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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K

(MARK ONE)

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<C>        <S>
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

                    FOR THE FISCAL YEAR ENDED JUNE 30, 2000
                                       OR

<TABLE>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                        COMMISSION FILE NUMBER 000-27405
                            ------------------------

                                 NETZERO, INC.

             (Exact name of registrant as specified in its charter)

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<S>                                            <C>
               DELAWARE                                   95-4644384
    (State or other jurisdiction of                    (I.R.S. Employer
    incorporation or organization)                    Identification No.)

         2555 TOWNSGATE ROAD,                                91361
     WESTLAKE VILLAGE, CALIFORNIA                         (Zip Code)
(Address of principal executive office)
</TABLE>

                                 (805) 418-2000
              (Registrant's telephone number, including area code)
                            ------------------------

       Securities registered pursuant to Section 12 (b) of the act: None
                            ------------------------

Securities registered pursuant to Section 12 (g) of the act: Common Stock $.001
                                   par value
                            ------------------------

    Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes /X/  No / /

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

    As of September 21, 2000, the aggregate market value of voting stock held by
non-affiliates of the registrant, based upon the last reported sales price of
the registrant's common stock on such date as reported by the Nasdaq National
Market, was approximately $190,577,976 (calculated by excluding shares owned
beneficially by directors and officers).

    As of September 21, 2000 there were 122,383,548 shares of the registrant's
common stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

    Part III incorporates certain information by reference from the registrant's
definitive proxy statement (the "Proxy Statement") for the Annual Meeting of
Stockholders to be held on November 16, 2000.

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                                 NETZERO, INC.
                               INDEX TO FORM 10-K

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PART I

Item 1.     Business....................................................      2

Item 2.     Properties..................................................     13

Item 3.     Legal Proceedings...........................................     13

Item 4.     Submission of Matters to a Vote of Security Holders.........     13

PART II

Item 5.     Market for Our Common Stock and Related Stockholder
              Matters...................................................     13

Item 6.     Selected Consolidated Financial Data........................     15

Item 7.     Management's Discussion and Analysis of Financial Condition
              and Results of Operations.................................     16

Item 7A.    Quantitative and Qualitative Disclosures About Market
              Risk......................................................     37

Item 8.     Financial Statements and Supplementary Data.................     37

Item 9.     Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure..................................     37

PART III

Item 10.    Directors and Executive Officers of the Registrant..........     37

Item 11.    Executive Compensation......................................     37

Item 12.    Security Ownership of Certain Beneficial Owners and
              Management................................................     37

Item 13.    Certain Relationships and Related Transactions..............     38

PART IV

Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form
              8-K.......................................................     38

SIGNATURES..............................................................     41
</TABLE>

    In this report, "NetZero," the "Company," "we," "us" and "our" collectively
refers to NetZero, Inc. and its wholly-owned subsidiary.
<PAGE>
    This report on Form 10-K and our annual report contain forward-looking
statements based on our current expectations, estimates and projections about
our operations, industry, financial condition and liquidity. Words such as
"anticipates," "expects," "intends," "plans," "believes," "may," "will" or
similar expressions are intended to identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. Such statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual results could
differ materially and adversely from those expressed in any forward-looking
statements as a result of various factors. The section entitled "Risk Factors"
set forth in this Form 10-K discusses some of the important risk factors that
may affect our business, results of operations and financial condition. We
undertake no obligation to revise or update publicly any forward-looking
statements for any reason.

                                     PART I

ITEM 1. BUSINESS

OUR COMPANY

    NetZero, Inc. ("NetZero" or the "Company") is a leading provider of
advertising- and commerce-supported Internet access offering a broad range of
interactive marketing, research and measurement solutions. We offer consumers
reliable free access to the Internet, free e-mail and customizable navigation
tools that provide "speed dial" to key sites on the Internet. Through June 30,
2000, approximately five million users registered for our free Internet access
services, of which approximately two million accessed our services in the month
of June 2000. Our service is available in more than 5,000 cities across North
America and Canada. We offer advertisers the ability to target messages to their
desired audience based on user demographics and on-line behavior. We also offer
advertisers and commerce partners a variety of additional services to build
their brands and market their products, including referring our users to
partners' Web sites, enabling customer registrations and facilitating electronic
commerce transactions. Our CyberTarget division offers marketers and advertisers
mass-scale, on-line market research and measurement services. Our RocketCash
subsidiary, acquired in September 2000, provides users with a secure on-line
gateway to make purchases without a credit card. The Company was incorporated in
July 1997 and launched its Internet access service in October 1998.

    Our service is based on two key principles. First, we provide users free
Internet access and other free services. We obtain demographic information when
users register for our services, which we supplement with our ability to track
their on-line activity. Second, we offer advertisers and commerce partners
access to a large audience and enable them to market to this audience through a
variety of techniques including targeted messages based on user demographics and
on-line behavior. Our model combines certain of the characteristics of network
television--where a mass audience has free access to an advertising-supported
medium--with the targeting advantages of direct marketing.

THE INTERNET ADVERTISING AND SERVICES MARKET

    The Internet is becoming an increasingly significant global medium for
communications, advertising and commerce. IDC estimates that approximately
107 million individuals in the United States used the Internet in 1999, and
projects that this figure will reach 210 million in 2004. Jupiter Communications
has projected that on-line advertising expenditures in the U.S. will grow from
an estimated $3.5 billion in 1999 to $16.5 billion in 2005. With the anticipated
growth in on-line advertising, significant opportunities exist for us as our
user base and our product offerings continue to expand.

    There are over 6,000 Internet service providers in the United States,
varying widely in geographic coverage, user focus and the nature and quality of
services provided to users. With the exception of a few large providers, the
vast majority of Internet service providers do not offer branded nationwide
coverage.

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A number of Internet service providers are beginning to supplement their basic
access with services such as electronic commerce and telecommunications.

    Most Internet service providers charge users monthly access fees and fees
for additional services, such as hosting users' Web sites. Pay services can cost
as much as $250 per year for dial-up Internet access. Telecommunications costs
associated with providing dial-up Internet access have declined in recent years
with the emergence of wholesale providers that resell capacity to Internet
service providers. These providers have built and continue to build networks on
a large scale and are able to spread the cost of their networks over multiple
Internet service providers. We believe that while users are generally focused on
speed and reliability as they evaluate Internet access services, they are also
increasingly focusing on cost, particularly as their other computing costs
decline and since the rest of their on-line experience is generally free. While
NetZero was the first company to offer free, unlimited Internet access on a
nationwide basis, a number of a companies have recently begun offering either
free Internet access or Internet access that is priced significantly lower than
the $250 per year charged by some of the larger providers. Jupiter
Communications estimates that 13% of all Internet users will use a free service
to access the Internet by 2003. However, several of the companies who offered
free Internet access have not succeeded due to their failure to generate
sufficient revenues to cover the cost of their service.

THE NETZERO STRATEGY

    Our objective is to redefine the Internet access model by creating a service
funded by advertising, marketing and commerce arrangements, not by Internet
access fees. The key elements of our strategy are:

    CREATE NEW PRODUCTS AND PURSUE DIVERSE REVENUE SOURCES.  Our service enables
us to pursue revenues from diverse sources. We receive revenues from media
placement, referrals to third parties, direct marketing and electronic commerce.
During fiscal 2000 we added a variety of new products and services that enabled
us to expand our sources of revenues including My Z Start, NZTV and ClubZero.
Our goal is to continue to increase our product and service offerings to
consumers and advertisers. This may include expanding our offerings to include
wireless and broadband services.

    IMPROVE USER EXPERIENCE.  We will continue our efforts to improve the
experience of users and maximize their retention by enhancing the technical
capabilities and ease of use of our service, making our users' on-line
experience more relevant and personal, providing additional user support options
and adding new services.

    INCREASE USER BASE.  We intend to continue to increase our user base.
Aggregating a large audience should provide economies of scale, increase our
attractiveness to advertisers and enhance our ability to enter into strategic
marketing arrangements. Initially, we did no advertising and our user base grew
almost exclusively through word-of-mouth referrals by existing users. In fiscal
2000 we expanded our audience through more aggressive user-acquisition programs,
including television, radio and print advertising, distribution of compact discs
to install our service, bundling and retail distribution relationships and
co-branding our service with selected partners. In addition, we have expanded
our service into Canada and intend to assess the possibility of additional
international expansion.

    BUILD A PREMIUM BRAND.  We believe that establishing brand awareness is
critical to attracting and retaining users and advertisers and intend to make
brand building prominent in our marketing efforts. Our strategy is to promote
the perception of the NetZero brand among users as a premier provider of
Internet services and among advertisers as the most effective means of targeting
potential customers. To achieve this objective, we plan to advertise the NetZero
brand on-line and through traditional media, including television, radio and
print advertising. We plan to support the quality brand image conveyed through
our marketing campaign by establishing relationships with leading on-line and
off-line consumer brands as advertisers and partners.

                                       3
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    MINIMIZE NETWORK COSTS.  Network costs associated with providing our service
are a major component of our cost structure. Our strategy of purchasing
telecommunications capacity from third-party wholesale providers, rather than
building and managing our own network, has enabled us to rapidly expand the
geographic scope of our service and accommodate user growth. Although we may at
some point consider investing in various forms of networking infrastructure,
particularly in cases where a given type of access would otherwise be difficult
or prohibitively costly to obtain, we currently intend to continue using
wholesale providers and to negotiate volume discounts as our purchasing power
increases. We believe this will enable us to reduce incremental costs, continue
to expand our service coverage and ensure reliable service through multiple
wholesale providers.

    ENGAGE IN ACQUISITIONS AND STRATEGIC ALLIANCES.  We intend to review
acquisitions and strategic alliances to enhance our products, services and
technologies; to develop advertising or product relationships with major
advertisers and commerce partners; and to increase our user base. Examples of
transactions we have entered into to achieve certain of these objectives include
the following:

    - In December 1999, we acquired AimTV, Inc. in a stock-for-stock
      transaction. AimTV developed a patent-pending technology designed to
      enable advertisers to run full-motion broadcast-quality commercials over
      dial-up Internet connections without the use of streaming technologies. We
      successfully integrated AimTV's technology into NetZero's service through
      the launch of NZTV.

    - In January 2000, we signed a four-year strategic alliance with General
      Motors Corporation. This alliance includes many of the advertising and
      targeting products NetZero offers. The base agreement could represent
      $68 million in revenue to NetZero over the contract term, subject to the
      fulfillment of certain criteria. The agreement also gives General Motors
      the option to purchase up to $35 million in additional services from
      NetZero, bringing the total potential revenue to $103 million.

    - In April 2000, QUALCOMM Incorporated, a pioneer and world leader in Code
      Division Multiple Access (CDMA) digital wireless technology purchased an
      equity stake in our company for approximately $144 million in cash. We now
      distribute QUALCOMM's award-winning Eudora e-mail management software to
      our users. We are also exploring opportunities to drive wireless Internet
      adoption by combining QUALCOMM's core wireless and Internet competencies
      with NetZero's technologies and numerous revenue streams.

    - In August 2000, we acquired Simpli.com, Inc., a company with technology
      designed to allow a higher level of understanding of user interests and
      preferences by analyzing keywords, click-through data and consumer
      choices. By processing this data, the technology is intended to enable
      highly targeted advertising and commerce offerings specific to a
      particular user's interests.

    - In September 2000, we acquired RocketCash Corporation, an on-line gateway
      that enables consumers, particularly the rapidly growing teen market, to
      shop and buy securely on the Internet without a credit card. RocketCash's
      technology enables consumers to aggregate various forms of currencies,
      including on-line incentive dollars, off-line promotional points, gift
      certificates, money orders, personal checks and U.S. dollars into one
      spending account.

SOURCES OF REVENUE

    We generate revenues through media fees, direct marketing agreements,
referring our users to partners' Web sites, enabling customer registrations for
partners and facilitating electronic commerce transactions. We also intend to
generate revenues through sales of, and licensing fees for, access to data
generated by our service. We implement these revenue arrangements through a
number of products and services, including the following:

    THE ZEROPORT.  A primary element of our service is that we display The
ZeroPort on users' screens throughout their Internet access sessions. The
ZeroPort is a small window displayed on our users'

                                       4
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computer screens while they are on-line that is always visible regardless of
where they navigate. Users can dock The ZeroPort at the top or bottom of their
screen but they cannot close it. We generate revenues through The ZeroPort by
displaying and/or users clicking on banner advertisements which can be targeted
based on users' profiles and on-line behavior; buttons, icons and drop-down
menus which are linked to advertisers' and sponsors' Web sites or functionality
offerings, including search; a ticker which, when enabled by the user, delivers
information through The ZeroPort which is linked directly to sponsors' Web
sites; and displaying a sponsor's media message with no resulting link to a Web
site. The ZeroPort also provides links to other NetZero products from which we
derive revenues, including the My Z Start home page and users' e-mail clients.

    MY Z START.  Another element of the NetZero service is that we designate the
first Web site viewed by users during an Internet access session. This page for
the vast majority of our users is My Z Start, a Web site designed by NetZero
that displays sponsored links to a variety of information, services and
products, including search, news, sports, music, weather, stocks and shopping.
We generate revenues from displaying the My Z Start page and by users clicking
on links and being referred to sponsors' Web sites. My Z Start also includes
links to other NetZero products from which we derive revenues, including
ClubZero. While My Z Start serves primarily as a start page for users accessing
the Internet through the NetZero service, it is accessible through any Internet
access service. We derived approximately 28% of our revenue in fiscal 2000 from
our start page agreement with LookSmart which expires in February 2001. There is
no assurance that the agreement will be renewed on comparable terms, if at all.
The failure to replace this agreement with a comparable arrangement would
adversely impact our business and results of operations.

    NZTV.  While making the initial dial-up connection to access the Internet,
certain NetZero users are displayed video and other forms of animated
advertisements in a small window on their computer screens which we have named
NZTV. Users can click on the NZTV advertisement during the connection process
and be referred to advertisers' Web sites once the Internet session has begun.
We generate revenues from displaying NZTV advertisements to our users.

    LAZERMAIL.  All of our registered users are given a NetZero e-mail address
as part of our Internet access service. Also, when registering for our service,
certain users provide NetZero with their pre-existing e-mail address. During the
registration process for our service, users can designate certain subjects for
which they have a particular interest, such as sports, health, news and finance.
Users can elect to receive e-mail messages regarding promotions or targeted
information on these subjects. We generate revenues by delivering e-mail
messages on behalf of advertisers targeted to each subject of interest, a
product we have named LazerMail. The advertising messages are delivered to users
who have elected to receive such information, regardless of whether the e-mail
is delivered to a NetZero e-mail address or alternate address provided. Such
messages contain links that refer users to advertisers' Web sites.

    CLUBZERO.  In an effort to assist our users in registering for selected
NetZero partners' services, we have created ClubZero which, upon direction from
the user, automatically fills out partner registration forms with user data
provided in the NetZero registration process. ClubZero also enables users to
store passwords for access to these partners' services, such that the user can
log in to ClubZero with their NetZero password and automatically have secure
access to these services. ClubZero displays links to partners' sites within
categories including auctions, autos, communication, finance and shopping. We
derive revenues by our users registering or using these partner services, and
from click-throughs generated by our users.

    CYBERTARGET.  A fundamental component of our zCast technology is NetZero's
ability to capture detailed data regarding our users' on-line behavior,
including Web sites visited, advertisements clicked on, and other activities. We
believe that this data, especially when combined with the demographic data we
receive when users register for the NetZero service, will serve as a powerful
and valuable tool for NetZero's partners to improve the effectiveness of their
on-line service offerings. Through a division of the company named CyberTarget,
we intend to generate revenues through the sale, licensing and analysis of

                                       5
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this data to third parties who specialize in data analysis and to other parties,
regardless of the extent to which, if any, they advertise with NetZero. We also
intend to expand our advertiser relationships and improve pricing of our
advertising offerings by including customized data reports with selected
purchases of our core products and services. CyberTarget's services are
performed within the guidelines of NetZero's privacy policy which dictates that
no personal identifying information may be shared with third parties without the
express consent of the NetZero user.

    ROCKETCASH.  We completed the acquisition of RocketCash in September 2000.
RocketCash provides users a secure on-line purchasing gateway which enables them
to combine a variety of currencies including on-line and off-line coupons,
rewards points, money orders, checks and debit and credit cards into a single,
convenient account. Through a growing network that exceeds 100 merchants, users
can make on-line purchases with the RocketCash gateway automatically filling out
merchant purchase forms and debiting their RocketCash account. While RocketCash
enables consumers without credit cards to conduct on-line purchases, it also
shields credit card holders from the security risks associated with sharing
their card information with third parties on-line. The primary benefit to
merchants includes expanding their customer base to include non-credit card
holders and security conscious consumers without needing to customize their Web
sites or transaction processes. RocketCash is marketed and made available to all
Internet users, regardless of their Internet access service and we intend to
enable all of NetZero's users with its functionality. We generate revenues by
receiving a percentage of transaction amounts for each purchase made through the
RocketCash gateway. As we only recently acquired this business and due to its
limited operating history, there is no assurance that it will result in
significant revenues.

    ZEROOUT.  When users initiate the process to exit their Internet access
session, we have the ability to display an advertising message, which we have
branded ZeroOut, in conjunction with their log-off menu. ZeroOut, which may be
targeted based on profile data, provides users the option to continue their
sessions by first visiting the advertiser's Web site. As such, the advertising
message provides a link to the site being promoted. We receive revenues by
displaying ZeroOut advertising messages and by users clicking on such messages.

SALES

    While historically we have relied in part on third party sales efforts, we
intend to sell and market our products and services primarily through our own
direct sales force. Our sales department is comprised of sales management,
account executives, telemarketers, sales planning and traffic management. At
June 30, 2000 we had 48 in-house sales staff and we plan to increase this number
significantly in fiscal 2001. Our recent expansion has included the opening of
new sales offices in Dallas, Seattle, Atlanta and Miami, complementing the
company's existing sales offices in New York, Boston, Washington, D.C., Chicago,
San Francisco and Los Angeles.

USER ACQUISITION

    Our user acquisition efforts involve a variety of activities. First, we
engage in a brand-building marketing effort that includes television, radio and
print media advertising. For example, we are a major half-time sponsor of all
NBA on NBC National Basketball Association telecasts, which is branded "NETZERO
@ THE HALF". "NETZERO @ THE HALF" is a multi-year deal with NBC Sports beginning
with the 1999-2000 basketball season. In addition, we engage in widespread
direct mailing and distribution of compact discs containing our software. We
have also established download links on numerous Web sites from which a
potential user can download our software. We have undertaken a significant
co-branding initiative where we co-sponsor the distribution of compact discs to
the sponsors' user base. The service provided through such discs contains
branding of both NetZero and the sponsor. For example, we completed co-branding
initiatives with Global Sports, Aetna U.S. Healthcare and KIIS-FM. We also may
engage in acquisitions of third parties to increase our users or provide
payments to third parties to refer their users to us.

                                       6
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    As part of our strategy to expand our services internationally, we recently
launched our free Internet service offering in Canada. Working with Canadian
business partners, we have begun to build a service rich in Canadian content,
dedicated to serving the unique needs of Canadian Internet users.

USER SUPPORT

    Our user support service strategy is to build programs designed to increase
user satisfaction and retention. Our user support service is a combination of
internal personnel and selective outsourcing of certain aspects of our user
service to vendors that provide us with greater efficiency and scalability for
future growth.

    We provide on-line and off-line "self-help" services that provide a variety
of support options to our users, including our SPEEDY Assistant off-line
software which is loaded onto the user's computer when the service is initially
installed from the compact disc and can also be downloaded from our Web site.
This off-line tool assists users in loading and operating our software, provides
answers to common questions and helps users set up their e-mail account through
step-by-step instructions. We also provide comprehensive help, tutorials,
advisories, answers to frequently asked questions and tips via our Web site and
automated e-mail response system. In addition, we provide traditional e-mail
support with a one day turnaround, and provide free telephone support to our
users 24 hours a day, seven days a week, with 90% of callers waiting three
minutes or less. For those that prefer not to wait at all, we offer a fee-based
support option with toll-free telephone access and no wait time on a
per-incident basis. Our user support service organization continually monitors
different quantitative measurements such as average wait time, first call
resolution rate and abandon rate. All user contacts are logged and categorized
to enable us to quickly recognize and act on trends. An internal quality
assurance team monitors the work of both telephone and e-mail agents and
provides feedback to our agents to improve their skills, increase their
productivity, and guarantee consistency throughout the user support group.

TECHNOLOGY

    We have developed or acquired a variety of technologies designed to enhance
the functionality of our service for the user and to provide a platform for the
creation of products and services tailored to the needs of advertisers and
commerce partners. The foundation of our service is a proprietary software
system called zCast that enables us to track our users' navigational activities
and to deliver highly targeted advertising. The zCast client is a JAVA
application that runs on a user's personal computer and that currently operates
on the Windows 95, Windows 98 and Windows NT 4.x operating systems. zCast has
the following major components:

    THE ZCAST CLIENT SOFTWARE.  The zCast Client application is the software
product that includes The ZeroPort, which is installed on users' personal
computers and is constantly visible while a connection to NetZero's service is
maintained. The zCast Client performs multiple tasks, including:

    - establishing a connection to the NetZero service;

    - capturing demographic information;

    - authenticating a user via a user ID and password;

    - tracking Web sites visited;

    - managing the display of advertising banners;

    - targeting advertising based on Web sites visited and on keyword search;

    - logging the number of times an ad was shown and the number of times an ad
      was clicked on;

    - monitoring the quality of the on-line session including dial-up and
      network errors;

    - providing a mechanism for customer feedback.

