<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   -----------

                                    FORM 10-Q

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
                                       OR

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

            FOR THE TRANSITION PERIOD FROM _____________ TO _____________

                                   -----------

                       COMMISSION FILE NUMBER 000-1084561

                                   -----------

                               ZAPME! CORPORATION
             (Exact name of Registrant as specified in its charter)

          DELAWARE                                          91-1836242
 (State or other jurisdiction of                        (I.R.S. Employer
  incorporation or organization)                        Identification No.)

                           3000 EXECUTIVE PARKWAY #150
                           SAN RAMON, CALIFORNIA 94583
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (925) 543-0300

                                   -----------

           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 periods 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 / /

           The number of shares of the issuer's Common Stock outstanding as of
July 31, 2000 was 45,162,423.


<PAGE>


                                      INDEX

<TABLE>
<CAPTION>
                                                                                                  PAGE
                                                                                                  ----
<S>                                                                                               <C>

             PART I  FINANCIAL INFORMATION
Item 1.      Consolidated Financial Statements
             Consolidated Balance Sheets as of June 30, 2000 and December 31,
                1999...........................................................................    3
             Consolidated Statements of Operations for the three months and six
                months ended June 30, 2000 and 1999............................................    4
             Consolidated Statements of Cash Flows for the six months ended June
                30, 2000 and 1999..............................................................    5
             Notes to Consolidated Financial Statements........................................    6
Item 2.      Management's Discussion and Analysis of Financial Condition and
                Results of Operations..........................................................    9
Item 3.      Quantitative and Qualitative Disclosures about Market Risk........................   26
             PART II  OTHER INFORMATION
Item 1.      Legal Proceedings.................................................................   27
Item 2.      Changes in Securities and Use of Proceeds.........................................   27
Item 3.      Defaults Upon Senior Securities...................................................   28
Item 4.      Submission of Matters to a Vote of Security Holders...............................   29
Item 5.      Other Information.................................................................   29
Item 6.      Exhibits and Reports on Form 8-K..................................................   29
Signatures.....................................................................................   30
</TABLE>


                                                                               2
<PAGE>


ZAPME! CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and
per share amounts)

<TABLE>
<CAPTION>
                                                                                            JUNE 30,   DECEMBER 31,
                                                                                              2000         1999
                                                                                              ----         ----
                                                                                           (UNAUDITED)
<S>                                                                                         <C>          <C>
ASSETS
Current assets:
   Cash and cash equivalents .............................................................   $81,848     $112,714
   Accounts receivable ...................................................................     9,273        1,500
   Other receivables .....................................................................     2,734        3,344
   Notes receivable from stockholder .....................................................       300          134
   Prepaid expenses and other current assets .............................................       593          801
Total current assets .....................................................................    94,748      118,493
Equipment, net ...........................................................................    42,431       30,393
Restricted cash ..........................................................................       567          565
Other assets .............................................................................     2,684        1,741
Goodwill .................................................................................    11,472         --
Total assets .............................................................................  $151,902     $151,192

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses .................................................    $9,159      $10,117
   Accrued compensation and related expenses .............................................     1,605        1,723
   Deferred revenue ......................................................................        60          677
   Current portion of capital lease obligations ..........................................    16,875       11,070
Total current liabilities ................................................................    27,699       23,587
Capital lease obligations ................................................................    21,783       13,292
Total liabilities ........................................................................    49,482       36,879
Redeemable Convertible Preferred stock:
   Preferred stock, no par value issuable in series:
   Authorized shares-500,000,000 at June 30, 2000 and none at December 31, 1999...........
   Issued and outstanding shares-669,920 at June 30, 2000 and none at December 31, 1999 ..
   Common stock, $0.01 par value..........................................................     5,500
Stockholders' equity:
Authorized shares-200,000,000 at June 30, 2000 and December 31, 1999
   Issued and outstanding shares-45,073,262 at June 30, 2000
       and 43,803,781 at December 31, 1999 ...............................................   186,114      183,765
   Preferred stock .......................................................................       595         --
   Deferred stock compensation ...........................................................    (6,829)     (11,642)
   Receivable due from stockholder .......................................................    (6,500)      (6,500)
   Accumulated deficit ...................................................................   (76,460)     (51,310)
Total stockholders' equity.......... .....................................................    96,920      114,313
Total liabilities, redeemable convertible preferred stock and
   stockholders' equity ..................................................................  $151,902     $151,192
</TABLE>


           See accompanying Notes to Consolidated Financial Statements


                                                                               3
<PAGE>


ZAPME! CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except
per share amounts) (Unaudited)

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED            SIX MONTHS ENDED
                                                                      JUNE 30,                    JUNE 30,
                                                                      --------                    --------
                                                                 2000          1999           2000           1999
                                                                 ----          ----           ----           ----
<S>                                                           <C>            <C>          <C>              <C>

Revenue from non-affiliates ................................      $269          $141         $1,523           $147
Revenue from affiliates ....................................     6,987          --           11,143           --
Total Revenue ..............................................    $7,256          $141        $12,666           $147
Costs and expenses:
   Cost of revenues ........................................    11,478         1,035         16,125          1,247
   Research and development, excluding stock-based
     compensation of $189 and $69 for the three months
     ended June 30, 2000 and June 30, 1999 and $385 and
     $127 for the six months ended June 30, 2000
     and June 30, 1999 .....................................     2,311           562          3,674          1,034
   Sales and marketing, excluding stock-based compensation
     of $223 and $400 for the three months ended
     June 30, 2000 and June 30, 1999 and $435 and $444
     for the six months ended June 30, 2000 and
     June 30, 1999 .........................................     2,303         1,592          4,630          2,456
   General and administrative, excluding stock-based
     compensation of $1,663 and $1,180 for the three months
     ended June 30, 2000 and June 30, 1999 and $3,283 and
     $1,960 for the six months ended June 30, 2000 and
     June 30, 1999 .........................................     3,149         1,115          9,319          1,975
   Amortization of deferred stock compensation .............     2,075         1,649          4,103          2,531
   Amortization of Goodwill ................................       399          --              399           --
Total costs and expenses ...................................    21,715         5,953         38,250          9,243
Loss from operations .......................................   (14,459)       (5,812)       (25,584)        (9,096)
Other income (expense) .....................................        66          --               59           --
Interest income (expense), net .............................        27            32            457             29
Net Loss ...................................................  $(14,366)      $(5,780)      $(25,068)       $(9,067)

Accretion and dividend on redeemable convertible
Preferred stock ............................................       (78)       (3,191)           (78)        (3,771)
Net loss applicable to common stockholders .................   (14,444)       (8,971)       (25,146)       (12,838)

Net loss per share
   Basic and diluted .......................................     (0.34)        (0.67)         (0.59)         (0.95)

Shares used in calculation of net loss per share:
   Basic and diluted .......................................    42,464        13,352         42,350         13,517
</TABLE>


           See accompanying Notes to Consolidated Financial Statements


                                                                               4
<PAGE>


ZAPME! CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
(Unaudited)

<TABLE>
<CAPTION>
                                                                                     SIX MONTHS ENDED
                                                                                         JUNE 30,
                                                                                         --------
                                                                                    2000           1999
                                                                                    ----           ----
<S>                                                                               <C>            <C>

OPERATING ACTIVITIES
Net loss .......................................................................  $(25,068)      $(9,067)
Adjustments to reconcile net loss to net cash used in operating activities:
   Amortization of deferred stock compensation .................................     4,103         2,531
   Depreciation and amortization ...............................................     7,152           770
   Amortization of other non-cash compensation..................................       164             0
   Amortization of goodwill ....................................................       399          --
   Changes in operating assets and liabilities:
   Accounts receivable .........................................................    (7,773)          (14)
   Other receivables ...........................................................       610        (1,063)
   Prepaid expenses and other current assets ...................................       208          (317)
   Other assets ................................................................    (1,169)          (75)
   Accounts payable and accrued expenses .......................................      (925)        1,676
   Accrued compensation and related expenses ...................................      (141)          436
   Deferred revenue ............................................................      (617)          302
Net cash used in operating activities ..........................................   (23,014)       (4,821)
INVESTING ACTIVITIES
Disposal of equipment, net .....................................................       787        (1,303)
Restricted cash ................................................................        (2)         (560)
Notes receivable from stockholder ..............................................      (166)           (4)
Purchase of eFundraising.com ...................................................    (1,850)            0
Purchase of LearningGate.com ...................................................    (1,187)            0
Net cash used in investing activities ..........................................    (2,417)       (1,867)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net .................................         0        25,960
Proceeds from the issuance of common stock, net ................................       369            18
Proceeds from borrowings on notes payable ......................................      --             700
Payments on notes payable ......................................................      --            (500)
Payments on lease obligations ..................................................    (5,726)         (450)
Payments of dividends ..........................................................       (78)         --
Net cash provided by (used in) financing activities ............................    (5,435)       25,728
Increase (decrease) in cash and cash equivalents ...............................   (30,866)       19,040
Cash and cash equivalents at beginning of period ...............................   112,714           815
Cash and cash equivalents at end of period .....................................   $81,848       $19,855

SUPPLEMENTAL DISCLOSURES:
Conversion of notes payable to stockholders to preferred stock .................       $--          $200

Accretion and dividends of redeemable preferred stock ..........................       $78          $936

Accretion of mandatory dividends and guaranteed return of preferred stock ......       $--        $2,835

Capital lease obligations incurred .............................................   $20,010        $6,768

Warrants issued in connection with lease financing .............................       $--          $169

Warrants issued in connection with Products and Services Agreement .............       $--          $974

Cash paid for interest .........................................................    $1,349          $110

Non cash investing activities
  Preferred stock issued in purchase of eFundraising.com .......................    (6,095)          --
  Common stock issued in purchase of LearningGate.com ..........................    (2,950)          --
</TABLE>


           See accompanying Notes to Consolidated Financial Statements


                                                                               5
<PAGE>


ZAPME! CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000

1.  BASIS OF PRESENTATION

           The accompanying unaudited consolidated financial statements
include the accounts of the following wholly owned subsidiaries of ZapMe!
Corporation: r)Star Broadband Networks, Inc., a Delaware Corporation,
eFundraising.com Corporation, a Canadian corporation, and LearningGate.com
Inc., a division of the Company. All significant intercompany accounts and
transactions have been eliminated in consolidation. In this document, ZapMe!
and its subsidiaries are collectively referred to as the "Company."

