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INFONAUTICS, INC.
(exact name of registrant as specified in its charter)

 590 North Gulph Road
King of Prussia, Pa 19406-2800
(Address of principal executive offices)

(610) 971-8840
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value

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

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

The aggregate market value of the common stock held by non-affiliates of the registrant as of March 28, 2001 was $7,350,000. For purposes of making this calculation only, the registrant has defined affiliates to include all directors and executive officers, all holders of more than ten percent of the Company's Class A Common Stock and all holders of more than five percent of the Company's Class A Common Stock who also have a representative on the Company's board of directors.

The number of shares outstanding of the registrant's common stock as of March 28, 2001 was 12,574,406.

Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Notice of Annual Meeting of Stockholders are incorporated by reference into Part III.

INFONAUTICS, INC.
ANNUAL REPORT ON FORM 10-K
For Fiscal Year Ended December 31, 2000

PART I

ITEM 1. BUSINESS

This Report on Form 10-K contains, in addition to historical information, forward-looking statements by Infonautics with regard to its expectations as to financial results and other aspects of its business that involve risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "may," "should," "anticipate," "believe," "plan," "estimate," "expect" and "intend," and other similar expressions are intended to identify forward-looking statements. These include, for example, statements regarding the merger with Tucows Inc., any conditions that apply to the merger, the consequences of the merger, and the costs and fees related to the merger, the continued listing of the Company's stock on the Nasdaq Small Cap Market, the sufficiency of Infonautics' liquidity, including cash resources and capital, the number of registered users and subscribers, monetization of users and subscribers, traffic to our sites, gross margins, current and future expenses and costs, future revenues and shortfalls in revenues, costs of revenue, pricing and its effects on our business, use of system resources and marketing effects, technology and systems, growth and expansion plans, product development plans, sales and marketing plans, our business models, changes in our marketing partners, capital expenditures, seasonality, effects of the U.S. economy, operating results, licensing and service contracts with bigchalk.com, inc., the transaction with bigchalk.com, inc., the Company's equity interest in bigchalk.com, inc., the Company's other equity interest and the derivative collar agreement, and the Company's status under the Investment Company Act of 1940.

These statements are based on management's current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Factors that may cause such a difference include, but are not limited to, the risks set forth in the Company's filings with the Securities and Exchange Commission from time to time. The sections of this Annual Report entitled "Business" and "Risk Factors," as well as other sections, contain a discussion of some of the factors that could contribute to these differences. All forward-looking statements included in this document are based on information available to Infonautics as of the date of this document, and Infonautics assumes no obligation to update or revise these cautionary statements or any forward-looking statements. These statements are not guarantees of future performance and you should not rely on them.

Overview

Infonautics, Inc. (including its subsidiaries, "Infonautics," the "Company," "we," or "our") is a pioneering provider of personalized information agents and Web sites. We deliver information over the Internet and other communications mediums such as email. Our sites provide our users with relevant information they cannot conveniently locate in any one place elsewhere on the Internet. Our content notification sites are personal portals that provide users with comprehensive information on a specific topic or area of interest. Our search and reference sites deliver deep, archival research content in response to users' questions. As the amount of information on the Internet continues to grow, users value our delivery of relevant information.

Our content notification sites - Company Sleuth, Job Sleuth, and Entertainment Sleuth - are intelligent personalized information agents that deliver the information users want, when and where they want it. These sites are also available from the Sleuth Center portal. Our content notification sites generate revenue in a variety of ways, including through advertising and affiliate marketing.

Our search and reference sites - Electric Library, Encyclopedia.com, and Newsdirectory.com - provide relevant information in response to users' questions and preferences from sites that are highly differentiated from traditional search engines and directories. Our search and reference sites generate revenue primarily through Electric Library subscription fees, and also through advertising, affiliate marketing, and co-branding.

The Company was incorporated in Pennsylvania in November 1992.

Recent developments

On March 28, 2001, the Company announced that it signed a definitive merger agreement with privately held Tucows Inc., a leading provider of wholesale digital products to Internet service providers and web hosting companies worldwide. In consideration of the merger, the Company will issue approximately 50 million shares of Class A common stock to the Tucows shareholders who will own roughly 80% of the merged company at closing. Upon completion of the merger, which is subject to Company and Tucows shareholder approval, certain regulatory approvals, and certain other closing conditions, Infonautics will remain a public company and is expected to adopt the Tucows name. The transaction is expected to close during the third quarter of 2001.

