NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED WITH RESPECT TO MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. ORGANIZATION AND BUSINESS

ORGANIZATION

InterWorld Corporation ("InterWorld") was incorporated in March 1995 under the laws of the State of Delaware. The consolidated financial statements of InterWorld include the accounts of InterWorld and its wholly owned subsidiaries, InterWorld Technology Ventures Pty, Ltd., an Australian corporation incorporated in November 1996, InterWorld Technology Ventures, Ltd., a Canadian corporation incorporated in November 1996, and InterWorld U.K. Ltd., a United Kingdom corporation incorporated in May 1998. In April 1997, InterWorld formed UGO Networks, Inc., ("UGO," formerly ActionWorld, Inc.) under the laws of the State of Delaware. Until March 30, 1998 InterWorld was the majority owner of UGO, and UGO is included in the consolidated financial statements of InterWorld at December 31, 1997. On March 30, 1998, InterWorld completed a spin-off distribution of UGO (Note 13).

BUSINESS

InterWorld is a leading provider of Internet commerce software solutions that enable manufacturers, distributors and retailers to conduct business over the Internet. InterWorld's products, called "enterprise commerce" software, enable companies to build their online businesses and integrate them with their existing business practices and enterprise systems. InterWorld derives its revenues from its family of enterprise commerce software consisting of its Commerce Exchange platform, applications, tools and business adapters.

2. LIQUIDITY

InterWorld has incurred significant operating losses since inception. At December 31, 1998 and March 31, 1999, InterWorld had an accumulated deficit of $53,195 and $60,346, respectively, and working capital (deficit) of ($635) and $5,307, respectively. Such losses have resulted principally from product development costs, sales and marketing costs and general and administrative costs associated with InterWorld developing its products and expanding its level of operations. In order to fund these efforts, InterWorld completed private placements of its mandatorily redeemable Series A Convertible Preferred Stock ("Series A Preferred") during 1996, 1997 and 1998 (Note 7). InterWorld utilized the net proceeds from these issuances to fund operations and for working capital requirements. The Company also completed a private placement of its mandatorily redeemable Series B Convertible Preferred Stock ("Series B Preferred") in January 1999 providing gross proceeds of approximately $16,500 (Note 15). Effective as of May 1998, InterWorld's secured loan agreement with a holder of Series A Preferred was amended to increase to $11,000 the maximum borrowings that could be made by InterWorld to fund its future cash requirements (Note 10).

The accompanying consolidated financial statements have been prepared assuming InterWorld will continue as a going concern. InterWorld's net losses and negative cash

INTERWORLD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

flows from operations and expected additional losses raise substantial doubt about its present ability to continue as a going concern. InterWorld's ability to continue as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations as they come due.

Management is also actively pursuing other financing options which include securing additional equity financing through an initial public offering. If for any reason the initial public offering is delayed or postponed, InterWorld intends to seek additional private equity financing. Management believes that sufficient funding will be available to meet its planned business objectives for a reasonable period of time; however, there can be no assurance that InterWorld will be successful in its efforts to raise additional capital. The consolidated financial statements do not include any adjustments relating to the recoverability of the carrying amount of the recorded assets or the amount of liabilities that might result from the outcome of these uncertainties.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of InterWorld and its wholly owned and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Assets and liabilities of InterWorld's foreign subsidiaries are translated to U.S. dollars based on exchange rates at the end of the respective reporting period. Income and expense items are translated at average exchange rates during the period. Transaction gains and losses are included in the determination of operating expenses. Cumulative translation adjustments are insignificant at December 31, 1998 and March 31, 1999.

ACCOUNTING ESTIMATES

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

CASH EQUIVALENTS

Cash equivalents, which are stated at cost, consist of short-term, highly liquid investments, with original maturities of less than three months when purchased. Interest is accrued as earned.

ACCOUNTS RECEIVABLE -- NET

Accounts receivable are stated net of allowance for doubtful accounts of $622, $1,217 and $1,194 at December 31, 1997 and 1998 and March 31, 1999, respectively.

Computer equipment and software...  3 years
Leasehold improvements............  Shorter of lease term or estimated
                                      useful life
Furniture and fixtures............  5 years
Office equipment..................  3 years

REVENUE RECOGNITION

Effective January 1, 1997 InterWorld adopted AICPA Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides guidance on when and in what amounts revenue should be recognized for licensing, selling, leasing, or otherwise marketing computer software. The adoption of SOP 97-2 did not have a material impact on InterWorld's results of operations for the year ended December 31, 1997.

