---

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 2001

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 000-27405

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NETZERO, INC.(Exact name of registrant as specified in its charter)

Delaware

95-4644384(State or other jurisdiction of
incorporation or organization)

(I.R.S Employer Identification No.)2555 Townsgate Road,
Westlake Village, California

91361(Address of principal executive office)

(Zip Code)


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

Not Applicable(Former name, former address and former fiscal year, if changed since last report)

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

There
were 125,315,028 shares of the registrant's common stock outstanding as of May 7, 2001.

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INDEX

|PART I.    |  | FINANCIAL INFORMATION                                                                                           |  |   
|---------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|Item 1.    |  | Consolidated Balance Sheets at March 31, 2001 and June 30, 2000                                                 |  | 3 
|           |  | Consolidated Statements of Operations for the three and nine months ended March 31, 2001 and 2000, respectively |  | 4 
|           |  | Consolidated Statements of Cash Flow for the nine months ended March 31, 2001 and 2000                          |  | 5 
|           |  | Notes to the Consolidated Financial Statements                                                                  |  | 6 
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                           |  | 13
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 41
|PART II.   |  | OTHER INFORMATION                                                                                               |  |   
|Item 1.    |  | Legal Proceedings                                                                                               |  | 41
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                       |  | 42
|Item 3.    |  | Defaults Upon Senior Securities                                                                                 |  | 42
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                             |  | 42
|Item 5.    |  | Other Information                                                                                               |  | 43
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                |  | 43
|Signatures |  | 45                                                                                                             

In
this Report, "NetZero," the "Company," "we," "us" and "our" collectively refers to NetZero, Inc. and its wholly-owned subsidiaries.

2

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Part I. Financial Information

NETZERO, INC.
CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                     | March 31,
2001                             |            | June 30,
2000 |            
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ------------- | -----------
|
|Assets                               |                                                                                                                                                                     |                                            |            |               |            
|Current assets:                      |                                                                                                                                                                     |                                            |            |               |            
|                                     | Cash and cash equivalents                                                                                                                                           |                                            | $          | 68,658,000    |            
|                                     | Short-term investments                                                                                                                                              |                                            |            | 81,877,000    |            
|                                     | Restricted cash                                                                                                                                                     |                                            |            | 10,062,000    |            
|                                     | Accounts receivable, net of allowance for doubtful accounts of $1,780,000 at March 31, 2001 and $1,651,000 at June 30, 2000                                         |                                            |            | 10,012,000    |            
|                                     | Other current assets                                                                                                                                                |                                            |            | 6,447,000     |            
|                                     |                                                                                                                                                                     |                                            |            |               |            
|                                     |                                                                                                                                                                     | Total current assets                       |            |               | 177,056,000
|Property and equipment, net          |                                                                                                                                                                     |                                            | 32,853,000 |               |            
|Restricted cash                      |                                                                                                                                                                     |                                            | 2,353,000  |               |            
|Intangible assets, net               |                                                                                                                                                                     |                                            | 1,488,000  |               |            
|Other assets                         |                                                                                                                                                                     |                                            | 2,674,000  |               |            
|                                     |                                                                                                                                                                     |                                            |            |               |            
|                                     |                                                                                                                                                                     | Total assets                               |            | $             | 216,424,000
|                                     |                                                                                                                                                                     |                                            |            |               |            
|Liabilities and Stockholders' Equity |                                                                                                                                                                     |                                            |            |               |            
|Current liabilities:                 |                                                                                                                                                                     |                                            |            |               |            
|                                     | Accounts payable                                                                                                                                                    |                                            | $          | 22,149,000    |            
|                                     | Accrued liabilities                                                                                                                                                 |                                            |            | 3,959,000     |            
|                                     | Deferred revenue                                                                                                                                                    |                                            |            | 1,870,000     |            
|                                     | Current portion of notes payable                                                                                                                                    |                                            |            | 1,827,000     |            
|                                     | Current portion of capital leases                                                                                                                                   |                                            |            | 5,072,000     |            
|                                     |                                                                                                                                                                     |                                            |            |               |            
|                                     |                                                                                                                                                                     | Total current liabilities                  |            |               | 34,877,000 
|Notes payable less current portion   |                                                                                                                                                                     |                                            | 749,000    |               |            
|Capital leases less current portion  |                                                                                                                                                                     |                                            | 4,009,000  |               |            
|Stockholders' equity                 |                                                                                                                                                                     |                                            |            |               |            
|                                     | Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized and no shares issued and outstanding at March 31, 2001 and June 30, 2000, respectively  |                                            |            |              |            
|                                     | Common stock, $0.001 par value; 500,000,000 authorized; 125,329,000 and 116,712,000 shares issued and outstanding at March 31, 2001 and June 30, 2000, respectively |                                            |            | 125,000       |            
|                                     | Additional paid-in capital                                                                                                                                          |                                            |            | 466,247,000   |            
|                                     | Notes receivable from stockholders                                                                                                                                  |                                            |            | (820,000      | )          
|                                     | Deferred stock-based charges                                                                                                                                        |                                            |            | (18,939,000   | )          
|                                     | Other accumulated comprehensive income                                                                                                                              |                                            |            | 395,000       |            
|                                     | Accumulated deficit                                                                                                                                                 |                                            |            | (270,219,000  | )          
|                                     |                                                                                                                                                                     |                                            |            |               |            
|                                     |                                                                                                                                                                     | Total stockholders' equity                 |            |               | 176,789,000
|                                     |                                                                                                                                                                     |                                            |            |               |            
|                                     |                                                                                                                                                                     | Total liabilities and stockholders' equity |            | $             | 216,424,000
|                                     |                                                                                                                                                                     |                                            |            |               |            

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

3

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NETZERO, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     | Three Months Ended
March 31, |             | Nine Months Ended
March 31, |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ----------- | --------------------------- | -
|
|Revenues                                                                                                                                                                                                          |                                                                                                                                                                                                                                     |                              |             |                             |  
|                                                                                                                                                                                                                  | Advertising and commerce                                                                                                                                                                                                            |                              | $           | 10,992,000                  |  
|                                                                                                                                                                                                                  | Billable services                                                                                                                                                                                                                   |                              |             | 1,778,000                   |  
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|                                                                                                                                                                                                                  | Total revenues                                                                                                                                                                                                                      |                              |             | 12,770,000                  |  
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|Cost of revenues (including stock-based charges of $80,000 and $96,000 for the quarters ended March 31, 2001 and 2000, and $319,000 and $285,000 for the nine months ended March 31, 2001 and 2000, respectively) |                                                                                                                                                                                                                                     |                              | 24,677,000  |                             |  
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|Gross loss                                                                                                                                                                                                        |                                                                                                                                                                                                                                     |                              | (11,907,000 | )                           |  
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|Operating expenses                                                                                                                                                                                                |                                                                                                                                                                                                                                     |                              |             |                             |  
|                                                                                                                                                                                                                  | Sales and marketing (including stock-based charges of $1,461,000 and $804,000 for the quarters ended March 31, 2001 and 2000, and $4,050,000 and $1,328,000 for the nine months ended March 31, 2001 and 2000,
respectively)        |                              |             | 12,490,000                  |  
|                                                                                                                                                                                                                  | Product development (including stock-based charges of $1,548,000 and $81,000 for the quarters ended March 31, 2001 and 2000, and $5,071,000 and $240,000 for the nine months ended March 31, 2001 and 2000,
respectively)           |                              |             | 6,760,000                   |  
|                                                                                                                                                                                                                  | General and administrative (including stock-based charges of $1,515,000 and $980,000 for the quarters ended March 31, 2001 and 2000, and $6,303,000 and $2,906,000 for the nine months ended March 31, 2001 and
2000, respectively) |                              |             | 7,066,000                   |  
|                                                                                                                                                                                                                  | Amortization of intangible assets                                                                                                                                                                                                   |                              |             | 6,539,000                   |  
|                                                                                                                                                                                                                  | Impairment of goodwill and intangible assets                                                                                                                                                                                        |                              |             | 48,622,000                  |  
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|                                                                                                                                                                                                                  | Total operating expenses                                                                                                                                                                                                            |                              |             | 81,477,000                  |  
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|Loss from operations                                                                                                                                                                                              |                                                                                                                                                                                                                                     |                              | (93,384,000 | )                           |  
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|Interest and other income                                                                                                                                                                                         |                                                                                                                                                                                                                                     |                              | 2,362,000   |                             |  
|Interest and other expense                                                                                                                                                                                        |                                                                                                                                                                                                                                     |                              | (366,000    | )                           |  
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|Net loss                                                                                                                                                                                                          |                                                                                                                                                                                                                                     | $                            | (91,388,000 | )                           | $
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|Unrealized gain on short-term investments                                                                                                                                                                         |                                                                                                                                                                                                                                     |                              | 395,000     |                             |  
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|Comprehensive loss                                                                                                                                                                                                |                                                                                                                                                                                                                                     | $                            | (90,993,000 | )                           | $
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|Basic and diluted net loss per share                                                                                                                                                                              |                                                                                                                                                                                                                                     | $                            | (0.79       | )                           | $
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  
|Shares used to calculate basic and diluted net loss per share                                                                                                                                                     |                                                                                                                                                                                                                                     |                              | 115,711,000 |                             |  
|                                                                                                                                                                                                                  |                                                                                                                                                                                                                                     |                              |             |                             |  

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

4

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NETZERO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)

|                                                                        |                                                                              | Nine Months Ended
March 31,                                                              |                                                 
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------
|
|Cash flows from operating activities:                                   |                                                                              |                                                                                          |                                                 
|                                                                        | Net loss                                                                     |                                                                                          | $                                               
|                                                                        | Adjustments to reconcile net loss to net cash used for operating activities: |                                                                                          |                                                 
|                                                                        |                                                                              | Depreciation and amortization                                                            |                                                 
|                                                                        |                                                                              | Impairment of goodwill and intangible assets                                             |                                                 
|                                                                        |                                                                              | Loss on disposal of property and equipment                                               |                                                 
|                                                                        |                                                                              | Allowance for doubtful accounts                                                          |                                                 
|                                                                        |                                                                              | Stock-based charges                                                                      |                                                 
|                                                                        |                                                                              | Accrued interestnotes receivable from stockholders                                      |                                                 
|                                                                        |                                                                              | Changes in operating assets and liabilities (excluding the effects of the acquisitions): |                                                 
|                                                                        |                                                                              |                                                                                          | Restricted cash                                 
|                                                                        |                                                                              |                                                                                          | Accounts receivable                             
|                                                                        |                                                                              |                                                                                          | Other assets                                    
|                                                                        |                                                                              |                                                                                          | Accounts payable and accrued expenses           
|                                                                        |                                                                              |                                                                                          | Deferred revenue                                
|                                                                        |                                                                              |                                                                                          |                                                 
|                                                                        |                                                                              |                                                                                          | Net cash used for operating activities          
|                                                                        |                                                                              |                                                                                          |                                                 
|Cash flows from investing activities:                                   |                                                                              |                                                                                          |                                                 
|                                                                        | Purchase of property and equipment                                           |                                                                                          |                                                 
|                                                                        | Purchase of patent rights                                                    |                                                                                          |                                                 
|                                                                        | Purchase of short-term investments                                           |                                                                                          |                                                 
|                                                                        | Proceeds from sale of short-term investments                                 |                                                                                          |                                                 
|                                                                        | Cash paid for acquisitions, net of cash acquired                             |                                                                                          |                                                 
|                                                                        |                                                                              |                                                                                          |                                                 
|                                                                        |                                                                              |                                                                                          | Net cash used for investing activities          
|                                                                        |                                                                              |                                                                                          |                                                 
|Cash flows from financing activities:                                   |                                                                              |                                                                                          |                                                 
|                                                                        | Payments on capital leases                                                   |                                                                                          |                                                 
|                                                                        | Payments on notes payable                                                    |                                                                                          |                                                 
|                                                                        | Proceeds from equipment financing                                            |                                                                                          |                                                 
|                                                                        | Proceeds from notes payable                                                  |                                                                                          |                                                 
|                                                                        | Repayment of notes receivable from stockholders                              |                                                                                          |                                                 
|                                                                        | Proceeds from exercise of stock options                                      |                                                                                          |                                                 
|                                                                        | Stock repurchases                                                            |                                                                                          |                                                 
|                                                                        | Proceeds from employee stock purchase plan                                   |                                                                                          |                                                 
|                                                                        | Net proceeds from issuance of common stock                                   |                                                                                          |                                                 
|                                                                        |                                                                              |                                                                                          |                                                 
|                                                                        |                                                                              |                                                                                          | Net cash (used) provided by financing activities
|                                                                        |                                                                              |                                                                                          |                                                 
|Change in cash and cash equivalents                                     |                                                                              |                                                                                          | (132,854,000                                    
|Cash and cash equivalents, beginning of period                          |                                                                              |                                                                                          | 201,512,000                                     
|                                                                        |                                                                              |                                                                                          |                                                 
|Cash and cash equivalents, end of period                                |                                                                              | $                                                                                        | 68,658,000                                      
|                                                                        |                                                                              |                                                                                          |                                                 
|Supplemental disclosure of non-cash investing and financing activities: |                                                                              |                                                                                          |                                                 
|                                                                        | Equipment obtained under capital leases                                      |                                                                                          | $                                               
|                                                                        |                                                                              |                                                                                          |                                                 
|                                                                        | Stock issued for acquisitions                                                |                                                                                          | $                                               
|                                                                        |                                                                              |                                                                                          |                                                 
|                                                                        | Issuance of warrant for marketing services                                   |                                                                                          | $                                               
|                                                                        |                                                                              |                                                                                          |                                                 

