive factors in creating communities on the Internet and business services are:

. the degree of quality and structure in the environment;
. functionality;
. brand recognition;
. user affinity and loyalty;
. demographic focus;
. variety of value-added services;
. ease-of-use;
. quality of service and of the production process; and
. reliability and critical mass.

We compete with numerous companies or sites that are primarily focused on business services, including companies that provide:

. similar services on the Internet, such as Yahoo for live events production, Well Engaged, Koz, and Participate.com for customized communities and many smaller companies that provide online market research and event services;
. software for businesses to implement business services in-house, such as Microsoft, IBM/Lotus, Netscape and iChat/Accuity; and
. similar solutions by non-online methods, such as market research firms, trade show firms and event production firms.

None of these companies are currently dominant in the business services area.

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In the consumer community area, we also compete with numerous companies, none of which are currently dominant. These competitors include Delphi, theglobe.com, Yahoo, Xoom, Homestead.com, WBS.net, Angelfire, Fortune City, iVillage, Tripod and Third Age. We expect the number of our competitors in the consumer community area to continue to increase as the barriers to entry in this area are low.

Other consumer community competitors include:

. community components of portals and search engine sites, Internet access sites and general purpose online services, such as America Online, the Microsoft Network, Yahoo!, Excite@Home, Infoseek, Lycos and Earthlink; and
. online event guide sites and the online event guide components of search engines such as Yahoo! and America Online.

We will likely also face competition in the future from developers of Web directories, search engine providers, shareware archives, content sites, commercial online services, sites maintained by Internet service providers and other entities that establish or attempt to establish communities on the Internet by developing their own communities or purchasing one of our competitors.

In addition, we could face competition in the future from traditional media companies, a number of which, including Disney, CBS, Fox and NBC, have recently made significant acquisitions of, or investments in, Internet companies. Further, our competitors and potential competitors may develop interactive business services or communities that are equal or superior to ours, or that achieve greater market acceptance than our business services and community.

We also compete with traditional forms of media such as newspapers, magazines, radio and television for advertisers and advertising revenues. We believe that the principal competitive factors in attracting advertisers to our Web sites include:

. our brand visibility;
. the high usage per user on our sites;
. the amount of traffic on our Web sites;
. the quality of the culture and environment of our Web sites;
. the demographics of our users;
. our ability to offer targeted audiences; and
. the overall cost-effectiveness of the advertising medium we offer.

We believe that the number of Internet companies relying on business services, Web-based advertising and ecommerce revenues will increase greatly in the future. Accordingly, we will likely face increased competition, resulting in increased pricing pressures on our advertising rates which could in turn harm our business.

Many of our current and potential competitors, including developers of Web directories and search engines, have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and larger existing customer bases than we do. These competitors are able to undertake more extensive marketing campaigns for their brands and services, adopt more aggressive advertising pricing policies and make more attractive offers to potential employees, distribution partners, companies, advertisers and third-party content providers. Internet content providers and Internet service providers, including developers of Web directories, search engines, sites that offer

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professional editorial content and commercial online services, may be perceived by advertisers as having more desirable Web sites for placement of advertisements.

In addition, many of our current advertising customers and network participants also have established collaborative relationships with certain of our competitors or potential competitors and other high-traffic Web sites or offer services that are or might become competitive to our services. As a result, any of the following could occur:

. we may be unable to increase the number of our users, business clients or advertisers at historical levels;
. we may be unable to retain our current users, business clients or advertiser customers;
. competitors may experience greater growth in traffic or business clients than we do as a result of these relationships which could have the effect of making their Web sites or services more attractive to advertisers; or
. our network participants may sever or elect not to renew their agreements with us.

We may be unable to compete successfully against current or future competitors and competitive pressures may cause our business to suffer.

Intellectual Property, Proprietary Rights And Domain Names

We regard our copyrights, service marks, trademarks, trade secrets, proprietary technology and similar intellectual property as critical to our success, and we rely on trademark and copyright law, trade secret protection and confidentiality and license agreements with our employees, clients, independent contractors, network participants and others to protect our proprietary rights. We strategically pursue the registration of trademarks and service marks in the United States, and have applied for and obtained registration in the United States for "Talk City" and "LiveWorld." We have also applied for U.S. trademark registration of "OnNow." Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are made available online.

We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of our brand is maintained by these licensees, licensees may take actions that might harm the value of our proprietary rights or reputation. The steps taken by us to protect our proprietary rights may not be adequate and third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. In addition, other parties may assert claims of infringement of intellectual property or other proprietary rights against us.

We have been subject to claims and expect to be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by us and our licensees. These claims, even if without merit, could cause us to expend significant financial and managerial resources. Further, if these claims are successful, we may be required to change our trademarks, alter our content and pay financial damages, any of which could harm our business.

We may be required to obtain licenses from others to refine, develop, market and deliver new services. We may be unable to obtain any needed license on commercially reasonable terms or at all and rights granted under any licenses may not be valid and enforceable.

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Employees

As of December 31, 1999, we had a total of 197 employees, all of whom were located in the United States. Of the total, 123 were engaged in product development and programming, 53 in sales and marketing and 21 in general and administrative. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

Executive Officers

The executive officers of the Company and certain information about them are as follows:

                  Name                              Age                                 Position
----------------------------------------      -------------      ---------------------------------------------------
Peter H. Friedman                                    44             Chairman of the Board and Chief Executive
                                                                    Officer

V. David Watkins                                     43             President and Chief Operating Officer

Jeffrey Snetiker                                     51             Senior Vice President, Chief Financial and
                                                                    Administrative Officer

Jenna Woodul                                         51             Senior Vice President of Community

Patricia Griffith                                    48             Vice President of Sales

Chris N. Christensen                                 39             Vice President of Engineering and Operations

Christopher J. Escher                                41             Vice President of Marketing

Peter H. Friedman has served as our Chairman of the Board, President and Chief Executive Officer since he co-founded our company in March 1996. From 1984 to February 1996, Mr. Friedman worked at Apple Computer, Inc., where he served as Vice President and General Manager of Apple's Internet/Online business unit. In this role, Mr. Friedman oversaw the launch and growth of eWorld, Apple's consumer online Internet-based service, managed and grew Apple's AppleLink business services and a series of Internet-based services such as Salon and Youth Central. Mr. Friedman also held various senior roles in marketing at Apple. Mr. Friedman received an M.B.A. degree from the Harvard Business School and a B.A. degree from Brown University.

V. David Watkins has served as our President and Chief Operating since December 1999. From March 1999 to November 1999, Mr. Watkins served as the President of Diamond Multimedia, Inc.'s RioPort.com Division. Mr. Watkins and his team successfully identified a new market opportunity for MP3 audio on the Internet. From April 1996 to February 1999, Mr. Watkins served as Vice President of the Multimedia Division for Diamond Multimedia, Inc. and was chartered to oversee the management of the audio and core graphics product lines. From June 1995 to March 1996, Mr. Watkins served as Executive Vice President of Catapult Entertainment, a company specializing in networked consumer entertainment game play. From June 1989 to May 1995, Mr. Watkins held various executive positions for Borland International including Vice President of Worldwide Marketing and Technical Support and Vice President and General Manager of the dBase and Paradox Business Groups. From June 1986 to May 1989, Mr. Watkins was a Vice President at Symantec Corporation. Mr. Watkins received a M.B.A. degree from Stanford University and a B.A. degree in Economics from Connecticut College.

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Jeffrey Snetiker has served as our Senior Vice President, Chief Financial and Administrative Officer since March 1999. From October 1996 to February 1999, Mr. Snetiker was Principal Consultant of Executive Business Advisory, a consulting company. From January 1995 to September 1996, Mr. Snetiker served as Senior Vice President, Finance and Administration of United Paramount Network, a television broadcast network. From October 1985 to November 1993, Mr. Snetiker held various executive positions for Reeves Entertainment, a television production and distribution company, including Executive Vice President, Chief Financial and Administrative Officer from January 1990 to November 1993, Senior Vice President, Finance and Administration from January 1989 to December 1989 and Vice President, Finance and Administration from October 1985 to December 1988. From January 1983 to September 1985, Mr. Snetiker was Vice President and Controller of Group W Productions, a subsidiary of Westinghouse Broadcasting & Cable. Mr. Snetiker received a B.S. degree in Accounting from C.W. Post College of Long Island University.

Jenna Woodul has served as our Senior Vice President of Community since she co-founded our company in March 1996. From January 1993 to March 1996, Ms. Woodul cultivated the online community for Apple's eWorld, where she directed the Community Center. Ms. Woodul worked at Apple from 1984 to 1988 in the area of Apple's business communications service, AppleLink, as a core member of the team which developed the community-oriented AppleLink Personal Edition, which later became America Online. Ms. Woodul received an M.A. degree from the University of New Mexico and a B.A. degree from Vassar College.

Patricia Griffith has served as our Vice President of Sales since January 1998. From July 1997 to January 1998, Ms. Griffith served as our Director of Western Sales. Ms. Griffith joined our company from Women.com where she served as Vice President of Sales from January 1996 to July 1997. At Women.com, Ms. Griffith was responsible for developing the advertising strategies and programs that launched a successful advertising model for Women's Wire. From October 1986 to December 1995, Ms. Griffith worked for Harte Hanks Communications, a marketing company, where she served as Senior Accountant Executive for Major/National Accounts. Ms. Griffith received a B.A. degree in History and a B.A. degree in Anthropology from the University of California, Santa Barbara.

Chris N. Christensen has served as our Vice President of Engineering and Operations since May 1996. From May 1993 to May 1996, Mr. Christensen served as the Engineering Manager for Apple's Online Services division. Mr. Christensen managed the Macintosh and Windows clients for Apple's eWorld online service. He also wrote the email application for the Newton and worked on the QuickTime plug-in for Macintosh. Prior to his experience at Apple, Mr. Christensen worked at Hewlett Packard for five years. Mr. Christensen received an M.E. degree and a B.S. degree from Rensselaer Polytechnic Institute.

Christopher J. Escher has served as our Vice President of Marketing since August 1997. From February 1997 to August 1997, Mr. Escher served as the managing director of the Palo Alto, California office of Cunningham Communication, Inc., a marketing communication firm specializing in high technology concerns. At Cunningham, Mr. Escher led the Cisco Systems account, among others. From October 1984 to February 1997, Mr. Escher worked at Apple in a variety of marketing and communications roles, from Online Services Marketing Director to Public Relations Director and Creative Director. He culminated his career at Apple in 1997 as Vice President, Corporate Communications. Mr. Escher received a B.A. degree in British Studies from Stanford University.

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Risk Factors That May Affect Results of Operations and Financial Condition

We have incurred losses since inception and we may be unable to achieve profitability or generate positive cash flow

We incurred net losses of $40.1 million in 1999, $15.7 million in 1998, $6.4 million in 1997 and $1.3 million in 1996, and we may be unable to achieve profitability in the future. If we continue to incur net losses in future periods, we may be unable to achieve one or more key elements of our strategy, including the following:

. increase the number and functionality of our business service offerings;
. increase the number of business services personnel;
. increase our sales and marketing activities, including increasing the number of our sales personnel;
. expand our content and community offerings for our consumers;
. expand our moderator network; or
. introduce additional e-commerce services.

We expect to continue to incur significant operating expenditures, as well as noncash advertising and promotional charges, and as a result we will need to generate significant revenues to achieve and maintain profitability. As of December 31, 1999, we had an accumulated deficit of approximately $63.5 million, including noncash advertising and promotional charges of $14.1 million. We may not achieve profitability if our revenues increase more slowly than we expect, or if operating expenses exceed our expectations or cannot be adjusted to compensate for lower than expected revenues. If we do achieve profitability, we may be unable to sustain or increase profitability on a quarterly or annual basis. Any of the factors discussed above could cause our stock price to decline.

Fluctuations in our quarterly operating results may cause our stock price to decline

It is likely that our operating results in one or more future quarters may be below the expectations of our investors, and as a result the price of our common stock could decline. We have historically experienced fluctuating quarterly operating results. Our net loss for the quarter ended June 30,1999 decreased from $15 million to $8.8 million for the quarter ended September 30, 1999. However, our net loss increased from $8.8 million as of September 30, 1999 to $9.4 million as of December 31, 1999. We expect that our quarterly operating results will continue to fluctuate significantly and be affected by many factors, the more important of which include:

. our dependence on increased business services and advertising and sponsorship revenues;
. expansion of our sales force;
. the length of our sales cycle, particularly our business services sales cycle;
. our ability to increase our audience of loyal, engaged users;
. management of growth; and
. potential technical difficulties or system down time affecting the Internet generally or us specifically.

These factors are described in more detail in the risk factors described below. Many of these factors are beyond our control.

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Our revenue model is new and unproven and we must continue to generate and develop multiple revenue streams

The success of our revenue model will depend on our ability to generate multiple revenue streams through our community network, particularly with our business services clients. To be successful, we must, among other things, develop and market products and services that achieve broad market acceptance by our users, business clients and advertisers. Our inability to generate multiple revenue streams may cause our accumulated deficit to increase and could result in our inability to achieve profitability.

Our growth will depend on our ability to increase our business services revenues

We derive a substantial portion of our revenues from the sale of business services and we expect to continue to rely on these revenues for the foreseeable future. If we do not continue to develop business services revenues, our revenues may not meet our expectations or may decline and we will need to revise our revenue model to reflect this. Business services represented 12% of our total revenues in 1997, 36% of our total revenues in 1998 and 33% of our total revenues in 1999. Our growth and future success will depend on our ability to increase the number of our business services clients, expand our business services offerings, effectively implement these services and increase the average revenue per project and per client. Our ability to generate significant business services revenues will also depend, in part, on our ability to create new business services offerings without diluting the value of our existing programs. We have only recently hired many of our business services sales personnel, including our Vice President of Business Services, in order to expand and develop our business services.

Our growth will depend upon the acceptance of the Internet as an attractive medium for our business services clients

Our current and potential business clients must accept the Internet as an attractive and sustainable substitute medium for the traditional methods to which they are accustomed. The market for business services may not continue to develop and may not be sustainable. The Internet as a business services solution has not been available for a sufficient period of time for us to gauge its effectiveness as compared with traditional methods, such as trade shows, phone and mail surveys and video conferencing.

We have recently launched our marketing campaign to increase awareness of our business services offerings, with no guarantee of success, which could decrease our results of operations.

We recently began our "We Helped" marketing campaign to increase the industry's awareness of our business services offerings. If this campaign does not increase awareness or generate sales of our business services at the level we anticipate, or at all, our limited sales and marketing resources will have been expended with no increase in our revenues, which could decrease our results of operations. In addition, if our campaign is not successful, our sales and marketing personnel will have been diverted and focused on this failed campaign when they could have been focused on other activities, such as sales and marketing efforts towards our advertisers and sponsors or network participants.

We rely heavily on advertising and sponsorship revenues, and if our advertising and sponsorship revenues decline due to lack of acceptance of the Internet as an advertising medium, our business will not grow or will decrease

We currently derive a substantial portion of our revenues from sponsorships and advertising. Advertising and sponsorship revenue represented 88% of our total revenues in 1997, 64% of our total revenues in 1998 and 67% of our total revenues in 1999. As a result, our success is highly dependent on

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the increased use of the Internet as an advertising medium. Our business will not grow or will decrease if the market for Internet advertising fails to develop or develops slower than expected. Most of our current or potential advertising customers have little or no experience using the Internet for advertising purposes and they have allocated only a limited portion of their advertising budgets to Internet advertising. Use of the Internet by consumers is at a very early stage of development and market acceptance of the Internet as a medium for advertising is subject to a high level of uncertainty. No standards are widely accepted to measure the effectiveness of Internet advertising. If these standards do not develop, existing sponsors or advertisers may not continue their current level of Internet-based programming, and sponsors or advertisers who are not currently advertising on the Internet may be reluctant to do so.

If we do not provide our advertisers with the guaranteed number of impressions required by our contracts with them, our reputation would be harmed and our advertising inventory would be decreased

The terms of our advertising contracts generally range from one week to twelve months. Our advertising contracts guarantee the advertiser a minimum number of impressions, or times that an advertisement is seen by users of our sites. If minimum impression levels are not achieved for any reason, we may be required to provide additional impressions after the contract term which could reduce the availability of advertising inventory for our other current and potential advertisers. Continued inability to deliver the guaranteed number of impressions to our advertisers would hurt our reputation and could cause our current as well as potential advertisers to not advertise on our sites. If minimum guaranteed impressions are not met, we defer recognition of the corresponding revenues until guaranteed impression levels are achieved.

We rely on our network participants for user volume and increased revenues

Our network participants currently drive approximately 58% of the volume of our sites, which is defined as the number of Internet page views or Internet advertisement views seen by our users. The volume is considered to be ''driven'' by the network participant if the user comes to our sites via the participant's site. If we were to terminate or otherwise lose the benefit of all of our network participant contracts, we would risk losing as much as 58% of our volume. Our network participant contracts typically have terms of six months to three years each.

In addition, we sell advertisements based on the volume of our sites, including volume provided by our network participants. Of our total advertising and sponsorship revenues for the year ended December 31, 1999, approximately 40% were generated through advertisements that ran based on volume provided by our network participants. If we were to terminate or otherwise lose the benefit of all of our network participant contracts, we could lose as much as 40% of our advertising and sponsorship revenues. We would need to replace these revenues with increased revenues from our business services. For the year ended December 31, 1999, none of our network participants individually drove volume responsible for more than 7% of our advertising and sponsorship revenues, except WebTV Network which was responsible for approximately 28% of our advertising and sponsorship revenues for the year.

We rely on WebTV Network for a substantial amount of our volume and revenues, and if our contract with WebTV Network were not renewed or terminated, we would need to replace this volume and revenues through other sources

We have a two-year contract with WebTV Network which runs through July 2000. If this contract were to be terminated or not renewed, we could lose as much as 41% of our volume. We would need to replace this volume with volume from our other network participants, through the growth of our sites or with volume generated through other means, such as increased marketing, any of which would result in

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an unexpected diversion of management efforts or increased operating expenses. In addition, if we were unable to replace this volume, we would also be unable to replace the 28% of our advertising and sponsorship revenues generated by WebTV Network. For the year ended 1999, WebTV Network was responsible for approximately 41% of our volume.

We recently acquired Research Connections, Inc. ("RCI") and if we are not successful in integrating RCI's operations with ours, our revenue and operating results could decline

Our recent acquisition of Research Connections, Inc., an online market research company, will only be successful if we are able to integrate its operations with ours, which could substantially divert attention from the day- to-day operations of the combined company. The diversion of the attention of management, especially our Vice President of Business Services and other key business services sales personnel, and any difficulties encountered in the transition process could cause the revenues and operating results of the combined company to decline. We must successfully integrate RCI's services offerings, specifically online market research, with ours.

In addition, integrating personnel with disparate business backgrounds and corporate cultures may be difficult. Further, this integration must occur at a time when we are significantly increasing our focus and sales and marketing efforts on our business services, including online market research sales. The sales personnel of RCI must effectively work with our personnel for this to be successful. It is possible that neither we nor RCI will retain key management and sales personnel.

The acquisition of RCI could also cause our business clients or clients of RCI to be uncertain about our ability to support the combined company's services and the direction of the combined company's development efforts. This may result in the delay or cancellation of orders, a significant decrease in our business services revenues and limit our ability to implement our business strategy.

We recently invested in SocialNet, Inc. and our investment could be at risk if SocialNet, Inc. does not grow as expected, or at all

In December 1999, we invested $3 million in SocialNet, Inc. ("SocialNet"), an online relationships company, in return for 1,554,404 shares of Series C Preferred Stock of SocialNet which represents approximately 7.6% of SocialNet's outstanding shares. The price per share for the Series C Preferred Stock was $1.93.

Our investment in this start-up company is at risk if SocialNet does not grow at the level we anticipate or at all. In addition, the benefits to us, including enhancing our demographic targeting, may not be realized if SocialNet fails to perform as we expect or achieve its business strategy. Many of these factors are out of our control.

Our uncertain sales cycle may cause us to incur substantial expenses and expend management time without generating the corresponding revenues which would reduce our cash flow

Our sales cycle, particularly with our business clients, is generally lengthy and uncertain. During the sales cycle, we may expend substantial funds and management resources without generating corresponding revenues. The time between the date of our initial contact with a potential client and the execution of a contract with that potential client typically ranges from a few weeks for smaller agreements to several months for larger agreements. Our sales cycle is also subject to delays as a result of factors over which we have little or no control, including the following:

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. budgetary constraints;
. internal acceptance reviews;
. the success and continued internal support of advertisers', business services clients' and network participants' own development efforts; and
. the possibility of cancellation or delay of projects by advertisers, business services clients or network participants.

The length and uncertainty of our sales cycle also may harm our billing and collection efforts. The length of the sales cycle prevents us from rendering our services on a more accelerated basis, which slows our cash flow and reduces our ability to fund the expenditures we incur during the sales cycle.

We depend on our users for content, promotion and sustaining an engaged audience, and if our users become dissatisfied or do not become engaged with our service, we would need to increase our expenditures for these activities

We depend largely on our users for content, word-of-mouth promotion and for sustaining an involved audience for our advertisers and, to a lesser extent, our business clients. If our users become dissatisfied or do not become engaged with our service, they will not generate significant content or promote our site and we will have to increase the expenditure of our own resources for these activities. In addition, dissatisfied or disengaged users would not continue to attract other users to our site. Loss of our users and failure to increase our number of engaged users would hurt our efforts to generate increased revenues. Our users may become dissatisfied with our service as a result of the increased focus on commercialization of our services due to their continued exposure to advertising or ecommerce activities on our sites or the use of their information for commercial purposes. Our users may also become dissatisfied with our service if we do not maintain our structured environment, if we experience system failures or we do not continually upgrade our software functionality. In addition, users may visit our community for a single event, such as a live event regarding the Grammy Awards, or to explore our community and not return.

We depend on our trained community leaders and moderators to engage our users and maintain our structured and moderated programming

We depend on our network of trained community leaders and moderators, which consisted of over 2,000 individuals as of December 31, 1999, to draw our users into our community and maintain our structured and moderated programming. Most of our trained community leaders and moderators are volunteers. These people volunteer because they like to meet and help people from all over the world, enjoy the recognition they receive in a community leadership position and generally have fun participating in such a novel form of communication. As the Internet evolves and online communication becomes more common, our trained community leaders and moderators may view moderating as less exciting or less of a novelty than it is now. Loss of our trained community leaders and moderators, or loss of our ability to attract these individuals to our service, would cause us to implement new programs to engage our users and maintain our structured environment. The implementation of these new programs would cause us to expend unexpected management time and resources which would increase our operating expenses.

Maintaining and promoting our brand identity is a critical aspect of maintaining and expanding our user base, business clients and the number of our network participants

We intend to continue our financial commitment to the maintenance and promotion of our brand loyalty through advertising campaigns in several forms of media, including television, print and billboards. These campaigns may not successfully enhance our brand, and we may incur excessive expenses in connection with our efforts to promote and maintain our brand without generating a

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corresponding increase in revenues, which would contribute to our not achieving profitability. We spent approximately $7.4 million in 1998 and $11.4 million in 1999 on these activities. We expect to spend over $7.8 million in fiscal year 2000, consisting of a combination of cash and noncash in-kind advertising. The amounts include co-branding, ingredient branding, where the Talk City brand receives a less prominent position than the brand, usually as an ingredient of the overall service offered, such as ''chat powered by Talk City,'' and other marketing activities with our network. These other marketing activities will consist of activities in which we work with our network participants to promote the services in a way which highlights both brands' involvement in the services offered.

Promotion and enhancement of our brand also will depend, in part, on our ability to continue to provide a clean, well lighted community experience. The value of our brand could diminish if businesses, users, network participants and advertisers do not perceive the www.business.talkcity.com business experience or www.talkcity.com community experience to be of high quality or if we introduce new services or enter into new business ventures that are not well received.

We are growing rapidly and must effectively manage and support our growth in order for our business strategy to succeed

We have grown rapidly and will need to continue to grow in all areas of operation in order to execute our business strategy. Managing and sustaining our growth will place significant demands on management as well as on our administrative, operational and financial systems and controls. If we are unable to do this effectively, we would have to divert resources, such as management time, away from the continued growth of our business and implementation of our business strategy. We had 56 employees as of December 31, 1998 compared to 197 employees as of December 31, 1999. We anticipate further significant increases in the number of our employees, especially in our sales and engineering departments in order to take full advantage of our relationships with Cox, Hearst and NBC, as well as to increase the sales of our business services offerings. This rapid growth caused us to outgrow our previous office facilities sooner than we expected. Accordingly, we recently relocated our corporate headquarters to a 56,000 square foot facility in Campbell, CA.

Our Chief Executive Officer and Senior Vice President of Community are critical to our business and they may not remain with us in the future

Our future success will depend to a significant extent on the continued services of Peter Friedman, our Chairman of the Board and Chief Executive Officer, and Jenna Woodul, our Senior Vice President of Community. The loss of the services of Mr. Friedman or Ms. Woodul could cause us to incur increased operating expenses and divert other senior management time in searching for their replacements. The loss of their services could also harm our reputation as our business clients, advertisers and network participants could become concerned about our future operations. We do not have long-term employment agreements with Mr. Friedman or Ms. Woodul and we do not maintain any key person life insurance policies.

We must continually attract and retain our sales, technical, marketing and other personnel or we will be unable to execute our business strategy

Our future success also will depend on our ability to attract, retain and motivate additional highly skilled sales personnel, especially business services sales personnel, technical, managerial, marketing and customer support personnel. Competition for these people is intense, especially in the Internet industry, and we may be unable to successfully attract, integrate or retain sufficiently qualified personnel. We have in the past experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled and qualified employees.

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We may be unable to consummate future potential acquisitions or investments or successfully integrate them with our business which would slow our growth strategy

As part of our continued strategy to expand the range of our community applications and features, to acquire additional community audiences and to expand our business services products, we may acquire, or make investments in, additional complementary businesses, technologies, services or products if appropriate opportunities arise in the future. We may be unable to identify additional suitable acquisition or investment candidates at reasonable prices or on reasonable terms. Additionally, regardless of whether suitable candidates are available, we may be unable to consummate future acquisitions or investments, which could harm our growth strategy. If we do acquire a company or make other types of acquisitions in the future, we could have difficulty integrating the acquired products, personnel or technologies. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses.

Our paid moderators could be viewed as employees rather than independent contractors which could subject us to adverse tax and employee benefit consequences

We treat our approximate 300 paid moderators as independent contractors. Our paid moderators sign independent contractor agreements and receive a flat monthly fee or are paid hourly. One or more jurisdictions may deem our paid moderators to be employees rather than independent contractors and seek to impose taxes, and any applicable interest and penalties, on us. The law regarding the distinction between independent contractors and employees is not entirely clear. We could be subject to substantial tax and employee benefit liabilities if it were ultimately determined that our paid moderators are actually employees.

Our volunteer community leaders could be viewed as employees, which would substantially increase our operating expenses

If our volunteer community leaders, consisting of approximately 1,700 individuals, were viewed as employees, we could be subject to payment of back wages and other penalties and our operating expenses could substantially increase. Former volunteers of America Online, Inc. filed a complaint with the Labor Department and a class action lawsuit claiming they were treated like employees and should have been paid.

System failures or slow downs would harm our reputation and thus reduce our attractiveness to our current and future business clients, users, network participants and advertisers

System failures could harm our reputation and reduce our attractiveness to businesses, users, network participants and advertisers. Our ability to attract potential business clients, users, network participants and advertisers to promote our brand will depend significantly on the performance of our network infrastructure. In addition, a key element of our strategy is to generate a high level of user volume. An increase in the volume of user traffic could strain the capacity of our infrastructure, resulting in a slowing or outage of our services and reduced traffic to our Web sites. We may be unable to improve our technical infrastructure in relation to increased user volume. Our users depend on Internet service providers, online service providers and other Web site operators for access to our Web sites. Many of these providers and operators have also experienced significant outages in the past, and they could experience outages, delays and other difficulties due to system failures unrelated to our systems.

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Our communications and other computer hardware operations are subject to disruptions which are out of our control and for which we may not have adequate insurance

Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage our communications hardware and other computer hardware operations. These operations are located separate from our principal offices at Frontier Global Center facilities in Sunnyvale, California. In addition, computer viruses, electronic break-ins or other similar interruptions also could disrupt our Web sites. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems.

Our business is largely dependent on the development and growth of the Internet, which may not grow, or if it does grow, may be unable to support the demands placed on it by this growth

Our market is new and rapidly evolving. The use of our Web sites, which drives our volume and in turn our revenues, may not grow if Internet usage in general does not continue to grow. If Internet usage does continue to grow, the Internet infrastructure may be unable to support the demands placed on it by this growth and its performance and reliability may decline. Varying factors could inhibit future growth in Internet usage, including:

. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service; and
. unavailability of cost effective, high speed service.

Many Web sites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. Internet usage, as well as the usage of our Web sites, could decline or grow at a slower rate than expected if these outages or delays frequently occur in the future.

We must keep pace with rapid technological change and the intense competition of the Internet industry in order to succeed

Our market is characterized by rapidly changing technologies, frequent new product and service introductions and evolving industry standards. The recent growth of the Internet and intense competition in our industry exacerbate these market characteristics. To succeed, we will need to effectively integrate the various software programs and tools required to enhance and improve our product offerings and manage our business. Enhancements or new services or features must meet the requirements of our current and prospective users and must achieve significant market acceptance. Our success also will depend on our ability to adapt to rapidly changing technologies by continually improving the performance features and reliability of our services. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products and services. We could also incur substantial costs if we need to modify our services or infrastructure to adapt to these changes.

We may be liable for misappropriation by others of our users' personal or credit card information

If third parties were able to penetrate our network security or otherwise misappropriate our users' personal information or credit card information, we could be subject to liability. These could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims.

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We may be liable for our use or sale of our users' personal information

We could be subject to liability claims by our users for misuses of personal information, such as for unauthorized marketing purposes. In addition, the Federal Trade Commission has been investigating various Internet companies regarding their use of personal information. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. We currently use our users' personal information internally to determine how to improve our service, applications and features and to target our advertisements and communications. We also use this information externally to provide our advertisers with the demographics of our user base. We may, in the future, sell our user information on an aggregate, not individual, basis.

We may be subject to liability for products sold through our Web sites

Consumers may sue us if any of the products that we sell online are defective, fail to perform properly or injure the user. Liability claims resulting from our sale of products could require us to expend significant time and money in litigation or to pay significant damages. To date, we have had very limited experience in the sale of products online and the development of relationships with manufacturers or suppliers of such products. We plan to develop a range of ecommerce opportunities, such as shopping events hosted by celebrity guests to promote particular products.

Internet security and concerns could hinder ecommerce

The need to securely transmit confidential information over the Internet has been a significant barrier to ecommerce and communications over the Internet. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. Our insurance policies carry coverage limits that may not be adequate to reimburse us for losses caused by security breaches. Any well publicized compromise of security could deter people from using the Internet or using it to conduct transactions that involve transmitting confidential information.

Changes in government regulation could limit our Internet activities or result in additional costs of doing business on the Internet

Currently few laws or regulations exist that specifically regulate communications or commerce on the Internet, but we expect more stringent laws and regulations to be enacted due to the increasing popularity and use of the Internet. Any new legislation or regulations or the application of existing laws and regulations to the Internet could limit our user volume and increase our operating expenses. In addition, the application of existing laws to the Internet is uncertain, may take years to resolve and could expose us to substantial liability for which we might not be indemnified by the content providers or other third parties. Existing laws and regulations currently, and new laws and regulations are likely to, address a variety of issues, including the following:

. user privacy and expression;
. the rights and safety of children;
. intellectual property;
. information security;
. anticompetitive practices;
. the convergence of traditional channels with Internet commerce;
. taxation and pricing; and
. the characteristics and quality of products and services.