During 1998, InterWorld also adopted SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative vendor specific objective evidence of the elements. The adoption of SOP 98-9 did not have a material impact on InterWorld's results of operations for the year ended December 31, 1998.

PRODUCT LICENSES

Revenue from the licensing of InterWorld's software products is recognized upon delivery to the customer, pursuant to an executed software licensing agreement when no significant vendor obligations exist, the fee is fixed or determinable and collection is probable. If acceptance by the customer is required, revenue is recognized upon customer acceptance. Amounts received from customers in advance of product shipment are classified as deposits from customers. InterWorld enters into reseller arrangements for its products that typically provide for license fees payable to InterWorld based on a percentage of the InterWorld's list price. License revenues from InterWorld's reseller arrangements are recognized when the fee is fixed or determinable upon delivery by the reseller when collection is probable.

SERVICES REVENUE

Revenue from professional services, such as custom development, installation and integration support, is recognized as the services are rendered. Contracts for professional services requiring significant production, modification or customization to InterWorld's software products are recognized on a percentage of completion basis.

INTERWORLD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Revenue from maintenance and customer support services, such as telephone support and product enhancements is recognized ratably over the period of the agreement under which the services are provided, typically one year.

Deferred revenue consists principally of billings in advance for services not yet provided.

ADVERTISING COSTS

Advertising costs included in sales and marketing expenses are expensed as incurred and approximated $204, $455, $470 and $29 for the years ended December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1999, respectively.

RESEARCH AND DEVELOPMENT

InterWorld charges all costs incurred to establish the technological feasibility of a product or product enhancement to research and development expense as incurred.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of accounts receivable, accounts payable, accrued expenses and notes payable approximates their fair values due to the relatively short maturity of these instruments.

INTERIM FINANCIAL DATA

The unaudited financial data at March 31, 1999 and for the three months ended March 31, 1998 and 1999 have been prepared by management and include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results of operations and cash flows. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the operating results to be expected for the entire year ending December 31, 1999.

INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments

INTERWORLD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

embedded in other contracts and for hedging activities. SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. At March 31, 1999, InterWorld did not own any derivative instruments and had not engaged in any hedging activities during the three months ended March 31, 1999. InterWorld does not expect to purchase derivative instruments or enter into hedging activities in the foreseeable future.

                                                      DECEMBER 31,
                                                    ----------------    MARCH 31,
                                                     1997      1998       1999
                                                    ------    ------    ---------
Computer equipment and software...................  $4,196    $5,967     $6,483
Office equipment..................................   1,330     1,447      1,481
Leasehold improvements............................   1,967     1,974      2,529
Furniture and fixtures............................     835       867      1,325
                                                    ------    ------     ------
                                                     8,328    10,255     11,818
Less: Accumulated depreciation and amortization...  (1,680)   (4,185)    (4,886)
                                                    ------    ------     ------
Property and equipment, net.......................  $6,648    $6,070     $6,932
                                                    ======    ======     ======

Computer equipment and software, office equipment, and furniture and fixtures include approximately $2,024, $1,149 and $827, respectively, of fixed assets acquired under capital leases at December 31, 1997, 1998 and March 31, 1999. Accumulated depreciation related to these assets approximated $1,536, $2,108 and $2,413 for the years ended December 31, 1997 and 1998 and for the three months ended March 31, 1999, respectively.

                                                      DECEMBER 31,
                                                    ----------------    MARCH 31,
                                                     1997      1998       1999
                                                    ------    ------    ---------
Trade accounts payable............................  $  607    $3,047     $2,650
Accrued commissions...............................     509       264        434
Accrued incentive compensation....................     856       615        575
Accrued professional fees.........................     160       674         28
Accrued financing fees............................      --        --        900
Other accrued expenses............................   1,315     1,191      1,005
                                                    ------    ------     ------
                                                    $3,447    $5,791     $5,592
                                                    ======    ======     ======

6. LOSS PER COMMON SHARE

Effective December 31, 1997, InterWorld adopted SFAS No. 128, "Earnings per Share" ("SFAS 128") which requires presentation of basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS") by all entities that have publicly traded common stock or potential common stock (options, warrants, convertible securities or contingent stock arrangements). SFAS 128 also requires presentation of earnings per share by an entity that has made a filing or is in the process of filing with a regulatory agency in preparation for the sale of those securities in a public market. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an antidilutive effect on earnings.

