<PAGE>

_______________________________________________________________________________

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

                                   FORM 10-K

          (Mark One)

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

          For the fiscal year ended December 31, 2000 or

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

          For the transition period from __________ to __________

                        Commission file number 000-26657

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

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

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

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

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

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

     As of March 26, 2001, 25,127,105 shares of Common Stock of Registrant were
     outstanding.  The aggregate market value of the shares held by non-
     affiliates of the Registrant (based upon the closing price of the
     Registrant's Common Stock on March 26, 2001 of $0.16 per share) was
     approximately $3.9 million.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of Registrant's definitive Proxy Statement to be filed pursuant to
     Regulation 14A promulgated by the Securities and Exchange Commission under
     the Securities Act of 1934, which is anticipated to be filed within 120
     days after the end of the Registrant's fiscal year ended December 31, 2000,
     are incorporated by reference in Part III hereof.

_______________________________________________________________________________
<PAGE>

                               TABLE OF CONTENTS

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                                                                                                       Page
                                                                                                       ----
<S>         <C>                                                                                        <C>
PART I
Item 1.     Business                                                                                     2
Item 2.     Property                                                                                    17
Item 3.     Legal Proceedings                                                                           17
Item 4.     Submission of Matters to a Vote of Security Holders                                         17


PART II
Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters                       17
Item 6.     Selected Consolidated Financial Data                                                        19
Item 7.     Management's Discussion and Analysis of Financial Condition                                 20
             and Results of Operations
Item 7A.    Quantitative and Qualitative Disclosures about Market Risk                                  26
Item 8.     Financial Statements and Supplementary Data                                                 27
Item 9.     Changes in and Disagreements with Accountants on Accounting                                 52
             and Financial Disclosure


PART III
Item 10.    Directors and Executive Officers of the Registrant                                          52
Item 11.    Executive Compensation                                                                      52
Item 12.    Security Ownership of Certain Beneficial Owners and Management                              52
Item 13.    Certain Relationships and Related Transactions                                              52


PART IV
Item 14.    Exhibits, Financial Statement Schedule and Reports on Form 8-K                              52

SIGNATURES                                                                                              55
</TABLE>
<PAGE>

PART I

Item:  1  Business

Overview

   Founded in 1996, Talk City, Inc. ("Talk City", "Talk City Marketing Group",
"TCMG" or the "Company"), based in Campbell, California, is a leading provider
of online affinity marketing services to Fortune 1000 companies.  TCMG helps
companies use their Web sites to bring their customers together into
communities, which significantly reduces marketing and support costs, increases
revenue, and strengthens customer relationships.

Talk City Marketing Group's lines of business include:

Integrated Affinity Marketing Solutions.  TCMG provides fully integrated
affinity marketing solutions through a cost-effective outsourcing model. The
Company's integrated solutions help companies use their web sites to bring their
customers together into communities, which results in reduced operating costs,
increased revenue opportunities, and stronger customer relationships.
Integrated solutions can include consulting services, market research services,
live online events and webcasts, software applications such as online discussion
boards and online customer support tools, and community moderation services.

Live Online Events.  TCMG helps clients build stronger relationships with their
customers by communicating with them on a more personal and interactive level
with live online events. Talk City Marketing Group successfully produces over
100 live events each month for clients whose objectives range from entertainment
to product launches, and from investor relations to employee relations. Events
produced by TCMG are seamlessly integrated, professionally produced, and highly
scalable.

Online Research.  TCMG is a pioneer in online market research as a cornerstone
for building e-relationships. The Company enables clients to combine market
research with integrated affinity marketing solutions to establish high-value
relationships with their customers, as well as gain insights into the success of
their online offerings. TCMG's research services are used in a range of
applications including web site evaluation, brand image studies, new product and
concept testing, customer satisfaction research, and e-commerce process
evaluations.

Network and Syndication.  With over 5 million unique users per month, TCMG
operates one of the largest community Web sites in the world at
www.talkcity.com. In addition to offering targeted advertising space to clients,
TCMG has created a "super community" by linking the communities created for
clients who want access to a larger audience.  Through its event syndication
service, TCMG offers smaller companies a cost effective yet dynamic and unique
source of live content for their Web sites, while offering a larger audience to
clients who want to produce custom live events for their own purposes.  TCMG's
chat syndication service enables clients to tap into Talk City Marketing Group's
existing, family-friendly, pre-populated chat rooms.


Clients

  Talk City Marketing Group has delivered solutions for some of the strongest
brands in the world including:

  Entertainment and Media.  NBC, ABC, CBS, Warner Brothers, The Hearst
  Corporation, Cox Interactive and The Wall Street Journal.

                                       2
<PAGE>

  Financial Services.  Charles Schwab, American Express, Kemper Funds, Fidelity
  Investments and H&R Block.

  Automotive.  Toyota, BMW, General Motors and Chrysler.

  Retail and Consumer Products.  Starbucks, Costco, Coca Cola, Sears, Procter &
  Gamble, Mattel, Kodak and The Home Depot.

  Technology.  Cisco Systems, Hewlett Packard, Intel, AT&T, IBM, Novell, Palm
  Computing and Microsoft.

  Internet.  WebTV, Quokka, Juno and EarthLink.

       No single customer accounted for 10% or more of our total revenues for
the year ended December 31, 2000.  Revenues from one major customer were 12% of
total revenues and 22% of total revenues for the years ended December 31, 1999
and 1998, respectively.


Sales

       The Company primarily sells our solutions through our internal sales
organization, with sales professionals located throughout the Unites States.
Our services are generally part of the client's corporate strategy and, as a
result, we generally work with the senior management of our business clients and
their agencies who possess broad budget authority.  On a limited basis, we also
utilize third-party services to sell advertising on our Web sites.

       As of December 31, 2000, the Company had a backlog from contracts
amounting to approximately $5.9 million that will be recognized as revenue in
future periods, with over 90% of the balance relating to fee-based services.  As
of December 31, 1999, the backlog was approximately $5.3 million.


Product Development

       We have developed a variety of proprietary software, including tools for
event production and community moderating, chat proxy servers, template systems
to support dynamic pages and monitoring and reporting systems.  For the years
ended December 31, 2000, 1999 and 1998, we incurred gross research and
development expenditures of $1.1 million, $1.5 million and $0.5 million,
respectively.


Competition

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

                                       3
<PAGE>

   We believe the primary competitive factors are:

   .  quality and structure of the service offering;

   .  functionality;

   .  brand recognition;

   .  user affinity and loyalty;

   .  variety of value-added services;

   .  ease-of-use;

   .  quality and reliability of service.

   The Company competes with a wide range of other marketing services companies.
Its primary competitors in the market for online affinity marketing solutions
are Participate.com and People Link.  Talk City Marketing Group believes its
value to its clients is its ability to deliver fully integrated solutions, as
well as its substantial experience working with some of the most valuable brands
in the world.  In the online event segment, the Company competes primarily with
Yahoo Broadcast and AOL/Time Warner.  Both of these companies have substantially
more resources than Talk City Marketing Group. The Company believes its
advantage is its experience running some of the largest online chat events ever
produced, and its ability to provide fully integrated online community solutions
of which the online events are an integral piece.

   Some of the present and potential competitors of the Company may have greater
financial, technical, marketing or personnel resources than the Company. The
competitive environment could have a variety of adverse effects, including:

   .  We may be unable to increase the number of users, business clients or
      advertisers at historical levels

   .  We may be unable to retain our current users, business clients or
      advertiser clients

   .  Competitors may experience greater growth in attracting and retaining
      business clients than we do as a result of these relationships which could
      have the effect of making their services more attractive to clients

   .  Our network participants may sever or elect not to renew their agreements
      with us

   Any of the foregoing events could negatively affect revenues or result in an
increase in costs as a percentage of revenues, either of which could
significantly harm the Company's business, financial condition and operating
results.

Intellectual Property, Proprietary Rights And Domain Names

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

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

                                       4
<PAGE>

and third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. In addition, other parties may assert claims of
infringement of intellectual property or other proprietary rights against us.

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

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

Employees

   As of December 31, 2000, we had a total of 136 employees, all of whom were
located in the United States. Of the total, 105 were engaged in product
development and programming, 17 in sales and marketing and 14 in general and
administrative.  None of our employees is represented by a labor union. We have
not experienced any work stoppages and consider our relations with our employees
to be good.

   In March, 2001, the Company implemented a restructuring which included a
reduction in headcount to approximately 87 employees.  See Note 16 of the notes
to our financial statements regarding subsequent events.

Executive Officers

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

<TABLE>
<CAPTION>
                  Name                            Age                               Position
----------------------------------------     ------------     --------------------------------------------------
<S>                                            <C>              <C>
Peter H. Friedman                                  45           Chairman of the Board and Chief Executive
                                                                Officer

V. David Watkins                                   44           President and Chief Operating Officer

Jeffrey Snetiker                                   52           Senior Vice President, Chief Financial and
                                                                Administrative Officer

Jenna Woodul                                       52           Chief Community Officer

Chris N. Christensen                               40           Vice President of Engineering and Operations
</TABLE>


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

                                       5
<PAGE>

marketing at Apple. Mr. Friedman received a M.B.A. degree from the Harvard
Business School and a B.A. degree from Brown University.

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

   Jeffrey Snetiker served as our Senior Vice President, Chief Financial and
Administrative Officer since March 1999. From October 1996 to February 1999, Mr.
Snetiker was Principal Consultant of Executive Business Advisory, a consulting
company. From January 1995 to September 1996, Mr. Snetiker served as Senior Vice
President, Finance and Administration of United Paramount Network, a television
broadcast network. From October 1985 to November 1993, Mr. Snetiker held various
executive positions for Reeves Entertainment, a television production and
distribution company, including Executive Vice President, Chief Financial and
Administrative Officer from January 1990 to November 1993, Senior Vice
President, Finance and Administration from January 1989 to December 1989 and
Vice President, Finance and Administration from October 1985 to December 1988.
From January 1983 to September 1985, Mr. Snetiker was Vice President and
Controller of Group W Productions, a subsidiary of Westinghouse Broadcasting &
Cable. Mr. Snetiker received a B.S. degree in Accounting from C.W. Post College
of Long Island University. Mr. Snetiker resigned from the Company on December
1, 2000 and at that time agreed to continue to serve as Talk City's Chief
Financial and Administrative Officer pursuant to a consulting arrangement that
ended on March 31, 2001.


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

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

                                       6
<PAGE>

Risk Factors That May Affect Results of Operations and Financial Condition

Talk City has incurred losses inclusive of noncash charges since inception and
it may be unable to achieve profitability or generate positive cash flow

     Talk City incurred net losses of approximately $41.6 million in 2000, $40.1
million in 1999, $15.7 million in 1998, $6.4 million in 1997 and $1.3 million in
1996, and it may be unable to achieve profitability in the future.  If the
Company continues to incur net losses in future periods, and is unable to raise
additional financing, it may be unable to achieve one or more key elements of
its strategy, including the following:

   .  fund ongoing operations;

   .  increase the number of online marketing services clients;

   .  increase its sales activities;

   .  adequately inform the market about its product positioning; or

   .  maintain the number of its network participants.

     Talk City expects to continue to incur significant operating expenditures,
as well as noncash advertising and promotional charges, and as a result the
Company will need to generate significant revenues to achieve and maintain
profitability.  As of December 31, 2000, Talk City had an accumulated deficit of
approximately $105.1 million, including noncash advertising and promotional
charges of $16.4 million.  The Company may not achieve profitability if its
revenues increase more slowly than it expects, or if operating expenses exceed
its expectations or cannot be adjusted to compensate for lower than expected
revenues.  If the Company does achieve profitability, it may be unable to
sustain or increase profitability on a quarterly or annual basis.  Any of the
factors discussed above could cause its stock price to decline.

If Talk City raises additional capital through the issuance of new securities,
existing stockholders will incur additional dilution

     In order to meet its liquidity needs, the Company may need to raise
additional capital.  However, if the Company raises additional capital through
the issuance of new securities, its stockholders will be subject to additional
dilution.  In addition, any new securities issued may have rights, preferences
or privileges senior to those securities held by the Company's current
stockholders.

Talk City's undesignated Preferred Stock may inhibit potential acquisition bids
for the Company, cause the market price for its Common Stock to fall and
diminish the voting rights of the holders of its Common Stock

     If the Company's Board of Directors ("Board") issues Preferred Stock,
potential acquirers may not make acquisition bids for the Company, the Company's
stock price may fall and the voting rights of existing stockholders may diminish
as a result.  The Board has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series.  The Board can fix the price, rights,
preferences, privileges and restrictions of the Preferred Stock without any
further vote or action by the stockholders.

Talk City has anti-takeover defenses that could delay or prevent an acquisition
of the Company

   Provisions of Talk City's Certificate of Incorporation, Bylaws and Delaware
law could make it more difficult for a third party to acquire the Company, even
if doing so would be beneficial to the stockholders.

                                       7
<PAGE>

The low price of our common stock could result in our shares being suspended or
delisted from NASDAQ

     Talk City common stock is currently listed on the Nasdaq National Market.
The Company, however, is currently not in compliance with Nasdaq's minimum bid
requirement because its stock has traded below $1.00 per share for well over 30
consecutive business days, and Nasdaq recently informed the Company of its
intention to delist the stock.  This delisting, however, has been stayed pending
the outcome of an oral hearing on March 29, 2001.  If this appeal is denied, the
Company's stock will be delisted from Nasdaq.  If this were to happen, it would
be much more difficult to purchase or sell Talk City stock or obtain accurate
quotations as to the price of its securities.

Talk City's stock price has traded far below the initial offering price and
could remain at this low price, which could affect its ability to acquire other
companies, leave it vulnerable to take over attempts and result in securities
class action litigation

     Since Talk City's initial public offering ("IPO") in July 1999, the market
price of its common stock has traded at or significantly below the initial
offering price of $12.00 per share, and has traded below $1.00 continuously
since October 2000.  If the price per share does not increase, the Company's
investors may incur a substantial loss on their investment.  In addition, the
sustained depression of the market price of its common stock may hamper the
Company's ability to conduct business, and in particular, could make it more
difficult to pursue acquisitions of potential complementary businesses, leaving
it vulnerable to a hostile takeover and result in securities class action
litigation.

Talk City's stock price may continue to be depressed due to broad economic,
market and industry factors beyond its control

     Talk City's stock price may continue to be depressed due to a variety of
factors, including factors beyond its control.  These broad market and industry
factors could continue to harm the market price of its Common Stock, regardless
of the Company's performance.  These factors include:

   .  announcements of or new programming by the Company or its competitors,
      including the Company's announcement of its restructurings;

   .  conditions or trends in the Internet services industry;

   .  changes in the market valuations of Internet companies;

   .  additions or departures of key personnel; and

   .  sales of substantial amounts of its Common Stock or other securities in
      the open market.

  General political and economic conditions, such as recession or interest rate
or currency rate fluctuations, also could harm the market price of the Company's
Common Stock.