           The unaudited consolidated financial information as of June 30,
2000 and June 30, 1999 includes all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of the results for the periods shown. The results of operations
for such periods are not necessarily indicative of the results expected for
the full fiscal year or for any future period. These financial statements
should be read in conjunction with the financial statements as of December
31, 1999 and related notes.

           Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission.

2.  BASIC AND DILUTED EARNINGS PER SHARE

           Basic and diluted net loss per share information for all periods
is presented under the requirements of FASB Statement No. 128, "Earnings per
Share." Basic and diluted loss per share has been computed using the weighted
average number of common shares outstanding during the period, less shares
that may be repurchased and excludes any anti-dilutive effects of options,
warrants and convertible securities. Potentially dilutive issuances have also
been excluded from computation of diluted net loss per share as their
inclusion would be antidilutive.

           The calculation of basic and diluted net loss per share is as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED         SIX MONTHS ENDED
                                                                               JUNE 30,                  JUNE 30,
                                                                               --------                  --------
                                                                          2000          1999        2000           1999
                                                                          ----          ----        ----           ----
<S>                                                                     <C>           <C>         <C>          <C>
Net loss .............................................................  $(14,366)     $(5,780)    $(25,068)      $(9,067)
Accretion and dividend on redeemable convertible preferred stock .....        78        3,191           78         3,771
Net Loss applicable to common stockholders ...........................  $(14,444)     $(8,971)    $(25,146)     $(12,838)
Weighted average shares of common stock outstanding ..................    44,119       14,332       44,005        14,311
Less: Weighted average shares subject to repurchase ..................    (1,655)         980       (1,655)          794
Weighted average shares of common stock outstanding used in computing
   basic and diluted net loss per share ..............................    42,464       13,352       42,350        13,517
   Basic and diluted net loss per share ..............................    $(0.34)      $(0.67)      $(0.59)       $(0.95)
</TABLE>


                                                                               6
<PAGE>


3.  STOCKHOLDERS' EQUITY

           The Company issued as purchase consideration to a management
seller of eFundraising.com Corporation ("eFundraising") 169,920 preferred
shares Series C, D and E in a wholly-owned subsidiary of eFundraising at
$3.50 per share amounting to $595,000.

4.  REDEEMABLE CONVERTIBLE PREFERRED STOCK

           In May 2000, the Company acquired eFundraising and as purchase
consideration issued 500,000 Series A preferred shares in a wholly-owned
subsidiary to the sellers of eFundraising at $11 per share amounting to
$5,500,000. The holders of the Series A preferred shares shall be entitled to
receive cash dividends at the annual rate per share of $1.10 for each Series
A preferred share, payable each quarter. The holders of the Series A
preferred shares shall have the right at any time to convert such shares into
ZapMe! common stock on a one-for-one basis. The holders of the Series A
preferred shares shall be entitled at any time after the third anniversary of
the closing date to require the Company to redeem the Series A shares at a
retraction price of $11 per share. The Company may at any time and from time
to time after the third anniversary of the closing date redeem all or any of
the Series A preferred shares at a redemption price of $11 per share. The
Series A preferred shares will automatically convert when the closing price
of the Company's common shares is above $20 per share.

WARRANTS

           The Company had the following warrants outstanding at June 30,
2000 to purchase shares of stock:

<TABLE>
<CAPTION>
      NUMBER OF SHARES               EXERCISE PRICE PER          EXPIRATION OF WARRANTS
      ----------------               -------------------         ----------------------
                                            SHARE
                                            -----
<S>                                  <C>                         <C>
              250,000                              $3.00                May 2003
              250,000                               3.50                May 2003
              100,000                               5.00               June 2004
              150,000                               5.00             December 2003
               50,000                               5.00               June 2004
               30,000                               5.00              October 2000
               12,500                               8.00              October 2000
              842,500
</TABLE>

INITIAL PUBLIC OFFERING

           In October 1999, the Company completed an initial public offering
in which the Company sold 9,000,000 shares of its common stock at a price of
$11.00 per share. Concurrently with the underwritten initial public offering,
the Company sold to various stockholders associated with Gilat Satellite
Networks, at $10.23 per share, an aggregate of 488,753 shares of the
Company's common stock. The proceeds to the Company from the offerings, after
deducting underwriting discounts and commissions, were approximately $97.1
million. Upon closing of the underwritten offering, all of the Company's then
outstanding preferred stock converted into common stock. After the offering,
the Company's authorized capital consists of 205,000,000 shares of capital
stock (200,000,000 shares of common stock and 5,000,000 shares of preferred
stock) of which approximately 45,162,423 shares of common stock were
outstanding at July 31, 2000.


                                                                               7
<PAGE>


5.  COMMITMENTS AND CONTINGENCIES

           In June 1999, the Company entered into an agreement whereby a
minimum number of school sites would be established and maintained for a
fixed monthly fee for a minimum of three years. In September 1999, the
agreement was amended and the fixed monthly fee on the minimum number of
sites was increased, which increased the Company's contingent obligation. If
no additional school sites were to be installed subsequent to June 30, 2000,
the maximum, contingent obligation would total approximately $2.5 million.

6.  RELATED PARTY TRANSACTIONS

           In August 1999 a majority of the Company's directors approved the
issuance of an immediately exercisable option to purchase 300,000 shares of
the Company's common stock to a director of the Company at an exercise price
of $5.00 per share. The shares were and are subject to a right of repurchase
in favor of the Company, which will expire at a rate of one third each
anniversary date of the date of grant. In September 1999, the officer
exercised the right to purchase the shares. The Company recorded deferred
stock compensation of approximately $1.8 million, which is being amortized by
a charge to operations over the vesting period of the stock using a graded
vesting method. The Company has also loaned the amount necessary to pay for
the aggregate purchase price of the option, which has been secured by a full
recourse promissory note. The note has a term of four years and bears an
interest rate of 5.98%.

           In September 1999, the Company hired a new chief executive
officer. As part of the officer's employment agreement, the Company granted a
right to purchase one million shares of the Company's common stock at an
exercise price of $5.00 per share. The shares are subject to a right of
repurchase in favor of the Company, which will expire at a rate of
twenty-five percent on the first anniversary of the grant date and one
forty-eighth of the shares at the end of each month thereafter. In September
1999, the officer exercised the right and the Company recorded deferred stock
compensation of approximately $6.0 million, which is being amortized by a
charge to operations over the vesting period of the stock using a graded
vesting method. The Company lent the amount necessary to pay for the
aggregate purchase price of the restricted stock, secured by a promissory
note. The promissory note, as amended in June 2000, provides for the shares
to serve as the sole collateral for the loan, a payment term of four years
and an interest rate of 5.98%.

           The Company recorded revenue totaling $6,987,000 in the three-month
period ended June 30, 2000 from affiliates with which the Company has
strategic business alliances for sponsorship and advertising, representing
96% of total revenue for the period. For revenue recognition purposes a party
is deemed an affiliate if it shares common board members, owns more than 5%
of the Company's stock or is a significant vendor to the Company.

Note 7. BUSINESS COMBINATIONS

           The Company completed two acquisitions during the three months
ended June 30, 2000: eFundraising and LearningGate.com, Inc. Each acquisition
was recorded using the purchase method of accounting under Accounting
Principles Boards ("APB") Opinion No. 16. The aggregate purchase price of the
acquired companies, excluding future contingent consideration, was
$11,553,000, and was comprised of common stock, preferred stock in a
subsidiary, Time Accelerated Restricted Stock Award Plan stock options
("TARSAPS") and cash. Results of operations for each acquired company have
been included in the financial results of the Company from the closing date
of each transaction forward.

           In accordance with APB 16, all identifiable assets were assigned a
portion of the cost (purchase price) of the acquired companies on the basis
of their respective fair values. The identifiable intangible assets and
goodwill are included in "Goodwill" on the accompanying consolidated balance
sheets and are being amortized over their estimated useful lives, which is 3
years.

           On May 10, 2000, the Company completed its acquisition of
eFundraising, a company that offers fundraising products and services to
schools and other organizations. In connection with the acquisition, the
Company issued a combination of cash and securities totaling approximately
$7,945,000 to acquire all of the outstanding shares of the corporation.
Pursuant to the terms of the agreement the purchase price may increase by the
then value of approximately 1,040,000 common shares if certain financial and
other milestones are achieved.

           On June 23, 2000, the Company completed its acquisition of
LearningGate.com, Inc., a provider of web-based educational tools
("LearningGate"). In connection with the acquisition, the Company issued
approximately 1 million common shares in addition to $858,000 cash to acquire
all of the outstanding shares of the corporation. The combination of cash and
securities totalled $3,608,000.

                                                                               8
<PAGE>


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

CAUTIONARY STATEMENT

           Certain written and oral statements made or incorporated by
reference from time to time by the Company or its representatives in this
document, other documents filed with the SEC, press releases, conferences, or
otherwise that are not historical facts, or are preceded by, followed by or
that include words such as "anticipate," "believe," "plan," "estimate,"
"expect," "seek," and "intend," and words of similar import are intended to
identify forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees
of future performance and are subject to business and economic risks and
uncertainties, which are difficult to predict. Therefore, our actual results
of operations may differ materially from those expressed or forecasted in the
forward-looking statements as a result of a number of factors, including, but
not limited to, those set forth in this discussion under "Certain Risk
Factors Which May Impact Future Operating Results" and other risks detailed
from time to time in reports filed with the SEC.

           All forward-looking statements of the Company are qualified by and
should be read in conjunction with such risk disclosure. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.