All prior periods presented have been restated for the adoption of SFAS 128.

                                                                    THREE MONTHS ENDED
                              YEARS ENDED DECEMBER 31,                   MARCH 31,
                       ---------------------------------------   -------------------------
                          1996          1997          1998          1998          1999
                       -----------   -----------   -----------   -----------   -----------
Net loss.............  $    (7,197)  $   (23,612)  $   (22,062)  $    (4,644)  $    (7,151)
                       -----------   -----------   -----------   -----------   -----------
Loss from continuing
  operations.........       (7,197)      (21,675)      (22,062)       (4,644)       (7,151)
                       -----------   -----------   -----------   -----------   -----------
Weighted average
  shares outstanding
  used for basic loss
  and diluted loss
  per share..........   13,500,000    13,500,709    13,771,371    13,507,149    13,867,442
Basic loss and
  diluted loss per
  share..............  $     (0.53)  $     (1.75)  $     (1.60)  $     (0.34)  $     (0.52)
                       ===========   ===========   ===========   ===========   ===========
Basic loss and
  diluted loss per
  share from
  continuing
  operations.........  $     (0.53)  $     (1.61)  $     (1.60)  $     (0.34)  $     (0.52)
                       ===========   ===========   ===========   ===========   ===========

At December 31, 1998, outstanding options to purchase 3,428,155 shares of common stock, with exercise prices ranging from $1.25 to $8.50 per share, and at March 31, 1999 options to purchase 4,716,331 shares of common stock with exercise prices ranging from $1.25 to $10.00, have been excluded from the computation of diluted loss per share as they are antidilutive. Outstanding warrants to purchase 534,070 shares of Series A Preferred with exercise prices ranging from $2.00 to $9.775 per share were also antidilutive and excluded from the computation of diluted loss per share at both December 31, 1998 and March 31, 1999. Common shares issuable upon conversion of Series A Preferred and Series B Preferred have also been excluded from the computation of diluted loss per share at December 31, 1998 and March 31, 1999 as they are antidilutive.

In January 1999, InterWorld completed the sale and issuance of 1,650,000 shares of Series B Preferred which are convertible into common stock (Note 15). InterWorld also granted options to purchase 1,604,567 shares of common stock (Note 15) in February 1999.

INTERWORLD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. COMMON STOCK AND CONVERTIBLE PREFERRED STOCK

COMMON AND PREFERRED STOCK SPLITS

Effective March 5, 1996, InterWorld implemented a 5,400-for-1 stock split, effected in the form of a stock dividend, applicable to all issued and outstanding shares of InterWorld's common stock.

On July 12, 1996, InterWorld implemented a 2.5-for-1 stock split applicable to all issued and outstanding shares of InterWorld's common and preferred stock (without changing the par value thereof).

All common and preferred shares and related per share data reflected in the accompanying financial statements and notes thereto have been presented as if the stock splits had occurred on January 1, 1996.

COMMON STOCK

In June 1998, the Board of Directors authorized an increase in the number of authorized shares of InterWorld's common stock from 27,000,000 shares to 35,000,000 shares. The Board of Directors also authorized an increase to 100,000,000 shares of common stock to be effective upon consummation of InterWorld's planned initial public offering. In addition, the Board of Directors also approved the authorization of an additional 15,000,000 shares of preferred stock, $.01 par value.

MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK

At December 31, 1998, InterWorld had authorized the issuance of 8,200,000 shares of preferred stock, $.01 par value. Such preferred shares have been designated as Series A Preferred. The holders of Series A Preferred are entitled to (i) share in dividends on a pro-rata basis with common stockholders on an as-converted basis; (ii) a liquidation preference equal to the sum of the price paid per share and all declared and unpaid dividends (the "Preference Amount");
(iii) demand redemption of the Preference Amount in the event of a merger where the shareholders of InterWorld do not control the surviving entity or a sale of all or substantially all of InterWorld's assets; (iv) mandatory redemption of the Preference Amount in cash at any date on or after March 2003 by a majority vote of the Series A preferred holders; (v) vote on all matters on an as converted basis; and (vi) convert to common stock at the Preference Amount multiplied by the shares to be converted divided by the conversion price (the "Conversion Price") per share. The initial Conversion Price is equal to the issuance price per share of Series A Preferred, and is subject to adjustment in the event shares of common stock are issued without consideration or for consideration per share less than the conversion price.