On December 15, 1999, we closed a transaction with Bell & Howell Company ("Bell & Howell") and its wholly owned subsidiary, Bell and Howell Information and Learning Company ("BHIL"), following approval of the transaction by our shareholders on November 30, 1999. In the transaction, we contributed our Electric Library K-12 and public library business and assets and liabilities into what is now bigchalk.com, inc. ("bigchalk.com"), an Internet education company. Also in the transaction, BHIL contributed its ProQuest K-12 and public library business and certain assets and liabilities into bigchalk.com. As part of the transaction, we also sold our e-commerce online archive business to BHIL and granted an option to bigchalk.com to purchase our Electric Library end-user business.

As a result of the transaction and taking into account our subsequent $3.5 million investment in, and the private placement by, bigchalk.com, we ultimately received a total of $18.5 million in cash and at the time owned approximately 31% of bigchalk.com's common stock. The balance of bigchalk.com's stock is owned by BHIL, a select group of institutional investors, and board members of bigchalk.com. We are represented on the Board of Directors of bigchalk.com. The Company, bigchalk.com, Bell & Howell, and BHIL have entered into a series of service and license agreements, as well as non-competition agreements. See Business -- Intellectual Property and Licenses. As a result of the transaction, we no longer sell to the K-12, public library, and post-secondary education markets. We are also no longer engaged in the e-commerce online archive business.

On January 10, 2000, we entered into a Stockholders Agreement with bigchalk.com, inc. and BHIL, as well as with other investors, in a "Series A" private placement of bigchalk.com preferred stock and common stock. The Company's equity interest in bigchalk.com was diluted as a result of this private placement. On December 20, 2000, we entered into an Amended and Restated Stockholders Agreement with bigchalk.com, inc., as well as with other investors, in a "Series B" private placement of bigchalk.com preferred stock. The Company's equity interest in bigchalk.com common stock remained the same, however, the Company was diluted to approximately 11% of the aggregate common and preferred stock as a result of this second private placement by bigchalk.com which closed by its terms at the end of February 2001.

On July 30, 2000, the Company, IBS Interactive, Inc., and First Avenue Ventures, Inc. entered into an Agreement and Plan of Reorganization providing for a business combination to be accomplished by the formation of a holding company ultimately to be named Digital Fusion, Inc. and the merger of subsidiaries of the holding company with and into IBS, Infonautics and First Avenue. On November 20, 2000, the Company, IBS, and First Avenue announced that they had mutually agreed to terminate the reorganization agreement to create Digital Fusion, Inc.

The Company received a letter dated January 3, 2001 from the NASDAQ Stock Market, Inc. notifying the Company that its securities have failed to meet the continued listing requirements for minimum bid price under the NASDAQ SmallCap Market rules. See Business - Risk Factors - -If We Fail To Meet The Listing Requirements Of The Nasdaq SmallCap Market, We May Be Unable To Sustain A Trading Market For Our Stock Which Would Affect The Liquidity Of Your Shares.

Our Sites

We currently provides content notification sites as well as search and reference sites.

Content Notification Sites

Our content notification sites are personal portals providing our users with comprehensive information on a specific topic or area of interest delivered over the Internet. Regardless of the topic or area of interest of each of our sites, they are designed to make the best information find the user to give that person an information edge. These sites use intelligent personalized information agents to comb the Internet on a daily basis looking for relevant information based on a large number of key words and phrases that we have developed. Our current content notification sites, all of which are free to registered users, include:

• Company Sleuth, our first content notification site, was launched in October 1998 and has been the model for our subsequent content notification sites. The site uncovers hard-to-find current events-type information about U.S. public companies available to anyone with access to the Internet. It searches various public and subscription-based sites and databases on a daily basis for new information in a variety of categories, including: patents, trademarks, Internet domain name registrations, federal litigation, stock prices, insider trading activity, SEC filings and news reports. The site then aggregates this information and matches it to the personal profiles created by its registered user. Company Sleuth offers users the ability to receive daily e-mails informing them of any new items of interest relating to the companies they have entered into their profile.
• Job Sleuth was launched in May 1999 and searches the Internet's top job sites and databases for job postings based on the user profiles of the site's registered users. The site delivers a daily e-mail to its users containing any job opportunities it has found from the top job sites on the Internet. Users can create multiple profiles based on more than 100 different job categories, geographic region, and keyword. The site addresses the needs of both the active job seeker as well as the passive job looker who simply wants to keep on top of job opportunities in the market.
• Entertainment Sleuth was launched in January 2000 and provides users with daily news on today's Hollywood and music stars and is designed to help entertainment fans find the latest information on their favorite celebrities. The site investigates over 1,000 entertainment Web sites every day and notifies registered users about newly discovered celebrity content in a daily e-mail. The site provides a wide-range of information including multimedia, photos, gossip, interviews and news on over 5,000 current stars. Registered users of Entertainment Sleuth can build a "star portfolio" and track up to 10 celebrities at any given time.
• The Sleuth Center portal makes our content notification sites available in one place on the Internet. Sleuth Center was launched in February 2000.

In March 2001, the Company stopped providing the Sports Sleuth site and has created a sports-related reference and information service using the Electric Library service. During 2000, the Company also stopped providing the Mobile Sleuth and Shopping Sleuth sites. In early 2001, the Company suspended the customizable Echo Factor content notification site and project.

See Business - Risk Factors -- If We Are Unable To Retain Access To Free Or Low Cost Web-Based Content, Then Our Ability To Provide Our Content Notification Sites In A Cost Efficient Manner Will Be Impaired.

Search and Reference Sites

Our search and reference sites employ a series of Web search capabilities that provide relevant information in response to users' questions and preferences from sites that are highly differentiated from traditional search engines. Our current search and reference sites include:

• Electric Library provides individual users on the Web with a digital library made up of well known published sources. It was launched in the first quarter of 1996 and it currently has approximately 75,000 registered paying users making it one of the largest paid subscription sites of its kind on the Internet. The site offers a user-friendly graphical interface and a powerful natural language search capability that allows users to search an entire content collection simply by asking a question. Results are provided in the form of a list of documents, from which the user can select from the most relevant content. The site is designed to enable users to satisfy their general and special interest information requirements in a manner highly differentiated from other search engines and directories. The site also provides users with the ability to see related Internet content from thousands of Web sites. Users are able to access Electric Library through any standard Web browser. We market the site to end-users through paid advertisements, bounty and royalty incentive arrangements, and a variety of other methods including affiliates. Individual subscriptions, which include a ten day free trial, are currently provided at $59.95 per year and offer unlimited consumer usage of the site. Two year subscriptions are currently available for $99.95. As a result of the closing of our transaction with Bell & Howell Company, we are contractually obligated not to market or sell Electric Library subscriptions to the K-12, public library, and post-secondary education markets, as those markets are now served by bigchalk.com, inc. or BHIL. See Business - Intellectual Property and Licenses; -- Risk Factors -- If We Are Unable To Retain Our Electric Library Customers After Their Subscription Period Has Ended; -- bigchalk.com, inc. Or A Third Party Could Purchase The Electric Library End User Business From Us; -- We Depend On bigchalk.com, inc. For Electric Library Technology And Related Technical Systems.
• Encyclopedia.com is a basic, easy-to-use research tool for anyone on the Internet. The site was launched in January 1998. The site contains the complete text of The Complete Columbia Encyclopedia and more than 52,000 articles from the encyclopedia have been assembled to provide free, quick, and useful information on almost any topic.

• The Company's sports content notification site, Sports Sleuth, has been replaced by a sports reference and information site called Sports Search beginning in March 2001.
• Newsdirectory.com, acquired by us in February 2000, is a media portal that provides an easy to use, comprehensive set of links to domestic and foreign news sources linking users with information ranging in scope from purely local to international. Not only does the free site generate page views as a resource itself, it also provides us with access to comprehensive news sources for all of our content notification and search and reference sites. Newsdirectory.com also serves as a cost-effective customer acquisition site for our sites.