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Those laws that do reference the Internet, such as the recently passed Digital Millennium Copyright Act, have not yet been interpreted by the courts and their applicability and reach are not defined. The Federal Trade Commission has submitted proposals to the Internet industry regarding the rights and safety of children using the Internet and is expected to issue regulations in this area.

If Internet service providers become regulated in a manner similar to long distance telephone carriers, Internet growth may grow at a slower pace which would cause our revenues to decrease

If Internet growth slows due to proposals to regulate Internet service providers similar to long distance telephone carriers, our user volume and the demand for our business services would decline which would cause our revenues to decrease. Increased use of the Internet has burdened the existing telecommunications infrastructure and led to interruptions in phone service in areas with high Internet use. Several telecommunications companies and local telephone carriers, such as Pacific Bell, have petitioned the Federal Communications Commission to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers and to impose access fees. If this were to occur, the costs of communicating on the Internet could increase substantially, potentially slowing the growth in use of the Internet.

We may be subject to liability for publishing or distributing content over the Internet

We may be subject to claims relating to content that is published on or downloaded from our sites. We also could be subject to liability for content that is accessible from our Web sites through links to other Web sites or that is posted by members in chat rooms or bulletin boards. Although we carry general liability insurance, our insurance may not cover potential claims of this type, such as defamation or trademark infringement, or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed. In addition, any claims like this, with or without merit, would result in the diversion of our financial resources and management personnel.

Current and potential competitors could decrease our market share and harm our business

Increases in the number of Web sites competing for the attention and spending of businesses, users and advertisers could result in price reductions, reduced margins or loss of market share, any of which could decrease our revenues, contribute to our not achieving profitability and hurt our reputation. The barriers to entry in the Internet services market are low and we expect the number of our competitors to continue to increase. Any company or individual can establish and maintain a Web site for minimal cost. We compete for business clients, users and advertisers with numerous companies, including the following:

. online services or Web sites that produce business services, such as market research, customized communities or online events, including Well Engaged and broadcast.com, Inc.;

. online services or Web sites with a focus on community services, such as America Online, GeoCities, Inc., a subsidiary of Yahoo! Inc., Tripod, Inc., a subsidiary of Lycos, Inc., Delphi, theglobe.com, Inc., Xoom Inc., Fortune City, Homestead.com, WBS.net and Angelfire;

. vertical community online services that focus on specific market or demographic segments, such as iVillage Inc., which is focused on women, or iTurf, which is focused on teens;

. Web retrieval and other Web portal companies that offer community applications, such as chat and home pages, as part of their site, including Excite@Home, Infoseek Corporation, Lycos and Yahoo!; and

. publishers and distributors of traditional media, such as television, radio and print.

None of the above identified competitors are dominant in its respective area of operation.

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We depend on third-party software to measure user demographics and for other related services and if this software does not function properly, we would need to purchase new software or write the software ourselves, each of which could cause a temporary disruption in our business

If software we have purchased from third parties to perform our services does not function properly or is not updated, we would need to purchase new software from other third party providers. Even though the third-party software we currently use is easily replaced through multiple other third party providers, or by our writing the necessary software programs ourselves, each of these alternatives would require an unplanned increase in operating expenses and could cause a one to two month disruption in our business.

It is important to advertisers that we accurately measure the demographics of our user base and the delivery of advertising impressions on our Web sites. Companies may choose not to advertise on our Web sites or may be less willing to pay the fees we intend to charge for advertising if they do not perceive our measurements to be reliable. We have purchased third-party software from Oracle Corporation and NetGravity, Inc. for these measurement services. We may be unable to accurately evaluate the demographic characteristics of our users if the third-party software does not function properly or is not enhanced to support our needs. Our ability to deliver our services to our users may also be harmed if other software we have purchased from third parties, such as Microsoft Exchange for real-time chat and Netscape Web for ad serving and management, is not reliable or does not function properly.

We are dependent on the trademark ''Talk City'' and if we could not use this mark, we would need to reimplement our Web site and re-build our brand identity

We are dependent on the trademark ''Talk City.'' If we were prevented from using this trademark, we would need to reimplement our Web site and devise new hard copy materials, such as letterhead and merchandise. We would also need to re-build our brand identity with our business clients, users, network participants and advertisers. Our operating expenses would substantially increase if we had to re-build our brand identity or reimplement our Web site.

Possible infringement of our intellectual property rights by third parties could substantially increase our operating expenses

Other parties may assert claims of infringement of intellectual property or other proprietary rights against us. These claims, even if without merit, could require us to expend significant financial and managerial resources. Further, if claims like this are successful, we may be required to change our trademarks, alter our content or pay financial damages, any of which could substantially increase our operating expenses. We also may be required to obtain licenses from others to refine, develop, market and deliver new services. We may be unable to obtain any needed license on commercially reasonable terms or at all and rights granted under any licenses may not be valid and enforceable. We have been subject to claims and expect to be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of trademarks and other intellectual property rights of third parties by us and our licensees.

Our stock price has traded at or below the initial offering price and is likely to be extremely volatile as the market for Internet companies' stock has recently experienced extreme price and volume fluctuations

The market price of our common stock has traded at or below the initial public offering price and may be extremely volatile as the market for Internet- related and technology companies has experienced extreme price and volume fluctuations in recent months. Despite the strong pattern of operating losses of

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Internet-related companies, the market demand, valuation and trading prices of these companies has been high. At the same time, the share prices of these companies' stocks have been highly volatile and have recorded lows well below their historical highs. As a result, investors in these companies often buy the stock at very high prices only to see the price drop substantially a short time later, resulting in an extreme drop in value in the stock holdings of these investors. Since our initial public offering, at times the market price of our common stock has traded at or below the initial offering price of $12.00 per share. If the price per share does not increase, our investors may incur a loss on their investment. Historically, we have experienced significant losses, which totaled $40.1 million and $15.7 million in 1999 and 1998, respectively. In addition, we have experienced fluctuations in our volume of users and usage patterns, which could lead to a further decrease, or to extreme volatility, of our stock price. We cannot assure you that our stock price will increase to trade at the same levels as other Internet stocks or that Internet stocks in general will sustain current market prices. Volatility in the market price of our common stock could result in securities class action litigation. Any litigation would likely result in substantial costs and a diversion of management's attention and resources.

Our stock price is extremely volatile due to broad market and industry factors beyond our control

Our stock price is subject to wide fluctuations in response to a variety of factors, including factors beyond our control. These broad market and industry factors could harm the market price of our common stock, regardless of our performance. These factors include:

. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations or new programming by us or our competitors;
. announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
. conditions or trends in the Internet and online services industries;
. changes in the market valuations of other Internet companies;
. additions or departures of key personnel; and
. sales of substantial amounts of our common stock or other securities in the open market.

General political and economic conditions, such as recession or interest rate or currency rate fluctuations, also could harm the market price of our common stock.

If we raise additional capital through the issuance of new securities, existing shareholders will incur additional dilution

If we raise additional capital through the issuance of new securities, our stockholders will be subject to additional dilution. In addition, any new securities issued may have rights, preferences or privileges senior to those securities held by our current stockholders.

Our undesignated preferred stock may inhibit potential acquisition bids for us, cause the market price for our common stock to fall and diminish the voting rights of the holders of our common stock

If our board of directors issues preferred stock, potential acquirers may not make acquisition bids for us, our stock price may fall and the voting rights of existing stockholders may diminish as a result. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series. Our board of directors can fix the price, rights, preferences, privileges and restrictions of the preferred stock without any further vote or action by our stockholders.

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We have anti-takeover defenses that could delay or prevent an acquisition of our company

Provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders.

Item: 2 Properties

Our principal administrative, sales, marketing, product development and programming facilities are located in Campbell, CA and consist of three separate facilities aggregating approximately 81,000 square feet of office space held under leases which expire in December 2002 and March 2009. As of December 31, 1999, we also lease sales office space elsewhere in the United States as follows: a 6,000 square foot facility in New York under a lease that expires in March 2004, a 4,000 square foot facility in Chicago under a lease that expires in August 2004, a 4,000 square foot facility in San Francisco under a lease that expires in June 2004 and a 1,000 square foot facility in Los Angeles under a lease that expires in October 2000.

Item: 3 Legal Proceedings

We are not currently subject to any material legal proceedings. We may from time to time become a party to various legal proceedings in the ordinary course of business.

Item: 4 Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of our stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of fiscal year 1999.

PART II

Item: 5 Market for Registrant's Common Equity and Related Stockholder Matters

Market Information

Talk City's Common Stock is traded on The Nasdaq National Market under the symbol "TCTY." The following table sets forth the range of the high and low closing sale prices by quarter as reported on the Nasdaq National Market since July 20, 1999, the date our Common Stock commenced public trading.

Fiscal year ended December 31, 1999:                                           High               Low
----------------------------------------------------------------------   ----------------   ----------------

Third Quarter (since July 20, 1999)                                           13 13/16              8 3/8
Fourth Quarter                                                                26 1/8                7 1/4

On March 21, 2000, there were approximately 6,820 stockholders of record of the Talk City's common stock.

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Dividends

We have never paid cash dividends on our common stock. We intend to retain our earnings for use in our business and, therefore, do not anticipate paying any cash dividends on the Common Stock.

Recent Sales of Unregistered Securities

The following table sets forth information regarding all securities of Talk City sold by the Company from January 1, 1999 to December 31, 1999. References to warrants below assume full exercise of warrants. Preferred Stock numbers are presented on an as-if converted to Common Stock basis.

Class of                                                  Title of           Number of          Aggregate          Form of
Purchasers                   Date of Sale                Securities          Securities         Purchase         Consideration
                                                                                                  Price
-----------------------------------------------------------------------------------------------------------------------------------
Officers, directors,    January 8, 1999 to        Exercise of options to        188,188      $   650,265   Cash and promissory
 employees and other    December 16, 1999         purchase Common Stock                                    notes
 eligible
 participants

2 investors             April 15, 1999            Issuance of Series D        1,350,000        5,400,000   In-kind advertising and
                                                  Preferred Stock                                          promotion

1 investor              April 15, 1999            Issuance of a warrant         266,667        2,250,000   In-kind advertising and
                                                  to purchase Series D                                     promotion
                                                  Preferred Stock;
                                                  exercisable for cash or
                                                  pursuant to a net
                                                  exercise provision
                                                  contained therein

1 investor              April 23, 1999            Issuance of a warrant          11,893           95,144   In consideration for
                                                  to purchase Series E                                     investment banking
                                                  Preferred Stock;                                         services
                                                  exercisable for cash
                                                  only

14 investors            April 15, 1999            Issuance of Series E        2,499,882       19,999,056   Cash
                                                  Preferred Stock

3 investors             December 16, 1999         Exercise of warrants to        70,628          211,884   Net Exercise
                                                  purchase Common Stock

17 investors            March 14, 1999 to         Exercise of warrants to        28,300           99,900   Cash
                        November 22, 1999         purchase Common Stock

All sales of Common Stock made pursuant to the exercise of stock options granted under the stock option plans of Talk City were made pursuant to the exemption from the registration requirements of the Securities Act afforded by Rule 701 promulgated under the Securities Act.

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All other sales were made in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act. The securities were sold to a limited number of people with no general solicitation or advertising. The purchasers were sophisticated investors with access to all relevant information necessary to evaluate the investment and who represented to us that the shares were being acquired for investment only.

Use of Proceeds From Sales of Registered Securities

On July 20, 1999, Talk City consummated its initial public offering of its Common Stock. The managing underwriters in the offering were Lehman Brothers, Inc., U.S. Bancorp Piper Jaffray, Volpe Brown Whelan & Company and E*Trade Securities, Inc. The shares of Common Stock sold in the offering were registered under the Securities Act on a Registration Statement (No. 333-77455) on Form S-1 which was declared effective by the Securities and Exchange Commission on July 19, 1999. All 5.1 million shares of Common Stock registered under the Registration Statement, including shares covered by an over-allotment option that was exercised by the underwriters, were sold at a price to the public of $12.00 per share. The aggregate offering amount registered was $61.2 million. In connection with the offering, Talk City paid an aggregate of $4,284,000 in underwriting discounts to the underwriters. In addition, the following table sets forth the other material expenses incurred in connection with the offering.

SEC Registration Fee                                                     $   19,207
NASD Filing Fee                                                              11,710
Nasdaq National Market Listing Fee                                           90,000
Printing Expenses                                                           223,000
Legal Fees and Expenses                                                     413,000
Accounting Fees and Expenses                                                408,000
Blue Sky Fees and Expenses                                                    8,000
Other                                                                       314,000
                                                                         ----------
                                                                         $1,486,917
                                                                         ==========

Talk City used the net proceeds of approximately $55.4 million from its initial public offering of Common Stock to invest in short-term, interest bearing, investment grade securities and has used its existing cash balances to fund its general operations. Talk City estimates that it will use the net proceeds as follows: 25% for marketing, including brand development, promotion and growth of user volume; 25% for expansion of our sales infrastructure; and 50% for working capital and general corporate purposes.

In addition, Talk City may use a portion of the net proceeds to acquire or invest in complementary businesses, technologies, or products. Pending these uses, the net proceeds of the offering will continue to be invested in short- term, interest bearing, investment grade instruments. We have no formal plan for use of the offering proceeds, nor have we sought the advice of or received reports from any of our professional advisors regarding the use of the offering proceeds. As a result, our use of the proceeds are subject to change at management's discretion. The amounts actually expended for each of the purposes listed above may vary significantly depending upon a number of factors, including the progress of our marketing programs, capital spending requirements and developments in the Internet industry. None of our net proceeds of the offering will be paid directly or indirectly to any of our directors, officers, or our general partners or their associates, persons owning 10% or more of any class of our equity securities, or an affiliate.

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Item: 6 Selected Financial Data

The following selected financial data should be read in conjunction with our Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

                                                                                                          March 29,
                                                                                                            1996
                                                                                                      (Inception) to
                                                                        Years ended December 31,        December 31,
                                                                    -----------------------------
                                                                   1999          1998           1997           1996
                                                                   ----          ----           ----           ----
Statement of Operations Data
Revenues:
 Business services........................................       $  2,580      $    522        $    25         $    --
 Advertising and sponsorships.............................          5,152           931            183              14
                                                                 --------      --------        -------         -------
    Total revenues........................................          7,732         1,453            208              14
Operating expenses:
 Product development and programming......................         15,520         5,383          3,472             771
 Sales and marketing......................................         17,730         6,668          2,492             252
 General and administrative...............................          5,691         1,804            974             335
 Noncash advertising and promotional charges..............         11,162         2,890             --              --
                                                                 --------      --------        -------         -------
    Total operating expenses..............................         50,103        16,745          6,938           1,358
                                                                 --------      --------        -------         -------
    Loss from operations..................................        (42,371)      (15,292)        (6,730)         (1,344)
Interest income (expense), net............................          2,264          (367)           339              36
                                                                 --------      --------        -------         -------
    Net loss..............................................        (40,107)      (15,659)        (6,391)         (1,308)
Accretion of redeemable convertible preferred
    stock and warrants....................................            159           558             38               8
                                                                 --------      --------        -------         -------
    Net loss applicable to common stockholders............       $(40,266)     $(16,217)       $(6,429)        $(1,316)
                                                                 ========      ========        =======         =======
Net loss per share:
 Basic and diluted........................................         $(3.14)       $(4.92)        $(2.10)         $(0.49)
 Weighted average shares..................................         12,840         3,295          3,068           2,679

                                                                                  As of December 31,
                                                                   1999         1998           1997           1996
                                                                   ----         ----           ----           ----
Balance Sheet Data
Cash, cash equivalents and short-term investments...........     $55,653     $ 14,437        $ 2,055         $ 8,930
Working capital.............................................      52,861       13,493          1,844           8,651
Total assets................................................      74,527       18,490          2,811           9,062
Long-term obligations, net of current portion...............         107          273             --              --
Redeemable convertible preferred stock and warrants.........          --       38,973         10,081          10,042
Total stockholders' (deficit) equity........................      66,323      (22,463)        (7,669)         (1,270)

Item: 7 Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of financial condition and results of operations of Talk City should be read in conjunction with the financial statements and notes thereto. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors That May Affect Results of Operations and Financial Condition" and elsewhere in this Report.

Overview

We provide online communities and customer relationship management for businesses and consumers. From inception through December 1999, our operating activities have primarily been focused on:

37

. developing the quality environment of our services;
. expanding the audience and usage of our services;
. establishing operating relationships with our network participants;
. building sales momentum and developing programs and content to market the Talk City brand name and attract users to our sites;
. developing a comprehensive computer software and hardware infrastructure;
. recruiting personnel; and
. raising capital.

To date, substantially all of our revenues have been derived from the sale of our business services, advertising and sponsorships. Our business services include designing customized communities, producing online events, conducting online market research and facilitating online meetings. These services help businesses develop and expand online relationships with customers, suppliers and employees. Revenues derived from business services are recognized ratably over the term of the contract period which coincides with when the services are performed, provided that the collection of the receivable is probable.

Advertising and sponsorship revenues are derived from two sources. Advertising revenues generally come from short-term banner advertisement contracts. Sponsorship revenues come from contracts under which we offer a combination of custom programming, prominent logo placement, other onsite promotions and additional banner ads. Our advertising and sponsorship clients enter into short-term agreements pursuant to which they generally receive a guaranteed number of advertising impressions on our site. Advertising and sponsorship revenues are recognized in the period in which the advertisement is displayed or the sponsorship event is run, provided that no significant obligations remain, at the lesser of the ratio of impressions delivered over total guaranteed impressions or on a straight-line basis over the term of the contract. In some cases, where we contract with third party sales representative firms to sell advertising revenues, we recognize revenues net of the commissions paid.

Operating expenses consist primarily of product development and programming, sales and marketing, general and administrative and interest expenses. Product development and programming expenses consist primarily of salaries, payroll taxes and benefits and expenditures related to editorial content, community management and support personnel, server hosting costs and software development and operations expenses. Sales and marketing expenses consist primarily of advertising and promotion costs, salaries, commissions and other related costs of internal sales and marketing personnel and program expenses, public relations costs and other marketing expenses. General and administrative expenses consist of salaries, payroll taxes and benefits and related costs for general corporate functions, including executive management, finance, human resources, facilities, legal and fees for other professional services.

Sales and marketing expenses exclude noncash advertising and promotional charges related to our advertising on the NBC television network and in magazines owned by Hearst along with promotional services attributable to the operating agreements with NBC. These advertising activities are paid for through noncash in-kind investments. This in-kind program includes $7.2 million of television commercials and print ads valued at rates discounted from the rate card to be incurred from 1998 through 2001. After December 31, 1999, noncash charges of $4.6 million will be charged to operations as the related advertising is run or promotional services are received. We expect that $4 million of this $4.6 million will be charged to operations during the year ended December 31, 2000. These amounts were determined based on the fair value of our common stock and warrants exchanged for the services received. See Note 9 of the notes to our financial statements.

We incurred losses of $40.1 million in 1999, $15.7 million in 1998, $6.4 million in 1997, and $1.3 million in 1996. These losses include noncash advertising and promotional charges of $14.1 million

38

through December 31, 1999. At December 31, 1999, we had an accumulated deficit of $63.5 million. We anticipate that we will incur additional operating losses for the foreseeable future.

Quarterly Results of Operations

The following table presents certain statement of operations data for our eight most recent quarters ended December 31, 1999. In management's opinion, this unaudited information has been prepared on the same basis as the audited annual financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation of the unaudited information for the quarters presented. This information should be read in conjunction with our financial statements, including the notes thereto, included elsewhere herein. The results of operations for any quarter are not necessarily indicative of results that may be expected for any future periods.

                                                                                  Three Months Ended
                                                                                  ------------------
                                                      Dec. 31,    Sept. 30,     June 30,    Mar. 31,    Dec. 31,    Sept. 30,
                                                        1999         1999        1999        1998         1998        1998
                                                      ---------   ----------   ----------   ---------   ---------   ----------
                                                                                    (in thousands)
Revenues:
  Business services................................   $  1,292      $   521     $    410     $   357     $   229      $   167
  Advertising and sponsorships.....................      2,034        1,505          990         623         433          231
                                                      --------      -------     --------     -------     -------      -------
     Total revenues................................      3,326        2,026        1,400         980         662          398
Operating expenses:
  Product development and programming..............      5,550        4,367        3,379       2,224       1,642        1,268
  Sales and marketing..............................      5,348        4,694        4,263       3,425       3,512        1,983
  General and administrative.......................      1,975        1,605        1,137         974         663          467
  Noncash advertising and promotional charges......        897          934        7,921       1,410         322        1,411
                                                      --------      -------     --------     -------     -------      -------
     Total operating expenses......................     13,770       11,600       16,700       8,033       6,139        5,129
                                                      --------      -------     --------     -------     -------      -------
     Loss from operations..........................    (10,444)      (9,574)     (15,300)     (7,053)     (5,477)      (4,731)
Interest income (expense), net.....................      1,001          809          300         154         154         (280)
                                                      --------      -------     --------     -------     -------      -------
     Net loss......................................     (9,443)      (8,781)     (15,000)     (6,899)     (5,323)      (5,011)
Accretion of redeemable convertible preferred stock
 and warrants......................................          -           16           71          72          40          478
                                                      --------      -------     --------     -------     -------      -------
     Net loss applicable to common
                                                      $ (9,443)     $(8,781)    $(15,071)    $(6,971)    $(5,363)     $(5,489)
       stockholders................................   ========      =======     ========     =======     =======      =======

                                                      Three Months Ended
                                                      ------------------
                                                      June 30,     Mar. 31,
                                                        1998         1998
                                                      ---------   ----------
                                                         (in thousands)
Revenues:
  Business services................................   $    66        $    60
  Advertising and sponsorships.....................       202             65
                                                      -------        -------
     Total revenues................................       268            125
Operating expenses:
  Product development and programming..............     1,298          1,175
  Sales and marketing..............................       697            476
  General and administrative.......................       338            336
  Noncash advertising and promotional charges......       118          1,039
                                                      -------        -------
     Total operating expenses......................     2,451          3,026
                                                      -------        -------
     Loss from operations..........................    (2,183)        (2,901)
Interest income (expense), net.....................      (251)            10
                                                      -------        -------
     Net loss......................................    (2,434)        (2,891)
Accretion of redeemable convertible preferred stock
 and warrants......................................        20             20
                                                      -------        -------
     Net loss applicable to common

       stockholders................................  $(2,454)       $(2,911)
                                                     ========       ========

39

Results of Operations

The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items reflected in our results of operations:

                                                              Year Ended December 31,
                                                        -------------------------------------
                                                           1999       1998          1997
                                                        -------------------------------------
Revenues, net:
  Business services                                         33 %       36 %          12 %
  Advertising and sponsorships                               67         64           88
                                                          -----    -------      -------
    Total revenues                                          100        100          100

Operating expenses:
  Product development and programming                       201        370        1,669
  Sales and marketing                                       229        459        1,198
  General and administrative                                 74        124          468
  Noncash advertising and promotional                       144        199            -
   charges                                                -----    -------      -------
    Total operating expenses                                648      1,152        3,335
                                                          -----    -------      -------
Loss from operations                                       (548)    (1,052)      (3,235)
Interest income (expense), net                               29        (25)         163
                                                          -----    -------      -------
Net loss                                                   (519)    (1,077)      (3,072)
Accretion of redeemable convertible preferred stock
   and warrants                                               2         38           18
                                                          -----    -------      -------
Net loss applicable to common stockholders                (521)%   (1,115)%      (3,090)%
                                                          =====    =======      =======

Years Ended December 31, 1999, 1998 and 1997

Revenues. Total revenues were $7.7 million in 1999, $1.5 million in 1998 and $208,000 in 1997. Business services revenues were $2.6 million, or 33% of total revenues, in 1999, $522,000, or 36% of total revenues, in 1998 and $25,000, or 12% of total revenues, in 1997. Advertising and sponsorship revenues were $5.2 million, or 67% of total revenues, in 1999, $931,000, or 64% of total revenues, in 1998 and $183,000, or 88% of total revenues, in 1997. The increases were primarily due to increased sales from the expansion of our sales force, which resulted in increases in the number of business clients, projects, advertisers and amounts spent per advertiser, as well as increases in our user volume and expansion of our consumer and business services offerings.

Operating Expenses:

Product Development and Programming. Product development and programming expenses were $15.5 million, or 201% of total revenues, in 1999, $5.4 million, or 370% of total revenues, in 1998 and $3.5 million, or 1,669% of total revenues, in 1997. The increase in absolute dollars in product development and programming from 1998 to 1999 was primarily attributable to an increase in personnel and recruiting-related costs of $4.5 million, an increase in consulting and contractor fees of $1.7 million and an increase in chat hosting, partner and server-related costs of $3.1 million associated with the rapid growth in user volume from our supervised chats and enhancements of functionality to our Web sites. The increase in absolute dollars in product development and programming from 1997 to 1998 was primarily attributable to an increase in personnel and recruiting-related costs of $700,000, and an increase in chat hosting and server-related costs of $1.1 million associated with the rapid growth in user volume from our supervised chats and enhancements of functionality to our Web sites. Product development expenses as a percentage of total revenues decreased in both periods due to growth in total revenues. We expect that product development and programming expenses will increase in absolute dollars in the future as we incur

40

additional costs related to expanding our engineering staff, establishing a secondary location for our servers and enhancing our content and functionality of our Websites.

Sales and Marketing. Sales and marketing expenses were $17.7 million, or 229% of total revenues, in 1999, $6.7 million, or 459% of total revenues, in 1998 and $2.5 million, or 1,198% of total revenues, in 1997. The increase in sales and marketing expenses from 1998 to 1999 was primarily attributable to an increase of approximately $5.9 million associated with the development and implementation of our branding, promotion and marketing campaigns and an increase in sales personnel and commission-related costs of $2.8 million as a result of implementing our sales and marketing strategy. The increase in sales and marketing expenses from 1997 to 1998 was primarily attributable to an increase of approximately $2.5 million in our online and print advertising, public relations and other promotional expenditures and an increase in personnel and recruiting-related expenses of $825,000 as a result of implementing our sales and marketing strategy. Sales and marketing expenses as a percentage of total revenues decreased in both periods due to growth in total revenues. We expect that sales and marketing expenses will increase in absolute dollars in the future as we incur additional costs related to expanding our internal sales force and increasing our expenditures to market and promote our business services offerings.

General and Administrative. General and administrative expenses were $5.7 million, or 74% of total revenues, in 1999, $1.8 million, or 124% of total revenues, in 1998 and $974,000, or 468% of total revenues, in 1997. The increase in general and administrative expenses from 1998 to 1999 was primarily due to stock-based compensation expense of $763,000 related to the issuance of stock options and personnel and recruiting-related expenses of $1 million. In addition, we incurred an increase in legal, accounting and insurance fees of $540,000 due to increased expenses associated with being a public company and an increase in facilities expenses of $740,000 in order to support the growth of our business. The increase in general and administrative expenses from 1997 to 1998 was primarily due to increases in personnel and professional services, travel and facilities-related expenses to support the growth of our operations. General and administrative expenses decreased as a percentage of revenues in both periods due to the growth in total revenues. We expect that general and administrative expenses will increase in absolute dollars in the future as we incur additional costs related to the growth of our business, our recent relocation of our corporate headquarters to a new 56,000 square foot facility and operations as a public company.

Noncash Advertising and Promotional Charges. We incurred charges of $11.2 million, or 145% of total revenues, for 1999 and $2.9 million, or 198% of total revenues, in 1998 representing noncash in-kind expenses associated with the advertising and operating agreements with NBC and Hearst.

Interest Income (Expense), Net. Net interest income was $2.3 million, or 29% of total revenues, in 1999, net interest expense was $367,000, or 25% of total revenues, in 1998 and net interest income was $339,000, or 163% of total revenues, in 1997. Interest income increased in 1999 compared to 1998 due to higher cash equivalent and investment balances as a result of proceeds received from sale of Preferred Stock in April 1999 and our initial public offering of Common Stock in July 1999. We incurred interest expense in 1998 as a result of our convertible loan financing in 1998.

Income Taxes. Management has established a full valuation allowance against its net deferred tax assets because it is more likely than not that sufficient taxable income will not be generated to utilize those deferred tax assets.

Financial Condition

Our total assets were $74.5 million and $18.5 million at December 31, 1999 and 1998, respectively, representing an increase of $56.0 million, or 303%. This increase was primarily due to cash proceeds received from the sale of our Common Stock in our July 1999 initial public offering and our April 1999

41

private placement of Preferred Stock. As of December 31, 1999, we had $55.6 million of cash and cash equivalents and short-term investments, compared to $14.4 million at December 31, 1998, representing an increase of $41.2 million, or 286%. During April 1999, we issued 2,499,882 shares of Series E redeemable convertible preferred stock resulting in proceeds of approximately $20.0 million. In July 1999, we issued 5.1 million shares of our Common Stock in connection with our IPO resulting in net proceeds of approximately $55.4 million.

Our accounts receivable balance, net of allowance for doubtful accounts, was $3.5 million and $763,000 as of December 31, 1999 and 1998, respectively, representing an increase of $2.8 million, or 363%. This increase was principally a result of increased business service revenues and advertising revenues. Days sales outstanding, or DSO, in accounts receivable was 76 days and 81 days as of December 31, 1999 and 1998, respectively. We expect DSO will fluctuate significantly in future quarters, and may even increase.

Our total current liabilities were $8.1 million and $1.7 million as of December 31, 1999 and 1998, respectively, representing an increase of 374%. This increase consists primarily of an increase in accounts payable, accrued liabilities and deferred revenue. The increase in accounts payable and accrued liabilities was primarily due to increases in accrued liabilities for vacation, commissions, moderator costs, marketing expenses and partner fees associated with our increased growth and ongoing business activities. The growth in deferred revenues at December 31, 1999 was due to our increased sales in the current quarter over the same period last year. Sales in the fourth quarter of 1999 were up 402% from the same quarter in 1998.

Liquidity and Capital Resources

Since our inception in March 1996, we have financed our operations primarily through the private placement of our Preferred Stock, our initial public offering in July 1999 and, to a lesser extent, through equipment financing. As of December 31, 1999, we had approximately $14.1 million in cash and cash equivalents and approximately $41.5 million in short-term investments.

Net cash used in operating activities was approximately $25.2 million, $11.0 million and $6.3 million for the years ended December 31, 1999, 1998 and 1997, respectively, representing increases of $14.6 million, or 133% from 1998 to 1999 and $4.7 million or 75% from 1997 to 1998. Cash used in operating activities in each of these periods was primarily the result of net operating losses, excluding the effects of noncash advertising expenses, and increases in accounts receivable and prepaid expenses, partially offset by increases in accrued expenses and accounts payable. For such periods, net cash used by operating activities was primarily a result of funding our business growth and ongoing operations.

Net cash used in investing activities was approximately $44.9 million, $6.5 million and $572,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Our investing activities have consisted primarily of net purchases of short-term investments, purchases of property and equipment, and a cost investment in Socialnet.com. Net purchases of short-term investments were $35.8 million, $5.7 million, and $0 for the years ended December 31, 1999, 1998 and 1997, respectively. The increases in short-term investment purchases were due to the investment of proceeds from our private placement of preferred stock in August 1998, private placement of preferred stock in April 1999 and initial public offering in July 1999. Property and equipment acquisitions totaled $5.8 million, $797,000 and $550,000 for the years ended December 31, 1999, 1998 and 1997. The increase in acquisitions of property and equipment from 1998 to 1999 was due to our growth in operations, server requirements and opening of sales offices in San Francisco and Chicago, as well as the expansion of our New York City sales office. On December 21, 1999, we made a $3 million cost investment in SocialNet, Inc. in exchange for 1,554,404 shares of Series C Preferred Stock, representing approximately 7.6% of the fully diluted shares outstanding of SocialNet, Inc. as of the investment date.