                                       7
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    THE ZCAST SERVER NETWORK.  Powered by JAVA, the zCast server network is a
group of software applications running on multiple servers that manage and
collect important data relating to each user's on-line session. The system is
designed to be scalable to handle large amounts of data. The servers consist of
application server software which interacts with The ZeroPort to send and
receive information such as authentication, playlists of advertisements and
impression and click counts; database servers which store session information,
user information and ad display and click counts; and ad servers which manage
the ad inventory and determine which ads users will view during their on-line
session. All of the above components run on Sun Microsystems servers. The system
is designed for scalability and to handle large amounts of data and are
connected to disk arrays which provides us with the ability to quickly scale and
improve overall system performance.

    OTHER TECHNOLOGIES.  Many of our technologies are designed to enhance user
experience, to provide the ability to offer additional revenue streams or to
increase operating efficiencies. For example, NZTV involves the display of
full-motion video advertisements during the log-on process. The advertisement is
downloaded to the user's computer while the user is on-line without adversely
impacting the user's on-line experience. The advertisement is updated based on
playlists. Another example is our Autodialer technology which is designed to
automatically ensure the user accesses our network through a dial-in number
which minimizes costs and enhances connectivity. Our ClubZero from-fill
technology permits users to elect to complete partners' registration forms with
information already provided to NetZero through the registration process. We
intend to continue to develop and acquire additional technologies with the goal
of enhancing the value of or service for both users and advertisers.

COMMUNICATIONS NETWORK

    To use our services, users initiate telephone connections between their
personal computers and computer hardware in local or regional telecommunications
facilities known as points of presence (also referred to as POPs). We contract
for the use of points of presence around the country from various wholesale
providers, including Genuity and Level3 Communications. These providers also
carry our data between their points of presence and our central computers in Los
Angeles, California. Through our network providers, we are able to offer local
dial-up phone numbers in over 5,000 cities across the United States and Canada.
Thus, our users typically bear no expenses for communication beyond the cost, if
any, of an ordinary local or regional phone call. Our service provides full
point-to-point protocol access to the Internet, and supports the v.90 standard
for 56 kbps connections and Integrated Services Digital Network, or ISDN, in
certain areas. We continuously monitor network service levels around the country
and work with our partners to help maintain high levels of network availability
and throughput for our users.

    Our agreements with wholesale telecommunications providers are generally
structured in one of two ways. We have usage agreements under which we are
charged for the aggregate number of hours that our users are connected to a
provider's network. We also have capacity agreements under which we are charged
for a fixed amount of wholesaler's telecommunications capacity in specific
locations whether or not the capacity is fully utilized. Our contract with
Genuity is a usage agreement that expires in August 2002 and includes a minimum
purchase commitment which extends throughout the term of the agreement. Our
contract with Level3 Communications is a capacity agreement under which we have
committed to minimum telecommunications capacity through 2002.

    Our zCast servers reside at two facilities, one provided by Level3
Communications in Los Angeles, California and the other by AboveNet
Communications in San Jose, California. Our data center, located in our
corporate offices in Westlake Village, California, houses our e-mail servers and
our data warehouse that is equipped with battery and generator power backup
systems to prevent outages from interruption of utility power to the building.

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COMPETITION

    COMPETITION FOR USERS

    Competition for Internet users continues to intensify. We believe that the
primary competitive factors determining success in the market for Internet users
include a reputation for reliability of service, effective customer support,
pricing, easy-to-use software, geographic coverage and scope of services. Other
important factors include the timing and introduction of new products and
services and industry as well as general economic trends. While we believe that
we compete favorably with respect to these factors, numerous of our competitors
may have an advantage over us with respect to specific factors. We currently
compete with established on-line service and content providers, such as America
Online and The Microsoft Network; independent national Internet service
providers such as EarthLink and Prodigy; providers of branded free Internet
services such as Juno Online Services, Inc. and FreeiNetworks; providers of free
Internet access services such as Spinway and 1stUp.com who offer their services
through third parties, such as Alta Vista and BlueLight.com, as well as
retailers, on a private label or co-branded basis; numerous regional and local
commercial Internet service providers, and portals and search engines such as
Yahoo!, Lycos and Excite, some of whom offer free Internet access in conjunction
with third parties. Some of these providers offer significantly greater customer
support and scope of services than we currently offer. We also compete against
other companies that offer free Internet access services or free products, such
as personal computers, bundled with, or as promotions for, access services. We
also compete with, and expect increased competition from, telecommunications
service providers, such as AT&T, GTE and Sprint. These companies generally have
far greater resources, distribution channels and brand awareness as well as
lower costs because, in certain cases, they control the telecommunications
services we are required to purchase. This cost advantage, which could result in
significant discounts to the user, could significantly increase competitive
pressures on us. We also believe that new competitors, including large computer
hardware and software, media, and telecommunications companies, will continue to
enter the Internet access market and that our competition will increase as large
diversified telecommunications and media companies acquire Internet service
providers and as Internet service providers consolidate into larger, more
competitive companies. Diversified competitors have also bundled other services
and products with Internet connectivity services, potentially placing us at a
significant competitive disadvantage. For example, Sprint and Earthlink are
offering a service that bundles unlimited Internet access with long distance
telephone service for a fixed fee.

    We also face competition from companies that provide broadband connections
to users' homes, including local and long-distance telephone companies, cable
television companies, electric utility companies, and wireless communications
companies. These companies may use broadband technologies to include Internet
access or business services such as hosting a user's individual web-site in
their basic bundle of services or may offer Internet access or business services
for little or no additional charge. Broadband technologies enable users to
access the Internet at much faster speeds than the dial-up service we currently
offer. While the market for such broadband technologies is still emerging, we
believe it will continue to grow and pose an increasingly significant source of
competition.

    COMPETITION FOR ADVERTISING CUSTOMERS.  We believe that the primary
competitive factors determining success in the market for advertising customers
include

    - the size and demographic profile of a user base;

    - the ability to target users based on specific demographic criteria;

    - pricing; and

    - geographic coverage.

    While we believe that we compete favorably with respect to these factors,
numerous of our competitors may have an advantage over us with respect to
specific factors. We compete for revenues with major

                                       9
<PAGE>
Internet service providers, content providers, large Web publishers, Web search
engine and portal companies, Internet advertising providers, content aggregation
companies, and various other companies that facilitate Internet advertising.
Many of these companies have longer operating histories, greater name
recognition, larger user bases and significantly greater financial, technical,
sales and marketing resources than we do. This may allow them to respond more
quickly than we can to new or emerging technologies and changes in advertiser
requirements. It may also allow them to devote greater resources than we can to
the development, promotion and sale of their products and services. These
competitors may also engage in more extensive research and development,
undertake more far-reaching marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to existing and potential employees,
strategic partners, advertisers and Web publishers. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective advertising
and sponsorship customers. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share. We also compete with
television, radio, cable and print media for a share of advertisers' total
advertising budgets.

GOVERNMENTAL REGULATION

    OVERVIEW.  The law relating to our business and operations is evolving and
is still in flux. In addition, a number of legislative and regulatory proposals
under consideration by federal, state, local and foreign governmental entities
may lead to the repeal, modification, or introduction of laws or regulations
which do or could affect our business, including but not limited to regulatory
fees, on-line content, user privacy, taxation, parental consent for access by
minors, access charges and regulatory fees, liability for third-party
activities, bulk e-mail or "spam", encryption standards, on-line sales of goods
and services, domain name registration and use, copyright infringement, and
other intellectual property issues, and distribution of compensation between or
among telecommunications carriers.

    REGULATION OF CONTENT AND ACCESS. A variety of restrictions on content and
access, primarily as they relate to children, have been enacted or proposed. The
Children's Online Protection Act of 1998 prohibits and imposes criminal
penalties and civil liability on anyone engaged in the business of selling or
transferring, by means of the World Wide Web, material that is harmful to
minors, unless access to this material is blocked to persons under 17 years of
age. In addition, the Telecommunications Act of 1996 enacted by Congress imposes
fines on any entity that knowingly permits any telecommunications facility under
such entity's control to be used to make obscene or indecent material available
to minors via an interactive computer service. Numerous states have adopted or
are currently considering similar types of legislation. In addition, laws have
been proposed which would require Internet service providers to supply, at cost,
filtering technologies to limit or block the ability of minors to access
unsuitable materials on the Internet. Because of these content restrictions and
potential liability to us for materials carried on or disseminated through our
systems, we may be required to implement measures to reduce our exposure to
liability.

    USER PRIVACY ISSUES.  Internet user privacy has become an issue both in the
United States and abroad. Some commentators, privacy advocates and government
bodies have recommended or taken actions to limit the use of personal profiles
or other personal information by those collecting such information, particularly
as it relates to children. For example, the Children's Online Privacy Protection
Act of 1998 requires, among other things, that on-line operators obtain
verifiable parental consent for the collection, use, or disclosure of personal
information from children.

    INTERNET TAXATION.  The tax treatment of activities on or relating to the
Internet is currently unsettled. A number of proposals have been made at the
federal, state and local levels and by foreign governments that could impose
taxes on the on-line sale of goods and services and other Internet activities.
Recently, the Internet Tax Information Act was signed into law, placing a
three-year moratorium on new state and local taxes on Internet commerce.
However, there can be no assurance that future laws imposing taxes or other

                                       10
<PAGE>
regulations on commerce over the Internet would not substantially impair the
growth of Internet commerce and as a result could make it cost-prohibitive to
operate our business.

    TELECOMMUNICATIONS REGULATION.  Neither the Federal Communications
Commission nor any other governmental agency directly regulates Internet service
providers like us, other than through regulations generally applicable to
businesses. In a report to Congress adopted on April 10, 1998, the FCC
reaffirmed that Internet service providers should be classified as unregulated
"information service providers", rather than regulated "telecommunications
providers" under the terms of the Telecommunications Act of 1996. This finding
is important because it means that regulations that apply to telephone companies
and other common carriers do not apply to us. We also are not required to
contribute a percentage of our gross revenues to support "universal service"
subsidies for local telephone services and other public policy objectives, such
as enhanced communications systems for schools, libraries, and some health care
providers. The FCC action is also likely to discourage states from regulating
Internet service providers as telecommunications carriers or imposing similar
subsidy obligations.

    Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that we could be exposed to regulation in the
future. For example, in the same report to Congress, the FCC stated its
intention to consider whether to regulate voice and fax telephony services
provided over the Internet as a "telecommunications" service even though
Internet access itself would not be regulated.

    We could also be affected by any change in the ability of our users to reach
our network through a dial-up telephone call without any additional charges. The
FCC has ruled that connections linking end users to their Internet service
providers are jurisdictionally interstate rather than local, but the FCC did not
subject such calling to the access charges that apply to traditional
telecommunications companies. Local telephone companies assess access charges to
long distance companies for the use of the local telephone network to originate
and terminate long distance calls, generally on a per-minute basis. We could be
adversely affected by any regulatory change that would result in the application
of access charges to Internet service providers because this would substantially
increase the cost of using the Internet. In addition, certain of the
telecommunications service providers from whom we purchase telecommunications
services are currently entitled to receive payments known as "reciprocal
compensation" from local exchange carriers with respect to their provision of
Internet access services. Legislation has been proposed that would eliminate
reciprocal compensation in conjunction with Internet access, a change which
would increase costs to some, if not many, of our providers. If such legislation
were to pass, providers might increase the cost of their services to us. Since
the largest component of our operating costs is comprised of payments to those
telecommunications providers, any increase in such costs would have a material
adverse effect on our gross margins.

    State public utility commissions generally have declined to regulate
enhanced or information services. Some states, however, have continued to
regulate particular aspects of enhanced services in limited circumstances, such
as where they are provided by incumbent local exchange carriers that operate
telecommunications networks. Moreover, the public service commissions of some
states continue to review potential regulation of these services. We cannot
assure you that state regulatory authorities will not seek to regulate aspects
of these activities as telecommunications services.

    THE WORKFORCE INVESTMENT ACT OF 1998.  Section 508 of the Workforce
Investment Act of 1998 requires that all web-sites operated by a federal agency,
as well as those operated by anyone doing business with the Federal government,
modify their web-sites to make them accessible to those who are handicapped.
There are proposals to extend this Act to all web-sites, which could increase
our costs and make our service less attractive to the non-handicapped.

                                       11
<PAGE>
INTELLECTUAL PROPERTY

    Our success and ability to compete are substantially dependent on our
technologies and trademarks, which we protect through a combination of patent,
copyright, trade secret and trademark law. We have filed numerous patent
applications relating to a variety of NetZero's business methods and
technologies.

    We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
NetZero's solutions or technologies. We cannot be certain that the steps we have
taken will prevent misappropriation of our solutions or technologies,
particularly in foreign countries where the laws or law enforcement may not
protect our proprietary rights as fully as in the United States. We have
licensed, and may license in the future, elements of our trademarks, trade dress
and similar proprietary right to third parties. While we attempt to ensure that
the quality of our brand is maintained by such business partners, such partners
may take actions that could materially and adversely affect the value of our
proprietary rights or reputation.

    Our zCast technology collects and utilizes data derived from our user
activity. This data is used for ad targeting and measuring ad performance.
Although we believe that we have the right to use this data, there can be no
assurance that third parties will not assert claims against us for using this
information. In addition, others may claim rights to the same information. We
cannot be certain that any of our proprietary rights will be viable or of value
in the future since the validity, enforceability and scope of protection of
proprietary rights in Internet-related industries is uncertain and still
evolving. In particular, there can be no assurance that any of our patent,
copyright or trademark applications, now pending or to be filed in the future,
will be approved. Even if they are approved, such patents, trademarks or
copyrights may be successfully challenged by others or invalidated. We could
spend significant funds procuring and attempting to enforce our proprietary
rights, and there can be no assurance that such rights will be upheld or will
provide us with any significant advantages. If our trademark registrations are
not approved because third parties own such trademarks, our use of the
trademarks will be restricted unless we enter into arrangements with such third
parties. These arrangements may not be available on commercially reasonable
terms.

    Furthermore, third parties may assert infringement claims against us. From
time to time we have been subject to claims in the ordinary course of our
business, including claims of alleged infringement of the trademarks, patents
and other intellectual property rights of third parties by us or our users. Any
such claims could subject us to significant liability for damages and could
result in the invalidation of our proprietary rights. In addition, even if we
were to win any such litigation, such litigation could be time-consuming and
expensive to defend, and could result in the diversion of our time and
attention, any of which could materially and adversely affect our business,
results of operations and financial condition. Any claims or litigation may also
result in limitations on our ability to use such trademarks, patents and other
intellectual property unless we enter into arrangement with such third parties,
which may be unavailable on commercially reasonable terms.

    We currently license from Oracle the software we use to run our accounting,
billing, finance, and data storage functions. The license agreement requires us
to pay annual support and license fees to Oracle. The agreement terminates in
April 2004. We also license from NetGravity the software we use to deliver
advertisements on The ZeroPort. The agreement requires that we pay NetGravity an
upfront license fee and ongoing consulting and support fees.

PRIVACY POLICY

    We believe that issues relating to the privacy of Internet users and the use
of personal information about these users are critically important as the
Internet and its commercial use grow. We have adopted and disclosed to our users
a detailed policy outlining the permissible uses of information about users and
the extent to which such information may be shared with others. Our users must
acknowledge and agree to

                                       12
<PAGE>
this policy when registering to use our service. We do not sell or license to
third parties any personally identifiable information about users unless they
specifically authorize us to do so. However, we do use information about users
to improve the effectiveness of advertising by our advertising customers. We are
a member of the TRUSTe program, an independent non-profit organization that
audits the privacy statements of web-sites and their adherence to those privacy
statements.

EMPLOYEES

    As of June 30, 2000 and 1999, we employed 283 and 116 people, respectively.
None of our employees are subject to any collective bargaining agreement and we
consider our relations with our employees to be good.

ITEM 2. PROPERTIES

FACILITIES

    Our corporate headquarters are located in two facilities in Westlake
Village, California. The facilities are 49,000 and 19,000 square feet and the
leases expire in May 2009 and December 2006, respectively. We also have leased
space for our sales and marketing efforts in San Francisco, Chicago, Boston,
Washington, D.C. and New York. We are continually evaluating our facilities
requirements.

ITEM 3. LEGAL PROCEEDINGS

    We are not a party to any material legal proceedings.

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

    No matters were submitted to a vote of our security holders during the
quarter ended June 30, 2000.

                                    PART II

ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

    Our common stock has been quoted on the Nasdaq Stock Market under the symbol
NZRO since the day following our IPO on September 23, 1999.

    The following table sets forth, for the periods indicated, the high and low
closing sales prices per share of the common stock:

<TABLE>
<CAPTION>
                                                              HIGH       LOW
                                                            --------   --------
<S>                                                         <C>        <C>
Fiscal Year Ended June 30, 2000
  First Quarter (from September 24, 1999).................  $29.125    $25.313
  Second Quarter..........................................  $33.938    $19.000
  Third Quarter...........................................  $35.563    $15.000
  Fourth Quarter..........................................  $16.063    $ 5.219
</TABLE>

    On September 21, 2000, the last reported sales price of the common stock was
$3.00 and there were 584 shareholders of record.

RECENT SALES OF UNREGISTERED SECURITIES

    In April 2000, we completed a private placement of our common stock pursuant
to which we raised approximately $144 million through the issuance and sale of
approximately 11,500,000 shares of our common stock to QUALCOMM Incorporated.
Following the completion of this transaction, QUALCOMM owned 9.9% of our
company. The offer and sale of those shares were exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof or
Regulation D.

                                       13
<PAGE>
    In May 2000, we issued approximately 40,000 shares of our common stock to
interQ, Inc. as consideration for the license of certain patents. The offer and
sale of those shares were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof or Regulation D.

    In August 2000, we acquired Simpli.com and issued approximately
2,500,000 shares in connection therewith and in September, we acquired
RocketCash and issued approximately 5,600,000 in connection therewith. The offer
and sale of the shares in both transactions were exempt from the registration
requirements of the Securities Act by virtue of Section 3(a)(10) thereof.

USE OF PROCEEDS

    On September 29, 1999 we completed the initial public offering of our common
stock pursuant to our Registration Statement on Form S-1 (File No. 333-80543)
that was declared effective by the Securities and Exchange Commission on
September 23, 1999. There has been no material change with respect to our use of
proceeds from our initial public offering to the information discussed in our
Quarterly Report on Form 10-Q for the nine months ended March 31, 2000

DIVIDEND POLICY

    We have not declared any cash dividends on our capital stock since inception
and do not anticipate the payment of a cash dividend in the foreseeable future.

                                       14
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

    The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.

<TABLE>
<CAPTION>
                                                                                      PERIOD FROM
                                                          YEAR ENDED JUNE 30,        JULY 21, 1997
                                                        ------------------------      (INCEPTION)
                                                           2000          1999      TO JUNE 30, 1998
                                                        -----------   ----------   -----------------
                                                                       (IN THOUSANDS)
<S>                                                     <C>           <C>          <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..........................................  $    55,506   $    4,634      $       --
Cost of revenues......................................       63,515       12,426              --
                                                        -----------   ----------      ----------
Gross loss............................................       (8,009)      (7,792)             --

Operating expenses:
  Sales and marketing.................................       49,376        1,651              --
  Product development.................................        9,721        1,018              --
  General and administrative..........................       19,122        3,718              25
  Stock-based charges.................................        6,346        1,236              --
  Amortization of intangible assets...................        5,525           --              --
                                                        -----------   ----------      ----------
Total operating expenses..............................       90,090        7,623              25
                                                        -----------   ----------      ----------
Loss from operations..................................      (98,099)     (15,415)            (25)
                                                        -----------   ----------      ----------
Interest and other income, net........................        6,813          115              --
                                                        -----------   ----------      ----------
Net loss..............................................  $   (91,286)  $  (15,300)     $      (25)
                                                        ===========   ==========      ==========

Basic and diluted net loss per share..................  $     (1.23)  $    (1.42)     $       --
                                                        -----------   ----------      ----------
Weighted average number of shares used to calculated
  to calculate basic and diluted net loss per share...   74,123,000   10,792,000      15,000,000
                                                        ===========   ==========      ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                         JUNE 30,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...........  $237,865   $24,035      $  1
Working capital.............................................   234,590    16,097       (23)
Total assets................................................   325,958    47,501         1
Capital leases and notes payable, less current portion......    10,278     3,527        --
Redeemable convertible preferred stock......................        --     2,140        --
Stockholders' equity (deficit)..............................   285,734    30,954       (23)
</TABLE>

                                       15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

    You should read the following discussion and analysis in conjunction with
the financial Statements and related Notes thereto contained elsewhere in this
Annual Report on Form 10-K. This Annual Report on Form 10-K and our annual
report to shareholders contain forward-looking statements based on our current
expectations, estimates and projections about our operations, industry,
financial condition and liquidity. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "may," "will" or similar expressions are
intended to identify forward-looking statements. In addition, any statements
that refer to expectations, projections or other characterizations of future
events or circumstances, including any underlying assumptions, are
forward-looking statements. Such statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, our actual results could differ materially
and adversely from those expressed in any forward-looking statements as a result
of various factors. The section entitled "Risk Factors" set forth in this
Form 10-K discusses some of the important risk factors that may affect our
business, results of operations and financial condition. We undertake no
obligation to revise or update publicly any forward-looking statements for any
reason.