If the recent restructurings of Talk City designed to increase awareness of and
refocus the Company's business on online marketing services, is not accepted,
the Company's results of operations may decrease and the business may be
adversely affected

     In June 2000, the Company underwent a restructuring of operations to more
clearly focus Talk City as an online marketing services provider, pursuant to
which it reorganized its business into four main areas of operations, which
include online live events services, market research services, community
solutions, and network and syndication services.  As a result of the this
restructuring, the Company reduced its total headcount by 35 employees, or
approximately 15% of its total workforce.  In December 2000, the Company
underwent a separate restructuring to further align the Company to sell and
implement fee-based services.  As a result of the December restructuring, the
Company reduced its total headcount by

                                       8
<PAGE>

55 employees, or 30% of the total workforce. On March 16, 2001, the Company
announced a further restructuring to recognize changes in the economic
environment and complete its transition to a 100% fee-based marketing services
model, including a reduction of its total headcount by 30%. If the
restructurings do not increase awareness or generate sales of the Company's
online marketing services at the level it anticipates, or at all, the Company's
management and other resources will have been expended with no increase in
revenues, which could decrease its results of operations, and otherwise
adversely affect the business.

The reductions in workforce related to the restructurings could result in market
uncertainty and decreased employee morale

     The reductions in workforce of Talk City related to the restructurings
could result in market concerns about the operations of the Company. Reductions
in workforce sometimes result in operational concerns about a company in the
market and, while the Company's reductions were in connection with the
restructurings, the Company may not be able to respond adequately to reports of
securities analysts or the market. In addition, the Company must take the
appropriate steps to sustain and prevent any decrease in employee morale due to
the reductions in workforce.

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

     The Company's operating results in one or more future quarters may be below
the expectations of its investors, and as a result the price of its Common Stock
could decline.  Talk City expects that its quarterly operating results will
continue to fluctuate significantly and be affected by many factors, the more
important of which include:

   .  general economic conditions;

   .  its dependence on increased online marketing services revenues;

   .  the length of its sales cycle;

   .  its ability to increase its audience of loyal, engaged clients and
      consumers;

   .  management of growth; and

   .  potential technical difficulties or system down time affecting the
      Internet generally or the Company specifically.

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

Talk City's growth will depend on its ability to increase its online marketing
services revenues

     Talk City has derived, and will continue to derive, a substantial portion
of its revenues from the sale of online marketing services.  If the Company does
not continue to develop online marketing services revenues, its revenues may not
meet its expectations or may decline and Talk City will need to revise its
revenue model to reflect this.  The Company's growth and future success will
depend on its ability to increase the number of its online marketing services
clients, expand its online marketing services offerings, effectively implement
these services and increase the average revenue per project and per client.
Talk City's ability to generate significant online marketing services revenues
will also depend, in part, on its ability to create new online marketing
services offerings without diluting the value of its existing programs.

                                       9
<PAGE>

Current and potential competitors could decrease Talk City's market share and
harm its business

     Increases in the number of Web sites competing for the attention and
spending of businesses, consumers and advertisers could result in price
reductions, reduced margins or loss of market share, any of which could decrease
Talk City's revenues and contribute to the Company not achieving profitability
and failing.  The barriers to entry in the Internet services market are low and
the Company expects the number of its competitors to increase.  Any company or
individual can establish and maintain a Web site for minimal cost.  Talk City
competes for business clients, consumers, network participants and advertisers
with numerous companies, including the following:

   .  online services or Web sites that produce online marketing services, such
      as live events, market research or customized community solutions,
      including Prospero Technologies Corporation ("Prospero"), Broadcast.com,
      Inc., Greenfield Online, PeopleLink and Participate.com;

   .  online services or Web sites with a focus on community services, such as
      AOL Time Warner, Geocities (a subsidiary of Yahoo), Tripod (a subsidiary
      of Lycos), Prospero, theglobe.com, Xoom, Fortune City, Homestead.com,
      WBS.net and Angelfire;

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

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

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

Year to year revenue growth in past periods may not be indicative of future
growth

     The Company achieved significant revenue growth in 2000 as compared to
1999, although the Company experienced sequential declines in quarterly revenue
from Q2 through Q4 of 2000. Accurate predictions of future growth are difficult
because of its limited operating history as well as of the rapid changes in its
markets as a result of increased competition, evolving technology and clients'
business requirements. Accordingly, current and potential investors should not
rely on past revenue growth as a prediction of future growth.

Talk City's variable sales cycle may cause the Company to incur substantial
expenses and expend management time without generating the corresponding
revenues, which would slow its cash flow

     Talk City's sales cycle varies in length of time. During the sales cycle,
the Company may expend substantial funds and management resources without
generating corresponding revenues. The time between the date of its initial
contact with a potential client and the execution of a contract with that client
typically ranges from a few weeks for smaller agreements to several months for
larger agreements. Its sales cycle is also subject to delays as a result of
factors over which the Company has little or no control, including the
following:

   .  budgetary constraints;

   .  internal acceptance reviews;

   .  the success and continued internal support of advertisers', online
      marketing services clients' and network participants' own development
      efforts; and

   .  the possibility of cancellation or delay of projects by advertisers,
      online marketing services clients or network participants.

     The length and uncertainty of its sales cycle also may harm its billing and
collection efforts. The length of the sales cycle might prevent the Company from
rendering its services on a more accelerated

                                       10
<PAGE>

basis, which slows its cash flow and reduces its ability to fund the
expenditures the Company incurs during the sales cycle.

Talk City depends on the clients of its online marketing services, including
business clients, advertisers, network participants and end users of its
network, for content, promotion and sustaining an engaged audience, and if its
clients or users become dissatisfied or do not become engaged with its services,
the Company would need to increase its expenditures for these activities

     Talk City depends largely on clients of its online marketing services,
including business clients, advertisers, network participants and end users of
its network, for content, word-of-mouth promotion and for sustaining an involved
audience for its advertisers and business clients.  If such clients or users
become dissatisfied or do not become engaged with its services, they will not
generate significant content or promote its Web sites or services and the
Company will have to increase the expenditure of its own resources for these
activities.  In addition, dissatisfied or disengaged clients or users would not
continue to attract other clients or users to the Company's sites.  Loss of its
clients or users and failure to increase its number of engaged clients or users
would hurt the Company's efforts to generate increased revenues.  The Company's
clients or users may become dissatisfied with its services as a result of the
increased focus on commercialization of its services due to their continued
exposure to advertising activities on its Web sites or the use of their
information for commercial purposes.  Talk City's clients or users may also
become dissatisfied with its services if the Company experiences system failures
or does not maintain its structured environment, attract quality business
clients, or continually upgrade its software functionality.

Talk City derives a substantial portion of its revenues from network services,
and if its network services revenues decline due to lack of acceptance of the
Internet as an advertising medium, its business will not grow or will decrease

     Talk City derives a substantial portion of its revenues from network
services.  Network services revenues represented 46% of its total revenue in
2000.  As a result, the Company's success is highly dependent on the increased
use of the Internet as an advertising medium.  Talk City's business will not
grow or will decrease if the market for Internet advertising fails to develop or
develops slower than expected.  Most of the Company's current or potential
advertising clients have little or no experience using the Internet for
advertising purposes and they have allocated only a limited portion of their
advertising budgets to Internet advertising.  Use of the Internet by consumers
is at a very early stage of development and market acceptance of the Internet as
a medium for advertising is subject to a high level of uncertainty.  No
standards are widely accepted to measure the effectiveness of Internet
advertising.  If these standards do not develop, existing sponsors or
advertisers may not continue their current level of Internet-based programming
or may be unwilling to pay the current advertising rates, and sponsors or
advertisers who are not currently advertising on the Internet may be reluctant
to do so.

If Talk City does not provide its advertisers with the guaranteed number of
impressions required by its contracts with them, its reputation would be harmed
and its advertising inventory would be decreased

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

                                       11
<PAGE>

Talk City relies on its network participants for user volume and increased
revenues

     Talk City's network participants drove 45% of the volume of the Company's
Web sites during the year ended December 31, 2000.  Volume is defined as the
number of Internet page views or Internet advertisement views seen by its users.
The volume is considered to be "driven" by the network participant if the user
comes to the Company's sites via the participant's Web site.  If Talk City were
to terminate or otherwise lose the benefit of all of its network participant
contracts, which typically have terms of nine months to three years each, the
Company could lose as much as 45% of its volume.

     In addition, the Company sells advertisements based on the volume of its
sites, including volume provided by its network participants.  Of the Company's
total advertising and sponsorship revenue during the twelve months ended
December 31, 2000, approximately 22% were generated through advertisements that
ran based on volume provided by its network participants.  If Talk City was to
terminate or otherwise lose the benefit of all of its network participant
contracts, the Company could lose as much as 22% of its advertising and
sponsorship revenue.  Talk City would need to replace these revenues with
increased revenues from its online marketing services.  For the year ended
December 31, 2000, none of the Company's network participants individually drove
volume responsible for more than 3% of its advertising and sponsorship revenue,
except WebTV Network, a wholly owned subsidiary of Microsoft Corporation ("WebTV
Network"), which was responsible for approximately 9% of its advertising and
sponsorship revenue for the quarter ended December 31, 2000 and 14% for the year
ended December 31, 2000.

Talk City relies on WebTV Network for a substantial amount of traffic on its
advertising network and, to a lesser extent its revenue, and if its contract
with WebTV Network were terminated, the Company would need to replace this
volume and revenue through other sources

     In July 2000, Talk City renewed its contract with WebTV Network for a term
of one year, expiring in July 2001.  If this contract were to be terminated or
not renewed, the Company could lose as much as 40% of the traffic on its
advertising network.  The Company would need to replace this volume with volume
from its other network participants, through the growth of its own Web sites, or
with volume generated through other means, such as increased marketing, any of
which would result in an unexpected diversion of management efforts or increased
operating expenses.  In addition, if Talk City were unable to replace this
volume, the Company might be unable to its advertising and sponsorship revenues
generated by WebTV Network, which, for the twelve months ended December 31,
2000, were 14% of all advertising and sponsorship revenues.

Talk City's growth will depend upon the acceptance of the Internet as an
attractive medium for its online marketing services clients

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

Talk City depends on its trained community leaders and moderators to engage its
users and maintain its structured and moderated environment

     Talk City depends on its network of trained community leaders and
moderators, which consisted of approximately 1,200 active individuals as of
December 31, 2000, to draw its users into its services and

                                       12
<PAGE>

maintain its structured and moderated environment. Most of its trained community
leaders and moderators are volunteers. These people volunteer because they like
to meet and help people from all over the world, enjoy the recognition they
receive in a "leadership" position and generally have fun participating in such
a novel form of communication. As the Internet evolves and online communication
becomes more common, the Company's trained community leaders and moderators may
view moderating as less exciting or less of a novelty than it is now. Loss of
its trained community leaders and moderators, or loss of its ability to attract
these individuals to its services, could require the Company to implement new
programs to engage its users and maintain its structured environment. The
implementation of these new programs would cause the Company to expend
unexpected management time and resources, which would increase its operating
expenses.

Talk City's paid moderators could be viewed as employees rather than independent
contractors, which could subject the Company to adverse tax and employee benefit
consequences

     Talk City treats its paid moderators, consisting of approximately 325
individuals as of December 31, 2000, as independent contractors.  The Company's
paid moderators sign independent contractor agreements and are paid a flat
monthly fee or per hour.  Laws governing the distinction between independent
contractors are not entirely clear, and some jurisdictions may rule that the
Company's paid moderators are employees rather than independent contractors. If
this happens, the Company could be subject to substantial tax and employee
benefit liabilities as well as other penalties.

Talk City's volunteer community leaders could be viewed as employees, which
would substantially increase its operating expenses

     If the Company's active volunteer community leaders, consisting of
approximately 875 individuals as of December 31, 2000, were viewed as employees,
Talk City could be subject to payment of back wages and other penalties, and its
operating expenses could substantially increase.  Previously, former volunteers
of America Online/Time Warner filed a complaint with the Labor Department and a
class action lawsuit claiming they were treated like employees and should have
been paid.

Talk City's chief executive officer, chief operating officer and chief community
officer are critical to its business and they may not remain with the Company in
the future

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

Talk City must continually attract and retain its sales, engineering and other
key personnel or the Company will be unable to execute its business strategy

   Talk City's future success also will depend on its ability to attract, retain
and motivate highly skilled sales, engineering and other key personnel.
Competition for such personnel is intense in the Internet industry, especially
in the Silicon Valley, and the Company may be unable to successfully attract,
integrate or retain sufficiently qualified personnel.

                                       13
<PAGE>

Talk City may be unable to consummate potential acquisitions or investments or
successfully integrate them with its business which could slow its growth
strategy

     As part of its strategy to expand its online marketing services if
resources permit, the Company may acquire or make investments in complementary
businesses, technologies, services or products if appropriate opportunities
arise. Talk City may be unable to identify suitable acquisition or investment
candidates at reasonable prices or on reasonable terms. Additionally, regardless
of whether suitable candidates are available, the Company may be unable to
consummate future acquisitions or investments, in part due to the low market
price if its stock, which could harm the Company's growth strategy. If Talk City
does acquire a company or make other types of acquisitions, the Company could
have difficulty integrating the acquired services, personnel or technologies.
These difficulties could disrupt its ongoing business, distract its management
and employees, and increase its expenses.

System failures or slow downs would harm the Company's reputation and thus
reduce its attractiveness to its current and future business clients, users,
network participants and advertisers

     System failures would harm the Company's reputation and reduce its
attractiveness to businesses, network participants and advertisers. Talk City's
ability to attract potential business clients, network participants and
advertisers to promote its brand will depend significantly on the performance of
its network infrastructure. In addition, a key element of its strategy is to
effectively perform its online marketing services for its business clients in
order to increase the usage of its online marketing services by business
clients. Increased usage of the Company's online marketing services could strain
the capacity of its infrastructure, resulting in a slowing or outage of its
services and reduced traffic to its Web sites. Talk City may be unable to
improve its technical infrastructure in relation to increased usage of its
services. In addition, the Company's users depend on Internet service providers,
online service providers and other Web site operators for access to its Web
sites. Many of these providers and operators have also experienced significant
outages in the past, and they could experience outages, delays and other
difficulties due to system failures unrelated to the Company's systems.

Talk City's communications and other computer hardware operations are subject to
disruptions which are out of its control and for which the Company may not have
adequate insurance

     A disaster could severely damage the Company's ability to deliver its
products and services to its customers. Talk City depends on its ability to
maintain and protect its facilities, which include communications hardware and
other computer hardware operations. These operations, which are separate from
its principal offices, are located at facilities in San Jose, California and
Elmsford, New York. San Jose may exist on or near a known earthquake fault zone.
Further, California is currently experiencing power outages due to a shortage in
the supply of power within the state, and these outages could increase in
frequency as the warm summer months approach. Power outages could interrupt our
operations and also the operations of our vendors and subcontractors within the
state of California. Although the facilities in which we host our computer
systems are designed to be fault tolerant, the systems are susceptible to damage
from fire, floods, earthquakes, power loss, telecommunications failures, and
similar events, such as computer viruses or electronic break-ins, any of which
could disrupt its Web sites. Although we maintain general business insurance
against fires, floods and some general business interruptions, there can be no
assurance that the amount of coverage will be adequate in any particular case.

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

     Talk City's market is characterized by rapidly changing technologies,
frequent new product and service introductions and evolving industry standards.
The growth of the Internet and intense competition in the industry exacerbate
these market characteristics. In addition, in recent months many Internet-
related
                                       14
<PAGE>

companies, similar to Talk City, have consolidated or restructured in order to
remain competitive within the Internet industry. To succeed, Talk City will need
to effectively implement its restructuring, integrate the various software
programs and tools required to enhance and improve its service offerings and
manage its business. Any enhancements or new services or features must meet the
requirements of its current and prospective clients and must achieve significant
market acceptance. The Company's success also will depend on its ability to
adapt to rapidly changing technologies by continually improving the performance
features and reliability of its services. The Company may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new services. Talk City could also incur
substantial costs if it needs to modify its services or infrastructure to adapt
to these changes.