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

5

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NETZERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Organization and Business.

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

NetZero
offers both free and pay Internet access services. The NetZero free Internet service is currently available for up to 40 hours per month per household. Households that
wish to continue with the free service beyond the current 40 hour limit may choose to subscribe to the "NetZero Professional" service, which requires them to pay $9.95, and provides them with
an extended access pass enabling unlimited Internet access for the remainder of that month. In addition, the Company currently offers the "NetZero Platinum" monthly subscription service for $9.95 per
month, which provides users with unlimited Internet access each month and features an ultra-thin toolbar without the advertising banners currently included on the ZeroPort of the free
service.

2. Basis of Presentation.

The consolidated financial statements are unaudited, other than the balance sheet information for the Company as of June 30, 2000 and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the results for the periods shown. The results of operations for
such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. Certain amounts in the prior year's financial statements have been reclassified
to conform to the presentation of the current period. These consolidated financial statements should be read in conjunction with the audited financial statements
and related notes included in the Company's Annual Report on Form 10-K for the year ended June 30, 2000 filed on September 28, 2000 with the Securities and Exchange
Commission (the "SEC").

At
March 31, 2001, the Company had cash, cash equivalents and short-term investments of approximately $150.5 million. The Company considers its existing
cash, cash equivalents and short-term investments to be adequate to fund its operating activities, capital expenditures and other obligations for at least the next 12 months.
However, the Company may need to raise additional capital for a variety of reasons including, without limitation, in order to fund more rapid growth, expand marketing activities, develop new or
enhance existing services or products to respond to competitive pressures or to acquire complementary services, businesses or technologies. If, in the future, the Company is not successful in
generating sufficient cash flow from operations, additional capital through public or private financings, strategic relationships or other arrangements will be necessary. This additional funding, if
needed, might not be available on acceptable terms, or at all. Failure to raise sufficient capital when needed could have a material adverse effect on the business, results of operations and financial
condition of the Company. If additional funds were raised through the issuance of equity securities, the percentage of stock owned by the then-current stockholders would be reduced.
Furthermore, such equity securities might have rights, preferences or privileges senior to those of the common stockholders.

6

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The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results may differ from those estimates.

3. Recent Accounting Pronouncements.

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

In
December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. In June 2000, the SEC issued SAB 101B, which requires implementation of SAB 101 by the Company no later than
June 30, 2001. The SEC issued additional guidance in the form of its Frequently Asked Questions and Answers document in October 2000. The Company believes that the adoption of SAB 101
will not have a material impact on the Company's financial position and results of operations.

In
March 2000, the FASB issued FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving Stock Compensation." FIN 44 provides guidance for
issues arising in applying APB 25. FIN 44 applies specifically to new awards, exchanges of awards in a business combination, modification to outstanding awards and changes in grantee status that occur
on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. The application of FIN
44 has not had a material impact on the Company's financial reporting.

4. Significant Accounting Policies.

Revenue Recognition

The Company's revenues are derived principally from the sale of advertising, which includes targeted and non-targeted banner advertisements,
placements and sponsorships, referrals of users to other web-sites, performance-based agreements including e-commerce arrangements and advertising messages delivered to the
Company's users via e-mail. Banner advertising and sponsorship revenues are recognized in the periods in which the advertisement or sponsorship placement is displayed, based upon the
lesser of impressions delivered over the total number of guaranteed impressions or ratably over the period in which the advertisement is displayed, provided that no significant Company obligations
remain, fees are fixed and determinable, and collection of the related receivable is probable. The Company's obligations typically include the guarantee of a minimum number of impressions or the
satisfaction of other performance criteria. Revenues from performance-based arrangements are recognized as the related performance criteria are met. Referral revenues are recognized as referrals are
made to advertisers' or sponsors' web-sites, provided that no significant Company obligations remain, fees are fixed and determinable, and collection of the related receivable is probable.
Barter transactions are recorded at the fair value of the goods or services provided or received, whichever is more readily determinable under the circumstances. In determining the value of the goods
or services

7

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provided, the Company uses historical pricing of comparable cash transactions. For the periods presented, revenues recognized from barter transactions were less than 1% of total net revenues.

The
Company also derives revenues from billable products and services, such as its pay Internet access services. Billable services revenues are recognized in the period in which the
related products or services are provided to the user. Billable services revenue primarily consists of subscription fees that are received from users of the Company's fee-based access services. In
addition, billable services revenues include fees charged to prospective users related to the cost of producing, shipping and handling of CD's containing the Company's software. The Company generally
requires that subscribers pre-pay for their billable services, which results in the deferral of certain revenues into the period in which the related access services are provided.

Long Lived Assets

The Company identifies and records impairment losses on long-lived assets, including goodwill that is not identified with an impaired asset, when
events and circumstances indicate that such assets might be impaired. Events and circumstances that may indicate that an asset is impaired include significant decreases in the market value of an
asset, a change in the extent or manner in which an asset is used, shifts in technology, loss of key management or personnel, changes in the operating model or strategy and competitive forces.

If
events and circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset is less than
the carrying amount of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Fair value is determined based on the present value of estimated
expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the assets.

5. Intangible Assets.

Intangible assets consist primarily of purchased technology, acquired workforce, acquired brand name and content, non-compete agreements, acquired
users, and goodwill related to the acquisitions of AimTV, Inc. ("AimTV"), Simpli.com, Inc. ("Simpli.com"), RocketCash Corporation ("RocketCash"), and FreeI Networks, Inc.
("Freei"). These acquisitions were accounted for as purchases and are further described in Note 6. Amortization of goodwill and identifiable intangible assets is provided for on the
straight-line basis over the estimated useful lives of the asset, which range from two to four years.

During
the third quarter of fiscal 2001, the Company identified indications of possible impairment of its long-lived assets, principally goodwill and other acquired
intangible assets. Such indicators included deterioration in the business climate for Internet advertising and other web-related companies, reduced levels of venture capital funding
activity for Internet-based consumer businesses, which historically have represented a significant portion of our revenues, significant declines in the market values of NetZero and our competitors in
the Internet advertising industry for a significant period of time, recent changes in the Company's 2001 operating and cash flow forecasts and long-term strategies as a result of
significant declines in the Internet advertising market and related revenues, and changes in strategic plans for certain of our acquired businesses.

Asset
impairment tests were performed at the enterprise and lowest level for which there are identifiable cash flows. The tests were performed by comparing the expected undiscounted
cash flows over the estimated useful lives of the assets, plus a terminal value for future cash flows, to the carrying amount of the goodwill and other intangible assets resulting from purchase
business combinations. Based on the results of these tests, it was determined that goodwill and other identifiable intangible assets initially recorded in connection with the acquisitions of AimTV,
Simpli.com, RocketCash and Freei were impaired.

8

---

The Company determined the fair value of the impaired assets using the discounted cash flow method and the market comparison method. An impairment of goodwill and intangible assets
totaling $48.6 million was recorded during the the quarter ended March 31, 2001, reflecting the amount by which the carrying amount of the assets exceeded their respective fair values.
The impairment consisted of $33.5 million for goodwill and $15.1 million for other acquired intangible assets. No impairment of goodwill or other acquired intangible assets was recorded
during fiscal 2000.

6. Acquisitions.

In December 1999, the Company acquired 100% of the outstanding capital stock and options of AimTV. AimTV has developed a patent-pending technology
designed to enable advertisers to run broadcast-quality commercials over narrowband Internet connections. Pursuant to the terms of the agreement, the outstanding capital stock and options were
exchanged for approximately 973,000 shares of common stock and options to purchase common stock of NetZero. The transaction has been accounted for under the purchase method and, accordingly, the
results of operations of AimTV have been included in the consolidated results of the Company since the date of acquisition. The excess of the purchase price over the fair value of net liabilities
acquired amounted to approximately $23.7 million. The excess purchase price was comprised of approximately $14.3 million of goodwill and $9.4 million of identifiable intangible
assets. Management has estimated the fair value of the net assets acquired, based on discounted future cash flows as well as strategic and market factors, to be below the carrying values of goodwill
and identifiable intangible assets. Accordingly, NetZero took an impairment charge during the quarter ended March 31, 2001 of approximately $11.1 million, to write off the remaining
balance of the goodwill and intangible assets acquired in connection with this acquisition.

In
August 2000, the Company acquired Simpli.com in a stock and cash transaction. Simpli.com is a targeted marketing infrastructure and search technology company. Pursuant to
the terms of the agreement, the Company issued 2.5 million shares of common stock and paid $2.6 million in cash. The transaction has been accounted for under the purchase method and,
accordingly, the results of
operations of Simpli.com have been included in the consolidated results of the Company since the date of acquisition. The excess of the purchase price over the fair value of net liabilities acquired
amounted to approximately $23.5 million. The excess purchase price was comprised of approximately $8.7 million of goodwill, $8.4 million of deferred stock-based charges and
$6.4 million of identifiable intangible assets all of which are being amortized over periods ranging from two to three years. Management has estimated the fair value of the net assets acquired,
based on discounted future cash flows as well as strategic and market factors, to be below the carrying values of goodwill and identifiable intangible assets. Accordingly, NetZero took an impairment
charge during the quarter ended March 31, 2001 of approximately $11.6 million, to write off the remaining balance of the goodwill and intangible assets acquired in connection with this
acquisition.