OVERVIEW

    We are a leading provider of advertising- and commerce-supported Internet
access offering a broad range of interactive marketing, research and measurement
solutions. We offer consumers reliable free access to the Internet, free e-mail
and customizable navigation tools that provide "speed dial" to key sites on the
Internet. Through June 30, 2000 approximately 5 million users registered for our
free Internet access services, of which approximately 2 million used our service
in the month of June 2000. Our service is available in more than 5,000 cities
across North America. We offer advertisers targeting capabilities through
numerous on-line advertising channels. We offer advertisers and commerce
partners a variety of additional services to build their brands and market their
products, including referring our users to partners' web-sites, enabling
customer registrations and facilitating electronic commerce transactions. Our
CyberTarget division offers marketers and advertisers mass-scale, on-line market
research and measurement services. Our RocketCash subsidiary, acquired in
September 2000, provides users with a secure online gateway to make purchases
without a credit card.

    We incorporated in July 1997 and launched our Internet access service in
October 1998. For the period from inception until October 1998, we had no
revenues and our operating activities related primarily to the development of
our proprietary zCast software. In fiscal 1999 and 2000 our revenues grew to
$4.6 million and $55.5 million, respectively.

    In December 1999, we acquired AimTV which has developed a patent-pending
technology to run broadcast quality commercials over narrowband Internet
connections resulting in the launch of NZTV in May 2000. The acquisition of
AimTV was accounted for under the purchase method of accounting. In
August 2000, we completed the acquisition of Simpli.com which, when integrated
into the NetZero service, will provide users with a more personalized search
capability. In September 2000, we finalized the acquisition of RocketCash that
will enable all of our users, particularly the rapidly growing teen market, to
shop online without the use of a credit card. The Simpli.com and RocketCash
acquisitions will be accounted for using the purchase method of accounting.

REVENUES

    We generate revenues through media fees, direct marketing agreements,
referring our users to partners' web-sites, enabling customer registrations for
partners and facilitating electronic commerce transactions. We also intend to
generate revenues through our CyberTarget division by offering marketers,
advertisers and market research companies mass-scale, online market research and
measurement services

                                       16
<PAGE>
using our unique zCast technology. We have only recently begun offering several
of our products and services, including CyberTarget, and there is no assurance
as to when, or if, these products or services will make a significant
contribution to our revenue.

    We anticipate that we will receive higher advertising rates for targeted
advertisements and sponsorships than for non-targeted banner advertisements.
However, we have limited experience in selling and managing these types of
arrangements and there can be no assurance that we will successfully sell all of
the various advertising services we offer or intend to offer or that such
arrangements will generate significant revenues or higher advertising rates. To
date, we have sold targeted advertising based upon web-sites visited, key word
searches, and users' demographic and geographic information. In addition, the
growth in the user base has resulted, and may result in the future, in
situations where advertising inventory capacity has increased faster than the
ability to sell such inventory at desired rates. We have in the past relied on
third parties to sell a portion of our banner advertisements, but intend to rely
primarily on our in-house sales force in the future. The failure of the efforts
of the in-house sales force to sell increased inventory at reasonable rates may
materially and adversely affect operating results. In addition, success with
performance-based fee arrangements may depend on our ability to effectively
target users. We are still in the early stages of that process and may encounter
technical and other limitations on our ability to successfully target users,
including limitations associated with privacy concerns. In addition, while we
believe that the growth in the user base will enhance the value of our services
to our advertising customers, there can be no assurance that we will adequately
perform under these arrangements or that we will be able to replace such
arrangements on comparable terms, if at all. The failure to generate significant
relationships with advertisers or the failure to replace significant contracts
when they expire could adversely affect our revenues and results of operations.

    Banner advertising and sponsorship revenues are recognized in the periods in
which the advertisement or sponsorship placement is displayed, based upon the
lesser of impressions delivered over the total number of guaranteed impressions
or ratably over the period in which the advertisement is displayed, provided
that no significant obligations on our part remain and collection of the related
receivable is probable. Our obligations typically include the guarantee of a
minimum number of impressions or the satisfaction of other performance criteria.
The guaranteed minimum number of impressions are generally required to be
delivered over the term of the commitment. Revenues from performance-based
arrangements, including click-throughs, are recognized as the related
performance criteria are met. Referral revenues are recognized in the periods in
which the referrals are made to advertisers' or sponsors' web-sites, provided
that no significant obligations on our part remain and collection of the related
receivable is probable.

    Our advertising revenues are subject to the effects of seasonality.
Advertisers typically purchase impressions on a forward basis. If purchasing
patterns or timing of purchasing by advertisers were to change, operations could
be materially affected.

    Advertising on the Internet, particularly the products and services we
offer, is a relatively new industry, and there is no assurance that the products
and services we offer now or in the future will meet with commercial acceptance.
In addition, competition for Internet-based advertising revenues is intense and
the amount of available advertising inventory on the Internet is increasing at a
significant rate. These factors are causing Internet advertising rates to
decline, and it is possible that rates will continue to decline in the future.
Many of the purchasers of Internet advertising have been companies with
Internet-based business models. Certain of these companies have come under
financial pressure and have not been able to access the capital markets to fund
their operations. This trend has impacted our ability to generate revenues and
could continue to do so in the future. This trend could also result in increased
reserves for doubtful accounts. Due to market forces and other factors, our
revenues and results of operations may fluctuate from period to period.

    We do not currently anticipate that inflation will have a material impact on
our results of operations.

                                       17
<PAGE>
COST OF REVENUES

    Cost of revenues consists of telecommunications costs, depreciation of
network equipment, occupancy costs and personnel and related expenses of our
network department. We have expended significant funds on building out our
network infrastructure. While we may expend significant additional funds on
capital expenditures in the future, such expenditures may be dependent upon our
expectation of user growth and usage patterns, as well as needs associated with
acquired businesses and new products. Telecommunications costs for network
access are expensed as incurred. Our failure to accurately forecast users' needs
could result in significant overcapacity, which would adversely impact our
results of operations. Conversely, under-forecasting usage could adversely
impact the ability of users to receive adequate service and adversely impact our
reputation and our ability to maintain or increase our subscriber base. We have
limited history in forecasting our user requirements, and there can be no
assurance that we will be able to accurately forecast such requirements in the
future.

SALES AND MARKETING

    Sales and marketing expenses include advertising and promotion expenses,
salaries, sales commissions, employee benefits, travel and related expenses for
our direct sales force, fees paid to third-party advertising sales agents and
sales support functions. We have expended, and intend to continue to expend,
significant amounts on sales and marketing including a national branding
campaign comprised of television, radio and print advertising, sponsorships and
a variety of other promotions. Due to the timing of these promotions, amounts
expended may vary significantly from period to period. Marketing costs
associated with increasing brand awareness and user base are expensed in the
period incurred.

PRODUCT DEVELOPMENT

    Product development costs include expenses for the development of new or
improved technologies and products, including salaries and related expenses for
the software engineering department, as well as costs for contracted services,
facilities and equipment. We believe that a significant level of product
development is necessary for the business and intend to increase, as necessary,
the amount of spending to fund this activity.

GENERAL AND ADMINISTRATIVE

    General and administrative expenses include salaries, employee benefits and
expenses for executive, finance, legal, human resources and customer support
personnel. In addition, general and administrative expenses include fees for
professional services, third-party customer support and occupancy costs. We
expect general and administrative expenses to increase as we continue to expand
our administrative infrastructure.

STOCK-BASED CHARGES

    In connection with the grant of stock options to employees and the
imposition of restrictions on shares of stock held by certain founders during
the fiscal years ended June 30, 2000 and 1999, we have recorded deferred
stock-based charges of approximately $11.7 million. This deferred compensation
represents the difference between the deemed fair value of common stock for
accounting purposes and the exercise price of these options or shares at the
date of grant. We are amortizing this amount over the vesting periods of the
applicable options or shares, generally four years.

    In December 1999, we entered into a CD distribution agreement under which we
issued an immediately exercisable, fully vested and non-forfeitable warrant to
purchase 575,000 shares of our common stock at $28.71 per share. We determined
that the fair value of the warrant approximated $8.6 million at the date of
issuance which is being amortized to stock-based charges over the four year term
of the agreement.

    Deferred stock-based charges are presented as a reduction of stockholders'
equity.

                                       18
<PAGE>
RESULTS OF OPERATIONS

    The following table sets forth, for the periods indicated, the percentages
that certain income statement items bear to net revenues:

<TABLE>
<CAPTION>
                                                                         PERIOD ENDED JUNE 30,
                                                                  ------------------------------------
                                                                    2000          1999          1998
                                                                  --------      --------      --------
<S>                                                               <C>           <C>           <C>
Net revenues................................................         100%          100%          --
Cost of revenues............................................         114           268           --
                                                                    ----          ----          ---
Gross loss..................................................         (14)         (168)          --

Operating expenses:
  Sales and marketing.......................................          89            36           --
  Product development.......................................          18            22           --
  General and administrative................................          34            80           --
  Stock-based charges.......................................          11            27           --
  Amortization of intangible assets.........................          10            --           --
                                                                    ----          ----          ---
Total operating expenses....................................         162           165           --
                                                                    ----          ----          ---
Loss from operations........................................        (176)         (333)          --
Interest and other income, net..............................          12             3           --
                                                                    ----          ----          ---
Net loss....................................................        (164)%        (330)%         --
                                                                    ====          ====          ===
</TABLE>

FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1999

    We launched our service in October 1998 which impacted our revenues, cost of
revenues and operating expenses in fiscal 1999 when compared to fiscal 2000.
Accordingly, comparisons of operating results between fiscal 2000 and prior
fiscal years reflect not only the continued growth in our operations and overall
infrastructure, but also the fact that operating activities were limited prior
to the October 1998 launch of our service.

    REVENUES.  Revenues for the year ended June 30, 2000 were $55.5 million,
which represented an increase of $50.9 million, or 1,098%, from $4.6 million for
the year ended June 30, 1999. The increase was primarily attributable to
increased revenue from sales of targeted and non-targeted banner advertisements
primarily through our in-house sales force and third parties, growth in the
amount of start page revenue from our agreement with LookSmart as a result of
the increased number of users, and increased sponsorships on The ZeroPort.
Approximately $15.7 million and $1.3 million, or 28% and 28%, of our total
revenues for the years ended June 30, 2000 and 1999, respectively, were
generated from our agreement with LookSmart. We do not anticipate that the rate
of growth that we experienced in fiscal 2000 will continue and our revenues may
fluctuate from quarter to quarter.

    COST OF REVENUES.  Cost of revenues for the year ended June 30, 2000 was
$63.5 million, which represented an increase of $51.1 million, or 411%, from
$12.4 million for the year ended June 30, 1999. The increase was primarily
attributable to increased telecommunications expense related to the growth in
our user base and an increase in the costs of our network department and
depreciation of our network equipment. During the year ended June 30, 2000, the
Company's cost of telecommunications services purchased averaged less than $0.25
per user hour.

    SALES AND MARKETING.  Sales and marketing expenses for the year ended
June 30, 2000 were $49.4 million, which represented an increase of
$47.7 million, or 2,891%, from $1.7 million for the year ended June 30, 1999.
The increase was primarily due to increased levels of advertising and other
marketing expenses associated with our initial major nationwide consumer
branding campaign (including the start of

                                       19
<PAGE>
our exclusive sponsorship of the half-time show of televised National Basketball
Association games on NBC), and the increase in personnel costs related to the
hiring of additional sales force and marketing personnel.

    PRODUCT DEVELOPMENT.  Product development expenses for the year ended
June 30, 2000 were $9.7 million, which represented an increase of $8.7 million,
or 855%, from $1.0 million for the year ended June 30, 1999. The increase was
primarily due to the hiring of additional software engineers and increases in
professional and consulting expenses and equipment maintenance costs.

    GENERAL AND ADMINISTRATIVE.  General and administrative expenses for the
year ended June 30, 2000 were $19.1 million, which represented an increase of
$15.4 million, or 414%, from $3.7 million for the year ended June 30, 1999. The
increase was primarily due to the hiring of additional administrative personnel,
increased customer support services, an increase in the allowance for doubtful
accounts, increased professional and consulting expenses and an increase in
non-income taxes and licenses.

    STOCK-BASED CHARGES.  Stock-based charges for the year ended June 30, 2000
were $6.3 million, which represented an increase of $5.1 million, or 413%, from
$1.2 million for the year ended June 30, 1999. The increase was primarily due to
the amortization of deferred stock-based compensation in connection with stock
option grants and restricted founders' shares which are being amortized over the
vesting period of the applicable options or shares and the amortization of
warrants issued in connection with a four-year CD distribution agreement.

    AMORTIZATION OF INTANGIBLE ASSETS.  Amortization of intangible assets
amounted to $5.5 million for the year ended June 30, 2000 as a result of our
acquisition of AimTV in December 1999. The intangible assets acquired are being
amortized over a period of two to three years.

    INTEREST INCOME AND INTEREST EXPENSE.  Interest income consists of earnings
on our cash and cash equivalents, short-term investments and restricted cash.
Interest expense consists primarily of interest expense on capital leases and
notes payable. Net interest income for the year ended June 30, 2000 was
$6.8 million, which represented an increase of $6.7 million from net interest
income of $0.1 million for the year ended June 30, 1999. The increase was
primarily due to income earned on cash balances from the proceeds of our initial
public offering and the investment by QUALCOMM, partially offset by an increase
in interest expense on capital leases and notes payable.

    INCOME TAXES.  As a result of operating losses and the inability to
recognize a benefit for our deferred tax assets, no income tax provision has
been recorded for years ended June 30, 2000 or June 30, 1999.

FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO THE PERIOD FROM JULY 21, 1997
(INCEPTION) THROUGH JUNE 30, 1998

    We began business operations in October 1998, and as a result, operating
results for the period from July 21, 1997 (inception) through June 30, 1998
included no revenues, no cost of revenues, and no expenses other than $25,000 of
general and administrative expenses. Accordingly, the results for this period
are not meaningful or material in comparison to the operating results for the
year ended June 30, 1999.

    REVENUES.  Revenues for the year ended June 30, 1999 were $4.6 million,
compared to no revenue for the period from July 21, 1997 (inception) through
June 30, 1998. The increase was primarily attributable to revenues generated
from banner advertisements and revenues generated from our start page agreement
with Looksmart, as well as increased sales of banner advertisements, primarily
through a third party sales force. In particular, we generated approximately
$1.3 million, or 28% of our total revenues for the year ended June 30, 1999,
from our agreement with LookSmart, which we entered into in April 1999. We also
generated approximately $1.2 million, or 26% of our total revenues for the year
ended June 30, 1999, from banner advertisements sold through Adsmart.

                                       20
<PAGE>
    COST OF REVENUES.  Cost of revenues for the year ended June 30, 1999 were
$12.4 million, compared to no cost of revenues for the period from July 21, 1997
(inception) through June 30, 1998. The increase was primarily attributable to
increased telecommunication expense related to the growth in our user base and
depreciation related to our network costs.

    SALES AND MARKETING.  Sales and marketing expenses for the year ended
June 30, 1999 were $1.7 million, compared to no sales and marketing expenses for
the period from July 21, 1997 (inception) through June 30, 1998. The increase
was primarily due to the hiring of additional direct sales force personnel.

    PRODUCT DEVELOPMENT.  Product development expenses for the year ended
June 30, 1999 were $1.0 million, compared to no product development expense for
the period from July 21, 1997 (inception) through June 30, 1998. The increase
was primarily due to the hiring of additional software engineers.

    GENERAL AND ADMINISTRATIVE.  General and administrative expense for the year
ended June 30, 1999 increased to $3.7 million from $25,000 for the period from
July 21, 1997 (inception) through June 30, 1998. The increase was primarily due
to the hiring of additional management and administrative personnel and
increased professional and consulting expense. The $25,000 of general and
administrative expense for the period from July 21, 1997 through June 30, 1998
primarily represented employee salaries.

    STOCK-BASED CHARGES.  Stock-based charges for the year ended June 30, 1999
was $1.2 million, compared to no stock-based charges for the period from
July 21, 1997 (inception) through June 30, 1998. The increase was primarily due
to stock option grants and restrictions placed on founders' shares.

    INTEREST INCOME AND INTEREST EXPENSE.  Interest income is comprised
primarily of interest income earned on cash and cash equivalents. Interest
expense is comprised primarily of interest expense on capital equipment leases.
Interest income, net, for the year ended June 30, 1999, was $115,000, compared
to no interest income or expense for the period from July 21, 1997 (inception)
through June 30, 1998. The increase was primarily due to interest earned on the
proceeds from the Series C and Series D preferred stock financings.

LIQUIDITY AND CAPITAL RESOURCES

    From inception of the business to September 1999 our operations were
financed primarily through the private placement of approximately $47 million in
equity securities. In September 1999, we completed an initial public offering of
11.5 million shares (including 1.5 million shares pursuant to the underwriters'
over-allotment option) of our common stock at a price of $16 per share,
resulting in proceeds of $169.3 million after deducting offering expenses,
including underwriters' discounts and commissions. In April 2000, we completed a
private placement of 11.5 million shares of our common stock to QUALCOMM,
resulting in proceeds of approximately $144 million. At June 30, 2000 the
Company had approximately $248 million in cash, cash equivalents, short-term
investments and restricted cash.

    Net cash used for operating activities was $83.5 million for the year ended
June 30, 2000 and consisted primarily of operating losses, deposits to guarantee
future obligations and increases in accounts receivable, restricted cash and
other assets, partially offset by increases in accounts payable and accrued
expenses, deferred revenue, depreciation, amortization and stock-based charges.

    Net cash used for investing activities of $58.5 million for the year ended
June 30, 2000 was primarily for purchases of short-term investments, server
network equipment, software licenses, office equipment and leasehold
improvements.

    Net cash provided by financing activities was $319.4 million for the year
ended June 30, 2000 and was principally attributable to the proceeds from the
initial public offering and the investment by QUALCOMM.

                                       21
<PAGE>
    We expect to continue to incur significant expenditures to fund our
operating losses and capital expenditures, including additions and enhancements
to our servers and network infrastructure, software licenses and furniture,
fixtures and equipment. The actual amount of capital expenditures will depend on
the rate of growth in the user base, which is difficult to predict and which
could change dramatically over time. Technological advances, as well as
acquisitions and the commercialization of new products, may also require capital
expenditures to develop or acquire new equipment or technology. We intend to use
a combination of cash and capital lease financing to fund capital expenditures
in a manner which minimizes cost of capital. However, there is no assurance that
lease financing will be available on favorable terms, if at all, in which case
we would be required to use a greater portion of cash to fund capital
expenditures.

    We consider our existing cash, cash equivalents and short-term investments
to be adequate to fund our operating activities, capital expenditures and other
obligations for at least the next 12 months. However, a variety of factors,
including acquisitions, could affect our funding needs. In the longer term,
additional capital may be needed in order to fund our operations, expand
marketing activities, develop new or enhance existing services or products, to
respond to competitive pressures or to acquire complementary services,
businesses or technologies. If we are not successful in generating sufficient
cash flow from operations, additional capital through public or private
financings, strategic relationships or other arrangements will be necessary.
This additional funding might not be available on acceptable terms, or at all.
Failure to raise sufficient capital when needed could have a material adverse
effect on the business, results of operations and financial condition. If
additional funds were raised through the issuance of equity securities, the
percentage of stock owned by the then-current stockholders would be reduced.
Furthermore, such equity securities might have rights, preferences or privileges
senior to those of the common stock holders.

NEW PRONOUNCEMENTS

    In March 1998, the American Institute of Certified Public accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
provides guidance on the cost of computer software developed or obtained for
internal use. The implementation of SOP No. 98-1 has not had a significant
impact on our financial position, results of operations or cash flows.

    In June 1998, The Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. Because the Company does
not currently hold any derivative instruments and does not engage in hedging
activities, the impact of the adoption of SFAS No. 133 is not currently expected
to have a material impact on financial position, results of operations or cash
flows. The Company will be required to implement SFAS No. 133 in the first
quarter of fiscal 2001.

    In March 2000, the FASB issued FASB Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." FIN No. 44
provides guidance for issues arising in applying APB Opinion No. 25, "Accounting
for Stock Issued to Employees." FIN No. 44 applies specifically to new awards,
exchanges of awards in a business combination, modification to outstanding
awards and changes in grantee status that occur on or after July 1, 2000, except
for the provisions related to re-pricings and the definition of an employee
which apply to awards issued after December 15, 1998. Application of FIN No. 44
is not anticipated to have an impact on our financial reporting.