The Infonautics Network

The Infonautics Network of Web sites is comprised of our content notification and search and reference sites. The Infonautics Network defines our presence on the Internet, which services that analyze and report on Web site traffic, users, and page views can use to evaluate and report on our performance using a variety of measures. See Business - Risk Factors -- Our Accuracy in Tracking And Measuring Advertising, Impressions, Page Views, And Registered Users Is Important To The Success Of Our Business .

Our Growth Strategy

The key elements in our strategy include enhancing our sites, implementing cost-effective marketing efforts to grow our base of subscribers and registered users, and generating revenue from our user base and the traffic across our sites. Our primary goals in marketing and distribution are to generate cost effective traffic which can be converted into profitable revenue. However, in order to achieve financial and related goals, such as reducing costs and seeking profitability, we may reduce or eliminate spending at various times, which would limit the growth of our business.

The Company also intends to "monetize" the user base and traffic across its sites. Our content notification sites are free to registered users. Our business models for these sites currently include site advertising including banner and sponsor ads, direct e-mail containing paid advertising, and various e-commerce models such as promotional offers which include referral fees, revenue sharing arrangements with key partners, co-branding of sites, and participation in affiliate networks. We have, and although we don't expect to continue to do so, entered into barter arrangements for the trading of advertising between Web sites and e-mails. See Business - Risk Factors -- Our Business Model Is Evolving And Depends In Part On Web Advertising, E-Commerce Programs, And Subscriptions, All Of Which Are Susceptible To Change.

Markets, Customers and Distribution

To date, the majority of our revenues have been derived from the sale of Electric Library subscriptions to educational and end-user markets. As a result of the closing of the transaction with Bell & Howell and BHIL, we will no longer have revenue from K-12, public library, and post-secondary educational contracts. Additionally, as part of the same transaction we sold our e-commerce online archive business, so no further revenue will be recognized from those customers.

In the near term, our major source of revenue will be from Electric Library subscription sales to individuals in the end-user market. The Electric Library site is a fee-based subscription service; the other search and reference sites are free to their users. Individual subscriptions, which include a free trial, are currently priced at $59.95 per year and offer unlimited usage of the site. Two year subscriptions are currently available for $99.95. Prior to March 2001, we also offered monthly subscriptions at $9.95 per month. To a lesser extent, we will generate revenues from other e-commerce revenue sources.

The sale of advertisements on the Infonautics Network is derived principally from short-term advertising contracts. Advertisements include banner and sponsor ads on our sites as well as ads placed in our e-mails which are sent to subscribers and registered users of our sites. Other sources of revenue for the Company are derived from various e-commerce sources. These e-commerce sources include promotional offers which include referral fees, revenue sharing arrangements with key partners, co-branding of sites, and participation in affiliate networks. For example, we earn revenue when subscribers register with a partner's site through a direct link from the Infonautics Network.

Our markets and customers are users of Internet applications who want high-quality, relevant content delivered to them in response to their specific interests and questions. We believe that these customers represent a significant and growing market for our sites. As of March 2001, we had the following metrics for our sites:

• Sleuth Center, including the Company Sleuth, Job Sleuth, and Entertainment Sleuth sites, had approximately 1.5 million individual site registrations;
• The Electric Library site had approximately 75,000 individual paying subscribers; and
• We delivered an estimated 450 million personalized e-mails to the registered users of all of our sites in 2000.

We obtain new users through affiliates, co-brand partners, consumer marketing and other referrals. An evolving business model on the Internet, affiliate marketing, is a referral system that enables individuals and other companies and organizations to market and promote a third party's products and services in return for a referral fee or commission. We participate in affiliate networks and currently have select affiliate web sites promoting various sites from our content notification and search and reference sites. A relatively small percentage of all our current affiliates account for a high percentage of our registered users. We believe that having an affiliate network that yields profitable registered users is beneficial and permits us to experiment with and tailor our affiliates to achieve our goals on a cost-effective basis.