                                                                               9
<PAGE>

OVERVIEW

           ZapMe! has built and is expanding the country's largest broadband
Internet Media Network specializing in education. ZapMe!'s solution utilizes
"always on" satellite technology which delivers technology tools and
educational resources to schools. We believe that by providing PC's,
software, installation, and support along with broadband connectivity to the
Internet, we will help bridge the digital divide and provide students of all
social and economic backgrounds access to the technology and information that
are critical in today's knowledge-based economy.

           We commenced operations in June 1997 and began offering
sponsorships through our proprietary network in December 1998. From inception
through June 30, 2000, our activities primarily consisted of:

           -          marketing the ZapMe! network to school districts;

           -          entering into agreements with school districts for the
                      placement of the ZapMe! network in schools;

           -          developing our proprietary user interface and satellite
                      multicasting capabilities;

           -          raising capital;

           -          recruiting personnel;

           -          conducting research and development activities; and

           -          purchasing assets to support our operations.

           Since December 1998, we have been:

           -          deploying our network in schools;

           -          developing our operations, technology and support
                      capabilities;

           -          forming strategic alliance relationships; and

           -          continuing to invest in research and development.

           In order to achieve our strategic plan, we intend to continue to
invest heavily in deploying our network, marketing and promotion, technology
and operations. We lease and purchase the computer equipment we install in
schools--including PCs, monitors, servers and printers--on customary terms for
sales made for educational purposes from our partners, some of which are also
sponsors.

           As of June 30, 2000, we had deployed ZapMe! equipment to
approximately 2,200 schools in 45 states. Total student enrollment in schools
with deployed ZapMe! equipment was over 2 million. Additionally, over 1,000
school districts, representing over 2,000 additional middle and high schools,
had approved and signed our three-year agreement as of that date.

           We have incurred net losses of approximately $76.5 million for the
period of inception through June 30, 2000. We expect to incur additional
losses for the foreseeable future due to the increased cost of, among other
things, sales and marketing, research and development and the assorted costs
of building and operating a larger network. We expect that the size of these
losses will fluctuate from quarter to quarter and that these fluctuations may
be substantial. In view of the rapidly evolving nature of our business and
our limited operating history, we believe that period-to-period comparisons
of our operating results are not necessarily meaningful and should not be
relied upon as an indication of future performance.

REVENUE. To date, the Company has generated revenue primarily from content
sponsorship fees paid by strategic partners. Four sponsors--Inacom, Toshiba,
Gilat, and Sylvan--accounted for approximately 79% of our revenue in the six
months ended June 30, 2000.


                                                                              10
<PAGE>


           We derive revenue principally from sponsorship, e-commerce and
network services. Sponsorship revenue consists of fees charged for
advertising or promotional messages delivered over our network. Revenue
related to sponsorship of content on our network is generally recognized when
sponsorship is provided. E-commerce revenue consists of referral fees and
commissions on transactions facilitated and referred through our network.
Revenue from e-commerce is recognized upon notification from the contracting
partner that a qualifying sale has occurred. Network services revenue is
derived from the distribution of content and products delivered through our
network, and from educational services delivered in the ZapMe! labs such as
teacher training, tutoring and other educational programs offered through a
strategic alliance with Sylvan Learning Systems. Network services and other
revenue is recognized in the time period in which the underlying service is
delivered. Network services and other revenue also include revenue from our
five-year agreement with Sylvan which provides for a sharing of revenue
derived from the delivery of Sylvan programs in ZapMe! computer labs. This
agreement allows Sylvan to offer student tutoring, teacher training, and
other programs in the ZapMe! computer labs. Fees payable under this agreement
are based on a rate for installed schools available for use by Sylvan. To
date, no programs have been offered under this arrangement, and additionally
no material e-commerce or network services have been delivered and no
significant revenue has been recognized by ZapMe! for those activities.

The Company is exploring the feasibility of offering a limited
sponsorship-based upgraded version of the Zapme! computer labs to certain
schools on a fee or grant basis. Although management is encouraged by early
feedback relating to our customers' desire for a limited sponsorship-based
alternative product, management believes it is too early to ascertain the
demand for such product or its affect on the Company's financial condition
and results of operations.

COSTS OF REVENUE. Costs of revenue consist primarily of depreciation on
school network equipment, allowances for the cost of equipment replacement
not covered by manufacturers' warranties, and the cost of operating our
satellite and terrestial communications network. The costs associated with
this form of telecommunication include (1) the cost of land-based equipment,
or "earth segment," such as the satellite dish, hubs, send and receive cards
located inside the network servers and land-based phone service and (2) the
cost of the link to and from the satellite, or "space segment." ZapMe!
provides much of its earth segment to schools by purchasing satellite dishes,
hubs and send/receive cards for its network servers. ZapMe! purchases the
space segment pursuant to fixed price agreements. Commencing July 1999, a
space segment vendor began to install and lease satellite dishes and computer
equipment as well as provide space segment under a long-term fixed-price per
school contract. The amount of the allowance for cost of equipment
replacements not covered by manufacturers' warranties that is included in
costs of revenue for the three months ended June 30, 2000 was $29,000 and for
the six months ended June 30, 2000 was $37,000. The amount of the reserve on
the balance sheet at June 30, 2000 was $68,000.

OPERATING EXPENSES. Our operating expenses consist primarily of sales and
marketing, research and development and general and administrative expenses.
Research and development expenses consist primarily of compensation and
consulting expenses associated with the development and refinement of the
ZapMe! user interface, the satellite network, content and quality assurance.
To date, we have not capitalized any software development costs under
Statement of Financial Accounting Standards ("SFAS") No. 86 because we
believe that our process for developing software is essentially completed
concurrent with the establishment of technological feasibility. As a result,
all development costs have been expensed as incurred. Sales and marketing
expenses consist primarily of salaries, commissions, travel expenses,
advertising expenses, costs of promotional programs, trade show expenses,
seminars and costs of marketing materials. General and administrative
expenses consist primarily of salaries and related costs for our executive,
administrative, finance, legal and information technology personnel, support
services, facilities costs and professional services fees.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation for the three months ended June 30, 2000 was $2.1 million made
up of $189,000 in research and development, $223,000 in sales and marketing,
and $1,663,000 in general and administrative. Amortization of deferred stock
compensation for the three months ended June 30, 1999 was $1.6 million made
up of $69,000 in research and development, $400,000 in sales and marketing,
and $1,180,000 in general and administrative. Amortization of deferred stock
compensation for the six months ended June 30, 2000 was $4.1 million made up
of $385,000 in research and development, $435,000 in sales and marketing, and
$3,283,000 in general and administrative. Amortization of deferred stock
compensation for the six months ended June 30, 1999 was $2.5 million made up
of $127,000 in research and development, $444,000 in sales and marketing, and
$1,960,000 in general and administrative. Deferred stock compensation arose
as a result of stock options granted during 1998 and 1999 and shares of
common stock sold to officers of ZapMe! at prices below the deemed fair
market value at the date of grant. Deferred stock compensation is amortized
over the vesting period of the options, generally three to four years, or the
performance period for various warrants we granted using a graded vesting
method. As a result, amortization of deferred stock compensation will
adversely impact our operating results for the next four years.


                                                                              11
<PAGE>


           Future amortization expense is estimated to be approximately $2.7
million for the remaining six months of 2000, and approximately $3.0 million,
$1.1 million and $99,000 for 2001, 2002 and 2003, respectively.

INCOME TAXES. There was no provision for federal or state income taxes for
any period since inception due to our operating losses. At December 31, 1999,
we had net operating loss carryforwards for federal income tax purposes of
approximately $21.9 million which will expire beginning in fiscal year 2012
if not utilized. Utilization of our net operating loss carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state
provisions. Such an annual limitation could result in the expiration of the
net operating loss carryforwards before utilization. A valuation allowance
has been established and, accordingly, no benefit has been recognized for our
net operating losses and other deferred tax assets. The net valuation
allowance increased by approximately $8.1 million during the year ended
December 31, 1999. We believe that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets such that a full valuation allowance
has been recorded. These factors include our history of net losses since
inception and expected near-term future losses. We will continue to assess
the realizability of the deferred tax assets based on actual and forecasted
operating results.

NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. We recorded accretion and a
dividend on our redeemable convertible preferred stock of approximately
$78,000 for the three months ended June 30, 2000 and $3,191,000 for the three
months ended June 30, 1999, and approximately $78,000 for the six months
ended June 30, 2000 and $3,771,000 for the six months ended June 30, 1999.

RESULTS OF OPERATIONS

REVENUE. Total revenues increased to approximately $7.3 million for the three
months ended June 30, 2000 versus approximately $141,000 for the three months
ended June 30, 1999. Total revenues increased to approximately $12.7 million
for the six months ended June 30, 2000 versus approximately $147,000 for the
six months ended June 30, 1999. Four sponsors-Inacom, Toshiba, Gilat, and
Sylvan-accounted for approximately 96% of our total revenue for the three
months ended June 30, 2000 and approximately 79% of our total revenue for the
six months ended June 30, 2000. During the three month period ended June 30,
2000, we added 3 new sponsors.

COSTS OF REVENUE. Costs of revenue increased to approximately $11.5 million
for the three months ended June 30, 2000. Given the minimal network
deployment level in early 1999, costs of revenue for the three months ended
June 30, 1999 were just $1.0 million. Costs of revenue increased to
approximately $16.1 million for the six months ended June 30, 2000. Given the
minimal network deployment level in early 1999, costs of revenue for the six
months ended June 30, 1999 were just $1.2 million. The increase from 1999 to
2000 was due primarily to 1) depreciation related to network equipment
installed in significantly more schools, 2) space segment costs related to
the increased number of installed schools, 3) call center costs to support
users and 4) a write off of earlier technology satellite cards deemed
worthless. We expect costs of revenue to continue to increase with the
ongoing deployment of the ZapMe! network.