    In December 1999, the SEC issued Staff Accounting Bulletin 101 ("SAB 101"),
"Revenue Recognition," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. In June 2000,
the SEC issued

                                       22
<PAGE>
SAB 101B, which requires implementation of SAB 101 by us no later than June 30,
2001. At this time, we are still assessing the impact of SAB 101 and the effect,
if any, on our financial position and results of operations.

FUTURE RESULTS OF OPERATIONS MAY VARY DUE TO CERTAIN FACTORS

    Our operating results may fluctuate substantially in the future as a result
of a variety of factors, many of which are outside of our control, including
those discussed elsewhere in this Annual Report on Form 10-K. The Company may
significantly increase its operating expenses and capital expenditures for a
variety of reasons including, without limitation, the expansion of its sales and
marketing efforts, the promotion of the NetZero brand, the enhancement of the
features and functionality of our services, the development of new services and
products, the integration of acquired companies, the upgrading of the internal
network infrastructure, pursuit of new distribution channels and the hiring of
new personnel across all levels of the organization. Expenditures in each of
these categories may vary significantly from period to period. While some
expenses are fixed in the short-term, total operating expenses are principally
determined on the basis of anticipated growth in revenues. There are risks
associated with the timing and achievement of revenue targets due to a variety
of factors, and there can be no assurance that revenues will increase
commensurately with expenses. We believe that expenses will significantly exceed
revenues for the foreseeable future. As a result of these and other factors,
operating results may vary substantially from quarter to quarter.

    In addition, seasonal trends could affect revenues generated. To the extent
that revenues depend on the amount of usage by users, any seasonal fluctuations
in Internet usage could affect revenues during such periods of fluctuation. We
anticipate that the summer and year-end vacation and holiday periods will impact
user traffic levels. Moreover, the rate at which new users sign up for our
service may be related to gifts or purchases of personal computers, which
typically increase during the fourth calendar quarter because of the holiday
season and may decline during other periods. As a result, new user registration
may be subject to seasonality. However, because our operating history is
limited, it is difficult to accurately predict these trends and plan
accordingly. Since operating expenses are based on expectations of future
revenues, it is possible that seasonal fluctuations could materially and
adversely affect the business, results of operations and financial condition.

    In addition to seasonality, there are several other factors that may cause
our quarter to quarter revenues to fluctuate significantly, including changes in
advertising rates due to increased competition, fluctuations in our user count,
termination of our material contracts, such as the LookSmart agreement, and the
effect of short term contracts which provide significant revenues in one quarter
but do not provide a significant revenue stream in subsequent quarters. These
and other factors may cause significant fluctuations in our quarter to quarter
revenues.

    A small number of customers have accounted for, and may in the future
account for, a significant portion of revenues. For example, in the year ended
June 30, 2000, LookSmart accounted for 28% of our revenues. The agreement with
LookSmart was renewed in February 2000 and will extend through February 2001.
There is no assurance that such agreement will be renewed or, if renewed, will
continue to generate comparable revenues. In addition, during the year ended
June 30, 2000 we generated a significant portion of our revenues from third
party sales organizations. We no longer have any agreements in effect with third
party sales organizations that we believe will result in significant revenues.
We intend to focus primarily on our in-house sales organization for our
advertising sales. The termination of material agreements, as well as the timing
of orders under material agreements, may cause significant fluctuations in our
results. Our business, results of operations and financial condition will be
materially and adversely affected if we are unable either to renew material
agreements or to replace such agreements with similar agreements with new
customers.

                                       23
<PAGE>
    Due to the foregoing factors, we believe that year to year or quarter to
quarter comparisons of operating results may not necessarily be a good
indication of future performance.

YEAR 2000 COMPLIANCE

    Many existing computer systems and software are coded to accept only two
digit entries in the date code field and cannot distinguish 21st century dates
from 20th century dates. If not corrected, various problems may arise from the
improper processing of dates and date-sensitive calculations by computers and
other machinery in Year 2000. These problems include system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with these "Year
2000" requirements.

    To date the Company has not experienced any material issues associated with
the Year 2000 problem. Formal assessment of the impact that the Year 2000
problem may have on existing operations has been completed.

    There have been no significant expenses either prior to, or subsequent to,
December 31, 1999 relating to this matter and to date there has been no impact
on results of operations or third party relationships.

                                  RISK FACTORS

    Before deciding to invest in our Company or to maintain or increase your
investment, you should carefully consider the risks described below, in addition
to the other information in this report and our other filings with the SEC. The
risks and uncertainties described below are not the only ones facing our
Company. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also affect our business operations. If any of
these risks actually occur, our business, financial condition or results of
operations could be seriously harmed. In that event, the market price of our
common stock could decline and you may lose all or part of your investment.

                                       24
<PAGE>
                  WE FACE RISKS ASSOCIATED WITH OUR OPERATIONS

WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR FREE INTERNET SERVICE PROVIDER
BUSINESS MODEL IS UNPROVEN, AND WE HAVE OPERATED OUR BUSINESS FOR ONLY A SHORT
PERIOD OF TIME.

    Our business model is unproven and a number of other businesses offering
free Internet access have failed. Since we only began offering Internet access
in October 1998, we have a limited operating history, which makes it difficult
to evaluate our performance. Our business model, unlike traditional Internet
service providers, does not have a measurable and predictable revenue stream
from user access fees. If we are not able to successfully address these risks,
we will not be able to grow our business, compete effectively or achieve
profitability.

OUR MARKET SHARE AND REVENUES WOULD SUFFER IF WE WERE NOT ABLE TO COMPETE
EFFECTIVELY FOR USERS WITH ESTABLISHED, AND NEW PROVIDERS OF, INTERNET ACCESS
SERVICES.

    COMPETITORS

    Competition for users is increasing. We currently compete or expect to
compete for users with the following types of companies that provide access
services:

    - companies that provide free Internet access under their own brands, such
      as Freei Networks, Inc. and Juno Online Services, Inc., as well as
      companies such as 1stUp.com and Spinway that provide free Internet access
      co-branded with, or under the brands of, third parties;

    - established online service and content providers, such as America Online
      and The Microsoft Network;

    - independent national Internet service providers, such as EarthLink and
      Prodigy;

    - national long-distance carriers, such as AT&T, GTE and MCI WorldCom;

    - local telephone companies and regional Bell operating companies, such as
      Pacific Bell;

    - numerous regional and local commercial Internet service providers;

    - computer hardware and software and other technology companies, such as IBM
      and Microsoft;

    - cable operators and online cable services, such as Excite@Home;

    - Internet portals and search engines such as Yahoo! and Alta Vista;

    - retail companies such as K-Mart and Costco; and

    - nonprofit or educational Internet service providers.

    We expect that competition for users will continue to intensify for the
foreseeable future. We believe that additional competitors for Internet users,
including major computer manufacturers, retail companies, and software, media
and telecommunications companies, will continue to enter the Internet access
market. Existing competitors may take steps such as reducing their subscriber
fees, offering promotions for access services, or bundling free access services
with other product offerings. For example, Alta Vista and Excite, leading
portals and search engines now offer free Internet access solutions in
conjunction with 1stUp.com; K-Mart, SOFTBANK, Spinway and Yahoo, have invested
in, or entered into relationships with, Bluelight.com to form a new free
Internet access provider; and both Microsoft and CompuServe have partnered with
personal computer makers and consumer electronics retailers to offer consumers
rebates on computer equipment when the consumer signs up for their Internet
access services. New entrants have announced Internet access models similar to
ours, and the implementation of similar models by new entrants or existing
competitors could limit the value of our consumer proposition. As awareness of
the

                                       25
<PAGE>
Internet grows, existing competitors are likely to further increase their
emphasis on their Internet access services, resulting in even greater
competition for us.

    We believe that increased competition has impacted our growth and will
likely continue to impact our growth in the future, resulting in additional
sales and marketing expenses that increase user acquisition cost, and result in
increased user turnover. Increased competition could also result in decreased
advertising revenue. Since we do not charge our users membership fees, we may
not be able to offset the effect of these increased costs, and we may not have
the resources to continue to compete successfully. The ability of our
competitors to acquire other Internet providers or to enter into strategic
alliances or joint ventures could also put us at a significant competitive
disadvantage.

    TELECOMMUNICATIONS SERVICES

    In addition, telecommunications companies with far greater resources,
distribution channels and brand awareness offer, or have announced that they
will offer, their own Internet access services to users. Since these companies
have their own telecommunications network infrastructure, they have lower
communications costs than we do. These advantages reduce the overall cost of
Internet access for such companies and may significantly increase competitive
pressures on us. In addition, each of our telecommunications providers supplies
network access to some of our competitors, and could choose to grant those
competitors preferential network access, potentially limiting our users' ability
to access the Internet. If our telecommunications service providers were to
decrease the levels of service or access provided to us, or if they were to
terminate their relationships with us for competitive or other reasons, and we
were not able to develop alternate sources of supply, we would not be able to
provide Internet access to our customers, which could ultimately result in a
significant loss of users and revenues.

    BROADBAND PROVIDERS

    We also face competition from companies that provide broadband Internet
access, including local and long-distance telephone companies, cable television
companies, electric utility companies, wireless communications companies and
other Internet service providers. Most of our service is offered via dial-up
modems, which are generally limited to access speeds of up to 56 kbps. Broadband
technologies enable users to transmit and receive print, video, voice and data
in digital form at significantly faster access speeds. We may have to develop
new technologies or add broadband access services to remain competitive, which
could require substantial time and expense. We cannot be certain that we will
succeed in adapting our Internet access service business to compete effectively
with these technologies.

    The telephone, cable and other companies that own broadband networks may
prevent us from offering broadband Internet access through the wire and cable
networks that they own. Our ability to compete with telephone and cable
television companies that are able to support broadband transmission may depend
on future regulation to guarantee open access to their broadband networks.
However, in January 1999, the Federal Communications Commission declined to take
any action to mandate or otherwise regulate access by Internet service providers
to broadband cable facilities at this time. We do not know whether local, state
or federal regulatory agencies will take any initiatives to implement this type
of regulation, and whether they will be successful in establishing their
authority to do so.

    In addition to competing directly in the Internet access market, both cable
and telephone companies are also aligning themselves with Internet service
providers who would receive preferential or exclusive use of broadband local
connections to users. If broadband Internet access becomes the preferred mode by
which users access the Internet and we are unable to gain access to broadband
networks on reasonable terms, our ability to compete could be materially and
adversely affected.

    We are in the process of developing, and plan to implement, a strategy to
deliver broadband services. There is no assurance that we will be successful in
developing or implementing this strategy. It is

                                       26
<PAGE>
anticipated that implementing a broadband strategy will result in significant
operating costs, which could adversely impact our financial position and results
of operations.

IF WE FAIL TO GROW OUR USER BASE, WE MAY NOT BE ABLE TO GENERATE REVENUES,
DECREASE PER-USER TELECOMMUNICATIONS COSTS OR IMPLEMENT OUR STRATEGY.

    If we are unable to grow our user base, we may not be able to generate
revenues, decrease per-user telecommunications costs or implement our strategy.
We intend to generate new users through other distribution channels, such as
television, radio and print media advertising, direct marketing campaigns, and
bundling, co-branding and retail distribution arrangements. However, we have
limited experience with marketing our service through these channels. If these
distribution channels prove more costly or less effective than anticipated, it
could adversely impact our ability to grow. We would also be unable to grow our
user base if a significant number of our current registered users stopped using
our service. There are a variety of reasons why users would discontinue using
our service, including:

    - users may decide they do not like the always-present nature of The
      ZeroPort;

    - users may not like having their online activities tracked;

    - reliability issues, which we have experienced in the past and may
      experience in the future, may cause user dissatisfaction; and

    - our limited user support may frustrate users who have difficulty using our
      service.

    There is no assurance that we will be able to successfully address these
issues and retain our existing user base.

OUR ADVERTISING REVENUES WILL SUFFER IF WE ARE UNABLE TO DEMONSTRATE THAT OUR
REGISTERED USERS ARE ACTIVELY USING OUR SERVICE.

    If we are not able to demonstrate to our advertisers that our registered
users are actively using our service, advertisers may choose not to advertise
with us and our advertising revenues could be materially and adversely affected.
While approximately 5 million users had registered for our service as of
June 30, 2000, approximately 2 million had used our service during the month of
June. We believe that a number of our users have Internet access accounts with
our competitors. As a result, these users may not use NetZero as their primary
Internet service provider. Also, some new users use the Internet only as a
novelty and do not become consistent users of Internet services and, therefore,
may be less likely to continue using our service.

IF WE FAIL TO GENERATE SUFFICIENT ADVERTISING REVENUES, WE MAY NOT BE ABLE TO
SUPPORT OUR OPERATIONS.

    Since we do not charge our users any fees for our Internet access and e-mail
services, we depend primarily on our ability to generate advertising revenues.
Accordingly, if we fail to generate sufficient advertising revenues, we may not
be able to support our operations. We generate revenues from a variety of
different arrangements including sales of targeted and untargeted banner
advertising, sponsorships, performance-based arrangements and referrals to third
party web-sites. We have limited experience marketing and pricing these types of
arrangements, and have limited actual experience with respect to the performance
of such arrangements. As such, we do not know if we are appropriately pricing,
marketing or structuring these arrangements, or whether we will perform under
these arrangements to the satisfaction of the other parties. Our failure to
appropriately price, market or structure these arrangements could impact our
ability to enter into and perform under these arrangements, or to renew these
arrangements on similar or acceptable terms. In addition, the success of some of
these arrangements will depend on our ability to effectively target users based
on demographic and other information. We may encounter technical and other
limitations on this ability, including problems associated with the accuracy of
the information

                                       27
<PAGE>
provided by our users, which we do not corroborate. In light of these factors,
there can be no assurance that we will be able to attract sufficient advertising
revenues to support our operations.

    In addition, competition for Internet-based advertising revenues is intense
and the amount of available standard banner advertising space on the Internet is
increasing at a significant rate. These factors are causing Internet advertising
rates to decline, and it is possible that rates will continue to decline in the
future. Also, our growth in users has resulted in, and in the future may result
in, our advertising inventory growing faster than our ability to sell the
inventory at reasonable rates. Many of the purchasers of Internet advertising
have been companies with Internet-based business models. Many of these companies
have come under financial pressure and have not been able to access the capital
markets to fund their operations. This trend could impact our ability to
generate revenues in the future and could result in increased reserves for
doubtful accounts.

    Many of our advertising competitors have longer operating histories, greater
name recognition, larger user bases, significantly greater financial, technical,
sales and marketing resources and more established relationships with
advertisers than we do. These advantages may allow such competitors to respond
more quickly than we can to new or emerging technologies and changes in
advertiser requirements. They may also be able to devote greater resources than
we can to develop, promote and sell their products and services. Such
competitors may also engage in more extensive research and development,
undertake more far-reaching marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to existing and potential employees,
strategic partners, advertisers and Web publishers. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective customers. We
must also compete with television, radio, cable and print media for a share of
advertisers' total advertising budgets. Advertisers may be reluctant to devote a
significant portion of their advertising budget to Internet advertising if they
perceive the Internet to be a limited or ineffective advertising medium.

IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE ACQUISITIONS INTO OUR OPERATIONS,
THEN OUR RESULTS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.

    We have made a number of acquisitions and may continue to make acquisitions
or undertake other business combinations that can complement our current or
planned business activities. Such acquisitions may not be available at the times
or on terms acceptable to us, or at all. In addition, acquiring a business
involves many risks, including:

    - disruption of our ongoing business and diversion of resources and
      management time;

    - unforeseen obligations or liabilities;

    - difficulty assimilating the acquired operations and personnel;

    - risks of entering markets in which we have little or no direct prior
      experience;

    - potential impairment of relationships with employees or users as a result
      of changes in management; and

    - potential dilutive issuances of equity, large and immediate write-offs,
      the incurrence of debt, and amortization of goodwill or other intangible
      assets.

    There can be no assurance that we will make any further acquisitions or that
we will be able to obtain additional financing for such acquisitions, if
necessary. There can be no assurance that we will be able to successfully
integrate the acquired businesses into our operations or that the acquired
businesses will perform as expected.

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WE MAY NOT BE ABLE TO PROVIDE INTERNET ACCESS FOR OUR USERS IF OUR
TELECOMMUNICATIONS CARRIERS RAISE THEIR RATES OR IF THEY DISCONTINUE DOING
BUSINESS WITH US.

    Our business substantially depends on the capacity, affordability,
reliability and security of our telecommunications networks. Only a small number
of telecommunications providers offer the network services we require. There has
been significant consolidation in the telecommunications industry, and there is
a significant risk that further consolidation could make us reliant on an even
smaller number of providers. Certain of our telecommunications services are
provided pursuant to short-term agreements that the providers can terminate or
elect not to renew. As a result, any or all of our current telecommunications
service providers could decide not to provide us with service at rates
acceptable to us, or at all, in which event, we may not be able to provide
Internet access to our users.

WE MAY LOSE OUR USERS IF OUR TELECOMMUNICATIONS PROVIDERS DELIVER UNACCEPTABLE
SERVICE QUALITY.

    If our third-party telecommunications service providers deliver unacceptable
service, the quality of our Internet access service would suffer. In this event,
we would likely lose users who are dissatisfied with our service. Since we do
not have direct control over our telecommunications carriers' network
reliability and the quality of their service, there can be no assurance that we
will be able to provide consistently reliable Internet access for our users.

IF TELECOMMUNICATIONS PRICES INCREASE, OUR MARGINS WOULD BE ADVERSELY IMPACTED.

    Our margins are highly sensitive to variations in prices for the
telecommunications services we purchase. Our business could be harmed if minimum
connection charges increase or become more prevalent. In addition, the
availability and pricing of telecommunications services varies geographically,
and we may not be able to obtain new or substitute telecommunications services
in certain geographic areas on commercially reasonable terms, if at all.
Legislation has been proposed from time to time that would increase the cost of
doing business of many of our telecommunications providers. Any increase in
their costs could result in increased prices to us. There can be no assurance
that our telecommunications providers will continue to provide their services on
commercially acceptable price terms, or that alternative services will be
available on similar terms.

OUR ABILITY TO SERVE ADVERTISEMENTS ON THE ZEROPORT COULD BE SEVERELY LIMITED IF
THE SOFTWARE WE LICENSE FROM NETGRAVITY FAILS TO PERFORM OR IF WE ARE NOT ABLE
TO RENEW OUR LICENSE.

    All of our advertisements are served using software licensed from
NetGravity. While there is other software available, it would substantially
disrupt our business to switch to another provider. As such, we are reliant on
NetGravity and its software. Our agreement with NetGravity expires in
June 2001; however we have an option to renew the agreement for an additional
two-year term upon initial expiration. 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 this event, our ability to
generate advertising revenues would be severely limited. In October 1999,
NetGravity was acquired by Double Click, an Internet advertising provider. Since
our agreement with NetGravity does not expire until June 2001 and we have an
option to renew for an additional two-year term upon initial expiration, we do
not believe the acquisition will have a material effect on our contractual
rights with NetGravity.

OUR STOCK PRICE COULD FALL AS A RESULT OF FUTURE LOSSES AND NEGATIVE CASH FLOW.

    We have a significant accumulated deficit. We expect that our losses and
negative cash flow will increase for the foreseeable future as we continue to
expand our operations. Our ability to achieve profitability or positive cash
flow depends upon a number of factors, including our ability to increase revenue
and reduce per-user costs. We cannot be certain that we will be able to continue
to grow our revenues or that we will obtain sufficient revenues to achieve
profitability or positive cash flow. If we do achieve profitability, we cannot
be certain that we can sustain or increase profitability on a quarterly or
annual basis in the future. If we fail to do so, the market price for our common
stock could suffer.

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<PAGE>
OUR REVENUES WOULD SIGNIFICANTLY DECREASE IF WE LOSE KEY CUSTOMERS.

    A small number of customers have accounted for, and may in the future
account for, a significant portion of our revenues. For example, we derived
approximately 28% of our revenues for the year ended June 30, 2000 from an
agreement with LookSmart. Our agreement with LookSmart was renewed in
February 2000 and will expire on February 15, 2001. There can be no assurance
that the agreement with LookSmart will be renewed or, if renewed, will result in
a comparable level of revenues. During the year ended June 30, 2000 we generated
a significant portion of our revenues from third party sales organizations. We
no longer have any agreements in effect with third party sales organizations
that we believe will result in significant revenues. We intend to focus
primarily on our in-house sales organizations for our advertising sales. The
termination of material agreements, as well as the timing of orders under
material agreements, may cause significant fluctuations in our quarterly
results. Our business, results of operations and financial condition will be
materially and adversely affected if we are unable either to renew our material
agreements or to replace such agreements with similar agreements with new
customers.

OUR REPUTATION AND ABILITY TO GENERATE REVENUES WILL BE HARMED IF USER DEMAND
FOR OUR SERVICE EXCEEDS OUR TELECOMMUNICATIONS AND SERVER CAPACITY.

    We may from time to time experience increases in our telecommunications
usage which exceed our then-available telecommunications capacity and the
capacity of our internal servers. As a result, users may be unable to register
or log on to our service, may experience a general slow-down in their Internet
access or may be disconnected from their sessions. Excessive user demand could
also result in system failures of our internal server networks, which would
prevent us from generating advertising revenues. Inaccessibility, interruptions
or other limitations on the ability to access our service due to excessive user
demand, or any failure of our servers to handle user traffic, would have a
material adverse effect on our reputation and our revenues.