We use our Encyclopedia.com, Sports Search, and Newsdirectory.com sites as effective customer acquisition vehicles for Electric Library. Additionally, we have a strategic marketing agreement to promote the end user Electric Library site. In November 1999, we entered into a strategic partnership with Microsoft Encarta Online ("Encarta") to feature Electric Library on Encarta's online site, as well as MSN's education channel. See Business - Risk Factors -- Our Business Model Is Evolving And Depends In Part On Web Advertising, E-Commerce Programs, And Subscriptions, All Of Which Are Susceptible To Change.

As a result of our transaction with Bell & Howell Company, we are subject to a non-competition agreement restricting us from distributing products or services into the K-12, public library, or post-secondary education segments. However, the agreement established exceptions from the non-competition provision for our activities with respect to end users. We are also subject to a non-competition agreement restricting us from distributing online publishing services. We do not believe that the restrictions in the non-competition agreements will prevent us from developing and retaining markets and customers for our products. See Business - Intellectual Property and Licenses.

Competition

The market for Internet applications such as our content notification and search and reference sites is intensely competitive and the barriers to entry are low. The number of sites on the Internet competing for users' attention and spending continues to increase rapidly. Furthermore, recent merger and acquisition activity in our industry appears to continue unabated and additional consolidation of companies, especially of smaller companies by larger ones, will only fuel already intense competition by many companies who are larger and more well-financed that we are.

We compete, directly and indirectly, with numerous types of companies, products, and services for, among other things, users, advertisers, advertising inventory and spending, and content suppliers. General categories of current and potential competitors to our sites include:

• Specialty-oriented Web sites and services such as Hoovers, Lifeminders, Quicken.com, About.com, Yodlee, The Street.com, and Strategy.com which are targeted to users with specific interests and needs;
• Search, search engine, and directory Web sites such as Yahoo! and Northern Light which provide extensive, highly-topical content to users in a variety of personalized and increasingly customizable formats and through several delivery means, including wireless;
• Media-based or oriented Web sites from traditional print, radio, and television companies such as AOL Time Warner, Inc., CNN.com or CBSMarketwatch.com which draw on their vast supply of archival and current content across an increasingly wide range of topics; and
• Consumer-oriented online services such as America Online, Inc. or Microsoft Network which provide their own or licensed content, Web sites, products, and services.

Competition for our content notification sites is and will be particularly intense from specialty-oriented Web sites and search and related Web sites. Competition for our search and reference sites is and will be particularly intense from search and related Web sites such as Northern Light, Britannica.com, and Ask Jeeves.

We believe that we are well-positioned with respect to our competitors. Nevertheless, we remain subject to the intense competition in our industry from a variety of sources, including possibly bigchalk.com, inc. in limited circumstances. See Business - - - Risk Factors -- The Competition We Face From Other Providers Of Electronic Information Is Intense.

Sources of Content for our Sites

The quality of the content provided by our sites is vital to our customers' satisfaction and their continued use of them. As a result, we seek to deliver the highest quality content. We currently use two primary sources of content: published content licensed from bigchalk.com, inc. and Web-based content that we link to directly. While we continue to seek high-value content to enhance the breadth and depth of the information available on our sites, we believe that the content licensing agreements and Web-based content sources we have in place today provide us with sufficient high quality content effectively to market our sites.

As part of our transaction with Bell & Howell Company, bigchalk.com, inc. and the Company have entered into a content license agreement. Under this agreement, bigchalk.com licenses content to us for use in the Electric Library site for end users, and if we request, in our content notification sites and for any new Company sites. To date, we only license content from bigchalk.com for use in connection with Electric Library for end users.

The content we license from bigchalk.com consists primarily of published content such as magazines, newspapers, and other periodicals. This content is comprised of titles licensed from BHIL to bigchalk.com as well as titles from our former content license agreements with publishers that were transferred to bigchalk.com in the Bell & Howell transaction. The number of titles currently available to be licensed to us under this agreement is approximately 1,500. Much of the bigchalk.com licensed content is updated daily, often by satellite or other direct links. The frequency of updates varies with the particular periodical or reference source.

The bigchalk.com content license has a five year term and grants us a non-exclusive, worldwide, royalty bearing license to use the full text licensed content subject to its terms. The royalty payable by us to bigchalk.com for the licensed content is based on an initially fixed percentage of net revenues derived from sales made to our customers of sites that include the licensed titles. On an annual basis following the initial twelve months of the content license, the percentage of net revenues associated with the royalty is subject to a proportionate adjustment based on a formula.