RESEARCH AND DEVELOPMENT. Research and development expenses increased to
approximately $2.3 million for the three months ended June 30, 2000 from
approximately $562,000 for the three months ended June 30, 1999. Research and
development expenses increased to approximately $3.7 million for the six
months ended June 30, 2000 from approximately $1.0 million for the six months
ended June 30, 1999. The increase was due primarily to increased payroll and
consulting fees as we continue to develop our network capabilities. We
believe that continued investment in research and development will contribute
to attaining our strategic objectives and, as a result, expect research and
development expenses to increase in future periods.

SALES AND MARKETING. Sales and marketing expenses increased to approximately
$2.3 million for the three months ended June 30, 2000 from approximately $1.6
million for the three months ended June 30, 1999. Sales and marketing
expenses increased to approximately $4.6 million for the six months ended
June 30, 2000 from approximately $2.5 million for the six months ended June
30, 1999. The increase in the level of expense was due primarily to
compensation associated with


                                                                              12
<PAGE>


the increased number of sales and marketing personnel and related overhead,
and increased travel costs associated with our direct selling efforts. We
expect selling and marketing expenses to increase in future periods as we
hire additional personnel, promote our home client, and develop incentive
programs to increase in-school and at home usage of the ZapMe! network.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
approximately $3.1 million for the three months ended June 30, 2000 from
approximately $1.1 million for the three months ended June 30, 1999. General
and administrative expenses increased to approximately $9.3 million for the
six months ended June 30, 2000 from approximately $2.0 million for the six
months ended June 30, 1999. The increase in the level of expenses is due
primarily to increased personnel and related overhead necessary to support
our increased scale of operations, particularly the addition of key executive
staff. We expect general and administrative expenses to increase as we expand
our operations.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation for the three months ended June 30, 2000 was $2.1 million made
up of $189,000 in research and development, $223,000 in sales and marketing,
and $1,663,000 in general and administrative. Amortization of deferred stock
compensation for the three months ended June 30, 1999 was $1.6 million made
up of $69,000 in research and development, $400,000 in sales and marketing,
and $1,180,000 in general and administrative. Amortization of deferred stock
compensation for the six months ended June 30, 2000 was $4.1 million made up
of $385,000 in research and development, $435,000 in sales and marketing, and
$3,283,000 in general and administrative. Amortization of deferred stock
compensation for the six months ended June 30, 1999 was $2.5 million made up
of $127,000 in research and development, $444,000 in sales and marketing, and
$1,960,000 in general and administrative.  The deferred stock compensation is
amortized over the vesting period of the related options using a graded
vesting method.

INTEREST INCOME (EXPENSE), NET. Interest income (expense), was approximately
$27,000 for the three months ended June 30, 2000 consisting of $1,371,000
interest income and $1,344,000 interest expense compared to approximately
$32,000 for the three months ended June 30, 1999 consisting of $145,000
interest income and $113,000 interest expense. Interest income (expense), net
increased to approximately $450,000 for the six months ended June 30, 2000
consisting of $2,993,000 interest income and $2,543,000 interest expense from
approximately $29,000 for the six months ended June 30, 1999 consisting of
$152,000 interest income and $123,000 interest expense. The increase is due
to substantially higher interest income on cash balances derived primarily
from proceeds from our initial public offering of Common Stock in October,
1999.

           Our revenue, operating expenses and operating results may vary
significantly from quarter to quarter. The fluctuations may be due to a
number of factors, many of which are beyond our control. These factors
include:

           -          the rate of expansion of our network through deployment
                      into additional schools;

           -          the rate of usage of our network in schools and at home;

           -          our ability to generate and sustain significant levels of
                      sponsorship revenue;

           -          fluctuations in the use of our network and in demand for
                      our products and services related to the school calendar,
                      including vacations and holidays;

           -          the burden of lease payment obligations;

           -          government action to regulate or otherwise restrict our
                      ability to serve schools;

           -          our ability to manage costs, including personnel costs;
                      and

           -          costs relating to possible acquisitions and integration of
                      technologies or businesses.

           Due to all of the foregoing factors, our quarterly revenue and
operating results are difficult to forecast, and we believe that
period-to-period comparisons of our operating results will not necessarily be
meaningful and should not be relied upon as an indication of future
performance.

LIQUIDITY AND CAPITAL RESOURCES

           On October 25, 1999, we closed our underwritten initial public
offering and a concurrent offering of our Common Stock, which resulted in the
net proceeds of approximately $97.1 million.


                                                                              13
<PAGE>


           Net cash used in operating activities increased to approximately
$23.0 million for the six months ended June 30, 2000 from approximately $4.8
million for the six months ended June 30, 1999. In each period, cash used by
operating activities was primarily a result of the net losses for such period
offset by amortization of deferred stock compensation. The increase in the
current period was due to a larger net loss.

           Net cash used in investing activities increased to approximately
$2.4 million for six months ended June 30, 2000 from approximately $1.9
million for the six months ended June 30, 1999. The increase in the current
period is primarily due to the acquisitions of eFundraising and LearningGate.
The increase is due mainly to the purchase of eFundraising for $1.8 million
and the purchase of LearningGate for $1.2 million.

           Cash provided by (used in) financing activities decreased to
approximately $(5.4) million for the six months ended June 30, 2000 from
approximately $25.7 million for the six months ended June 30, 1999. The
decrease was attributable to reduced stock issuance in the current period and
increased payments on lease obligations.

           Capital lease obligations incurred totaled approximately $20.0
million for the six months ended June 30, 2000 compared to $6.8 million for
the six months ended June 30, 1999. Lease financing was used primarily to
acquire and install computer equipment in schools. The increase was due to
higher school deployment levels in the current period.

           Our deferred revenue balance includes deferred revenue
attributable to billings in advance of earnings on content sponsorship
activities. We record an account receivable and deferred revenue upon billing
for sponsorships. We recognize revenue ratably over the period the
sponsorship is delivered.

           We believe that our available cash resources and amounts available
under financing facilities will be sufficient to meet our expected working
capital and capital expenditure requirements for the next twelve months.

           We may need to raise additional funds in order to support more
rapid expansion, develop new vertical markets, respond to competitive
pressures, acquire complementary businesses or technologies, or respond to
unanticipated developments. We may seek to raise additional funds through
private or public sales of securities, strategic financial and business
relationships, bank debt, lease financing, or otherwise. If additional funds
are raised through the issuance of equity securities, the percentage of
ZapMe! owned by existing stockholders will be reduced, stockholders may
experience additional dilution, and these equity securities may have rights,
preferences, or privileges senior to those of the holders of ZapMe!'s common
stock. Additional financing may not be available on acceptable terms, if at
all. If adequate funds are not available or are not available on acceptable
terms, we may be unable to deploy or enhance our network and Netspace, take
advantage of future opportunities, or respond to competitive pressures or
unanticipated developments, which could severely harm our business.


                                                                              14
<PAGE>


CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS

           The Company operates in a rapidly changing environment that
involves a number of risks, some of which are beyond its control. The
following discussion highlights some of these risks and the possible impact
of these factors on future results of operations.

WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY.

           Because we were incorporated in June 1997 and only launched our
network in June 1998, we have a limited operating history on which investors
can base an evaluation of our business and prospects. Our revenue and income
potential are unproven and our business model is unique, constantly evolves
and will continue to evolve. We only recently began generating revenue from
sponsorships and to date we have not generated any material revenue from
e-commerce or network services. We have limited insight into trends that may
emerge and affect our business.

           An investor in our common stock must carefully consider the risks
and difficulties frequently encountered by companies in an early stage of
development, as well as the risks we face due to our participation in a new
and rapidly evolving market. Our business strategy may not be successful and
we may not successfully overcome these risks.

WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES.

           We incurred net losses of approximately $57.8 million for the
period of inception through June 30, 2000. These losses resulted primarily
from costs related to developing the ZapMe! network, deploying the ZapMe!
network to schools and developing content and features for the ZapMe!
network. We have not achieved profitability. We expect to have increasing net
losses and negative cash flows for the foreseeable future. The size of these
net losses will depend, in part, on the rate of growth in our revenues from
our sponsors, e-commerce offerings and network services and on the level of
our expenses. We intend to increase our operating expenses substantially as
we:

           -          increase the number of users of our network through the
                      deployment of our network to additional schools;

           -          increase our network usage through marketing activities
                      and the addition of new features; and

           -          increase our general and administrative functions to
                      support our growing operations.

           As a result, we expect that our operating expenses will increase
significantly for the foreseeable future. With increased expenses, we will
need to generate significant additional revenues to achieve profitability.
Consequently, it is possible that we will never achieve profitability, and
even if we do achieve profitability, we may not sustain or increase
profitability on a quarterly or annual basis in the future. If we do not
achieve or sustain profitability in the future, then we may be unable to
continue our operations.

WE EXPECT OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE AND OUR EARLY STAGE OF
DEVELOPMENT LIMITS OUR ABILITY TO PREDICT REVENUES AND EXPENSES PRECISELY.

           Our quarterly and annual operating results have varied in the past
and are likely to fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. Factors that might cause
quarterly fluctuations in our operating results include the factors described
in the subheadings below. To respond to these and other factors, we may need
to make business decisions that could impact our quarterly operating results.
Most of our expenses, such as lease payment obligations, employee
compensation and rent, are relatively fixed in the short term. Moreover, our
expense levels are based, in part, on our expectations regarding future
revenue levels. As a result, if total revenues for a particular quarter are
below our expectations we could not proportionately reduce our operating
expenses for that quarter. Therefore, this revenue shortfall would have a
disproportionate effect on our expected operating results for that quarter.
Consequently, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful, and should not be viewed as
indicators of our future performance. In addition, during future periods our
quarterly or annual operating results may fail to meet the expectations of
securities analysts or investors. In this case the trading price of our
common stock would likely decrease.


                                                                              15
<PAGE>


OUR METHODS OF GENERATING REVENUES ARE NEW AND LARGELY UNTESTED.

           The success of our business will depend on our ability to generate
revenue. We have only recently begun to generate revenue, and because our
methods of generating revenue are new and largely untested we may generate
lower revenues than we expect. Further, if we are unable to generate multiple
new sources of revenue, our future revenue growth will suffer. Currently, we
expect to receive the majority of our revenue from:

           -          sponsorships;

           -          e-commerce; and

           -          network services, including marketing and profit sharing
                      fees.