In
September 2000, the Company acquired RocketCash in a stock for stock transaction. RocketCash is a leading online gateway that enables consumers, particularly the rapidly
growing teen market, to shop and buy securely on the Internet without a credit card. Pursuant to the terms of the agreement, the Company issued approximately 5.2 million shares of common stock
and options to purchase common stock. The transaction has been accounted for under the purchase method and, accordingly, the results of operations of RocketCash have been included in the consolidated
results of the Company since the date of acquisition. The excess of the purchase price over the fair value of net liabilities acquired amounted to approximately $30.2 million. The excess
purchase price was comprised of approximately $18.1 million of goodwill, $9.0 million of identifiable intangible assets and $3.1 million of deferred stock-based charges all of
which are being amortized over periods ranging from two to four years. Management has estimated the fair value of the net assets acquired, based on discounted future cash flows as well as strategic
and market factors, to be below the carrying values of goodwill and identifiable intangible assets. Accordingly, NetZero took an impairment charge during the quarter

9

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ended March 31, 2001 of approximately $21.6 million, to write off the remaining balance of the goodwill and intangible assets acquired in connection with this acquisition.

In
November 2000, the Company acquired certain assets of Freei for approximately $4.6 million. Assets acquired included the domain names "Freeinternet.com",
"Freeinet.com" and "Freei.net", certain proprietary rights, certain fixed assets, and the rights to market NetZero's service to Freei's users. The assets acquired have been included in the
consolidated balance sheet of the Company at their fair market value since the date of acquisition and are being amortized generally over a two-year period. The Company has estimated the
fair value of the net assets acquired, based on discounted future cash flows as well as strategic and market factors, to be below the carrying values of the assets. Accordingly, NetZero took an
impairment charge during the quarter ended March 31, 2001 of approximately $3.3 million to write off the remaining balances of the intangible assets acquired in connection with this
acquisition.

The
following summarized unaudited pro forma financial information for the nine months ended March 31, 2001 and 2000 assumes that the acquisitions had occurred at the beginning
of each period presented:

Nine Months Ended
March 31,2001

2000Net revenues

$
45,253,000

$
36,840,000Net loss

$
(168,949,000
)
$
(96,039,000
)Net loss per share

$
(1.47
)
$
(1.33
)


7. Concentration of Credit Risk.

At March 31, 2001 and March 31, 2000, two customers comprised approximately 21%, and 11%, and one customer comprised 11%, of the accounts
receivable balance, respectively. For the three months ended March 31, 2001 and March 31, 2000, three customers comprised 20%, 14% and 11% of revenues, and one customer comprised 26% of
revenues, respectively. For the nine months ended March 31, 2001 and March 31, 2000, three customers comprised 25%, 12%, and 11% of revenues, and two customers comprised 31% and 15% of
revenues, respectively.

8. Equity.

Initial Public Offering

In September 1999, the Company completed an initial public offering in which the Company sold 11.5 million shares of its common stock, including
1.5 million shares in connection with the exercise of the underwriters' over-allotment option, at $16 per share. The proceeds to the Company from the offering, after deducting
offering expenses, including underwriting discounts and commissions, were
$169.3 million. Upon the closing of the offering, all of the Company's then outstanding preferred stock automatically converted into common stock on an one-for-one
basis.

Private Placement

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

Restricted Stock Awards

In July 2000, certain employees were granted restricted stock awards totaling approximately 1.5 million shares of common stock. The shares of
common stock subject to such awards will vest and

10

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be issued in twelve successive equal quarterly installments beginning in August 2000. The Company has recorded deferred stock-based charges of approximately $7.8 million in connection
with these awards.

Marketing Agreements

In connection with the acquisition of RocketCash, the Company issued 500,000 shares of its common stock in connection with a RocketCash consumer-marketing
program and recorded stock-based charges of approximately $2.8 million. These charges are being amortized in sales and marketing expense over the fifteen-month term of the agreement.

9. Earnings (Loss) Per Share.

The Company has adopted SFAS No. 128, "Earnings per Share" ("EPS"). SFAS No. 128 requires dual presentation of basic and diluted EPS. Basic EPS
represents the weighted average number of shares outstanding divided into net income (loss) during a reported period. Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common stock. The Company has not included potential common stock in the calculation of EPS as such inclusion would have an
anti-dilutive effect.

The
following table sets forth the computation of basic and diluted net loss per share:

|                                     |                                                    | Three Months Ended
March 31, |       | Nine Months Ended
March 31, |  
|------------------------------------ | -------------------------------------------------- | ---------------------------- | ----- | --------------------------- | -
|
|Numerator:                           |                                                    |                              |       |                             |  
|                                     | Net loss                                           |                              | $     | (91,388,000                 | )
|                                     |                                                    |                              |       |                             |  
|Denominator:                         |                                                    |                              |       |                             |  
|                                     | Weighted average common shares                     |                              |       | 125,287,000                 |  
|                                     | Adjustment for common shares subject to repurchase |                              |       | (9,576,000                  | )
|                                     |                                                    |                              |       |                             |  
|                                     | Adjusted weighted average common shares            |                              |       | 115,711,000                 |  
|                                     |                                                    |                              |       |                             |  
|Basic and diluted net loss per share |                                                    | $                            | (0.79 | )                           | $
|                                     |                                                    |                              |       |                             |  

10. Commitments and Contingencies.

In December 2000, NetZero sued Juno Online Services ("Juno") for patent infringement and filed a motion for a temporary restraining order restricting
Juno from displaying banner advertisements on its service. In January 2001, the temporary restraining order was granted and NetZero posted a bond in the amount of $5.0 million. In April 2001,
the temporary restraining order was lifted and Juno subsequently informed NetZero that it intends to seek recourse against the bond to recover damages
incurred during the time the temporary restraining order was in place. NetZero believes its initial patent claims are meritorious, although the matter will not be decided until a trial on the merits,
which may not occur until calendar 2002. If the Company succeeds on the merits, it does not believe Juno will be entitled to damages as a result of the temporary restraining order. Even if Juno were
to succeed in its damage claim, the Company does not believe that any payments to be made by NetZero in connection therewith would be material to its financial position, results of operations and cash
flows. However, there can be no assurance of the outcome of this matter.

In
April 2001, NetZero and certain of its officers and directors were served with a complaint alleging violations of the federal securities laws. A number of other complaints
have since been filed containing similar allegations, but only one other complaint has been served as of May 14, 2001. These

11

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complaints were brought as purported shareholder class actions under Sections 11 and 15 of the Securities Act of 1933, as amended.

The
complaints generally allege that the prospectus through which NetZero conducted its initial public offering in September 1999 was materially false and misleading because it
failed to disclose, among other things, that (i) the underwriters of NetZero's initial public offering had solicited and received excessive and undisclosed commissions from certain investors in
exchange for which the underwriters allocated to those investors material portions of the restricted number of NetZero shares issued in connection with initial public offering; and (ii) the
underwriters had entered into agreements with customers whereby they agreed to allocate NetZero shares to those customers in the initial public offering in exchange for which the customers agreed to
purchase additional NetZero shares in the aftermarket at pre-determined prices.

The
pending lawsuits involve complex questions of fact and law and likely will require the expenditure of significant funds and the diversion of other resources to defend. Although
the Company believes the outcome of the above outstanding legal proceedings, claims and litigation will not have a material adverse effect on its business, results of operations or financial position,
the results of litigation are inherently uncertain, and an adverse outcome is at least reasonably possible. The Company is unable to estimate the range of possible loss from outstanding litigation,
and no amounts have been provided for such matters in the accompanying consolidated financial statements.

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

12

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

This report on Form 10-Q contains forward-looking statements based on our current expectations, estimates and projections about our
operations, industry, financial condition and liquidity. Words such as "anticipates," "expects," "intends," "plans," "believes," "may," "will" or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are
forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our
actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled "Risk Factors" set forth in this
Form 10-Q and our Form 10-K for the year ended June 30, 2000, discuss some of the important risk factors that may affect our business, results of
operations and financial condition. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Overview

We are a leading provider of free and pay Internet access services and targeted marketing solutions. We offer consumers free and pay access to the Internet,
free e-mail and customizable navigation tools that provide "speed dial" to key sites on the Internet. Our services are currently available in more than 5,000 cities across the United
States and Canada. In addition to offering consumers access to the Internet, we offer mass marketers targeting capabilities through numerous online advertising channels. We also offer advertisers and
commerce partners a variety of additional services to build their brands and market their products, including referring our users to partners' web-sites, enabling customer registrations
and facilitating electronic commerce transactions. Our CyberTarget division offers marketers and advertisers mass-scale, online market research and measurement services.

We
incorporated in July 1997 and launched our Internet access service in October 1998. During that period, we had no revenues and our operating activities related
primarily to the development of our proprietary zCast software. Since October 1998, we have focused on building our free Internet access business and the NetZero brand.

In
January 2001, we began limiting our free Internet service to a maximum of 40 hours per household per calendar month. Households desiring to exceed the 40 hour
limitation are currently offered the opportunity to sign up for "NetZero Professional," a service plan that provides households the option to pay a fee, currently set at $9.95, to allow them access to
our service for the remainder of the
calendar month. If these households elect not to pay a fee when they reach the 40 hour limit during a given month they will be denied access to our service for the remainder of the month, but their
account will not be terminated and they can begin accessing the service for free at the beginning of the next month.

In
March 2001, we launched a new service called "NetZero Platinum". The NetZero Platinum service is intended to offer households Internet service for a monthly fee, currently
$9.95, that is in most respects the same as NetZero's standard free service except that the 40 hour limitation does not apply, the user accesses a modified start-page and the service features a
small toolbar without the advertising banners currently included in the ZeroPort on the free service. There can be no assurance that these new products and services will meet with commercial success.

Through
March 31, 2001 approximately 8.6 million users registered for our Internet access services, of which approximately 3.9 million used the service in the
month of March. Approximately 75,000 of these users had subscribed to one of our billable Internet access services during the month of March.

13

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In December 1999, we acquired AimTV, which has developed a patent-pending technology to run broadcast quality television commercials over narrowband Internet connections
resulting in the launch of NZTV in May 2000. In August 2000, we acquired Simpli.com, which has developed proprietary technologies to enhance our banner targeting and personalization
capabilities. In September 2000, we acquired RocketCash, which has developed a secure, flexible-currency-shopping technology enabling consumers to make purchases on the Internet with or without
a credit card. In November 2000, we acquired certain tangible and intangible assets of one of our competitors, Freei, a free Internet service provider, for approximately $4.7 million.
The assets acquired primarily included the domain names "Freeinternet.com", "Freeinet.com" and "Freei.net", certain proprietary rights, certain fixed assets, and the rights to market the NetZero
service to Freei users. All of these acquisitions have been accounted for using the purchase method of accounting. During the quarter ended March 31, 2001, we determined that the carrying value
of goodwill and intangible assets recorded in connection with these acquisitions was impaired. As a result, we recorded an impairment charge totaling $48.6 million.

Revenues

We generate revenues through advertising and commerce transactions, fees for our Internet access services, sales of CD's incorporating our Internet access
software, and through the sale or license of our data. Our advertising and commerce related revenues consist of fees from the placement of media, direct marketing agreements, referring our users to
partners' web-sites, enabling customer registrations for partners, and facilitating electronic commerce transactions. Our fees for Internet access services consist of monthly fees for
users who elect to exceed our monthly limit on the number of free hours of Internet access we offer and monthly subscription fees from our users who choose to receive our
service without the banner advertising window in the ZeroPort. We generate revenues from the license or sale of our data through our CyberTarget division by offering marketers, advertisers and market
research companies mass-scale, online market research and measurement services using our zCast technology. We have only recently begun offering several of our products and services,
including CyberTarget and fee-based Internet access services, and there is no assurance as to when, or if, these products or services will make a significant contribution to our revenue.