42

Net cash provided by financing activities was approximately $75.6 million, $24.2 million and $0 for the years ended December 31, 1999, 1998 and 1997, respectively. In the year ended December 31, 1999, cash provided consisted primarily of net proceeds of approximately $20 million from the private placement of preferred stock in April 1999 and approximately $55.4 million from our initial public offering in July 1999, partially offset by principal payments on notes payable. Net cash provided by financing activities for the year ended December 31, 1998 consisted primarily of the our private placement of Series D Preferred Stock with net proceeds of approximately $21.2 million in August and September 1998 and net proceeds of $2.9 million from our convertible loan financing.

As of December 31, 1999, our principal commitments consisted of obligations outstanding under operating leases. Although we have no material commitments for capital expenditures, we anticipate a substantial increase in our capital expenditures consistent with our anticipated growth in operations, infrastructure and personnel. In October 1999, we signed a nine-year, three and one-half month lease for a new 56,000 square foot corporate headquarters in Campbell, California, which commenced on December 15, 1999. The Company is required to provide a $2,100,000 letter of credit as security for the lease. The letter of credit may be reduced by specified amounts in the lease agreement after every twelve months through December 14, 2005, provided no default has occurred. A $2,100,000 certificate of deposit with a one year maturity is held as collateral by a bank for guarantee of the letter of credit. The certificate of deposit is included in short-term investments. Future minimum lease payments under all non-cancelable operating leases total $18.8 million.

In May 1998, we obtained an equipment line of credit with a financial institution in the amount of $2.0 million. This line of credit is secured by our fixed assets and has a four-year term that expires in April 2002. As of December 31, 1999, the amount outstanding under this line of credit was $261,000.

Our capital requirements depend on numerous factors, including market acceptance of our services, the resources we allocate to our community network, marketing and selling our services, brand promotions and other factors. We have experienced substantial increases in our expenditures since inception consistent with growth in our operations and personnel, and we anticipate that our expenditures will continue to increase for the foreseeable future. Additionally, we will continue to evaluate possible acquisitions of and investments in complementary businesses, technologies, services or products and to expand our sales and marketing programs. We believe that our available cash and cash equivalents will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. Thereafter, we may need to raise additional funds; however, in order to fund more rapid expansion, including significant increases in personnel and office facilities, to develop new or enhance existing services or products, to respond to competitive pressures, or to acquire or invest in complementary businesses, technologies, services or products. In addition, in order to meet our long term liquidity needs, we may need to raise additional funds, establish a credit facility or seek other financing arrangements. Additional funding may not be available on favorable terms or at all.

43

Item: 7a Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We place our investments with high quality issuers and, by policy, limit the amount of credit risk exposure to any one issuer. We are averse to principal loss and ensure the safety and preservation of our invested funds by limiting default, market and reinvestment risk. We classify our cash equivalents and short-term investments as "fixed rate" if the rate of return on such instruments remains fixed over their term. These "fixed rate" investments include fixed-rate commercial paper and corporate notes. We classify our cash equivalents and short-term investments as "variable rate" if the rate of return on such investments varies based on the change in a predetermined index or set of indices during their term. These "variable rate" investments primarily include market auction preferred securities held at two securities brokers.

As of December 31, 1999, the contractual maturities of all debt securities in the Company's portfolio, except auction-rate securities, were less than one year. The contractual maturities for the auction-rate securities exceed 10 years. However, the Company has the option of adjusting the interest rates or liquidating these investments on their respective reset dates, which occur every 90 days or less. Auction rate securities held for more than 90 days are included in short term investments.

The table below presents the amounts and related weighted average interest rates of our investment portfolio at December 31, 1999:

                                        Average                         Book                     Fair
                                     Interest Rate                      Value                   Value
                                 -------------------           -------------------      ------------------
Cash equivalents:
      Fixed rate                        6.18%                         $  6,417                $ 6,417
      Variable rate                     6.15%                            6,700                  6,700

Short-term investments:
      Fixed rate                        5.94%                           27,136                 27,136
      Variable rate                     6.33%                           14,405                 14,405

44

Item: 8 Financial Statements and Supplementary Data

Index to Financial Statements

Report of KPMG LLP, Independent Auditors                                           46
Balance Sheets as of December 31, 1999 and 1998                                    47
Statements of Operations for the years ended December 31, 1999, 1998 and 1997      48
Statements of Redeemable Convertible Preferred Stock and Stockholders'
  Equity (Deficit) for the years ended December 31, 1999, 1998 and 1997            49
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997      50
Notes to Financial Statements                                                      51

45

Report of KPMG LLP, Independent Auditors

The Board of Directors and Stockholders
Talk City, Inc.:

We have audited the accompanying balance sheets of Talk City, Inc. (the Company), as of December 31, 1999 and 1998, and the related statements of operations, redeemable convertible preferred stock and stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Talk City, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles.

                                               /s/ KPMG LLP

Mountain View, California
February 2, 2000

46

Talk City, Inc.

Balance Sheets
(in thousands, except share and par value amounts)

                                                                                     December 31,
                                                                                    -------------
                                                                                 1999           1998
                                                                                 ----           ----
Assets
Current assets:
Cash and cash equivalents...................................................    $ 14,112       $  8,697
Short term investments......................................................      41,541          5,740
Accounts receivable, net of allowances of $254 and $100
in 1999 and 1998, respectively..............................................       3,533            763
Prepaid expenses and other current assets...................................       1,772             --
                                                                                --------       --------
Total current assets........................................................      60,958         15,200
                                                                                --------       --------
Property and equipment, net.................................................       5,689            999
Other assets, net...........................................................       7,880          2,291
                                                                                --------       --------
Total assets................................................................    $ 74,527       $ 18,490
                                                                                ========       ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Notes payable, current portion..............................................    $    154       $    127
Accounts payable............................................................       3,977          1,205
Accrued liabilities.........................................................       3,302            320
 Deferred revenue...........................................................         664             55
                                                                                --------       --------
Total current liabilities...................................................       8,097          1,707
Notes payable, less current portion.........................................         107            273
                                                                                --------       --------
Total liabilities...........................................................       8,204          1,980
Commitments
Redeemable convertible preferred stock:
Authorized-- None and 19,000,000 in 1999 and 1998, respectively
Issued and outstanding--  None and 10,929,909 in 1999 and 1998,
respectively.
                                                                                      --         38,973
Stockholders' equity (deficit):
Preferred stock, no par value; 5,000,000 shares authorized; no shares
issued and outstanding......................................................          --             --
  Common stock, $0.001 par value:
Authorized--100,000,000 and 60,000,000 in 1999 and 1998,
respectively
Issued and outstanding--24,461,370 and 4,191,666 in 1999
and 1998, respectively......................................................          24              4
Additional paid-in capital..................................................     131,306          1,792
  Deferred compensation.....................................................        (550)          (598)
  Notes receivable from stockholders........................................        (992)          (303)
  Accumulated deficit.......................................................     (63,465)       (23,358)
                                                                                --------       --------
Total stockholders' equity (deficit)........................................      66,323        (22,463)
                                                                                --------       --------
Total liabilities and stockholders' equity (deficit)........................    $ 74,527       $ 18,490
                                                                                ========       ========

See accompanying notes to financial statements.

47

Talk City, Inc.

Statements of Operations
(in thousands, except per share amounts)

                                                                  Years ended December 31,
                                                                  ------------------------
                                                          1999              1998              1997
                                                          ----              ----             -----
Revenues:
    Business services................................      $  2,580          $    522           $    25
    Advertising and sponsorships.....................         5,152               931               183
                                                           --------          --------           -------
        Total revenues...............................         7,732             1,453               208
                                                           --------          --------           -------
Operating expenses:
    Product development and programming..............        15,520             5,383             3,472
    Sales and marketing..............................        17,730             6,668             2,492
    General and administrative.......................         5,691             1,804               974
    Noncash advertising and promotional
        charges......................................        11,162             2,890                --
                                                           --------          --------           -------
           Total operating expenses..................        50,103            16,745             6,938
                                                           --------          --------           -------
           Loss from operations......................       (42,371)          (15,292)           (6,730)
Interest income (expense), net.......................         2,264              (367)              339
                                                           --------          --------           -------
           Net loss..................................       (40,107)          (15,659)           (6,391)
Accretion of redeemable convertible preferred
  stock and warrants.................................           159               558                38
                                                           --------          --------           -------
           Net loss applicable to common
             stockholders............................     $(40,266)         $(16,217)          $(6,429)
                                                           ========          ========           =======
Net loss per share:
    Basic and diluted................................        $(3.14)           $(4.92)           $(2.10)
                                                           ========          ========           =======
    Weighted average shares..........................        12,840             3,295             3,068
                                                           ========          ========           =======

See accompanying notes to financial statements.

48

Talk City, Inc.

Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit)

(in thousands, except share amounts)

                                                                        Redeemable
                                                                       Convertible
                                                                     Preferred stock            Common stock       Additional
                                                                 ------------------------   --------------------     paid-in

                                                                    Shares       Amount       Shares      Amount     capital
                                                                 ------------   ---------   -----------   ------   -----------
Balances, December 31, 1996.....................................   3,794,785      10,043     3,837,200         4          328
Repurchase of common stock......................................          --          --      (150,000)       --          (30)
Accretion attributable to redeemable preferred stock............          --          38            --        --          (38)
Amortization of stock-based compensation........................          --          --            --        --           --
Net loss........................................................          --          --            --        --           --
                                                                 -----------    --------    ----------       ---     --------
Balances, December 31, 1997.....................................   3,794,785      10,081     3,687,200         4          260
Noncash issuance of preferred stock and preferred and common
     stock warrants pursuant to the NBC agreements..............     884,615       4,565            --        --          575
Issuance of preferred stock, net of $1,233 issuance costs.......   6,250,509      23,769            --        --           --
Issuance of preferred stock warrants for services rendered in
     connection with the preferred stock offering...............          --         438            --        --         (438)
Issuance of common stock warrants pursuant to the convertible
     loan agreements............................................          --          --            --        --          490
Issuance of common stock upon exercise of stock options, net of
     repurchases................................................          --          --       504,466        --          133
Deferred stock-based compensation related to option grants......          --          --            --        --          892
Amortization of stock-based compensation........................          --          --            --        --           --
Accretion attributable to redeemable preferred stock............          --         120            --        --         (120)
Net loss........................................................          --          --            --        --           --
                                                                  ----------    --------    ----------       ---     --------
Balances, December 31, 1998.....................................  10,929,909      38,973     4,191,666         4        1,792
Issuance of common stock upon exercise of stock options and
     warrants, net of repurchases...............................          --          --       324,994        --          996
Issuance of convertible preferred stock, net of $38 issuance
     costs.......................................................   2,499,884      19,961            --        --           --
Noncash issuance of preferred stock pursuant to the NBC
    and Hearst agreements.......................................   1,350,000      10,261            --        --           --
Noncash issuance of preferred stock warrants pursuant to the
    NBC agreement...............................................          --       2,283
Revaluation of warrants related to the NBC operating agreements           --          30            --        --          886
Conversion of convertible preferred stock into common stock..... (14,779,793)    (71,667)   14,844,710        15       71,652
Proceeds from initial public offering, net of  $5,771 issuance..          --          --     5,100,000         5       55,424
 costs
Deferred stock-based compensation related to option grants......          --          --            --        --          715
Amortization of stock-based compensation........................          --          --            --        --           --
Accretion attributable to redeemable preferred stock............          --         159            --        --         (159)
Net loss........................................................          --          --            --        --           --
                                                                 ------------    --------    ----------       ---     --------
Balances, December  31, 1999....................................          --    $     --    24,461,370       $24     $131,306
                                                                 ===========    ========    ==========       ===     ========

                                                                                        Notes
                                                                                     receivable                          Total
                                                                      Deferred          from        Accumulated      stockholders'

                                                                    compensation    stockholders      deficit      equity (deficit )

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

Balances, December 31, 1996.....................................             (89)           (205)        (1,308)             (1,270)
Repurchase of common stock......................................              --              30             --                  --
Accretion attributable to redeemable preferred stock............              --              --             --                 (38)
Amortization of stock-based compensation........................              30              --             --                  30
Net loss........................................................              --              --         (6,391)             (6,391)
                                                                           -----           -----       --------            --------
Balances, December 31, 1997.....................................             (59)           (175)        (7,699)             (7,669)
Noncash issuance of preferred stock and preferred and common
     stock warrants pursuant to the NBC agreements..............              --              --             --                 575
Issuance of preferred stock, net of $1,233 issuance costs.......              --              --             --                  --
Issuance of preferred stock warrants for services rendered in
     connection with the preferred stock offering...............              --              --             --                (438)
Issuance of common stock warrants pursuant to the convertible
      loan agreements...........................................              --              --             --                 490
Issuance of common stock upon exercise of stock options, net of
      repurchases...............................................              --            (128)            --                   5
Deferred stock-based compensation related to option grants......            (892)             --             --                  --
Amortization of stock-based compensation........................             353              --             --                 353
Accretion attributable to redeemable preferred stock............              --              --             --                (120)
Net loss........................................................              --              --        (15,659)            (15,659)

                                                                           -----           -----       --------            --------
Balances, December 31, 1998.....................................            (598)           (303)       (23,358)            (22,463)
Issuance of common stock upon exercise of stock options and
     warrants, net of repurchases...............................              --            (689)            --                 307
Issuance of convertible preferred stock, net of $38 issuance
     costs......................................................              --              --             --                  --
Noncash issuance of preferred stock pursuant to the NBC
    and Hearst agreements.......................................              --              --             --                  --
Noncash issuance of preferred stock warrants pursuant to the
    NBC agreement
Revaluation of warrants related to the NBC operating agreements.              --              --             --                 886
Conversion of convertible preferred stock into common stock.....              --              --             --              71,667
Proceeds from initial public offering, net of  $5,771 issuance
    costs.......................................................              --              --             --              55,429
Deferred stock-based compensation related to option grants......            (715)             --             --                  --
Amortization of stock-based compensation........................             763              --             --                 763
Accretion attributable to redeemable preferred stock............              --              --             --                (159)
Net loss........................................................              --              --        (40,107)            (40,107)

                                                                           -----           -----       --------            --------
Balances, December  31, 1999....................................           $(550)          $(992)      $(63,465)           $ 66,323
                                                                           =====           =====       ========            ========

See accompanying notes to financial statements.

49

Talk City, Inc.

Statements of Cash Flows
(in thousands)

                                                                                               Years ended  December 31,
                                                                                               -------------------------
                                                                                             1999         1998        1997
                                                                                             ----         ----        ----

Cash flows from operating activities:
  Net loss.................................................................                  $(40,107)    $(15,659)    $(6,391)
  Adjustments to reconcile net loss to net cash used in operating
   activities:
   Depreciation and amortization............................................                    1,140          347         125
   Stock-based compensation expense.........................................                      763          353          30
   Common stock warrants issued pursuant to the loan financing..............                       --          490          --
   Noncash advertising and promotional charges..............................                   11,162        2,890          --
   Provision for accounts receivable allowance..............................                      318          100          --
   Changes in operating assets and liabilities:
   Accounts receivable......................................................                   (3,088)        (742)       (111)
   Prepaid expenses and other current assets................................                   (1,772)          67         (66)
   Accounts payable.........................................................                    2,772          814         102
   Accrued liabilities......................................................                    2,982          312           8
   Deferred revenue.........................................................                      609           55          --
                                                                                             --------     --------     -------
   Net cash used in operating activities....................................                  (25,221)     (10,973)     (6,303)
                                                                                             --------     --------     -------
Cash flows from investing activities:
   Purchases of property and equipment......................................                   (5,839)        (797)       (550)
   Investment in private company............................................                   (3,000)          --          --
   Purchases of short-term investments......................................                  (48,011)      (5,740)         --
   Proceeds from sale of short-term investments.............................                   12,210           --          --
   Other assets.............................................................                     (282)         (22)        (22)
                                                                                              --------     --------     -------
Net cash used in investing activities......................................                    (44,922)      (6,559)       (572)
                                                                                              --------     --------     -------

Cash flows from financing activities:
   Proceeds from initial public offering, net of issuance costs.............                   55,429           --          --
   Proceeds from sale of redeemable preferred stock, net of issuance
   costs....................................................................                   19,961       21,197          --
   Proceeds from issuance of common stock from exercise
   of stock options and warrants............................                                      307            5          --
   Proceeds from convertible loan financing, net of issuance costs..........                       --        2,903          --
   Repayment of convertible loan financing..................................                       --         (331)         --
   Proceeds from notes payable..............................................                       --          491          --
   Repayment of notes payable...............................................                     (139)         (91)         --
                                                                                             --------     --------     -------
Net cash provided by financing activities...................................                   75,558       24,174          --
                                                                                             --------     --------     -------
   Net (decrease) increase in cash and cash equivalents.....................                    5,415        6,642      (6,875)
   Cash and cash equivalents at beginning of period.........................                    8,697        2,055       8,930
                                                                                             --------     --------     -------
   Cash and cash equivalents at end of period...............................                 $ 14,112     $  8,697     $ 2,055
                                                                                             ========     ========     =======
   Cash paid during the period for interest.................................                 $     74     $    113     $    --
                                                                                             ========     ========     =======
Supplemental disclosure of noncash financing activities:
   Conversion of redeemable preferred stock to common stock.................                 $ 71,667     $     --     $    --
                                                                                             ========     ========     =======
   Accretion of redeemable convertible preferred stock and warrants.........                 $    159     $    558     $    38
                                                                                             ========     ========     =======
   Common stock issued for notes receivable.................................                 $    689     $    128     $    --
                                                                                             ========     ========     =======
   Issuance of stock and warrants and revaluation of warrants
                                                                                            $ 13,460     $  5,140     $    --
      for advertising and promotional services.................................                ========     ========     =======

   Issuance of preferred stock for conversion of loan financing.............                $      --     $  2,572     $    --
                                                                                             ========     ========     =======
   Deferred stock-based compensation related to option grants...............                 $    715     $    892     $    --
                                                                                             ========     ========     =======

See accompanying notes to financial statements

50

Talk City, Inc.

Notes to Financial Statements

(1) Description of Business and Nature of Operations

Talk City, Inc. (the Company), incorporated in March 1996, is a provider of online communities and customer relationship management services for businesses and consumers. The Company offers businesses, at www.business.talkcity.com, a wide range of services to help them develop and expand online relationships with customers, suppliers and employees. These services include designing fully integrated, customized communities, producing online events, conducting online market research and facilitating online meetings. For consumers, the Company operates a network of online communities located at www.talkcity.com. This network includes 20 topical categories, over 50 themed communities, 50 co- branded network participant communities and thousands of user generated communities. These communities offer services such as moderated chat, home pages, special event production, message boards and online event guides. The Company generates revenues by selling business services and advertising and sponsorships on its Web sites to corporations in the United States of various sizes within several industries.

(2) Summary of Significant Accounting Policies

(a) Revenue Recognition

To date, the Company's revenues have been derived primarily from the sale of business services and sponsorship and advertising contracts.

Business services revenues are derived principally from contracts relating to one or more events and contracts for a period of time up to two years in which the Company designs customized communities, produces online events, conducts market research, and facilitates online discussion boards for customers. Business services revenues are recognized as the events are run or ratably over the term of the contract period which coincides with when the services are performed, provided that collection of the receivable is probable.

Sponsorship contracts integrate traditional advertising with content designed to support broad marketing objectives, including brand promotion, awareness, and product introductions. Advertising revenues are derived principally from short-term advertising contracts in which the Company delivers banner advertisements on its online properties over a specified period of time for a fixed fee. The Company's contracts typically are short-term agreements that guarantee a minimum number of impressions or pages to be delivered to users over a specified period of time. Revenues from these contracts are recognized in the period in which the advertisement is displayed or the event is run, provided that no significant Company obligations remain. The amount of revenue recognized each period is based on the lesser of the ratio of impressions delivered over total guaranteed impressions or the ratable amortization over the term of the contract.

In certain instances where the Company contracts with third party sales agents for the sale of advertising, the Company recognizes the revenues from such transactions net of the related commission paid to the agent.

(b) Cash Equivalents

All highly liquid financial instruments purchased with an original maturity of three months or less are reported as cash equivalents.

51

(c) Short-term Investments

Marketable securities are stated at fair value at the balance sheet date. By policy, the Company invests primarily in high-grade marketable securities. Marketable securities are classified as available-for-sale securities under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities."

Management determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates such determination at each balance sheet date. The Company has classified its marketable securities as available-for-sale, which are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. At December 31, 1999 and 1998, the fair value of marketable securities (consisting primarily of commercial paper, corporate notes and market auction securities) approximates their cost. Therefore, no unrealized gain or loss has been recorded. Realized gains and losses have not been material for any period presented.

(d) Fair Values of Financial Instruments

The Company has the following financial instruments: cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued liabilities, long-term debt and a standby letter of credit. The carrying value of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximates fair value based on liquidity of these financial instruments or based on their short-term nature. The carrying value of long-term debt and standby letter of credit approximates fair value based on the market interest rates available to the Company for debt of similar risk and maturities. The Company does not have any foreign currency hedging or other derivative financial instruments as of December 31, 1999.

(e) Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the equipment, generally ranging from three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease life, generally ranging from three to six years.

(f) Long Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If such amounts are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(g) Product Development and Programming

Product development and programming expenses consist primarily of salaries, payroll taxes and benefits and expenditures related to editorial content, community management and support personnel, server hosting costs and software development and operations expenses. Costs related to the development of new products and enhancements to existing products are charged to operations as incurred. Software development costs are required to be capitalized when a product's technological feasibility has been established by completion of a working model of the product. To date, completion of a working model of the Company's products and general release have substantially coincided. As a result, the Company has not capitalized any software development costs because such costs have not been significant.

52

In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use. SOP 98-1 was effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. The Company's adoption of this standard did not have a material effect on the Company's capitalization policy.

(h) Advertising and Marketing Expense

The cost of advertising is expensed as incurred. Advertising costs were $22,606,000, $7,410,000, and $1,245,000, for the years ended December 31, 1999, 1998 and 1997, respectively. For the years ended December 31, 1999 and 1998, these costs included, $11,162,000, and $2,890,000, respectively, of noncash advertising and promotional charges pursuant to the NBC and Hearst advertising and operating agreements. See Note 9--Advertising and Operating Agreements.

(i) Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" which utilizes the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

(j) Stock-Based Compensation

The Company accounts for its stock-based compensation arrangements with employees using the intrinsic-value method pursuant to Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." As such, compensation expense is recorded on the date of grant when the fair value of the underlying common stock exceeds the exercise price for stock options or the purchase price for the issuance or sales of common stock. Pursuant to SFAS No. 123, the Company discloses the pro forma effects of using the fair value method of accounting for stock-based compensation arrangements. See Note 5--Capitalization.

The Company accounts for stock-based compensation arrangements with nonemployees in accordance with the Emerging Issues Task Force Abstract (EITF) No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." Accordingly, unvested options held by nonemployees are subject to revaluation at each balance sheet date based on the then current fair market value.

Unearned deferred compensation resulting from employee and nonemployee option grants is amortized on an accelerated basis over the vesting period of the individual options, generally four years in accordance with Financial Accounting Standards Board Interpretation No. 28.

(k) Comprehensive Loss

The Company has no significant components of other comprehensive loss, and accordingly, the comprehensive loss is the same as the net loss for all periods.

53

(l) Net Loss Per Share

Basic net loss per share is computed using the weighted-average number of outstanding shares of common stock. Diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, potential common shares from options and warrants to purchase common stock using the treasury stock method and from convertible securities using the if-converted basis. All potential common shares have been excluded from the computation of diluted net loss per share for all periods presented because the effect would have been antidilutive.

Diluted net loss per share does not include the effect of the following antidilutive common equivalent shares (in thousands):

                                                                         Years ended December 31,
                                                                         ------------------------
                                                                   1999            1998            1997
                                                                   ----            ----            ----
Stock options............................................         1,248             343             675
Unvested common stock subject to repurchase..............           374             752             647
Preferred and common stock warrants......................         1,205           1,311              --
Redeemable convertible preferred stock (as if converted).            --           6,467           3,795
                                                                  -----           -----           -----
                                                                  2,827           8,873           5,117
                                                                  =====           =====           =====

(m) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

(n) Reverse Stock Split and Reincorporation

On July 12, 1999, the Company effected a one for two reverse stock split of the Company's common stock and preferred stock and a reincorporation of the Company into the state of Delaware. As part of the reincorporation the common stock par value was adjusted to equal $0.001 per share and the number of common shares authorized was increased to 100,000,000. The share information in the accompanying financial statements has been retroactively restated to reflect the effect of this reverse stock split for all periods presented.

(o) Segment Reporting

The Company has one operating segment because it is not organized by multiple segments for purposes of making operating decisions or assessing performance. The chief operating decision maker evaluates performance, makes operating decisions, and allocates resources based on financial data consistent with the presentation in the accompanying financial statements.

(p) Concentration of Credit Risk

Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short term investments and trade accounts receivable. The Company maintains cash and cash equivalents with three domestic financial institutions. From time to time, the Company's cash balances with its financial institutions may exceed Federal Deposit Insurance Corporation insurance limits.

The Company's customers are concentrated in the United States. The Company performs ongoing credit evaluations, generally does not require collateral and establishes an allowance for doubtful accounts based upon

54

factors surrounding the credit risk of customers, historical trends and other information; to date, such losses have been within management's expectations. As of December 31, 1999 and 1998, the allowance for bad debts was $254,000 and 100,000, respectively.

The Company's operations and assets are based in the United States, and its revenues have substantially all been earned from customers in the United States. Revenues from one major customer were $947,000 and $319,000 for the years ended December 31, 1999 and 1998, respectively. Total receivables from this customer were $377,000 and $171,000 at December 31, 1999 and 1998, respectively. No customer accounted for more than 10% of revenues for the year ended December 31, 1997.

(q) Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. The Company believes the adoption of SFAS No. 133 will not have a material effect on its results of operations, financial position or cash flows. This statement will be effective for the Company beginning January 1, 2001.

(3) Financial Statement Components

(a) Cash Equivalents and Short-Term Investments

The following is a summary of cash equivalents and short-term investments as of December 31, 1999 and 1998 (in thousands):

                                                                                          December 31,
                                                                                     -----------------------
                                                                                       1999         1998
                                                                                     ---------   -----------
Cash equivalents:
   Money markets funds..............................................................   $   163       $    21
   Commercial paper.................................................................     6,417         4,445
   Auction rate securities..........................................................     6,700         1,300
   Corporate notes..................................................................        --         2,347
                                                                                       -------       -------
                                                                                        13,280         8,113
                                                                                       -------       -------
Short-term investments:
   Commercial paper.................................................................    13,414           980
   Auction rate securities..........................................................    13,722            --
   Corporate notes..................................................................    14,405         4,760
                                                                                       -------       -------
                                                                                        41,541         5,740
                                                                                       -------       -------
                                                                                       $54,821       $13,853
                                                                                       =======       =======

As of December 31, 1999 and 1998, the contractual maturities of all debt securities in the Company's portfolio, except auction-rate securities, were less than one year. The contractual maturities for the auction-rate securities exceed 10 years. However, the Company has the option of adjusting the interest rates or liquidating these investments on their respective reset dates, which occur every 90 days or less. Auction rate securities held for more than 90 days are included in short term investments.

55

(b) Property, Plant and Equipment

Property and equipment consisted of the following as of December 31, 1999 and 1998 (in thousands):

                                                                                          December 31,
                                                                                   --------------------------
                                                                                       1999          1998
                                                                                   ------------   -----------
Computer equipment................................................................    $5,016        $1,435
Furniture and fixtures............................................................     1,188            50
Leasehold improvements............................................................     1,120            --
                                                                                      ------        ------
                                                                                       7,324         1,485
Less accumulated depreciation and amortization....................................     1,635           486
                                                                                      ------        ------
                                                                                      $5,689        $  999
                                                                                      ======        ======

(c) Other Assets

Other assets consisted of the following as of December 31, 1999 and 1998 (in thousands)

                                                                                       December 31,
                                                                                ---------------------------
                                                                                    1999           1998
                                                                                ------------   ------------
Capitalized in-kind advertising and promotional expenses, net (Note 9).......         $4,559         $2,253
Cost investment in SocialNet, Inc (Note 10)..................................          3,000             --
Deposits.....................................................................            321             38
                                                                                      ------         ------

                                                                                      $7,880         $2,291
                                                                                      ======         ======

(d) Accrued Liabilities

Accrued liabilities consisted of the following as of December 31, 1999 and 1998 (in thousands):

                                                                                          December 31,
                                                                                   --------------------------
                                                                                       1999          1998
                                                                                   ------------   -----------
Accrued compensation and benefits..............................................      $  953            $ 202
Accrued sales and marketing expenses...........................................         987               --
Accrued moderator expenses.....................................................         390               --
Other accrued liabilities......................................................         972              118
                                                                                     ------            -----
                                                                                     $3,302            $ 320
                                                                                     ======            =====

(e) Interest Income (Expense), Net

Interest income (expense), net consisted of the following (in thousands):

                                                                                 Years ended December 31,
                                                                          --------------------------------------
                                                                               1999          1998        1997
                                                                          --------------   ---------   ---------
Interest income........................................................      $2,341         $ 241        $ 339
Interest and other expense.............................................         (77)         (608)          --
                                                                             ------         -----        -----
                                                                             $2,264         $(367)       $ 339
                                                                             ======         =====        =====

Included in interest expense in 1998 is the value associated with the common stock warrants issued to the holders of the notes totaling $490,000. See Note 5--Capitalization.

56

(4) Notes Payable

The Company has an equipment line of credit with a financial institution that provides up to $2,000,000 in borrowings, bears interest at a rate determined on the draw date, and currently expires in April 2002. The line of credit is secured by the Company's fixed assets. As of December 31, 1999 and 1998, $261,000 and $400,000, respectively, was outstanding under this agreement with the principal amount due in 48 monthly installments beginning in May 1998. These amounts bear interest at a fixed rate of approximately 20%.

The aggregate principal payments due under the line of credit subsequent to December 31, 1999 are as follows: 2000, $154,000; 2001, $93,000; and 2002, $14,000.

(5) Capitalization

(a) Redeemable Convertible Preferred Stock

A summary of redeemable convertible preferred stock issued by the Company since inception follows:

                                                                     Noncumulative    Liquidation     Redemption
                                                        Shares         dividend       preference         price
                                                        issued         per share       per share       per share
                                                     -------------   -------------   -------------   -------------
Series A..........................................         150,000           $0.16           $2.00           $2.00
Series A1.........................................         350,000            0.16            2.00            2.00
Series B..........................................       3,294,785            0.22            2.80            2.80
Series C..........................................         384,615            0.38            4.68            4.68
Series D..........................................       8,100,509            0.32            4.00            4.00
Series E..........................................       2,499,884            0.32            8.00            8.00
                                                        ----------
                                                        14,779,793
                                                        ==========

Each share of the Series A, A1, B, D and E redeemable preferred stock was convertible into common stock at a rate of 1.00 shares of common stock for one share of preferred. Pursuant to antidilution adjustments, the Series C Stock was convertible at a rate of 1.17 shares of common stock for 1 share of Series C Stock. The redeemable preferred stock automatically converted to common stock upon completion of the Company's public offering of common stock in July 1999.