           From inception through June 30, 2000, we generated approximately
90% of our revenue from sponsorships. Although we expect to generate a
portion of our future revenue through e-commerce and network services, we
have not generated any material e-commerce or network service revenue through
June 30, 2000. As a result, our expected primary methods of generating
revenue are relatively new to us and largely untested.

           We expect that revenue from sponsorships will make up a
significant amount of our revenue for the foreseeable future, although we may
never achieve significant sponsorship revenue. If Internet and online
advertising do not continue to grow, or if sponsorship on the ZapMe! network
does not achieve market acceptance, our revenues generated from sponsorships
will be lower than expected, and may be insufficient to support our business
model.

           The success of our e-commerce initiative depends on our adult
users-parents, teachers and administrators-being willing to engage in
commerce over our network and more generally upon the adoption of the
Internet as a medium for commerce by a broad base of customers and our users.
If this market fails to develop or develops more slowly than expected, or if
our e-commerce services do not achieve market acceptance, our revenue
generated from e-commerce will be lower than expected.

           In the future, we expect to generate revenue through network
services. For example, we have entered into an agreement with a strategic
partner who will use the ZapMe! labs after school hours and, in return, will
pay us a portion of its revenue or profits. We anticipate entering into other
arrangements like this one; however, if we are unable to structure such
arrangements, if they develop more slowly then expected, or if our partners
are unable or unwilling to make full and effective use of our ZapMe! labs and
network, our revenue generated from network services will be lower then
expected.

OUR BUSINESS AND FUTURE REVENUE GROWTH WILL SUFFER IF WE FAIL TO RETAIN AND
GROW OUR USER BASE, GENERATE FREQUENT AND RECURRING USAGE BY OUR USERS, OR
DEMONSTRATE THAT OUR USERS ARE ACTUALLY USING OUR SERVICE.

           The success of our business will depend on our ability to add
users and demonstrate to sponsors that our users are using the ZapMe! network
on a regular basis. Our ability to grow our user base depends largely on our
ability to deploy our network to additional schools and extend our network to
home users. If we are unable to rapidly deploy our network to a large number
of additional schools, we will not be able to grow our core school user base,
and our ability to generate revenue and implement our strategy will be
severely limited. Our ability to grow our user base also depends on our
success with the development and implementation of programs designed to help
schools encourage their students to register.

           We must also encourage our users to use our service regularly and
for long periods of time. We have developed programs and features to
encourage this type of use of our network; however, these programs could
fail, in whole or in part. There are also a variety of reasons why our users
might not continue to regularly use our service. Some users may dislike our
community billboard which is always present on our interface. Users may find
that our features and content are not sufficiently compelling to continue
regular use, or may turn to other Internet providers for such services such
as e-mail. A number of our users may not actively use our service for periods
of time. If we are not able to demonstrate to


                                                                              16
<PAGE>


our sponsors that we have an active and growing user base, sponsors may
choose not to enter into sponsorship agreements with us and our revenue
generated from sponsorships would suffer.

WE RELY HEAVILY ON OUR KEY PARTNERS AND IF THEY TERMINATE THEIR STRATEGIC
ALLIANCES WITH US OR IF THE ARRANGEMENT FAILS TO MEET OUR OBJECTIVES, WE MAY
EXPERIENCE DIFFICULTY OR DELAYS IN INSTALLING AND MAINTAINING OUR NETWORK AND
OUR REVENUE GROWTH MAY SUFFER.

           Our current strategic alliance relationships include: Classroom
Connect, Dell, Microsoft, School Specialty, Spacenet, Sylvan, Toshiba and
Xerox. We rely heavily on our strategic alliance relationships. These
agreements involve many aspects of our business and in some cases include the
sale of equity securities to these companies. These types of arrangements are
complex and will require a great deal of effort to operate successfully. As a
result, there are many risks related to these arrangements, including some
that we may not have foreseen. It is difficult to assess the likelihood of
occurrence of these risks, including the lack of success of the overall
arrangement to meet the parties' objectives. If we fail to maintain these
relationships, or if our partners do not perform to our expectations, our
ability to deploy our network to additional schools, the performance of our
network, and our ability to generate revenues may all be harmed. Specific
examples of these strategic alliance relationships include: (1) our
agreements with Sylvan relating to the use of our network and labs outside of
school hours, (2) our agreement with Dell relating to the acquisition and
integration of our computer lab equipment, and (3) our agreements with
Spacenet relating to the installation of our network and labs as well as the
operation of our network.

WE ARE DEPENDENT ON THIRD PARTIES TO DEPLOY OUR NETWORK TO SCHOOLS AND
SUPPORT IT ONCE INSTALLED.

           We plan to rapidly deploy our network to additional schools across
the country. We have used, and plan to continue to use, third parties such as
Gilat and Spacenet, and Toshiba, to install and support the ZapMe! network in
each school. In the past we have experienced difficulties resulting from the
failure of former third party integrators to manage successfully a wide-scale
deployment into a school environment. Such failures resulted in delays in the
scheduled deployment of our network to additional schools. We have recently
entered into relationships with nationally recognized parties to install
software on the computers, to install the ZapMe! lab in each school site and
to serve as the general contractor to oversee the installation process.
However, these parties may not be able to install schools on a wide scale
according to our schedule. While we do not currently anticipate additional
changes of our third party installers, any further changes would cause delays
in the deployment of the ZapMe! network and any inability to install schools
according to our plan could limit or eliminate revenue generated from
sponsorships, e-commerce and network services. Further, if we do need to hire
substitute or additional third party installers of our network we cannot
assure you that we will be able to do so on terms as favorable as our current
arrangements, or at all, which could result in higher installation costs to
us as well as potential delays in our deployment.

           We also rely on third parties to provide the majority of support
necessary to maintain the ZapMe! network and labs once installed. Any
inability to maintain or delays to the maintenance of this equipment would
lead to lower revenue generated from sponsorship and network services.

OUR DEPENDENCE ON SHORT-TERM SPONSORSHIP CONTRACTS EXPOSES US TO GREATER
PRESSURE ON OUR SPONSORSHIP PRICES AND ALLOWS SPONSORS TO QUICKLY CEASE THEIR
SPONSORSHIPS.

           A substantial portion of our sponsorship revenue is and will
continue to be derived from short-term contracts. Consequently, we may not be
able to command higher prices typically associated with more comprehensive
arrangements. Further, many of our sponsors are able to cease sponsorship of
our network quickly and without penalty, thereby increasing our exposure to
competitive pressures. Our current sponsors may discontinue sponsorship of
our network and we may not be able to secure new contracts from existing or
future sponsors at attractive rates or at all.

WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A SMALL NUMBER OF
SPONSORS AND OUR REVENUE MAY DECLINE SIGNIFICANTLY IF ANY MAJOR SPONSOR
CANCELS OR DELAYS A PURCHASE.

           A small number of sponsors account for a significant portion of
our revenue, and we anticipate that this trend will continue. For example, in
the near-term we expect to derive a substantial portion of our revenue from
an agreement with


                                                                              17
<PAGE>


Sylvan, and anticipate that this agreement will continue to account for a
meaningful percentage of our revenue through December 31, 2003, when it
expires. Four sponsors-Inacom, Toshiba, Gilat, and Sylvan-accounted for
approximately 79% of our revenue during the six months ended June 30, 2000.
Our revenue from sponsorships will not increase if we are unable to renew our
material agreements, replace such agreements with similar agreements with new
sponsors, or sufficiently diversify our sponsor base so that we do not rely
on a small number of sponsors for a significant portion of our revenue.

OUR VARIED SALES CYCLES COULD HARM OUR RESULTS OF OPERATIONS IF FORECASTED
SALES ARE DELAYED OR DO NOT OCCUR.

           The length of time between the date of initial contact with a
potential sponsor and the execution of a contract with the potential sponsor
varies significantly and depends on the nature of the arrangement.
Furthermore, contracting with potential sponsors is subject to delays over
which we have little or no control, including:

           -          potential sponsors' adoption of the ZapMe! network, which
                      is an entirely new advertising medium, as an acceptable
                      use of advertising budgets;

           -          potential sponsors' budgetary constraints;

           -          potential sponsors' internal acceptance reviews; and

           -          the possibility of cancellation or delay of projects by
                      sponsors.

           During any given sales cycle, we may expend substantial funds and
management resources and yet not obtain sponsorship revenue. Our results of
operations for a particular period may suffer if sales to sponsors forecasted
in a particular period are delayed or do not otherwise occur.

OPPOSITION TO OUR NETWORK, ADVERTISING IN SCHOOLS AND UNRESTRICTED INTERNET
ACCESS MAY LEAD TO NEGATIVE PUBLICITY, REGULATORY CONTROL, LEGAL ACTION,
BOYCOTTS OR OTHER ACTIONS THAT COULD HARM OUR BUSINESS.

           We expect to generate a significant portion of our revenue from
sponsorships purchased by marketers interested in addressing our student
population across the ZapMe! network in schools. This business model may
prove controversial and lead to negative publicity as well as action by the
government or private interests to restrict or stop our network. To date,
some third parties that oppose corporate advertising in schools, as well as
sponsorships on the ZapMe! network, have engaged in publicity campaigns to
deter sponsors from dealing with the companies engaging in advertising or
sponsorship activities and have sought legislation to curb this practice. In
particular, California recently enacted a law that imposes additional
procedural requirements before local public school boards can enter into
contracts involving advertising in schools. In particular, starting in the
year 2000, California public school boards must (a) notice a public hearing
and make certain findings regarding the importance and affordability of a
covered product or service, such as the ZapMe! network, before entering into
new contracts and (b) give parents the right to opt in writing that their
children not participate. Minnesota enacted a similar law. These laws could
delay deployment of the ZapMe! network and reduce student participation.
Similar or more restrictive legislation is possible in other states including
Wisconsin and New York, and at the local and federal levels. For example,
Congress is currently considering legislation that would require prior,
written parental consent before any entity could collect any information for
any commercial purpose from any student under 18. Anti-school-advertising
groups have had some successes in the past seeking regulation and boycotts of
companies that advertise in schools, such as Channel One, a wholly-owned
subsidiary of Primedia, Inc. Moreover, any new restriction, law or regulation
pertaining to online media, sponsorships or e-commerce in schools, or the
application or interpretation of existing laws, could decrease the demand for
our service, increase our cost of doing business or otherwise have a negative
impact on our business.