Advertising and Commerce Revenues

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

14

---

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

We
generally invoice customers at the end of our performance, such as at the completion of an advertising campaign or service sponsorship. In addition, certain customers are invoiced
for sponsorships and other commitments on a quarterly basis. Recently there has been a reduction in the growth of online advertising, and currently, a number of our customers hold back a significant
amount of their advertising dollars spent with us until the last month of a quarter. Such practices may result in extended average days sales outstanding at the end of a fiscal quarter.

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

Advertising
on the Internet, particularly the products and services we offer, is a relatively new and changing industry, and there is no assurance that the products and services we
offer now, or in the future, will meet with commercial acceptance. Internet advertising rates have been declining rapidly, and it is possible that rates will continue to decline in the future. Many of
the purchasers of Internet advertising have been companies with Internet-based business models. Certain of these companies have come under financial pressure and have not been able to access the
capital markets to fund their operations. This trend has impacted our ability to generate revenues and could continue to do so in the future. This trend could also result in increased allowances for
doubtful accounts. Due to market forces and other factors, our revenues and results of operations may fluctuate from period to period. We have experienced several consecutive quarters of decreased
revenues and there can be no assurance that we will not experience decreased revenues in sequential quarters in future periods.

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

We
have entered into barter transactions on an extremely limited basis and, for the periods presented, barter revenue accounts for less than 1% of the our total net revenue.

Billable Services Revenue

During the quarter ended March 31, 2001, we began limiting our free Internet access up to 40 hours per month per household and offering our users
who reach their limit the NetZero Professional service for $9.95 per month, which currently provides unlimited Internet access for the remainder of the month. This is designed to either reduce
telecommunications expense associated with heavy users or, alternatively, generate additional revenues to mitigate such expense. In addition, in March 2001 we began offering the NetZero
Platinum service at a standard rate of $9.95 per month, which provides users with unlimited Internet access each month and features a thin toolbar without the advertising banners currently included in
the ZeroPort on our free service. We have a very limited history with usage limitations and pay services. While our experience has demonstrated that limiting hours reduces our telecommunication costs,
we also believe that it adversely impacts our ability to

15

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maintain or increase our free user base. We may impose additional limitations on our free usage in the future, which we believe will have additional adverse impacts on our ability to maintain or
increase our free user base. Decreases in our free user base and in the number of hours users are permitted to access our free service results in a reduction of our volume of advertising inventory,
which may adversely affect our advertising revenues.

Billable
services revenues are recognized in the period in which the fees are fixed and determinable and the related products or services are provided to the user. Billable services
revenue primarily consists of subscription fees that we receive from users of our fee-based access services. We generally require that our subscribers pre-pay for their billable services, which
results in the deferral of certain revenues into the period in which the access services are provided. Billable services also consists of fees charged to prospective users related to the cost of
producing, shipping and handling copies of the NetZero software on CD's. We have a very limited history with respect to our various billable services and there can be no assurances that we will be
able to generate significant revenues from these services. We currently offer our billable services under a number of different pricing plans, and occasionally offer discounted promotional pricing
plans. We continually evaluate the desirability and effectiveness of our pricing plans, and may in the future make changes or offer different discounted promotions. Future changes in our pricing plans
and promotional discounts may adversely impact the number of billable service subscriptions and the amount of revenues we receive for such subscriptions.

Cost of Revenues

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

Sales and Marketing

Sales and marketing expenses include advertising and promotion expenses, salaries, sales commissions, employee benefits, travel and related expenses for our
in-house sales force, fees paid to third-party
advertising sales agents and sales support functions. In the past, we have expended significant amounts on sales and marketing, including a national branding campaign comprised of television, radio
and print advertising, sponsorships and a variety of other promotions and, due to the timing of these promotions, amounts expended have varied significantly from period to period. We have in place
significant marketing obligations, certain of which expire in June 2001. While we intend to significantly reduce our marketing expenses following such date, we have little experience marketing
pay services and there can be no assurance we will be able to decrease our marketing expenses as currently anticipated. Marketing costs associated with increasing brand awareness and user base are
expensed in the period incurred.

16

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Product Development

Product development costs include expenses for the development of new or improved technologies and products, including salaries and related expenses for the
software engineering department, as well as costs for contracted services, facilities and equipment. We are currently evaluating our product development programs and may reduce our expenses in the
near term. However there can be no assurance we will be able to decrease our product development expenses as currently anticipated.

General and Administrative

General and administrative expenses include salaries, employee benefits and expenses for executive, finance, legal, human resources and internal and customer
support personnel. In addition, general and administrative expenses include fees for professional services, third-party customer support, bad debt expense, and occupancy costs.

Amortization of Intangible Assets

Amortization of intangible assets includes amortization of goodwill, purchased technologies and other identifiable intangible assets associated with our
various acquisitions. During the quarter ended March 31, 2001, we determined that the carrying value of goodwill and intangible assets recorded in connection with several acquisitions was
impaired. Indications of impairment included the deterioration in the business climate for Internet advertising and other web-related companies, reduced levels of venture capital funding activity for
Internet-based consumer businesses, which historically have represented a significant portion of our revenues, significant declines in the market value of NetZero and our competitors in the Internet
advertising industry for a significant period of time, recent changes in our 2001 operating cash flow forecasts and long-term strategies and changes in our strategic plans for certain of our acquired
businesses. An impairment charge totaling $48.6 million was recorded during the quarter ended March 31, 2001, reflecting the amount by which the carrying amount of the assets
exceeded their respective fair values. The impairment charge consisted of $33.5 million for goodwill and $15.1 million for other acquired intangible assets. No impairment charge was
recorded during fiscal 2000.

As
of March 31, 2001, we had approximately $1.5 million in remaining intangible assets on our balance sheet, primarily related to costs incurred to acquire and develop
patents and trademarks. Decreases in the fair value of these assets, or assets acquired as a result of future acquisitions, could result in our recording impairment losses with respect to some or all
such assets. Any such loss could adversely and materially impact our results of operations and financial position.

Stock-Based Charges

In connection with the grant of stock options and restricted stock to employees, the imposition of restrictions on shares of stock held by founders, the
issuance of restricted shares of stock in connection with our recent acquisitions and the issuance of warrants in connection with various marketing programs, we recorded deferred stock-based charges,
which are being amortized over the vesting period of the applicable shares.

17

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Consolidated Results of Operations

The following tables set forth, for the periods presented, selected unaudited consolidated statements of operations data in dollars and as a percentage of net
revenues:

|                         |                                              | Three Months Ended
March 31, |        | Nine Months Ended
March 31, |        
|------------------------ | -------------------------------------------- | ---------------------------- | ------ | --------------------------- | -------
|
|
|Advertising and commerce |                                              | $                            | 10,992 |                             | $      
|Billable services        |                                              |                              | 1,778  |                             |        
|                         |                                              |                              |        |                             |        
|                         | Total revenues                               |                              |        | 12,770                      |        
|Cost of revenues         |                                              |                              | 24,677 |                             |        
|                         |                                              |                              |        |                             |        
|                         | Gross loss                                   |                              |        | (11,907                     | )      
|Operating expenses:      |                                              |                              |        |                             |        
|                         | Sales and marketing                          |                              |        | 12,490                      |        
|                         | Product development                          |                              |        | 6,760                       |        
|                         | General and administrative                   |                              |        | 7,066                       |        
|                         | Amortization of intangibles                  |                              |        | 6,539                       |        
|                         | Impairment of goodwill and intangible assets |                              |        | 48,622                      |        
|                         |                                              |                              |        |                             |        
|                         |                                              | Total operating expenses     |        |                             | 81,477 
|                         |                                              |                              |        |                             |        
|                         |                                              | Loss from operations         |        |                             | (93,384
|Net interest income      |                                              |                              | 1,996  |                             |        
|                         |                                              |                              |        |                             |        
|                         |                                              | Net loss                     |        | $                           | (91,388
|                         |                                              |                              |        |                             |        

|                                             |                            | Three Months Ended
March 31, |      | Nine Months Ended
March 31, |     
|-------------------------------------------- | -------------------------- | ---------------------------- | ---- | --------------------------- | ----
|
|Advertising and commerce                     |                            | 86                           | %    | 99                          | %   
|Billable services                            |                            | 14                           |      | 1                           |     
|                                             |                            |                              |      |                             |     
|                                             | Total revenues             |                              | 100  |                             | 100 
|Cost of revenues                             |                            | 193                          |      | 110                         |     
|                                             |                            |                              |      |                             |     
|                                             | Gross loss                 |                              | (93  | )                           | (10 
|Operating expenses:                          |                            |                              |      |                             |     
|                                             | Sales and marketing        |                              | 98   |                             | 81  
|                                             | Product development        |                              | 53   |                             | 10  
|                                             | General and administrative |                              | 55   |                             | 42  
|Amortization of intangibles                  |                            | 51                           |      | 15                          |     
|Impairment of goodwill and intangible assets |                            | 381                          |      |                            |     
|                                             |                            |                              |      |                             |     
|                                             | Total operating expenses   |                              | 638  |                             | 148 
|                                             |                            |                              |      |                             |     
|                                             | Loss from operations       |                              | (731 | )                           | (158
|Net interest income                          |                            | 15                           |      | 11                          |     
|                                             |                            |                              |      |                             |     
|                                             | Net loss                   |                              | (716 | )%                          | (147
|                                             |                            |                              |      |                             |     

18

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Three Months Ended March 31, 2001 Compared to the Three Months Ended March 31, 2000

Revenues.

Advertising and Commerce

Advertising and commerce revenues for the three months ended March 31, 2001 were $11.0 million, which represented a decrease of
$5.6 million, or 34%, from $16.6 million for the three months ended March 31, 2000. The decrease was primarily due to a reduction in revenues from our agreement with
LookSmart, which ended in January 2001, as well as continued deterioration and softness in the overall online advertising market.

Billable Services

Billable services revenues for the three months ended March 31, 2001 were $1.8 million, which represented an increase of $1.6 million from
$0.2 for the three months ended March 31, 2000. The increase in revenues was due primarily to the launch of the NetZero Platinum and NetZero Professional billable Internet service plans during
the quarter ended March 31, 2001.

Cost of Revenues.

Cost of revenues for the three months ended March 31, 2001 was $24.7 million, which represented an increase of $6.1 million, or 33%, from
$18.6 million for the three months ended March 31, 2000. The increase was primarily attributable to increased telecommunications usage related to an increase in our user base experienced
during the December 2000 and March 2001 quarters, partially offset by a decrease in telecommunications cost per hour of usage primarily as a result of increased utilization of
telecommunication commitments. These increases were also partially offset by a decrease in average hours per active user as a result of the implementation of a 40 hour limit on our free
service. During the March 2001 quarter, our cost of telecommunications services purchased averaged less than $0.15 per hour.

Sales and Marketing.

Sales and marketing expenses for the three months ended March 31, 2001 were $12.5 million, which represented a decrease of $1.2 million,
or 9%, from $13.7 million for the three months ended March 31, 2000. The decrease was primarily due to a reduction in media advertising and promotion expense, partially offset by an
increase in sales personnel and related costs as a result of our focus on developing an in-house sales force and an increase in stock-based charges. Sales and marketing expenses included
$1.5 million and $0.8 million of stock-based charges during the quarters ended March 31, 2001 and 2000, respectively. Stock-based charges associated with sales and marketing
increased primarily as a result of warrants issued in connection with a RocketCash marketing promotion.