WE WILL NOT BE ABLE TO SUPPORT INCREASED NUMBERS OF USERS IF WE ARE UNABLE TO
ENHANCE OUR INTERNAL NETWORK INFRASTRUCTURE.

    Our internal network infrastructure is composed of a complex system of
application, database, advertisement and e-mail servers. Service interruptions
originating within our internal network have occurred in the past and may occur
in the future, especially when usage exceeds capacity. We will need to invest in
substantial financial, operational, and management resources to enhance our
systems, particularly our database servers and storage capabilities, to handle a
large number of users. We cannot be certain that we will be able to accomplish
this on a timely basis and at a commercially reasonable cost, or at all. If we
fail to do so, we will be unable to grow our business.

IF WE FAIL TO MANAGE OUR TELECOMMUNICATIONS CAPACITY, OUR SERVICE LEVELS MAY
SUFFER OR WE MAY EXPERIENCE INCREASED PER-USER COSTS.

    We will have to accurately anticipate our future telecommunications capacity
needs within lead-time requirements. If we fail to procure sufficient quantities
of telecommunications products and services, we may be unable to provide our
current and future users with acceptable service levels. We also run the risk of
purchasing excessive amounts of telecommunications products and services based
on incorrect projections regarding increased usage. In that event, we would be
required to bear the costs of excess telecommunications capacity without
commensurate increases in revenues. There can be no assurance that we will be
able to effectively manage these and other aspects of our business. Our failure
to do so would likely have a material adverse effect on our business, results of
operations and financial condition.

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<PAGE>
WE MAY NOT BE ABLE TO GROW OUR USER BASE IF WE ARE UNSUCCESSFUL IN ESTABLISHING
AND MAINTAINING THE NETZERO BRAND.

    If we are unsuccessful in establishing or maintaining the NetZero brand, we
may not be able to grow our user base. We believe that establishing and
maintaining the NetZero brand is critical to retain and expand our user base.
Promotion of the NetZero brand will depend on our success in providing
high-quality Internet products and services. However, such success will depend,
in part, on the services, products and efforts of third parties, over which we
have little or no control. For instance, if our third party telecommunications
service providers fail to provide quality service, our users' ability to access
the Internet may be interrupted, which may adversely affect the NetZero brand.
If our users and advertisers do not perceive our existing products and services
as high quality, or if we introduce new products or services or enter into new
business ventures that are not favorably received by our users and advertisers,
then we may be unsuccessful in building brand recognition and brand loyalty in
the marketplace. In addition, we may also need to devote substantial resources
to create and maintain a distinct brand loyalty among our users and to promote
and maintain the NetZero brand in a very competitive market. If we incur
excessive expenses in promoting and maintaining our brand, our financial results
could be seriously harmed.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IF WE ARE NOT ABLE TO RESPOND TO
CHANGING INDUSTRY STANDARDS.

    We may not be able to compete effectively if we are not able to adapt to
changes in technology and industry standards, and to develop and introduce new
and enhanced products and service offerings. We believe that our ability to
compete successfully will also depend upon the continued compatibility of our
services with products offered by various vendors. Although we intend to support
emerging standards in the market for Internet access, we may not be able to
conform our technology and equipment to support these new standards in a timely
fashion. For instance, Sun Microsystems continues to upgrade its JAVA language
and implementing new versions of JAVA may require additional memory to
implement. Our software uses the JAVA language extensively and we will have to
modify our resources accordingly to accommodate new versions. There can be no
assurance that we will be able to make such modifications, or any other
modifications which may be required to adapt to new or changing standards, in a
cost-effective and timely manner, or at all.

WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCT OR SERVICE OFFERINGS IF WE ARE UNABLE
TO OBTAIN NEEDED TECHNOLOGY.

    We rely upon third parties to help us develop technologies that enhance our
current product and service offerings. If our relationships with these third
parties are impaired or terminated, then we would have to find other developers
on a timely basis or develop technology completely on our own. We cannot predict
whether we will be able to obtain the third-party technology necessary for
continued development and introduction of new and enhanced products and
services.

CONSUMERS MAY DECIDE NOT TO USE OUR SERVICE IF OUR TECHNOLOGY AND SERVICES
BECOME OBSOLETE.

    Others may develop services or technologies that render our services or
technology noncompetitive or obsolete. For instance, a number of companies are
offering broadband and other high speed Internet access services, which allow
users to access the Internet at much faster speeds than the access services we
currently provide. Our ability to remain technologically competitive may require
substantial expenditures and lead time.

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<PAGE>
WE MAY NOT SUCCESSFULLY DEVELOP AND MARKET NEW PRODUCTS IN A TIMELY MANNER.

    We may expend significant resources developing and implementing new
products. Product development involves a number of uncertainties, including
unanticipated delays and expenses. New products may have technological problems
or may not be accepted by our users or advertisers. There is no assurance that
new products will be introduced in a timely manner or result in user
satisfaction or increased revenues. If we are unable to respond in a timely
manner to technological advances, we may not be able to compete effectively for
users, which could cause our revenues to decrease.

IF OUR SOFTWARE OR HARDWARE CONTAINS ERRORS, OUR BUSINESS COULD BE SERIOUSLY
HARMED.

    The software and hardware used to operate and provide our services is
complex and, accordingly, may contain undetected errors or failures. We have in
the past, and may in the future, encounter errors in the software or hardware
used to operate and provide our services. This has resulted in, and may in the
future result in, a number of adverse consequences, including:

    - users being disconnected from our service or being unable to access our
      service;

    - loss of data or revenue;

    - injury to reputation; and

    - diversion of development resources.

    We have experienced some technical and customer support issues associated
with our products and software releases. These issues have resulted in users
discontinuing our service and have adversely impacted our revenues. We cannot
assure you that we will not experience additional problems in the future.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IF WE ARE NOT ABLE TO PROTECT OUR
PROPRIETARY RIGHTS.

    If we are not able to protect our proprietary rights, we may not be able to
compete effectively. We principally rely upon copyright, trade secret, and
contract laws to protect our proprietary technology. We cannot be certain that
we have taken adequate steps to prevent misappropriation of our technology or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. In addition, since we
provide our Internet access software for free, we are extremely susceptible to
various forms of unauthorized use of our software. These actions could adversely
affect our brand name.

WE MAY INCUR SUBSTANTIAL COSTS AND DIVERSION OF MANAGEMENT RESOURCES IF WE
INFRINGE UPON THE PROPRIETARY RIGHTS OF OTHERS.

    We have permission and, in some cases, licenses from each developer of the
software that we use in our software. Although we do not believe that the
software or the trademarks we use or any of the other elements of our business
infringe on the proprietary rights of any third parties, third parties may
assert claims against us for infringement of their proprietary rights and these
claims may be successful. In addition, a number of third-party owners of patents
have claimed to hold patents that cover various forms of online transactions or
online technology. As with other online service providers, patent claims could
be asserted against us based upon our services or technologies.

    We could incur substantial costs and diversion of management resources in
the defense of any claims relating to proprietary rights. Parties making these
claims could secure a judgment awarding substantial damages as well as
injunctive or other equitable relief that could effectively block our ability to
use our products in the United States or abroad. If a third party asserts a
claim relating to proprietary technology

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<PAGE>
or information against us, we may seek licenses to the intellectual property
from the third party. We cannot be certain, however, that third parties will
extend licenses to us on commercially reasonable terms, or at all. If we fail to
obtain the necessary licenses or other rights, it could materially and adversely
affect our ability to operate our business.

OUR SERVICE COULD BE DISRUPTED BY A SECURITY BREACH, VIRUS OR INAPPROPRIATE USE
BY INTERNET USERS.

    The future success of our business will depend on the security of our
network and, in part, on the security of the network infrastructures of our
third-party telecommunications service providers, over which we have no control.
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. There can be no assurance that we would
prevail in such claims and our failure to do so could result in large judgments
against us. Users or other third parties could also potentially jeopardize the
security of confidential information stored in our computer systems or our
users' computer systems by their inappropriate use of the Internet, including
breaking into our computer network, which could cause losses to us or our users.
Users or third parties may also potentially expose us to liability by "identity
theft", or posing as another NetZero 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 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. We also cannot assure you that the security measures of our
third-party network providers will be adequate. In addition, to alleviate
problems caused by computer viruses or other inappropriate uses or security
breaches, we may have to interrupt, delay, or temporarily cease service to our
users, which could have a material adverse effect on our revenues and could also
result in inreased user turnover.

OUR REVENUES COULD BE ADVERSELY AFFECTED IF PROGRAMS TO DISABLE THE ZEROPORT
BECOME PREVALENT.

    Various software programs have been developed that specifically target The
ZeroPort to disable our ability to deliver advertisements to a user. These
programs attempt to blank out, or block, banner advertisements on The ZeroPort
or completely delete The ZeroPort from users' computer screens. To date, such
programs have not interrupted our operations or caused us to fail to meet the
terms of our advertising agreements. While we believe we have been able to limit
the effectiveness of such attempts, there can be no assurance that we will be
able to continue to do so in the future. Widespread adoption of this type of
software would seriously damage our ability to operate our business and generate
revenues.

WE MAY NOT BE ABLE TO EXPAND OUR OPERATIONS IF WE ARE NOT ABLE TO OBTAIN
ADDITIONAL EQUIPMENT FROM THIRD-PARTY HARDWARE SUPPLIERS.

    The expansion of our network infrastructure and Internet services in general
is placing, and will continue to place, a significant demand on our suppliers.
From time to time, we have experienced delayed delivery from suppliers of
modems, servers, and other equipment. We may be unable to implement our planned
expansion and our users may be unable to connect to our network if we are not
able to obtain additional equipment in a timely manner and on commercially
acceptable terms. In particular, our servers are a critical part of our
infrastructure and we will need additional servers to expand our operations. We

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currently purchase, and expect to continue to purchase, all of our servers from
Sun Microsystems. Since we do not have an agreement with Sun Microsystems
regarding future server purchases, we have no assurance that Sun Microsystems
will continue to supply servers to us on commercially acceptable terms, if at
all.

WE MAY EXPERIENCE LOSS OF DATA, DISRUPTION OF OPERATIONS, OR ERRONEOUS
OVERCHARGES OR UNDERCHARGES TO ADVERTISING CUSTOMERS IF THE ORACLE SOFTWARE WE
USE TO RUN OUR OPERATIONS FAILS TO OPERATE CORRECTLY.

    Virtually every aspect of our operations, including finance, billing,
accounting, storage and retrieval of user data, and advertisement tracking, uses
or interfaces with a centralized software system provided by Oracle. We have
only limited experience with the operation of this system. Difficulty with the
operation of, or errors, defects or malfunctions in the operation of, this
system could result in loss of data, erroneous overcharges or undercharges to
advertising customers or disruption of operations.

OUR ABILITY TO OPERATE OUR BUSINESS COULD BE SERIOUSLY HARMED IF WE LOSE MEMBERS
OF OUR SENIOR MANAGEMENT TEAM AND OTHER KEY EMPLOYEES.

    Our business is largely dependent on the personal efforts and abilities of
our senior management and other key personnel. Any of our officers or employees
can terminate his or her employment relationship at any time. The loss of these
key employees or our inability to attract or retain other qualified employees
could seriously harm our business and prospects. We do not carry key man life
insurance on any of our employees.

WE WILL NOT BE ABLE TO GROW OUR BUSINESS IF WE ARE NOT ABLE TO HIRE ADDITIONAL
PERSONNEL.

    Our future success also depends on our ability to attract, retain and
motivate highly skilled technical, managerial, editorial, merchandising, sales,
marketing and user service personnel. We plan to hire additional personnel in
all areas of our business. Competition for such personnel is intense,
particularly in the Internet and high technology industry. As a result, we may
be unable to successfully attract, assimilate or retain qualified personnel. We
may also be unable to retain the employees we currently employ or attract
additional technical personnel. If we fail to retain and attract the necessary
personnel, we may not be able to operate and grow our business.

OUR BUSINESS COULD BE SHUT DOWN OR SEVERELY IMPACTED IF A NATURAL DISASTER
OCCURS.

    Our operations and services depend on the extent to which our computer
equipment and the telecommunications infrastructure of our third-party network
providers is protected against damage from fire, earthquakes, power loss,
telecommunications failures, and similar events. A significant portion of our
computer equipment, including critical equipment dedicated to our Internet
access services, is located at our headquarters and at facilities in Los Angeles
and San Jose, California. Despite precautions taken by us and our third-party
network providers, over which we have no control, a natural disaster or other
unanticipated problems at our headquarters or at a network hub, or within a
third-party network provider's network, could cause interruptions in the
services that we provide. For example, if an earthquake damages equipment at our
network operations center, we may have no means of replacing this equipment on a
timely basis or at all and our service would be shut down. We do not currently
maintain fully redundant or back-up Internet services, backbone facilities or
other fully redundant computing and telecommunications facilities. Furthermore,
we do not currently have any business disruption insurance. Any prolonged
disruption of our services due to system failure could result in user turnover
and decreased revenues.

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<PAGE>
                 WE FACE RISKS RELATED TO THE INTERNET INDUSTRY

WE COULD BE EXPOSED TO SIGNIFICANT LEGAL LIABILITY IF NEW CASE LAW IS DECIDED,
OR NEW GOVERNMENT REGULATION IS ENACTED, REGARDING THE INTERNET AND INTERNET
SERVICE PROVIDERS.

    The law relating to our business and operations is evolving and in a state
of flux. The modification, repeal or adoption of laws or regulations may
decrease the growth in the use of the Internet, affect telecommunications costs
or increase the likelihood or scope of competition from regional telephone
companies. These results could decrease the demand for our services or increase
our cost of doing business, each of which would cause our gross margins and
revenues to fall. In particular, the following risks could occur:

REGULATION OF CONTENT AND ACCESS COULD LIMIT OUR ABILITY TO GENERATE REVENUES
AND EXPOSE US TO LIABILITY.

    Prohibition and restriction of Internet content and access could dampen the
growth of Internet use, decrease the acceptance of the Internet as a
communications and commercial medium and expose us to liability. A variety of
restrictions on content and access, primarily as they relate to children, have
been enacted or proposed, including laws which would require Internet service
providers to supply, at cost, filtering technologies to limit or block the
ability of minors to access unsuitable materials on the Internet. Because of
these content restrictions and potential liability to us for materials carried
on or disseminated through our systems, we may be required to implement measures
to reduce our exposure to liability. These measures may require the expenditure
of substantial resources or the discontinuation of our product or service
offerings that subject us to this liability. Further, we could incur substantial
costs in defending against any of these claims and we may be required to pay
large judgments or settlements or alter our business practices. In addition, our
liability insurance may not cover potential claims relating to the Internet
services we provide or may not be adequate to indemnify us for all liabilities
that may be imposed on us.

WE COULD BE EXPOSED TO LIABILITY FOR DEFAMATION, NEGLIGENCE AND INFRINGEMENT.

    Because users download and redistribute materials that are cached or
replicated by us in connection with our Internet services, claims could be made
against us for defamation, negligence, copyright or trademark infringement, or
other theories based on the nature and content of such materials. While we have
attempted to obtain safe harbor protection against claims of copyright
infringement under the Digital Millennium Copyright Act of 1998, there can be no
guarantee that we will prevail in any such claims. We also could be exposed to
liability because of third-party content that may be accessible through our
services, including links to web-sites maintained by our users or other third
parties, or posted directly to our web-site, and subsequently retrieved by a
third party through our services. It is also possible that if any third-party
content provided through our services contains errors, third parties who access
such material could make claims against us for losses incurred in reliance on
such information. These types of claims have been successfully brought against
other online service providers. In particular, copyright and trademark laws are
evolving and it is uncertain how broadly the rights provided under these laws
will be applied to online environments. It is impossible for us to determine who
the potential rights holders may be with respect to all materials available
through our services.

OUR ABILITY TO SELL TARGETED ADVERTISING MAY BE LIMITED IF NEW LAWS RELATING TO
USER PRIVACY ARE ENACTED.

    Our ability to sell targeted advertising partly depends on our ability to
use personal information collected from our users. We cannot assure you that our
current information collection procedures and disclosure policies will be found
to be in compliance with existing or future laws or regulations. Our failure to
comply with existing laws, or the adoption of new laws or regulations that
require us to change the way

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<PAGE>
we conduct our business, could make it cost-prohibitive to operate our business,
and prevent us from pursuing our business strategies including the sale of
targeted advertising.

OUR MARGINS AND COSTS WOULD BE ADVERSELY AFFECTED IF OUR BUSINESS BECOMES
SUBJECT TO TAXATION.

    The tax treatment of activities on or relating to the Internet is currently
unsettled. A number of proposals have been made at the federal, state and local
levels and by foreign governments that could impose taxes on the online sale of
goods and services and other Internet activities. Recently, the Internet Tax
Freedom Act was signed into law, placing a three-year moratorium on new state
and local taxes on Internet commerce. However, there can be no assurance that
future laws imposing taxes or other regulations on commerce over the Internet
would not substantially impair the growth of Internet commerce and, as a result,
negatively impact our margins or make it cost-prohibitive to operate our
business.

TELECOMMUNICATIONS REGULATION COULD MAKE IT MORE EXPENSIVE FOR US TO DO
BUSINESS.

    As an Internet service provider, we are not currently directly regulated by
the Federal Communications Commission or any other governmental agency, other
than regulations applicable to businesses generally. Nevertheless,
Internet-related regulatory policies are continuing to develop, and it is
possible that we could be exposed to regulation in the future. We could be
adversely affected if any regulatory or statutory change results in the
application of access charges to Internet service providers, because this would
substantially increase the cost of using the Internet. Similarly, new laws or
regulations could increase costs to those entities who provide us with
telecommunications services, and those changes too could substantially increase
our cost of doing business. Since one of the largest components of our operating
costs is telecommunications expense, any increase in such costs would have a
material adverse effect on our cost of revenues and gross margins. We could also
be affected by any change in the ability of our users to reach our network
through a dial-up telephone call without any additional charges.

SEASONAL TRENDS IN INTERNET USAGE AND ADVERTISING SALES MAY NEGATIVELY AFFECT
OUR BUSINESS.

    Seasonal trends could affect the advertising revenues we generate from
operating our Internet services. To the extent that our advertising revenues
depend on the amount of usage by our users, seasonal fluctuations in Internet
usage could affect our advertising revenues during these periods of fluctuation.
In addition, the rate at which new users sign up for our services may be lower
during certain seasons and holiday periods. 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 our expectations of
future revenues, it is possible that seasonal fluctuations could materially and
adversely affect our revenues and our operating results.

IF INTERNET USAGE DOES NOT CONTINUE TO GROW, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS AND INCREASE OUR REVENUES.

    If our assumption that use of the Internet will continue to grow turns out
to be incorrect, we will not be able to grow our business and increase our
revenues. Substantially all of our revenues are dependent on the continued use
and expansion of the Internet. Use of the Internet has grown dramatically, but
we cannot assure you that usage of the Internet will continue to expand. A
decrease in the demand for Internet services or a reduction in the currently
anticipated growth for such services could cause our user base and our
advertising revenues to decrease.

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<PAGE>
OUR BRAND AND BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO PROTECT
OUR DOMAIN NAMES OR ACQUIRE OTHER RELEVANT DOMAIN NAMES.

    We currently hold the Web domain name relating to our brand, NetZero.com, as
well as numerous other related Web domain names. The acquisition and maintenance
of domain names generally is regulated by governmental agencies and their
designees. The regulation of domain names in the United States and in foreign
countries is subject to change in the near future. As a result, we may be unable
to acquire or maintain relevant domain names in the countries in which we
conduct, or plan to conduct, business. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon, dilute
or otherwise decrease the value of our trademarks and other proprietary rights.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    We do not currently hold any derivative instruments and do not engage in
hedging activities. Also, we are not currently party to any transactions
denominated in a foreign currency. Thus, our exposure to interest rate and
foreign exchange fluctuations is minimal.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    For financial statements, see Index to Consolidated Financial Statements on
page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

    Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    (a) Identification of Directors. The information under the caption "Proposal
One: Election of Directors," appearing in our Proxy Statement, is incorporated
herein by reference.

    (b) Identification of Executive Officers. The information under the caption
"Executive Officers and Key Employees," appearing in our Proxy Statement, is
incorporated herein by reference.

    (c) Compliance with Section 16(a) of the Exchange Act. The information under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance," appearing
in our Proxy Statement, is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

    The information under the caption "Executive Compensation and Other
Information," appearing in our Proxy Statement, is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information under the caption "Ownership of Securities," appearing in
our Proxy Statement, is incorporated herein by reference.

                                       37
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information under the heading "Certain Transactions," appearing in our
Proxy Statement, is incorporated herein by reference.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) (1) FINANCIAL STATEMENTS

       See index to Consolidated Financial Statements on page F-1.

   (2) FINANCIAL STATEMENT SCHEDULES

       The following financial statement schedule of the Company is filed as
       part of this Form 10-K. All other schedules have been omitted because
       they are not applicable, not required, or the information is included in
       the consolidated financial statements or notes thereto.