Talk City depends on third-party software to measure user demographics and for
other related services and, if this software does not function properly, the
Company would need to purchase new software or develop the software itself,
which could cause a temporary disruption in its business

     If software purchased from third parties to perform the Company's services
does not function properly or is not updated, the Company would need to purchase
new software from other third-party providers.  Even though the third-party
software Talk City currently uses is easily replaced through multiple other
third-party providers, and although the Company could develop the necessary
software programs itself, each of these alternatives would require an unplanned
increase in operating expenses and could cause a disruption in its business.

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

Changes in government regulation could limit Talk City's Internet activities or
result in additional costs of doing business on the Internet

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

   .  user privacy and expression;

   .  the rights and safety of children;

   .  information security;

   .  the convergence of traditional channels with Internet commerce; and

   .  taxation and pricing.

                                       15
<PAGE>

If Internet Service Providers become regulated in a manner similar to long
distance telephone carriers, Internet growth may slow which would cause the
Company's revenues to decrease

     If Internet growth slows due to proposals to regulate Internet Service
Providers in a way similar to long distance telephone carriers, Talk City's
volume and the demand for its online marketing services would decline, causing
its revenues to decrease.  The use of the Internet has burdened the existing
telecommunications infrastructure and led to interruptions in phone service in
areas with high Internet use.  Several telecommunications companies and local
telephone carriers have petitioned the Federal Communications Commission to
regulate Internet Service Providers and online service providers in a manner
similar to long distance telephone carriers and to impose access fees.  If this
were to occur, the costs of communicating on the Internet could increase
substantially, potentially slowing the growth in use of the Internet.

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

     Talk City may be subject to claims relating to content that is published on
or downloaded from its Web sites. The Company also could be subject to liability
for content that is accessible from its Web sites through links to other Web
sites. Although Talk City carries general liability and multimedia liability
insurance, the Company's insurance may not cover potential claims of this type
or may not be adequate to cover all costs incurred in defense of potential
claims or to indemnify the Company for all liability that may be imposed. In
addition, any claims like this, with or without merit, would result in the
diversion of its financial resources and management personnel.

Talk City may be liable for misappropriation by others of its users' personal
information

     If third parties were able to penetrate the Company's network security or
otherwise misappropriate its users' personal information, Talk City could be
subject to liability.  These could include claims for impersonation or other
similar fraud claims.

Talk City may be liable for its use or sale of its users' personal information

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

Talk City is dependent on the trademark "Talk City," and if the Company could
not use this mark, it would need to reimplement its Web sites and re-build its
brand identity

     Talk City is dependent on the trademark "Talk City." If the Company were
prevented from using this trademark, it would need to reimplement its Web sites
and devise new hard copy materials, such as letterhead and merchandise.  The
Company would also need to re-build its brand identity with its business
clients, network participants and advertisers.  If this were to happen, Talk
City's operating expenses would substantially increase.

                                       16
<PAGE>

Possible infringement of Talk City's intellectual property rights by third
parties could substantially increase its operating expenses and harm its ability
to conduct business

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

Item  2.  Properties

     Our principal administrative, sales, marketing, product development and
programming offices are located in a single facility in Campbell, California of
approximately 56,000 square feet held under a lease which expires in March 2009.
In addition to this facility, as of December 31, 2000 we also leased 7,100
square feet of office space in Westfield, New Jersey under a lease that expires
in July 2005, and 3,500 square feet in Newton Center, Massachusetts under a
lease expiring in August 2005.  As of December 31, 2000, we also leased sales
office space elsewhere in the United States as follows:  a 6,000 square foot
facility in New York consisting of two office suites of approximately 3,000
square feet each under a lease that expires in March 2004; a 4,000 square foot
facility in Chicago under a lease that expires in August 2004 and a 4,000 square
foot facility in San Francisco under a lease that expires in June 2004.

     Subsequent to December 31, 2000, we have terminated our leases for office
space in Chicago, San Francisco as well as one of our two suites in New York
City.  See Note 16 in the notes to our financial statements regarding subsequent
events.

Item  3.  Legal Proceedings

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

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

   No matter was submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
2000.

PART II

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

Market Information

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

                                       17
<PAGE>

     As previously announced by the Company in its Form 8-K filed with the
Securities and Exchange Commission on December 5, 2000, it is not currently in
compliance with Nasdaq's minimum bid price requirement. In addition, subsequent
to that date, we were advised by Nasdaq that the Company is not in compliance
with its minimum capitalization requirements. The delisting action, however, has
been stayed pending the outcome of an oral hearing before the Nasdaq Listing
Qualifications Panel requested by the Company. The hearing was held on March 29,
2001 in Washington, D.C. In the event the appeal is denied, the Company's stock
will be delisted from the Nasdaq National Market and will instead trade on the
over-the-counter market.

<TABLE>
<CAPTION>
Fiscal year ended December 31, 1999:                                          High              Low
------------------------------------                                    ----------------  ----------------
<S>                                                                     <C>               <C>
Third Quarter (since July 20, 1999)                                          $  13 13/16           $ 8 3/8
Fourth Quarter                                                                    26 1/8             7 1/4

Fiscal year ended December 31, 2000:
------------------------------------
First Quarter                                                                     25 7/8                 6
Second Quarter                                                                     5 5/8            1 7/16
Third Quarter                                                                     2 1/32            1 3/16
Fourth Quarter                                                                 $  1 1/16           $  5/32
</TABLE>

     On April 2, 2001, there were approximately 6,100 stockholders of record of
Talk City's common stock.

Dividends

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

Recent Sales of Unregistered Securities

     None.

Use of Proceeds From Sales of Registered Securities

     On July 20, 1999, Talk City consummated the IPO of its Common Stock.  The
shares of Common Stock sold in the offering were registered under the Securities
Act on a Registration Statement on Form S-1 (the "Registration Statement") which
was declared effective by the SEC on July 19, 1999 (file number 333-77455).  The
aggregate offering amount registered pursuant to the IPO was $61.2 million.
After deducting the underwriting discounts and commissions of $4,284,000, and
the IPO expenses of $1,487,000, the net proceeds from the IPO were approximately
$55.4 million.

                                       18
<PAGE>

     From January 1, 2000 through December 31, 2000, Talk City has applied
proceeds from the IPO as follows:

<TABLE>
        <S>                                                            <C>
        Restructuring payments:                                         $0.6 million

        Purchase of property and equipment:                             $6.7 million

        Working capital:                                               $38.2 million
</TABLE>

     The foregoing amounts represents the Company's best estimates of its use of
proceeds for the period indicated.

Item  6.    Selected Consolidated Financial Data

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

<TABLE>
<CAPTION>
                                                                                                                     March 29,
                                                                                                                       1996
                                                                                                                  (Inception) to
                                                                      Years ended December 31,                      December 31
 (in thousands except per share data)                         2000          1999          1998           1997          1996
                                                              ----          ----          ----           ----          ----
<S>                                                      <C>           <C>           <C>             <C>            <C>
Statement of Operations Data
Revenues:
 Network and syndication services................         $  6,792      $  5,412      $    999        $   183        $    14
 Community solution services.....................            3,179         1,126           315             25             --
 Event services..................................            3,162           817            32             --             --
 Market research services........................            1,709           377           107             --             --
                                                          --------      --------      --------        -------        -------
    Total revenues...............................           14,842         7,732         1,453            208             14
Cost of revenues.................................           16,093         8,941         3,568          2,352            384
                                                          --------      --------      --------        -------        -------
    Gross margin.................................           (1,251)       (1,209)       (2,115)        (2,144)          (370)
Operating expenses:
 Product development.............................            7,952         4,751         1,460            911            387
 Sales and marketing.............................           15,292        19,558         7,023          2,701            252
 General and administrative......................           11,991         5,691         1,804            974            335
 Restructuring charges...........................            1,237            --            --             --             --
 Unrealized loss on minority investment..........            3,000            --            --             --             --
 Noncash advertising and promotional charges.....            2,388        11,162         2,890             --             --
 Amortization of goodwill........................              684            --            --             --             --
                                                          --------      --------      --------        -------        -------
    Total operating expenses.....................           42,544        41,162        13,177          4,586            974
                                                          --------      --------      --------        -------        -------
    Loss from operations.........................          (43,795)      (42,371)      (15,292)        (6,730)        (1,344)
Interest income (expense), net...................            2,159         2,264          (367)           339             36
                                                          --------      --------      --------        -------        -------
    Net loss.....................................          (41,636)      (40,107)      (15,659)        (6,391)        (1,308)
Accretion of redeemable convertible preferred
 stock and warrants..............................               --           159           558             38              8
                                                          --------      --------      --------        -------        -------
    Net loss applicable to common stockholders...         $(41,636)     $(40,266)     $(16,217)       $(6,429)       $(1,316)
                                                          ========      ========      ========        =======        =======
Net loss per share:
 Basic and diluted...............................           $(1.69)       $(3.14)       $(4.92)        $(2.10)        $(0.49)
 Weighted average shares.........................           24,704        12,840         3,295          3,068          2,679
</TABLE>

                                       19
<PAGE>

<TABLE>
<CAPTION>
(in thousands)                                                                     As of December 31,
                                                               2000          1999         1998            1997           1996
                                                             -------       -------      --------        -------        -------
<S>                                                          <C>           <C>          <C>             <C>            <C>
Balance Sheet Data
Cash, cash equivalents and short-term investments....        $13,969       $53,553      $ 14,437        $ 2,055        $ 8,930
Working capital......................................         12,588        50,761        13,493          1,844          8,651
Total assets.........................................         34,779        74,527        18,490          2,811          9,062
Long-term obligations, net of current portion........             21           107           273             --             --
Redeemable convertible preferred stock and warrants..             --            --        38,973         10,081         10,042
Total stockholders' (deficit) equity.................         29,703        66,323       (22,463)        (7,669)        (1,270)
</TABLE>


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

     This section contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements represent our
expectations or beliefs concerning future events and include statements
regarding our expectations or beliefs that:  we will incur additional operating
losses for the foreseeable future; network and syndication revenues will decline
in absolute dollars and as a percentage of total revenues in the future as the
Company focuses on community solution services, event services and market
research; cost of revenues will decrease in absolute dollars as a result of the
anticipated cost savings pursuant to the restructurings; product development
expenses will decrease in absolute dollars as a result of the anticipated cost
savings pursuant to the restructurings; sales and marketing expenses will
decrease in absolute dollars as a result of the anticipated cost savings
pursuant to the restructurings; general and administrative expenses will stay
flat or decrease slightly in absolute dollars; DSOs will fluctuate significantly
in future quarters and may increase; our expenditures will continue to increase
for the foreseeable future; we will continue to evaluate possible acquisitions
and investments in other businesses; our available cash and cash equivalents
will be sufficient to meet our anticipated needs for working capital and capital
expenditures in the next six to nine months; and our need to raise additional
funds in order to meet our operating and other needs.  Actual results could
differ materially from those  projected in the forward-looking statements as a
result of known and unknown risk factors and uncertainties, and you should not
rely on these forward-looking statements.  Such factors may include, but are not
necessarily limited to:  whether we will continue to incur significant losses
and our ability to generate increased revenues; the success of our recent
restructuring; the feasibility of incurring more dilution by selling equity in
our Company; and our ability to grow our business.  In addition to the
foregoing, please see the section beginning on page seven of this report
entitled "Risk Factors That May Affect Results of Operations and Financial
Condition" for a description of those factors that might cause actual results to
differ from those projected in the forward-looking statements herein.

Overview

     We provide online communities and customer relationship management for
businesses and consumers. From inception through December 2000, our operating
activities have primarily been focused on:

   .  developing the quality environment of our services;

   .  expanding the audience and usage of our services;

   .  establishing operating relationships with our network participants;

   .  building sales momentum and developing programs and content to market the
      Talk City brand name and attract users to our sites;

   .  developing a comprehensive computer software and hardware infrastructure;

   .  recruiting personnel; and

   .  raising capital.

                                       20
<PAGE>

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

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

     Cost of revenues include payroll and related expenses associated with
content and production personnel who conduct online market research, implement
customized communities, and produce online events. Also included are moderator
costs, Internet communication charges and server-related costs to support our
Web site.

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

     Sales and marketing expenses exclude noncash advertising and promotional
charges related to our advertising on the NBC television network and in
magazines owned by Hearst along with promotional services attributable to the
operating agreements with NBC. These advertising activities are paid for through
noncash in-kind investments. This in-kind program includes $7.2 million of
television commercials and print ads valued at rates discounted from the rate
card to be incurred from 1998 through 2001. After December 31, 2000, noncash
charges of $2.2 million will be charged to operations as the related advertising
is run or promotional services are received, all of which we expect will be
charged to operations during the year ended December 31, 2001. These amounts
were determined based on the fair value of our common stock and warrants
exchanged for the services received. See Note 10 of the notes to our financial
statements.

     We incurred losses of $41.6 million in 2000, $40.1 million in 1999, $15.7
million in 1998, $6.4 million in 1997, and $1.3 million in 1996. These losses
include noncash advertising and promotional charges of $16.4 million through
December 31, 2000. At December 31, 2000, we had an accumulated deficit of $105.1
million. We anticipate that we will incur additional operating losses for the
foreseeable future.

                                       21
<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                --------------------------------------------
                                                                      2000           1999           1998
                                                                --------------------------------------------
<S>                                                             <C>             <C>            <C>
Revenues, net:
  Network and syndication services                                      46 %           70 %           69 %
  Community solution services                                           21             15             22
  Event services                                                        21             10              2
  Market research services                                              12              5              7
                                                                     -----          -----        -------
    Total revenues                                                     100            100            100
Cost of revenues                                                       108            116            246
                                                                     -----          -----        -------
    Gross margin                                                        (8)           (16)          (146)
Operating expenses:
  Product development                                                   54             61            101
  Sales and marketing                                                  103            253            483
  General and administrative                                            81             74            124
  Unrealized loss on minority investment                                20              -              -
  Restructuring charges                                                  8              -              -
  Noncash advertising and promotional charges                           16            144            199
  Amortization of goodwill                                               5              -              -
                                                                     -----          -----        -------
    Total operating expenses                                           287            532            907
                                                                     -----          -----        -------
Loss from operations                                                  (295)          (548)        (1,053)
Interest income (expense), net                                          14             29            (25)
                                                                     -----          -----        -------
Net loss                                                              (281)          (519)        (1,078)
Accretion of redeemable convertible preferred stock
   and warrants                                                          -              2             38
                                                                     -----          -----        -------
Net loss applicable to common stockholders                            (281)%         (521)%       (1,116)%
                                                                     =====          =====        =======
</TABLE>

Years Ended December 31, 2000, 1999 and 1998

     Revenues.   Total revenues were $14.8 million in 2000, $7.7 million in 1999
and $1.5 million in 1998. Network and syndication revenues were $6.8 million, or
46% of total revenues, in 2000, $5.4 million, or 70% of total revenues, in 1999
and $999,000, or 69% of total revenues, in 1998. Community solution services
revenues were $3.2 million, or 21% of total revenues, in 2000, $1.1 million, or
15% of total revenues, in 1999 and $315,000, or 22% of total revenues, in 1998.
Event services revenues were $3.2 million, or 21% of total revenues, in 2000,
$817,000, or 10% of total revenues, in 1999, and $32,000, or 2% of total
revenues, in 1998.  Market research revenues were $1.7 million, or 12% of total
revenues, in 2000, $377,000, or 5% of total revenues, in 1999, and $107,000, or
7% of total revenues, in 1998. The increases in total revenues from 1998 to 1999
and from 1999 to 2000 were primarily due to increases in the number of business
clients and advertisers, as well as increases in our user volume and expansion
of our consumer and online marketing services offerings.  While network and
syndication revenues increased for the year ended December 31, 2000 as compared
to same period in 1999, network and syndication revenues declined sequentially
from the quarter ended March 31, 2000 through the quarter ended December 31,
2000.  The Company expects the network and syndication revenues will decline in
absolute dollars and as a percentage of total revenues in the future as the
Company focuses on community solution services, event services and market
research.