                                                             CARRYING VALUE
                                     ISSUANCE                 DECEMBER 31,
                                       PRICE      GROSS     -----------------   REDEMPTION
DATE                      SHARES     PER SHARE   PROCEEDS    1997      1998       VALUE
----                     ---------   ---------   --------   -------   -------   ----------
March 1996.............  1,287,500     $2.00     $ 2,575    $ 2,475   $ 2,494    $ 2,575
July 1996..............  1,056,631     4.732       5,000      5,000     5,000      5,000
December 1996..........    956,000      6.25       5,975      5,975     5,975      5,975
January-June 1997......    164,000      6.25       1,025      1,025     1,025      1,025
August 1997............  1,122,931      7.50       8,422      8,422     8,422      8,422
September 1997.........  1,764,705      8.50      15,000     14,422    14,532     15,000
March 1998.............  1,188,232      8.50      10,100         --     9,886     10,100
                         ---------               -------    -------   -------    -------
          Total........  7,539,999               $48,097    $37,319   $47,334    $48,097
                         =========               =======    =======   =======    =======

The Series A Preferred shares are subject to automatic conversion upon consummation of an underwritten public offering of InterWorld's common stock providing aggregate proceeds, net of underwriting discounts and commissions, of greater than $10,000.

In connection with the March 1996 Series A Preferred issuance, InterWorld issued warrants to an investor to purchase 103,420 shares of Series A Preferred, at an exercise price of $2.00 per share. The fair value of the warrants in the amount of $135 has been recorded to additional paid-in capital. The warrants may be exercised at any time and expire ten years from issuance or five years from the effective date of InterWorld's initial public offering, whichever is later.

In connection with the September 1997 Series A Preferred issuance, InterWorld issued warrants to purchase an aggregate of 110,294 shares of its Series A Preferred, at an exercise price of $9.775 per share, as a placement fee. The fair value of the warrants in the amount of $587 has been recorded to additional paid-in-capital.

InterWorld incurred cash expenses of $54 and $20 during 1997 and 1998, respectively, in connection with the Series A Preferred issuances.

In November 1997, InterWorld had authorized the issuance of 1,188,235 shares of Series A Preferred at $8.50 per share. As of December 31, 1997, InterWorld had received deposits in the amount of $225 for subscriptions to purchase 26,471 shares.

During 1997, InterWorld issued warrants to purchase 75,000 shares of Series A Preferred at $7.50 per share to a financial advisor. The fair value of the warrants in the amount of $371 was expensed during 1997.

In March 1998, in connection with the sale and issuance of Series A Preferred, InterWorld issued warrants to purchase an aggregate of 39,864 shares of its Series A

INTERWORLD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Preferred at an exercise price of $9.775 per share as a placement fee. The fair value of the warrants in the amount of $252 has been recorded to paid-in-capital.

The excess of the redemption value over the carrying value of Series A Preferred is being recorded by periodic charges to stockholders' equity through March 2003, the earliest date at which the Series A Preferred holders may require redemption of their shares.

8. TRANSACTIONS WITH RELATED PARTIES

During 1996 and 1997, InterWorld recognized product license and service revenues from sales to a holder of Series A preferred of $156 and $12, respectively.

In May 1996, InterWorld made loans in the aggregate amount of $193, bearing interest at a rate of 6% per annum, to its three co-founders. The principal and interest on the loans to two of the founders, in the aggregate amount of $114, will be forgiven in equal installments starting in 1999, except that if either of them voluntarily terminates his employment or service as a director prior to May 2001, his loan including interest will become due and payable in May 2001. In May 1998 the third founder repaid $23 of the principal amount of his loan, reducing the principal amount of the loan to $75. The balance of such loan was forgiven and expensed in June 1998. Interest income from such loans amounted to $7, $12 and $9 in 1996, 1997 and 1998, respectively. At December 31, 1997 and 1998, other assets included $211 and $114, respectively, in amounts due from co- founders.

During 1998, InterWorld recognized product license and service revenue from sales to UGO of $474. All sales to UGO were for product licenses and services provided subsequent to UGO's spin-off on March 30, 1998 (Note 13).