The Company borrowed approximately $2,900,000 under a convertible loan arrangement from April 1998 through August 1998. Advances were at an interest rate of 9% per annum. In connection with the issuance of the Series D Stock in September 1998, notes of $2,572,000, including accrued interest, were converted into 658,476 shares of Series D Stock and the remaining notes were repaid in full.

No dividends have been declared or paid on either the preferred stock or common stock since inception of the Company.

(b) Common Stock

The Company completed its initial public offering ("IPO") of approximately 5.1 million shares of Common Stock, including 100,000 shares of the underwriters over-allotment option, on July 23, 1999 (the 100,000 shares of the underwriters over-allotment option was completed on August 24, 1999) and raised approximately $55.4 million, net of offering costs of $5,771,000. Talk City is listed on the NASDAQ National Market under the symbol "TCTY."

Option holders have exercised options to purchase shares of restricted common stock in exchange for stockholder promissory notes. The notes are secured by the underlying shares of common stock and were issued with full recourse rights. The notes bear interest at rates ranging between 5.2% and 6.9% and expire on various dates

57

ranging from November 2006 to March 2009. The Company has the right to repurchase all unvested shares purchased by the notes at the original exercise price in the event of employee termination. The number of shares subject to this repurchase right decreases as the shares vest under the original option terms, generally over four years. As of December 31, 1999, there were 374,049 shares subject to repurchase. These options were exercised at prices ranging from $0.20 to $5.00 with a weighted average exercise price of $1.83 per share.

(c) Stock Option Plans and Employee Stock Purchase Plan

The Company's 1996 Stock Option Plan (the 1996 Plan) provides for stock options to be granted to employees, independent contractors, officers, and directors. Options are generally granted at an exercise price which approximates 100% of the estimated fair market value per share at the date of grant, as determined by the Company's Board of Directors. All options are granted at the discretion of the Company's Board of Directors and have a term not greater than 10 years from the date of grant. Options issued generally vest ratably over 4 years, 25% one year after the grant date and the remainder at a rate of 1/36 per month thereafter.

The Board of Directors also approved a 1999 Director Option Plan reserving 250,000 shares of common stock for issuance thereunder and an amendment and restatement to the 1996 Plan increasing the shares of common stock reserved for issuance thereunder by 750,000. The amendment and restatement of the 1996 Plan also provides for the automatic annual increase in the number of shares reserved for issuance under the 1996 Plan on the first day of the Company's fiscal year beginning in 2000 by the lesser of 750,000 shares, 4% of the then outstanding shares of common stock or an amount determined by the Board of Directors.

The Board of Directors approved, on April 23, 1999, the 1999 Employee Stock Purchase Plan ("ESPP"). The common stock available for sale under the plan shall be 500,000 plus an annual increase to be added on the first day of the Company's fiscal year beginning in 2000 equal to the lesser of (i) 500,000 shares, (ii) 2% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board. Qualified employees may elect to have a certain percentage not to exceed 15% of their salary withheld pursuant to the 1999 Plan. The salary withheld is then used to purchase shares of the Company's common stock at a price equal to 85% of the market value of the stock at the beginning of the 24 month offering period or end of the six-month purchase period, whichever is lower. Under this Plan, 42,409 shares were issued during fiscal 1999 representing approximately $261,000 in employee contributions.

A summary of stock option activity follows:

                                                   1999                      1998                      1997
                                          -----------------------   -----------------------   -----------------------
                                                         Weighted                  Weighted                  Weighted
                                                         average                   average                   average
                                            Options      exercise     Options      exercise     Options      exercise
                                          outstanding     price     outstanding     price     outstanding     price
                                          ------------   --------   ------------   --------   ------------   --------
Outstanding at beginning of
  period...............................       342,998      $ 0.82       674,801       $0.26       207,750       $0.20
  Options granted......................     1,213,425       11.06       315,623        0.92       520,551        0.28
  Options exercised....................      (188,188)       3.46      (534,519)       0.26            --          --
  Options canceled.....................       (82,122)       3.53      (112,907)       0.38       (53,500)       0.28
                                           ----------                 ---------                  --------
Outstanding at end of year.............     1,247,537       10.08       342,998        0.82       674,801        0.26
                                           ==========                 =========                  ========
Shares available for future grant......       731,892                   315,336                   488,000
                                           ==========                 =========                  ========
Weighted Average fair value of
  options granted during the year:
  Granted at fair value                    $     8.65                 $    0.70                  $   0.28
  Granted  below fair value                      6.25                      2.16                        --
  All options granted                            8.46                      2.10                      0.28

58

The Company uses the intrinsic value-based method to account for all its employee stock-based compensation arrangements. The Company has recorded deferred stock-based compensation expense of $715,000 and $892,000 relating to options granted during the years ended December 31, 1999 and 1998, respectively. These amounts represent the difference between the exercise price and the deemed fair value for financial reporting purposes of the company's common stock during the periods in which such options were granted. Amortization of deferred stock compensation of $763,000 and $353,000 was recognized during the years ended December 31, 1999 and 1998, respectively.

Information regarding the weighted average remaining contractual life and weighted average exercise price of options outstanding and options exercisable as of December 31, 1999, for selected exercise price ranges is as follows:

                                                   Options outstanding               Options Exercisable
                                          --------------------------------------   -----------------------
                                                         Weighted-
                                                          average      Weighted-                 Weighted-
      Range of                                           remaining      average                   average
      exercise                              Number      contractual    exercise      Number      exercise
       prices                             outstanding   life (years)     price     outstanding     price
       ------                             -----------   ------------   ---------   -----------   ---------
$   0.20  -    0.40                           155,338        7.68       $ 0.28       103,379      $ 0.26
    2.00  -    6.00                           153,774        9.02         4.11        34,648        3.77
    8.00  -   12.00                           267,925        9.52         9.08        43,800       11.05
   13.94  -   17.94                           670,500        9.96        14.08            --          --
                                            ---------                                -------
                                            1,247,537        9.46        10.06       181,827        3.53
                                            =========                                =======

The following pro forma information regarding stock-based compensation has been determined as if the Company had accounted for its employee stock options and employee stock purchase plan shares under the fair market value method of SFAS 123. The weighted average fair value of employee stock purchase plan shares issued during 1999 was $7.19. The fair value of these options and employee stock purchase plan shares were estimated at the date of grant using the Black Scholes model with the following weighted average assumptions: (i) a dividend yield of 0% for all periods; (ii) expected volatility of 96% for employees and nonemployees for 1999, 0% for employees and 135% and 45% for nonemployees in 1998 and 1997; (iii) risk-free interest rate of 5.0% in 1999, 5.0% in 1998, and 6.0% in 1997; (iv) an expected life of three years for employees, a contractual life of ten years for nonemployees and six months for shares issued under the employee stock purchase plan.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting periods. The Company's pro forma information is as follows:

(in thousands, except per share amounts)
                                                                                  Years ended December 31,
                                                                          ----------------------------------------
                                                                             1999           1998          1997
                                                                          -----------   ------------   -----------
   Net loss as reported................................................     $(40,266)      $(16,217)      $(6,429)
   Incremental pro forma compensation expense under SFAS 123...........         (647)          (153)          (16)
                                                                            --------       --------       -------
   Pro forma net loss                                                       $(40,913)      $(16,370)      $(6,445)
                                                                            ========       ========       =======

  Pro forma net loss per share                                              $  (3.19)      $  (4.97)      $ (2.10)
                                                                            ========       ========       =======

Under SFAS 123, compensation expense representing the fair value of the option grant is recognized over the vesting period. The impact on pro forma net loss may not be representative of compensation expense in future years, when the effect of amortization of multiple awards would be reflected in pro forma earnings.

59

(d) Warrants

In connection with the Series D Preferred Stock issuance, the Company issued warrants to two investment banking firms to purchase 123,830 shares of Series D Stock with an exercise price of $4.00 per share. The warrants are exercisable any time prior to September 14, 2003 and were valued at approximately $438,000 using the Black-Scholes option pricing model. The fair value of the warrants was deemed to be a direct financing cost associated with the Series D Stock issuance and was accreted to Redeemable Convertible Preferred Stock in 1998 and has been presented as an increase in the net loss applicable to common stockholders in the 1999 and 1998 statement of operations.

In connection with the NBC operating and advertising agreements, the Company issued warrants to purchase 375,000 shares of common stock and 522,223 shares of the Series D Stock. See Note 9--Advertising and Operating Agreements.

All of the warrants associated with the Series D Stock were converted into common stock warrants at a conversion ratio of one Series D Stock warrant to one common stock warrant at the time of the Company's IPO.

In connection with the convertible loan financing, the Company issued warrants to purchase 290,300 shares of common stock with an exercise price of $3.00 per share. The warrants may be exercised at any time prior to the fifth anniversary of the issuance of the warrants, ranging from April 2003 through July 2003. The warrants were valued at approximately $490,000 using the Black- Scholes option pricing model. The fair value of the warrants was deemed to be additional interest expense and charged to Interest Income (Expense), Net in 1998.

The following weighted-average assumptions were used in estimating the fair value of the warrants: (i) dividend yield of 0%; (ii) expected volatility of 135% for 1998 and 126% for 1999; (iii) weighted average risk-free interest rates of approximately 5% in 1998 and 6.0% in 1999; and (iv) contractual life of five years.

During 1999, warrants representing 98,928 shares were exercised. No warrants were exercised during 1998. As of December 31, 1999 and 1998, warrants outstanding were 1,204,946 and 1,311,353 respectively.

(6) Income Taxes

The reconciliation between the amount computed by applying the U. S. federal statutory tax rate of 34% to the net loss and the actual provision for income taxes for the years ended December 31, 1999, 1998 and 1997, follows (in thousands):

                                                                             1999          1998         1997
                                                                          -----------   ----------   ----------
Income tax benefit at statutory rate.................................       $(13,636)     $(5,270)     $(2,173)
Current year net operating loss and temporary differences for
  which no benefit has been recgnized................................         13,414        4,969        2,153
Other................................................................            222          301           20
                                                                            --------      -------      -------
       Total.........................................................       $      -      $     -      $     -
                                                                            ========      =======      =======

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of December 31, 1999 and 1998, are as follows (in thousands):

60

                                                                                      1999          1998
                                                                                   -----------   ----------
Deferred tax assets:
     Net operating loss carryforwards.........................................       $ 21,767      $ 8,812
     Preferred and common stock warrants......................................          1,889          582
     Property and equipment...................................................            329          179
     Research credit carryforwards............................................            585          233
     Other....................................................................            533          117
                                                                                     --------      -------
             Total gross deferred tax assets..................................         25,103        9,923
Valuation allowance...........................................................        (25,103)      (9,923)
                                                                                     --------      -------
             Total net deferred tax assets....................................       $     --      $    --
                                                                                     ========      =======

Management has established a full valuation allowance against its net deferred tax assets because it is more likely than not that sufficient taxable income will not be generated during the 15-year carryforward period. The net increase in total valuation allowance for the years ended December 31, 1999, 1998 and 1997 was approximately $15,180,000, $6,556,000 and $2,826,000, respectively.

The Company has net operating loss carryforwards for federal and California income tax purposes of approximately $56,383,000 and $28,780,000, respectively, available to reduce future taxable income subject to income taxes. The net operating loss carryforwards expire beginning in 2011 through 2019 for federal income tax purposes and in 2004 for California income tax purposes.

The Company also has research credit carryforwards for federal and California income tax return purposes of approximately $402,000 and $220,000, respectively, available to reduce future income taxes. The federal research credit carryforward expires beginning in 2011 through 2019. The California research credit carryforward can be utilized indefinitely.

The Internal Revenue Code of 1986 and the California Conformity Act of 1987 substantially restrict the ability of a corporation to utilize existing net operating losses and credits in the event of an "ownership change." The issuances of preferred stock have resulted in multiple ownership changes since inception of the Company. Approximately $16,800,000 of the federal net operating loss carryforward will be subject to an annual limitation in the amount of $1,700,000. Any unused annual limitation can be carried over and added to the succeeding year's annual limitation within the allowable carryforward period. Future changes in ownership may result in additional limitations.

The Company also has research credit carryforwards for federal and California income tax return purposes of approximately $402,000 and $220,000, respectively, available to reduce future income taxes. The federal research credit carryforward expires beginning in 2011 through 2019. The California research credit carryforward can be utilized indefinitely.

Included in gross deferred tax assets as of December 31, 1999 is approximately $464,000 related to stock options and warrants for which the benefit, when realized will be recorded to equity.

(7) Commitments

The Company leases its facilities under noncancelable operating leases expiring at various dates through March 2009. In October 1999, the Company signed a nine-year three and one-half month lease for a new 56,000 square foot corporate headquarters in Campbell, California, which commenced on December 15, 1999. The Company is required to provide a $2,100,000 letter of credit as security for the lease. The letter of credit may be reduced by specified amounts in the lease agreement after every twelve months through December 14, 2005 provided no default has occurred. A $2,100,000 certificate of deposit with a one year maturity is held as collateral by a bank for guarantee of the letter of credit. The certificate of deposit is included in short-term investments.

61

Rent expense was approximately $790,000, and $211,000, $63,000 for the years ended December 31, 1999, 1998 and 1997, respectively.

Future minimum lease payments under noncancelable operating leases as of December 31, 1999 are as follows (in thousands):

2000........................................................................................    $ 2,108
2001........................................................................................      2,290
2002........................................................................................      2,366
2003........................................................................................      2,093
2004 and thereafter.........................................................................      9,898
                                                                                                -------
       Total minimum lease payments.........................................................    $18,755
                                                                                                =======

(8) Retirement Plan

Effective January 1997, the Company established a qualified 401(k) Plan (the Plan) available to all employees who meet the Plan's eligibility requirements. Participants may elect to contribute a percentage of their compensation to this Plan up to a statutory maximum amount. The Company may make matching contributions to the Plan on a discretionary basis. The Company has not made any contributions to the Plan in 1999, 1998 or 1997.

(9) Advertising and Operating Agreements

Advertising Agreements

The Company entered into three separate agreements with the National Broadcasting Company (NBC) whereby NBC provided the Company with advertising time and promoted the Company's services on television, primarily during prime time programs, in exchange for preferred stock and warrants described as follows:

(i) On April 22, 1998, the Company issued 213,675 shares of Series C Redeemable Convertible Preferred Stock (Series C Stock) at a price of $4.68 per share in exchange for advertising provided by NBC.

(ii) On August 31, 1998, the Company issued 170,940 shares of Series C Stock at a price of $4.68 per share and warrants to purchase 125,000 shares of Series D redeemable convertible preferred stock (Series D Stock) with an exercise price of $6.00 per share in exchange for advertising spots provided by NBC. The warrant is exercisable at any time prior to August 31, 2003 and was valued at approximately $425,000 using the Black Scholes option pricing model.

(iii) On August 21, 1998, the Company entered into a letter agreement whereby NBC would provide the Company with the use of advertising spots having an aggregate discounted rate card value of $2,400,000 in exchange for 600,000 shares of Series D Stock with a face value of $4.00 per share and warrants to purchase 266,667 shares of Series D Stock with a weighted average exercise price of $8.44 per share. For every $800,000 in advertising, the Company would issue 200,000 shares of Series D Stock and warrants to purchase 41,667, 125,000 and 100,000 shares of Series D Stock in the first, second, and third tranches, respectively. On April 15, 1999, as NBC had not provided any advertising spots pursuant to this agreement, the Board of Directors amended the agreement with NBC to effect the immediate issuances of 600,000 shares of Series D Stock and warrants to purchase 266,667 shares of Series D Stock. The warrants were valued on April 15, 1999 at approximately $1,871,000 using the Black Scholes option pricing model.

62

On October 30, 1998, the Company entered into an agreement with the New Media and Technology division of Hearst Communications, Inc. (Hearst) whereby Hearst would provide advertising space to the Company in selected national publications. The advertising has an aggregate discounted rate card value of $3,000,000 and would be provided in exchange for 750,000 shares of Series D. For every $4.00 of print advertising provided by Hearst, the Company would issue one share of Series D Stock. On April 15, 1999, as Hearst had not provided all the advertising pursuant to this agreement, the Board of Directors amended the agreement with Hearst to effect the immediate issuance of 750,000 shares of Series D Stock.

All the warrants and preferred stock issued pursuant to the above are noncancelable and nonforfeitable. Accordingly, the fair market value of these instruments was measured and fixed on the date of their respective issuance. The total fair value was recorded in Other Assets and is being charged to operations as the advertisements are run. The fair values attributable to the amended NBC and Hearst agreements were based on the fair value of the Series E Redeemable Convertible Preferred Stock issued at $8.00 per share on April 15, 1999. For the years ended December 31, 1999 and 1998, advertising expense related to these agreements of $9,198,000 and $2,228,000, respectively, was recorded to noncash advertising and promotional charges in the statement of operations. As of December 31, 1999 and 1998, the unamortized value attributable to the noncancelable stock and warrants of $3,007,000 and $0, respectively, was recorded in Other Assets.

In connection with the Company's IPO, the preferred stock issued in the above arrangements was converted to common stock at their respective ratios. In addition, the warrants are exercisable into shares of common stock, determined based on the respective conversion ratios.

Operating Agreements

During 1998, the Company entered into two operating agreements with NBC Multimedia whereby the Company and NBC Multimedia jointly produce, market, and promote the Company's online properties and involves the integration of the Company's and NBC Multimedia's Web sites over a period of two to three years. In connection with these agreements, the Company issued preferred stock and warrants to NBC Multimedia as follows:

(i) The Company executed an operating agreement whereby the Company issued a warrant to purchase 375,000 shares of common stock with an exercise price of $4.00 per share. The warrant is exercisable at any time prior to its expiration in April 2003. Pursuant to the original agreement, of the shares issuable upon exercise of the warrants, 50% and 25% are subject to cancellation, if not previously exercised, in the event NBC Multimedia cancelled the agreement for convenience prior to February 25, 1999 and February 25, 2000, respectively. On April 15, 1999, the Board of Directors amended the operating agreement with NBC to effect the immediate issuance of a noncancelable warrant to purchase 375,000 shares of common stock in exchange for the previous warrant issued to NBC under this agreement. The warrant was initially valued at approximately $630,000 using the Black-Scholes option pricing model.

(ii) The Company executed an operating agreement whereby the Company issued 500,000 shares of Series D Stock valued at $4.00 per share and a warrant to purchase 130,556 shares of Series D Stock with a weighted average exercise price of $7.66 per share. The warrant is exercisable at any time prior to its expiration in August 2003. Pursuant to the original terms, of the shares issuable upon exercise of the warrant, 25% are subject to cancellation, if not previously exercised, in the event NBC multimedia cancelled the agreement for convenience prior to August 2001. On April 15, 1999, the Board of Directors amended the operating agreement with NBC to effect the immediate issuance of a noncancelable warrant to purchase 130,556 shares of Series D Stock in exchange for and upon cancellation of the previous warrant issued to NBC under this agreement. The warrant was initially valued at approximately $439,000 using the Black-Scholes option pricing model.

63

In accordance with ETIF 96-18, the warrants subject to cancellation were required to be revalued at each balance sheet date based on the current fair value through the date the related cancellation or repurchase rights lapsed. As a result of the amendments described above, the value of the warrants that were initially subject to cancellation was fixed and measured on April 15, 1999 based on the Series E Redeemable Preferred Stock price per share. The fair value of the Series D Stock of $2,000,000 and the fair value of the warrants of $2,179,000 issued in connection with the operating agreements was recorded in Other Assets and is being amortized over the remaining term of the respective operating agreements, which coincides with when the services are received. For the years ended December 31, 1999 and 1998, amortization expense related to these agreements of $1,964,000 and $662,000, respectively, was recorded to noncash advertising and promotional charges in the statement of operations. As of December 31, 1999 and 1998, the unamortized value attributable to the noncancelable preferred stock and warrants of $1,552,000 and $2,253,000, respectively, was recorded in Other Assets.

(10) Related Party Transactions

On December 21, 1999, the Company entered into a Series C Preferred Stock Agreement with SocialNet, Inc. ("SocialNet"), a privately held corporation. In accordance with the Series C Preferred Stock Agreement, the Company purchased 1,554,404 shares of Series C Preferred Stock of SocialNet, representing a 7.6% ownership interest in SocialNet, for $3.0 million. The Company accounts for this investment under the cost method. Additionally, the Company recorded $129,000 in revenue for the sale of advertising and business services to SocialNet in 1999. Accounts receivable from SocialNet were $30,000 at December 31, 1999.

In 1999 and 1998, the Company recorded revenue totaling $569,000 and $92,000, respectively, for the sale of advertising and business services to various stockholders of the Company. Accounts receivable from the stockholders were $192,000 and $31,000, respectively. Accounts payable to stockholders were $22,000 and $2,000 at December 31, 1999 and 1998, respectively.

(11) Network Participants

As of December 31, 1999, the Company's community included 31 network participants with whom it produces co-branded versions of Talk City for their approximate 50 Internet sites. The network participants consist of three types of companies: major media, Internet service providers and Internet content. Through its network participants, the Company receives user volume driven by the network participants. The volume is considered to be "driven" by network participant if the user comes to the Company's site via a participant's site. For the year ended December 31, 1999, approximately 35% of the Company's advertising and sponsorship revenues were based on volume driven by its network participants. For this period, one network participant was responsible for approximately 28% of the Company's advertising and sponsorship revenue. If the Company were to terminate or otherwise lose the benefit of its network participants, the Company could be at risk of being unable to replace the network participant's volume and associated advertising and sponsorship revenues which could have a negative impact on the Company's operating results.

(12) Subsequent Event

On January 3, 2000, the Company acquired Research Connections, Inc., ("RCI"), a privately-held online market research company. The Company will pay $500,000 in cash and issue 242,424 shares of its common stock with an approximate fair value of $3 million in exchange for all outstanding shares of RCI. Cash consideration of $500,000 is due as follows: $250,000 was paid on January 3, 2000; $125,000 will be paid on April 3, 2000; and $125,000 will be paid on July 3, 2000. In addition, contingent cash consideration of $1.5 million, subject to an employment agreement with the sole shareholder of RCI, was placed into an escrow fund. Funds will be released over four years with 25% released on January 3, 2001 and the remainder released evenly over the following thirty-six months. In the event the shareholder is terminated for cause or voluntarily leaves employment of the Company, then all remaining cash in the escrow fund shall be forfeited to the Company and the shareholder will have no further right to such cash.

64

The Company will record the cash consideration of $1.5 million as compensation expense as the funds are released from escrow.

The acquisition will be accounted for as a purchase. Therefore, the results of operations of RCI and the fair value of the assets acquired and liabilities assumed will be included in the Company's financial statements beginning on the acquisition date. The preliminary allocation of the purchase price will result in goodwill of approximately $3.4 million, which will be capitalized and amortized on a straight line basis over five years.

PART III

Item: 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item: 10 Directors and Executive Officers of the Registrant

We will furnish to the Securities and Exchange Commission a definitive Proxy Statement (the "Proxy Statement") not later than 120 days after the close of the fiscal year ended December 31, 1999. The information required by this item is incorporated herein by reference to the Proxy Statement.

Item: 11 Executive Compensation

The information required by this item is incorporated herein by reference to the Proxy Statement.

Item: 12 Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated herein by reference to the Proxy Statement.

Item: 13 Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to the Proxy Statement.

PART IV

Item: 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K.

(a) Exhibits

2.1 Agreement and Plan of Reorganization between the registrant and Research Connections, Inc., dated January 3, 2000.

3.2 Second Amended and Restated Certificate of Incorporation of the Company.*

3.3 Bylaws of the registrant.*

4.1 Form of registrant's Common Stock certificate.*

4.2 Third Amended and Restated Shareholders Rights Agreement, dated April 23, 1999, between the registrant and the parties named therein, as amended on May 26, 1999.*

10.1 Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.*

65

  10.2    1996A Stock Option Plan and related agreements.*

  10.3    Amended and Restated 1996 Stock Option Plan and related agreements.*

  10.4    1999 Employee Stock Purchase Plan.*

  10.5    1999 Director Option Plan.*

  10.6    Office Lease Agreement, dated May 21, 1997, by and between the
          registrant and The Manufacturers Life Insurance Company (U.S.A.).*

  10.7    Office Lease Agreement, dated February 28, 1999, by and between the
          registrant and SLG Graybar LLC.*

  10.8    Repurchase Agreement, dated November 20, 1996, as amended, by and
          between the registrant and Peter H. Friedman.*

  10.9    Repurchase Agreement, dated November 20, 1996, as amended, by and
          between the registrant and Jenna Woodul.*

 10.10    Stock Option Agreement, dated March 1, 1999, by and between the
          registrant and Jeffrey Snetiker.*

 10.11    Master Service Agreement, dated April 19, 1999, by and between the
          registrant and Frontier GlobalCenter.*

 10.12    Network Affiliation Agreement, dated March 1, 1998 by and between
          the registrant and 24/7 Media Inc.*

 10.13    Content and Services Agreement, effective July 19, 1998, by and
          between the registrant and WebTV Networks, Inc.*

 10.14    Contract, dated May 13, 1997, by and between the registrant and NFO
          Research.*

 10.15    Operating Agreement, dated August 24, 1998, by and between the
          registrant and Cox Interactive Media, Inc.*

 10.16    Hearst-Talk City Operating Agreement, dated April 20, 1999, by and
          between the registrant and Hearst New Media and Technology division,
          a division of Hearst Communications, Inc.*

 10.17    Series D Preferred Stock Purchase Agreement, dated October 30, 1998,
          by and between the registrant and Hearst Communications, Inc.,
          Hearst New Media & Technology division, as amended on April 15,
          1999.*

 10.18    NBC-Talk City Chat Services Agreement, dated August 21, 1998, by and
          between the registrant and NBC Multimedia, Inc., as amended on April
          19, 1999.*

 10.19    Letter Agreement, dated February 25, 1998, by and between the
          registrant and NBC Multimedia, Inc., as amended on July 27, 1998 and
          April 19, 1999.*

 10.21    Lease Agreement, dated May 5, 1999, by and between the registrant
          and Pruneyard Associates, LLC.*

 10.22    Sublease Agreement, Second Amendment to Lease and Consent to
          Sublease Agreement, and Tri-Party Construction Agreement dated
          October 20, 1999, by and between the registrant, Compuware
          Corporation and Pruneyard Associates, LLC. **

 23.1     Consent of KPMG LLP, Independent Auditors.

 27.1     Financial Data Schedule (filed only with the electronic submission
          of Form 10-K in accordance with the Edgar requirements).
______________

66

* Incorporated by reference from registrant's 424(b) Prospectus, dated July 19, 1999, as declared effective by the Securities and Exchange Commission on July 19, 1999. ** Incorporated by reference from the registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1999.

(b) Financial Statement Schedule

67

The following financial statement schedule for the years ended December 31, 1999, 1998, and 1997 should be read in conjunction with the financial statements of Talk City, Inc. filed as part of this Annual Report on Form 10-K.

Schedule II - Valuation and Qualifying Accounts

------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Charged to
                                            Balance at         Charged to        other
                                            beginning of       costs and         accounts -        Deduction -      Balance at
Description                                 period              expenses         describe (1)      describe  (2)    end of period
------------------------------------------------------------------------------------------------------------------------------------

Year ended December 31, 1999
 Deducted from asset accounts:
  Allowance for doubtful accounts           $100,000            $214,084            $104,000             164,084          $254,000
------------------------------------------------------------------------------------------------------------------------------------

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

Year ended December 31, 1998
 Deducted from asset accounts:
  Allowance for doubtful accounts              --                100,000               --                    --            100,000
------------------------------------------------------------------------------------------------------------------------------------

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

Year ended December 31, 1997
 Deducted from asset accounts:
  Allowance for doubtful accounts              --                  --                  --                    --                --
-----------------------------------------------------------------------------------------------------------------------------------

(1) Charges to revenue
(2) Uncollectible accounts written off, net of recoveries

(c) Reports on Form 8-K No reports on Form 8-K were filed or required to be filed for the last quarter of the fiscal year.

68

REPORT ON SCHEDULE OF KPMG, LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Talk City, Inc.:

The audits referred to in our report included herein dated February 2, 2000, included the accompanying financial statement schedule as of December 31, 1999, and for each of the years in the three-year period ended December 31, 1999. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, the accompanying financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

                                        /s/ KPMG LLP

Mountain View, California
February 2, 2000

69

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

TALK CITY, INC.

    By:  /s/ Peter Friedman
-------------------------------

       Peter H. Friedman
    Chief Executive Officer
   and Chairman of the Board

         March 28, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.