Product Development.

Product development expenses for the three months ended March 31, 2001 were $6.8 million, which represented an increase of $5.2 million,
or 310%, from $1.6 million for the three months ended March 31, 2000. The increase was primarily due to increased depreciation related to equipment used in product
development and testing, increased stock-based charges and the hiring of additional personnel directly by NetZero and in connection with our acquisitions of Simpli.com and RocketCash. Product
development expenses included $1.5 million and $0.1 million of stock-based charges during the quarters ended March 31, 2001 and 2000, respectively. Stock-based charges associated
with product development increased primarily as a result of restricted shares that were issued in connection with the acquisition of Simpli.com.

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General and Administrative.

General and administrative expenses for the three months ended March 31, 2001 were $7.1 million, which represented a slight increase of $13,000,
or 0.2%, from $7.1 million for the three months ended March 31, 2000. The increase was primarily due to an increase in salaries and wages due to the hiring of additional administrative
personnel, increased stock-based charges and increased occupancy costs. These increases were almost fully offset by decreases in customer support costs as a result of charging our users for these
services and a decrease in consulting and professional service fees. General and administrative expenses included $1.5 million and $1.0 million of stock-based charges during the quarters
ended March 31, 2001 and 2000, respectively. The increase was primarily the result of restricted stock awards granted to employees and the issuance of restricted stock in connection with our
recent acquisitions.

Amortization of Intangible Assets.

Amortization of intangible assets for the three months ended March 31, 2001 and 2000 was $6.5 million and $2.5 million, respectively. The
increase was primarily the result of our acquisitions of Simpli.com in August 2000, RocketCash in September 2000, and certain assets of Freei in November 2000.

Impairment of Goodwill and Intangible Assets.

During the quarter ended March 31, 2001, we determined that the carrying value of goodwill and intangible assets recorded in connection with several
acquisitions was impaired. An impairment charge totaling $48.6 million was recorded during the quarter ended March 31, 2001, reflecting the amount by which the carrying amount of the
assets exceeded their respective fair values. The impairment charge consisted of $33.5 million for goodwill and $15.1 million for other acquired intangible assets. No impairment charge
was recorded during fiscal 2000.

Interest Income and Interest Expense.

Interest income consists of earnings on our cash and cash equivalents, short-term investments and restricted cash. Interest expense consists
primarily of interest expense on capital leases and notes payable. Net interest income for the three months ended March 31, 2001 was $2.0 million, which represented an increase of
$0.2 million from $1.8 million for the three months ended March 31, 2000. The increase was primarily due to higher average cash and short-term investment balances
during the quarter.

Income Taxes.

As a result of operating losses and our inability to recognize a benefit from our deferred tax assets, we have not recorded a benefit for income taxes for the
three months ended March 31, 2001 and 2000.

Nine Months Ended March 31, 2001 Compared to the Nine Months Ended March 31, 2000

Revenues.

Advertising and Commerce

Advertising and commerce revenues for the nine months ended March 31, 2001 were $42.8 million, which represented an increase of
$6.4 million, or 18%, from $36.4 million for the nine months ended March 31, 2000. The increase was primarily attributable to increases in ZeroPort advertising revenues generated
from various agreements, including General Motors, LookSmart and Cisco, partially offset by a reduction in revenues from our agreement with AdSmart, which ended in February 2000.

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Billable Services

Billable services revenues for the nine months ended March 31, 2001 were $2.4 million, which represented an increase of $2.0 million from
$0.4 million for the nine months ended March 31, 2000. The increase in revenues was due primarily to the launch of the NetZero Platinum and NetZero Professional billable Internet service
plans during the quarter ended March 31, 2001.

Cost of Revenues.

Cost of revenues for the nine months ended March 31, 2001 was $64.0 million, which represented an increase of $18.0 million, or 39%, from
$46.0 million for the nine months ended March 31, 2000. The increase was primarily attributable to increased telecommunications usage related to the growth in our user base and increased
depreciation related to our internal network costs, partially offset by a reduction in telecommunications cost per user hour. During the nine months ended March 31, 2001, our cost of
telecommunications services purchased averaged less than $0.15 per user hour.

Sales and Marketing.

Sales and marketing expenses for the nine months ended March 31, 2001 were $43.7 million, which represented an increase of $8.9 million,
or 25%, from $34.8 million for the nine months ended March 31, 2000. The increase was primarily due to an increase in media advertising and promotion expense by NetZero and RocketCash,
increased stock based charges and increased sales and marketing personnel related costs as a result of our focus on developing an in-house sales force. Sales and marketing included $4.1 million
of stock based charges for the nine months ended March 31, 2001 compared to $1.3 million for the nine months ended March 31, 2000. Stock based charges increased primarily as a
result of the issuance of warrants in connection with a RocketCash marketing promotion.

Product Development.

Product development expenses for the nine months ended March 31, 2001 were $20.4 million, which represented an increase of $16.4 million,
or 405%, from $4.0 million for the nine months ended March 31, 2000. The increase was primarily due to increased depreciation related to equipment used in product development and
testing, increased stock-based charges, and the hiring of additional personnel directly by NetZero and in connection with our acquisitions of Simpli.com and RocketCash. Product development expenses
included $5.1 million of stock-based charges for the nine months ended March 31, 2001 compared to $0.2 million for the nine months ended March 31, 2000. Stock-based charges
associated with product development increased primarily as a result of restricted shares issued in connection with the acquisition of Simpli.com.

General and Administrative.

General and administrative expenses for the nine months ended March 31, 2001 were $23.8 million, which represented an increase of
$6.8 million, or 40%, from $17.0 million for the nine months ended March 31, 2000. The increase was primarily due to the hiring of additional administrative personnel, increased
stock-based charges and increased occupancy costs. General and administrative expenses included $6.3 million of stock-based charges for the nine months ended March 31, 2001 compared to
$2.9 million for the nine months ended March 31, 2000. Stock-based charges associated with general and administrative expenses increased primarily as a result of restricted stock awards
to employees and the issuance of restricted stock in connection with our recent acquisitions.

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Amortization of Intangible Assets.

Amortization of intangible assets for the nine months ended March 31, 2001 was $16.7 million compared to $3.2 million for the nine months
ended March 31, 2000. The increase was primarily the result of our acquisitions of Simpli.com in August 2000, RocketCash in September 2000, and certain assets of Freei in
November 2000.

Impairment of Goodwill and Intangible Assets.

During the quarter ended March 31, 2001, we determined that the carrying value of goodwill and intangible assets recorded in connection with several
acquisitions was impaired. An impairment charge totaling $48.6 million was recorded during the quarter ended March 31, 2001, reflecting the amount by which the carrying amount of the
assets exceeded their respective fair values. The impairment charge consisted of $33.5 million for goodwill and $15.1 million for other acquired intangible assets. No impairment charge
was recorded during fiscal 2000.

Interest Income and Interest Expense.

Interest income consists of earnings on our cash and cash equivalents, short-term investments and restricted cash. Interest expense consists
primarily of interest expense on capital leases and notes payable. Net interest income for the nine months ended March 31, 2001 was $8.4 million, which represented an increase of
$4.6 million from $3.8 million for the nine months ended March 31, 2000. The
increase was primarily due to higher average cash and short-term investment balances, partially offset by an increase in interest expense on capital leases and notes payable.

Income Taxes.

As a result of operating losses and our inability to recognize a benefit from our deferred tax assets, we have not recorded a benefit for income taxes for the
nine months ended March 31, 2001 and 2000.

Liquidity and Capital Resources

From inception of the business to March 31, 2001, our operations have been financed primarily through the sale of equity securities, cash generated from
sales of our products and services and, to a lesser extent, equipment lease financing. At March 31, 2001, we had approximately $150.5 million in cash, cash equivalents and
short-term investments and approximately $12.4 million in restricted cash.

For
the nine months ended March 31, 2001, net cash used for operating activities was $68.4 million consisting primarily of operating losses and increases in restricted
cash and other assets, partially offset by an impairment charge for goodwill and intangible assets, depreciation and amortization, stock-based charges, decreases in accounts receivable and increases
in accounts payable and deferred revenue. For the nine months ended March 31, 2000 net cash used for operating activities was $61.4 million and consisted of operating losses, deposits to
guarantee future obligations and increases in accounts receivable and other assets, partially offset by depreciation, amortization, and stock-based charges and an increase in accounts payable and
accrued expenses.

For
the nine months ended March 31, 2001, net cash used for investing activities was $58.1 million of which $45.1 million represented the net increase in
short-term investments and the balance was for acquisitions and capital expenditures. In the nine months ended March 31, 2000, cash used for investing activities of
$20.1 million consisted of capital expenditures of $12.6 million and $7.5 million for the purchase of short-term investments.

Net
cash used for financing activities was $6.3 million for the nine months ended March 31, 2001 and was primarily for payments on capital lease and notes payable
obligations. In the nine months

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ended March 31, 2000 cash provided from financing activities was $176.0 million and was principally attributable to the proceeds from our initial public offering.

Our
business model of offering free Internet access is predicated on receiving revenues for advertisements. However, declines in Internet advertising rates have resulted in us
recognizing declining revenues and increasing gross losses over the last three sequential quarters. We have limited visibility as to when, or if, online advertising rates will stabilize or increase,
and they may continue to decrease. We have taken steps to address our declining revenues and increasing gross loss by introducing, in the March 2001 quarter, billable services and restrictions
on the number of free hours per household per month. In addition, we intend to implement limitations on our operating expenses, particularly with regards to our marketing expenses. We have
substantially built out our network infrastructure and, in the near term, do not foresee the need for the same level of capital expenditures, which we have experienced in the past. In order to succeed
we must increase our revenues while controlling our telecommunications costs, our operating expenses and our capital expenditures. Many factors will impact our ability to grow revenues including, but
not limited to, the number of users who sign up for our new pay services, the growth or reduction in our user base, the Internet advertising market and our ability to sell our existing products and
develop new revenue generating products. Billable services are new products for us and we cannot assure you that our existing users or new users will sign up for these plans. In addition, as a result
of limiting the number of free hours per month we may lose a significant number of users. There can be no assurance that we will be able to effectively manage our business to decrease our losses.

We
have invested significantly in our network infrastructure, software licenses, furniture, fixtures and equipment and we may need to make further investments in the future although,
at this time, we do not foresee the need for the same level of expenditures which we have experienced since our initial public offering. The actual amount of capital expenditures will depend on the
rate of growth or reduction in our user base, which is difficult to predict and could change dramatically over time. Technological advances may also require us to make capital expenditures to develop
or acquire new equipment or technology. We intend to use cash to fund our future operating losses and a combination of cash and lease financing to fund our capital expenditures in a manner which
minimizes our cost of capital. However, we cannot assure you that lease financing will be available on favorable terms, if at all, in which case we would be required to use a greater portion of cash
to fund our capital expenditures.

We
currently anticipate that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operating activities, capital expenditures and
other obligations for at least the next 12 months. However, we may need to raise additional capital for a variety of reasons including, without limitation, in order to fund more rapid growth,
expand our marketing activities, develop new or enhance existing services or products to respond to competitive pressures or to acquire complementary services, businesses or technologies. If, in the
future, we are not successful in generating sufficient cash flow from operations, we may need to raise additional capital through public or private financings, strategic relationships or other
arrangements. This additional funding, if needed, might not be available to us on acceptable terms, or at all. Our failure to raise sufficient capital when needed could have a material adverse effect
on our business, results of operations and financial condition. If additional funds were raised through the issuance of equity securities, the percentage of stock owned by the then-current
stockholders would be reduced. Furthermore, such equity securities might have rights, preferences or privileges senior to holders of our common stock.