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
        Schedule II--Valuation on Qualifying Accounts.......    F-22
</TABLE>

   (3) EXHIBITS

       The following exhibits are filed as part of, or are incorporated by
       reference in, this Form 10-K.

<TABLE>
<CAPTION>

<S>                          <C>
 3.1**                       Certificate of Incorporation of the Registrant.

 3.2**                       Bylaws of the Registrant.

 4.1**                       Specimen common stock certificate.

10.1+                        Amendment to the Amended and Restated Start Page Agreement
                             dated as of July 1, 2000 by and between the Registrant and
                             LookSmart, Ltd.

10.2***++                    Amended and Restated Start Page Agreement dated as of
                             February 1, 2000 by and between the Registrant and
                             LookSmart, Ltd.

10.3***                      The ZeroPort Advertising Agreement dated as of February 5,
                             2000 by and between the Registrant and idealab! Inc.

10.4***                      Employment Agreement dated as of December 1, 1999, by and
                             between the Registrant and Brian Woods.

10.5**++                     Adserver License Agreement dated as of August 28, 1998,
                             between the Registrant and NetGravity, as amended.

10.6**                       Technology Assignment Agreement dated as of September 11,
                             1998, by and between the Registrant and Impact Software,
                             Inc.

10.7**                       Form of Stock Restriction Agreement between the Registrant
                             and the founders.

10.8**++                     Quotation for Dialinx Services dated December 9, 1998,
                             between the Registrant and GTE Internetworking Incorporated,
                             as amended.

10.9**                       Master Agreement dated as of October 13, 1998, by and
                             between the Registrant and GTE Internetworking Incorporated.

10.10**                      Standard Office Lease dated as of March 6, 1999, as amended
                             on March 7, 1999, by and between the Registrant and Westlake
                             Gardens.

10.11**                      Addendum to Stock Option Agreements.
</TABLE>

                                       38
<PAGE>

<TABLE>
<CAPTION>

<S>                          <C>
10.12**                      Employment Agreement dated as of March 20, 1999, by and
                             between the Registrant and Frederic A. Randall, Jr.

10.13**                      Employment Agreement dated as of March 20, 1999, between the
                             Registrant and Mark R. Goldston.

10.14**                      Stock Pledge Agreement dated as of March 20, 1999 between
                             the Registrant and Mark R. Goldston, as amended.

10.15**                      Note secured by Stock Pledge Agreement dated March 20, 1999,
                             made by Mark R. Goldston in favor of the Registrant, as
                             amended.

10.16**++                    Software License and Service Agreement dated as of April 14,
                             1999, between the Registrant and Oracle Corporation.

10.17**                      Employment Agreement dated as of April 17, 1999, by and
                             between the Registrant and Charles S. Hilliard.

10.18**                      Stock Pledge Agreement dated April 17, 1999, between the
                             Registrant and Charles S. Hilliard.

10.19**                      Note secured by Stock Pledge Agreement dated April 17, 1999
                             made by Charles S. Hilliard in favor of the Registrant.

10.20**                      Amended and Restated Investors' Rights Agreement dated as of
                             May 10, 1999, by and among the Registrant and the investors,
                             officers and founders listed on schedules thereto.

10.21**                      1998 Stock Option/Stock Issuance Plan.

10.22**                      1999 Stock Option/Stock Issuance Plan.

10.23**                      Form of Indemnification Agreement between the Registrant and
                             its directors.

10.24**                      1999 Stock Incentive Plan.

10.25**                      Employee Stock Purchase Plan.

10.26**                      Form of Indemnification Agreement between the Registrant and
                             its executive officers.

11.1                         Statement re computation of earnings per share (included in
                             Note 11 to the consolidated financial statements filed as
                             part of this Annual Report on Form 10-K).

23.1                         Consent of PricewaterhouseCoopers LLP, independent
                             accountants.

27.1                         Financial Data Schedule.
</TABLE>

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

*   Incorporated by reference herein to the Form 8-K and all amendments thereto
    filed with the securities and Exchange Commission on December 14, 1999.

**  Incorporated by reference herein to the Company's Registration Statement on
    Form S-1 and all amendments thereto (File No. 333-82827).

*** Incorporated by reference herein to the Form 10-Q and all amendments thereto
    filed with the Securities and Exchange Commission on May 15, 2000.

+   Confidential treatment has been requested for certain confidential portions
    of this exhibit pursuant to Rule 24b-2 under the Securities and Exchange
    Act, as amended. In accordance with Rule 24b-2, these confidential portions
    have been omitted from this exhibit and filed separately with the Securities
    and Exchange Commission.

++  Confidential treatment has been requested and received for certain portions
    of this exhibit.

                                       39
<PAGE>
(B) REPORTS ON FORM 8-K

    No reports on Form 8-K were filed for the quarter ended June 30, 2000.

(C) EXHIBITS:

    The exhibits filed as part of this report are listed in Item 14(a)(3) of
this Form 10-K.

(D) FINANCIAL STATEMENT SCHEDULES:

    The financial statement schedules required by Regulation S-X and Item 8 of
this form are listed in Item 14(a)(2) of this Form 10-K.

                                       40
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 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 on September 28, 2000.

<TABLE>
<C>                                                    <S>  <C>
                                                            NETZERO, INC.

                                                            /s/ MARK R. GOLDSTON
                                                            -----------------------------------------
                                                            Mark R. Goldston
                                                            CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>

    KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Mark R. Goldston, Frederic A. Randall, Jr. and
Charles S. Hilliard, as his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendment to
this Annual Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes may do or cause to be
done by virtue hereof.

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on September 28, 2000.

<TABLE>
<CAPTION>
                      SIGNATURE                                   TITLE                    DATE
                      ---------                                   -----                    ----
<S>                                                    <C>                          <C>
/s/ MARK R. GOLDSTON
-------------------------------------------            Chairman, Chief Executive    September 28, 2000
Mark R. Goldston                                       Officer and Director

/s/ RONALD T. BURR
-------------------------------------------            President, Chief Technology  September 28, 2000
Ronald T. Burr                                         Officer and Director

/s/ CHARLES S. HILLIARD                                Senior Vice President,
-------------------------------------------            Finance and Chief Financial  September 28, 2000
Charles S. Hilliard                                    Officer

/s/ JAMES T. ARMSTRONG
-------------------------------------------            Director                     September 28, 2000
James T. Armstrong

/s/ DAVID C. BOHNETT
-------------------------------------------            Director                     September 28, 2000
David C. Bohnett

/s/ JENNIFER S. FONSTAD
-------------------------------------------            Director                     September 28, 2000
Jennifer S. Fonstad

/s/ BILL GROSS
-------------------------------------------            Director                     September 28, 2000
Bill Gross

-------------------------------------------            Director
Paul G. Koontz
</TABLE>

                                       41
<PAGE>
                                 NETZERO, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
Report of Independent Accountants...........................     F-2

Consolidated Balance Sheets.................................     F-3

Consolidated Statements of Operations.......................     F-4

Consolidated Statements of Stockholders' Equity (Deficit)...     F-5

Consolidated Statements of Cash Flow........................     F-6

Notes to Consolidated Financial Statements..................     F-7

Report of Independent Accountants on Financial Statement
  Schedule..................................................    F-21

Schedule II--Valuation and Qualifying Accounts..............    F-22
</TABLE>

                                      F-1
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of NetZero, Inc.:

    In our opinion, the accompanying consolidated balance sheets and the related
statements of operations, cash flows and of stockholders' equity (deficit)
present fairly, in all material respects, the financial position of
NetZero, Inc. and its subsidiary at June 30, 2000 and 1999 and their results of
operations and their cash flows for each of the two years in the period ended
June 30, 2000 and the period from July 21, 1997 (inception) through June 30,
1998 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
August 9, 2000

                                      F-2
<PAGE>
                                 NETZERO, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                        JUNE 30,
                                                              ----------------------------
                                                                  2000            1999
                                                              -------------   ------------
<S>                                                           <C>             <C>
                                          ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 201,512,000   $ 24,035,000
  Short-term investments....................................     36,353,000             --
  Restricted cash...........................................      6,982,000             --
  Accounts receivable, net of allowance for doubtful
    accounts of $1,651,000 at June 30, 2000 and $160,000 at
    June 30, 1999...........................................     15,748,000      2,253,000
  Other current assets......................................      3,941,000        689,000
                                                              -------------   ------------
    Total current assets....................................    264,536,000     26,977,000
Property and equipment, net.................................     37,662,000     18,116,000
Restricted cash.............................................      2,692,000      1,789,000
Intangible assets, net......................................     19,523,000             --
Other assets................................................      1,545,000        619,000
                                                              -------------   ------------
    Total assets............................................  $ 325,958,000   $ 47,501,000
                                                              =============   ============

                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  18,727,000   $  4,879,000
  Accrued liabilities.......................................      2,506,000      1,521,000
  Deferred revenue..........................................        825,000      2,739,000
  Current portion of notes payable..........................      1,641,000        560,000
  Current portion of capital leases.........................      6,247,000      1,181,000
                                                              -------------   ------------
  Total current liabilities.................................     29,946,000     10,880,000

Notes payable less current portion..........................      2,143,000      1,210,000
Capital leases less current portion.........................      8,135,000      2,317,000
                                                              -------------   ------------
  Total liabilities.........................................     40,224,000     14,407,000
                                                              -------------   ------------
Commitments and contingencies (Note 15)

Redeemable convertible preferred stock, no-par value;
  19,231,000 shares authorized; 19,230,000 issued and
  outstanding at June 30, 1999; liquidation preference and
  redemption value of $2,140,000; no shares issued or
  outstanding at June 30, 2000..............................             --      2,140,000

Stockholders' equity
  Convertible preferred stock, $0.001 par value; 55,769,000
    shares authorized; 45,182,000 shares isued and
    outstanding at June 30, 1999; liquidation preference of
    $44,917,000; 10,000,000 shares authorized and no shares
    issued and outstanding at June 30, 2000.................             --     44,720,000
  Common stock, $0.001 par value; 500,000,000 and
    150,000,000 shares authorized at June 30, 2000 and 1999,
    respectively; 116,712,000 and 28,624,000 shares issued
    and outstanding at June 30, 2000 and 1999,
    respectively............................................        118,000      1,352,000
  Additional paid-in capital................................    405,847,000      9,019,000
  Notes receivable from stockholders........................       (799,000)    (1,029,000)
  Deferred stock-based charges..............................    (12,821,000)    (7,783,000)
  Accumulated deficit.......................................   (106,611,000)   (15,325,000)
                                                              -------------   ------------
    Total stockholders' equity..............................    285,734,000     30,954,000
                                                              -------------   ------------
    Total liabilities and stockholders' equity..............  $ 325,958,000   $ 47,501,000
                                                              =============   ============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-3
<PAGE>
                                 NETZERO, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                               YEAR ENDED            JULY 21, 1997
                                                                JUNE 30,              (INCEPTION)
                                                       ---------------------------      THROUGH
                                                           2000           1999       JUNE 30, 1998
                                                       ------------   ------------   -------------
<S>                                                    <C>            <C>            <C>
Net revenues.........................................  $ 55,506,000   $  4,634,000             --
Cost of revenues (excluding stock-based charges of
  $357,000 and $60,000 for the years ended June 30,
  2000 and 1999, respectively).......................    63,515,000     12,426,000             --
                                                       ------------   ------------    -----------

Gross loss...........................................    (8,009,000)    (7,792,000)            --
                                                       ------------   ------------    -----------

Operating expenses:
  Sales and marketing (excluding stock-based charges
    of $2,060,000 and $38,000 for the years ended
    June 30, 2000 and 1999, respectively)............    49,376,000      1,651,000             --
  Product development (excluding stock-based charges
    of $299,000 for the year ended June 30, 2000)....     9,721,000      1,018,000             --
  General and administrative (excluding stock-based
    charges of $3,630,000 and $1,138,000 for the
    years ended June 30, 2000 and 1999,
    respectively)....................................    19,122,000      3,718,000         25,000
  Stock-based charges................................     6,346,000      1,236,000             --
  Amortization of intangible assets..................     5,525,000             --             --
                                                       ------------   ------------    -----------
    Total operating expenses.........................    90,090,000      7,623,000         25,000
                                                       ------------   ------------    -----------

Loss from operations.................................   (98,099,000)   (15,415,000)       (25,000)
                                                       ------------   ------------    -----------
Interest income......................................     8,342,000        225,000             --
Interest expense.....................................    (1,529,000)      (110,000)            --
                                                       ------------   ------------    -----------

Net loss.............................................  $(91,286,000)  $(15,300,000)   $   (25,000)
                                                       ============   ============    ===========

Basic and diluted net loss per share.................  $      (1.23)  $      (1.42)   $        --
                                                       ------------   ------------    -----------

Weighted average number of shares used to calculate
  basic and diluted net loss per share...............    74,123,000     10,792,000     15,000,000
                                                       ============   ============    ===========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-4
<PAGE>
                                 NETZERO, INC.
                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
                                           CONVERTIBLE
                                         PREFERRED STOCK              COMMON STOCK           ADDITIONAL    NOTES RECEIVABLE
                                    -------------------------   -------------------------     PAID-IN            FROM
                                      SHARES        AMOUNT        SHARES        AMOUNT        CAPITAL        STOCKHOLDERS
                                    -----------   -----------   -----------   -----------   ------------   ----------------
<S>                                 <C>           <C>           <C>           <C>           <C>            <C>
Balance at July 21, 1997
  (inception).....................           --   $        --            --   $        --   $         --      $       --
Issuance of common stock..........           --            --    15,000,000         2,000             --              --
Net loss..........................           --            --            --            --             --              --
                                    -----------   -----------   -----------   -----------   ------------      ----------
Balance at June 30, 1998..........           --            --    15,000,000         2,000             --              --

Issuance of common stock..........           --            --        23,000         2,000             --              --
Issuance of Series C convertible
  preferred stock, net............   27,077,000    11,512,000            --            --             --              --
Exercise of warrants for Series C
  convertible preferred stock.....       23,000        10,000            --            --             --              --
Exercise of stock options.........           --            --     6,115,000       319,000             --              --
Exercise of options for a note
  receivable......................           --            --     7,486,000     1,029,000             --      (1,029,000)
Deferred stock-based charges......           --            --            --            --      8,952,000              --
Amortization of deferred
  stock-based compensation........           --            --            --            --             --              --
Charge for issuance of Series A
  and B options...................           --            --            --            --         67,000              --
Issuance of Series D convertible
  preferred stock.................   18,082,000    33,198,000            --            --             --              --
Net loss..........................           --            --            --            --             --              --
                                    -----------   -----------   -----------   -----------   ------------      ----------
Balance at June 30, 1999..........   45,182,000    44,720,000    28,624,000     1,352,000      9,019,000      (1,029,000)

Conversion of convertible
  preferred stock.................  (45,182,000)  (44,720,000)   45,182,000    44,720,000             --              --
Conversion of redeemable
  convertible preferred stock.....           --            --    19,230,000     2,140,000             --              --
Reincorporation into Delaware and
  change in par value of common
  stock...........................           --            --            --   (48,119,000)    48,119,000              --
Issuance of common stock from
  initial public offering.........           --            --    11,500,000        12,000    169,339,000              --
Issuance of common stock in
  private placement...............           --            --    11,540,000        12,000    143,934,000              --
Issuance of common stock through
  employee stock purchase plan....           --            --        49,000            --        504,000              --
Exercise of stock options.........           --            --       674,000         1,000        322,000          (7,000)
Repurchase of option shares
  exercised.......................           --            --    (1,012,000)       (1,000)       (22,000)             --
Issuance of common stock for
  acquisition.....................           --            --       925,000         1,000     23,248,000              --
Issuance of warrant for marketing
  services........................           --            --            --            --      8,600,000              --
Deferred stock-based charges......           --            --            --            --      2,784,000              --
Amortization of deferred
  stock-based compensation........           --            --            --            --             --              --
Payment received on notes
  receivable from stockholders....           --            --            --            --             --         300,000
Interest earned on notes
  receivable from stockholders....           --            --            --            --             --         (63,000)
Net loss..........................           --            --            --            --             --              --
                                    -----------   -----------   -----------   -----------   ------------      ----------
Balance at June 30, 2000..........           --   $        --   116,712,000   $   118,000   $405,847,000      $ (799,000)
                                    ===========   ===========   ===========   ===========   ============      ==========

<CAPTION>

                                      DEFERRED                           TOTAL
                                     STOCK-BASED     ACCUMULATED     STOCKHOLDERS'
                                       CHARGES         DEFICIT      EQUITY (DEFICIT)
                                    -------------   -------------   ----------------
<S>                                 <C>             <C>             <C>
Balance at July 21, 1997
  (inception).....................  $         --    $         --                --
Issuance of common stock..........            --              --             2,000
Net loss..........................            --         (25,000)          (25,000)
                                    ------------    -------------     ------------
Balance at June 30, 1998..........            --         (25,000)          (23,000)
Issuance of common stock..........            --              --             2,000
Issuance of Series C convertible
  preferred stock, net............            --              --        11,512,000
Exercise of warrants for Series C
  convertible preferred stock.....            --              --            10,000
Exercise of stock options.........            --              --           319,000
Exercise of options for a note
  receivable......................            --              --                --
Deferred stock-based charges......    (8,952,000)             --                --
Amortization of deferred
  stock-based compensation........     1,169,000              --         1,169,000
Charge for issuance of Series A
  and B options...................            --              --            67,000
Issuance of Series D convertible
  preferred stock.................            --              --        33,198,000
Net loss..........................            --     (15,300,000)      (15,300,000)
                                    ------------    -------------     ------------
Balance at June 30, 1999..........    (7,783,000)    (15,325,000)       30,954,000
Conversion of convertible
  preferred stock.................            --              --                --
Conversion of redeemable
  convertible preferred stock.....            --              --         2,140,000
Reincorporation into Delaware and
  change in par value of common
  stock...........................            --              --                --
Issuance of common stock from
  initial public offering.........            --              --       169,351,000
Issuance of common stock in
  private placement...............            --              --       143,946,000
Issuance of common stock through
  employee stock purchase plan....            --              --           504,000
Exercise of stock options.........            --              --           316,000
Repurchase of option shares
  exercised.......................            --              --           (23,000)
Issuance of common stock for
  acquisition.....................            --              --        23,249,000
Issuance of warrant for marketing
  services........................    (8,600,000)             --                --
Deferred stock-based charges......    (2,784,000)             --                --
Amortization of deferred
  stock-based compensation........     6,346,000              --         6,346,000
Payment received on notes
  receivable from stockholders....            --              --           300,000
Interest earned on notes
  receivable from stockholders....            --              --           (63,000)
Net loss..........................            --     (91,286,000)      (91,286,000)
                                    ------------    -------------     ------------
Balance at June 30, 2000..........  $(12,821,000)   $(106,611,000)    $285,734,000
                                    ============    =============     ============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5
<PAGE>
                                 NETZERO, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
                                                                      YEAR ENDED
                                                                       JUNE 30,                JULY 21, 1997
                                                              ---------------------------   (INCEPTION) THROUGH
                                                                  2000           1999          JUNE 30, 1998
                                                              ------------   ------------   -------------------
<S>                                                           <C>            <C>            <C>
Cash flows from operating activities:
  Net loss..................................................  $(91,286,000)  $(15,300,000)       $(25,000)
  Adjustments to reconcile net loss to net cash used for
    operating activities:
    Depreciation and amortization...........................     9,252,000        633,000              --
    Amortization of intangible assets.......................     5,525,000             --              --
    Allowance for doubtful accounts.........................     1,491,000        160,000              --
    Stock-based charges.....................................     6,346,000      1,236,000              --
    Accrued interest--notes receivable from stockholders....       (63,000)            --              --
    Loss on disposal of fixed assets........................            --         98,000              --
    Changes in operating assets and liabilities (excluding
      the effects of acquisition):
      Restricted cash.......................................    (7,809,000)    (1,789,000)             --
      Accounts receivable...................................   (14,986,000)    (2,413,000)             --
      Other assets..........................................    (4,153,000)    (1,308,000)             --
      Accounts payable and accrued expenses.................    14,134,000      6,586,000          24,000
      Deferred revenue......................................    (1,915,000)     2,739,000              --
                                                              ------------   ------------        --------
      Net cash used for operating activities................   (83,464,000)    (9,358,000)         (1,000)
                                                              ------------   ------------        --------

Cash flows from investing activities:
  Purchases of property and equipment.......................   (20,756,000)   (13,609,000)             --
  Purchase of patent rights.................................    (1,000,000)            --              --
  Purchase of short-term investments........................   (43,853,000)            --              --
  Sale of short-term investments............................     7,500,000             --              --
  Proceeds from sale of fixed assets........................            --        226,000              --
                                                              ------------   ------------        --------
      Net cash used for investing activities................   (58,109,000)   (13,383,000)             --
                                                              ------------   ------------        --------
Cash flows from financing activities:
  Payments on capital leases................................    (2,690,000)      (241,000)             --
  Payments on notes payable.................................    (1,484,000)      (165,000)             --
  Proceeds from bridge loan.................................            --        100,000              --
  Proceeds from equipment refinancing.......................     5,680,000             --              --
  Proceeds from notes payable...............................     3,498,000             --              --
  Repayment of notes receivable from stockholders...........       300,000             --              --
  Proceeds from exercise of stock options...................       316,000        319,000              --
  Net proceeds from issuance of common stock................   313,430,000          2,000           2,000
  Net proceeds from issuance of redeemable convertible
    preferred stock.........................................            --      2,140,000              --
  Net proceeds from issuance of convertible preferred
    stock...................................................            --     44,620,000              --
                                                              ------------   ------------        --------
      Net cash provided by financing activities.............   319,050,000     46,775,000           2,000
                                                              ------------   ------------        --------
    Change in cash and cash equivalents.....................   177,477,000     24,034,000           1,000
Cash and cash equivalents, beginning of period..............    24,035,000          1,000              --
                                                              ------------   ------------        --------
Cash and cash equivalents, end of period....................  $201,512,000   $ 24,035,000        $  1,000
                                                              ------------   ------------        --------

Supplemental disclosure of cash flow activities:
  Cash paid for interest....................................  $  1,412,000   $    110,000        $     --
                                                              ============   ============        ========
Supplemental disclosure of non-cash investing and financing
  activities:
  Note receivable from stockholders in connection with the
    exercise of stock options...............................  $         --   $  1,029,000        $     --
  Bridge loan repayment in exchange for issuance of
    convertible preferred stock.............................            --        100,000              --
  Equipment obtained under capital leases...................     7,894,000      3,739,000              --
  Equipment financed with notes payable.....................            --      1,725,000              --
  Accounts payable financed with note payable...............            --        210,000              --
  Common stock issued for acquisition.......................    23,249,000             --              --
  Issuance of common stock warrant for marketing services...     8,600,000             --              --
  Issuance of common stock for patent rights................       349,000             --              --
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-6
<PAGE>
                                 NETZERO, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

NetZero, Inc. ("NetZero" or the "Company") was incorporated in July 1997 and
launched its service in October 1998. The Company is a leading provider of
advertising and commerce-sponsored Internet access, offering a broad range of
interactive marketing, research and measurement solutions. NetZero offers
consumers free access to the Internet, free e-mail and custom navigation tools
that provide "speed dial" to key sites on the Internet. Through proprietary
technologies, the Company offers advertisers targeting capabilities through
numerous online advertising and sponsorship channels. The Company's CyberTarget
division offers marketers and advertisers mass-scale, online market research and
measurement services.