     Cost of Revenues.  Cost of revenues were $16.1 million, or 108% of total
revenues, in 2000, $8.9 million, or 116% of total revenues, in 1999 and $3.6
million, or 246% of total revenues, in 1998.  The

                                       22
<PAGE>

increase in absolute dollars of cost of revenues from 1999 to 2000 was due to
higher server-related expenses associated with conducting additional online
events and market research studies of $2.5 million, $1.3 million associated with
market research production, $0.9 million attributable to higher online hosting
costs, and the balance primarily attributable personnel costs associated with
the production of our services. The increase from 1998 to 1999 was due to
Internet connection fees and server related expenses associated with conducting
additional online events and market research studies of $0.6 million, as well as
an increase in chat hosting of $2.2 million associated with the rapid growth in
user volume from our supervised chats. Cost of revenues as a percentage of total
revenues decreased in all periods due to growth in total revenues. We expect
that cost of revenues will decrease in absolute dollars as a result of the
anticipated cost savings pursuant to the restructurings.

Operating Expenses:

     Product Development.  Product development expenses were $8.0, or 54% of
total revenues, in 2000, $4.8 million, or 61% of total revenues, in 1999, and
$1.5 million, or 101% of total revenues, in 1998. The increase in absolute
dollars in product development from 1999 to 2000 was primarily attributable to
an increase in personnel and recruiting-related costs to support the development
and broadening of our line of products. The increase in absolute dollars in
product development and programming from 1998 to 1999 was primarily attributable
to an increase in engineering personnel costs. Product development expenses as a
percentage of total revenues decreased in all periods due to growth in total
revenues.  We expect that product development expenses will decrease in absolute
dollars as a result of the anticipated cost savings pursuant to the
restructurings.

     Sales and Marketing.  Sales and marketing expenses were $15.3 million, or
103% of total revenues, in 2000, $19.6 million, or 253% of total revenues, in
1999, and $7.0 million, or 483% of total revenues, in 1998. The decrease in
sales and marketing expenses from 1999 to 2000 was primarily attributable to a
decrease of approximately $7.0 million associated with advertising, partially
offset by an increase in sales and marketing personnel and commission-related
costs of $1.9 million and an increase of $0.5 million in facilities related
charges as we expanded our sales force.  The increase in sales and marketing
expenses from 1998 to 1999 was primarily attributable to an increase of
approximately $5.9 million associated with the development and implementation of
our branding, promotion and marketing campaigns and an increase in sales
personnel and commission-related costs of $2.8 million as a result of
implementing our sales and marketing strategy.  Sales and marketing expenses as
a percentage of total revenues decreased in all periods due to growth in total
revenues.  We expect that sales and marketing expenses will decrease in absolute
dollars as a result of the anticipated cost savings pursuant to the
restructurings.

     General and Administrative.  General and administrative expenses were $12.0
million, or 81% of total revenues, in 2000, $5.7 million, or 74% of total
revenues, in 1999, and $1.8 million, or 124% of total revenues, in 1998. The
increase in general and administrative expenses from 1999 to 2000 was primarily
due to costs of $2.6 million associated with moving the corporate headquarters,
an increase in the allowance for doubtful accounts of $1.5 million, increased
personnel costs of $1.2 million and increased costs of $1.0 million incurred in
operating as a public company for the entire year in 2000. The increase in
general and administrative expenses from 1998 to 1999 was primarily due to
stock-based compensation expense of $763,000 related to the issuance of stock
options and personnel and recruiting-related expenses of $1 million. In
addition, we incurred an increase in legal, accounting and insurance fees of
$540,000 due to increased expenses associated with becoming a public company in
July 1999 and an increase in facilities expenses of $740,000 in order to support
the growth of our business. General and administrative expenses increased in
2000 as a percentage of revenues as a result of the higher expenses associated
with the new headquarters and the public company costs. General and
administrative expenses as a percentage of revenues decreased in 1999 due to the
growth in total revenues. We expect that general and administrative expenses
will remain constant or decrease slightly in absolute dollars in the future.

                                       23
<PAGE>

   Noncash Advertising and Promotional Charges.   We incurred charges of $2.4
million, or 16% of total revenues, for 2000, $11.2 million, or 144% of total
revenues, for 1999 and $2.9 million, or 199% of total revenues, in 1998
representing noncash in-kind expenses associated with the advertising and
operating agreements with NBC and Hearst.

   Interest Income (Expense), Net.   Net interest income was $2.2 million, or
14% of total revenues, in 2000, $2.3 million, or 29% of total revenues, in 1999,
and net interest expense was $367,000, or 25% of total revenues, in 1998.
Interest income decreased in 2000 compared to 1999 as a result of lower average
cash and cash equivalents and investment balances due to the consumption of cash
to fund ongoing operations.  Interest income increased in 1999 compared to 1998
due to higher cash equivalent and investment balances as a result of proceeds
received from sale of preferred stock in April 1999 and our initial public
offering of common stock in July 1999.  We incurred interest expense in 1998 as
a result of our convertible loan financing in 1998.

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

Financial Condition

   Our total assets were $34.8 million and $74.5 million at December 31, 2000
and 1999, respectively, representing a decrease of $39.7 million, or 53%.  This
decrease was primarily due to the consumption of cash during 2000 to fund
ongoing operations.  As of December 31, 2000, we had $14.0 million of cash and
cash equivalents and short-term investments, as compared to $53.5 million as of
December 31, 1999.

   Our accounts receivable balance, net of allowance for doubtful accounts, was
$2.6 million and $3.5 million as of December 31, 2000 and 1999, respectively,
representing a decrease of $0.9 million, or 26%.  This decrease was principally
a result of an increase in the allowance for doubtful accounts reserve.  Days
sales outstanding, or DSO, in accounts receivable was 101 days and 81 days as of
December 31, 2000 and 1999, respectively.  We expect DSO will fluctuate
significantly in future quarters, and may even increase.

   Our total current liabilities were $5.1 million and $8.1 million as of
December 31, 2000 and 1999 respectively, representing a decrease of 38%.  This
decrease consists primarily of a decrease in accounts payable, and accrued
liabilities.  The decrease in accounts payable and accrued liabilities was
primarily due to decreases in balances associated with the move to the corporate
headquarters at the end of 1999 as well as lower accrued marketing liabilities.
The increase in deferred revenues at December 31, 2000 was due to the increase
in our fee-based marketing services revenues in the fourth quarter of 2000,
which grew 86% from the same period in 1999.

Liquidity and Capital Resources

   Since our inception in March 1996, we have financed our operations primarily
through the private placement of our preferred stock, our initial public
offering in July 1999 and, to a lesser extent, through equipment financing. As
of December 31, 2000, we had approximately $7.0 million in cash and cash
equivalents and approximately $7.0 million in short-term investments.

   Our capital requirements depend on numerous factors, including market
acceptance of our services, the resources we allocate to our community network,
marketing and selling our services, brand promotions and other factors.  We have
experienced substantial increases in our expenditures since inception consistent
with growth in our operations and personnel.  Additionally, we will continue to
evaluate possible acquisitions of and investments in complementary businesses,
technologies, services or products and to expand our sales and marketing
programs.  We believe that our available cash and cash equivalents

                                       24
<PAGE>

will be sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next six to nine months. Thereafter, we may need
to raise additional funds in order to meet our operating needs, to fund
expansion, to develop new or enhance existing services or products, to respond
to competitive pressures, or to acquire or invest in complementary businesses,
technologies, services or products. In addition, in order to meet our long term
liquidity needs, we may need to raise additional funds, establish a credit
facility or seek other financing arrangements. Additional funding may not be
available on favorable terms or at all.

   Net cash used in operating activities was approximately $32.3 million, $25.2
million and $11.0 million for the years ended December 31, 2000, 1999 and 1998,
respectively, representing increases of $7.1 million, or 28%, from 1999 to 2000,
and $14.2 million, or 129% from 1998 to 1999.  Cash used in operating activities
in each of these periods was primarily the result of funding our business growth
and ongoing operations.

   Net cash provided by investing activities was approximately $23.8 million for
the year ended December 31, 2000.  Net cash used in investing activities was
approximately $44.9 million and $6.5 million for the years ended December 31,
1999 and 1998, respectively.  Our investing activities have consisted primarily
of purchases and sales of short-term investments, purchases of property and
equipment, a cost investment in SocialNet.com, and the acquisition of Research
Connections, Inc.  Net sales of short-term investments were $32.5 million for
the year ended December 31, 2000.  The net sales of short-term investments were
used to fund the cash requirements of the ongoing operating activities.  Net
purchases of short-term investments were $35.8 million and $5.7 million for the
years ended December 31, 1999, and 1998, respectively.  The increases in short-
term investment purchases were due to the investment of proceeds from our
private placement of preferred stock in August 1998, private placement of
preferred stock in April 1999 and initial public offering in July 1999.
Property and equipment acquisitions totaled $6.7 million, $5.8 million and
$797,000 for the years ended December 31, 2000, 1999, and 1998.  The increase in
acquisitions of property and equipment from 1999 to 2000 was due to our growth
in operations, as well as the establishment of a new server location. The
increase in acquisitions of property and equipment from 1998 to 1999 was due to
our growth in operations, server requirements and opening of sales offices in
San Francisco and Chicago, as well as the expansion of our New York City sales
office.  On December 21, 1999, we made a $3 million cost investment in
SocialNet, Inc. in exchange for 1,554,404 shares of Series C Preferred Stock,
representing approximately 7.6% of the fully diluted shares outstanding of
SocialNet, Inc. as of the investment date.  As of December 31, 2001, the book
value of the SocialNet, Inc. investment has been reduced to $0 due to
impairment.

   Net cash provided by financing activities was approximately $1.4 million,
$75.6 million and $24.2 million for the years ended December 31, 2000, 1999 and
1998, respectively. Net cash provided by financing in the year ended December
31, 2000 was primarily the result of proceeds from the issuance of common stock
from the exercise of stock options and warrants.  In the year ended December 31,
1999, cash provided consisted primarily of net proceeds of approximately $20
million from the private placement of preferred stock in April 1999 and
approximately $55.4 million from our initial public offering in July 1999,
partially offset by principal payments on notes payable.  Net cash provided by
financing activities for the year ended December 31, 1998 consisted primarily of
the private placement of Series D Preferred Stock with net proceeds of
approximately $21.2 million in August and September 1998 and net proceeds of
$2.9 million from our convertible loan financing.

   As of December 31, 2000, our principal commitments consisted of obligations
outstanding under non-cancelable operating leases. In October 1999, we signed a
nine-year, three and one-half month lease for a new 56,000 square foot corporate
headquarters in Campbell, California, which commenced on December 15, 1999. The
Company is required to provide a $2,100,000 letter of credit as security for the
lease. Under the lease agreement, the letter of credit may be reduced by
$300,000 per year after every twelve months through December 14, 2005, provided
no default has occurred. As of December 31, 2000, a

                                       25
<PAGE>

$1,800,000 certificate of deposit with a one year maturity is held as collateral
by a bank for guarantee of the letter of credit. The certificate of deposit is
included in Other Assets. Future minimum lease payments under all non-cancelable
operating leases total $15.9 million. This balance reflects the effect of the
termination of the leases for sales office space in Chicago, San Francisco and
New York subsequent to December 31, 2000, which reduced the future minimum lease
payments by approximately $1.0 million. See Note 16 of the notes to our
financial statements.

   In May 1998, we obtained an equipment line of credit with a financial
institution in the amount of $2.0 million. This line of credit is secured by our
fixed assets and has a four-year term that expires in April 2002. As of December
31, 2000, the amount outstanding under this line of credit was $107,000.

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

Item  7a.   Quantitative and Qualitative Disclosures about Market Risk

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

As of December 31, 2000, the contractual maturities of all debt securities in
the Company's portfolio were less than one year.   The table below presents the
amounts and related weighted average interest rates of our investment portfolio
at December 31, 2000:

<TABLE>
<CAPTION>
                                                   Average                Book                Fair
                                                Interest Rate            Value                Value
                                            ------------------     ----------------    -----------------
<S>                                           <C>                    <C>                 <C>
           Cash equivalents:
                 Fixed rate                               6.70%              $4,348               $4,348
                 Variable rate                            6.57%               1,321                1,321

            Short-term investments:
                 Fixed rate                               6.37%               6,980                6,980
                 Variable rate                              --                   --                   --
</TABLE>

                                       26
<PAGE>

Item  8.  Financial Statements and Supplementary Data

Index to Financial Statements

<TABLE>
<S>                                                                                                  <C>
Report of KPMG LLP, Independent Auditors                                                               28
Balance Sheets as of December 31, 2000 and 1999                                                        29
Statements of Operations for the years ended December 31, 2000, 1999 and 1998                          30
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
for the years ended December 31, 2000, 1999, and 1998                                                  31
Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998                         32
Notes to Financial Statements                                                                          34
</TABLE>

                                       27
<PAGE>

                   Report of KPMG LLP, Independent Auditors


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

We have audited the accompanying balance sheets of Talk City, Inc. (the
Company), as of December 31, 2000 and 1999, and the related statements of
operations, redeemable convertible preferred stock and stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 2000.  In connection with our audits of the financial statements,
we have also audited the accompanying financial statement schedule.  These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Talk City, Inc. as of December
31, 2000 and 1999, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
Also in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in note 15 to the
financial statements, the Company's recurring net losses, amounts of cash used
in operating activities, and accumulated deficit raise substantial doubt about
its ability to continue as a going concern.  Management's plans in regard to
these matters are also described in note 15.  The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

/s/ KPMG, LLP

Mountain View, California
February 2, 2001, except as to
Note 16 which is as of March 16, 2001

                                       28
<PAGE>

                                Talk City, Inc.