9. STOCK OPTION, DEFINED CONTRIBUTION AND PROFIT SHARING PLANS

STOCK OPTION PLANS

In March 1996, InterWorld implemented its 1996 Stock Option Plan (the "Plan") whereby incentive and nonqualified options to purchase shares of InterWorld's stock may be granted to directors and employees of InterWorld and its subsidiaries. In June 1998, the Board of Directors approved amendments to the Plan whereby the aggregate number of shares of common stock for which options may be granted under the Plan was increased to 6,600,000. The exercise and vesting periods and the exercise price for options granted under the Plan are determined by the Board of Directors or a Committee of the Board of Directors. The Plan stipulates that no option may be exercisable after seven years from the date of grant. The fair market value of InterWorld's common stock is determined by the Board of Directors. Options granted under the Plan generally vest over a period of five years, 20% on the first anniversary of the date of grant and 5% each quarter thereafter.

                               1996                   1997                   1998
                       --------------------   --------------------   --------------------
                                   WEIGHTED               WEIGHTED               WEIGHTED
                        SHARES     AVERAGE     SHARES     AVERAGE     SHARES     AVERAGE
                         UNDER     EXERCISE     UNDER     EXERCISE     UNDER     EXERCISE
                        OPTION      PRICE      OPTION      PRICE      OPTION      PRICE
                       ---------   --------   ---------   --------   ---------   --------
Options outstanding,
  beginning of
  year...............         --              1,269,750    $1.25     2,904,737    $1.71
Options granted......  1,271,750    $1.25     1,821,749    $2.00       875,068    $4.25
Options granted......         --                     --                291,050    $8.50
Options exercised....         --                 (5,650)   $1.25      (364,136)   $1.89
Options forfeited....     (2,000)   $1.25      (181,112)   $1.38      (278,564)   $2.39
                       ---------              ---------              ---------
Options outstanding,
  end of year........  1,269,750    $1.25     2,904,737    $1.71     3,428,155    $2.86

                                    OPTIONS OUTSTANDING AT         WEIGHTED AVERAGE
                                      DECEMBER 31, 1998       REMAINING CONTRACTUAL LIFE
                                    ----------------------    --------------------------
At $1.25..........................          902,750                      5.0
At $2.00..........................        1,455,579                      5.6
At $4.25..........................          781,576                      6.2
At $8.50..........................          288,250                      6.5

InterWorld applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and related interpretations in accounting for its Plan and other stock-based compensation issued to employees. During the years ended December 31, 1996, 1997, and 1998, InterWorld has recognized compensation expense for options granted to employees of $71, $752 and $ 1,615, respectively. InterWorld estimates that it will recognize compensation expense in an aggregate amount of $4,385 in future years as options vest for grants made during 1996, 1997 and 1998. (See Note 15 for compensation expense for Options granted in 1999).

During 1996, 1997 and 1998, InterWorld issued 20,000, 15,000 and 8,706 options, respectively, to third party consultants in exchange for services. InterWorld has recognized non-cash expense of $28 in 1996, $36 in 1997 and $47 in 1998 based on the fair value of such options at the date of grant.

Had compensation cost for option grants to employees been determined based upon the fair value at the date of grant for awards under the Plan consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), InterWorld's net loss and loss per share for the years ended December 31, 1996, 1997 and 1998 would have increased by approximately $115, or $0.01 per share, $677 or $0.05, and $1,568 or $0.11 per share, respectively.

                                                     1996       1997       1998
                                                    -------    -------    -------
Dividend yield....................................   None       None       None
Weighted average risk-free interest rate on date
  of grant........................................   6.21%      5.90%      5.11%
Forfeitures.......................................   None       None       None
Expected life.....................................  5 years    5 years    5 years
Volatility........................................    75%        75%        85%

DEFINED CONTRIBUTION PLAN

InterWorld has a defined contribution savings plan (the "Plan"), which qualifies under Section 401(k) of the Internal Revenue Code. Participants may contribute up to 15% of their gross wages not to exceed, in any given year, a limitation set by Internal Revenue Service regulations. The Plan provides for discretionary contributions to be made by InterWorld as determined by its Board of Directors. InterWorld has not made any contributions to the Plan.