In December 1999, the Company acquired Aim TV, Inc. ("AimTV") through the
issuance of common stock (see Note 4).

At June 30, 2000, the Company has cash, cash equivalents and short-term
investments of approximately $237.9 million. The Company considers its existing
cash, cash equivalents and short-term investments to be adequate to fund its
operating activities, capital expenditures and other obligations for at least
the next 12 months. However, in the longer term, additional capital may be
needed in order to fund more rapid growth, expand marketing activities, develop
new or enhance existing services or products, to respond to competitive
pressures or to acquire complementary services, businesses or technologies. If
the Company is not successful in generating sufficient cash flow from
operations, additional capital through public or private financings, strategic
relationships or other arrangements will be necessary. This additional funding
might not be available on acceptable terms, or at all. Failure to raise
sufficient capital when needed could have a material adverse effect on the
business, results of operations and financial condition. If additional funds
were raised through the issuance of equity securities, the percentage of stock
owned by the then-current stockholders would be reduced. Furthermore, such
equity securities might have rights, preferences or privileges senior to those
of the common stock holders.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements
include the accounts of the Company and its subsidiary. Intercompany
transactions and balances have been eliminated in consolidation.

USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent liabilities and the reported amounts of revenues and
expenses. Actual results could differ from those estimates.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS--The Company considers all
highly liquid, short-term investments purchased with an original maturity of
three months or less to be cash equivalents. Short-term investments consist
principally of A-1 rated commercial paper and United States Government Agency
notes and are classified as available for sale. To date, unrealized holding
gains and losses have not been significant.

RESTRICTED CASH--Restricted cash collateralizes the Company's obligations for
certain advertising campaigns and lease agreements.

PROPERTY AND EQUIPMENT--Property and equipment are stated at historical cost.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets, generally three to five years, or the
shorter of the lease term or the estimated useful lives of the assets, if
applicable.

                                      F-7
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK--Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash
equivalents, short-term investments and accounts receivable. Cash and cash
equivalents are deposited with major financial institutions; at times, such
balances with any one financial institution may be in excess of FDIC insurance
limits. The Company has short-term investments in a short-term fixed income
portfolio. The Company's accounts receivable are derived primarily from revenue
earned from customers located in the United States. The Company extends credit
based upon an evaluation of the customer's financial condition and generally
collateral is not required. The Company maintains an allowance for doubtful
accounts based upon the expected collectibility of accounts receivable; to date
such losses have been within management's expectations.

At June 30, 2000, two customers comprised 16% and 14% of the accounts receivable
balance, respectively, and at June 30, 1999, two customers comprised 43% and 13%
of the accounts receivable balance, respectively. For the year ended June 30,
2000, two customers comprised 28% and 10% of revenues, respectively, and for the
year ended June 30, 1999, two customers comprised 27% and 26% of revenues,
respectively.

SOURCE OF SUPPLIES--The Company relies on third-party networks, local telephone
companies and other companies to provide data communications capacity. Although
management believes that alternate telecommunications facilities could be found
in a timely manner, any disruption of these services could have an adverse
effect on the Company's financial position and results of operations.

INTANGIBLE ASSETS--Goodwill and other intangible assets are amortized on a
straight-line basis over their estimated useful lives ranging from two to four
years. Amortization expense amounted to $5,525,000 and $0 for the years ended
June 30, 2000 and 1999, respectively. Intangible assets are regularly reviewed
by the Company for impairment to assess whether the fair value is less than the
carrying value.

FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company's financial instruments,
including cash and cash equivalents, short-term investments, restricted cash,
accounts receivable, accounts payable, accrued liabilities, notes payable and
lease obligations are carried at historical cost, which approximates their fair
value due to the short term maturity of these instruments and the relatively
stable interest rate environment.

LONG-LIVED ASSETS--The Company identifies and records impairment losses on
long-lived assets when events and circumstances indicate that such assets might
be impaired. In the event the expected undiscounted future cash flows
attributable to the asset is less than the carrying amount of the asset, an
impairment loss equal to the excess of the asset's carrying value over its fair
value is recorded. To date, no such impairment has been recorded.

REVENUE RECOGNITION--The Company's revenues are derived principally from the
sale of advertising, which includes targeted and non-targeted banner
advertisements, placements and sponsorships, referrals of users to other
web-sites, performance-based agreements including e-commerce arrangements and
advertising messages delivered to the Company's users via e-mail. Banner
advertising and sponsorship revenues are recognized in the periods in which the
advertisement or sponsorship placement is displayed, based upon the lesser of
impressions delivered over the total number of guaranteed impressions or ratably
over the period in which the advertisement is displayed, provided that no
significant Company obligations remain and collection of the related receivable
is probable. The Company's obligations typically include the guarantee of a
minimum number of impressions or the satisfaction of other performance criteria.
Revenues from performance-based arrangements are recognized as the related
performance criteria are

                                      F-8
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
met. Referral revenues are recognized as referrals are made to advertisers' or
sponsors' web-sites, provided that no significant Company obligations remain and
collection of the related receivable is probable.

COST OF REVENUES--Cost of revenues consist of telecommunications costs,
depreciation of network equipment, occupancy costs and personnel and related
expenses of our network department. The costs are expensed as incurred.

SALES AND MARKETING--Sales and marketing expenses include advertising and
promotion expenses, salaries, sales commissions, employee benefits, travel and
related expenses for the Company's direct sales force, fees paid to third-party
advertising sales agents, marketing, and sales support functions. These costs
are expensed as incurred.

Advertising and promotion expenses include media, agency and production
expenses. Production costs are expensed the first time the advertisement is
aired. Media and agency costs are expensed when the advertising runs.
Advertising and promotion expense for the years ended June 30, 2000 and 1999 was
$38,034,000 and $102,000, respectively. There were no advertising and promotion
expenses for the period ended June 30, 1998.

PRODUCT DEVELOPMENT COSTS--Product development costs include expenses for the
development of new or improved technologies and products, including salaries and
related expenses for the software engineering department, as well as costs for
contracted services, facilities, and equipment. Costs incurred by the Company to
develop, enhance, manage, monitor and operate the Company's web-sites are
generally expensed as incurred, except for certain costs relating to the
acquisition and development of internal-use software that are capitalized and
depreciated over their estimated useful lives, generally three years or less.

GENERAL AND ADMINISTRATIVE--General and administrative expenses include
salaries, employee benefits and expenses for our executive, finance, legal,
human resources and customer support personnel. In addition, general and
administrative expenses include fees for professional services and occupancy
costs. These costs are expensed as incurred.

STOCK-BASED COMPENSATION--The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is recognized over the
vesting period based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the exercise price. The Company accounts
for stock issued to non-employees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force 96-18.

INCOME TAXES--The Company utilizes the liability method of accounting for income
taxes. Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement and the tax bases of
assets and liabilities using enacted tax rates in effect for the period in which
the differences are expected to reverse. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.

NET LOSS PER SHARE--Basic and diluted net loss per share is computed by dividing
the net loss for the period by the weighted average number of common shares
outstanding during the period. Shares associated with stock options, warrants
and convertible preferred stock are not included to the extent they are
antidilutive.

                                      F-9
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME--SFAS No. 130 ("Reporting Comprehensive Income")
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes in
equity (net assets) during a period from non-owner sources. To date, the Company
has not had any significant transactions that are required to be reported in
comprehensive income.

SEGMENTS--The Company operates in one principal business segment, a provider of
advertising and commerce-sponsored Internet access. Substantially all of the
Company's operating results and identifiable assets are in the United States.

STOCK SPLIT--In July 1999, the Company authorized and implemented a
three-for-two forward stock split. The share information in the accompanying
financial statements has been retroactively restated to reflect the effect of
the stock split.

RECLASSIFICATIONS--Certain prior year amounts have been reclassified to conform
to the fiscal year 2000 presentation. These changes had no impact on previously
reported results of operations or shareholders' equity.

3.  RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public accountants ("AICPA")
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance on the cost of computer software developed or obtained for internal
use. The implementation of SOP No. 98-1 has not had a significant impact on the
Company's financial position, results of operations or cash flows.

In June 1998, The Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. Because the Company does
not currently hold any derivative instruments and does not engage in hedging
activities, the impact of the adoption of SFAS No. 133 is not currently expected
to have a material impact on financial position, results of operations or cash
flows. The Company will be required to implement SFAS No. 133 in the first
quarter of fiscal 2001.

In December 1999, the SEC issued Staff Accounting Bulletin 101 ("SAB 101"),
"Revenue Recognition," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. In June 2000,
the SEC issued SAB 101B, which requires implementation of SAB 101 by the Company
no later than June 30, 2001. At this time, the Company is still assessing the
impact of SAB 101 and the effect, if any, on the Company's financial position
and results of operations.

In March 2000, the FASB issued FASB Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation." FIN No. 44 provides
guidance for issues arising in applying APB No. 25. FIN No. 44 applies
specifically to new awards, exchanges of awards in a business combination,
modification to outstanding awards and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee which apply to awards issued

                                      F-10
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
after December 15, 1998. Application of FIN No. 44 is not anticipated to have an
impact on the Company's financial reporting.

4.  ACQUISITIONS

On December 1, 1999, the Company acquired 100% of the outstanding capital stock
and options of AimTV, Inc. ("AimTV"). AimTV has developed a patent-pending
technology designed to enable advertisers to run broadcast-quality commercials
over narrowband Internet connections. Pursuant to the terms of the agreement,
the outstanding capital stock and options were exchanged for approximately
973,000 shares of common stock and options to purchase common stock of NetZero.
The transaction has been accounted for under the purchase method and,
accordingly, the results of operations of AimTV have been included in the
consolidated results of the Company since the date of acquisition. The excess of
the purchase price over the fair value of net liabilities acquired amounted to
approximately $23.7 million. The excess purchase price is comprised of
approximately $14.3 million of goodwill and $9.4 million of identifiable
intangible assets which are being amortized over their estimated useful lives
ranging from two to three years.

The following summarized unaudited pro forma information for the years ended
June 30, 2000 and 1999 assumes that the acquisition of AimTV had occurred at the
beginning of each year presented:

<TABLE>
<CAPTION>
                                                              JUNE 30, 2000    JUNE 30, 1999
                                                              --------------   --------------
                                                                        (UNAUDITED)
<S>                                                           <C>              <C>
Revenues....................................................   $ 55,506,000     $  4,634,000
Net loss....................................................   $(96,867,000)    $(18,483,000)
Net loss per share..........................................   $      (1.31)    $      (1.60)
</TABLE>

5.  PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                              JUNE 30, 2000    JUNE 30, 1999
                                                              --------------   --------------
<S>                                                           <C>              <C>
Computer software and equipment.............................   $24,541,000      $14,068,000
Furniture and fixtures......................................     5,679,000          929,000
Assets under capital leases.................................    17,313,000        3,739,000
                                                               -----------      -----------
Total.......................................................    47,533,000       18,736,000
Less: accumulated depreciation, including accumulated
  capital lease amortization of $3,007,000 and $246,000 at
  June 30, 2000 and 1999, respectively......................    (9,871,000)        (620,000)
                                                               -----------      -----------
                                                               $37,662,000      $18,116,000
                                                               ===========      ===========
</TABLE>

                                      F-11
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.  INTANGIBLE ASSETS

Intangible assets consist of the following:

<TABLE>
<CAPTION>
                                                              JUNE 30, 2000    JUNE 30, 1999
                                                              --------------   --------------
<S>                                                           <C>              <C>
Goodwill....................................................   $14,260,000       $       --
Software and technology.....................................     7,000,000               --
Non-compete agreements......................................     2,200,000               --
Other intangible assets.....................................     1,588,000               --
                                                               -----------       ----------
                                                                25,048,000               --
Less: accumulated amortization..............................    (5,525,000)              --
                                                               -----------       ----------
                                                               $19,523,000       $       --
                                                               ===========       ==========
</TABLE>

7.  ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                              JUNE 30, 2000    JUNE 30, 1999
                                                              --------------   --------------
<S>                                                           <C>              <C>
Accrued payroll and related expenses........................    $2,293,000       $  619,000
Other accrued liabilities...................................       213,000          642,000
Accrued offering expenses...................................            --          260,000
                                                                ----------       ----------
                                                                $2,506,000       $1,521,000
                                                                ==========       ==========
</TABLE>

8.  LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                              JUNE 30, 2000    JUNE 30, 1999
                                                              --------------   --------------
<S>                                                           <C>              <C>
Notes payable to vendor, quarterly payments of $198,000,
  including interest at 15.3% through March 2002,
  uncollateralized..........................................   $ 1,195,000      $ 1,770,000
Note payable, monthly payments of $108,000, including
  interest at 13.7% through August 2002, collateralized by
  certain property and equipment............................     2,589,000               --
                                                               -----------      -----------
                                                                 3,784,000        1,770,000
Less: current portion.......................................    (1,641,000)        (560,000)
                                                               -----------      -----------
                                                               $ 2,143,000      $ 1,210,000
                                                               ===========      ===========
</TABLE>

The weighted average interest rate on fiscal 2000 borrowings is approximately
14%.

                                      F-12
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.  LONG-TERM DEBT (CONTINUED)
Future minimum principal payments required are as follows:

<TABLE>
<S>                                                           <C>
Year ended June 30:
2001........................................................  $1,641,000
2002........................................................   1,710,000
2003........................................................     433,000
                                                              ----------
                                                              $3,784,000
                                                              ==========
</TABLE>

9.  RELATED PARTY TRANSACTIONS

In September 1998, the Company purchased certain software technology for $80,000
from a related party.

At June 30, 2000 and 1999, the Company held notes receivable from two employees
for $799,000 and $1,029,000, respectively, for the exercise of stock options.
The notes bear interest at 4.83% and 5.28% per annum, respectively, and are due
on March 20, 2004 and April 16, 2004, respectively, unless paid earlier. The
notes, which are classified as a component of stockholders' equity, are full
recourse to the Company and are collateralized by the shares of common stock
issued upon exercise.

During the year ended June 30, 2000, an entity which is a shareholder of the
Company and certain of its affiliates purchased $4.3 million in banner
advertisements, of which approximately $2.6 million was included in accounts
receivable at June 30, 2000. In addition, the Chairman and Chief Executive
Officer of this related entity is also a director of the Company.

10.  CAPITALIZATION

Convertible and redeemable convertible preferred stock at June 30, 1999 and
immediately prior to the Company's September 1999 initial public offering was
composed of the following:

<TABLE>
<CAPTION>
                                                        SHARES
                                               ------------------------   LIQUIDATION   REDEMPTION
                                               AUTHORIZED   OUTSTANDING     AMOUNT        AMOUNT
                                               ----------   -----------   -----------   ----------
<S>                                            <C>          <C>           <C>           <C>
Series A redeemable convertible..............  11,956,000   11,956,000    $ 1,063,000   $1,063,000
Series B redeemable convertible..............   7,275,000    7,274,000      1,077,000    1,077,000
Series C convertible.........................  27,681,000   27,100,000     11,646,000           --
Series D convertible.........................  19,500,000   18,082,000     33,271,000           --
Undesignated.................................   8,588,000           --             --           --
                                               ----------   ----------    -----------   ----------
                                               75,000,000   64,412,000    $47,057,000   $2,140,000
                                               ==========   ==========    ===========   ==========
</TABLE>

COMMON STOCK

As a condition to the issuance of Series A redeemable convertible preferred
stock in September 1998, the employee founding stockholders of all of the then
15 million outstanding common shares entered into stock restriction agreements
with the Company pursuant to which 7.5 million of the outstanding common shares
were restricted and were made subject to monthly vesting over a four-year period
based on the founders' continued employment with the Company. Under the terms of
the restricted stock agreements, the Company has the right to repurchase the
unvested shares at the original issue price in the event a

                                      F-13
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.  CAPITALIZATION (CONTINUED)
founder ceases to be an employee or service provider to the Company. The
repurchase right shall automatically lapse with respect to the unvested shares
in the event the founder is constructively or involuntarily terminated without
cause following a corporate transaction, defined as a (i) merger or
consolidation with more than a 50% change of control or (ii) sale, transfer or
disposition of substantially all the Company's assets in a dissolution. The
Company recorded deferred stock compensation amounting to $333,000 for the
shares covered under the restricted stock agreements. The deferred amount will
be recognized as compensation expense over the vesting period. During the years
ended June 30, 2000 and 1999, such compensation expense included in stock-based
compensation in the statement of operations amounted to $90,000 and $173,000,
respectively.

In July 1999, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission ("SEC") that would permit
the Company to sell shares of the Company's common stock in connection with a
proposed initial public offering. Also in July 1999, the Board of Directors
approved the reincorporation of the Company in the State of Delaware, the change
in the par value of the Company's common stock and the increase in the number of
authorized shares that was effected prior to the closing of the initial public
offering. The reincorporation was effected on September 21, 1999. On
September 23, 1999, the Company completed its initial public offering in which
the Company sold 11.5 million shares of its common stock, including 1.5 million
shares in connection with the exercise of the underwriters' over-allotment
option, at $16 per share. The proceeds to the Company from the offering, after
deducting offering expenses, including underwriting discounts and commissions,
were $169.3 million. Upon the closing of the offering, all issued and
outstanding shares of the Company's redeemable and convertible preferred stock
and convertible preferred stock were converted into an aggregate of 19,230,000
and 45,182,000 shares of common stock, respectively. After the offering, the
Company's authorized capital consisted of 510 million shares of capital stock
(500 million shares of common stock and 10 million shares of Preferred Stock) of
which approximately 116.7 million shares of common stock were outstanding at
June 30, 2000.

In April 2000, the Company completed a private placement of 11.5 million shares
of the Company's common stock and realized proceeds of approximately
$144 million.

At June 30, 2000 and 1999, 11,120,000 and 17,001,000 shares of common stock were
subject to repurchase, of which 4,219,000 and 6,094,000 shares, respectively,
related to unvested shares under the restricted stock agreements and 6,901,000
and 10,907,000 shares related to unvested stock options exercised.

WARRANTS

Under the terms of a loan outstanding during the third quarter of fiscal 1999,
the Company issued fully vested and exercisable warrants to purchase 23,000
shares of its Series C convertible preferred stock at an exercise price of
$.4297 per share. The Company determined the fair value of the warrants to be
immaterial at the date of issuance.

In December 1999, the Company entered into a CD distribution agreement under
which the Company issued an immediately exercisable, fully vested and
non-forfeitable warrant to purchase 575,000 shares of the Company's common stock
at $28.71 per share. The Company determined that the fair value of the warrant
approximated $8.6 million at the date of issuance which is being amortized to
stock-based charges over the four year term of the agreement.