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

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                                     ------------
                                                                                  2000          1999
                                                                                  ----          ----
<S>                                                                           <C>            <C>
Assets
Current assets:
  Cash and cash equivalents.........................................          $   6,989      $ 14,112
  Short term investments............................................              6,980        39,441
  Accounts receivable, net of allowances of $1,719 and $254
    in 2000 and 1999, respectively..................................              2,580         3,533
  Prepaid expenses and other current assets.........................              1,094         1,772
                                                                              ---------      --------
     Total current assets...........................................             17,643        58,858
                                                                              ---------      --------
Property and equipment, net.........................................              8,234         5,689
Goodwill, net.......................................................              2,733            --
Other assets, net...................................................              6,169         9,980
                                                                              ---------      --------
     Total assets...................................................          $  34,779      $ 74,527
                                                                              =========      ========
Liabilities and Stockholders' Equity
Current liabilities:
  Notes payable, current portion....................................          $      86      $    154
  Accounts payable..................................................              1,085         3,977
  Accrued liabilities...............................................              3,138         3,302
  Deferred revenue..................................................                746           664
                                                                              ---------      --------
     Total current liabilities......................................              5,055         8,097
Notes payable, less current portion.................................                 21           107
                                                                              ---------      --------
     Total liabilities..............................................              5,076         8,204
                                                                              ---------      --------
Stockholders' equity:
  Preferred stock, no par value; 5,000,000 shares authorized; no
  shares issued and outstanding.....................................                 --            --
    Common stock, $0.001 par value:
    Authorized--100,000,000 in 2000 and 1999
    Issued and outstanding-- 25,127,105 and 24,461,370 in 2000 and
    1999, respectively..............................................                 25            24
  Additional paid-in capital........................................            135,196       131,306
    Deferred compensation...........................................               (223)         (550)
    Notes receivable from stockholders..............................               (172)         (992)
    Accumulated deficit.............................................           (105,101)      (63,465)
  Treasury stock, 54,687 common shares in 2000 at cost                              (22)           --
                                                                              ---------      --------
     Total stockholders' equity.....................................             29,703        66,323
                                                                              ---------      --------
     Total liabilities and stockholders' equity.....................          $  34,779      $ 74,527
                                                                              =========      ========
</TABLE>

                See accompanying notes to financial statements.

                                       29
<PAGE>

                                Talk City, Inc.

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

<TABLE>
<CAPTION>
                                                                     Years ended December 31,
                                                                     -----------------------
                                                                2000            1999            1998
                                                                ----            ----            ----
<S>                                                         <C>             <C>             <C>
Revenues:
  Network and syndication services...................       $  6,792        $  5,412        $    999
  Community solutions services.......................          3,179           1,126             315
  Event services.....................................          3,162             817              32
  Market research services...........................          1,709             377             107
                                                            --------        --------        --------
     Total revenues..................................         14,842           7,732           1,453
Cost of revenues                                              16,093           8,941           3,568
                                                            --------        --------        --------
Gross margin                                                  (1,251)         (1,209)         (2,115)
Operating expenses:
  Product development................................          7,952           4,751           1,460
  Sales and marketing................................         15,292          19,558           7,023
  General and administrative.........................         11,991           5,691           1,804
  Restructuring charges..............................          1,237              --              --
  Unrealized loss on minority investment.............          3,000              --              --
  Noncash advertising and promotional charges........          2,388          11,162           2,890
  Amortization of goodwill...........................            684              --              --
                                                            --------        --------        --------
     Total operating expenses........................         42,544          41,162          13,177
                                                            --------        --------        --------
     Loss from operations............................        (43,795)        (42,371)        (15,292)
Interest income (expense), net.......................          2,159           2,264            (367)
                                                            --------        --------        --------
     Net loss........................................        (41,636)        (40,107)        (15,659)
Accretion of redeemable convertible preferred
 stock and warrants..................................             --             159             558
                                                            --------        --------        --------
     Net loss applicable to common
       stockholders..................................       $(41,636)       $(40,266)       $(16,217)
                                                            ========        ========        ========
Net loss per share:
  Basic and diluted..................................       $  (1.69)       $  (3.14)       $  (4.92)
                                                            ========        ========        ========
  Weighted average shares............................         24,704          12,840           3,295
                                                            ========        ========        ========
</TABLE>

                See accompanying notes to financial statements.

                                       30
<PAGE>

                                Talk City, Inc.


 Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity
                                   (Deficit)
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                      Redeemable
                                                                      Convertible
                                                                    Preferred stock          Common stock          Treasury Stock
                                                                    ---------------          ------------          --------------
                                                                 Shares       Amount     Shares       Amount     Shares     Amount
                                                                 ------       ------     ------       ------     ------     ------
<S>                                                              <C>          <C>        <C>          <C>        <C>        <C>
Balances, December 31, 1997..................................    3,794,785    10,081     3,687,200         4         --         --
Noncash issuance of preferred stock and preferred and common
  stock warrants pursuant to the NBC agreements..............      884,615     4,565            --        --         --         --
Issuance of preferred stock, net of $1,233 issuance costs....    6,250,509    23,769            --        --         --         --
Issuance of preferred stock warrants for services rendered
  in connection with the preferred stock offering............           --       438            --        --         --         --
Issuance of common stock warrants pursuant to the convertible
  loan agreements............................................           --        --            --        --         --         --
Issuance of common stock upon exercise of stock options, net
  of repurchases.............................................           --        --       504,466        --         --         --
Deferred stock-based compensation related to option grants...           --        --            --        --         --         --
Amortization of stock-based compensation.....................           --        --            --        --         --         --
Accretion attributable to redeemable preferred stock.........           --       120            --        --         --         --

Net loss.....................................................           --        --            --        --         --         --
                                                               -----------    ------    ----------    ------     ------     ------
Balances, December 31, 1998..................................   10,929,909    38,973     4,191,666         4         --         --
Issuance of common stock upon exercise of stock options and
  warrants, net of repurchases...............................           --        --       324,994        --         --         --
Issuance of convertible preferred stock, net of $38 issuance
  costs......................................................    2,499,884    19,961            --        --         --         --
Noncash issuance of preferred stock pursuant to the NBC
  and Hearst agreements......................................    1,350,000    10,261            --        --         --         --
Noncash issuance of preferred stock warrants pursuant to the
  NBC agreement..............................................           --     2,283            --        --         --         --
Revaluation of warrants related to the NBC operating
  agreements.................................................           --        30            --        --         --         --
Conversion of convertible preferred stock into common stock..  (14,779,793)  (71,667)   14,844,710        15         --         --
Proceeds from initial public offering, net of  $5,771
  issuance costs.............................................           --        --     5,100,000         5         --         --
Deferred stock-based compensation related to option grants...           --        --            --        --         --         --
Amortization of stock-based compensation.....................           --        --            --        --         --         --
Accretion attributable to redeemable preferred stock.........           --       159            --        --         --         --
Net loss.....................................................           --        --            --        --         --         --
                                                               -----------    ------    ----------    ------     ------     ------
Balances, December  31, 1999.................................           --        --    24,461,370        24         --         --
Issuance of common stock for acquisition of Research
  Connections, Inc...........................................           --        --       242,424        --         --         --
Issuance of common stock upon exercise of stock options and
  warrants, net of repurchases...............................           --        --       477,998         1         --         --
Proceeds from repayment of stockholders' notes receivable....           --        --            --        --         --         --
Interest income on stockholder notes.........................           --        --            --        --         --         --
Forgiveness of stockholder note receivable...................           --        --            --        --         --         --
Purchase of treasury stock...................................           --        --       (54,687)       --     54,687        (22)
Amortization of stock-based compensation.....................           --        --            --        --         --         --
Net loss.....................................................           --        --            --        --         --         --
                                                               -----------    ------    ----------    ------     ------    -------
Balances, December  31, 2000.................................           --        --    25,127,105    $   25     54,687    $   (22)
                                                               ===========    ======    ==========    ======     ======    =======









<CAPTION>
                                                                                              Notes                       Total
                                                               Aditional                   receivable                  stockholders'
                                                                paid-in       Deferred        from       Accumulated     equity
                                                                capital    compensation   stockholders     Deficit      (deficit)
                                                              ----------   ------------   ------------   -----------   -----------
<S>                                                            <C>          <C>            <C>            <C>           <C>
Balances, December 31, 1997..................................        260            (59)          (175)       (7,699)       (7,669)
Noncash issuance of preferred stock and preferred and common
  stock warrants pursuant to the NBC agreements..............        575             --             --            --           575
Issuance of preferred stock, net of $1,233 issuance costs....         --             --             --            --            --
Issuance of preferred stock warrants for services rendered
  in connection with the preferred stock offering............       (438)            --             --            --          (438)
Issuance of common stock warrants pursuant to the convertible
  loan agreements............................................        490             --             --            --           490
Issuance of common stock upon exercise of stock options, net
  of repurchases.............................................        133             --           (128)           --             5
Deferred stock-based compensation related to option grants...        892           (892)            --            --            --
Amortization of stock-based compensation.....................         --            353             --            --           353
Accretion attributable to redeemable preferred stock.........       (120)            --             --            --          (120)
Net loss.....................................................         --             --             --       (15,659)      (15,659)
                                                                --------          -----          -----     ---------      --------
Balances, December 31, 1998..................................      1,792           (598)          (303)      (23,358)      (22,463)
Issuance of common stock upon exercise of stock options and
  warrants, net of repurchases...............................        996             --           (689)           --           307
Issuance of convertible preferred stock, net of $38 issuance
  costs......................................................         --             --             --            --            --
Noncash issuance of preferred stock pursuant to the NBC
  and Hearst agreements......................................         --             --             --            --            --
Noncash issuance of preferred stock warrants pursuant to the
  NBC agreement..............................................         --             --             --            --            --
Revaluation of warrants related to the NBC operating
  agreements.................................................        886             --             --            --           886
Conversion of convertible preferred stock into common stock..     71,652             --             --            --        71,667
Proceeds from initial public offering, net of  $5,771
  issuance costs.............................................     55,424             --             --            --        55,429
Deferred stock-based compensation related to option grants...        715           (715)            --            --            --
Amortization of stock-based compensation.....................         --            763             --            --           763
Accretion attributable to redeemable preferred stock.........       (159)            --             --            --          (159)
Net loss.....................................................         --             --             --       (40,107)      (40,107)
                                                                --------          -----          -----     ---------      --------
Balances, December  31, 1999.................................   $131,306          $(550)         $(992)    $ (63,465)     $ 66,323
Issuance of common stock for acquisition of Research
  Connections, Inc...........................................      3,000             --             --            --         3,000
Issuance of common stock upon exercise of stock options and
  warrants, net of repurchases...............................      1,022             --            377            --         1,400
Proceeds from repayment of stockholders' notes receivable....         --             --            159            --           159
Interest income on stockholder notes.........................         --             --            (49)           --           (49)
Forgiveness of stockholder note receivable...................         --             --            333            --           333
Purchase of treasury stock...................................         --             --             --            --           (22)
Amortization of stock-based compensation.....................       (132)           327             --            --           195
Net loss.....................................................         --             --             --       (41,636)      (41,636)
                                                                --------          -----          -----     ---------      --------
Balances, December  31, 2000.................................   $135,196          $(223)         $(172)    $(105,101)     $ 29,703
                                                                ========          =====          =====     =========      ========
</TABLE>

               See accompanying notes to financial statements.

                                       31
<PAGE>

                                Talk City, Inc.

                            Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                     Years ended  December 31,
                                                                                                     ------------------------
<S>                                                                                              <C>         <C>         <C>
                                                                                                      2000        1999        1998
                                                                                                      ----        ----        ----

Cash flows from operating activities:
 Net loss.....................................................................................    $(41,636)   $(40,107)   $(15,659)
 Adjustments to reconcile net loss to net cash used in operating
  activities:
  Depreciation and amortization...............................................................       4,852       1,140         347
  Stock-based compensation expense............................................................         195         763         353
  Common stock warrants issued pursuant to the loan financing.................................          --          --         490
  Noncash advertising and promotional charges.................................................       2,388      11,162       2,890
  Impairment of investment in private company.................................................       3,000          --          --
  Provision for accounts receivable allowance.................................................       1,306         318         100
  Forgiveness of stockholder receivable.......................................................         333          --          --
  Interest on stockholder notes...............................................................         (49)         --          --
  Changes in operating assets and liabilities:
   Accounts receivable........................................................................        (353)     (3,088)       (742)
   Prepaid expenses and other current assets..................................................         678      (1,772)         67
   Accounts payable...........................................................................      (2,892)      2,772         814
   Accrued liabilities........................................................................        (164)      2,982         312
   Deferred revenue...........................................................................          82         609          55
                                                                                                  --------    --------    --------
  Net cash used in operating activities.......................................................     (32,260)    (25,221)    (10,973)
                                                                                                  --------    --------    --------
Cash flows from investing activities:
   Purchases of property and equipment........................................................      (6,713)     (5,839)       (797)
   Investment in private company..............................................................          --      (3,000)         --
   Cash paid for acquisition of Research Connections, Inc. net of issuance costs..............        (417)         --          --
   Purchases of short-term investments........................................................      (7,069)    (48,011)     (5,740)
   Proceeds from sale of short-term investments...............................................      39,530      12,210          --
   Other assets...............................................................................      (1,577)       (282)        (22)
                                                                                                  --------    --------    --------
Net cash provided by (used in) investing activities...........................................      23,754     (44,922)     (6,559)
                                                                                                  --------    --------    --------

Cash flows from financing activities:
   Proceeds from initial public offering, net of issuance costs...............................          --      55,429          --
   Proceeds from sale of redeemable preferred stock, net of issuance costs....................          --      19,961      21,197
   Proceeds from issuance of common stock from exercise
      of stock options and warrants...........................................................       1,400         307           5
   Proceeds from convertible loan financing, net of issuance costs............................          --          --       2,903
   Repayment of convertible loan financing....................................................          --          --        (331)
   Proceeds from repayment of notes receivable................................................         159          --          --
   Proceeds from notes payable................................................................          --          --         491
   Repayment of notes payable.................................................................        (154)       (139)        (91)
   Purchase of treasury stock.................................................................         (22)         --          --
                                                                                                  --------    --------    --------
Net cash provided by financing activities.....................................................       1,383      75,558      24,174
                                                                                                  --------    --------    --------
Net (decrease) increase in cash and cash equivalents..........................................      (7,123)      5,415       6,642
Cash and cash equivalents at beginning of period..............................................      14,112       8,697       2,055
                                                                                                  --------    --------    --------
Cash and cash equivalents at end of period....................................................    $  6,989    $ 14,112    $  8,697
                                                                                                  ========    ========    ========
</TABLE>


                                       32
<PAGE>

                                Talk City, Inc.

                     Statements of Cash Flows (continued)
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                                  Years Ended December 31,
                                                                                                  -----------------------
<S>                                                                                              <C>       <C>       <C>
                                                                                                    2000       1999     1998
                                                                                                    ----       ----     ----

Supplemental disclosure of cash flow information::

 Cash paid during the period for interest..............................................           $   39    $    74   $  113
                                                                                                  ======    =======   ======
 Common stock issuance for acquisition of Research Connections, Inc. ..................           $3,000    $    --   $   --
                                                                                                  ======    =======   ======
 Conversion of redeemable preferred stock to common stock..............................           $   --    $71,667   $   --
                                                                                                  ======    =======   ======
 Accretion of redeemable convertible preferred stock and warrants......................           $   --    $   159   $  558
                                                                                                  ======    =======   ======
 Common stock issued for notes receivable, net of repurchases..........................           $ (377)   $   689   $  128
                                                                                                  ======    =======   ======
 Issuance of stock and warrants for advertising and promotional services...............           $   --    $13,460   $5,140
                                                                                                  ======    =======   ======
 Issuance of preferred stock for conversion of loan financing..........................           $   --    $    --   $2,572
                                                                                                  ======    =======   ======
 Deferred stock-based compensation related to option grants............................           $   --    $   715   $  892
                                                                                                  ======    =======   ======
</TABLE>

                 See accompanying notes to financial statements

                                       33
<PAGE>

                                Talk City, Inc.