10. SECURED LOAN AGREEMENT

Effective as of May 1998, InterWorld's secured loan agreement with a holder of Series A Preferred was amended to increase to $11,000 the maximum borrowings that could be made by InterWorld. The loan accrues interest, which is payable monthly, at a rate of 10% per annum and is secured by the accounts receivable of InterWorld. InterWorld may borrow amounts under the loan agreement for a period of twelve months subsequent to its initial borrowing under the loan agreement or until completion of an initial public offering by InterWorld. The loan principal is due and payable the later of 15 months from the initial borrowing or 21 months from the date of the agreement. The initial borrowing under the loan agreement occurred on October 26, 1998.

At December 31, 1998, InterWorld had $4,000 in outstanding borrowings under the loan agreement. Interest expense recognized on the loan in 1998 amounted to $60.

The amount of $3,229 presented as notes payable to stockholders on the balance sheet at December 31, 1998 is net of unamortized debt discount.

The lender was issued a warrant to purchase 51,766 shares of Series A Preferred at an exercise price of $9.775 per share upon execution of the loan agreement. The lender was also issued a warrant to purchase an additional 51,766 shares of Series A Preferred at a price of $9.775 per share upon InterWorld's initial borrowing under the loan agreement in October, 1998.

The aggregate fair value of the warrants in the amount of $1,023 has been recorded as debt discount on the loan obligation and is being amortized to interest expense over a period of twelve months.

INTERWORLD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. CONCENTRATIONS OF RISK AND CUSTOMER INFORMATION

Financial instruments which potentially subject InterWorld to concentrations of credit risk are primarily cash, accounts receivable, accounts payable, and notes payable. InterWorld generally does not require collateral and the majority of its trade receivables are unsecured. InterWorld sells its products to a wide range of commercial enterprises. InterWorld had no significant foreign revenue in any of the periods presented.

For the year ended December 31, 1996, two customers accounted for 31% and 17% of net revenues. For the year ended December 31, 1997, two different customers accounted for 11% and 10% of net revenues. For the year ended December 31, 1998, another customer accounted for 14% of net revenues. For the three months ended March 31, 1999, two customers accounted for 27% and 15% of net revenues.

For the years ended December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1999, InterWorld's foreign sales were not material.

12. INCOME TAXES

InterWorld has incurred losses since inception which have generated net operating loss carryforwards of approximately $39,210 and $43,316 at December 31, 1998 and March 31, 1999, respectively, for federal and state income tax purposes. These carryforwards are available to offset future taxable income and expire in 2011 through 2019. At December 31, 1998 and March 31, 1999, InterWorld also had research and development tax credit carryforwards in the amount of $1,437 and $1,800, respectively, which expire in 2002 through 2019.

Section 382 of the Internal Revenue Code of 1986, as amended (the "IRC"), places a limitation on the utilization of federal net operating loss carryforwards upon the occurrence of an ownership change. In general, a change in ownership occurs when a greater than 50 percent change in ownership takes place over a three year testing period. The annual utilization of net operating loss carryforwards generated prior to such change is limited, in any one year, to a percentage of the entity's fair value at the time of the change in ownership. As a result of certain equity transactions consummated by InterWorld, a change in ownership, as defined by Section 382 of the IRC, has occurred during the three months ended March 31, 1999.

The net operating loss carryforwards and temporary differences between carrying amounts of assets and liabilities for financial reporting and income tax purposes result in a net deferred tax benefit of $21,842 and $24,507 at December 31, 1998 and March 31, 1999, respectively. InterWorld's operating plans anticipate taxable income in future periods; however, such plans make significant assumptions which cannot be reasonably assured, including market acceptance of InterWorld's products and services by customers. Therefore, in consideration of InterWorld's accumulated losses and the uncertainty of its ability to utilize this deferred tax benefit in the future, InterWorld has recorded a valuation allowance in the amount of $21,842 and $24,507 at December 31, 1998 and March 31, 1999, respectively, to offset the deferred tax benefit amount.