                                      F-14
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.  NET LOSS PER SHARE

The following table sets forth the computation of basic, diluted and pro forma
net loss per share for the years ended June 30, 2000 and 1999, and the period
from July 21, 1997 (inception) through June 30, 1998:

<TABLE>
<CAPTION>
                                                                                         JULY 21, 1997
                                                                 YEAR ENDED               (INCEPTION)
                                                       -------------------------------      THROUGH
                                                       JUNE 30, 2000    JUNE 30, 1999    JUNE 30, 1998
                                                       --------------   --------------   --------------
<S>                                                    <C>              <C>              <C>
Numerator:
  Net loss...........................................   $(91,286,000)    $(15,300,000)    $   (25,000)
                                                        ------------     ------------     -----------
Denominator:
  Weighted average common shares.....................     87,941,000       19,401,000      15,000,000
  Adjustment for common shares subject to
    repurchase.......................................    (13,818,000)      (8,609,000)             --
                                                        ------------     ------------     -----------
  Adjusted weighted average common shares............     74,123,000       10,792,000      15,000,000
                                                        ============     ============     ===========
Basic and diluted net loss per share.................   $      (1.23)    $      (1.42)    $        --
                                                        ============     ============     ===========
</TABLE>

The diluted per share computations exclude convertible preferred stock, unvested
common stock, warrants and options which were antidilutive. The number of shares
excluded from the diluted net loss per share computation were 20,266,000,
84,910,000 and 4,285,000 for the periods ended June 30, 2000, 1999 and 1998,
respectively.

12.  EMPLOYEE BENEFIT PLANS

The Company has a 401(k) Profit Sharing Plan (the "Plan") available to all
employees who meet the Plan's eligibility requirements. Under the Plan,
participating employees may defer a percentage (not to exceed 15%) of their
eligible pretax earnings up to the Internal Revenue Service's annual
contribution limit. Company matching and profit sharing contributions are
discretionary. To date, the Company has not made any contributions to the Plan.

13.  PROVISION FOR INCOME TAXES

As a result of net operating losses, the Company has not recorded a provision
for income taxes. The components of the Company's deferred tax assets and
related valuation allowances at June 30, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                    JUNE 30, 2000   JUNE 30, 1999
                                                    -------------   -------------
<S>                                                 <C>             <C>
Deferred tax assets:
  Net operating loss carryforwards................  $ 36,313,000     $ 5,868,000
  Other...........................................     1,730,000         125,000
                                                    ------------     -----------
  Total deferred tax assets.......................    38,043,000       5,993,000
  Less: valuation allowance.......................   (38,043,000)     (5,993,000)
                                                    ------------     -----------
Net deferred taxes................................  $         --     $        --
                                                    ============     ===========
</TABLE>

                                      F-15
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13.  PROVISION FOR INCOME TAXES (CONTINUED)

Based on management's assessment, the Company has placed a valuation allowance
against its otherwise recognizable deferred tax assets due to the likelihood
that the Company may not generate sufficient taxable income during the
carryforward period to utilize net operating loss carryforwards and other
deferred tax benefits. The valuation allowance for net deferred taxes increased
by $32,050,000 during the year ended June 30, 2000. The increase was the result
of additional net losses and net changes in temporary differences.

At June 30, 2000, the Company had net operating losses for federal and state
income tax purposes of approximately $90,924,000 and $90,923,000, respectively,
which begin to expire in 2019 and 2006, respectively. The net operating losses
can be carried forward to offset future taxable income. Utilization of the above
carryforwards may be subject to utilization limitations, which may inhibit the
Company's ability to use carryforwards in the future.

14.  STOCK OPTIONS AND STOCK ISSUANCE PLANS

The Company's 1998 and 1999 Stock Option and Stock Issuance Plans (the "Plans")
provide for the issuance of stock and stock options at prices not less than 85%
(110% if the award is issued to a 10% stockholder) of the fair market value at
the date of issue. An aggregate of 25,044,000 shares were reserved under the
Plans, of which 3,229,000 shares were available for future grant at June 30,
2000 and 8,571,000 options were outstanding at June 30, 2000.

The Plans provide for the grant of nonstatutory and incentive stock options to
employees, officers, directors and consultants of the Company. Options granted
generally vest 25% after one year of service, and ratably over 36 months
thereafter. Certain grants are immediately exercisable for unvested shares of
common stock, with the unvested portion of the shares remaining subject to
repurchase by the Company at the exercise price until the vesting period is
complete. The Company had 6,901,000 unvested shares of common stock issued and
outstanding under the Plans at June 30, 2000 (Note 10), which were subject to
repurchase by the Company at the exercise price.

The following table summarizes activity under the Plans for the periods ended
June 30, 2000, 1999, and 1998:

<TABLE>
<CAPTION>
                                                                                         WEIGHTED
                                                                                         AVERAGE
                                                             NUMBER          PRICE       EXERCISE
                                                            OF SHARES      PER SHARE      PRICE
                                                           -----------   -------------   --------
<S>                                                        <C>           <C>             <C>
Options outstanding at July 21, 1997 (inception).........           --   $          --    $   --
  Granted................................................    4,285,000             .03       .03
                                                           -----------
Options outstanding at June 30, 1998.....................    4,285,000             .03       .03
  Granted................................................   13,865,000     .03 -  3.33       .26
  Exercised..............................................  (13,601,000)    .03 -   .87       .10
  Canceled...............................................   (1,052,000)    .03 -   .10       .04
                                                           -----------
Options outstanding at June 30, 1999.....................    3,497,000     .03 -  3.33       .69
  Granted................................................    7,307,000    1.03 - 35.56     16.40
  Exercised..............................................     (674,000)    .03 -  3.33       .49
  Canceled...............................................   (1,559,000)    .03 - 34.50      7.64
                                                           -----------
Options outstanding at June 30, 2000.....................    8,571,000   $ .03 - 35.56    $12.92
                                                           ===========   =============    ======
</TABLE>

                                      F-16
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14.  STOCK OPTIONS AND STOCK ISSUANCE PLANS (CONTINUED)
Options granted during the years ended June 30, 2000 and 1999 resulted in total
deferred compensation amounts of $2,784,000 and $8,619,000, respectively, which
were included in deferred stock compensation in stockholders' equity. Deferred
compensation expense is computed over the service period by using the aggregate
percentage of compensation accrued by the end of each year of service (the
vesting period). During the years ended June 30, 2000 and 1999, such
compensation expense included in stock-based compensation in the statement of
operations amounted to $5.2 million and $996,000, respectively. Annual
amortization of deferred stock compensation for options granted as of June 30,
2000 is approximately $3.0 million, $1.6 million, $623,000 and $24,000 for the
years ending June 30, 2001, 2002, 2003 and 2004, respectively.

Additional information with respect to the outstanding options as of June 30,
2000 is as follows:

<TABLE>
<CAPTION>
                                                                                           OPTIONS EXERCISED
                                  OPTIONS OUTSTANDING             OPTIONS EXERCISABLE    SUBJECT TO REPURCHASE
                        ---------------------------------------   --------------------   ----------------------
                                    WEIGHTED AVERAGE   AVERAGE                AVERAGE                 AVERAGE
                         NUMBER        REMAINING       EXERCISE    NUMBER     EXERCISE    NUMBER     REPURCHASE
PRICES                  OF SHARES   CONTRACTUAL LIFE    PRICE     OF SHARES    PRICE     OF SHARES     PRICE
------                  ---------   ----------------   --------   ---------   --------   ---------   ----------
<S>                     <C>         <C>                <C>        <C>         <C>        <C>         <C>
$  .03 to  1.03         2,068,000         8.85          $ 0.73    1,448,000    $ 0.67    6,901,000     $0.13
  3.33 to 13.75         1,990,000         9.26            8.95      745,000      6.65           --        --
 14.63 to 19.94         3,337,000         1.85           19.22       68,000     19.25           --        --
 20.56 to 29.13         1,103,000         9.08           22.59      185,000     23.09           --        --
 30.00 to 35.56            73,000         9.34           32.59       29,000     31.25           --        --
                        ---------                                 ---------              ---------
                        8,571,000                                 2,475,000              6,901,000
                        =========                                 =========              =========
</TABLE>

The Company calculated the minimum fair value of each option grant on the date
of the grant using the minimum value option pricing model as prescribed by SFAS
No. 123 through September 23, 1999. The fair value of the options granted
subsequent to September 23, 1999 have been estimated at the date of grant using
the Black-Scholes option pricing model. The following weighted average
assumptions were used:

<TABLE>
<CAPTION>
                                                                          JULY 21, 1997
                                                   YEAR ENDED              (INCEPTION)
                                         ------------------------------      THROUGH
                                         JUNE 30, 2000    JUNE 30, 1999   JUNE 30, 1998
                                         --------------   -------------   -------------
<S>                                      <C>              <C>             <C>
Risk-free interest rates...............         6%              5%              6%
Expected lives (in years)..............         5               4               4
Dividend yield.........................         0%              0%              0%
Expected volatility....................        85%              0%              0%
</TABLE>

<TABLE>
<CAPTION>
                                                  AS REPORTED      PRO FORMA
                                                  ------------   -------------
<S>                                               <C>            <C>
Year ended June 20, 2000:
Net Loss........................................  $(91,286,000)  $(105,365,000)
Basic and diluted net loss per share............         (1.23)          (1.42)

Year ended June 30, 1999:
Net loss........................................  $(15,300,000)  $ (15,331,000)
Basic and diluted net loss per share............         (1.42)          (1.42)

Period from July 21, 1997 (inception) through
  June 30, 1998:
Net loss........................................  $    (25,000)  $     (25,000)
Basic and diluted net loss per share............            --              --
</TABLE>

                                      F-17
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14.  STOCK OPTIONS AND STOCK ISSUANCE PLANS (CONTINUED)
The weighted average grant-date fair value of options granted was $10.63, $.07
and $-- per share for the periods ended June 30, 2000, 1999, and 1998,
respectively.

In September 1998, the Company issued options to a non employee investor to
purchase 704,000 and 422,000 shares of Series A and Series B redeemable
convertible preferred stock, respectively, at exercise prices equal to the
respective Series A and Series B issuance prices. The Company incurred a charge
of $67,000 relating to these options which is included in stock-based charges in
the accompanying statement of operations. The options were exercised and the
preferred shares issued in March 1999.

In December 1998, the Company issued, to a non-employee director, 225,000
options to purchase Series C convertible preferred stock at $.4297 per share.
These options, which have a 48-month vesting period from the date of grant, were
exercised in March 1999. The unvested portion remains subject to repurchase by
the Company at the original issue price.

The Company has an Employee Stock Purchase Plan (ESPP), with a term of ten
years, which expires in the year 2009, and under which 2,072,000 shares of the
Company's common stock have been authorized and reserved for issuance. Eligible
employees may authorize payroll deductions of up to 15% of their compensation to
purchase shares of common stock at 85% of the lower of the market price per
share at the beginning or end of each six-month offering period.

During 2000, approximately 49,000 shares were purchased under the Company's ESPP
at weighted average purchase price of $10.25 per share. At June 30, 2000 there
were approximately 2,023,000 shares available for future issuance. The weighted
average fair value of ESPP shares purchased in 2000 was $5.74 per share.

15.  COMMITMENTS AND CONTINGENCIES

CAPITAL LEASES

During the years ended June 30, 2000 and 1999, the Company entered into certain
noncancelable lease obligations for certain computer and office equipment. The
future minimum lease payments are discounted using varying interest rates over
the two- to five-year lease terms.

Future minimum lease payments under noncancelable capital leases for the
following fiscal years at June 30, 2000 are:

<TABLE>
<S>                                                           <C>
2001........................................................  $ 7,087,000
2002........................................................    5,016,000
2003........................................................    4,543,000
2004........................................................       18,000
                                                              -----------
Total minimum obligations...................................   16,664,000
Less: amounts representing interest.........................   (2,282,000)
                                                              -----------
Present value of minimum obligations........................   14,382,000
Less: current portion.......................................   (6,247,000)
                                                              -----------
Total.......................................................  $ 8,135,000
                                                              ===========
</TABLE>

                                      F-18
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15.  COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES

The Company leases its facilities under noncancelable operating leases expiring
at various periods through 2010. The leases generally contain annual escalation
provisions as well as renewal options. The Company must maintain letters of
credit with financial institutions as a security deposit in accordance with
certain facility lease agreements. The letters of credit, which remain in effect
until various dates through June 2001, are collateralized by certificates of
deposit and are classified as restricted cash at June 30, 2000.

Future minimum lease payments under operating leases for the following fiscal
years at June 30, 2000 are:

<TABLE>
<S>                                                           <C>
2001........................................................  $ 2,487,000
2002........................................................    2,479,000
2003........................................................    2,520,000
2004........................................................    2,585,000
2005........................................................    2,480,000
Thereafter..................................................    8,590,000
                                                              -----------
Total.......................................................  $21,141,000
                                                              ===========
</TABLE>

Total rental expense for operating leases was $1,908,000, $153,000 and $0 for
the periods ended June 30, 2000, 1999 and 1998, respectively.

OTHER COMMITMENTS

Under the terms of a multi-year advertising agreement, the Company is commited
to purchase approximately $19.1 million and $20.5 million in advertising for the
fiscal years ending June 30, 2001 and 2002, respectively.

LITIGATION

The Company is subject to legal proceedings and claims, which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial position or results of operations of the Company.

                                      F-19
<PAGE>
                                 NETZERO, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.  QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                      QUARTER ENDED
                                                   ---------------------------------------------------
                                                   SEPTEMBER 30    DECEMBER 31    MARCH 31    JUNE 30
                                                   -------------   ------------   ---------   --------
                                                      (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S>                                                <C>             <C>            <C>         <C>
FISCAL 2000
Net revenues.....................................    $  7,720        $ 12,242     $ 16,858    $ 18,686
Gross profit (loss)..............................      (4,373)         (2,906)      (1,601)        871
Loss from operations.............................     (14,991)        (26,513)     (26,624)    (29,971)
Net loss.........................................    $(14,927)       $(24,576)    $(24,860)   $(26,923)
Basic and diluted net loss per share.............    $  (1.04)       $  (0.27)    $  (0.27)   $  (0.26)

FISCAL 1999
Net revenues.....................................    $     --        $    122     $    781    $  3,731
Gross loss.......................................          (6)           (942)      (3,198)     (3,646)
Loss from operations.............................        (217)         (1,789)      (5,125)     (8,284)
Net loss.........................................    $   (217)       $ (1,795)    $ (5,095)   $ (8,193)
Basic and diluted net loss per share.............    $  (0.02)       $  (0.22)    $  (0.50)   $  (0.72)
</TABLE>

17.  SUBSEQUENT EVENTS

In July 2000, the Company issued approximately 1.7 million common stock options
to all employees who had existing stock options that had an exercise price
greater than $5.50 per share. The options granted vest 25% after six months and
ratably over eighteen months thereafter. Additionally, the Company issued
approximately 1.5 million shares of restricted common stock to certain
employees. Such restricted shares vest in twelve equal quarterly installments
commencing in August 2000.

SUBSEQUENT EVENTS (UNAUDITED)

In August 2000, the Company purchased all of the outstanding stock and stock
options of Simpli.com, Inc. ("Simpli.com"). The purchase price was satisfied
through the issuance of approximately 2.5 million shares of the Company's common
stock and approximately $2.6 million in cash. Simpli.com is a targeted marketing
infrastructure and search technology company which provides search and targeted
marketing solutions based on user interests and preferences.

In September 2000, the Company issued approximately 5.6 million shares of its
common stock to acquire all of the outstanding shares and stock options of
RocketCash Corporation ("RocketCash"). RocketCash is an on-line gateway that
enables customers to shop and buy online at merchant web-sites without a credit
card, in a secure environment.

                                      F-20
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of NetZero, Inc.

Our audits of the consolidated financial statements referred to in our report
dated August 9, 2000 appearing in the 2000 Annual Report to Shareholders of
NetZero, Inc. (which report and consolidated financial statements are included
in this Annual Report on Form 10-K) also included an audit of the financial
statement schedule included on page F-22 of this Annual Report on Form 10-K. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Woodland Hills, California
August 9, 2000

                                      F-21
<PAGE>
                                 NETZERO, INC.

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                                           ------------------------
                                              BALANCE AT   CHARGED TO    WRITE-OFFS   BALANCE AT
                                              BEGINNING     COSTS AND      NET OF       END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS               OF PERIOD     EXPENSES     RECOVERIES     PERIOD
--------------------------------------------  ----------   -----------   ----------   -----------
<S>                                           <C>          <C>           <C>          <C>
Year ended June 30, 2000....................  $  160,000   $ 1,834,000   $343,000(a)  $ 1,651,000

Year ended June 30, 1999....................  $       --   $   160,000   $       --   $   160,000

Period from July 21, 1997 (inception)
  to June 30, 1998..........................  $       --   $        --   $       --   $        --

VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS
--------------------------------------------

Year ended June 30, 2000....................  $5,993,000   $32,050,000   $       --   $38,043,000

Year ended June 30, 1999....................  $   10,000   $ 5,983,000   $       --   $ 5,993,000

Period from July 21, 1997 (inception)
  to June 30, 1998..........................  $       --   $    10,000   $       --   $    10,000
</TABLE>

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

(a) Represents specific accounts written off that were considered to be
    uncollectible.

                                      F-22
<PAGE>
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO.  DOCUMENT
-----------  --------
<S>          <C>
 3.1**       Certificate of Incorporation of the Registrant.

 3.2**       Bylaws of the Registrant.

 4.1**       Specimen common stock certificate.

10.1+        Amendment to the Amended and Restated Start Page Agreement
             dated as of July 1, 2000 by and between the Registrant and
             LookSmart, Ltd.

10.2***++    Amended and Restated Start Page Agreement dated as of
             February 1, 2000 by and between the Registrant and
             LookSmart, Ltd.

10.3***      The ZeroPort Advertising Agreement dated as of February 5,
             2000 by and between the Registrant and idealab! Inc.

10.4***      Employment Agreement dated as of December 1, 1999, by and
             between the Registrant and Brian Woods.

10.5**++     Adserver License Agreement dated as of August 28, 1998,
             between the Registrant and NetGravity, as amended.

10.6**       Technology Assignment Agreement dated as of September 11,
             1998, by and between the Registrant and Impact Software,
             Inc.

10.7**       Form of Stock Restriction Agreement between the Registrant
             and the founders.

10.8**++     Quotation for Dialinx Services dated December 9, 1998,
             between the Registrant and GTE Internetworking Incorporated,
             as amended.

10.9**       Master Agreement dated as of October 13, 1998, by and
             between the Registrant and GTE Internetworking Incorporated.

10.10**      Standard Office Lease dated as of March 6, 1999, as amended
             on March 7, 1999, by and between the Registrant and Westlake
             Gardens.

10.11**      Addendum to Stock Option Agreements.

10.12**      Employment Agreement dated as of March 20, 1999, by and
             between the Registrant and Frederic A. Randall, Jr.

10.13**      Employment Agreement dated as of March 20, 1999, between the
             Registrant and Mark R. Goldston.

10.14**      Stock Pledge Agreement dated as of March 20, 1999 between
             the Registrant and Mark R. Goldston, as amended.

10.15**      Note secured by Stock Pledge Agreement dated March 20, 1999,
             made by Mark R. Goldston in favor of the Registrant, as
             amended.

10.16**++    Software License and Service Agreement dated as of April 14,
             1999, between the Registrant and Oracle Corporation.

10.17**      Employment Agreement dated as of April 17, 1999, by and
             between the Registrant and Charles S. Hilliard.

10.18**      Stock Pledge Agreement dated April 17, 1999, between the
             Registrant and Charles S. Hilliard.

10.19**      Note secured by Stock Pledge Agreement dated April 17, 1999
             made by Charles S. Hilliard in favor of the Registrant.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.  DOCUMENT
-----------  --------
<S>          <C>
10.20**      Amended and Restated Investors' Rights Agreement dated as of
             May 10, 1999, by and among the Registrant and the investors,
             officers and founders listed on schedules thereto.

10.21**      1998 Stock Option/Stock Issuance Plan.

10.22**      1999 Stock Option/Stock Issuance Plan.

10.23**      Form of Indemnification Agreement between the Registrant and
             its directors.

10.24**      1999 Stock Incentive Plan.

10.25**      Employee Stock Purchase Plan.

10.26**      Form of Indemnification Agreement between the Registrant and
             its executive officers.

11.1         Statement re computation of earnings per share (included in
             Note 11 to the consolidated financial statements filed as
             part of this Annual Report on Form 10-K).

23.1         Consent of PricewaterhouseCoopers LLP, independent
             accountants.

27.1         Financial Data Schedule.
</TABLE>

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

*   Incorporated by reference herein to the Form 8-K and all amendments thereto
    filed with the securities and Exchange Commission on December 14, 1999.

**  Incorporated by reference herein to the Company's Registration Statement on
    Form S-1 and all amendments thereto (File No. 333-82827).

*** Incorporated by reference herein to the Form 10-Q and all amendments thereto
    filed with the Securities and Exchange Commission on May 15, 2000.

+   Confidential treatment has been requested for certain confidential portions
    of this exhibit pursuant to Rule 24b-2 under the Securities and Exchange
    Act, as amended. In accordance with Rule 24b-2, these confidential portions
    have been omitted from this exhibit and filed separately with the Securities
    and Exchange Commission.

++  Confidential treatment has been requested and received for certain portions
    of this exhibit.