           The Internet is the subject of an increasing number of laws and
regulations. These laws or regulations may relate to liability for
information retrieved from or transmitted over the Internet, online content
regulation, user privacy, taxation and the quality of products and services.
In addition, these new laws have not yet been interpreted by the courts, and
consequently their applicability and reach are not defined. Moreover, the
applicability to the Internet of existing laws governing issues such as
intellectual property ownership, copyright, defamation, obscenity and
personal privacy is


                                                                              18
<PAGE>


uncertain and developing. We may be subject to claims that our services
violate such laws. Any new legislation or regulation in the United States or
abroad or the application of existing laws and regulations to the Internet
could impose significant restrictions, requirements or additional costs on
our business, require us to change our operating methods, or subject us to
additional liabilities and cause the price of our common stock to decline.

WE ARE DEPENDENT ON OUR NETWORK INFRASTRUCTURE, AND IN PARTICULAR ON
SATELLITES AND SATELLITE TRANSMISSION TECHNOLOGY, AND ANY FAILURE OF OUR
NETWORK WOULD HARM OUR OPERATIONS.

           Our business plan calls for rapidly deploying our network to many
additional schools. Our network infrastructure may not be able to support the
demands this growth places on it and its performance and reliability may
decline. We have experienced and may in the future experience interruptions
in service as a result of outages and other delays occurring throughout our
network infrastructure. If these outages or delays occur frequently in the
future, use of our network could grow more slowly or decline.

           Our network operations center and our communications and other
computer hardware are also subject to disruptions which are beyond 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 network operations.

           Each school installed with the ZapMe! network is connected to our
network through a satellite link. The complete or partial loss of the
satellite used to transmit data to schools could affect the performance of
our network. Our network currently uses a single satellite.

           Orbiting satellites are subject to the risk of failing prematurely
due to mechanical failure, a collision with objects in space or an inability
to maintain proper orbit. Any such loss of the use of the satellite could
prevent us from delivering our services. This interruption in services would
continue until either a new substitute satellite is placed into orbit, or
until our services were moved to a different satellite. Moving to an
alternate satellite would require us to redirect all of the satellite dishes
in our network-a very time consuming and expensive process. The loss of a
satellite could also result in increased costs of using satellites. We are
dependent on transmissions from the satellite to our customer sites, and
these transmissions may be interrupted or experience other difficulty, which
could result in service interruptions and delays in our network. In addition,
the use of the satellite to provide transmissions to our customers requires a
direct line of sight between the satellite and the receiver at the school and
is subject to distance and rain attenuation. In markets which experience
heavy rainfall we may need to use greater power to maintain transmission
quality. Such changes may require Federal Communications Commission, or FCC,
approval which may not be granted.

WE MAY BE SUBJECT TO THIRD PARTY ABUSES OF OUR NETWORK, SUCH AS "SPAM" OR
"HACKING," WHICH COULD LEAD TO INTERRUPTIONS IN OUR SERVICE AND OTHER ADVERSE
CONSEQUENCES WHICH COULD BE EXPENSIVE TO FIX, SUBJECT US TO LIABILITY OR
RESULT IN LOWER USE OF OUR NETWORK THAN WE EXPECT.

           The future success of our business depends on the security of our
network. Computer viruses or problems caused by our users or other third
parties, such as the sending of excessive volumes of unsolicited bulk e-mail
or "spam," could lead to interruptions, delays, or cessation in service to
our users. In addition, the sending of "spam" through our network could
result in third parties asserting claims against us. We may not prevail in
such claims and our failure to do so could result in large judgments which
would harm our business. Users or other third parties could also potentially
jeopardize the security of confidential information stored in our computer
systems by their inappropriate use of the Internet, including "hacking,"
which could cause losses to us or our users or deter persons from using our
services. Users or third parties may also potentially expose us to liability
by "identity theft," or posing as another ZapMe! user. Unauthorized access by
current and former employees or others could also potentially jeopardize the
security of confidential information stored in our computer systems and those
of our users.

           We expect that our users will increasingly use the Internet for
commercial transactions in the future. Any network malfunction or security
breach could cause these transactions to be delayed, not completed at all, or
completed with compromised security. Users or others may assert claims of
liability against us as a result of any failure by us to prevent these
network malfunctions and security breaches, and may deter others from using
our services, which could cause our


                                                                              19
<PAGE>


business prospects to suffer. Although we intend to continue using
industry-standard security measures, such measures have been circumvented in
the past, and we cannot assure you that these measures will not be
circumvented in the future. In addition, to alleviate problems caused by
computer viruses or other inappropriate uses or security breaches, we may
have to interrupt, delay, or cease service to our users, which could severely
harm our business.

WE ARE DEPENDENT ON OUR LEASED SATELLITE BANDWIDTH AND IF SUCH LEASES WERE
TERMINATED OR OTHERWISE UNAVAILABLE TO US WE COULD BE SUBJECTED TO
SIGNIFICANT ADDITIONAL COSTS OR RESTRICTIONS ON OUR BUSINESS.

           We currently lease satellite bandwidth from GE Americom and
Spacenet. If, for any reason, the leases were to be terminated, we might not
be able to renegotiate new leases with GE Americom or Spacenet or another
satellite provider on favorable terms, if at all.

           The satellite industry is a highly regulated industry. In the
United States, operation and use of satellites requires licenses from the
FCC. As a lessee of satellite space, we could in the future be indirectly
subject to new laws, policies or regulations or changes in the interpretation
or application of existing laws, policies or regulations, any of which may
modify the present regulatory environment in the United States. While we
believe that our satellite access providers will be able to obtain all U.S.
licenses and authorizations necessary to operate effectively, they may not
continue to be successful in doing so. Our failure to indirectly obtain some
or all necessary licenses or approvals could impose significant additional
costs and restrictions on our business, require us to change our operating
methods, or result in our no longer being able to provide our service to
affected users.


                                                                              20
<PAGE>


IF WE ARE UNABLE TO COMPETE EFFECTIVELY AGAINST OUR CURRENT AND POTENTIAL
COMPETITORS THEN WE MAY LOSE USERS TO OTHER SERVICES WHICH COULD RESULT IN
LOWER USAGE OF OUR NETWORK AS WELL AS LOWER THAN EXPECTED REVENUES.

           The market for the ZapMe! network is new and rapidly evolving, and
we expect competition in and around this market to intensify in the future.
While we do not believe any of our competitors currently offer the
functionality offered by the ZapMe! network, we face competition from a
number of companies who provide services and functionality similar to
portions of our network, who market products and services to a similar base
of users, or both, and who could in the future seek to compete more directly
with us. In this light, we believe our current and potential competitors
include America Online, Channel One, Family Education Network, Helius, Inc.,
Bigchalk.com and Lightspan.

           Many of our existing competitors, as well as potential new
competitors, have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and
marketing resources than we do. This may allow them to devote greater
resources than we can to the development and promotion of their products and
services. Many of these competitors offer a wider range of products and
services than we do. These products and services may attract users to our
competitors' sites and, consequently, result in lower usage of our network.

SCHOOLS MAY USE ALTERNATIVE MEANS TO ACQUIRE COMPUTERS AND INTERNET ACCESS,
WHICH COULD REDUCE OUR POTENTIAL USER BASE AND MAY LEAD TO LOWER THAN
EXPECTED REVENUES.

           An immediate attraction of deploying our network is free access to
computers and the Internet. However, for a variety of reasons, schools may
decide to use other methods to acquire computers and Internet access. If
schools decide to use means other than deployment of our network, it will
limit our user base, and consequently we will have lower than expected
revenues from sponsorships, e-commerce and network services. Aside from
purchasing the computers and Internet access from already existing budgets or
from donations from parents or other members of the community, some other
methods of acquiring computer equipment and Internet access that schools may
turn to include the government subsidized E-Rate and various free computer
equipment and Internet access companies and offerings.

WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED.

           We expect to use our existing cash for general corporate purposes,
including expanding our sales and marketing activities, continuing
investments in technology and product development and other capital
expenditures, as well as working capital and other corporate expenses,
including the funding of net losses from operations. We believe that our
existing capital resources will be sufficient to meet our cash requirements
for at least the next twelve months. However, our cash requirements are
large, and depend on several factors, including cash outflows due to lease
obligations, the rate of expansion of our installed school base, the
availability of equipment leases on competitive terms, our success in
generating revenues, the growth of sales and marketing, and other factors. If
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated.

           If additional funds are raised through the issuance of equity
securities, the percentage ownership of our stockholders will be reduced,
stockholders may experience additional dilution, or these equity securities
may have rights, preferences or privileges senior to those of the holders of
our common stock. If additional funds are raised through the issuance of debt
securities, such securities would have rights, preferences and privileges
senior to holders of common stock and the term of such debt could impose
restrictions on our operations. Additional financing may not be available
when needed on terms favorable to us or at all. If adequate funds are not
available or are not available on acceptable terms, we may be unable to
deploy our network, develop or enhance our services, take advantage of future
opportunities or respond to competitive pressures.

WE ARE DEPENDENT ON THE CONTINUED GROWTH IN USE AND POPULARITY OF OUR NETWORK
AND THE INTERNET BY OUR USERS AND OUR ABILITY TO SUCCESSFULLY ANTICIPATE THE
FREQUENTLY CHANGING TASTES OF OUR USERS.