                                                     DECEMBER 31,
                                                  ------------------    MARCH 31,
                                                   1997       1998        1999
                                                  -------    -------    ---------
Deferred tax assets:
  Net operating loss............................  $10,690    $17,250    $ 19,059
Net operating loss of discontinued operations...      616         --          --
  Provision for losses of discontinued
     operations to date of disposition..........      295         --          --
  Foreign operating loss carryforward...........      792      1,781       2,251
  Accruals, reserves and other..................    1,273      1,061       1,049
  Research and development credits..............      481      1,437       1,801
  Depreciation..................................       --        101         135
  Nonqualified stock options and warrants.......      204        212         212
                                                  -------    -------    --------
     Total deferred tax assets..................   14,351     21,842      24,507
                                                  -------    -------    --------
Deferred tax liabilities:
  Depreciation..................................      (77)        --          --
                                                  -------    -------    --------
     Total deferred tax liabilities.............      (77)        --          --
                                                  -------    -------    --------
Net deferred tax asset..........................   14,274     21,842      24,507
                                                  -------    -------    --------
Less: valuation allowance.......................  (14,274)   (21,842)    (24,507)
                                                  -------    -------    --------
Deferred tax asset, net.........................  $    --    $    --    $     --
                                                  =======    =======    ========

                                                                     THREE MONTHS
                                                  YEAR ENDED             ENDED
                                             --------------------      MARCH 31,
                                             1996    1997    1998        1999
                                             ----    ----    ----    -------------
Federal income tax statutory rate..........  (35)%   (35)%   (35)%          (35)%
State income taxes, net of federal tax
  benefit..................................  (12)    (12)     (9)            (9)
Excess foreign tax benefits................   --      --       4             --
Incentive stock options....................   --       1       3              5
Other nondeductible items..................   --      --       3              2
Increase in valuation allowance............   47      46      34             37
                                             ---     ---     ---       --------
Income tax rate as recorded................   --      --      --             --
                                             ===     ===     ===       ========

13. DISCONTINUED OPERATIONS

On March 30, 1998, InterWorld completed a spin-off distribution of its subsidiary UGO, reducing its majority ownership to a minority interest of approximately 18%. Since March 30, 1998, InterWorld's minority interest in UGO has decreased to approximately 10% as a result of private equity financings by UGO. Common shares of UGO were distributed to the InterWorld's common and preferred stockholders of record as of March 30, 1998 on the basis of 0.18 a common share of UGO for each common and preferred share (on an as converted basis) of InterWorld. UGO is an online retailer of game and entertainment software.

InterWorld has presented UGO as a discontinued operation in the Consolidated Statement of Operations for the year ended December 31, 1997. A provision of $627 for estimated operating losses through the disposal date was recorded at December 31, 1997. The costs of disposal were not expected to be significant.

A summary of the net liabilities distributed is as follows:

                                                 DECEMBER 31, 1997    MARCH 30, 1998
                                                 -----------------    --------------
Cash...........................................       $   596            $    96
Equipment, net.................................            92                315
Other current assets...........................            20                 53
Notes payable..................................        (1,150)            (1,400)
Accounts payable and accrued expenses..........           (30)              (113)
                                                      -------            -------
                                                      $  (472)           $(1,049)
                                                      =======            =======

INTERWORLD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

InterWorld has not guaranteed and is not contingently liable for any obligations of UGO. InterWorld carries its investment in UGO at cost and it has no continuing significant involvement in the operations of UGO.

During 1997, UGO had no revenues and incurred net losses of $1,310. The basic loss per share and diluted loss per share for the year ended December 31, 1997 attributable to discontinuance of the operations of UGO was approximately $0.14 per share.

14. COMMITMENTS

Leases

InterWorld has entered into noncancelable operating leases primarily for office space, furniture and office equipment with initial or remaining terms of six months or more. Total rent expense amounted to $365, $1,349 and $1,283 for the years ended December 31, 1996, 1997 and 1998, respectively.

During 1997, InterWorld completed a sale-leaseback transaction with a holder of Series A Preferred, selling computer equipment, office equipment, and furniture and fixtures of $878, net of accumulated depreciation, for $819, and realizing a loss of $59. The lease has been accounted for as a capital lease. During 1997 InterWorld acquired computer equipment, office equipment, and furniture and fixtures pursuant to capital lease agreements with the Series A Preferred holder. The leases had an aggregate initial principal amount of $3,181. In connection with the leases InterWorld issued the lessor in March 1996 and February 1997 warrants to purchase 37,500, and 39,200 shares of Series A Preferred, at exercise prices of $2.00 and $6.25 per share, respectively. The aggregate fair value of the warrants in the amount of $210 has been recorded as debt discount on the related capital lease obligation and is being amortized to interest expense over the term of the lease. During 1997 and 1998, InterWorld recognized interest expense of $52 and $70 related to the warrants.