------------------------------------------------------------------------------------------------------------------------------
Name                                         Title                                   Date
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Principal Executive Officer:
------------------------------------------------------------------------------------------------------------------------------
/s/ Peter H. Friedman                        Chief Executive Officer and             March 28, 2000
---------------------                        Chairman of the Board
Peter H. Friedman
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Principal Financial Officer and Principal
Accounting Officer:
------------------------------------------------------------------------------------------------------------------------------
/s/ Jeffrey Snetiker                         Senior Vice President,                  March 28, 2000
--------------------                         Chief Financial and
Jeffrey Snetiker                             Administrative Officer
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Directors:
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
/s/ John Sculley                             Director                                March 28, 2000
----------------
John Sculley
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
/s/ Joseph A. Graziano                       Director                                March 28, 2000
----------------------
Joseph A. Graziano
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
/s/ Kenneth A. Bronfin                       Director                                March 28, 2000
----------------------
Kenneth A. Bronfin
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
/s/ Barry M. Weinman                         Director                                March 28, 2000
--------------------
Barry M. Weinman
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
/s/ Thomas P. Hirschfeld                     Director                                March 28, 2000
------------------------
Thomas P. Hirschfeld
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
/s/ Martin J. Yudkovitz                      Director                                March 28, 2000
-----------------------
Martin J. Yudkovitz
------------------------------------------------------------------------------------------------------------------------------

70

EXHIBIT 2.1

AGREEMENT AND PLAN OF REORGANIZATION

Dated as of January 3, 2000


TABLE OF CONTENTS

                                                                                                              Page
                                                                                                              ----
SECTION 1 - THE MERGER..................................................................................        1

    1.1     Merger; Effective Time......................................................................        1
    1.2     Closing.....................................................................................        1
    1.3     Effects of the Merger.......................................................................        1
    1.4     Certificate of Incorporation; Bylaws; Directors; Officers...................................        2
    1.5     Tax-Free Reorganization.....................................................................        2

SECTION 2 - EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE............................................        2

    2.1     Effect on Capital Stock.....................................................................        2
    2.2     Exchange of Certificates....................................................................        4

SECTION 3 - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SOLE SHAREHOLDER......................        5

    3.1     Organization, Standing and Corporate Power..................................................        6
    3.2     Company Capital Structure...................................................................        6
    3.3     Subsidiaries................................................................................        6
    3.4     Authority/Noncontravention..................................................................        6
    3.5     Financial Statements; No Undisclosed Liabilities............................................        7
    3.6     Absence of Certain Changes or Events........................................................        8
    3.7     Litigation..................................................................................        8
    3.8     Contracts...................................................................................        8
    3.9     Compliance With Laws........................................................................        9
    3.10    Absence of Changes in Benefit Plans; Employment Agreements; Labor Relations.................       10
    3.11    ERISA Compliance............................................................................       10
    3.12    Taxes.......................................................................................       11
    3.13    No Excess Parachute Payments................................................................       13
    3.14    Title to Properties.........................................................................       13
    3.15    Intellectual Property.......................................................................       13
    3.16    Year 2000 Compliance........................................................................       14
    3.17    Voting Requirements.........................................................................       15
    3.18    Payments....................................................................................       15
    3.19    Transactions with Related Parties...........................................................       15
    3.20    Restrictions on Business Activities.........................................................       16
    3.21    Accounts Receivable; Inventory..............................................................       16
    3.22    Minute Books................................................................................       16
    3.23    Environmental Matters.......................................................................       16
    3.24    Insurance...................................................................................       17
    3.25    Warranties; Indemnities.....................................................................       17
    3.26    Representations Complete....................................................................       17

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TABLE OF CONTENTS
(continued)

                                                                                                              Page
                                                                                                              ----
SECTION 4 - REPRESENTATIONS AND WARRANTIES OF PARENT....................................................       18

    4.1     Organization, Standing and Corporate Power..................................................       18
    4.2     Authority/Noncontravention..................................................................       18
    4.3     SEC Documents; Parent Financial Statements..................................................       18
    4.4     Parent Common Stock.........................................................................       19

SECTION 5 - COVENANTS...................................................................................       19

    5.1     Conduct of Business of the Company..........................................................       19
    5.2     No Solicitation.............................................................................       21
    5.3     Shareholder Approval........................................................................       22
    5.4     Access to Information.......................................................................       22
    5.5     Confidentiality.............................................................................       22
    5.6     Expenses....................................................................................       22
    5.7     Public Disclosure...........................................................................       22
    5.8     Consents....................................................................................       22
    5.9     FIRPTA Compliance...........................................................................       23
    5.10    Reasonable Efforts..........................................................................       23
    5.11    Notification of Certain Matters.............................................................       23
    5.12    Blue Sky Laws...............................................................................       23
    5.13    Noncompetition and Employment Agreements....................................................       23
    5.14    Investment Representation Agreements........................................................       23

SECTION 6 - CONDITIONS TO THE MERGER....................................................................       24

    6.1     Conditions to the Obligations of Parent and Sub.............................................       24
    6.2     Additional Conditions to Obligations of Company.............................................       25

SECTION 7 - INDEMNIFICATION.............................................................................       26

    7.1     General Indemnification.....................................................................       26
    7.2     Limitation and Expiration...................................................................       27
    7.3     Escrow Fund.................................................................................       27
    7.4     Indemnification Procedures..................................................................       28
    7.5     Survival of Representations, Warranties and Covenants.......................................       31

SECTION 8 - TERMINATION, AMENDMENT AND WAIVER...........................................................       31

    8.1     Termination.................................................................................       31
    8.2     Effect of Termination.......................................................................       32
    8.3     Amendment...................................................................................       32
    8.4     Extension; Waiver...........................................................................       32
    8.5     Notice of Termination.......................................................................       32

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TABLE OF CONTENTS
(continued)

                                                                                                              Page
                                                                                                              ----
SECTION 9 - MISCELLANEOUS..............................................................................        32

    9.1     Notices....................................................................................        32
    9.2     Interpretation.............................................................................        33
    9.3     Counterparts...............................................................................        34
    9.4     Entire Agreement; Assignment...............................................................        34
    9.5     Severability...............................................................................        34
    9.6     Other Remedies.............................................................................        35
    9.7     Governing Law..............................................................................        35
    9.8     Further Assurances.........................................................................        35
    9.9     Absence of Third Party Beneficiary Rights..................................................        35
    9.10    Mutual Drafting............................................................................        35
    9.11    Further Representations....................................................................        35

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INDEX OF EXHIBITS

Exhibit A      Form of Escrow Agreement

Exhibit B      Form of Noncompetition Agreement

Exhibit C      Form of Investment Representation Agreement

Exhibit D      Form of Legal Opinion of Counsel to the Company

Exhibit E      Form of Registration Rights Agreement

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AGREEMENT AND PLAN OF REORGANIZATION

THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of January 3, 2000 between Talk City, Inc., a Delaware corporation ("Parent"), and Research Connections, Inc., a New Jersey corporation (the "Company"), and Amy J. Yoffie, an individual and sole shareholder of the Company (the "Sole Shareholder").

RECITAL

The Boards of Directors of each of the Company and Parent believe it is in the best interests of each company and their respective shareholders that the Company and Parent combine into a single company through the merger of the Company with and into Parent (the "Merger") pursuant to the terms of this Agreement and, in furtherance thereof, have approved the Merger.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the parties agree as follows:

SECTION 1

THE MERGER

1.1 Merger; Effective Time. Subject to the terms and conditions of this Agreement, the Company will be merged into Parent (the "Merger") in accordance with the New Jersey Business Corporation Act (the "New Jersey Act") and the Delaware General Corporation Law (the "DGCL", and together with the New Jersey Act, the "State Corporation Law").

Subject to the provisions of this Agreement, a Certificate of Merger (the "Certificate of Merger") shall be filed in accordance with the State Corporation Law on the Closing Date (as defined in Section 1.2). The Merger shall become effective upon confirmation of such filing of the Certificate of Merger (the date of confirmation of such filing is referred to as the "Effective Date" and the time of confirmation of such filing is referred to as the "Effective Time").

1.2 Closing. The closing of the Merger (the "Closing") will take place as soon as practicable on the first business day after satisfaction or waiver of the latest to occur of the conditions set forth in Section 6 (the "Closing Date"), at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050, unless a different date or place is agreed to in writing by the parties hereto.

1.3 Effects of the Merger. At the Effective Time, the separate existence of the Company shall cease and the Company shall be merged with and into Parent, and the effects of the Merger shall be as provided in this Agreement and the applicable provisions of the State Corporation Law. Parent after the Merger is sometimes referred to as the "Surviving Corporation." Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of the Company shall vest in the Surviving Corporation, and all

debts, liabilities, obligations and duties of the Company shall become the debts, liabilities, obligations and duties of the Surviving Corporation.

1.4 Certificate of Incorporation; Bylaws; Directors; Officers. At the Effective Time, (i) the Certificate of Incorporation of Parent shall be the Certificate of Incorporation of the Surviving Corporation; (ii) the Bylaws of Parent as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation until altered, amended or repealed; (iii) the directors of Parent shall be the initial directors of the Surviving Corporation and will hold office from the Effective Time until their respective successors are duly elected or appointed and qualified in the manner provided in the Certificate of Incorporation and Bylaws of the Surviving Corporation, as the same may be amended from time to time or otherwise as provided by law; and (iv) the officers of Parent shall be the initial officers of the Surviving Corporation.

1.5 Tax-Free Reorganization. The Merger is intended to be a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). The parties have consulted with their own tax advisors regarding the tax consequences of the Merger.

SECTION 2

EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES

2.1 Effect on Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of capital stock of the Company:

(a) Cancellation of Certain Shares of Capital Stock of the Company.
All shares of capital stock of the Company that are owned directly or indirectly by the Company shall be canceled and no stock of Parent or other consideration shall be delivered in exchange therefor.

(b) Conversion of Capital Stock of the Company. Subject to Sections 2.1(c), (d) and (e) below, all issued and outstanding shares of common stock of the Company, no par value ("Company Common Stock") (other than shares to be canceled pursuant to Section 2.1(a)), that are issued and outstanding immediately prior to the Effective Time shall automatically be canceled and extinguished and converted, without any action on the part of the holder thereof, into the right to receive an aggregate of 242,424 shares of common stock of Parent (the "Parent Common Stock") and $500,000 in cash (the "Cash Consideration", and together with the Parent Common Stock, the "Merger Consideration"). All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration to be issued or paid in consideration therefor upon the surrender of such certificate in accordance with Section 2.2 of this Agreement. The ratio pursuant to which each share of Company Common Stock will be exchanged for shares of Parent Common Stock, determined in accordance with the foregoing provisions, is referred to as the "Exchange Ratio."

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(c) Payment Schedule and Escrow.

(i) The Merger Consideration will be paid as follows: $250,000 of the Cash Consideration will be paid on the Closing, $125,000 of the Cash Consideration will be paid three (3) months after the Closing and the remaining $125,000 of the Cash Consideration will be paid six (6) months after the Closing. The Parent Common Stock will be distributed as follows:

(A) 121,212 shares of Parent Common Stock will be distributed on Closing; and

(B) 121,212 shares of Parent Common Stock will be distributed on Closing and placed in an escrow account to be released over four
(4) years, with 25% released twelve (12) months after the Closing (the "First Anniversary") and the remainder released evenly over the 36 months following the First Anniversary.

(ii) As collateral security for the payment of any indemnification obligations of the Sole Shareholder pursuant to Section 7 of this Agreement, at the Closing the Company and the Sole Shareholder shall, and by execution hereof does hereby, transfer, pledge and assign to Parent, for the benefit of Parent, a security interest in the following assets:

(A) 121,212 shares of Parent Common Stock issuable by Parent in the Merger pursuant to Section 2.1(c)(i)(B) (the "Pledged Shares"), as well as the certificates and instruments representing or evidencing the Pledged Shares, and all non-cash dividends and other property at any time received or otherwise distributed in respect of or in exchange or substitution for any or all of the Pledged Shares; and in the event the Company or the Sole Shareholder receives any such property, the Company and the Sole Shareholder shall immediately deliver such property to Parent as part of the Pledged Shares;

(B) $1.5 million in cash paid by Parent to the Sole Shareholder pursuant to a supplemental employment letter of even date herewith from Parent to the Sole Shareholder (the "Supplemental Cash"); and

(C) all rights, titles, interests, privileges and preferences appertaining or incident to the foregoing property, except as provided for in Section 2.1(c)(iv).

(iii) Each certificate evidencing the Pledged Shares issued in the name of the Sole Shareholder in the Merger, shall, at the Closing, be delivered to Parent, together with an undated stock power duly signed in blank by the Sole Shareholder, such certificate bearing no restrictive or cautionary legend other than those imprinted by the transfer agent at Parent's request.

(iv) The Sole Shareholder shall be entitled to exercise any voting powers incident to the Pledged Shares until such time, if ever, that they are demanded to be transferred to Parent to satisfy the indemnification obligations of the Sole Shareholder pursuant to Section 7 hereof.

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(d) Adjustment of Exchange Ratio. If, between the date of this Agreement and the Effective Time, the outstanding shares of Parent Common Stock (or, subject to Section 5.1 below, Company Common Stock) shall have been changed into a different number of shares or a different class by reason of any reclassification, split-up, stock dividend, stock combination, then the Exchange Ratio shall be correspondingly adjusted.

(e) Fractional Shares. No fractional shares of Parent Common Stock shall be issued, but in lieu thereof each holder of shares of Company Common Stock who would otherwise be entitled to receive a fraction of a share of Parent Common Stock shall receive from Parent an amount of cash equal to the per share market value of Parent Common Stock (based on the last sales price of Parent Common Stock, as published in the Wall Street Journal, on December 15, 1999) multiplied by the fraction of a share of Parent Common Stock to which such holder would otherwise be entitled. The fractional share interests of each shareholder of the Company shall be aggregated, so that no Company shareholder shall receive cash in an amount greater than the value of one full share of Parent Common Stock.

2.2 Exchange of Certificates.

(a) Exchange Agent. Prior to the Effective Time, Parent shall designate its transfer agent or a bank or trust company, reasonably acceptable to the Company, to act as exchange agent (the "Exchange Agent") in the Merger.

(b) Parent to Provide Cash Consideration and Common Stock. Promptly after the Effective Time, Parent shall deliver to the Exchange Agent in accordance with this Section 2 and the Merger Agreement, the Cash Consideration payable by federal wire transfer of immediately available funds pursuant to wire transfer instructions provided by the Sole Shareholder at least two business days prior to Closing and the shares of Parent Common Stock issuable pursuant to
Section 2.1 and the Merger Agreement in exchange for outstanding shares of capital stock of the Company (including cash in an amount sufficient for payment in lieu of fractional shares pursuant to Section 2.1(e)).

(c) Exchange Procedures. As soon as practicable after the Effective Time, the Surviving Corporation shall cause to be mailed to the Sole Shareholder
(i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates") shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration to which the Sole Shareholder is entitled pursuant to Section 2.1. The Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Common Stock which is not registered on the transfer records of the Company, the appropriate number of shares of Parent Common Stock may be delivered to a

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transferee if the Certificate representing such capital stock of the Company is presented to the Exchange Agent and accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent the right to receive upon such surrender the Merger Consideration as provided by this Section 2 and the provisions of the State Corporation Law.

(d) No Further Ownership Rights in Capital Stock of the Company. The Merger Consideration to be delivered upon the surrender for exchange of shares of Company Common Stock in accordance with the terms hereof shall be deemed to have been delivered in full satisfaction of all rights pertaining to such shares of Company Common Stock, and following the Effective Time, the Certificates shall have no further rights to, or ownership in, shares of capital stock of the Company. There shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Section 2.

(e) Lost, Stolen or Destroyed Certificates. In the event any certificates evidencing shares of Company Common Stock shall have been lost, stolen or destroyed, the Exchange Agent shall make payment in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such Merger Consideration and cash for fractional shares, if any, as may be required pursuant to Section 2.1(e); provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed.

(f) No Liability. Notwithstanding anything to the contrary in this Section 2.2, none of the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to a holder of shares of Company Common Stock for any amount paid to a public official pursuant to any applicable abandoned property, escheat or similar law.

SECTION 3

REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE SOLE SHAREHOLDER

Except as disclosed in writing in a disclosure letter referring specifically to the representations and warranties in this Agreement that specifically identifies the section and subsection to which such disclosure relates and that is delivered to Parent by the Company and the Sole Shareholder and certified by a duly authorized officer of the Company and the Sole Shareholder prior to the date of this Agreement (the "Company Schedules"), each of the Company and the Sole Shareholder represents and warrants to Parent as set forth below.

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3.1 Organization, Standing and Corporate Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite corporate power and authority to carry on its business as now being conducted. The Company is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary. The Company has delivered to Parent complete and correct copies of its Articles of Incorporation and Bylaws.

3.2 Company Capital Structure. The authorized capital stock of the Company consists of 100,000 shares of Common Stock, of which 100 shares are issued and outstanding. All of such outstanding shares have been duly authorized, validly issued, fully paid and non-assessable and have been issued in compliance with all applicable federal and state securities laws. The outstanding shares of capital stock of the Company are not subject to preemptive rights created by statute, the Articles of Incorporation or Bylaws of the Company, or any agreement to which the Company is a party or by which it may be bound. There are no voting agreements or voting trusts with respect to any of the outstanding shares of capital stock of the Company. The outstanding shares of capital stock of the Company are held by the persons and in the amounts set forth in Section 3.2 of the Company Schedules.

3.3 Subsidiaries. The Company does not have and has never had any subsidiaries or affiliated companies and does not otherwise own and has never otherwise owned any shares of capital stock or any interest in, or control, directly or indirectly, any other corporation, partnership, association, joint venture or other business entity.

3.4 Authority/Noncontravention. The Company has the requisite corporate power and authority to execute and deliver this Agreement and, subject to the approval and adoption of this Agreement and approval of the Merger by the Sole Shareholder, to consummate the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions contemplated hereby, subject, in each case, to the approval and adoption of this Agreement and approval of the Merger by the Sole Shareholder. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. The execution and delivery of this Agreement do not, and subject to the approval and adoption of this Agreement and approval of the Merger by the Sole Shareholder as required in connection with this Agreement and the transactions contemplated by this Agreement, the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit or require any consent, approval or authorization under, or result in the creation of any pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively, "Liens") in or upon any of the properties or assets of the

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Company under, any provision of (a) the Articles of Incorporation or Bylaws of the Company, (b) any loan or credit agreement, bond, debenture, note, mortgage, indenture, lease or other material contract, commitment, agreement, arrangement, obligation, undertaking, instrument, permit, concession, franchise or license applicable to the Company or its properties or assets (including, without limitation, any of the contracts of the Company set forth in the Company Schedules) or (c) subject to the governmental filings and other matters referred to in the following sentence, any statute, law, ordinance, rule or regulation or judgment, order or decree, in each case, applicable to the Company or its properties or assets, other than, in the case of clauses (b) and (c), any such conflicts, violations, defaults, rights, or Liens or other occurrences that individually or in the aggregate would not have a Material Adverse Effect (as defined in Section 9.2) on the Company. No consent, approval, order or authorization of, or registration, declaration or filing with, any Federal, state or local, domestic or foreign, government or any court, administrative agency or commission or other governmental authority or agency, domestic or foreign (a "Governmental Entity"), is required by or with respect to the Company in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the Merger or the other transactions contemplated by this Agreement, except for (a) the receipt of a valid exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), (b) the filing of the Certificate of Merger as required by the State Corporation Law and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business and
(c) such other consents, approvals, orders, authorizations, registrations, declarations and filings the failure of which to be obtained or made individually or in the aggregate would not have a Material Adverse Effect on the Company or impair the ability of the Company to perform its obligations under this Agreement.

3.5 Financial Statements; No Undisclosed Liabilities.

(a) The unaudited compiled balance sheet (the "Company Balance Sheet") of the Company as of September 30, 1999 (the "Balance Sheet Date") and the related profit and loss statement for the year ended September 30, 1999 (the "Company Financial Statements") are in accordance with the books and records of the Company and are complete and correct in all material respects, have each been prepared in accordance with GAAP (with the exception that no statement of cash flows or footnotes have been included) in conformity with the practices consistently applied by the Company throughout the periods involved and, to the best of the Company's and the Sole Shareholder's knowledge, present fairly the financial position and results of operations of the Company as of the dates and for the periods specified. True and complete copies of the Company Financial Statements have previously been supplied to Parent.

(b) As of the Balance Sheet Date, the Company did not have any indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise, and whether due or to become due or asserted or unasserted), which were not fully reflected in, reserved against or otherwise described in the Company Balance Sheet that would be required to be disclosed on a balance sheet prepared as of the Balance Sheet Date in conformity with GAAP applied on a basis consistent with the Company Financial Statements. Since the Balance Sheet Date, the Company has not incurred any indebtedness, obligations or liabilities of any kind (whether accrued,

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absolute, contingent or otherwise, and whether due or to become due or asserted or unasserted) that would be required to be disclosed on a balance sheet prepared as of the date hereof in conformity with GAAP applied on a basis consistent with the Company Financial Statements, other than those incurred in the ordinary course of business consistent with past practice, none of which would have a Material Adverse Effect on the Company.

3.6 Absence of Certain Changes or Events. Except as set forth in Section 3.6 of the Company Schedules, since the Balance Sheet Date and until the date hereof, the Company has conducted its business only in the ordinary course consistent with past practice, and there has not been (a) any Material Adverse Effect with respect to the Company, (b) any declaration, setting aside or payment of any dividend on, or other distribution (whether in cash, stock or property) with respect to any of the Company's capital stock, (c) any split, combination, reclassification or repurchase of any of the Company's capital stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of the Company's capital stock, (d) (i)any granting by the Company to any officer of the Company of any increase in compensation, except in the ordinary course of business consistent with past practice or as required under employment agreements in effect as of the date hereof, (ii) any granting by the Company to any officer of the Company of any increase in severance or termination pay, except as was required under any employment, severance or termination agreement in effect as of the date hereof, or (iii) any entry by the Company into (A) any currently effective employment, severance, termination or indemnification agreement, or consulting agreement (other than in the ordinary course of business consistent with past practice), with any current or former officer, director, employee or consultant or (B) any agreement with any current or former officer, director, employee or consultant the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving the Company of the nature contemplated by this Agreement,
(e) any damage, destruction or loss, whether or not covered by insurance, that individually or in the aggregate would exceed $25,000, (f) any change in accounting methods, principles or practices by the Company, except insofar as may have been required by a change in GAAP or (g) any tax election that individually or in the aggregate would have an adverse effect on the Company.

3.7 Litigation. There is no suit, claim, action, proceeding or investigation, pending or threatened, against or affecting the Company, nor is there any judgment, order, decree or injunction of any Governmental Entity or arbitrator outstanding against, or, to the best knowledge of the Company, investigation by any Governmental Entity involving, the Company.

3.8 Contracts. Except as set forth in Section 3.8 of the Company Schedules, as of the date hereof, the Company is not a party to, nor are any of their properties or assets bound by, any currently binding (i) contracts, licenses or agreements, with respect to any intellectual property with a value or cost in excess of $50,000, (ii) any employment or consulting agreement or contract (or commitment to enter into any such agreement or contract) with an employee or individual consultant or salesperson or consulting or sales agreement or contract (or commitment to enter into any such agreement or contract) with a firm or other organization in excess of $50,000 annually, (iii) any agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits

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of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement, (iv) any fidelity or surety bond or completion bond, (v) any lease of personal property having a value individually in excess of $50,000, (vi) any agreement of indemnification, agreement providing for reimbursement of payments or providing a right of rescission, hold harmless or guaranty, or any obligation or liability with respect to infringement of the intellectual property rights of another person, in excess of, or entered into in connection with a transaction in excess of, $50,000, (vii) any agreement, contract or commitment containing any covenant limiting the freedom of such party, any of its subsidiaries or the Surviving Corporation to engage in any line of business or to compete with any person, (viii) any agreement, contract or commitment relating to capital expenditures and involving future payments by such party or any of its subsidiaries in excess of $50,000 in one or in a series of transactions, (ix) any agreement, contract or commitment relating to the disposition or acquisition of assets or any interest in any business enterprise outside the ordinary course of business, (x) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit, (xi) any purchase order or contract for the purchase of materials involving in excess of $50,000, (xii) any construction contracts,
(xiii) contracts that relate to corporate governance, the voting or transfer of any equity securities of such party, the registration of any securities of such party under the Securities Act or that grants any redemption or preemptive rights or (xiv) any other agreement, contract or commitment that involves $50,000 or more or is not cancelable without penalty within thirty (30) days (collectively, the "Contracts"). The Company has delivered or otherwise made available to Parent true, correct and complete copies of the Contracts listed in
Section 3.8 of the Company Schedules, together with all amendments, modifications and supplements thereto and all side letters to which the Company is a party affecting the obligations of any party thereunder. The Company is not in violation of or in default (with or without notice or lapse of time, or both) under any lease, permit, concession, franchise, license or any other Contract, commitment, agreement, arrangement, obligation or understanding to which it is a party or by which it or any of its properties or assets is bound. As of the Closing, after giving effect to the Merger and the transactions contemplated hereby, the Surviving Corporation shall be entitled to all of the benefits under the agreements (as the same may be amended) set forth on Section 3.8 of the Company Schedules to which the Company is entitled on the date hereof.

3.9 Compliance With Laws. The Company is in compliance with all statutes, laws, ordinances, rules, regulations, judgments, orders and decrees of any Governmental Entity applicable to its business or operations, except for instances of possible noncompliance that individually or in the aggregate would not impair in any material respect the ability of the Company to perform its obligations under this Agreement or prevent or materially delay the consummation of any of the transactions contemplated by this Agreement. The Company has in effect all Federal, state and local, domestic and foreign, governmental consents, approvals, orders, authorizations, certificates, filings, notices, permits, franchises, licenses and rights (collectively "Permits") necessary for it to own, lease or operate its properties and assets and to carry on its business as now conducted and there has occurred no violation of, or default under, any such Permit.

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3.10 Absence of Changes in Benefit Plans; Employment Agreements; Labor
Relations. Since the Balance Sheet Date and until the date hereof, there has not been any termination, adoption, amendment or agreement to amend in any material respect by the Company any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock appreciation, restricted stock, stock option, phantom stock, performance, retirement, vacation, severance, disability, death benefit, hospitalization, medical or other material plan, arrangement or understanding providing benefits to any current or former officer, director or employee of such party or any of its subsidiaries (collectively, "Benefit Plans"). Except as set forth in Section 3.10 of the Company Schedules, as of the date hereof there exist no currently binding employment, severance or termination agreements or consulting agreements between the Company and any current or former officer of the Company. There are no collective bargaining or other labor union agreements to which the Company is a party or by which it is bound. The Company has not encountered any labor union organizing activity, nor had any actual or threatened employee strikes, work stoppages, slowdowns or lockouts.

3.11 ERISA Compliance.

(a) Section 3.11(a) of the Company Schedules contains a list of all "employee pension benefit plans" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) (sometimes referred to herein as "Pension Plans"), "employee welfare benefit plans" (as defined in Section 3(1) of ERISA) and all other Benefit Plans maintained or contributed to by the Company or any person or entity that, together with the Company, is treated as a single employer under Section 414(b), (c), (m) or (o) of the Code (a "Commonly Controlled Entity") for the benefit of any current or former officers, directors or employees of the Company. The Company has made available to Parent true, complete and correct copies of (i) each Benefit Plan (or, in the case of any unwritten Benefit Plans, descriptions thereof), (ii) the most recent annual report on Form 5500 required to be filed with the Internal Revenue Service (the "IRS") with respect to each Benefit Plan (if any such report was required), (iii) the most recent summary plan description for each Benefit Plan for which such summary plan description is required and (iv) each trust agreement and group annuity contract relating to any Benefit Plan. Each Benefit Plan has been administered in accordance with its terms. The Company and all the Benefit Plans are all in compliance with applicable provisions of ERISA and the Code.

(b) Each of the Pension Plans has been the subject of a determination letter (or its equivalent) from the IRS to the effect that such Pension Plan is qualified and exempt from United States Federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, and no such determination letter (or its equivalent) has been revoked nor has any event occurred since the date of its most recent determination letter (or its equivalent) or application therefor that would adversely affect its qualification or materially increase its costs.

(c) Neither the Company nor any Commonly Controlled Entity of the Company has maintained, contributed to or been obligated to contribute to any Benefit Plan that is subject to Title IV of ERISA.

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(d) No officer or employee of the Company will be entitled to any additional compensation or benefits or any acceleration of the time of payment or vesting of any compensation or benefits under any Benefit Plan as a result of the transactions contemplated by this Agreement or any benefits under any Benefits Plan the value of which will be calculated on the basis of any of the transactions contemplated by this Agreement.

3.12 Taxes.

(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or, collectively, "Taxes", means (i) any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts; (ii) any liability for the payment of any amounts of the type described in clause (i) as a result of being a member of an affiliated, consolidated, combined or unitary group for any period; and (iii) any liability for the payment of any amounts of the type described in clause (i) or (ii) as a result of any express or implied obligation to indemnify any other person or as a result of any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity.

(b) Tax Returns and Audits.

(i) The Company as of the Closing will have prepared and timely filed all required federal, state, local and foreign returns, estimates, information statements and reports ("Returns") relating to any and all Taxes concerning or attributable to the Company or its operations and such Returns are true and correct and have been completed in accordance with applicable law.

(ii) The Company as of the Closing (A) will have paid all Taxes it is required to pay and will have withheld with respect to its employees all federal and state income taxes, Federal Insurance Contribution Act ("FICA"), Federal Unemployment Tax Act ("FUTA") and other Taxes required to be withheld, and (B) will have accrued on the Current Balance Sheet all Taxes attributable to the periods covered by the Current Balance Sheet and will not have incurred any liability for Taxes for the period prior to the Closing other than in the ordinary course of business.

(iii) The Company has not been delinquent in the payment of any Tax, nor is there any Tax deficiency outstanding, assessed or proposed against the Company, nor has the Company executed any waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax.

(iv) No audit or other examination of any Return of the Company is presently in progress, nor has the Company been notified of any request for such an audit or other examination.

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(v) The Company has no liabilities for unpaid federal, state, local and foreign Taxes which have not been accrued or reserved against in accordance with GAAP on the Current Balance Sheet, whether asserted or unasserted, contingent or otherwise, and the Company has not incurred any liability for Taxes since the date of the Current Balance Sheet other than in the ordinary course of business.

(vi) The Company has made available to Parent or its legal counsel, copies of all foreign, federal, state and local income and all state and local sales and use Returns for the Company filed for all periods since its inception.

(vii) There are (and immediately following the Closing there will be) no liens, pledges, charges, claims, restrictions on transfer, mortgages, security interests or other encumbrances of any sort (collectively, "Tax Liens") on the assets of the Company relating to or attributable to Taxes other than Tax Liens for Taxes not yet due and payable.

(viii) Neither the Company nor any Shareholder has knowledge of any basis for the assertion of any claim relating or attributable to Taxes which, if adversely determined, would result in any Tax Lien on the assets of the Company.

(ix) None of the Company's assets is treated as "tax exempt use property," within the meaning of Section 168(h) of the Code.

(x) As of the Closing, there will not be any contract, agreement, plan or arrangement, including, but not limited to, the provisions of this Agreement, covering any employee or former employee of the Company that, individually or collectively, could give rise to the payment of any amount to such employee or former employee that would not be deductible by the Company as an expense under applicable law.

(xi) The Company has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(4) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by the Company.

(xii) The Company is not a party to any tax sharing, indemnification or allocation agreement nor does the Company owe any amount under any such agreement.

(xiii) The Company's tax basis in its assets for purposes of determining its future amortization, depreciation and other federal income Tax deductions is accurately reflected on the Company's tax books and records.

(xiv) The Company is not, and has not been at any time, a "United States Real Property Holding Corporation" within the meaning of Section 897(c)(2) of the Code.

(xv) No adjustment relating to any Return field by the Company has been proposed formally or informally by any tax authority to the Company or any representative thereof.

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(c) Executive Compensation Tax. There is no contract, agreement, plan or arrangement to which the Company is a party as of the dates hereof, including but not limited to the provisions of this Agreement, covering any employee or former employee of the Company, which, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Sections 280G, 404 or 162(m) of the Code.

(d) Subchapter C Corporation Status. The Company is, and at all times during its existence has been, an C Corporation under and within the meaning of the Code, and under all applicable state Tax laws and regulations.

3.13 No Excess Parachute Payments. No amount that could be received (whether in cash or property or the vesting of property) in connection with any of the transactions contemplated by this Agreement by any employee, officer or director of the Company who is a "disqualified individual" (as such term is defined in proposed Treasury Regulation Section 1.280G-1) under any employment, severance or termination agreement, other compensation arrangement or Benefit Plan currently in effect would be an "excess parachute payment" (as such term is defined in Section 280G(b)(1) of the Code). No such person is entitled to receive any additional payment from the Company, the Surviving Corporation or any other person (a "Parachute Gross-Up Payment") in the event that the excise tax of Section 4999(a) of the Code is imposed on such person. The Board of Directors of the Company has not granted to any officer, director or employee of the Company any right to receive any Parachute Gross-Up Payment.

3.14 Title to Properties.

(a) Except for those personal items of the Sole Shareholder set forth in Section 3.14 of the Company Schedules, the Company has good and marketable title to, or valid leasehold interests in, all of its properties and assets except for such as are no longer used or useful in the conduct of its business or as have been disposed of in the ordinary course of business. All such material assets and properties, other than assets and properties in which the Company has a leasehold interest, are free and clear of all Liens (other than Liens for current taxes not yet due and payable).

(b) The Company has complied in all material respects with the terms of all leases to which it is a party and under which it is in occupancy, all such leases are in full force and effect and have been made available to Parent. The Company enjoys peaceful and undisturbed possession under all such leases.

3.15 Intellectual Property.

(a) The Company owns, or has the right to use, sell or license all intellectual property necessary or required for the conduct of its business as presently conducted and as presently contemplated (such intellectual property and the rights thereto are collectively referred to as the "Company IP Rights").

(b) Section 3.15 of the Company Schedules sets forth with respect to the intellectual property of the Company: (i) for each patent and patent application, the number, normal

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expiration date, title and priority information for each country in which such patent has been issued, or, the application number, date of filing, title and priority information for each country, (ii) for each trademark, trade name or service mark, whether or not registered, the date first used, and, if registered, the application serial number or registration number, the class of goods covered, the nature of the goods or services, the countries in which the names or mark is used and the expiration date for each country in which a trademark has been registered and (iii) for each copyright for which registration has been sought, whether or not registered, the date of creation and first publication of the work, the number and date of registration for each country in which a copyright application has been registered.