                         Notes to Financial Statements


(1) Description of Business and Nature of Operations

    Talk City, Inc., incorporated in March 1996, is a leading provider of
online affinity marketing services. The Company helps companies use their Web
sites to bring their customers together into communities, which significantly
reduces marketing and support costs, increases revenue, and strengthens customer
relationships. The Company offers businesses a wide range of services which
include: consulting services; market research services; live online events and
webcasts; software applications such as online discussion boards and online
customer support tools; and community moderation services; as well as
advertising services. The Company also operates one of the largest community Web
sites in the world at www.talkcity.com.
                      ----------------

(2) Summary of Significant Accounting Policies

   (a)   Revenue Recognition

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

     Revenues from network and syndication services are generally derived from
  short-term banner advertisement and sponsorship contracts under which the
  Company offers a combination of custom programming, prominent logo placement,
  other onsite promotions and additional banner ads.  Talk City's clients for
  network and syndication services enter into short-term agreements pursuant to
  which they generally receive a guaranteed number of advertising impressions on
  the Company's network sites.  Revenues from network and syndication services
  are recognized in the period in which the advertisement is displayed, or the
  event is run, provided that no significant obligations remain, at the lesser
  of the ratio of impressions delivered over total guaranteed impressions or on
  a straight-line basis over the term of the contract

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

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

     Talk City's event services primarily include the setup and production of
  live, online, interactive events for the Company's clients.  Revenues from the
  event services are recognized as the events are run or ratably over the term
  of the contract.

                                       34
<PAGE>

     Market research services consist of the production and delivery of online
  market research surveys and focus groups.  Revenue is recognized at the lesser
  of the estimated percentage of project completion or on a straight-line basis
  over the term of the contract.

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

     In December 1999, the Securities and Exchange Commission (the "SEC") issued
  Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in
  Financial Statements."  SAB 101 summarizes certain of the SEC's views in
  applying accounting principles generally accepted in the United States of
  America to revenue recognition in financial statements.  In March 2000, the
  SEC issued SAB 101A, which delayed the implementation of SAB 101.  In June
  2000, the SEC issued SAB 101B, which further delayed the implementation date
  of SAB 101.  We adopted SAB 101 beginning October 1, 2000.  The adoption of
  SAB 101 did not have a material impact on our financial position or results of
  operations.

  (b)  Cash Equivalents

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

  (c)  Short-term Investments

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

     Management determines the appropriate classification of its investments in
  marketable securities at the time of purchase and reevaluates such
  determination at each balance sheet date. The Company has classified its
  marketable securities as available-for-sale, which are carried at fair value,
  with unrealized gains and losses, net of tax, reported as a separate component
  of stockholders' equity. At December 31, 2000 and 1999, the fair value of
  marketable securities (consisting primarily of commercial paper, corporate
  notes and market auction securities) approximates their cost. Therefore, no
  unrealized gain or loss has been recorded. Realized gains and losses have not
  been material for any period presented.

  (d)  Fair Values of Financial Instruments

     The Company has the following financial instruments:  cash and cash
  equivalents, short-term investments, accounts receivable, accounts payable,
  accrued liabilities, long-term debt and  a standby letter of credit.  The
  carrying value of cash and cash equivalents, short-term investments, accounts
  receivable, accounts payable and  accrued liabilities approximates fair value
  based on liquidity of these financial instruments or based on their short-term
  nature.  The carrying value of long-term debt and the standby letter of credit
  approximates fair value based on the market interest rates available to the
  Company for debt of similar risk and maturities. The Company does not have any
  foreign currency hedging or other derivative financial instruments as of
  December 31, 2000.

                                       35
<PAGE>

  (e)  Property and Equipment

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

  (f)  Long Lived Assets

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

  (g)  Product Development

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

  (h)  Advertising and Marketing Expense

     The cost of advertising is expensed as incurred. Advertising costs were
  $6,769,000, $22,606,000, and $7,410,000, for the years ended December 31,
  2000, 1999 and 1998, respectively. For the years ended December 31, 2000, 1999
  and 1998, these costs included, $2,388,000, $11,162,000, and $2,890,000,
  respectively, of noncash advertising and promotional charges pursuant to the
  NBC and Hearst advertising and operating agreements. See Note 10--Advertising
  and Operating Agreements.

  (i)  Income Taxes

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

                                       36
<PAGE>

  (j)  Stock-Based Compensation

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

     Effective July 1, 2000, the Company has adopted the Financial Accounting
  Standards Board Interpretation No. 44, "Accounting for Certain Transactions
  Involving Stock Compensation--an Interpretation of APB No. 25" ("FIN 44").
  FIN No. 44 clarifies the application of Opinion No. 25 for certain issues
  including:  (a) the definition of employees for purposes of applying Opinion
  No. 25, (b) the criteria for determining whether a plan qualifies as a
  noncompensatory plan, (c) the accounting consequence of various modifications
  to the terms of a previously fixed stock option or award, and (d) the
  accounting for an exchange of stock compensation awards in a business
  combination.  The Company's adoption of FIN No. 44 has not had a material
  impact on its financial statements, cashflows, or results of operations.  See
  Note 6--Capitalization.

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

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

  (k)  Comprehensive Loss

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

  (l)  Net Loss Per Share

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

                                       37
<PAGE>

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

<TABLE>
<CAPTION>
                                                                       Years ended December 31,
                                                                       -----------------------
<S>                                                           <C>            <C>            <C>
                                                                       2000           1999           1998
                                                                       ----           ----           ----
   Stock options............................................          4,419          1,248            343
   Unvested common stock subject to repurchase..............              5            374            752
   Preferred and common stock warrants......................            991          1,205          1,311
   Redeemable convertible preferred stock (as if converted)
    converted)..............................................             --             --          6,467
                                                                      -----          -----          -----
                                                                      5,415          2,827          8,873
                                                                      =====          =====          =====
</TABLE>


  (m)  Use of Estimates

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

  (n)  Reverse Stock Split and Reincorporation

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

  (o)   Segment Reporting

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

  (p)  Concentration of Credit Risk

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

     The Company's customers are concentrated in the United States.  The Company
  performs ongoing credit evaluations, generally does not require collateral and
  establishes an allowance for doubtful accounts based upon factors surrounding
  the credit risk of customers, historical trends and other information; to
  date, such losses have been within management's expectations. As of December
  31, 2000 and 1999, the allowance for bad debts was $1,719,000 and $254,000,
  respectively.

     The Company's operations and assets are based in the United States, and its
  revenues have substantially all been earned from customers in the United
  States.  For the year ended December 31, 2000, no single customer represented
  over 10% of revenues.  As of December 31, 2000, total

                                       38
<PAGE>

  receivables from a single customer were $373,000. Revenues from one major
  customer were $947,000 and $319,000 for the years ended December 31, 1999 and
  1998, respectively. Total receivables from this customer were $377,000 at
  December 31, 1999.

  (q)  Recently Issued Accounting Standards

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

  (r)  Reclassifications

     Certain reclassifications have been made to the prior years' financial
  statements to conform to the December 31, 2000 presentation.

(3) Business Combinations

     On January 3, 2000, the Company acquired Research Connections, Inc.
  ("RCI"), a privately-held online market research company.  The Company paid
  $500,000 in cash and issued 242,424 shares of its Common Stock, with an
  approximate fair market value of $3 million, in exchange for all outstanding
  shares of RCI.  The cash consideration of $500,000 was due as follows:
  $250,000 was paid on January 3, 2000; $125,000 was paid on April 3, 2000; and
  $125,000 was paid on July 3, 2000.  In addition, contingent cash consideration
  of $1.5 million, subject to an employment agreement with the former sole
  shareholder of RCI, was placed into an escrow fund and recorded as restricted
  cash in Other Assets.  Funds will be released over four years with 25%
  released on January 3, 2001 and the remainder released evenly over the
  following 36 months.  In the event the shareholder is terminated for cause or
  voluntarily leaves employment of the Company, then all remaining cash in the
  escrow fund shall be forfeited to the Company and the shareholder will have no
  further right to such cash.  The Company will record the cash consideration of
  $1.5 million as compensation expense as the funds are released from escrow.

     The Company accounted for the acquisition of RCI pursuant to the purchase
  method of accounting.  Thus, the results of operations of RCI and the fair
  value of the assets acquired and liabilities assumed was included in the
  Company's financial statements beginning on the acquisition date.  The
  allocation of the purchase price of $3.5 million resulted in cash and other
  assets of approximately $100,000 and goodwill of approximately $3.4 million,
  which was capitalized and is being amortized on a straight line basis over
  five years.

     The Company's consolidated statement of operations includes the operations
  of RCI from January 3, 2000 to December 31, 2000.  The unaudited pro forma
  financial information in the following table illustrates the combined results
  of the Company's operations and the operations of RCI for the period from
  January 1, 1999 to December 31, 1999, as if the acquisition of RCI had
  occurred as of January 1, 1999.  The unaudited pro forma financial information
  is presented for informational purposes and is not necessarily indicative of
  the results of operations which would have occurred if the Company had
  constituted a single entity as of January 1, 1999.  The unaudited pro forma
  information is also not necessarily indicative of the future results of the
  operations of the combined entity.

                                       39
<PAGE>

<TABLE>
<CAPTION>
                                   In thousands                                      (Unaudited)
<S>                                                                                  <C>
   Net revenues....................................................................     $  8,717
   Cost of revenues................................................................        9,059
                                                                                        --------
        Gross Margin...............................................................         (342)
                                                                                        --------
   Operating Expenses..............................................................       42,786
                                                                                        --------
        Loss from Operations.......................................................      (43,128)
                                                                                        --------
   Interest Income.................................................................        2,264
                                                                                        --------
        Net Loss...................................................................     $(40,864)
                                                                                        --------
</TABLE>

    The proforma net loss includes the Company's net loss of $40,107,000 and
  RCI's net loss of $73,000 plus a pro forma adjustment of $684,000 to include
  the amortization expense associated with the goodwill related to the
  acquisition.

(4) Financial Statement Components

   (a)  Cash Equivalents and Short-Term Investments

   The following is a summary of cash equivalents and short-term investments as
of December 31, 2000 and 1999 (in thousands):

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                    --------------------
<S>                                                                                 <C>        <C>
                                                                                         2000       1999
                                                                                      -------    -------
  Cash and cash equivalents:
     Cash.........................................................................    $ 1,320    $   832
     Money markets funds..........................................................      1,321        163
     Commercial paper.............................................................      3,749      6,417
     Auction rate securities......................................................         --      6,700
     Corporate notes..............................................................        599         --
                                                                                      -------    -------
                                                                                        6,989     14,112
                                                                                      -------    -------
  Short-term investments:
     Commercial paper.............................................................      2,243     13,414
     Auction rate securities......................................................         --     11,622
     Corporate notes..............................................................      4,737     14,405
                                                                                      -------    -------
                                                                                        6,980     39,441
                                                                                      -------    -------
                                                                                      $13,969    $53,553
                                                                                      =======    =======
</TABLE>

   As of December 31, 2000 and 1999, the contractual maturities of all debt
securities in the Company's portfolio, except auction-rate securities, were less
than one year.  The contractual maturities for the auction-rate securities
exceed 10 years.  However, the Company has the option of adjusting the interest
rates or liquidating these investments on their respective reset dates, which
occur every 90 days or less.  Auction rate securities held for more than 90 days
are included in short term investments.

                                       40
<PAGE>

  (b)   Property, Plant and Equipment

   Property and equipment consisted of the following as of December 31, 2000 and
1999 (in thousands):

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                  --------------------------
<S>                                                                               <C>           <C>
                                                                                          2000          1999
                                                                                       -------        ------
   Computer equipment...........................................................       $ 9,254        $5,016
   Furniture and fixtures.......................................................         1,811         1,188
   Leasehold improvements.......................................................         1,130         1,120
                                                                                       -------        ------
                                                                                        12,195         7,324
   Less accumulated depreciation and amortization...............................         3,961         1,635
                                                                                       -------        ------
                                                                                       $ 8,234        $5,689
                                                                                       =======        ======
</TABLE>

  (c)  Other Assets

       Other assets consisted of the following as of December 31, 2000 and 1999
   (in thousands):

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                  --------------------------
<S>                                                                               <C>           <C>
                                                                                          2000          1999
                                                                                        ------        ------
   Capitalized in-kind advertising and promotional expenses, net (Note 10)......        $2,171        $4,559
   Cost investment in SocialNet, Inc (Note 11)..................................            --         3,000
   Deposits.....................................................................         3,998         2,421
                                                                                        ------        ------
                                                                                        $6,169        $9,980
                                                                                        ======        ======
</TABLE>

   (d)  Accrued Liabilities

      Accrued liabilities consisted of the following as of December 31, 2000 and
   1999 (in thousands):

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                  --------------------------
<S>                                                                               <C>           <C>
                                                                                          2000          1999
                                                                                        ------        ------
   Accrued compensation and benefits............................................        $1,375        $  953
   Accrued general and administrative expenses..................................           562           505
   Accrued rent.................................................................           350            --
   Accrued sales and marketing expenses.........................................           321           987
   Accrued moderator expenses...................................................           300           390
   Other accrued liabilities....................................................           230           467
                                                                                        ------        ------
                                                                                        $3,138        $3,302
                                                                                        ======        ======
</TABLE>

   (e)  Interest Income (Expense), Net

<TABLE>
<CAPTION>
Interest income (expense), net consisted of the following (in thousands):

                                                                               Years ended December 31,
                                                                         -------------------------------------
<S>                                                                      <C>             <C>        <C>
                                                                                  2000       1999        1998
                                                                                ------     ------       -----
   Interest income.....................................................         $2,213     $2,341       $ 241
   Interest and other expense..........................................            (54)       (77)       (608)
                                                                                ------     ------       -----
                                                                                $2,159     $2,264       $(367)
                                                                                ======     ======       =====
</TABLE>

   Included in interest expense in 1998 is the value associated with the common
stock warrants issued to the holders of the notes totaling $490,000. See Note 6-
-Capitalization.

                                       41
<PAGE>

(5)  Notes Payable

   The Company has an equipment line of credit with a financial institution that
provides up to $2,000,000 in borrowings, bears interest at a rate determined on
the draw date, and currently expires in April 2002. The line of credit is
secured by the Company's fixed assets. As of December 31, 2000 and 1999,
$107,000 and $261,000, respectively, was outstanding under this agreement with
the principal amount due in 48 monthly installments beginning in May 1998.
These amounts bear interest at a fixed rate of approximately 20%.

   The aggregate principal payments due under the line of credit subsequent to
December 31, 2000 are as follows: 2001, $86,000; and 2002, $21,000.

(6)  Capitalization

  (a)  Redeemable Convertible Preferred Stock

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

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

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

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

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

  (b)  Common Stock

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

                                       42
<PAGE>

   Option holders have exercised options to purchase shares of restricted common
stock in exchange for stockholder promissory notes. The notes are secured by the
underlying shares of common stock and were issued with full recourse rights. The
notes bear interest at rates ranging between 6.0% and 6.9% and expire on various
dates ranging from November 2006 to January 2008. The Company has the right to
repurchase all unvested shares purchased by the notes at the original exercise
price in the event of employee termination. The number of shares subject to this
repurchase right decreases as the shares vest under the original option terms,
generally over four years. As of December 31, 2000, there were 4,917 shares
subject to repurchase. These options were exercised at $0.28 per share.