           Our business is unlikely to be successful if the popularity of the
Internet and related media in school as an educational tool and among
students in general does not continue to increase. Even if the popularity of
the Internet and related media does increase, the success of our network in
particular depends on our ability to anticipate and keep current


                                                                              21
<PAGE>


with the frequently changing tastes of our users, primarily students age
13-19. Any failure on our part to successfully anticipate, identify or react
to changes in styles, trends or preferences of our users would lead to
reduced interest in and use of the ZapMe! network and therefore limit
opportunities for sponsorship sales as well as e-commerce. Moreover, the
ZapMe! brand could be eroded by misjudgments in service offerings or a
failure to keep our content current with the evolving preferences of our
audience.

SEASONAL AND CYCLICAL PATTERNS MAY AFFECT OUR REVENUE AND RESULTS OF
OPERATIONS.

           We believe that in-school advertising and e-commerce sales will be
lower during the Summer, in late December and early January and during other
school holiday periods when most users of the ZapMe! network will be on
vacation and away from school. In addition, advertising sales in traditional
media, such as television and radio, generally are lower in the first and
third calendar quarters of each year. If our market makes the transition from
an emerging to a more developed market, these traditional seasonal and
cyclical patterns may develop in the future. These patterns would exacerbate
seasonality to which we are subject by further reducing advertising revenues
in the first and third calendar quarter of each year. Seasonal and cyclical
patterns in online advertising and e-commerce in general may also affect our
revenue. Because our operating history is so limited, it is difficult for us
to accurately predict these trends and plan accordingly. Since our operating
expenses are based on future revenue performance, it is possible that
seasonal fluctuations could materially and adversely affect our revenue and
results of operations.

OUR NETWORK IS NEW AND WE MAY NEED TO DEVELOP TOOLS TO ATTRACT SPONSORS AND
PARTNERS.

           No standard measurement currently exists to determine the
effectiveness or market reach of the sponsor messages that is available on
our network. We may need to develop standards and systems measuring these
factors to support and promote our network as a significant advertising
medium. If we fail to develop such standards, it could be difficult to
attract sponsors and sponsorship revenue.

OUR EFFORTS TO DEVELOP WIDESPREAD BRAND RECOGNITION ARE LIKELY TO BE
EXPENSIVE AND MAY FAIL.

           The development of our brand is important to our future success.
If we fail to develop sufficient brand recognition, our ability to attract
advertising and sponsorship revenue may be impaired, and our revenue will
suffer. In order to build our brand awareness we must succeed in our brand
marketing efforts, deliver features and services that are engaging to our
users, provide high-quality content and increase user traffic to the ZapMe!
network. These efforts have required, and will continue to require,
significant expenses. We cannot assure you that we will be successful in
developing our brand.

WE MAY BE LIABLE OR INCUR ADDITIONAL COSTS FOR OUR USE OR DISTRIBUTION OF OUR
USERS' INFORMATION.

           Despite our best efforts, we could be subject to liability claims
for misuses of information collected from our users, such as for unauthorized
marketing purposes, and will face additional expenses to analyze and comply
with increasing regulation in this area, including the Children's Online
Privacy Protection Act. We could incur additional expenses, or be required to
alter, or eliminate, various current practices if new regulations regarding
the use or distribution of information collected online are introduced or if
our privacy practices are investigated.

WE MAY BE SUBJECT TO LIABILITY FOR PRODUCTS SOLD THROUGH OUR NETWORK.

           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. However, we plan to develop a range of e-commerce
opportunities. 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 spend
significant time and money in litigation or to pay significant damages.

WE MAY BE SUBJECT TO LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER OUR
NETWORK.

           We may be subject to claims relating to content that is published
on or downloaded from the ZapMe! network.


                                                                              22
<PAGE>


We also could be subject to liability for content that is accessible from our
network 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, could
require us to change our network in a manner that could be less attractive to
our customers and would result in the diversion of our financial resources
and management personnel.

WE MAY NOT BE ABLE TO DELIVER VARIOUS SERVICES IF THIRD PARTIES FAIL TO
PROVIDE RELIABLE SOFTWARE, SYSTEMS AND RELATED SERVICES TO US.

           All of our advertisements are served using software licensed from
NetGravity. While there is other software available, it would substantially
disrupt our business in the near term to switch to another provider. As such,
we are reliant on NetGravity and its software. If NetGravity's software fails
to perform as expected, or if we are not able to renew such agreement or
license or internally develop similar software in the future, we may not be
able to effectively display advertisements to our users. In such event, our
revenue from sponsorships would likely suffer. On October 26, 1999,
DoubleClick, an Internet advertising provider, acquired NetGravity in a
stock-for-stock transaction. Although we have experienced no change in our
relationship, we can not predict how the acquisition will affect our
relationship with DoubleClick in the future.

           In addition we are dependent on various third parties for other
software, systems and related services. Several of the third parties that
provide software and services to us have a limited operating history, have
relatively immature technology and are themselves dependent on reliable
delivery of services from others. As a result, our ability to deliver various
services to our users may suffer due to the failure of these third parties to
provide reliable software, systems and related services to us.

THE INABILITY TO OBTAIN KEY SOFTWARE FROM THIRD PARTIES MAY HARM OUR BUSINESS.

           We rely on software licensed from third parties, including
applications that are integrated with internally developed software and used
in our products. Most notably, we license remote management software and
Windows NT. These third-party technology licenses may not continue to be
available to us on commercially reasonable terms, or at all, and we may not
be able to obtain licenses for other existing or future technologies that we
desire to integrate into our products. Our business could be seriously harmed
if we cannot maintain existing third-party technology licenses or enter into
licenses for other existing or future technologies needed for our products.

OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND
FEATURES IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY.

           Our market is characterized by rapidly changing technologies,
frequent new service introductions and evolving industry standards. The
recent growth of the Internet and intense competition in our industry
exacerbate these market characteristics. Our future success will depend on
our ability to adapt to rapidly changing technologies by continually
improving the performance, features and reliability of our network. We may
experience difficulties that could delay or prevent the successful
development, introduction or marketing of new features, content or network
services. In addition, our new enhancements must meet the requirements of our
current and prospective users and must achieve significant market acceptance.
We could also incur substantial costs if we need to modify our service or
infrastructures to adapt to these changes.

FAILURE TO MANAGE THE GROWTH OF OUR OPERATIONS COULD HARM OUR BUSINESS AND
STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES.

           We have rapidly and significantly expanded our operations. We
anticipate that further significant expansion will be required to grow our
user base if we are to be successful in implementing our business strategy.
We may not be able to implement management information and control systems in
an efficient and timely manner, and our current or planned personnel,
systems, procedures and controls may not be adequate to support our future
operations. If we are unable to manage growth effectively, our business would
suffer. To manage the expected growth of our operations and personnel, we
will be required to:

           -          improve existing and implement new operational, financial
                      and management controls, reporting systems and procedures;

           -          install new management information systems; and

           -          train, motivate and manage our sales and marketing,
                      engineering, technical and customer support employees.


                                                                              23
<PAGE>


THE LOSS OF KEY PERSONNEL MAY HURT OUR ABILITY TO OPERATE OUR BUSINESS
EFFECTIVELY.

           Our success depends to a significant degree upon the continued
contributions of the principal members of our sales, engineering and
management departments, many of whom perform important management functions
and would be difficult to replace. Specifically, we believe that our future
success is highly dependent on our senior management, and in particular on
Lance Mortensen, our Chairman, and Rick Inatome, our Chief Executive Officer.
The loss of the services of any key personnel, particularly senior
management, could seriously harm our business.

IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS
NECESSARY, WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES.

           We have recently hired and anticipate continuing to hire
additional engineering, sales, marketing, e-commerce, customer support and
accounting personnel. We may not be able to attract and retain the necessary
personnel to accomplish our business objectives, and we may experience
constraints that will adversely affect our ability to deploy the ZapMe!
network in a timely fashion or to support our users and operations. We have
at times experienced, and continue to experience, difficulty in recruiting
qualified personnel. Recruiting qualified personnel is an intensely
competitive and time-consuming process.

WE COULD BE REQUIRED TO RECORD A SIGNIFICANT ACCOUNTING EXPENSE UPON THE
VESTING OF A WARRANT.

           As part of our agreement with Sylvan, we issued a warrant to
purchase 150,000 shares of our common stock at $5.00 per share. This warrant
was amended in May 2000 and is currently exercisable. ZapMe! recorded
deferred stock compensation of approximately $557,000 as of June 30, 2000.
The amount was computed using the Black-Scholes option valuation model and
will be remeasured at each measurement date. ZapMe! could be required to
record additional significant non-cash accounting expense based on the value
of the warrant during the life of the warrant. The value of the warrant at
each measurement date will depend on the value of our common stock at that
time.

WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND RESULT
IN INCREASED DEBT AND ASSUMPTION OF CONTINGENT LIABILITIES.


                                                                              24
<PAGE>


           As part of our business strategy, we expect to review acquisition
prospects that would complement our current product offerings, augment our
market coverage, enhance our technical capabilities, or otherwise offer
growth opportunities. While we have no current agreements or negotiations
underway with respect to any such acquisitions, we may acquire businesses,
products or technologies in the future. In the event of such future
acquisitions, we could:

           -          issue equity securities which would dilute current
                      stockholders' percentage ownership;

           -          incur substantial debt; or

           -          assume contingent liabilities.

           Such actions by us could have a detrimental effect on our results
of operations and/or the price of our common stock. Acquisitions also entail
numerous risks, including:

           -          difficulties in assimilating acquired operations,
                      technologies, products or personnel;

           -          unanticipated costs associated with the acquisition that
                      could materially adversely affect our results of
                      operations;

           -          negative effects on our reported results of operations
                      from acquisition related charges and of amortization of
                      acquired technology and other intangibles;

           -          diversion of management's attention from other business
                      concerns;

           -          adverse effects on existing business relationships with
                      suppliers and customers;

           -          risks of entering markets in which we have no or limited
                      prior experience; and

           -          potential loss of key employees of acquired organizations.

POSSIBLE INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS.