(c) The Company has taken all reasonable steps necessary or appropriate (including, entering into appropriate confidentiality, nondisclosure agreements with officers, directors, subcontractors, independent contractors, full-time and part-time employees, licensees and customers) to safeguard and maintain the secrecy and confidentiality of, and the proprietary rights in, the Company IP Rights.

(d) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not constitute a breach of any instrument or agreement governing any Company IP Right (the "Company IP Rights Agreements"), will not cause the forfeiture or termination or give rise to a right of forfeiture or termination of any Company IP Right or impair the right of the Company, the Surviving Corporation or Parent to use, sell or license any Company IP Right or portion thereof.

(e) (i) Neither the manufacture, marketing, license, sale or intended use of any product or technology currently licensed or sold by the Company violates any license or agreement between the Company and any third party or infringes any proprietary right of any other party; and (ii) there is no pending or, to the best knowledge of the Company, threatened claim or litigation contesting the validity, ownership or right to use, sell, license or dispose of any Company IP Right or operate the Company's Web service.

3.16 Year 2000 Compliance.

(a) All of the current or past products and services offered by the Company, including each item of hardware, software, or firmware, any system, equipment, or products consisting of or containing one or more thereof, any and all enhancements, upgrades, customizations, modifications, maintenance and the like are Year 2000 Compliant (as defined below). The Company is not subject to any pending or threatened claim, regulatory action, processing or investigation concerning the Year 2000 Compliance of its respective products, services or operations, and, to the best knowledge of the Company, there is no basis for any such claim, regulatory action, investigation or proceeding. To the best knowledge of the Company, all of the internal management information systems (including hardware, firmware, operating system software, utilities, and applications software) and all facilities and systems used in the ordinary course of business by or on behalf of the Company, including payroll, accounting, billing/receivables, customer service, human resources, and e-mail systems used by the Company, are Year 2000 Compliant. To the best of the Company's knowledge, all vendors of products or

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services to the Company, and its respective products, services and operations, are Year 2000 Compliant, and each such vendor will continue to furnish its products or services to the Company, without interruption or material delay, on and after January 1, 2000.

(b) For purposes of this Agreement, "Year 2000 Compliant" means that
(i) the products, services, or other items (s) at issue accurately process, provide and/or receive all date/time data (including calculating, comparing, and sequencing) within, from, into, and between centuries (including the twentieth and twenty-first centuries and the years 1999 and 2000), including leap year calculations, and (ii) neither the performance nor the functionality nor the Company's provision of the products, services, and other item (s) at issue will be affected by any dates/times prior to, on, after, or spanning January 1, 2000. The design of the products, services, and other item (s) at issue includes proper date/time data century recognition and recognition of 1999 and 2000, calculations that accommodate single century and multi-century formulae and date/time values before, on, after spanning January 1, 2000, and date/time data interface values that reflect the century, 1999, and 2000.

3.17 Voting Requirements. The affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock are the only votes of the holders of any capital stock of the Company necessary to approve and adopt this Agreement and approve the Merger.

3.18 Payments. Neither the Company nor any of its representatives acting on its behalf have, directly or indirectly, paid or delivered any fee, commission or other sum of money or property, however characterized, to any finder, agent, government official or other party, in the U.S. or any other country which the Company knows or has reason to believe to have been illegal under any federal, state or local laws of the U.S. or any other country having jurisdiction. Neither the Company nor any of its representatives acting on its behalf, have accepted or received any unlawful contributions, payments, gifts or expenditures.

3.19 Transactions with Related Parties. Except for compensation arrangements in the ordinary course of business, as disclosed on Section 3.19 of the Company Schedules or for amounts less than $10,000, no Related Party (as defined below) of the Company has (a) borrowed or loaned money or other property to the Company which has not been repaid or returned, (b) any currently enforceable contractual or other claims, express or implied, of any kind whatsoever against the Company or (c) has or had any material economic interest in any property currently used by the Company or any subsidiary thereof. For purposes of this Agreement, (i) "Related Party" means as to any person, any of such person's officers and directors, any Affiliate thereof or the respective officers and directors of any such Affiliate, or any other person in which any of the foregoing persons have any direct or material indirect interest, (ii) "Affiliate" of a person means any other person which directly or indirectly controls, is controlled by, or is under common control with, such person and
(iii) "control" (including, with correlative meaning, the terms "controlled by" and "under common control with"), as used with respect to any person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities, by contract or otherwise.

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3.20 Restrictions on Business Activities. There is no agreement (noncompete, grant of exclusivity or otherwise), commitment, judgment, injunction, order or decree to which the Company is a party or otherwise binding upon the Company which has or reasonably could be expected to have the effect of prohibiting or impairing any business practice of the Company, any acquisition of property (tangible or intangible) by the Company or the conduct of business by the Company.

3.21 Accounts Receivable; Inventory.

(a) The Company has made available to Parent a list of all accounts receivable of the Company reflected on the Balance Sheet ("Accounts Receivable") along with a range of days elapsed since invoice.

(b) All Accounts Receivable of the Company are collectible except to the extent of reserves therefor set forth in the Balance Sheet. No person has any Lien on any of such Accounts Receivable and no request or agreement for deduction or discount has been made with respect to any of such Accounts Receivable.

(c) All of the inventories of the Company reflected on the Balance Sheet and the Company's books and records on the date of this Agreement were purchased, acquired or produced in the ordinary and regular course of business and in a manner consistent with the Company's regular inventory practices and are set forth on the Company's books and records in accordance with the practices and principles of the Company consistent with the method of treating said items in prior periods.

3.22 Minute Books. The minute books of the Company made available to counsel for Parent are the only minute books of the Company and contain an accurate summary of all meetings of directors (or committees thereof) and shareholders or actions by written consent since the date of incorporation of the Company.

3.23 Environmental Matters.

(a) Except as set forth in Section 3.23 of the Company Schedules, to the best knowledge of the Company, no underground storage tanks and no amount of any substance that has been designated by any Governmental Entity or by applicable federal, state, local or other applicable law to be radioactive, toxic, hazardous or otherwise a danger to health or the environment, including, without limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all substances listed as hazardous substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or defined as a hazardous waste pursuant to the United States Resource Conservation and Recovery Act of 1976, as amended, and the regulations promulgated pursuant to said laws, but excluding office and janitorial supplies properly and safely maintained (a "Hazardous Material"), are present in, on or under any property, including the land and the improvements, ground water and surface water thereof, that the Company has at any time owned, operated, occupied or leased.

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(b) The Company has not transported, stored, used, manufactured, disposed of, released or exposed its employees or others to Hazardous Materials in violation of any law in effect on or before the Closing, nor has the Company disposed of, transported, sold, or manufactured any product containing a Hazardous Material (collectively, "Company Hazardous Materials Activities") in violation of any rule, regulation, treaty or statute promulgated by any Governmental Entity in effect prior to or as of the date hereof to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity.

(c) To the best knowledge of the Company, the Company currently holds all environmental approvals, permits, licenses, clearances and consents (the "Environmental Permits") necessary for the conduct of the Company's Hazardous Material Activities and other business of the Company as such activities and business are currently being conducted. All Environmental Permits are in full force and effect. The Company (A) is in compliance with all material terms and conditions of the Environmental Permits and (B) is in compliance in all material respects with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the laws of all Governmental Entities relating to pollution or protection of the environment or contained in any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder.

(d) No action, proceeding, revocation proceeding, amendment procedure, writ, injunction or claim is pending, or to the best knowledge of the Company, threatened, concerning any Environmental Permit, Hazardous Material or any Company Hazardous Materials Activity. The Company is not aware of any fact or circumstance which could involve the Company in any environmental litigation or impose upon the Company any material environmental liability.

3.24 Insurance. Section 3.24 of the Company Schedules lists all insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of the Company. There is no claim by the Company pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and the Company is otherwise in material compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). The Company has not received any notice that the insurers intend to terminate or materially increase the premiums payable under any of such policies.

3.25 Warranties; Indemnities. Section 3.25 of the Company Schedules sets forth a list of all agreements containing warranties and indemnities relating to products sold or services rendered by the Company, and no warranty or indemnity has been given by the Company which differs therefrom in any material respect.
Section 3.25 of the Company Schedules also indicates all warranty and indemnity claims in excess of $5,000 made against the Company.

3.26 Representations Complete. None of the representations or warranties made by the Company, nor any document, written information, statement, financial statement, certificate, schedule or exhibit prepared or furnished by the Company or its representatives pursuant to this Agreement or in connection with the transactions contemplated hereby contains or will contain at the

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Effective Time, any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. To the best knowledge of the Company, there is no event, fact or condition that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect that has not been set forth in this Agreement or in the Company Schedules.

SECTION 4

REPRESENTATIONS AND WARRANTIES OF PARENT

Except as disclosed in writing in a disclosure letter referring specifically to the representations and warranties in this Agreement that specifically identifies the section and subsection to which such disclosure relates and that is delivered to the Company by Parent certified by a duly authorized officer of Parent prior to the date of this Agreement, Parent represents and warrants to the Company as follows:

4.1 Organization, Standing and Corporate Power. Parent is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite corporate power and authority to carry on its business as now being conducted. Parent is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed or be in good standing individually or in the aggregate would not have a Material Adverse Effect on Parent.

4.2 Authority/Noncontravention. Parent has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by the Company and the consummation by Parent of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of each of Parent and no other corporate proceedings on the part of each of Parent are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of Parent and constitutes valid and binding obligations of Parent, enforceable against in accordance with its terms. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Parent in connection with the execution and delivery of this Agreement by Parent or the consummation by Parent of the Merger or the other transactions contemplated by this Agreement, except for (a) the receipt of a valid exemption from the registration requirements of the Securities Act and (b) the filing of the Certificate of Merger as required by the State Corporation Law and appropriate documents with the relevant authorities of other states in which Parent is qualified to do business.

4.3 SEC Documents; Parent Financial Statements. Parent has furnished or made available to the Company a true and complete copy of its Registration Statement on Form S-1 dated July 19, 1999 and its Quarterly Reports on Form 10-Q for the periods ending June 30, 1999 and

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September 30, 1999 (collectively, the "SEC Documents") which Parent filed under the Securities Act with the Securities and Exchange Commission (the "SEC"). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. The financial statements of Parent, including the notes thereto, included in the SEC Documents (the "Parent Financial Statements") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP consistently applied (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by applicable rules and regulations of the SEC) and fairly present the consolidated financial position of Parent at the dates thereof and of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring audit adjustments). There has been no change in Parent accounting policies except as described in the notes to the Parent Financial Statements. Parent has no material obligations other than (i) those set forth in the Parent Financial Statements and (ii) those not required to be set forth in the Parent Financial Statements under generally accepted accounting principles.

4.4 Parent Common Stock. The shares of Parent Common Stock, when issued in the Merger in compliance with this Agreement, will be validly issued, fully paid and nonassessable. Such shares will be issued in compliance with applicable state and federal securities laws.

SECTION 5

COVENANTS

5.1 Conduct of Business of the Company. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, the Company shall carry on its business in the usual, regular and ordinary course in substantially the same manner as conducted prior to the date of this Agreement and, to the extent consistent with such business, use all commercially reasonable efforts consistent with past practice and policies to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve its relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, with the objective that its goodwill and ongoing business shall be unimpaired at the Effective Time. The Company shall promptly notify Parent of any event or occurrence not in the ordinary course of business of the Company. Except as expressly contemplated by this Agreement or disclosed in the Company Schedules, the Company shall not, without the prior written consent of Parent:

(a) Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock, or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or repurchase or otherwise acquire, directly or indirectly, any shares of its capital stock;

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(b) Issue, deliver or sell, authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities or authorize or propose any change in its equity capitalization;

(c) Solicit approval for or effect any amendments to the Company's Articles of Incorporation or Bylaws;

(d) Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the Company;

(e) Sell, lease, license, pledge or otherwise dispose of or encumber any of its properties or assets except in the ordinary course of business consistent with past practice (including without limitation any indebtedness owed to it or any claims held by it);

(f) Except in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or guarantee, endorse or otherwise become responsible for the obligations of others, or make loans or advances;

(g) Pay, discharge or satisfy in an amount in excess of $10,000 in any one case any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business consistent with past practice of liabilities reflected or reserved against in the Company's Financial Statements or those incurred after the Balance Sheet in the ordinary course of business;

(h) Adopt or amend any employee benefit or employee stock purchase or employee option plan, or enter into any employment contract, pay any special bonus or special remuneration to any director or employee, or increase the salaries or wage rates of its officers or employees other than in the ordinary course of business, consistent with past practice, or change in any material respect any management policies or procedures;

(i) Commence a lawsuit other than for the routine collection of bills;

(j) Transfer or license to any person or entity or otherwise extend, amend or modify in any material respect any rights to the Company IP Rights or enter into grants to future patent rights, other than in the ordinary course of business;

(k) Except in the ordinary course of business with prior notice to Parent, violate, amend or otherwise modify the terms of any of the Company's contracts binding on the Company as set forth in Section 3.8 of the Company Schedules;

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(l) Revalue any of its assets, including without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business and consistent with past practice;

(m) Make any material tax election other than in the ordinary course of business and consistent with past practice, change any material tax election, adopt any material tax accounting method other than in the ordinary course of business and consistent with past practice, change any material tax accounting method, file any material tax return (other than any estimated tax returns, payroll tax returns or sale tax returns) or any amendment to a material tax return, enter into any closing agreement, settle any tax claim or assessment, or consent to any tax claim or assessment, without the prior written consent of Parent, which consent will not be reasonably withheld;

(n) Engage in any activities or transactions that are outside the ordinary course of its business consistent with past practice;

(o) Fail to pay or otherwise satisfy its monetary obligations as they become due, except such as are being contested in good faith; or waive or commit to waive any rights of substantial value; or cancel, materially amend or renew any insurance policy; or

(p) Take, or agree (in writing or otherwise) to take, any of the actions described in Sections 5.1(a) through (o) above, or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue or incorrect or result in any of the conditions to the Merger set forth in Section 6 not being satisfied.

5.2 No Solicitation. Until the earlier of the Effective Time or the termination of this Agreement pursuant to the provisions of Section 8.1, neither the Company nor the Sole shareholder will (nor will the Company permit any of the Company's officers, directors, agents, representatives or affiliates to) directly or indirectly, take any of the following actions with any party other than Parent and its designees: (a) solicit, conduct discussions with or engage in negotiations with any person or take any other action intended or designed to facilitate the efforts of any person, other than Parent, relating to the possible acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any portion of its capital stock or assets, (b) provide information with respect to it to any person, other than Parent, relating to the possible acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any portion of its or their capital stock or assets, (c) enter into an agreement with any person, other than Parent, providing for the acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any portion of its capital stock or assets or (d) make or authorize any statement, recommendation or solicitation in support of any possible acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any portion of its capital stock or assets by any person, other than by Parent. In addition to the foregoing, if the Company or the Sole shareholder receives any unsolicited bona fide offer or proposal relating to any of the above, the Company or the Sole shareholder (as the case may be) shall immediately notify Parent thereof, including information as to the identity of the offeror or the party making any such offer or proposal and the specific terms of such offer or proposal, as the case may be.

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5.3 Shareholder Approval. The Sole Shareholder agrees to vote in favor of the Merger, this Agreement and the transactions contemplated hereby, and agrees to take all actions and execute all documents necessary to effect the foregoing.

5.4 Access to Information. Upon reasonable notice, the Company shall afford Parent and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to (a) all of the Company's properties, books, contracts, commitments and records, and (b) all other information concerning the business, properties and personnel (subject to restrictions imposed by applicable law) of the Company as Parent may reasonably request, including without limitation access upon reasonable request to the Company's employees, customers and vendors for due diligence inquiry. The Company agrees to provide to Parent and its accountants, counsel and other representatives copies of internal financial statements, business plans and projections promptly upon request. No information or knowledge obtained in any investigation pursuant to this Section 5.4 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Merger.

5.5 Confidentiality. Each of the parties agrees to keep such information or knowledge obtained in any investigation pursuant to Section 5.4, or pursuant to the negotiation and execution of this Agreement or the effectuation of the transactions contemplated hereby, confidential pursuant to a mutual Nondisclosure Agreement dated as of January 3, 2000 by and between Parent and the Company (the "Confidentiality Agreement").

5.6 Expenses. Whether or not the Merger is consummated, all reasonable and customary fees and expenses incurred in connection with the Merger including, without limitation, all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties incurred by a party in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby, shall be the obligation of the respective party incurring such fees and expenses. Such fees and expenses of the Company and the Sole Shareholder shall be incurred entirely by the Company, and after the Merger shall be paid for by the Sole Shareholder.

5.7 Public Disclosure. Unless otherwise required by law, prior to the Effective Time, no disclosure (whether or not in response to an inquiry) of the subject matter of this Agreement shall be made by any party hereto unless approved by Parent and the Company prior to release, provided that such approval shall not be unreasonably withheld, subject, in the case of Parent, to Parent's obligation to comply with applicable securities laws.

5.8 Consents. Each of Parent and the Company shall promptly apply for or otherwise seek, and use its reasonable efforts to obtain, all consents and approvals required to be obtained by it for the consummation of the Merger, and the Company shall use all reasonable efforts to obtain all consents, waivers and approvals under any of the Company's agreements, contracts, licenses or leases in order to preserve the benefits thereunder for the Surviving Corporation and otherwise in connection with the Merger. All of such Company consents and approvals are set forth in Section 5.8 of the Company Schedules.

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5.9 FIRPTA Compliance. On the Closing Date, the Company shall deliver to Parent a properly executed statement in a form reasonably acceptable to Parent for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).

5.10 Reasonable Efforts. Subject to the terms and conditions provided in this Agreement, each of the parties hereto shall use all reasonable efforts to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby to obtain all necessary waivers, consents and approvals and to effect all necessary registrations and filings and to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated by this Agreement for the purpose of securing to the parties hereto the benefits contemplated by this Agreement; provided that Parent shall not be required to agree to any divestiture by Parent or the Company or any of Parent's subsidiaries or affiliates of shares of capital stock or of any business, assets or property of Parent or its subsidiaries or affiliates or the Company or its affiliates, or the imposition of any material limitation on the ability of any of them to conduct their businesses or to own or exercise control of such assets, properties and stock.

5.11 Notification of Certain Matters. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of (i) the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which may cause any representation or warranty of the Company and Parent, respectively, contained in this Agreement to be untrue or inaccurate in any material respect at or prior to the Effective Time and (ii) any failure of the Company or Parent, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.11 shall not limit or otherwise affect any remedies available to the party receiving such notice.

5.12 Blue Sky Laws. Parent shall take such steps as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of Parent Common Stock pursuant hereto. The Company shall use its best efforts to assist Parent as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable in connection with the issuance of Parent Common Stock pursuant hereto.

5.13 Noncompetition and Employment Agreements. Prior to the Effective Time
(a) Parent and the Sole Shareholder shall enter into a noncompetition agreement substantially in the form attached as Exhibit B (the "Noncompetition Agreement") and (b) the Sole Shareholder shall enter into an employment agreement with Parent in a form satisfactory to the parties thereto (the "Employment Agreement"). The Noncompetition Agreement and the Employment Agreement shall become effective as of the Effective Time.

5.14 Investment Representation Agreements. All of the holders of outstanding shares of capital stock of the Company shall execute and deliver to Parent Investment Representation Agreements in the form attached as Exhibit C.

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SECTION 6

CONDITIONS TO THE MERGER

6.1 Conditions to the Obligations of Parent and Sub. The obligations of Parent to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, exclusively by Parent:

(a) Shareholder Approval. This Agreement, the agreements contemplated hereunder and the Merger and other transactions contemplated hereby and thereby shall have been approved and adopted by the affirmative vote or consent of the Sole Shareholder, in compliance with applicable law and the Company's Articles of Incorporation and Bylaws.

(b) Representations, Warranties and Covenants. The representations and warranties of the Company and the Sole Shareholder in this Agreement shall be true and correct on and as of the date of this Agreement and as of the Closing Date as though such representations and warranties were made on and as of such time and the Company and the Sole Shareholder shall have performed and complied with all covenants, obligations and conditions of this Agreement required to be performed and complied with by each of them as of the Closing Date. Parent shall have been provided with a certificate dated as of the Closing Date executed on behalf of the Company by its Chief Executive Officer and Chief Financial Officer to such effect.

(c) Legal Opinion. Parent shall have received a legal opinion from Foss Bowe San Filippo & Caruso, LLC, legal counsel to the Company, substantially in the form of Exhibit D.

(d) No Injunctions or Restraints on Conduct of Business. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or provision challenging Parent's proposed acquisition of the Company, or limiting or restricting Parent's conduct or operation of the business of the Company (or its own business) following the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending.

(e) Litigation. There shall be no action, suit, claim or proceeding of any nature pending, or overtly threatened, against Parent or the Company, their respective properties or any of their officers or directors, arising out of, or in any way connected with, the Merger or the other transactions contemplated by the terms of this Agreement, or that could materially and adversely affect the business, assets, liabilities, financial condition, results of operations or prospects of the Company.

(f) Due Diligence. Parent shall be satisfied with the results of its due diligence review of the Company.

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(g) Investment Representations. Parent shall have received from the Sole Shareholder an executed Investment Representation Agreement which shall be in full force and effect.

(h) Employment Agreement; Employment Generally. The Employment Agreement shall have been executed and delivered by the parties thereto, Parent shall have received reasonable assurances from Jennifer Dale, which assurances are satisfactory to Parent, that Ms. Dale will continue her employment with Parent, and all officers of the Company shall have resigned from their respective positions.

(i) Escrow Agreement. The Escrow Agreement shall have been duly executed and delivered by the parties thereto.

(j) Noncompetition Agreement. The Noncompetition Agreement shall have been duly executed and delivered by the parties thereto.

(k) Confidentiality Agreement. The Confidentiality Agreement shall have been duly executed and delivered by the Sole Shareholder.

(l) Vesting of Stock Options or Warrants. There shall be no acceleration of vesting of stock options or warrants as a result of the Merger except upon the termination without cause of the Sole Shareholder by Parent or the death or disability of the Sole Shareholder.

(m) Financial Condition. Parent shall be satisfied that the liabilities of the Company as of the date hereof do not exceed the liabilities set forth on the Company Balance Sheet as of September 30, 1999, except as set forth in the Company Schedules.

(n) Securities Law Compliance. Parent shall have received from Sole Shareholder an executed investment representation statement and completed questionnaire in form and substance satisfactory to Parent that the issuance of the shares of Parent Common Stock pursuant to the Merger is exempt from the registration requirements of the Securities Act and is exempt from registration under applicable state securities laws.

(o) Board of Directors' Approval. The Board of Directors of Parent shall have approved the Merger.

6.2 Additional Conditions to Obligations of Company. The obligations of the Company to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, exclusively by the Company:

(a) Representations, Warranties and Covenants. The representations and warranties of Parent in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and as of the Closing Date as though such representations and warranties were made on and as of such time and each of Parent shall have performed and complied with all

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covenants, obligations and conditions of this Agreement required to be performed and complied with by it as of the Closing Date. The Company shall have been provided with a certificate dated as of the Closing Date and executed on behalf of Parent by an executive officer of Parent to such effect.

(b) Registration Rights Agreement. The Registration Rights Agreement in the form of Exhibit E shall have been executed and delivered by Parent.

(c) Employment Agreement. The Employment Agreement shall have been executed and delivered by the parties thereto.

SECTION 7

INDEMNIFICATION

7.1 General Indemnification. The Sole Shareholder covenants and agrees to indemnify, defend, protect and hold harmless Parent and the Surviving Corporation and their respective officers, directors, employees, shareholders, assigns, successors and affiliates (individually, an "Indemnified Party" and collectively, "Indemnified Parties") from, against and in respect of:

(a) all liabilities, losses, claims, damages, punitive damages, courses of actions, lawsuits, administrative proceedings (including informal proceedings), investigations, audits, demands, assessments, adjustments, judgments, settlement payments, deficiencies, penalties, fines, interest (including interest from the date of such damages) and costs and expenses (including without limitation reasonable attorneys' fees and disbursements of every kind, nature and description) (collectively, "Damages") suffered, sustained or incurred by the Indemnified Persons in connection with, resulting from or arising out of, directly or indirectly:

(i) any breach of any representation or warranty of the Company or the Sole Shareholder set forth in this Agreement or any certificate, document or instrument delivered by or on behalf of the Company or the Sole Shareholder in connection herewith;

(ii) any nonfulfillment of any covenant or agreement on the part of the Company or the Sole Shareholder in this Agreement;

(iii) the business, operations or assets of the Company prior to the Closing Date, including without limitation all taxes due and payable prior to the Closing Date, except as otherwise disclosed in the Company Financial Statements or the Company Schedules; or

(iv) the actions or omissions of the Company's directors, officers, shareholders, employees or agents prior to the Closing Date; and

(b) any and all Damages incident to any of the foregoing or to the enforcement of this Section 7.1.

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7.2 Limitation and Expiration. Notwithstanding the above:

(a) There shall be no liability for indemnification under Section 7.1 unless the aggregate amount of Damages exceeds $25,000 (the "Indemnification Threshold"), in which event the liability for indemnification will apply to the entire aggregate amount of Damages. For purposes of satisfying indemnification obligations pursuant to Section 7.1, the Pledged Shares shall be valued at $12.375 per share (subject to adjustment for stock splits, recapitalizations and the like).

(b) From and after the Effective Date, the Escrow Fund (as defined in
Section 7.3) shall be Parent's and the other Indemnified Parties' exclusive remedy for any breach of a representation, warranty or covenant made by the Company or the Sole Shareholder in this Agreement (except in the case of (i) fraud, (ii) willful misrepresentation or (iii) willful failure to disclose in breach of this Agreement).

(c) The indemnification obligations under this Section 7 shall terminate as follows:

(i) with respect to claims or demands (a "Claim") relating to a breach of the representations and warranties set forth in Section 3.12 (Taxes) and 3.23 (Environmental Matters) or fraud or willful misconduct, upon the later of the expiration of the applicable statute of limitations period or the final resolution of any and all such Claims pending as of such date; and

(ii) with respect to all other Claims for indemnification under this Section 7, upon the later of the second anniversary of the Closing Date or the final resolution of any such claims pending as of the second anniversary.

The term "Indemnification Deadline Date" refers to the expiration date of the applicable statute of limitations period with respect to Claims under clause
(i) above and the second anniversary with respect to claims under clause (ii) above. The term "Pending Claims" refers to the pending claims described in clauses (i) and (ii) above. From and after the applicable Indemnification Deadline Date, the indemnification obligations under this Section 7 shall survive only to the extent of Pending Claims and all remaining Supplemental Cash as provided in Section 7.4(h), Pledged Shares and other property in the Escrow Fund (except as otherwise provided in the Escrow Agreement) shall be released to the Sole Shareholder pursuant to the terms of the Escrow Agreement.

7.3 Escrow Fund. The deposit of the Pledged Shares and Supplemental Cash (collectively, the "Escrow Amount") pursuant to Section 2.1(c)(ii), together with all interest accruing thereon, shall constitute the "Escrow Fund" and shall be governed by the terms set forth in this Agreement and in the Escrow Agreement. The Escrow Fund shall be available to satisfy the indemnification obligations to Indemnified Persons pursuant to the terms of this Section 7.

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7.4 Indemnification Procedures. All Claims for indemnification under this Section 7 shall be asserted and resolved as follows:

(a) In the event the Indemnified Party has a Claim hereunder which does not involve a Claim being asserted against or sought to be collected by a third party, the Indemnified Party shall with reasonable promptness send a Claim Notice (as defined in Section 7.4(c) below) with respect to such Claim to the Sole Shareholder. If the Sole Shareholder does not notify the Indemnified Party within 45 days from the date of receipt of such Claim Notice that the Sole Shareholder disputes such Claim, the amount of such Claim shall be conclusively deemed a liability of the Sole Shareholder hereunder. In case the Sole Shareholder shall object in writing to any Claim made in accordance with this
Section 7.4(a), the Indemnified Party shall have fifteen (15) days to respond in a written statement to the objection of the Sole Shareholder. If after such fifteen (15) day period there remains a dispute as to any Claims, the parties shall attempt in good faith for sixty (60) days to agree upon the rights of the respective parties with respect to each of such Claims. If the parties should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties. If no such agreement can be reached after good faith negotiation, either party may demand arbitration of the matter unless the amount of the damage or loss is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and in either such event the matter shall be settled by arbitration conducted by three arbitrators. Parent and the Sole Shareholder shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator, each of which arbitrators shall be independent and have at least ten years relevant experience. The arbitrators shall set a limited time period and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrators, to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrators shall rule upon motions to compel or limit discovery and shall have the authority to impose sanctions, including attorneys fees and costs, to the extent as a court of competent law or equity, should the arbitrators determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification. The decision of a majority of the three arbitrators as to the validity and amount of any Claim in such Claim Notice shall be binding and conclusive upon the parties to this Agreement. Such decision shall be written and shall be supported by written findings of fact and conclusions which shall set forth the award, judgment, decree or order awarded by the arbitrators.

(b) Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Santa Clara County, California under the rules then in effect of the American Arbitration Association. For purposes of this Section 7.4, in any arbitration hereunder in which any claim or the amount thereof stated in the Claim Notice is at issue, the Indemnified Party shall be deemed to be the Non-Prevailing Party in the event that the arbitrators award such Indemnified Party less than the sum of one-half (1/2) of the disputed amount plus any amounts not in dispute; otherwise, the Indemnifying Party shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative costs of the arbitration, and the expenses, including without limitation, reasonable attorneys' fees and costs, incurred by the other party to the arbitration.

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(c) In the event that any Claim for which the Sole Shareholder would be liable to an Indemnified Party hereunder is asserted against an Indemnified Party by a third party, the Indemnified Party shall with reasonable promptness notify the Sole Shareholder of such Claim, including a copy of the Claim made if the Claim was made in writing, specifying the nature of such claim and the amount or the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such Claim) (the "Claim Notice"). The Sole Shareholder shall have 30 days from the receipt of the Claim Notice (the "Notice Period") to notify the Indemnified Party (i) whether or not the Sole Shareholder disputes her liability to the Indemnified Party hereunder with respect to such Claim and (ii) if the Sole Shareholder does not dispute such liability, whether or not the Sole Shareholder desires, at her sole cost and expense, to defend against such Claim, provided that the Sole Shareholder is hereby authorized (but not obligated) prior to and during the Notice Period to file any motion, answer or other pleading and to take any other action which the Sole Shareholder shall deem necessary or appropriate to protect her interests. In the event that the Sole Shareholder notifies the Indemnified Party within the Notice Period that the Sole Shareholder does not dispute her obligation to indemnify hereunder and desires to defend the Indemnified Party against such Claim and except as hereinafter provided, the Sole Shareholder shall have the right to defend by appropriate proceedings, which proceedings shall be diligently settled or prosecuted by the Sole Shareholder to a final conclusion; provided that, unless the Indemnified Party otherwise agrees in writing, the Sole Shareholder may not settle any matter (in whole or in part) unless such settlement includes a complete and unconditional release of the Indemnified Party. If the Indemnified Party desires to participate in, but not control, any such defense or settlement the Indemnified Party may do so at the Indemnified Party's sole cost and expense. If the Sole Shareholder elects not to defend the Indemnified Party against such Claim, whether by failure of the Sole Shareholder to give the Indemnified Party timely notice as provided above or otherwise, then the Indemnified Party, without waiving any rights against the Sole Shareholder, may settle or defend against any such Claim in the Indemnified Party's sole discretion and the Indemnified Party shall be entitled to recover from the Sole Shareholder the amount of any settlement or judgment and, on an ongoing basis, all indemnifiable costs and expenses of the Indemnified Party with respect thereto, including interest from the date such costs and expenses were incurred.