  (c)  Stock Option Plans and Employee Stock Purchase Plan

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

   The shareholders approved, on May 19, 2000, the Company's Amended and
Restated 1996 Stock Option Plan the number of shares of Common Stock authorized
for issuance under the 1996 Stock Option Plan by 3,500,000 shares, and to change
the annual evergreen increase by a number of shares equal to the lesser of (i)
2,000,000 shares, (ii) 7% of the then outstanding shares of Common Stock, or
(iii) a lesser amount determined by the Board.

   The Board of Directors approved, on April 23, 1999,  a 1999 Director Option
Plan reserving 250,000 shares of common stock for issuance and an amendment and
restatement to the 1996 Plan increasing the shares of common stock reserved for
issuance by 750,000. The amendment and restatement of the 1996 Plan also
provides for the automatic annual increase in the number of shares reserved for
issuance under the 1996 Plan on the first day of the Company's fiscal year
beginning in 2000 by the lesser of 750,000 shares, 4% of the then outstanding
shares of common stock or an amount determined by the Board of Directors.

   The Board of Directors also approved, on April 23, 1999, the 1999 Employee
Stock Purchase Plan ("ESPP"). The common stock available for sale under the plan
shall be 500,000 plus an annual increase to be added on the first day of the
Company's fiscal year beginning in 2000 equal to the lesser of (i) 500,000
shares, (ii) 2% of the outstanding shares on such date, or (iii) a lesser amount
determined by the Board. Qualified employees may elect to have a certain
percentage not to exceed 15% of their salary withheld pursuant to the 1999 Plan.
The salary withheld is then used to purchase shares of the Company's common
stock at a price equal to 85% of the market value of the stock at the beginning
of the 24 month offering period or end of the six-month purchase period,
whichever is lower.  Under this Plan, 398,650 shares were issued during fiscal
2000 representing approximately $558,000 in employee contributions.

                                       43
<PAGE>

   A summary of stock option activity follows:

<TABLE>
<S>                                       <C>           <C>       <C>           <C>       <C>           <C>
                                                            2000                    1999                    1998
                                          -----------              ----------               ---------
                                                        Weighted                Weighted                Weighted
                                                        average                 average                 average
                                            Options     exercise    Options     exercise    Options     exercise
                                          outstanding    price    outstanding    price    outstanding    price
                                          -----------   --------  -----------   --------  -----------   --------
 Outstanding at beginning of
   period...............................    1,247,537     $10.10      342,998     $ 0.82      674,801      $0.26
   Options granted......................    4,941,725       4.79    1,213,425      11.06      315,623       0.92
   Options exercised....................      (34,202)     11.47     (188,188)      3.46     (534,519)      0.26
   Options canceled.....................   (1,736,244)      7.13     (120,698)      3.53     (112,907)      0.38
                                          -----------              ----------               ---------
 Outstanding at end of year.............    4,418,816       9.26    1,247,537      10.08      342,998       0.82
                                          ===========              ==========               =========
 Shares available for future grant......    2,180,580                 731,892                 315,336
                                          ===========              ==========               =========
 Weighted average fair value of
   options granted during the year:
   Granted at fair value                  $      4.79              $     8.65               $    0.70
   Granted  below fair value                        -                    6.25                    2.16
   All options granted                           4.79                    8.46                    2.10
</TABLE>

   The Company uses the intrinsic value-based method to account for all its
employee stock-based compensation arrangements.  The Company has recorded
deferred stock-based compensation expense of $0, $715,000 and $892,000 relating
to options granted during the years ended December 31, 2000, 1999 and 1998,
respectively.  These amounts represent the difference between the exercise price
and the deemed fair value for financial reporting purposes of the Company's
common stock during the periods in which such options were granted.
Amortization of deferred stock compensation of $195,000, $763,000 and $353,000
was recognized during the years ended December 31, 2000, 1999 and 1998,
respectively.

   Information regarding the weighted average remaining contractual life and
weighted average exercise price of options outstanding and options exercisable
as of December 31, 2000, for selected exercise price ranges is as follows:

<TABLE>
<CAPTION>
                                                                Options outstanding            Options Exercisable
                                                        ------------------------------------  ----------------------
                                                                     Weighted-
                                                                      average     Weighted-               Weighted-
                       Range of                                     remaining     average                 average
                       exercise                          Number     contractual   exercise     Number     exercise
                        prices                        outstanding  life (years)    price    outstanding    price
                        ------                        -----------  ------------  ---------  -----------  ---------

<C>                     <S>   <C>                       <C>          <C>           <C>        <C>          <C>
                $ 0.20  -      0.56                         403,324         9.09      $ 0.49       80,034     $ 0.25
                  1.53  -      1.91                       1,320,825         9.56        1.74       60,650       1.53
                  2.00  -      6.00                       1,249,068         9.30        2.11       78,443       3.21
                  7.88  -     10.31                         113,788         8.62        8.67       52,368       8.76
                 11.75  -     12.88                         745,000         9.07       12.81       30,250      12.01
                 13.94  -     17.94                         586,811         8.96       17.94      486,267      13.96
                                                          ---------                               -------
                                                          4,418,816         9.26        5.40      788,012      10.12
                                                          =========                               =======
</TABLE>


   The following pro forma information regarding stock-based compensation has
been determined as if the Company had accounted for its employee stock options
and employee stock purchase plan shares under the fair market value method of
SFAS 123.  The weighted average fair value of employee stock purchase plan
shares issued during 2000 was $1.40.  The fair value of these options and
employee stock purchase plan shares were estimated at the date of grant using
the Black Scholes model with the following weighted

                                       44
<PAGE>

average assumptions: (i) a dividend yield of 0% for all periods; (ii) expected
volatility of 141% and 96% for employees and nonemployees for 2000 and 1999, 0%
for employees and 135% for nonemployees in 1998; (iii) risk-free interest rate
of 5.7% in 2000, 5.0% in 1999, and 5.0% in 1998; (iv) an expected life of three
years for employees, a contractual life of ten years for nonemployees and six
months for shares issued under the employee stock purchase plan.

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

<TABLE>
<CAPTION>
(in thousands, except per share amounts)
                                                                                Years ended December 31,
                                                                         --------------------------------------
<S>                                                                      <C>          <C>          <C>
                                                                               2000         1999          1998
                                                                           --------     --------      --------
   Net loss as reported................................................    $(41,636)    $(40,266)     $(16,217)
   Incremental pro forma compensation expense under SFAS 123...........      (2,742)        (647)         (153)
                                                                           --------     --------      --------
   Pro forma net loss                                                      $(44,378)    $(40,913)     $(16,370)
                                                                           ========     ========      ========

   Pro forma net loss per share                                            $  (1.80)    $  (3.19)     $  (4.97)
                                                                           ========     ========      ========
</TABLE>

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

  (d)   Warrants

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

   In connection with the NBC operating and advertising agreements, the Company
issued warrants to purchase 375,000 shares of common stock and 522,223 shares of
the Series D Stock. See Note 10--Advertising and Operating Agreements.

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

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

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

                                       45
<PAGE>

   During 2000, warrants representing 212,972 shares were exercised and warrants
representing 751 shares were cancelled.  During 1999, warrants representing
278,560 shares were granted, warrants representing 98,928 shares were exercised,
and warrants representing 286,039 shares were cancelled.  No warrants were
exercised during 1998.  As of December 31, 2000, 1999 and 1998, warrants
outstanding were 991,223, 1,204,946 and 1,311,353, respectively.

(7)  Income Taxes

   The reconciliation between the amount computed by applying the U.S. federal
statutory tax rate of 34% to the net loss and the actual provision for income
taxes for the years ended December 31, 2000, 1999 and 1998, follows (in
thousands):

<TABLE>
<S>                                                                    <C>            <C>            <C>
                                                                               2000           1999          1998
                                                                           --------       --------       -------
  Income tax benefit at statutory rate.............................        $(14,124)      $(13,636)      $(5,270)
  Current year net operating loss and temporary differences for
    which no benefit has been recognized...........................          12,766         13,414         4,969
   Other...........................................................           1,358            222           301
                                                                           --------       --------       -------
        Total......................................................        $      -       $      -       $     -
                                                                           ========       ========       =======
</TABLE>

   The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 2000 and
1999, are as follows (in thousands):

<TABLE>
<S>                                                                               <C>          <C>
                                                                                        2000          1999
                                                                                    --------      --------
  Deferred tax assets:
     Net operating loss carryforwards...........................................    $ 34,083      $ 21,767
     Preferred and common stock warrants........................................       2,719         1,889
     Property and equipment.....................................................         195           329
     Research credit carryforwards..............................................         758           585
     Other......................................................................       1,094           533
                                                                                    --------      --------
        Total gross deferred tax assets.........................................      38,849        25,103
  Valuation allowance...........................................................     (38,849)      (25,103)
                                                                                    --------      --------
        Total net deferred tax assets...........................................    $     --      $     --
                                                                                    ========      ========
</TABLE>

   Management has established a full valuation allowance against its net
deferred tax assets because it is more likely than not that sufficient taxable
income will not be generated during the carryforward period. The net increase in
total valuation allowance for the years ended December 31, 2000, 1999, and 1998
was approximately $13,746,000, $15,180,000, and $6,556,000, respectively.

   The Company has net operating loss carryforwards for federal and California
income tax purposes of approximately $91,912,000, and $43,420,000, respectively,
available to reduce future taxable income subject to income taxes.  The net
operating loss carryforwards expire in various years from 2011 through 2020 for
federal income tax purposes and from 2004 through 2010 for California income tax
purposes.

   The Company also has research credit carryforwards for federal and California
income tax return purposes of approximately $494,000 and $301,000, respectively,
available to reduce future income taxes. The federal research credit
carryforward expires beginning in 2011 through 2020.  The California research
credit carryforward can be utilized indefinitely.

   The Internal Revenue Code of 1986 and the California Conformity Act of 1987
substantially restrict the ability of a corporation to utilize existing net
operating losses and credits in the event of an "ownership change."  The
issuances of preferred stock have resulted in multiple ownership changes since
inception of

                                       46
<PAGE>

the Company. Approximately $16,800,000 of the federal net operating loss
carryforward will be subject to an annual limitation in the amount of
$1,700,000. Any unused annual limitation can be carried over and added to the
succeeding year's annual limitation within the allowable carryforward period.
Future changes in ownership may result in additional limitations.


   Included in gross deferred tax assets as of December 31, 2000 is
approximately $1,443,000 related to stock options and warrants for which the
benefit, when realized will be recorded to equity.

(8)  Commitments

   The Company leases its facilities under operating leases expiring at various
dates through March 2009.  In October 1999, the Company signed a nine-year three
and one-half month lease for a new 56,000 square foot corporate headquarters in
Campbell, California, which commenced on December 15, 1999. The Company is
required to provide a $2,100,000 letter of credit as security for the lease.
Under the lease agreement, the letter of credit may be reduced by $300,000 per
year after every twelve months through December 14, 2005 provided no default has
occurred.  As of December 31, 2000, a $1,800,000 certificate of deposit with a
one year maturity was held as collateral by a bank for guarantee of the letter
of credit.  The certificate of deposit is included in Other Assets.

   Rent expense was approximately $2,490,000, $790,000, and $211,000 for the
years ended December 31, 2000, 1999, and 1998, respectively.

   The following table details the future minimum lease payments under non-
cancelable operating leases as of December 31, 2000 on a pro forma basis,
showing the impact of lease cancellations in San Francisco, Chicago and New York
that have occurred subsequent to December 31, 2000--see Note 16 regarding
subsequent events--(in thousands):

<TABLE>
<S>                                                                                          <C>
   2001..............................................................................          $ 1,989
   2002..............................................................................            1,935
   2003..............................................................................            1,997
   2004..............................................................................            1,975
   2005 and thereafter...............................................................            7,966
                                                                                               -------
        Total minimum lease payments.................................................          $15,862
                                                                                               =======
</TABLE>

(9)  Retirement Plan

   Effective January 1997, the Company established a qualified 401(k) Plan (the
Plan) available to all employees who meet the Plan's eligibility requirements.
Participants may elect to contribute a percentage of their compensation to this
Plan up to a statutory maximum amount. The Company may make matching
contributions to the Plan on a discretionary basis. The Company has not made any
contributions to the Plan in 2000, 1999 or 1998.

(10) Advertising and Operating Agreements

   Advertising Agreements

   The Company entered into three separate agreements with the National
Broadcasting Company ("NBC") whereby NBC provided the Company with advertising
time and promoted the Company's

                                       47
<PAGE>

services on television, primarily during prime time programs, in exchange for
preferred stock and warrants described as follows:

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

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

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

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

   All the warrants and preferred stock issued pursuant to the above are non-
cancelable and non-forfeitable. Accordingly, the fair market value of these
instruments was measured and fixed on the date of their respective issuance. The
total fair value was recorded in Other Assets and is being charged to operations
as the advertisements are run. The fair values attributable to the amended NBC
and Hearst agreements were based on the fair value of the Series E Redeemable
Convertible Preferred Stock issued at $8.00 per share on April 15, 1999.  For
the years ended December 31, 2000 and 1999, advertising expense related to these
agreements of $1,402,208 and $9,198,000, respectively, was recorded to noncash
advertising and promotional charges in the statement of operations. As of
December 31, 2000 and 1999, the unamortized value attributable to the non-
cancelable stock and warrants of $2,171,000 and $3,007,000, respectively, was
recorded in Other Assets.

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

                                       48
<PAGE>

   Operating Agreements

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

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

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

   In accordance with EITF 96-18, the warrants subject to cancellation were
required to be revalued at each balance sheet date based on the current fair
value through the date the related cancellation or repurchase rights lapsed.  As
a result of the amendments described above, the value of the warrants that were
initially subject to cancellation was fixed and measured on April 15, 1999 based
on the Series E Redeemable Preferred Stock price per share.  The fair value of
the Series D Stock of $2,000,000 and the fair value of the warrants of
$2,179,000 issued in connection with the operating agreements was recorded in
Other Assets and is being amortized over the remaining term of the respective
operating agreements, which coincides with when the services are received.  For
the years ended December 31, 2000 and 1999, amortization expense related to
these agreements of $986,000 and $1,964,000, respectively, was recorded to
noncash advertising and promotional charges in the statement of operations. As
of December 31, 2000 and 1999, the unamortized value attributable to the non-
cancelable preferred stock and warrants of $567,000 and $1,552,000,
respectively, was recorded in Other Assets.

(11)  Related Party Transactions

   On December 21, 1999, the Company entered into a Series C Preferred Stock
Agreement with SocialNet, Inc. ("SocialNet"), a privately held corporation.  In
accordance with the Series C Preferred Stock Agreement, the Company purchased
1,554,404 shares of Series C Preferred Stock of SocialNet, representing a 7.6%
ownership interest in SocialNet, for $3.0 million.  The Company accounts for
this investment under the cost method.  As of December 31, 2000, management
determined that the value of this asset was impaired and wrote-off the entire
investment as an unrealized loss on minority investment.

                                       49
<PAGE>

The Company recorded $446,000 and $129,000 in revenues for the sale of services
to SocialNet in 2000 and 1999, respectively. Accounts receivable from SocialNet
were $75,000 and $30,000 at December 31, 2000 and 1999, respectively.