           We seek to protect our intellectual property and to respect the
intellectual property rights of others. To protect our own intellectual
property, we rely on U.S. and international law regarding copyright, patents,
trademarks and trade secrets as well as confidentiality agreements with
employees, consultants, contractors and business partners. We cannot
guarantee that we will succeed in obtaining, registering, policing or
defeating challenges to our intellectual property rights, or that we will
avoid claims that we are infringing the rights of others.

           Despite our efforts to protect our intellectual property, we may
be unsuccessful in doing so. We may be unable to obtain patents or register
trademarks for a variety of reasons, including a mistaken belief that these
items are eligible for intellectual property protection or that we are the
entity entitled to this protection, if any. Our copyrights and trade secrets
may similarly turn out to be ineligible for legal protection. In addition,
parties may attempt to disclose, obtain or use its proprietary information
despite, or in the absence of, a confidentiality agreement. Some foreign
countries do not protect intellectual property rights to the same extent as
the United States, and intellectual property law in the United States is
still uncertain and evolving as applied to Internet-related industries. The
status of domain names and the regulatory bodies in charge of them is also
unsettled. Any inability to register or otherwise protect our intellectual
property rights could seriously harm our business since it could enable
competitors to copy important features on our network.

           Furthermore, third parties may assert intellectual property
infringement claims against ZapMe!. These claims, possibly including those
from companies from which we license key technology for its operations, could
result in significant liability, the inability to use key rights and
technologies, and the invalidation of our own proprietary rights. In
addition, regardless of the outcome, any litigation could be time-consuming,
expensive, and distracting of management's time and attention.


                                                                              25
<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

           Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income we can
earn on our investment portfolio and on the increase or decrease in the
amount of interest expense we must pay with respect to our various
outstanding debt instruments. The risk associated with fluctuating interest
expense is limited, however, to the expense related to those debt instruments
and credit facilities which are tied to market rates. We do not use
derivative financial instruments in our investment portfolio. We ensure the
safety and preservation of our invested principal funds by limiting default
risks, market risk and reinvestment risk. We mitigate default risk by
investing in safe and high-credit quality securities. A hypothetical increase
or decrease in market interest rates by 10% from the market interest rates at
June 30, 2000 would not cause the fair value of our cash and cash equivalents
or the interest expense paid with respect to our outstanding debt instruments
to change by a material amount. Declines in interest rates over time will,
however, reduce our interest income while increases in interest rates over
time will increase our interest expense. As of June 30, 2000 we had not
engaged in any foreign currency activity.


                                                                              26
<PAGE>


                                    PART II.

                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

           In the March 31, 2000 Quarterly Report on Form 10-Q and previous
filings, the Company reported the filing of a demand for arbitration with our
former president and director, Frank J. Vigil, related to his employment at
and departure from ZapMe! On July 28, 2000, the Arbitrator named Zapme! the
prevailing party and issued an award in ZapMe!'s favor on the
misrepresentation claim while declining to rescind the employment agreement.
The Arbitrator also denied all of Mr. Vigil's counterclaims.

           In particular, the Arbitrator determined: (i) ZapMe! has the right
to repurchase 625,000 shares at $0.12 per share and Mr. Vigil is entitled to
retain 250,000 shares of the 875,000 received under the Restricted Stock
Purchase Agreement; (ii) ZapMe! has the right to repurchase 450,000 shares at
$0.12 per share and Mr. Vigil is entitled to retain 25,000 shares of the
Employee Bonus Stock for 1998; (iii) Mr. Vigil must repay to ZapMe! a
$125,000 loan made to him, with interest; (iv) Mr. Vigil must pay ZapMe!'s
reasonable attorney's fees incurred in the action, as well as all of the
Arbitrator's fees and the fees of the American Arbitration Association; and
(iv) Mr. Vigil must repay to ZapMe! all salary inadvertently paid by ZapMe!
to him after his termination and must repay ZapMe! for post-employment
expense reimbursements he received but was awarded reimbursement of his
unpaid business expenses in the amount of $5,816. The Arbitrator retained
jurisdiction to resolve any remaining issues.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

           (a)       Modification of Constituent Instrument

                     Not applicable.

           (b)       Change in Rights

                     Not applicable.


                                                                              27
<PAGE>
           (c)       Issuance of Securities

                     The Company had the following sales of unregistered
                     securities during the quarter:

                     (i)       In May 2000, the Company acquired eFundraising
                               and as purchase consideration issued 500,000
                               Series A preferred shares in a wholly owned
                               subsidiary to the sellers of eFundraising
                               valed at $5,500,000. In addition, the Company
                               issued as purchase consideration to a
                               management seller of eFundraising 169,920
                               Series C, D, and E preferred shares in a
                               wholly owned subsidiary of eFundraising valued
                               at $595,000. The offer and sale of the common
                               stock was exempt from the registration
                               requirements of the Securities Act of 1933, as
                               amended, pursuant to Section 4(2) thereof. The
                               Company relied on the following criteria to
                               make such exemption available: The number of
                               offerees, the size and manner of the offering,
                               the sophistication of the offerees and the
                               availability of material information.

                     (ii)      In June 2000, the Company acquired
                               LearningGate and as purchase consideration
                               issued 999,958 shares of the Company's common
                               stock to the sellers of LearningGate valued at
                               $2,750,000. The offer and sale of the common
                               stock was exempt from the registration
                               requirements of the Securities Act of 1933, as
                               amended, pursuant to Section 3(a)(10) thereof.

           (d)       Use of Proceeds

                     On October 20, 1999, we commenced our underwritten initial
                     public offering of 9,000,000 shares of common stock at
                     $11.00 per share and a concurrent offering of 488,753
                     shares of common stock, at $10.23 per share, pursuant to a
                     registration statement (No. 333-84557) (the "Initial
                     Registration Statement") and a related registration
                     statement (333-89367) filed pursuant to Rule 462(b) of the
                     Securities Act. The Initial Registration Statement was
                     declared effective by the Securities and Exchange
                     Commission on October 19, 1999. The offering has been
                     terminated and all shares were sold. The managing
                     underwriters for the underwritten initial public offering
                     were Merrill Lynch & Co., Deutsche Bank Securities Inc.,
                     Thomas Weisel Partners LLC and Wit Capital Corporation.
                     Proceeds to the Company from the offering (after deducting
                     underwriting fees) were approximately $97.1 million. In
                     addition, we incurred approximately $1.6 million for
                     expenses related to the initial public offering. The net
                     offering proceeds have been used for general corporate
                     purposes, to provide working capital to develop products
                     and for the two acquisitions described below. Funds that
                     have not been used have been invested in short-term
                     financial instruments. No payments constituted
                     direct or indirect payments to any of our directors,
                     officers or general partners or their associates, to
                     persons owning 10% or more of any class of our equity
                     securities, or to any of our affiliates.

                     In May 2000, the Company acquired eFundraising and as
                     purchase consideration paid $1,850,000 cash and other
                     consideration to the sellers of eFundraising.

                     In June 2000, the Company acquired LearningGate and as
                     purchase consideration paid $1,187,000 cash and other
                     consideration to the sellers of LearningGate.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

           None.


                                                                              28
<PAGE>


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

           At the Company's Annual Meeting of Stockholders held on May 25,
2000 the following individuals were elected to the Board of Directors:

           1.  Election of Directors

<TABLE>
<CAPTION>
                                          VOTES FOR      VOTES WITHHELD
                                          ---------      --------------
<S>                                       <C>            <C>

                Lance Mortensen           31,836,927     38,156
                Rick Inatome              31,838,027     37,056
                Michael Arnouse           31,854,271     20,812
                Douglas Becker            31,854,071     21,012
                Thomas Hitchner           31,854,121     20,962
                Jack Kemp                 31,851,893     23,190
</TABLE>

           The following proposal was approved at the Company's Annual
Meeting:

           2. Appointment of Ernst & Young, LLP as independent auditors of
the Company for 2000

<TABLE>
<CAPTION>
              VOTES FOR      VOTES AGAINST      VOTES WITHHELD     BROKER NON-VOTE
              ---------      -------------      --------------     ---------------
<S>           <C>            <C>                <C>                <C>
              31,850,428     12,220                    11,935            500
</TABLE>

ITEM 5.  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON 8-K

           a)        Exhibits

           The exhibits listed in the accompanying Index to Exhibits are
filed as a part of this Form 10-Q.

           b)        Reports on Form 8-K

                     (i)       On June 5, 2000, the Company filed a Report on
                               Form 8-K announcing that its independent
                               auditors, Ernst & Young LLP, resigned. The
                               Company also announced that it approved the
                               engagement of Grant Thornton, LLP as its
                               independent auditors for the fiscal year ended
                               December 31, 2000 to replace the firm of Ernst &
                               Young LLP.

                     (ii)      On May 25, 2000, the Company filed a Report on
                               Form 8-K announcing that its direct and indirect
                               wholly-owned subsidiaries acquired all of the
                               voting shares of eFundraising.com, Inc.


                                                                              29
<PAGE>


                                 SIGNATURES

           Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

                                   ZAPME! CORPORATION
                                   (Registrant)
                                   By:
                                                    /s/ Rick Inatome
                                               -----------------------------
                                                      Rick Inatome
                                           PRESIDENT AND CHIEF EXECUTIVE OFFICER
                                               (PRINCIPAL EXECUTIVE OFFICER)

                                   By:
                                                    /s/ Robert Edwards
                                               -----------------------------
                                                      Robert Edwards
                                               (PRINCIPAL FINANCIAL OFFICER)

Date: August 14, 2000


                                                                              30
<PAGE>


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT                     DESCRIPTION
  NO.
--------------------------------------------------------------------------------
<S>        <C>
10.1       ZapMe! Corporation 1998 Stock Plan, as amended and restated, July 28,
           2000.

10.2       Office sublease agreement by and between GMAC Home Services and
           ZapMe! Corporation dated April 25, 2000.

10.3       Restricted Stock Purchase Agreement dated September 13, 1999 by and
           between the Company and Rick Inatome (amended as of June 21, 2000).

11.1       Computation of Net Loss Per Share.

27.1       Financial Data Schedule.
</TABLE>


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