(d) Notwithstanding Section 7.4(b) above, the Indemnified Party shall have the right to control or assume (as the case may be) the defense of any Claim and the amount of any judgment or settlement and the reasonable costs and expenses of defense shall be included as part of the indemnification obligations of the Sole Shareholder hereunder if any Claim seeks material prospective relief which, in the reasonable opinion of the Indemnified Party, could have a material adverse effect on the assets, liabilities, financial condition, results of operations or business prospects of Parent and the Indemnified Party shall have given the Sole Shareholder written notice of the same. If the Indemnified Party should elect to exercise such right, the Sole Shareholder shall have the right to participate in, but not control, the defense of such claim or demand at the sole cost and expense of the Sole Shareholder. Notwithstanding the foregoing, the Indemnified Party shall not settle any Claim without the written consent of the Sole Shareholder, which consent shall not be unreasonably withheld.

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(e) Nothing herein shall be deemed to prevent the Indemnified Party from making a Claim, and an Indemnified Party may make a Claim hereunder, for potential or contingent claims or demands provided the Claim Notice sets forth the specific basis for any such potential or contingent claim or demand to the extent then feasible and the Indemnified Party has reasonable grounds to believe that such a claim or demand may be made.

(f) The Indemnified Party's failure to give reasonably prompt notice to the Sole Shareholder of any actual, threatened or possible claim or demand which may give rise to a right of indemnification hereunder shall not relieve the Sole Shareholder of any liability which she may have to the Indemnified Party unless the failure to give such notice materially and adversely prejudices the Sole Shareholder.

(g) The parties will make appropriate adjustments for any tax benefits, tax detriments or insurance proceeds in determining the amount of any indemnification obligation under Section 7, provided that the Sole Shareholder shall not be obligated to seek any payment pursuant to the terms of any insurance policy.

(h) The Supplemental Cash and Pledged Shares shall be available to satisfy the indemnification obligations of the Sole Shareholder pursuant to this
Section 7 through the second anniversary of this Agreement; provided, however, that in the event that any Pending Claims are outstanding as of such date, an amount of Pledged Shares and Supplemental Cash equal to 125% of such Pending Claims shall remain available to satisfy such Pending Claims until the resolution of such Pending Claims (the "Escrow Amount Expiration Date"). As soon as reasonably practicable following the Escrow Amount Expiration Date, Parent shall distribute all Supplemental Cash and Pledged Shares not required to satisfy indemnification obligations under this Section 7 to the Sole Shareholder. The Pledged Shares shall bear a restrictive legend preventing their transfer pending expiration of such indemnification obligations in substantially the form set forth below:

"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN PLEDGED AS COLLATERAL PURSUANT TO THAT CERTAIN AGREEMENT AND PLAN OF REORGANIZATION DATED JANUARY 3, 2000 BY AND AMONG TALK CITY, INC., RESEARCH CONNECTIONS, INC. AND AMY J. YOFFIE. PRIOR TO THE EXPIRATION OF THE PLEDGE AS SET FORTH IN SUCH AGREEMENT, SUCH SHARES MAY NOT BE OFFERED, SOLD, EXCHANGED, TRANSFERRED OR OTHERWISE DISPOSED OF."

Within three (3) business days following the Indemnification Deadline Date, Parent shall use its reasonable commercial efforts to remove any stop transfer orders made to its transfer agent, shall authorize the transfer agent to remove the restrictive legend relating to the obligations of this Section 7 and shall release the number of Pledged Shares referred to above in this clause (h). Upon final resolution of all Pending Claims, Parent shall remove any stop transfer orders made to the transfer agent, shall authorize its transfer agent to remove the restrictive legend relating to the indemnification obligations of this
Section 7 and shall release the number of Pledged Shares then to

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be released. For purposes of this Agreement, the term "Value" per Pledged Share shall mean $12.375 per share (subject to stock splits, recapitalizations and the like).

7.5 Survival of Representations, Warranties and Covenants. All representations, warranties and covenants made by the Company and the Sole Shareholder in or pursuant to this Agreement or in any document delivered pursuant hereto will survive the Closing and will remain in effect until, and will expire upon the Indemnification Deadline Date, provided, however, that the indemnification obligations with respect to any Pending Claim (and the related representations, warranties and covenants) will survive until the final resolution of such Pending Claim.

SECTION 8

TERMINATION, AMENDMENT AND WAIVER

8.1 Termination. This Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time, whether before or after approval of the Merger by the Sole Shareholder of the Company:

(a) by mutual written consent of the Company and Parent;

(b) by Parent or the Company if the Closing has not occurred by February 28, 2000; provided, however, that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose action or failure to act has been the principal cause of the failure of the Merger to occur on or before such date and such action or failure to act constitutes a material breach of this Agreement;

(c) by Parent or the Company if there shall be a final nonappealable order of a federal or state court in effect preventing consummation of the Merger; or there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity which would make the consummation of the Merger illegal;

(d) by Parent if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity, which would: (i) prohibit Parent's or the Company's ownership or operation of all or a portion of the business of the Company or (ii) compel Parent or the Company to dispose of or hold separate all or a portion of the business or assets of the Company or Parent as a result of the Merger;

(e) by Parent if it is not in breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Company or the Sole Shareholder and such breach has not been cured within five (5) business days after written notice to the Company and the Sole Shareholder (provided that no cure period shall be required for a breach which by its nature cannot be cured); or

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(f) by the Company if it is not in breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Parent and such breach has not been cured within five (5) business days after written notice to Parent (provided that no cure period shall be required for a breach which by its nature cannot be cured).

Where action is taken to terminate this Agreement pursuant to this Section 8.1, it shall be sufficient for such action to be authorized by the Board of Directors (as applicable) of the party taking such action.

8.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 8.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent, Sub, the Company or the Sole Shareholder, or their respective officers, directors or shareholders, provided that each party shall remain liable for any breaches of this Agreement prior to its termination; and provided further that, the provisions of Sections 5.5, 5.6, 7 and 8 of this Agreement shall remain in full force and effect and survive any termination of this Agreement.

8.3 Amendment. This Agreement may be amended by the parties hereto at any time prior to the Closing by execution of an instrument in writing signed on behalf of each of the parties hereto, provided, however, that no amendment shall be made which by law requires the further approval of the Sole Shareholders without obtaining such approval.

8.4 Extension; Waiver. At any time prior to the Effective Time, Parent, on the one hand, and the Company, on the other, may, to the extent legally allowed,
(i) extend the time for the performance of any of the obligations of the other party hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party.

8.5 Notice of Termination. Any termination of this Agreement under Section 8.1 above will be effective immediately upon the delivery of written notice of the terminating party to the other parties hereto.

SECTION 9

MISCELLANEOUS

9.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with acknowledgment of complete transmission) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

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(a) if to Parent, to:
Talk City, Inc.
1919 South Bascom Avenue
Campbell, CA 95008
Attention: Chief Executive Officer Telephone No.: (408) 871-5200 Facsimile No.: (408) 871-5300

with a copy to:

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road
Palo Alto, CA 94304-1050

Attention: Page Mailliard, Esq.

Telephone No.: (650) 493-9300

Facsimile No.: (650) 496-4088

(b) if to the Company, to:

Research Connections, Inc. 414 Central Avenue
Westfield, NJ 07090
Attention: Amy J. Yoffie Telephone No.: (800) 665-9724 Facsimile No.: (908) 654-9364

with a copy to:

Foss Bowe San Filippo & Caruso, LLC 225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attention: William J. Bowe Telephone No.: (732) 741-2525 Facsimile No.: (732) 741-2192

(c) if to the Sole Shareholder, to:

Amy J. Yoffie
c/o: Research Connections, Inc. 414 Central Avenue
Westfield, NJ 07090

9.2 Interpretation.

(a) When a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this Agreement unless otherwise indicated. When a reference is made in this

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Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When reference is made herein to "the business of" an entity, such reference shall be deemed to include the business of all direct and indirect subsidiaries of such entity.

(b) For purposes of this Agreement the term "knowledge" means with respect to a party hereto, with respect to any matter in question, that any of the chief executive officer, chief operating officer, president, chief financial officer, general counsel or controller of such party, has actual knowledge of such matter.

(c) For purposes of this Agreement, the term "Material Adverse Effect" when used in connection with an entity means any change, event, violation, inaccuracy, circumstance or other matter, if such change, event, violation, inaccuracy, circumstance or other matter would have a material adverse effect on the business, assets (including intangible assets), capitalization, financial condition, results of operations or prospects of (i) such entity and its subsidiaries taken as a whole, or (ii) the Surviving Corporation.

(d) For purposes of this Agreement, the term "subsidiary" of any entity means any other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned or controlled by such entity.

9.3 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart.

9.4 Entire Agreement; Assignment. This Agreement, the schedules and Exhibits hereto, the Confidentiality Agreement and the documents and instruments and other agreements among the parties hereto referenced herein: (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other person any rights or remedies hereunder; and
(c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided, except that Parent may assign its rights and delegate its obligations hereunder to its affiliates. This Agreement is binding upon and will inure to the benefit of the parties hereto and their respective successors and permitted assigns.

9.5 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably

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to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.

9.6 Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy.

9.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof.

9.8 Further Assurances. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by any other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement.

9.9 Absence of Third Party Beneficiary Rights. No provision of this Agreement is intended, nor will be interpreted, to provide to create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder, employee, partner of any party hereto or any other person or entity.

9.10 Mutual Drafting. This Agreement is the joint product of the parties hereto, and each provision hereof has been subject to the mutual consultation, negotiation and agreement of each of the parties, and shall not be construed for or against any party hereto.

9.11 Further Representations. Each party to this Agreement acknowledges and represents that it has been represented by its own legal counsel in connection with the transactions contemplated by this Agreement, with the opportunity to seek advice as to its legal rights from such counsel. Each party further represents that it is being independently advised as to the tax consequences of the transactions contemplated by this Agreement and is not relying on any representation or statements made by the other party as to such tax consequences.

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IN WITNESS WHEREOF, Parent, the Company and the Sole Shareholder have entered into this Agreement as of the date first written above.

RESEARCH CONNECTIONS, INC.              TALK CITY, INC.

By: /s/ Amy J. Yoffie                    By: /s/ Jeffrey Snetiker
    -----------------------------          -------------------------------------

Name:   Amy J. Yoffie                   Name: Jeffrey Snetiker
     ----------------------------            -----------------------------------

Title:  President                       Title: Sr Vice President
      ---------------------------             ----------------------------------
                                               Chief Financial & Admin. Officer

SOLE SHAREHOLDER

By /s/ Amy J. Yoffie
   ------------------------------

Name: Amy J. Yoffie

[Signature page to Reorganization Agreement]

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EXHIBIT A

FORM OF ESCROW AGREEMENT

THIS ESCROW AGREEMENT (the "Escrow Agreement") is made and entered into as of February 11, 2000 by and among Talk City, Inc., a Delaware corporation ("Talk City"), Research Connections, Inc., a New Jersey corporation ("Research Connections"), Amy J. Yoffie (the "Sole Shareholder") and Firstar Bank, N.A., as escrow agent (the "Escrow Agent").

RECITALS

A. Talk City, Research Connections and the Sole Shareholder are parties to that certain Agreement and Plan of Reorganization dated as of January 3, 2000 (the "Reorganization Agreement"), providing for the merger (the "Merger") of Research Connections with and into Talk City. Capitalized terms used but not defined herein shall have the meanings set forth in the Reorganization Agreement.

B. One of the conditions to the closing of the Merger, as set forth in the Reorganization Agreement, is the execution and delivery of this Escrow Agreement.

C. Pursuant to Section 2.1(c)(ii) of the Reorganization Agreement, Talk City shall deposit with the Escrow Agent (i) 121,212 shares of Talk City Common Stock (the "Pledged Shares") and (ii) $1.5 million in cash (the "Supplemental Cash," and together with the Pledged Shares, the "Escrow Amount") into an escrow fund (the "Escrow Fund") to be used to satisfy any potential indemnification obligations of Research Connections or the Sole Shareholder to any Indemnified Party for Damages under Section 7 of the Reorganization Agreement.

D. This Escrow Agreement sets forth the basis on which the Escrow Agent will receive and hold, and make distributions from, the Escrow Fund and the duties for which the Escrow Agent will be responsible.

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows:

1. Appointment. Talk City and the Sole Shareholder hereby appoint the Escrow Agent as escrow agent to serve in such capacity in accordance with the terms and conditions set forth in this Escrow Agreement. The Escrow Agent hereby accepts such appointment.

2. Reorganization Agreement. The Escrow Agent acknowledges receipt of a copy of the Reorganization Agreement; however, except for reference thereto for definitions of certain words or terms not defined herein, the Escrow Agent is not charged with any duties or responsibilities with respect to the Reorganization Agreement.

3. Escrow Amount. Immediately following the Effective Time, Talk City shall deposit the Supplemental Cash and stock certificates evidencing the Pledged Shares directly with the Escrow Agent, the receipt of which shall be acknowledged, and the same accepted, by the Escrow Agent as escrow agent hereunder. The Escrow Fund, as such term is used herein, shall include the Escrow Amount deposited pursuant to this Section 3, less any distributions made hereunder.

4. Investment.

(a) The Supplemental Cash placed in the Escrow Fund, together with all interest accruing thereon, shall be invested by the Escrow Agent, without distinction as to principal and income, in one or more of the following investments: (i) interest bearing open-ended or time deposits of any domestic bank (including deposit in the Escrow Agent's bank money market deposit accounts), including one or more accounts maintained in the commercial banking department (if any) of the Escrow Agent; provided, however, that any amount not invested in the Escrow Agent's bank money market deposit accounts shall be invested, to the extent reasonably possible, in accounts that are insured by the Federal Deposit Insurance Corporation ("FDIC") or (ii) short-term U.S. Department of Treasury bills, or any short-term government obligation money market fund that includes similar investments. Talk City shall indemnify and hold the Escrow Agent harmless from any and all liability for acting upon the investment instructions given in this Section 4.

(b) For the purpose of investing funds held in escrow, the Escrow Agent may accept and act upon the oral instructions of Talk City. The Escrow Agent will confirm all oral investment instructions in writing within three (3) business days. If there is any discrepancy between any oral instructions and a written confirmation of those instructions, the Escrow Agent's records of oral investment instructions shall govern. Talk City shall indemnify and hold the Escrow Agent harmless from any and all liability for acting on any oral investment instructions purported to be given by Talk City. The Escrow Agent shall not be responsible for the authenticity of any such instructions, whether or not the person giving the instructions was, in fact, an authorized representative of Talk City. In no event shall the Escrow Agent be liable to Talk City hereunder for any consequential, special or exemplary damages, including, but not limited to lost profits, from any cause whatsoever arising out of, or in any way connected with acting upon oral instructions believed by the Escrow Agent to be genuine. The Escrow Agent will act upon investment instructions the day such instructions are received, provided the requests are communicated within a sufficient amount of time to allow the Escrow Agent to make the specified investment. Instructions received after an applicable investment cutoff deadline will be treated as being received by the Escrow Agent on the next business day, and the Escrow Agent shall not be liable for any loss arising directly or indirectly, in whole or in part, from the inability to invest funds on the day the instructions are received. The Escrow Agent shall not be liable for any loss incurred by the actions of third parties or for any loss arising by error, failure or delay in making an investment that is caused by circumstances beyond the Escrow Agent's reasonable control.

(c) All interest earned pursuant to this Section 4 shall be distributed quarterly by the Escrow Agent to Talk City, unless otherwise agreed to by the Escrow Agent and Talk City. Talk City acknowledges that payment of any interest earned on the funds invested in the Escrow Fund will be subject to backup withholding penalties unless either a properly completed Internal Revenue Service Form W8 or W9 certification is submitted to the Escrow Agent.

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5. Release of Escrow Amount. Subject to Sections 5(c) and 6 below, the Escrow Amount shall be released to the Sole Shareholder as follows:

(a) 121,212 shares of Parent Common Stock will be distributed on Closing and placed in the Escrow Fund to be released over four (4) years, with 25% released twelve (12) months after the Closing (the "First Anniversary") and the remainder released evenly over the 36 months following the First Anniversary.

(b) $1.5 million in cash will be placed in the Escrow Fund on Closing to be released over four (4) years, with 25% released on the First Anniversary and the remainder released evenly over the 36 months following the First Anniversary. Notwithstanding the foregoing, the Supplemental Cash is subject to the Sole Shareholder's continued employment by Talk City at the time of the distributions. In the event the Sole Shareholder is terminated for cause (as defined below) or voluntarily leaves the employment of Talk City, then all remaining cash in the Escrow Fund shall be forfeited to Talk City and the Sole Shareholder shall have no further right to such cash. The Sole Shareholder's death, disability or termination by Talk City other than for cause shall not be grounds for forfeiture of the Supplemental Cash. Amounts released from the Escrow Fund will be subject to all applicable withholding taxes. The term "cause" shall mean (i) the conviction of, plea of nolo contendere, a guilty plea or confession by the Sole Shareholder to a felony or the commission of any act of fraud or material dishonesty against, or the embezzlement, theft or misappropriation of property belonging to Talk City or its affiliates, (ii) the continuous failure by the Sole Shareholder to perform the material duties and responsibilities that are reasonably consistent with the Sole Shareholder's position which remain uncured for a period of fifteen (15) days after receipt of notice thereof from Talk City, (iii) the use of illegal substances by the Sole Shareholder, (iv) engaging in conduct that is seriously injurious to the business of Talk City or its affiliates (it being understood that business decisions made by the Sole Shareholder in good faith are not to be considered grounds for termination for cause) or (v) the material breach by the Sole Shareholder of the Confidentiality Agreement, the Noncompetition Agreement or any agreement related thereto which is not cured fifteen (15) days after receipt of notice thereof from Talk City. Termination for cause or voluntary resignation, without the Sole Shareholder's consent, shall not include the forced relocation of the Sole Shareholder's principal place of business to more than 20 miles from its present location in Westfield, New Jersey. A date of delivery of any Escrow Amount is referred to as a "Delivery Date."

(c) Notwithstanding the above, any Escrow Amount to be delivered on a Delivery Date shall not be delivered to the Sole Shareholder in the event and to the extent that there is a Pending Claim then outstanding pursuant to Section 7 of the Reorganization Agreement.

6. Claims Upon Escrow Fund.

(a) Upon receipt by the Escrow Agent at any time prior to the Indemnification Deadline Date of a certificate signed by an officer of Talk City (an "Officer's Certificate") providing notice of a Claim and specifying in reasonable detail the date the Damages relating to such Claim were paid, incurred or otherwise arose, and the nature of the misrepresentation or breach to which such Damages are related, the Escrow Agent shall, subject to the provisions of Section 6(b) below, deliver to Talk City, as promptly as practicable, the amount in cash or the number of shares out of

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the Escrow Fund equal to such Damages as indemnity; provided, however, that payment shall not be made unless and until the aggregate amount of Damages exceeds $25,000, at which point payment shall be made from the first dollar of Damages. Pledged Shares shall only be delivered as payment for Damages after all Supplemental Cash has been delivered as payment for Damages. For purposes of this Escrow Agreement, the Pledged Shares shall be valued at $12.375 per share (subject to adjustments for stock splits, recapitalizations and the like).

(b) At the time of delivery of any Officer's Certificate to the Escrow Agent, a duplicate copy of such Officer's Certificate shall be delivered to the Sole Shareholder and for a period of forty-five (45) days after such delivery, the Escrow Agent shall make no delivery of Supplemental Cash or Pledged Shares from the Escrow Fund pursuant to Section 6(a) above unless the Escrow Agent shall have received written authorization from the Sole Shareholder to make such delivery. After the expiration of such forty-five (45) day period, the Escrow Agent shall make delivery of Supplemental Cash and/or Pledged Shares equal to the amount of Damages from the Escrow Fund in accordance with Section 6(a) above, provided that no such payment or delivery shall be made if the Sole Shareholder delivers written notice to the Escrow Agent and to Talk City prior to the expiration of such forty-five (45) day period that the Sole Shareholder disputes in good faith the Claim set forth in the Officer's Certificate, with the basis for such dispute set forth in reasonable detail.

7. Resolution of Conflicts; Arbitration.

(a) In case the Sole Shareholder shall object in writing to any Claim made in any Officer's Certificate as described in Section 6(b), Talk City shall have fifteen (15) days to respond in a written statement to the objection of the Sole Shareholder. If after such fifteen (15) day period there remains a dispute as to any Claim, the Sole Shareholder and Talk City shall attempt in good faith for sixty (60) days to agree upon the rights of the respective parties with respect to each of such Claim. If the Sole Shareholder and Talk City should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties and shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum and shall make the distributions from the Escrow Fund only in accordance with the terms thereof or of the Escrow Agreement.

(b) If no such agreement can be reached after good faith negotiation, either Talk City or the Sole Shareholder may, by written notice to the other, demand arbitration of the matter in accordance with Section 7.4 of the Reorganization Agreement, unless the amount of the damage or loss is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration. The decision of the arbitrators as to the validity and amount of any Claim in such Officer's Certificate shall be binding and conclusive upon the parties to this Agreement, and, notwithstanding anything in Section 6 hereof, the Escrow Agent shall be entitled to act in accordance with such decision and make or withhold payments out of the Escrow Fund in accordance therewith.

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8. Escrow Provisions.

(a) The Escrow Agent shall be protected in acting upon any written notice, request, waiver, consent, receipt or other paper or document from any duly authorized officer or agent of Talk City or any other Indemnified Party or from the Sole Shareholder, not only as to its due execution and the validity and effectiveness of its provisions, but also as to the truth of any information therein contained, that the Escrow Agent in good faith believes to be genuine and as to which the Escrow Agent shall have no actual notice of invalidity, lack of authority or other deficiency.

(b) The Escrow Agent shall not be liable for any error of judgment, or for any act done or step taken or omitted by it in good faith, or for any mistake of fact or law, or for anything which it may do or refrain from doing in connection therewith, except for any liability arising from its own negligence, willful misconduct or bad faith.

(c) The Escrow Agent shall be entitled to consult with competent and responsible counsel of its choice with respect to the interpretation of the provisions hereof, and any other legal matters relating hereto, and shall be fully protected in taking any action or omitting to take any action in good faith in accordance with the advice of such counsel.

(d) Talk City and the Sole Shareholder jointly and severally agree to indemnify and hold the Escrow Agent harmless for any and all claims, liabilities, costs, payments and expenses, including fees of counsel (who may be selected by the Escrow Agent) for court actions, for anything done or omitted by it in the performance of this Escrow Agreement, except as a result of the Escrow Agent's own negligence, willful misconduct or bad faith.

(e) All fees and related expenses of the Escrow Agent for its services hereunder shall be paid by Talk City. Such fees and expenses shall be determined in accordance with the fee schedule attached hereto as Schedule A or as otherwise provided to Talk City.

9. Successor Escrow Agent. The Escrow Agent, or any successor, may resign at any time upon giving written notice to Talk City and the Sole Shareholder thirty (30) days before such resignation shall take effect. In addition, Talk City and the Sole Shareholder may terminate the Escrow Agent's appointment as escrow agent upon giving written notice (jointly signed by Talk City and the Sole Shareholder) to the Escrow Agent thirty (30) days before such termination shall take effect. If the Escrow Agent shall resign, be terminated or be unable to serve, then it shall be succeeded by such bank or trust company jointly named by Talk City and the Sole Shareholder in such thirty (30) day period, or if no such appointment is made by that time, then by a bank or trust company appointed by a court of competent jurisdiction upon petition by either Talk City or the Sole Shareholder (in which action the other party shall be afforded a reasonable opportunity to participate) to appoint a successor escrow agent. The Escrow Agent shall transfer the Pledged Shares to its successor and shall thereupon be discharged, and the successor shall thereupon succeed to all of the rights, powers and duties and shall assume all of the obligations of the Escrow Agent originally named in this Escrow Agreement.

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10. Payment of Taxes. The Sole Shareholder shall be treated as the owner of the Pledged Shares for all tax purposes while and to the extent that the Pledged Shares are held by the Escrow Agent. The Escrow Agent shall cause all information statements to be prepared in accordance with this Section 10 and all parties shall prepare their tax returns accordingly.

11. Termination.

(a) Unless extended in writing by the parties hereto, the escrow provided for in this Escrow Agreement shall expire upon the Indemnification Deadline Date; provided, however, that Research Connections' indemnification obligations with respect to any Pending Claim will survive until the final resolution of such Pending Claim (the "Termination Date").

(b) Promptly following the Indemnification Deadline Date and receipt of instructions from Talk City and the Sole Shareholder, the Escrow Agent shall, to the extent Supplemental Cash and/or Pledged Shares are available therefor in the Escrow Fund and in the following order of priority:

(i) withhold Supplemental Cash and/or Pledged Shares in the Escrow Fund in sufficient amount, or to the extent funds are available therefor, to satisfy 125% of the maximum amount of Damages estimated by Talk City and the Sole Shareholder relating to any and all Pending Claims as set forth in Section 7.4(h) of the Reorganization Agreement; and

(ii) distribute any Supplemental Cash and/or Pledged Shares remaining after the allocations and distributions provided for in clause (i) above to the Sole Shareholder in accordance with her interest in the Escrow Fund.

(c) Promptly following the Termination Date and receipt of instructions from the Sole Shareholder, the Escrow Agent shall, to the extent Supplemental Cash and/or Pledged Shares are available therefor in the Escrow Fund, distribute such remaining Supplemental Cash and/or Pledged Shares to the Sole Shareholder in accordance with her interest in the Escrow Fund.

12. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given or delivered if delivered personally or by express courier, mailed by registered or certified mail (return receipt requested) or sent by telecopy, confirmation received, to the parties at the following addresses and telecopy numbers (or at such other address or number for a party as shall be specified by like notice):

(a) If to Talk City or Sub, to:

TALK CITY, INC.
1919 Bascom Avenue
Campbell, CA 95008

Attn: Peter Friedman
Telecopy No.: (408) 871-5300 Telephone No.: (408) 871-5200

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with a copy to:

Wilson Sonsini Goodrich & Rosati 650 Page Mill Road
Palo Alto, CA 94304-1050
Attn: Page Mailliard, Esq.

Telecopy No.: (650) 493-6811

Telephone No.: (650) 493-9300

(b) if to Research Connections, to:

Research Connections, Inc. 414 Central Avenue
Westfield, NJ 07090
Attention: Amy J. Yoffie
Telecopy No.: (908) 654-9364 Telephone No.: (800) 665-9724

with a copy to:

Foss Bowe San Filippo & Caruso 225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attn: William Bowe, Esq.

Telecopy No.: (732) 741-2525

Telephone No.: (732) 741-2192

(c) If to the Sole Shareholder:

Amy J. Yoffie
c/o Research Connections
414 Central Avenue
Westfield, New Jersey 07090

with a copy to:

Foss Bowe San Filippo & Caruso 225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attn: William Bowe, Esq.

Telecopy No.: (732) 741-2525

Telephone No.: (732) 741-2192

(d) If to the Escrow Agent:

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Firstar Bank, N.A.

101 East Fifth Street
St. Paul, MN 55101

Attn: Frank Leslie
Telecopy No.: 651-229-6415 Telephone No.: 651-229-2600

13. Nonassignability. Notwithstanding anything to the contrary contained herein, no Pledged Shares or any beneficial interest therein may be sold, assigned or otherwise transferred, including by operation of law, by the Sole Shareholder or be taken or reached by any legal or equitable process in satisfaction of any debt or other liability of the Sole Shareholder. Any such attempted transfer in violation of this Section shall be null and void.

14. Successors and Assigns. This Escrow Agreement and all action taken hereunder in accordance with its terms shall be binding upon and inure to the benefit of Talk City, its subsidiaries, and their respective successors and assigns, the Escrow Agent and its successors, and the Sole Shareholder and her successors.

15. Entire Agreement. This Escrow Agreement constitutes the entire agreement among the parties with the Escrow Agent, and among the other parties with respect to this particular escrow except as set forth under the Reorganization Agreement, and it supersedes all prior or concurrent arrangements or understandings with respect thereto. The other parties hereby acknowledge and agree that Escrow Agent's duties and obligations hereunder are limited, and that Escrow Agent shall have no duties or obligations except as clearly specified herein, nor shall Escrow Agent have any responsibility for the enforcement of the obligations of any parties hereto.

16. Waivers. No waiver by any party hereto of any condition or of any breach of any provision of this Escrow Agreement shall be effective unless in writing. No waiver by any party of any such condition or breach, in any one instance, shall be deemed to be a further or continuing waiver of any such condition or breach or a waiver of any other condition or breach of any other provision contained herein.

17. Counterparts. This Escrow Agreement may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute one and the same instrument.

18. Governing Law. This Escrow Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.

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IN WITNESS WHEREOF, the parties have executed or caused this Escrow Agreement to be duly executed as of the day and year first above written.

TALK CITY, INC.

By: /s/ Jeffrey Snetiker
   ----------------------------------

Title:  SR VP, CHIEF FINANCIAL OFFICER
      -------------------------------

RESEARCH CONNECTIONS, INC.

By: /s/ Amy J. Yoffie
   ----------------------------------

Title:  President
      -------------------------------

AMY J. YOFFIE
("Sole Shareholder")

By: /s/ Amy J. Yoffie
   ----------------------------------

Title: President
      -------------------------------

FIRSTAR BANK, N.A.
("Escrow Agent")

By: /s/ Frank Leslie
   ----------------------------------

Title:  Vice President
      -------------------------------

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SCHEDULE A

ESCROW AGENT FEE SCHEDULE

$2,500 per year (plus out-of-pocket expenses)


EXHIBIT B

NON-COMPETITION AGREEMENT

THIS NON-COMPETITION AGREEMENT (the "Agreement") is made as of February 11, 2000 by and among Talk City, Inc., a Delaware corporation ("Talk City"), Research Connections, Inc., a New Jersey corporation ("Research Connections"), and Amy J. Yoffie ("Shareholder").

Background

A. Talk City, Research Connections and Amy J. Yoffie have entered into an Agreement and Plan of Reorganization dated as of January 3, 2000 (the "Reorganization Agreement"), which provides for the merger (the "Merger") of Research Connections with and into Talk City whereby Talk City will be the surviving corporation ("Surviving Corporation").

B. Shareholder is receiving significant consideration pursuant to the terms of the Reorganization Agreement.

C. As a condition to the closing of the Merger, to preserve the value and goodwill of the business being acquired by Talk City, Shareholder has agreed with Talk City to enter into this Agreement effective upon the closing of the Merger.

NOW THEREFORE, in consideration of the mutual promises made herein, Talk City and Shareholder (collectively referred to as the "Parties") hereby agree as follows:

1. Covenant Not to Compete or Solicit.

(a) For the period beginning on the date hereof and ending on the earlier of (i) four years after the date of the Reorganization Agreement and
(ii) the date one (1) year after the termination of Shareholder's employment with Talk City or any subsidiary of Talk City, voluntary or involuntary, for any reason (the "Non-Compete Period"), Shareholder shall not directly or indirectly, without the prior written consent of Talk City, (A) engage anywhere in the world in (whether as an employee, consultant, proprietor, partner, director or otherwise), or have any ownership interest in (except for ownership of five percent (5%) or less of the outstanding shares of any entity whose securities are listed on a national securities exchange), or participate in the financing, operation, management or control of, any firm, corporation or business that provides or conducts market research in online communities or interactive services for businesses and consumers unless agreed to by Talk City in writing; or (B) approach, contact or solicit any customer of Talk City or any subsidiary of Talk City or interfere with the business of any customer of Talk City or any subsidiary of Talk City regarding the provision or conduct of market research in online communities or interactive services.