   In 2000, 1999 and 1998, the Company recorded revenue totaling $455,000,
$569,000 and $92,000, respectively, for the sale of services to various
stockholders of the Company.  As of December 31, 2000 and 1999, accounts
receivable from the stockholders were $124,000 and $192,000, respectively.
Accounts payable to stockholders were $23,000 and $22,000 at December 31, 2000
and 1999, respectively.

(12)  Network Participants

   As of December 31, 2000, the Company's community included approximately 35
network participants with whom it produces co-branded versions of Talk City for
over 50 Internet sites.  The network participants consist of three types of
companies: major media, Internet service providers and Internet content.
Through its network participants, the Company receives user volume driven by the
network participants.  The volume is considered to be "driven" by a network
participant if the user comes to the Company's site via a participant's site.
For the year ended December 31, 2000, approximately 22% of the Company's
advertising and sponsorship revenues were based on volume driven by its network
participants.  During this period, one network participant was responsible for
approximately 14% of the Company's advertising and sponsorship revenue.  If the
Company were to terminate or otherwise lose the benefit of its network
participants, the Company could be at risk of being unable to replace the
network participant's volume and associated advertising and sponsorship revenues
which could have a negative impact on the Company's operating results.

(13)  Restructuring Charges

   In June 2000, the Company underwent a restructuring of operations to more
clearly focus Talk City as an online marketing services provider.  As a result
of the this restructuring, the Company reduced its total headcount by 35
employees, or approximately 15% of its total workforce.  In December 2000, the
Company underwent a separate restructuring to further align the Company on
selling and implementing fee-based services.  As a result of the December
restructuring, the Company reduced its total headcount by 55 employees, or 30%
of the total workforce.  The Statement of Operations for the period ended
December 31, 2000 includes a charge of approximately $1,237,000, related to
these restructurings.  Such amount consists of approximately $1,058,000 for
employee severance and other related costs and $179,000 for the markdown of
inventory.  Substantially all liabilities related to these restructurings were
paid as of December 31, 2000.

(14) Quarterly Results of Operations (Unaudited)

   The following unaudited table presents certain statement of operations data
for our eight most recent quarters ended December 31, 2000. In management's
opinion, this unaudited information has been prepared on the same basis as the
audited annual financial statements and includes all adjustments, consisting
only of normal recurring adjustments, necessary for fair presentation of the
unaudited information for the quarters presented. This information should be
read in conjunction with our financial statements, including the notes thereto,
included elsewhere herein. The results of operations for any quarter are not
necessarily indicative of results that may be expected for any future periods.

                                       50
<PAGE>

<TABLE>
<CAPTION>
                                                                                    (Unaudited)
                                                                                 Three Months Ended
                                                                                 -------------------
<S>                                        <C>         <C>         <C>        <C>        <C>        <C>         <C>         <C>
                                           Dec. 31,    Sept. 30,   June 30,   Mar. 31,   Dec. 31,   Sept. 30,   June 30,    Mar. 31,

                                             2000        2000       2000       2000       1999        1999        1999       1999
                                           --------     -------   --------   --------   --------     -------    --------    -------
                                                                                  (in thousands)
Revenues:
 Network & syndication servies............ $    823     $ 1,445   $  2,471   $  2,053   $  2,129     $ 1,571    $  1,042    $   670
 Community solution services..............      935         925        785        534        612         216         168        130
 Event services...........................      865         931        831        535        376         184         134        123
 Market research services.................      428         448        420        413        209          55          56         57
                                           --------     -------   --------   --------   --------     -------    --------    -------
     Total revenues.......................    3,051       3,749      4,507      3,535      3,326       2,026       1,400        980
Cost of revenues..........................    4,383       3,973      4,118      3,619      3,182       2,461       1,953      1,345
                                           --------     -------   --------   --------   --------     -------    --------    -------
                Gross margin..............   (1,332)       (224)       389        (84)       144        (435)       (553)      (365)

Operating expenses:
 Product development......................    2,047       2,205      1,935      1,765      1,587       1,366       1,011        758
 Sales and marketing......................    2,969       2,760      4,629      4,934      6,129       5,234       4,678      3,546
 General and administrative...............    3,193       2,981      2,766      3,051      1,975       1,605       1,137        974
 Unrealized loss on minority investment...    3,000           -          -          -          -           -           -          -
 Restructuring charges....................      768           -        469          -          -           -           -          -
 Noncash advertising and promotional
  charges.................................    1,014         213        443        718        897         934       7,921      1,410
 Amortization of goodwill.................      171         171        171        171          -           -           -          -
                                           --------     -------   --------   --------   --------     -------    --------    -------
     Total operating expenses.............   13,162       8,330     10,413     10,639     10,588       9,139      14,747      6,688
                                           --------     -------   --------   --------   --------     -------    --------    -------
     Loss from operations.................  (14,494)     (8,554)   (10,024)   (10,723)   (10,444)     (9,574)    (15,300)    (7,053)

Interest income (expense), net............      388         455        595        721      1,001         809         300        154
                                           --------     -------   --------   --------   --------     -------    --------    -------
     Net loss.............................  (14,106)     (8,099)    (9,429)   (10,002)    (9,443)     (8,765)    (15,000)    (6,899)

Accretion of redeemable convertible
 preferred stock and warrants............         -           -          -          -          -          16          71         72
                                           --------     -------   --------   --------   --------     -------    --------    -------
     Net loss applicable to common
       stockholders......................  $(14,106)    $(8,099)  $ (9,429)  $ (6,971)  $ (9,443)    $(8,781)   $(15,071)   $(6,971)

                                           ========     =======   ========   ========   ========     =======    ========    =======
</TABLE>

(15)   Liquidity

   The Company's financial statements have been prepared assuming that the
Company will continue as a going concern.  Since inception, the Company's
recurring net losses, cash used in operating activities and accumulated deficit
require the Company to obtain additional cash to sustain its operations
throughout 2001.  The Company presently has not secured future funding
commitments but is currently in discussions with third parties to obtain
additional funding.  At this time, however, no formal agreements have been
finalized.  Recovery of the carrying amounts of certain assets, including
property, equipment and goodwill, is dependent on obtaining additional capital.

(16)   Subsequent Events

   Through March, 2001, the Company entered into definitive agreements with
various lessors to terminate the operating lease agreements for the office space
in Chicago, San Francisco and one suite in New York City.   As a result of these
terminations, the Company's obligations under non-cancelable operating leases
were reduced by approximately $1.0 million.

   On March 16, 2001, the Company announced a further restructuring to recognize
changes in the economic environment and complete its transition to a 100% fee-
based marketing services model.  The restructuring included a reduction in
workforce of approximately 40 people or 30% of the total workforce.  This step,
along with other cost cutting measures, are expected to significantly reduce
operating expenses in 2001.  The Company expects to record an additional
restructuring charge of approximately $225,000 in the March 31, 2001 quarter.

                                       51
<PAGE>

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

   None

PART III

Item  10.  Directors and Executive Officers of the Registrant

   We will furnish to the Securities and Exchange Commission a definitive Proxy
Statement (the "Proxy Statement") not later than 120 days after the close of the
fiscal year ended December 31, 2000.  The information required by this item is
incorporated herein by reference to the Proxy Statement.

Item  11.  Executive Compensation

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

Item  12.  Security Ownership of Certain Beneficial Owners and Management

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

Item  13.  Certain Relationships and Related Transactions

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

PART IV

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

Item 14a.  List of Documents

   1.  Financial Statements

   The financial statements of the Company as set forth under Item 8 of this
Annual Report on Form 10-K on are presented herein at the pages noted.
<TABLE>
<CAPTION>
                                                                                          Page Numbers
                                                                                          ------------
<S>                                                                               <C>
Report of KPMG LLP, Independent Auditors........................................                28
Balance Sheets as of December 31, 2000 and 1999.................................                29
Statements of Operations for the years ended December 31, 2000, 1999 and 1998...                30
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity                   31
 (Deficit) for the years ended December 31, 2000, 1999 and 1998.................
Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998...                32
Notes to Financial Statements...................................................                34
</TABLE>

                                       52
<PAGE>

2.   Financial Statement Schedules.

     The financial statement schedule for the years ended December 31, 2000,
1999 and 1998 is presented following the exhibits attached hereto and should be
read in conjunction with the financial statements of Talk City, Inc. filed as
part of this Annual Report on Form 10-K.

3.   Exhibits.

     The exhibits set forth below, and listed on the accompanying index to
exhibits, are filed as part of, or incorporated by reference into, this Annual
Report on Form 10-K.

<TABLE>
<CAPTION>
  Exhibit
   Number                                            Description
  -------                                            -----------
<S>           <C>
    2.1       Agreement and Plan of Reorganization between the Company and Research Connections, Inc.,
              dated January 3, 2000.***

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

    3.3       Bylaws of the Company.*

    4.1       Form of the Company's Common Stock certificate.*

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

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

   10.2       1996A Stock Option Plan and related agreements.*

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

   10.4       1999 Employee Stock Purchase Plan.*

   10.5       1999 Director Option Plan.*

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

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

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

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

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

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

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

   10.13      Content and Services Agreement, effective July 19, 1998, by and between the Company and
              WebTV Networks, Inc., as amended on July 27, 2000.****

</TABLE>
                                       53
<PAGE>

<TABLE>
<CAPTION>
  Exhibit
   Number                                            Description
  -------                                            -----------
<S>           <C>
   10.14      Contract, dated May 13, 1997, by and between the Company and NFO Research.*

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

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

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

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

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

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

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

   23.1       Consent of KPMG LLP, Independent Auditors

   24.1       Power of Attorney (see page 55)
</TABLE>
______________
<TABLE>
<CAPTION>
<C>     <S>
*       Incorporated by reference from the Company's 424(b) Prospectus, dated July 19, 1999, as declared effective by the Securities
        and Exchange Commission on July 19, 1999.

**      Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1999.

***     Incorporated by reference from the Company's Annual Report on Form 10-K for the period ended December 31, 1999.

****    Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000.
</TABLE>

Item 14b.  Reports on Form 8-K.

     On December 5, 2000, the Company filed a Report on Form 8-K on which it
disclosed:  (i) the resignation of John Sculley from the Board of Directors, and
(ii) the receipt of correspondence from the Nasdaq Stock Market, Inc. regarding
the potential delisting of the Company's shares from the Nasdaq National Market.

     On February 12, 2001, the Company filed a Report on Form 8-K disclosing the
resignation of Thomas P. Hirschfeld and Joseph A. Graziano from the Board of
Directors, effective January 1, 2001.

                                       54
<PAGE>

                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Santa Clara, State of
California, on the Second day of April, 2001.

                                    TALK CITY
                                    ---------

                                    By:  /s/ Peter Friedman
                                        -------------------
                                        Name:   Peter Friedman
                                        Title:  Chief Executive Officer and
                                                Chairman of the Board

                               POWER OF ATTORNEY


     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Peter H. Friedman and V. David
Watkins each of them acting individually, as his attorneys-in-fact, each with
full power of substitution, for him in any and all capacities, to sign any and
all amendments to this report, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorney to any and all amendments said report.

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act, this report has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
               Signature                                   Title                              Date
-------------------------------------------------------------------------------------------------------------
<S>                                       <C>                                       <C>
/s/ Peter H. Friedman                     Chief Executive Officer and Chairman of        April 2, 2001
-----------------------------             the Board.
    Peter H. Friedman                     Principal Executive Officer.
-------------------------------------------------------------------------------------------------------------
/s/ V. David Watkins                      President and Chief Operating Officer.
-----------------------------             Principal Financial Officer.                   April 2, 2001
    V. David Watkins
-------------------------------------------------------------------------------------------------------------
/s/ Brian D. Gentry                       Vice President, Finance and
-----------------------------             Controller.                                    April 2, 2001
    Brian D. Gentry                       Principal Accounting Officer.
-------------------------------------------------------------------------------------------------------------
/s/ Kenneth A. Bronfin
-----------------------------             Director                                       April 2, 2001
    Kenneth A. Bronfin
-------------------------------------------------------------------------------------------------------------
/s/ Barry M. Weinman
-----------------------------             Director                                       April 2, 2001
    Barry M. Weinman
-------------------------------------------------------------------------------------------------------------
/s/ Martin J. Yudkovitz
-----------------------------             Director                                       April 2, 2001
    Martin J. Yudkovitz
-------------------------------------------------------------------------------------------------------------
</TABLE>

                                       55
<PAGE>

Item 14c.    Exhibits

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
  Exhibit
   Number                                         Description
 ---------    ----------------------------------------------------------------------------------------
<S>           <C>
    2.1       Agreement and Plan of Reorganization between the Company and Research Connections, Inc.,
              dated January 3, 2000.***

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

    3.3       Bylaws of the Company.*

    4.1       Form of the Company's Common Stock certificate.*

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

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

   10.2       1996A Stock Option Plan and related agreements.*

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

   10.4       1999 Employee Stock Purchase Plan.*

   10.5       1999 Director Option Plan.*

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

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

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

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

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

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

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

   10.13      Content and Services Agreement, effective July 19, 1998, by and between the Company and
              WebTV Networks, Inc., as amended on July 27, 2000.****

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

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

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

                                       56
<PAGE>

<TABLE>
<CAPTION>
  Exhibit
   Number                                         Description
 ---------    ----------------------------------------------------------------------------------------
<S>           <C>
   10.17      Series D Preferred Stock Purchase Agreement, dated October 30, 1998, by and between the
              Company and Hearst Communications, Inc., Hearst New Media & Technology division, as
              amended on April 15, 1999.*

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

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

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

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

   23.1       Consent of KPMG LLP, Independent Auditors

   24.1       Power of Attorney (see page 55)
</TABLE>
______________
<TABLE>
<CAPTION>
<S>      <C>
*         Incorporated by reference from the Company's 424(b) Prospectus, dated July 19, 1999, as declared effective by the
          Securities and Exchange Commission on July 19, 1999.

**        Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1999.

***       Incorporated by reference from the Company's Annual Report on Form 10-K for the period ended December 31, 1999.

****      Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000.
</TABLE>

                                       57
<PAGE>

Item 14d.  Financial Statement Schedule.

     The following financial statement schedule for the years ended December 31,
2000, 1999 and 1998 should be read in conjunction with the financial statements
of Talk City, Inc. filed as part of this Annual Report on Form 10-K.

                Schedule II - Valuation and Qualifying Accounts


<TABLE>
<CAPTION>
                                                                           Charged to
                                                 Balance at   Charged to     other
                                                Beginning of  costs and    accounts -    Deduction -    Balance at
                 Description                       Period      expenses   describe (1)  describe  (2)  end of period
--------------------------------------------------------------------------------------------------------------------
<S>                                             <C>           <C>         <C>           <C>            <C>
Year ended December 31, 2000
 Deducted from asset accounts:
  Allowance for doubtful accounts                   $254,144  $1,627,186     $159,324        321,628      $1,719,026
--------------------------------------------------------------------------------------------------------------------

Year ended December 31, 1999
 Deducted from asset accounts:
  Allowance for doubtful accounts                   $100,000  $  214,084     $104,144        164,084      $  254,144
--------------------------------------------------------------------------------------------------------------------

Year ended December 31, 1998
 Deducted from asset accounts:
  Allowance for doubtful accounts                         --  $  100,000           --             --      $  100,000
--------------------------------------------------------------------------------------------------------------------
</TABLE>
  (1)  Charges to revenue, net
  (2) Uncollectible accounts written off, net of recoveries

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