We
have received a notice from the Nasdaq National Market that our common stock has failed to maintain the required minimum bid price of $1.00 over a period of 30 consecutive trading
days. As a result, we have 90 calendar days, or until June 25, 2001, to regain compliance with this requirement. At the end of such time period, we have 7 days in which to request an
appeal with respect to the delisting notice and we will be granted an appeal within 45 days of such request. If we are unable to regain

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compliance with this requirement during this time period, and any appeal to the Nasdaq National Market for relief from this requirement is unsuccessful, our securities will be delisted from trading by
the Nasdaq National Market. If our common stock were delisted from the Nasdaq National Market, the ability of any potential or future investors to achieve liquidity from our common stock would be
severely limited and will inhibit, if not preclude, our ability to raise additional capital on acceptable terms, if at all.

Recent Accounting Pronouncements

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

In
December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. In June 2000, the SEC issued SAB 101B, which requires implementation of SAB 101 by the Company no later than June 30, 2001. The SEC issued additional guidance in
the form of its Frequently Asked Questions and Answers document in October 2000. The Company believes that the adoption of SAB 101 will not have a material impact on the Company's financial
position and results of operations.

In
March 2000, the FASB issued FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving Stock Compensation." FIN 44 provides guidance for
issues arising in applying APB 25. FIN 44 applies specifically to new awards, exchanges of awards in a business combination, modification to outstanding awards and changes in grantee status that occur
on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. The application of FIN
44 has not had a material impact on the Company's financial reporting.

Future results of operations may vary due to certain factors

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

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

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

We
have previously experienced reductions in revenues from material customers and may experience additional reductions in the future. For the three and nine months ended
March 31, 2001 LookSmart accounted for 14% and 25% of our revenues, respectively. Our agreement with LookSmart was terminated on January 19, 2001. LookSmart provided search functionality
on our start page and on the
ZeroPort, and was provided with the right to advertise third party services on our start page. After the termination of the LookSmart agreement, we experienced a significant decline in revenues
derived from search functionality on our start page and we do not anticipate generating the amount of revenue from our start page that we historically experienced. In addition, we derived
approximately 20% and 11% of our revenues for the quarter ended March 31, 2001 from our agreements with General Motors Corporation ("General Motors") and Cisco Systems, Inc. ("Cisco"),
respectively. While we have a long-term relationship with General Motors, they have recently requested reductions in their advertising obligations. While we do not currently anticipate
such reductions will be material to our business, we can give no assurance that we will continue to derive the amount of anticipated revenues from General Motors. In addition, our agreement with Cisco
is terminable by Cisco commencing on June 30, 2001, and we can give no assurance that we will continue to generate significant revenues from Cisco beyond such date. The termination or
renegotiation of significant agreements, as well as the timing of orders under such agreements, may cause significant fluctuations in our quarterly results. Our business, results of operations and
financial condition will be materially and adversely affected if we are unable either to maintain or renew our significant agreements or to replace such agreements with similar agreements with new
customers.

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RISK FACTORS

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

We Face Risks Associated with Our Operations

We cannot predict our success because our business model is unproven and changing, and we have operated our business for only a short period of time.

Our business model is unproven and a number of other businesses offering free Internet access have failed. Since we only began offering Internet access in
October 1998, we have a limited operating history, which makes it difficult to evaluate our performance. Our advertising supported business model, unlike traditional Internet service providers,
does not have a measurable and predictable revenue stream from user access fees. Due to a variety of factors including deterioration in the online advertising market, we have altered our model to
limit the number of hours a month a user can access our service without charge. In addition, we offer a variety of products intended to provide us with additional revenues. We may make additional
changes to our model in the future. There can be no assurance that our existing model will be successful or that any changes to our model will be successful. If we are not able to successfully address
these risks, we will not be able to grow our business, compete effectively or achieve profitability.

If we fail to generate sufficient advertising and pay service revenues, we may not be able to support our operations.

Historically we have depended primarily on our ability to generate advertising revenues. Accordingly, if we fail to generate sufficient advertising revenues,
we may not be able to support our operations. To
date, advertising revenues have not been sufficient to support our operations. Our operating costs have continued to increase from quarter to quarter while our revenues from advertising have, from
time to time, decreased from quarter to quarter. We generate revenues from a variety of different advertising arrangements including sales of targeted and untargeted banner advertising, sponsorships,
performance-based arrangements and referrals to third party web-sites. We have limited experience marketing and pricing these types of arrangements, and have limit experience with respect
to the performance of such arrangements. As such, we do not know if we are appropriately pricing, marketing or structuring these arrangements, or whether we will perform under these arrangements to
the satisfaction of the other parties. Our failure to appropriately price, market or structure these arrangements could impact our ability to enter into and perform under these arrangements, or to
renew these arrangements on similar or acceptable terms. Due to a variety of factors including the deterioration of the online advertising market and the decrease in capital available to Internet
companies, we have experienced a number of situations where arrangements are not renewed, are renewed at significantly lower rates or are repriced during the term of the arrangement. These factors may
significantly impact our ability to enter into new arrangements with third parties, to enforce our existing arrangements and to maintain or grow our revenues. In addition, the success of some of these
arrangements may depend on our ability to effectively target users based on demographic and other information. We may encounter technical and other limitations on this ability, including problems
associated with the accuracy of the information provided by our users, which we do not corroborate. In light of these factors, there can be no assurance that we will be able to attract sufficient
advertising revenues to support our operations.

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

Many
of our advertising competitors have longer operating histories, greater name recognition, larger user bases, significantly greater financial, technical, sales and marketing
resources and more established relationships with advertisers than we do. These advantages may allow such competitors to respond more quickly than we can to new or emerging technologies and changes in
advertiser requirements. They may also be able to devote greater resources than we can to develop, promote and sell their products and services. Such competitors may also engage in more extensive
research and development, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to existing and potential employees,
strategic partners, advertisers and Web publishers. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to
increase the ability of their products or services to address the needs of our prospective customers. We must also compete with television, radio, cable and print media for a share of advertisers'
total advertising budgets. Advertisers may be reluctant to devote a significant portion of their advertising budget to Internet advertising if they perceive the
Internet to be a limited or ineffective advertising medium. Our market share and revenues would suffer if we were not able to compete effectively for users with established and new providers of
Internet access services.

We
have recently commenced offering pay services and believe that a significant portion of our revenues, at least in the near term, will come from pay services. Due in part to the
current status of the online advertising market, we believe that we will need to convert a significant number of free users to pay users, or to sign up a significant number of new pay users, in order
to generate sufficient revenues to support our operations. Our failure to generate revenues from pay users could adversely impact our ability to support our operations.

We have no prior experience in offering pay services and may not be successful in implementing such services.

We have recently begun offering pay Internet access services. We have no prior experience in offering such services. While we are offering such services at a
price lower than the prices set by certain of our competitors, there is no assurance that we will be successful in having a substantial number of users sign up for these services. We intend to use our
marketing and technical resources to focus on pay services, which may limit the number of free users that access our service. In addition, expenses related to billing users are substantial and we have
no experience with respect to charge backs, user cancellation and marketing costs in connection with pay services. If the revenues we receive from our fee-based products do not exceed the
expenses associated with offering such products, or if we are unsuccessful in implementing these services, our financial position and results of operations would be adversely impacted. Our market
share and billable services revenue could be adversely affected if we are not able to compete effectively for users with established providers of Internet services.

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Our market share and revenues would suffer if we were unable to compete effectively for users with established and new providers of Internet access services.

Competitors

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



We
expect that competition for users will continue to intensify. While we have recently experienced a period of decreased competition for users of free Internet access services due to
the failure of numerous free Internet access providers, there can be no assurance that we will not experience
additional competition from new competitors. In addition, because we are focusing our resources on pay services and imposing limitations on our free service, we believe that we will experience more
direct competition from companies who charge for their Internet service, including those who charge on a discounted basis. Companies that offer pay Internet access services, including America Online
and The Microsoft Network, have significantly greater resources than we do and spend significantly greater resources marketing to users. There is no assurance that we will be able to compete
effectively with our competitors for users of pay services. We believe that additional competitors for Internet users, including major computer manufacturers, retail companies, and software, media and
telecommunications companies, will continue to enter the Internet access market. Existing competitors have taken, and may continue to take, steps such as reducing their subscriber fees, offering
promotions for access services, or bundling free access services with other product offerings. For example, both Microsoft and CompuServe have partnered with personal computer makers and consumer
electronics retailers to offer consumers rebates on computer equipment when the consumer signs up for their Internet access services.

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

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Telecommunications Services

In addition, telecommunications companies with far greater resources, distribution channels and brand awareness offer, or have announced that they will offer,
their own Internet access services to users. Since these companies have their own telecommunications network infrastructure, they have lower communications costs than we do. These advantages reduce
the overall cost of Internet access for such companies and may significantly increase competitive pressures on us. For example, AT&T WorldNet offers an Internet access service priced at $4.95 per
month combined with an advertising banner window, and also announced a program where it bundles its Internet access service with its long distance service at a discounted rate. In addition, each of
our telecommunications providers supplies network access to some of our competitors, and could choose to grant those competitors preferential network access, potentially limiting our users' ability to
access the Internet. If our telecommunications service providers were to decrease the levels of service or access provided to us, or if they were to terminate their relationships with us for
competitive or other reasons, and we were not able to develop alternate sources of supply, we would not be able to provide Internet access to our customers, which could ultimately result in a
significant loss of users and revenues.

Broadband Providers

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

The
telephone, cable and other companies that own broadband networks may prevent us from offering broadband Internet access through the wire and cable networks that they own. Our
ability to compete with telephone and cable television companies that are able to support broadband transmission may depend on future regulation to guarantee open access to their broadband networks.
In January 2001, the Federal Trade Commission ordered AOL Time Warner to make available its cable broadband networks to three non-affiliated Internet service providers. We are not
one of the three Internet service providers given access to AOL Time Warner's cable broadband networks, so our ability to compete in the cable broadband access market may be significantly impaired. We
do not know whether local, state or federal regulatory agencies will take any further action to regulate the broadband access market, and whether they will be successful in establishing their
authority to do so.

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

We
are in the process of developing, and plan to implement, a strategy to deliver broadband services. There is no assurance that we will be successful in developing or implementing
this strategy. It is anticipated that implementing a broadband strategy will result in significant operating costs, which could adversely impact our financial position and results of operations.

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We anticipate that our free user base may, in the near term, continue to decline. If we experience greater than anticipated decreases in our free user base and are unable to
convert a significant number of users to pay services, our ability to generate advertising revenues, decrease per-hour telecommunication costs and to implement our strategy will be
adversely impacted.

If we are unable to grow our user base, we may not be able to generate revenues, decrease per-hour telecommunications costs or implement our
strategy. We have, from time to time, experienced such rapid growth in our free user base that we have instituted measures to limit the number of new free users on our service. Due to limitations on
the number of hours that a user can access our service without charge and other factors including revenue generation initiatives, we have recently experienced a decline in our number of active free
users. This decline may continue into the future. If we implement additional limitations on our free access services, we may experience further significant declines in the number of existing free
users as well as new free users accessing our service. This may significantly and adversely impact our ability to grow in the long term. Unless we are able to convert a significant number of free
users to pay users, our revenues will be adversely impacted. We intend to generate new users, focusing primarily on pay services, through other distribution channels, such as television, radio and
print media advertising, direct marketing campaigns, and bundling, co-branding and retail distribution arrangements. However, we have limited experience with marketing pay services. If
these distribution channels prove more costly or less effective than anticipated, it could adversely impact our ability to grow our pay user base. In addition, even if we are successful in achieving a
significant number of pay users, we do not know if these users will continue to use our service. We would be unable to grow our user base if a significant number of our users stopped using our
service. There are a variety of reasons why users would discontinue using our service, including:



There
is no assurance that we will be able to retain our existing free user base or grow our pay user base.