(b) During the Non-Compete Period, Shareholder shall not, directly or indirectly, without the prior written consent of Talk City, (i) solicit, encourage, hire or take any other action which is intended to induce any employee of Talk City or any subsidiary of Talk City to terminate his or her employment with Talk City or any subsidiary of Talk City, or (ii) interfere in any manner with the contractual or employment relationship between Talk City or any subsidiary of Talk City and any employee of Research Connections. Notwithstanding anything to the contrary in the preceding sentence, nothing in this Section 1(b) shall prohibit Shareholder from hiring a former employee of Talk City or any of its subsidiaries.

(c) The covenants contained in the preceding paragraphs shall be construed as a series of separate covenants, one for each county, city and state (U.S. or foreign) of any geographic area where any business is presently carried on by Research Connections. Except for geographic coverage, each such separate covenant shall be identical in terms to the covenant contained in the preceding paragraphs. If, in any judicial proceeding, a court refuses to enforce any of such separate covenants (or any part thereof), then such unenforceable covenant (or such part) shall be eliminated from this Agreement to the extent necessary to permit the remaining separate covenants (or portions thereof) to be enforced. In the event that the provisions of this Section 1 are deemed to exceed the time, geographic or scope limitations permitted by applicable law, then such provisions shall be reformed to the maximum time, geographic or scope limitations, as the case may be, permitted by applicable laws.

(d) Shareholder acknowledges that her services are needed by virtue of the Merger, and that Shareholder's covenant not to compete or solicit contained in this Section 1 is given in conjunction with such Merger. Shareholder also acknowledges that the business of Talk City is worldwide and therefore, any actions taken by the Shareholder in violation of this Agreement anywhere in the world would harm Talk City's business.

(e) Shareholder acknowledges that breach of this Section 1 would cause irreparable injury to Surviving Corporation and agrees that in the event of such breach, Surviving Corporation shall have available, in addition to any other right or remedy available (including any award of ascertainable damages) the right to seek injunctive relief without the necessity of proving actual damages.

2. Arbitration. All disputes or controversies (whether of law or fact) of any nature whatsoever arising from or relating to this Agreement and the transactions contemplated hereby shall be decided by arbitration by the American Arbitration Association (the "Association") in accordance with the rules and regulations of the Association.

The parties shall, within 30 days of the date of demand by either party for arbitration, mutually select one independent, qualified arbitrator. Each party reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization. In the event objection is made, the Association shall resolve any dispute regarding the propriety of an individual arbitrator acting in that capacity. The parties shall each bear one-half of the expenses of the arbitrator. Hearings in the proceeding shall commence within 120 days of the selection of the arbitrator.

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Arbitration shall take place in San Francisco, California. At the request of either party, arbitration proceedings will be conducted confidentially; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrators in confidence under seal, available for the inspection only by the Association, the parties and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in confidence. The arbitrator shall be able to decree any and all relief of an equitable and legal nature, including but not limited to such relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs. The decree or award rendered by the arbitrator may be entered as a final and binding judgment in any court having jurisdiction thereof.

Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or those authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require.

3. Miscellaneous.

(a) Severability. If any portion of this Agreement is held by a court of competent jurisdiction to conflict with any federal, state or local law, and is not reformed, such portion of this Agreement shall be of no force or effect and this Agreement shall otherwise remain in full force and effect and be construed as if such portion had not been included in this Agreement.

(b) No Assignment. Shareholder shall not assign this Agreement or any rights or obligations under this Agreement without the prior written consent of Talk City and Surviving Corporation.

(c) Notice. Any notice or communication required or permitted under this Agreement shall be made in writing and shall be deemed given if delivered personally or mailed by certified or registered mail, return receipt requested and postage prepaid or sent by telecopy, confirmation received, to the parties at the following addresses and telecopy numbers (or at such other address or number for a party as shall be specified by like notice):

(i) If to Talk City, to:

TALK CITY, INC.
1919 South Bascom Avenue
Campbell, CA 95008
Attention: Chief Executive Officer
Telecopy No.: (408) 871-5300

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Telephone No.: (408) 871-5200

with a copy to:

Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road
Palo Alto, California 94304 Attention: Page Mailliard, Esq.

Telecopy No.: (650) 493-6811
Telephone No.: (650) 493-9300

(ii) if to Research Connections, to:

RESEARCH CONNECTIONS, INC.
414 Central Avenue
Westfield, NJ 07090
Attention: Amy J. Yoffie
Telecopy No.: (908) 654-9364
Telephone No.: (800) 665-9724

with a copy to:

Foss, Bowe, San Filippo & Caruso
225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attn: William J. Bowe, Esq.
Telecopy No.: (732) 741-2525
Telephone No.: (732) 741-2192

(iii) if to Surviving Corporation, to:

TALK CITY, INC.
1919 South Bascom Avenue
Campbell, CA 95008
Attention: Chief Executive Officer
Telecopy No.: (408) 871-5300
Telephone No.: (408) 871-5200

with a copy to:

Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road

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Palo Alto, California 94304 Attention: Page Mailliard, Esq.

Telecopy No.: (650) 493-6811
Telephone No.: (650) 493-9300

(iv) if to Shareholder, to:

Amy J. Yoffie
c/o Research Connections 414 Central Avenue
Westfield, NJ 07090

with a copy to:

Foss Bowe San Filippo & Caruso 225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attn: William J. Bowe, Esq.

Telecopy No.: (732) 741-2525
Telephone No.: (732) 741-2192

(d) Entire Agreement. This Agreement contains the entire agreement and understanding of the parties and supersedes all prior discussions, agreements and understandings relating to the subject matter of this Agreement. This Agreement may not be changed or modified, except by an agreement in writing executed by Talk City, by Research Connections and/or Surviving Corporation and by Shareholder.

(e) Waiver of Breach. The waiver of a breach of any term or provision of this Agreement shall not operate as or be construed to be a waiver of any other previous or subsequent breach of this Agreement.

(f) Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of Delaware (without giving effect to its choice of law principles).

(g) Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.

(h) Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.

(i) Jurisdiction. All parties hereto agree to submit to the jurisdiction of the federal and state courts of the State of California.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

TALK CITY, INC.                              SHAREHOLDER


By: /s/ Jeffrey Snetiker                     /s/ Amy J. Yoffie
   ----------------------------              ----------------------------
   Name:  JEFFREY SNETIKER                   Amy J. Yoffie
   Title: SR VP, CHIEF FINANCIAL OFFICER

RESEARCH CONNECTIONS, INC.

By: /s/ Amy J. Yoffie
   ----------------------------
   Name:  Amy J. Yoffie
   Title: President

[Signature Page to Noncompetition Agreement]

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EXHIBIT C

INVESTMENT REPRESENTATION AGREEMENT

The undersigned is aware that pursuant to an Agreement and Plan of Reorganization, dated as of January 3, 2000, (the "Reorganization Agreement"), entered into by and among Talk City, Inc., a Delaware corporation ("Parent"), Research Connections, Inc., a New Jersey corporation (the "Company"), and Amy J. Yoffie, an individual and sole shareholder of the Company (the "Sole Shareholder"), the Company will merge (the "Merger") with and into Parent and all shares of Company Capital Stock will be exchanged for cash and shares of Parent Common Stock as set forth in the Reorganization Agreement (the "Merger Consideration"). Unless otherwise indicated, capitalized terms not defined herein have the meanings set forth in the Reorganization Agreement.

The undersigned understands that the execution of this Certificate is a condition precedent to Parent's obligation to consummate the Merger and to the receipt of the shares of Parent Common Stock in connection with the Merger (pursuant to the terms and conditions of the Reorganization Agreement).

The undersigned hereby represents and warrants as follows:

1. The Parent Common Stock issued to the undersigned will be acquired for investment for the undersigned's own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof in violation of the Securities Act of 1933, as amended (the "1933 Act"), and the undersigned has no present intention of selling, granting any participation in, or otherwise distributing the same. The undersigned represents that the entire legal and beneficial interest of the Parent Common Stock will be held for the undersigned's account only, and neither in whole or in part for any other person other than a wholly owned subsidiary of the undersigned. By executing this Agreement, the undersigned further represents that the undersigned has no present contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participation to such person or to any third person, with respect to any of the Parent Common Stock.

2. The undersigned represents that (without limiting or affecting the representations and warranties of Parent under the Reorganization Agreement) it:
(i) has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the undersigned's prospective investment in the shares of Parent Common Stock; (ii) has received copies of Parent's Registration Statement on Form S-1 dated July 19, 1999; (iii) has received all the information it has requested from the Parent and the Company it considers necessary or appropriate for deciding whether to accept the Parent Common Stock; (iv) has the ability to bear the economic risks of the undersigned's prospective investment; and (v) is able, without materially impairing its financial condition, to hold the Parent Common Stock for an indefinite period of time and to suffer complete loss on its investment.

3. Each certificate representing Parent Company Stock issued pursuant hereto to the undersigned and any shares issued or issuable in respect of any such Parent Common Stock upon any


stock split, stock dividend, recapitalization, or similar event, shall be stamped or otherwise imprinted with legends in the following form (in addition to any legend required under applicable state securities laws):

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER, AS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION. SUCH TRANSFER RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE SHARES.

4. The certificates evidencing the Parent Common Stock shall also bear any legend required pursuant to any state, local or foreign law governing such securities or the Reorganization Agreement.

5. The undersigned understands and acknowledges that the Parent Common Stock has not been registered under the 1933 Act and Parent Common Stock must be held indefinitely unless subsequently registered under the 1933 Act or an exemption from such registration is available and that the Parent is obligated to register the Parent Common Stock only in accordance with the terms of the Registration Rights Agreement.

6. The undersigned acknowledges that the Parent Common stock shall not be transferable except upon the conditions specified in this Agreement and the Reorganization Agreement.

7. Prior to any proposed transfer of any Parent Common Stock, unless there is in effect a registration statement under the 1933 Act covering the proposed transfer, the undersigned shall give written notice to the Company of its intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall, if the Parent so requests, be accompanied by either (i) a written opinion of legal counsel who shall be satisfactory to Parent, addressed to Parent and satisfactory in form and substance to Parent's counsel, to the effect that the proposed transfer of Parent Common Stock may be effected without registration under the 1933 Act, or (ii) a "No Action" letter from the Securities and Exchange Commission (the "Commission") to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Parent Common Stock shall be entitled to transfer such shares of Parent Common Stock in accordance with the terms of the notice delivered by the holder to Parent.

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Each certificate evidencing the shares of Parent Common Stock transferred as above provided shall bear the appropriate restrictive legend set forth in
Section (c) above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for Parent such legend is not required in order to establish compliance with any provisions of the 1933 Act.

8. The undersigned is familiar with the provisions of Rule 144, promulgated under the 1933 Act, which in substance, permits limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof (or from an affiliate of such issuer) in a non-public offering subject to the satisfaction of certain conditions, including, among other things: (i) a public trading market then exists for the Parent Common Stock;
(ii) the availability of certain public information about Parent; (iii) the resale occurring not less than one (1) year after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and (iv) the sale being made through a broker in an unsolicited "broker transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three (3) month period not exceeding the specified limitations stated therein, if applicable. The undersigned further understands that at the time the undersigned wishes to sell the shares of Parent Common Stock received from Parent there may be no public market upon which to make such a sale, and that, even if such a public market then exists, Parent may not be satisfying the current public information requirements of Rule 144, and that, in such event, the undersigned would be precluded from selling the shares of Parent Common Stock received from Parent under Rule 144 even if the one (1) year minimum holding period had been satisfied. The undersigned further understands that in the event all of the applicable requirements of Rule 144 are not satisfied, registration under the 1933 Act, compliance with Regulation A, or some other registration exemption would be required to sell the shares of Parent Common Stock received from Parent.

9. The undersigned is the sole record and beneficial owner of capital stock of the Company in the amount set forth next to its name on the signature page hereto. Such capital stock is not subject to any claim, lien, pledge, charge, security interest or other encumbrance or to any rights of first refusal of any kind, and the undersigned has not granted any rights to purchase such shares to any other person or entity. The undersigned has the sole right to transfer such shares. Such shares constitute all of the capital stock owned, beneficially or of record, by the undersigned, and the undersigned has no other rights to acquire any capital stock of the Company except as set forth on the signature page hereto.

10. The undersigned has had an opportunity to review with its own tax advisors the tax consequences to the undersigned of the Merger and the transactions contemplated by the Reorganization Agreement. The undersigned understands that it must rely solely on its advisors and not on any statements or representations by Parent, the Company or any of their agents with respect to tax matters. The undersigned understands that it (and not Parent or the Company) shall be responsible for its own tax liability that may arise as a result of the Merger or the transactions contemplated by the Reorganization Agreement.

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11. The undersigned will have sufficient assets, after completion of the Merger, to satisfy all of the undersigned's obligations to its creditors, as the same become due and payable.

12. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of Delaware.

13. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one agreement.

IN WITNESS WHEREOF, the undersigned has executed this Certificate this 11th day of February, 2000.

Amy J. Yoffie
Print Name of Stockholder

/s/ Amy J. Yoffie
---------------------------------
Signature of Authorized Signatory

Number of Shares and Type of Capital Stock of the Company:


(indicate class of stock,

i.e., common, preferred)

242,424 shares of Common Stock

[SIGNATURE PAGE TO INVESTMENT REPRESENTATION STATEMENT]

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EXHIBIT D

Foss Bowe San Filippo & Caruso, LLC
COUNSELLORS AT LAW
225 BROAD STREET
P.O. BOX 896
RED BANK, NEW JERSEY 07701-0896

                                (732) 741-2525
ROGER J. FOSS                 Fax: (732) 741-2192                Lakewood Office
PHILIP E. SAN FILIPPO      E-Mail: f-s@monmouth.com         1200 State Highway 9
WILLIAM J. BOWE                                            Cross River Mill Mall
ANTHONY R. CARUSO                                             Lakewood, NJ 08701
KATHLEEN A. SHEEDY                                                (732) 367-2990
GREGORY R. MILNE
  NJ & PA BARS                                         Please Reply To: Red Bank

SAMUEL J. VACCHIANO ANGELA WHITE DALTON
NJ & PA BARS
CHRISTINA D. HARDMAN
NJ & NY BARS
JOHN W. CHRISTIE
Of Counsel
0056/0003 February 11, 2000

Talk City, Inc.
1919 South Bascom Avenue
Campbell, CA 95008
Attention: Chief Executive Officer

Re: Agreement and Plan of Reorganization Talk City, Inc./Research Connections, Inc.

Gentlemen:

We have acted as counsel to Research Connections, Inc. a New Jersey corporation ("Company"), in connection with the transactions contemplated by the Agreement and Plan of Reorganization dated as of January 3, 2000 by and between the Company and Talk City, Inc. a Delaware corporation (the "Parent") ("Reorganization Agreement"). This letter is being delivered to you pursuant to
Section 6.1 (c) of the Reorganization Agreement. Terms defined in the Reorganization Agreement and not otherwise defined herein are used herein as defined therein.

As a basis for the opinions set forth herein, we have reviewed all of the documents listed on Schedule A attached hereto and made a part hereof (the "Transaction Documents" collectively with the Reorganization Agreement, the "Agreements").

We have relied upon certain certificates of the Company and the Sole Shareholder executed on the date hereof and which have been delivered to you. We have assumed, without independent investigation, that such statements and representations are true, correct and complete, but are not aware of any falsity or incompleteness. We have not examined any records of any court, administrative tribunal or other similar entity in connection with our opinions.

We have made no investigation as to whether the Parent is authorized to perform its obligations under the Agreements or whether any person or entity, other than the Company is


Talk City, Inc.
Attention: Chief Executive Officer
February 11, 2000

Page 2

authorized to do business in New Jersey. We express no opinion as to whether any such authorization is required in connection therewith. We assume that if any such authorization is required, that the parties are so authorized.

In connection with the rendering of this opinion, we have assumed:

(a) that each of the parties thereto (other than the Company and the Sole Shareholder) has duly and validly executed and delivered each of the Agreements to which such party is a signatory, each such party's obligations (other than the obligations of the Company and the Sole Shareholder) set forth therein are its legal, valid and binding obligations, enforceable in accordance with their respective terms, the absence of any requirement of consent, approval or other authorization by any person or entity with respect to the actions of each such party, the due organization, existence and good standing of each such party, and the legal right, and power of the Parent under all applicable laws and regulations to perform its obligations under the Agreements;

(b) that each person executing any such document or agreement on behalf of any such party (other than the Company and the Sole Shareholder) is duly authorized to do so;

(c) the legal capacity of all natural persons (but are not aware of any incapacity);

(d) that there have been no oral or written modifications of or amendments to the Agreements;

(e) the genuineness of all signatures of all persons signing any document or agreement; and

(f) the authenticity of all documents and agreements submitted to us as originals and the conformity to original documents and agreements of all documents or agreements submitted to us as copies.

The opinions expressed herein are subject to and are limited by:

(a) bankruptcy, insolvency, reorganization, fraudulent conveyance, fraudulent transfer, moratorium or other similar laws of general application, now or hereafter in effect, affecting the enforcement of creditors' rights in general;


Talk City, Inc.
Attention: Chief Executive Officer
February 11, 2000

Page 3

(b) judicial discretion and general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, principles that (i) include a requirement that a creditor act with reasonableness, in good faith and deal fairly with its debtors, or (ii) limit a creditor's right to accelerate maturity of a debt upon the occurrence of a default deemed immaterial;

(c) the provisions of the Industrial Site Recovery Act (ISRA) in the event there occurs a closing, terminating or transferring of operations within the meaning of N.J.A.C. 7:26B1.5(b) after the date hereof (which provisions may prevent foreclosure of any lien on any collateral pending compliance with the requirements of ISRA);

(d) the qualification that any provision requiring the payment of attorney's fees and costs of suit may be unenforceable except to the extent that such fees and costs are reasonable and are permitted by applicable Court Rules of New Jersey;

(e) the non-enforceability under the laws of New Jersey of provisions requiring amendments or waivers of the provisions of agreements or documents to be written (other than as provided pursuant to N.J.S.A. 25:1-5);

(f) the non-enforceability of provisions which purport to constitute or provide for the waiver or release of the rights of the Company, including, without limitation, the waiver or release of rights to notice; and

(g) the non-enforceability under certain circumstances of provisions to the effect that failure to exercise or delay in exercising rights or remedies will not operate as a waiver of the rights or remedies.

Based upon and subject to the foregoing, it is our opinion that:

1. The Company is a corporation duly organized and validly existing under, and by virtue of, the laws of the State of New Jersey and is in good standing under such laws. The Company has requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted.

2. The Company has all requisite legal and corporate power to execute and deliver the Reorganization Agreement and the other Transaction Documents contemplated thereunder and to carry out and perform its obligations under the terms of the Agreements.


Talk City, Inc.
Attention: Chief Executive Officer
February 11, 2000

Page 5

This opinion letter is being provided to you at the request of the Company. This letter is delivered by us for the purpose of inducing you to accept delivery of the Transaction Documents with full knowledge that you will rely on it in finalizing the transactions contemplated by the Agreements.

The members of this firm are admitted to the bar of the State of New Jersey and we express no opinion as to the laws of any other jurisdiction (including the applicability of the laws of any other jurisdiction, domestic or foreign, to the transactions contemplated by the Agreements or the effect of such laws thereon). To the extent that the laws of any other jurisdiction may apply, we have assumed that such laws are identical to the laws of the State of New Jersey.

This opinion is provided to you as a legal opinion only and not as a guaranty or warranty of the matters discussed herein. This opinion is for your reliance only in connection with the Agreements and is not intended for the reliance of, and shall not be relied upon by, any other person or entity without our express written consent may rely on this opinion. This opinion is not to be quoted in whole or in part or referred to, nor is it to be filed with or disclosed to any governmental agency (other than agencies responsible for the regulation of the Parent) without our prior written consent. No opinion is to be implied or inferred beyond the opinions expressly stated herein. We undertake no obligation to inform you of any matters which may subsequently come to our attention or subsequently occur which affect, in any way, the opinions rendered herein.

Very truly yours,

FOSS BOWE SAN FILIPPO & CARUSO
A Limited Liability Company

By: /s/ WILLIAM J. BOWE
    ----------------------------
    WILLIAM J. BOWE
    A Member of the Firm


SCHEDULE A

Transaction Documents

1. Agreement of Merger by and among Talk City, Inc., Research Connections, Inc. and Amy J. Yoffie dated as of February 11, 2000.
2. Escrow Agreement by and among Talk City, Inc., Research Connections, Inc. Amy J. Yoffie and Firstar Bank, N.A. dated as of February 11, 2000.
3. Noncompetition Agreement by and among Talk City, Inc., Research Connections, Inc. and Amy J. Yoffie dated as of February 11, 2000.
4. Investment Representation Agreement by and among Talk City, Inc., Research Connections, Inc. and Amy J. Yoffie dated as of January 3, 2000.
5. Registration Rights Agreement by and between Talk City, Inc. and Amy J.
Yoffie dated as of February 11, 2000.
6. Corporate Resolutions dated February 8, 2000
7. Research Connections, Inc. Compliance Certificate dated as of February 8,

2000


EXHIBIT E

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), is made as of February 11, 2000, by and between Talk City, Inc., a Delaware corporation ("Parent"), and Amy J. Yoffie (the "Sole Shareholder"), the sole former shareholder of Research Connections, Inc., a New Jersey corporation (the "Company").

WHEREAS:

A. Pursuant to the terms of the Agreement and Plan of Reorganization dated as of January 3, 2000 (the "Reorganization Agreement"), by and among Parent, the Company and the Sole Shareholder, the Company is being merged with and into Parent (the "Merger"), with Parent being the surviving corporation.

B. In connection with the Merger, the Sole Shareholder shall receive cash and shares (the "Shares") of Common Stock of Parent ("Parent Common Stock").

C. The Reorganization Agreement provides for the execution and delivery of this Agreement at the closing of the transactions contemplated thereby which grants the Sole Shareholder, subsequent to the first anniversary of the closing of the Merger (the "First Anniversary") certain piggyback rights to have her Shares registered under the Securities Act of 1933, as amended.

NOW, THEREFORE, the parties hereby agree as follows:

1. DEFINITIONS.

(a) As used in this Agreement, the following terms shall have the following meanings:

(i) "register," "registered," and "registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the "SEC").

(ii) "Registrable Securities" means the Shares and any shares of capital stock issued or issuable as a dividend on or in exchange for or otherwise with respect to the Shares, provided, however, that such securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold or are, in the opinion of counsel for Parent, available for sale in a single transaction exempt from the registration and prospectus delivery requirements of the

1933 Act so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation such sale.

(iii) "Registration Expenses" shall mean all expenses, except as otherwise stated below, incurred by Parent in complying with Section 2 below, including without limitation all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for Parent, blue sky fees and expenses, the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of Parent which shall be paid in any event by Parent) and the reasonable fees and disbursements of one counsel for all holders of Registrable Securities under this Agreement and under the Third Amended and Restated Shareholders Rights Agreement dated April 23, 1999.

(iv) "Registration Statement" means a registration statement of Parent under the 1933 Act.

(v) "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Sole Shareholder and, except as set forth above, all reasonable fees and disbursements of counsel for the Sole Shareholder.

2. REGISTRATION.

(a) Notice of Registration. If at any time or from time to time after the First Anniversary, Parent shall determine to register any of its securities, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to employee benefit plans, or (ii) a registration relating solely to a Commission Rule 145 transaction, Parent will:

(i) promptly give to the Sole Shareholder written notice thereof; and

(ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within twenty (20) days after receipt of such written notice from Parent, subject to Section 2(b) below.

(b) Underwriting. If the registration of which Parent gives notice is for a registered public offering involving an underwriting, Parent shall so advise the Sole Shareholder as a part of the written notice given pursuant to
Section 2(a)(i). In such event the right of the Sole Shareholder to registration pursuant to Section 2 shall be conditioned upon the Sole Shareholder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. The Sole Shareholder proposing to distribute her securities through such underwriting shall (together with Parent and the other holders distributing her securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by Parent. Notwithstanding any other provision of this

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Section 2, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter and Parent may reduce the Registrable Securities to be included in such registration to the extent the underwriters deem necessary. Parent shall so advise the Sole Shareholder and other holders distributing their securities through such underwriting and the number of shares of Registrable Securities and other shares that may be included in the registration and underwriting shall be allocated among all the holders of any such shares in proportion, as nearly as practicable, to the respective amounts of Registrable Securities and other shares held by such holders at the time of filing the Registration Statement. To facilitate the allocation of shares in accordance with the above provisions, Parent may round the number of shares allocated to any holder to the nearest 100 shares. If any holder disapproves of the terms of any such underwriting, such holder may elect to withdraw therefrom by written notice to Parent and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to one hundred eighty (180) days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require.

(c) Right to Terminate Registration. Parent shall have the right to terminate or withdraw any registration initiated by it under this Section 2 prior to the effectiveness of such registration whether or not the Sole Shareholder has elected to include securities in such registration.

3. EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with all registrations pursuant to Section 2 shall be borne by Parent. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Sole Shareholder and all other Registration Expenses shall be borne by the Sole Shareholder pro rata on the basis of the number of shares so registered.

4. REGISTRATION PROCEDURES. In case of each registration, qualification or compliance effected by Parent pursuant to Section 2, Parent will keep the Sole Shareholder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense Parent will:

(a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for at least one hundred eighty (180) days or until the distribution described in the Registration Statement has been completed; and

(b) Furnish to the Sole Shareholder and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities.

5. INDEMNIFICATION.

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(a) Parent will indemnify the Sole Shareholder, and each person controlling the Sole Shareholder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 3, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made (which such qualification Parent acknowledges shall not apply to any registration statement, or any amendment or supplement thereto, pursuant to
Section 11 of the Securities Act), not misleading, or any violation by Parent of the Securities Act, the Exchange Act, state securities law or any rule or regulation promulgated under such laws applicable to Parent in connection with any such registration, qualification or compliance, and within a reasonable period Parent will reimburse the Sole Shareholder, and each person controlling the Sole Shareholder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action; provided that Parent will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to Parent by an instrument duly executed by the Sole Shareholder, controlling person or underwriter and stated to be specifically for use therein.

(b) The Sole Shareholder will, if Registrable Securities held by the Sole Shareholder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify Parent, each of its directors and officers, each underwriter, if any, of Parent's securities covered by such a registration statement, each person who controls Parent or such underwriter within the meaning of Section 15 of the Securities Act, and the Sole Shareholder, and each person controlling the Sole Shareholder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, and within a reasonable period will reimburse Parent, the Sole Shareholder, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to Parent

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by an instrument duly executed by the Sole Shareholder and stated to be specifically for use therein. Notwithstanding the foregoing, the liability of the Sole Shareholder under this subsection (b) shall be limited in an amount equal to the gross proceeds before expenses and commissions to the Sole Shareholder received for the shares sold by the Sole Shareholder, unless such liability arises out of or is based on willful misconduct by the Sole Shareholder.

(c) Each party entitled to indemnification under this Section 5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 5 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or separate and different defenses. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation.

6. INFORMATION BY HOLDER. The Sole Shareholder shall furnish to Parent such information regarding the Sole Shareholder, the Registrable Securities held by her and the distribution proposed by the Sole Shareholder as Parent may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement.

7. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, Parent agrees to use its best efforts to:

(a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that Parent becomes subject to the reporting requirements of the Securities Act or the Exchange Act;

(b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of Parent under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and

(c) So long as the Sole Shareholder owns any Restricted Securities to furnish to the Sole Shareholder forthwith upon request a written statement by Parent as to its compliance with

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the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by Parent for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of Parent, and such other reports and documents of Parent and other information in the possession of or reasonably obtainable by Parent as the Sole Shareholder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Sole Shareholder to sell any such securities without registration.

8. STANDOFF AGREEMENT. In connection with any public offering of Parent's securities, the Sole Shareholder agrees, upon request of Parent or the underwriters managing any underwritten offering of Parent's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of Parent or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days in the case of Parent's initial public offering, and ninety (90) days in the case of other public offerings of Parent) from the effective date of such registration as may be requested by the underwriters; provided that the officers and directors of Parent who own stock of Parent and holders of five percent (5%) or more of Parent's outstanding voting securities also agree to such restrictions.

9. TERMINATION OF REGISTRATION RIGHTS. The registration rights granted pursuant to Section 2 shall terminate as to the Sole Shareholder at such time as a public market for Parent's Common Stock exists and all Registrable Securities held by the Sole Shareholder have been sold pursuant to Rule 144.

10. AMENDMENT OF REGISTRATION RIGHTS.

Provisions of this Agreement may be amended and the observance thereof may be waived only by the mutual written consent of Parent and the Sole Shareholder.

11. MISCELLANEOUS.

(a) Any notices required or permitted to be given under the terms hereof shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular U.S. mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be:

If to Parent:

Talk City, Inc.
1919 South Bascom Avenue

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Campbell, CA 95008
Attention: Chief Executive Officer
Facsimile: (408) 871-5300

With copy to:

Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Page Mailliard, Esq.
Facsimile: (650) 496-4088

If to the Sole Shareholder:

Amy J. Yoffie
Research Connections, Inc.
414 Central Avenue
Westfield, NJ 07090
Facsimile: (908) 654-9364

With a copy to:

Foss Bowe San Filippo & Caruso
225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attention: William J. Bowe, Esq.
Facsimile: (732) 741-2525

Each party shall provide notice to the other party of any change of its address.

(b) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

(c) This Agreement shall be enforced, governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed entirely within such State. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.

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(d) This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof.

(e) This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto.

(f) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

(g) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

(h) Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

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IN WITNESS WHEREOF, Parent and the Sole Shareholder have caused this Agreement to be duly executed as of the date first above written.

TALK CITY, INC.

By: /s/ Jeffrey Snetiker
   --------------------------------------
   Name:  Jeffrey Snetiker
   Title: Sr VP, Chief Financial Officer

SOLE SHAREHOLDER

By: /s/ Amy J. Yoffie
   --------------------------------------
   Amy J. Yoffie

[Signature Page to Registration Rights Agreement]

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EXHIBIT 23.1

CONSENT OF KPMG, LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Talk City, Inc.:

We consent to incorporation by reference in the registration statement (No. 333- 94183) on Form S-8 of Talk City, Inc. of our reports dated February 2, 2000, relating to the balance sheets of Talk City, Inc. as of December 31, 1999, and 1998, and the related statements of operations, redeemable preferred stock and stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1999, and related schedule, which reports appear in the December 31, 1999 annual report on Form 10-K of Talk City, Inc.

                                            /s/ KPMG LLP

Mountain View, California


March 27, 2000


ARTICLE 5
MULTIPLIER: 1,000


PERIOD TYPE YEAR
FISCAL YEAR END DEC 31 1999
PERIOD START JAN 01 1999
PERIOD END DEC 31 1999
CASH 14,112
SECURITIES 41,541
RECEIVABLES 3,787
ALLOWANCES 254
INVENTORY 226
CURRENT ASSETS 60,958
PP&E 7,324
DEPRECIATION 1,635
TOTAL ASSETS 74,527
CURRENT LIABILITIES 8,097
BONDS 0
PREFERRED MANDATORY 0
PREFERRED 0
COMMON 24
OTHER SE 66,299
TOTAL LIABILITY AND EQUITY 74,527
SALES 7,732
TOTAL REVENUES 7,732
CGS 0
TOTAL COSTS 50,103
OTHER EXPENSES 0
LOSS PROVISION 214
INTEREST EXPENSE 77
INCOME PRETAX (40,266)
INCOME TAX 0
INCOME CONTINUING (40,266)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET INCOME (40,266)
EPS BASIC (3.14)
EPS DILUTED (3.14)