YEAR                                                          OPERATING    CAPITAL
----                                                          ---------    -------
1999........................................................   $1,006      $1,505
2000........................................................    1,138         627
2001........................................................      930          --
2002........................................................      852          --
2003........................................................      825          --
2004 and thereafter.........................................    3,836          --
                                                               ------      ------
     Total minimum lease payments...........................   $8,587       2,132
                                                               ------      ------
Less:  Amounts representing interest........................                 (118)
                                                                           ------
Present value of future minimum lease payments..............                2,014
Less:  Current maturities...................................                1,398
                                                                           ------
     CAPITAL LEASE OBLIGATIONS-LONG TERM....................               $  616
                                                                           ======

A Series A Preferred stockholder in January 1997 issued an irrevocable letter of credit with a term of one year, in the amount of $1,579 as security for performance under an office space lease. As consideration for the issuance, InterWorld issued the Series A Preferred stockholder warrants to purchase 25,260 shares of Series A Preferred, at an exercise price of $6.25. The fair value of such warrants, in the amount of $104, was recorded as interest expense during 1997.

15. SUBSEQUENT EVENTS

In January 1999, InterWorld completed the sale and issuance of 1,650,000 shares of Series B Preferred at $10.00 per share, providing gross proceeds of $16,500 and net proceeds, after deducting placement fees and other expenses paid by InterWorld, of $15,510. Except with respect to potential adjustments to the conversion price, InterWorld's Series B Preferred shares provide the same rights and preferences as those of prior Series A Preferred issuances.

In January 1999, InterWorld utilized a portion of net proceeds from the issuance of the Series B Preferred to repay $4,000 under its secured loan agreement (Note 10).

In February 1999, InterWorld granted to employees and consultants options to purchase 1,604,567 shares of common stock, all at an exercise price of $10.00 per share of which the granting of options to purchase 115,000 common shares are contingent upon the commencement of employment. InterWorld estimates it will recognize approximately $8,556 of compensation expense over the vesting period of these options.

INTERWORLD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNAUDITED

In June 1999, InterWorld entered into an agreement to lease additional office space at its current location. As a result, annual rental costs have increased by approximately $1.1 million. The lease expires in April 2015.

16. INITIAL PUBLIC OFFERING AND PRO FORMA PRESENTATION (UNAUDITED)

In May 1999, the Board of Directors of InterWorld authorized management to pursue an underwritten sale of shares of InterWorld's common stock in an initial public offering (the "IPO") pursuant to the Securities Act of 1933.

Upon completion of the IPO, InterWorld will adopt an employee stock purchase plan. Under the plan, eligible employees will be provided an opportunity to purchase shares of InterWorld's common stock through regular payroll deductions. The total number of shares of common stock that are authorized for issuance under the plan is 1,000,000. Employees will be given an opportunity to purchase shares of common stock during consecutive six-month periods, and the right to purchase shares will expire on the last day of the six-month period. The purchase price for shares offered under the Plan each year will be equal to a percentage designated by the compensation committee of the Board of Directors (not less than 85%) of the lower of the fair market value of InterWorld's common stock at the commencement or termination of the six-month period. The plan will expire on the tenth anniversary of the effective date of the plan.

Upon the closing of the IPO, all outstanding shares of Series A Preferred and Series B Preferred will automatically convert into an aggregate of 9,189,999 shares of common stock. The pro forma effects of this conversion have been reflected in unaudited pro forma stockholder's equity at March 31, 1999.

For the periods ended December 31, 1998 and March 31, 1999, the pro forma basic and diluted loss per share from continuing operations reflecting the effects of the conversion of Series A Preferred and Series B Preferred would have been ($1.05) and ($0.31), respectively. Pro forma basic and diluted loss per share for the periods ended December 31, 1998 and March 31, 1999 would have been ($1.05)and ($0.31), respectively. The pro forma weighted average shares outstanding at December 31, 1998 and March 31, 1999 would have been 21,031,403 and 22,746,329, respectively.

Also upon completion of the IPO, 178,570 previously unvested options to purchase 178,570 shares of common stock will automatically vest. InterWorld will recognize approximately $229 of noncash compensation expense upon the vesting of such options.

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