Our advertising revenues will suffer if we are unable to demonstrate that our registered users are actively using our service.

If we are not able to demonstrate to our advertisers that our registered users are actively using our service, advertisers may choose not to advertise with us
and our advertising revenues could be materially and adversely affected. Approximately 8.6 million users had registered for our service through March 31, 2001, of which approximately
3.9 million had used our service during the month of March. We believe that a number of our users have Internet access accounts with our competitors. As a result, these users may not use
NetZero as their primary Internet service provider. Also, some new users use the Internet only as a novelty and do not become consistent users of Internet services and, therefore, may be less likely
to continue using our service.

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We may not successfully develop and market new products in a timely or cost-effective manner; Our new products may not be accepted by consumers or advertisers.

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

Several
of the new products we have offered, or intend to offer, such as NetZero Platinum, Surf Safari and our new start page are intended to generate additional revenues for us.
There is no assurance that such products will provide us with any meaningful revenue.

If we are unable to successfully integrate acquisitions into our operations, then our results and financial condition may be adversely affected.

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



In
the quarter ended March 31, 2001, we recorded an impairment charge related to goodwill, intangible assets and other assets in the amount of approximately
$48.6 million in connection with certain acquisitions. There can be no assurance that we will make any further acquisitions, that we will be able to obtain additional financing for such
acquisitions, if necessary, or that any acquisitions will be successful.

We may not be able to provide Internet access for our users if our telecommunications carriers raise their rates or if they discontinue doing business with us.

Our business substantially depends on the capacity, affordability, reliability and security of our telecommunications networks. Only a small number of
telecommunications providers offer the network services we require. There has been significant consolidation in the telecommunications industry, and there is a significant risk that further
consolidation could make us reliant on an even smaller number of providers. In addition, several vendors have experienced significant financial difficulties and there is no assurance that such vendors
will continue to perform consistent with our expectations or contractual rights. Certain of our telecommunications services are provided pursuant to short-term agreements that the
providers can terminate or elect not to renew. As a result, any or all of our current telecommunications service providers could decide not to provide us with service at rates acceptable to us, or at
all, in which event, we may not be able to provide Internet access to our users.

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We may lose our users if our telecommunications providers deliver unacceptable service quality.

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

If telecommunications prices increase, our margins would be adversely impacted.

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

Our ability to serve advertisements on the ZeroPort could be severely limited if the software we license from NetGravity fails to perform or if we are not able to renew our
license.

All of our advertisements are served using software licensed from NetGravity. While there is other software available, it would substantially disrupt our
business to switch to another provider. As such, we are reliant on NetGravity and its software. Our agreement with NetGravity expires in June 2001; however we have an option to renew the
agreement for an additional two-year term upon initial expiration. If NetGravity's software fails to perform as expected, or if we are not able to renew such agreement or license or
internally develop similar software in the future, we may not be able to effectively display advertisements to our users. In this event, our ability to generate advertising revenues would be severely
limited. In October 1999, DoubleClick, an Internet advertising provider, acquired NetGravity. Since our agreement with NetGravity does not expire until June 2001 and we have an option to
renew for an additional two-year term upon initial expiration, we do not believe the acquisition will have a material effect on our contractual rights with NetGravity.

Our stock price could fall as a result of future losses and negative cash flow.

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

Our revenues would significantly decrease if we lose key customers.

A small number of customers have accounted for, and may in the future account for, a significant portion of our revenues. We have previously experienced
reductions in revenues from material customers and may experience additional reductions in the future. For example, 35% and 14% of our revenues for the quarter ended December 31, 2000 and
March 31, 2001, respectively, were attributable to our start page agreement with LookSmart. Our agreement with LookSmart was terminated on January 19, 2001. LookSmart provided search
functionality on our start page and on the ZeroPort, and

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was provided with the right to advertise third party services on our start page. After the termination of the LookSmart agreement, we experienced a significant decline in revenues derived from search
functionality on our start page and we do not anticipate generating the amount of revenue from our start page that we historically experienced. In addition, we derived approximately 20% and 11% of our
revenues for the quarter ended March 31, 2001 from our agreements with General Motors and Cisco, respectively. While we have a long-term relationship with General Motors
Corporation, they have recently requested reductions in their advertising obligations. While we do not currently anticipate such reductions will be material to our business, we can give no assurance
that we will continue to derive the amount of anticipated revenues from General Motors. In addition, our agreement with Cisco is terminable by Cisco commencing June 30, 2001 and we can give no
assurance that we will continue to generate significant revenues from Cisco beyond such date. The termination or renegotiation of significant agreements, as well as the timing of orders under such
agreements, may cause significant fluctuations in our quarterly results. Our business, results of operations and financial condition will be materially and adversely affected if we are unable either
to maintain or renew our significant agreements or to replace such agreements with similar agreements with new customers.

During
the year ended June 30, 2000, we generated a significant portion of our revenues from third party sales organizations. We no longer have any agreements in effect with
third party sales organizations that we believe will result in significant revenues, and there is no assurance that our in-house sales organization will generate the amount of revenues
necessary to support our business.

Our reputation and ability to generate revenues will be harmed if user demand for our service exceeds our telecommunications and server capacity.

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

We will not be able to support increased numbers of users if we are unable to enhance our internal network infrastructure.

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

If we fail to manage our telecommunications capacity, our service levels may suffer or we may experience increased per-user costs.

We will have to accurately anticipate our future telecommunications capacity needs within lead-time requirements. If we fail to procure sufficient
quantities of telecommunications products and services, we may be unable to provide our current and future users with acceptable service levels. We also run the risk of purchasing excessive amounts of
telecommunications products and services based on incorrect projections regarding increased usage. In that event, we would be required to bear the costs of excess telecommunications capacity without
commensurate increases in revenues. Due to recent

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declines in our user base and the limitations we have imposed on the number of hours that a free user can access our services, we are experiencing decreases in telecommunications usage in excess of
the amounts that we anticipated when entering into certain agreements for telecommunications services. This may result in significant excess capacity in the near term, which may result in increased
costs per
user on an hourly basis. There can be no assurance that we will be able to effectively manage these and other aspects of our business. Our failure to do so would likely have a material adverse effect
on our business, results of operations, financial position and cash flow.

We may not be able to grow our user base if we are unsuccessful in establishing and maintaining the NetZero brand.

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

We may not be able to compete effectively if we are not able to respond to changing industry standards.

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

We may not be able to develop new product or service offerings if we are unable to obtain needed technology.

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

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Consumers may decide not to use our service if our technology and services become obsolete.

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

If our software or hardware contains errors, our business could be seriously harmed.

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



We
have experienced some technical and customer support issues associated with our products and software releases. These issues have resulted in users discontinuing our service and
have adversely impacted our revenues. In addition, certain of our new services require us to bill the user, and we have
limited experience in implementing billing services. We cannot assure you that we will not experience additional problems in the future.

We may not be able to compete effectively if we are not able to protect our proprietary rights.

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

In
addition, we have recently filed lawsuits against a number of entities alleging that they are violating our proprietary rights. There is no assurance that we will prevail in any of
these claims. Our attempts to enforce our proprietary rights could result in significant costs without a corresponding economic or competitive benefit.

We may incur substantial costs and diversion of management resources if we infringe upon the proprietary rights of others.

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

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We could incur substantial costs and diversion of management resources in the defense of any claims relating to proprietary rights. Parties making these claims could secure a judgment
awarding substantial damages as well as injunctive or other equitable relief that could effectively block our ability to use our products in the United States or abroad. If a third party asserts a
claim relating to proprietary technology or information against us, we may seek licenses to the intellectual property from the third party. We cannot be certain, however, that third parties will
extend licenses to us on commercially reasonable terms, or at all. If we fail to obtain the necessary licenses or other rights, it could materially and adversely affect our ability to operate our
business.

A security breach, virus or inappropriate use by Internet users could disrupt our service.

The future success of our business will depend on the security of our network and, in part, on the security of the network infrastructures of our third-party
telecommunications service providers, over which we have no control. Computer viruses or problems caused by our users or other third parties, such as the sending of excessive volumes of unsolicited
bulk e-mail or "spam", could lead to interruptions, delays, or cessation in service to our users. In addition, the sending of "spam" through our network could result in third parties
asserting claims against us. There can be no assurance that we would prevail in such claims and our failure to do so could result in large judgments against us. Users or other third parties could also
potentially jeopardize the security of confidential information stored in our computer systems or our users' computer systems by their inappropriate use of the Internet, including breaking into our
computer network, which could cause losses to us, or our users. Users or third parties may also potentially expose us to liability by "identity theft", or posing as another NetZero user. Unauthorized
access by current and former employees or others could also potentially jeopardize the security of confidential information stored in our computer systems and those of our users. We expect that our
users will increasingly use the Internet for commercial transactions in the future. Any network malfunction or security breach could cause these transactions to be delayed, not completed at all, or
completed with compromised security. Users or others may assert claims of liability against us as a result of any failure by us to prevent these network malfunctions and security breaches, and may
deter others from using our services, which could cause our business prospects to suffer. Although we intend to continue using industry-standard security measures, such measures have been circumvented
in the past, and we cannot assure you that these measures will not be circumvented in the future. We also cannot assure you that the security measures of our third-party network providers will be
adequate. In addition, to alleviate problems caused by computer viruses or other inappropriate uses or security breaches, we may have to interrupt, delay, or temporarily cease service to our users,
which could have a material adverse effect on our revenues and could also result in increased user turnover.

Our revenues could be adversely affected if programs to disable the ZeroPort become prevalent.

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

We may not be able to expand our operations if we are not able to obtain additional equipment from third-party hardware suppliers.

The expansion of our network infrastructure and Internet services in general is placing, and will continue to place, a significant demand on our suppliers.
From time to time, we have experienced

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delayed delivery from suppliers of modems, servers, and other equipment. We may be unable to implement our planned expansion and our users may be unable to connect to our network if we are not able to
obtain additional equipment in a timely manner and on commercially acceptable terms. In particular, our servers are a critical part of our infrastructure and we will need additional servers to expand
our operations. We currently purchase, and expect to continue to purchase, all of our servers from Sun Microsystems. Since we do not have an agreement with Sun Microsystems regarding future server
purchases, we have no assurance that Sun Microsystems will continue to supply servers to us on commercially acceptable terms, if at all.

We may experience loss of data, disruption of operations, or erroneous overcharges or undercharges to advertising customers if the Oracle software we use to run our operations
fails to operate correctly.

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

Our ability to operate our business could be seriously harmed if we lose members of our senior management team and other key employees.

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

We will not be able to grow our business if we are not able to retain or hire additional personnel.

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

Our business could be shut down or severely impacted if a natural disaster occurs.

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

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We may not realize the benefits associated with our acquired intangible assets.

As of December 31, 2000, we had approximately $55.0 million in intangible assets recorded on our balance sheet, which primarily included goodwill
and acquired technologies associated with our acquisitions. During the quarter ended March 31, 2001, we determined the carrying value of these assets was impaired using the discounted cash flow
method and the market comparison method. An impairment of goodwill, intangible assets and other assets totaling $48.6 million was recorded during the quarter, reflecting the amount by which the
carrying amount of the assets exceed their respective fair values. The impairment consisted of $33.5 million for goodwill and $15.1 million for other acquired intangible assets and other
assets. There can be no assurance that we will not experience similar impairment losses in the future. Any such loss could adversely and materially impact our results of operations and financial
condition.

If we are unable to successfully defend against pending legal actions against us, we could face substantial liabilities.

We are currently a party to pending legal actions against us which are discussed in detail under "Legal Proceedings," the outcomes of which are uncertain and
could result in significant judgments against us. Defending against these lawsuits may involve significant expense and diversion of management's attention and resources from other matters. Although we
believe that the lawsuits lack merit, due to the inherent uncertainties of litigation, we may not prevail in these actions. In addition, our ongoing operations may continue to subject us to
significant litigation and costs in the future.

Our common stock may be delisted from the Nasdaq National Market.

On March 25, 2001, we received a notice from the Nasdaq National Market that our common stock has failed to maintain the required minimum bid price of $1.00
over a period of 30 consecutive trading days. As a result, the Nasdaq National Market has provided us with 90 calendar days, or until June 25, 2001, to regain compliance with this requirement.
At the end of such time period, we have 7 days in which to request an appeal with respect to the delisting notice and we will be granted an appeal within 45 days of such request. If we
are unable to regain compliance with this requirement during this time period, and any appeal to the Nasdaq National Market for relief from this requirement is unsuccessful, our securities will be
delisted from trading by the Nasdaq National Market. We meet all the other criteria to remain listed on the Nasdaq National Market and, if necessary, we believe we would be able to meet the minimum
bid price requirement by effecting a reverse split of our common stock. However, there is no assurance that we would be able to effect a reverse split of our common stock in a timely manner, that
doing so would enable us to remain listed on the Nasdaq National Market or that a reverse split would not adversely affect the price of our common stock. If we were to be delisted, trading in shares
of our common stock would decrease substantially or cease altogether, the market price of our common stock may decline further, and you may lose some or all of your investment.

We Face Risks Related to the Internet Industry

We could be exposed to significant legal liability if new case law is decided, or new government regulation is enacted, regarding the Internet and Internet service providers.

The law relating to our business and operations is evolving and in a state of flux. The modification, repeal or adoption of laws or regulations may decrease
the growth in the use of the Internet, affect telecommunications costs or increase the likelihood or scope of competition from regional telephone companies. These results could decrease the demand for
our services or increase our cost of doing

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business, each of which would cause our gross margins and revenues to fall. In particular, the following risks could occur:

Regulation of content and access could limit our ability to generate revenues and expose us to liability.

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

We could be exposed to liability associated with changes in our services or the services of third parties.

Our service involves the provision of Internet access services as well as a variety of other products and services offered under the NetZero brand or directly
by sponsors. We, and our sponsors, have implemented, and may in the future implement, changes to such services. This may involve the termination of services by NetZero or its sponsors or changes to
terms and conditions of services by NetZero or its sponsors. There can be no assurance that users, advertisers, sponsors or other third parties, including governmental agencies, will not assert claims
against us for implementing such changes, or that any such claims would be resolved in our favor.

We could be exposed to liability for defamation, negligence and infringement.

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

Our ability to sell targeted advertising may be limited if new laws relating to user privacy are enacted.

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

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

Our margins and costs would be adversely affected if our business becomes subject to taxation.

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

Telecommunications regulation could make it more expensive for us to do business.

Other than regulations generally applicable to all business, neither the Federal Communications Commission nor any other governmental agency currently directly
regulates Internet service providers. Nevertheless, Internet-related regulatory policies are continuing to develop, and it is possible that we
could be exposed to regulation in the future. We could be adversely affected if any regulatory or statutory change results in the application of access charges to Internet service providers, because
this would substantially increase the cost of using the Internet. Similarly, new laws or regulations could increase costs to those entities that provide us with telecommunications services, and those
changes too could substantially increase our cost of doing business. Since one of the largest components of our operating costs is telecommunications expense, any increase in such costs would have a
material adverse effect on our cost of revenues and gross margins. We could also be affected by any change in the ability of our users to reach our network through a dial-up telephone call
without any additional charges.

Seasonal trends in Internet usage and advertising sales may negatively affect our business.

Seasonal trends could affect the advertising revenues we generate from operating our Internet services. To the extent that our advertising revenues depend on
the amount of usage by our users, seasonal fluctuations in Internet usage could affect our advertising revenues during these periods of fluctuation. In addition, the rate at which new users sign up
for our services may be lower during certain seasons and holiday periods. Because our operating history is so limited, it is difficult for us to accurately predict these trends and plan accordingly.
Since our operating expenses are based on our expectations of future revenues, it is possible that seasonal fluctuations could materially and adversely affect our revenues and our operating results.

If Internet usage does not continue to grow, we may not be able to grow our business and increase our revenues.

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

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Our brand and business could be adversely affected if we are not able to protect our domain names or acquire other relevant domain names.

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

ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

NetZero currently does not hold any derivative instruments and does not engage in hedging activities. Also, NetZero is not currently party to any transactions
denominated in a foreign currency. Thus, NetZero's exposure to interest rate and foreign exchange fluctuations is minimal.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In December 2001, NetZero sued Juno Online Services ("Juno") for patent infringement and filed a motion for a temporary restraining order restricting
Juno from displaying banner advertisements on its service. In January 2001, the temporary restraining order was granted and NetZero posted a bond in the amount of $5.0 million. In
April 2001, the temporary restraining order was lifted and Juno subsequently informed NetZero that it intends to seek recourse against the bond to recover damages incurred during the time the
temporary restraining order was in place. NetZero believes its initial patent claims are meritorious, although the matter will not be decided until a trial on the merits, which may not occur until
calendar 2002. If we succeed on the merits we do not believe Juno will be entitled to damages as a result of the temporary restraining order. Even if Juno were to succeed in its damage claim, we do
not believe that any payments to be made by NetZero in connection therewith would be material to our financial position. However, there can be no assurance of the outcome of this matter.

In
April 2001, NetZero and certain of its officers and directors were served with a complaint(1) alleging violations of the federal securities laws. A number of other
complaints(2) have since been filed containing similar allegations, but only one other complaint has been served as of May 14, 2001(3). These complaints were brought as purported shareholder
class actions under Sections 11 and 15 of the Securities Act of 1933, as amended.

The
complaints generally allege that the prospectus through which NetZero conducted its initial public offering in September 1999 was materially false and misleading because it
failed to disclose, among other things, that (i) the underwriters of NetZero's initial public offering had solicited and received excessive and undisclosed commissions from certain investors in
exchange for which the underwriters allocated to those investors material portions of the restricted number of NetZero shares issued in connection with initial public offering; and (ii) the
underwriters had entered into agreements with customers whereby they agreed to allocate NetZero shares to those customers in the initial public offering in exchange for which the customers agreed to
purchase additional NetZero shares in the aftermarket at pre-determined prices.

The
complaints listed herein are the only complaints we are aware of to have been filed as of May 14, 2001. There may be additional complaints containing similar allegations
that have been filed that we are not aware of and there may be similar complaints filed in the future. We anticipate that the

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complaints listed below that have not yet been served on NetZero will be served in the near future. As of May 14, 2001, NetZero had not yet answered any of the complaints, and discovery had not
yet commenced. We believe that the allegations are without merit and intend to defened the actions vigorously.

The
pending lawsuits involve complex questions of fact and law and likely will require the expenditure of significant funds and the diversion of other resources to defend. Although we
believe the outcome of outstanding legal proceedings, claims and litigation will not have a material adverse effect on our business, results of operations or financial condition, the results of
litigation are inherently uncertain, and an adverse outcome is at least reasonably possible. We are unable to estimate the range of possible loss from outstanding litigation, and no amounts have been
provided for such matters in the accompanying consolidated financial statements.

We
are also involved in other legal proceedings, claims and litigation arising in the ordinary course of business. In the opinion of management, the amount, and ultimate liability, if
any, with respect to these
actions will not materially affect the financial position, results of operations or cash flows of the company.

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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(d)Use of proceeds from sales of registered securities.On
September 29, 1999, NetZero completed an initial public offering of its common stock, $.001 par value. The shares of common stock sold in this offering were registered under the Securities Act
of 1933, as amended, on a Registration Statement on Form S-1 (Reg. No. 333-82827) that was declared effective by the SEC on September 23, 1999. The
offering commenced on September 24, 1999. All 11.5 million shares of common stock registered under the Registration Statement (including 1.5 million shares sold pursuant to the
exercise of the underwriters' over-allotment option) were sold at a price of $16 per share. The aggregate price of the offering amount registered was $184 million.

In
connection with the initial public offering, NetZero paid an aggregate of $12.9 million in underwriting discounts and commissions to the underwriters and paid other expenses
in the amount of approximately $1.8 million. After deducting the underwriting discounts and commissions and offering expenses, NetZero received net proceeds from the offering of approximately
$169.3 million. As of March 31, 2001, NetZero had used approximately $158 million of the net proceeds from the offering to fund its operating losses and capital expenditures. The
balance of the proceeds will be used primarily to fund future operating losses. Pending the use of the remaining proceeds of the offering, the cash will be invested in short-term, interest
bearing, investment-grade securities. None of the net proceeds from the offering were paid directly or indirectly to any director, officer, general partner of NetZero or their associates, persons
owning 10% or more of any class of equity securities of NetZero, or an affiliate of NetZero.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

The
following exhibits are filed as part of this Form 10-Q.

|10.1 |  | Amendment to Employment Agreement dated as of February 9, 2001 by and between the Registrant and Mark R. Goldston.            
|---- |  | ------------------------------------------------------------------------------------------------------------------------------
|10.2 |  | Amendment to Employment Agreement dated as of February 9, 2001 by and between the Registrant and Charles S. Hilliard.         
|10.3 |  | Amendment to Employment Agreement dated as of February 9, 2001 by and between the Registrant and Frederic A. Randall, Jr.     
|10.4 |  | Amendment to Employment Agreement dated as of February 9, 2001 by and between the Registrant and Brian Woods.                 
|10.5 |  | Amendment to Stock Restriction Agreement dated as of April 8, 1999 by and between the Registrant and Ronald T. Burr.          
|10.6 |  | Second Amendment to Stock Restriction Agreement dated as of February 9, 2001 by and between the Registrant and Ronald T. Burr.

None

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Exhibit Index

The following exhibits are filed as part of this Form 10-Q.

|10.1 |  | Amendment to Employment Agreement dated as of February 9, 2001 by and between the Registrant and Mark R. Goldston.            
|---- |  | ------------------------------------------------------------------------------------------------------------------------------
|10.2 |  | Amendment to Employment Agreement dated as of February 9, 2001 by and between the Registrant and Charles S. Hilliard.         
|10.3 |  | Amendment to Employment Agreement dated as of February 9, 2001 by and between the Registrant and Frederic A. Randall, Jr.     
|10.4 |  | Amendment to Employment Agreement dated as of February 9, 2001 by and between the Registrant and Brian Woods.                 
|10.5 |  | Amendment to Stock Restriction Agreement dated as of April 8, 1999 by and between the Registrant and Ronald T. Burr.          
|10.6 |  | Second Amendment to Stock Restriction Agreement dated as of February 9, 2001 by and between the Registrant and Ronald T. Burr.

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SIGNATURES

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

| |  | NETZERO, INC.
(REGISTRANT)
| |  | --------------------------
| |  | By:                       

Dated:
May 15, 2001

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