Under the bigchalk.com content license agreement, bigchalk.com is the preferred provider to the Company of the type of content licensed under the agreement, namely, published titles such as newspapers, magazines, and periodicals. bigchalk.com has a right of first refusal under the license agreement if we intend to obtain similar type of content from a third party. In order for bigchalk.com to assert its right of first refusal, it must license the third party content to us on the same terms as proposed by the third party. Otherwise, we can license the content directly from the third party and bigchalk.com will have declined its right of first refusal in that particular case. See Business - Risk Factors -- We Depend On bigchalk.com, inc. For Our Published Content And If We Are Unable To License Additional Content On A Cost-Effective Basis, We May Be Unable To Retain Our Current Customers And Attract New Customers.

In addition to the content we license directly from bigchalk.com or third party content providers, the Company also accesses certain Web-based content in our content notification sites. We access Web-based content primarily by searching selected third party Web sites for relevant content and then providing links to that content from our sites. In most cases, clicking on the link to that content takes a user of our site directly to the third party Web site where the content is located. Typically, we pay no fee or a nominal fee for these links. In February 2001, we entered into an agreement with Data Monitor, a business content provider, to provide access to their large business content database. See Business - Risk Factors -- If We Are Unable To Retain Access To Free Or Low Cost Web-Based Content, Then Our Ability To Provide Our Content Notification Sites In A Cost Efficient Manner Will Be Impaired.

Seasonality

During the summer months, and possibly during other times of the year such as major holidays, Internet usage often declines. As a result, our sites may experience reduced user traffic. For example, our experience with Electric Library shows that new user registrations and usage of the site declines during the summer months and around the year-end holidays. Our experience with Company Sleuth shows that new user registrations and usage of the site declines at about the same times. Seasonality may also affect advertising and affiliate performance which could in turn affect our sites' performance. These seasonal effects could cause fluctuations in our financial results as well as our performance statistics reported and measured by services such as Media Metrix, Inc.

U.S. Economy

The decline in the prices of stocks and the subsequent reduction in trading and watching stocks may result in reduced user traffic and transactions for Company Sleuth. Not all of our sites may experience the same effects and some, Job Sleuth, for example, might experience increased usage during a period of layoffs or corporate restructuring.

Technology, Infrastructure and Operations

The Company regards its technology, infrastructure, and operations as highly important to its success. We continue to leverage our traditional strengths in the areas of content management and natural language searching learned during our development of the Electric Library site and system. Given the potentially large numbers of visitors to and users of our sites, we have also increased our expertise in the area of horizontal scalability across our sites. Scalability is the ability of a computer system to maintain high user performance and low cost per transaction as the system's size, volume and transactions grow, as well as take full advantage of the growth. We have made significant improvements in the speed and reliability of our sites using a combination of internally developed solutions and industry standard techniques such as "trusted" caching, Linux enhancements, and intelligent page updating.

Our internally developed technology in the area of Web site tracking, search, and retrieval is intended to further enhance the quality and user experience of our content notification sites. For example, we have patent-pending technology used to track changes in Web sites across the Internet. We also make extensive use of XML (extensible markup language) technology to enhance our Web site tracking and retrieval capabilities. We have also developed sophisticated "spidering" and meta-searching capabilities permitting us to provide significantly enhanced results as compared to most commercially available spidering technologies available for use on the Internet. Most of our internal technology is developed by our employees. In certain cases, however, we employ independent contractors as developers to take advantage of their special expertise as well as to increase our time to market. Currently, we contract with individual independent contractors as well as with independent contractor companies for this work, all of which is provided according to written agreements establishing the Company's rights to the work. See Business - Risk Factors -- Rapid Technology Change May Render Our Sites Noncompetitive Or Obsolete.

In addition to our own technology, we selectively use third party technology applications in our sites and systems and we have developed a number of our own proprietary technologies to enhance the value of these applications to us. For Electric Library, we license and use software, technology, and systems from bigchalk.com, inc.

Most of our infrastructure and operations (computer systems and personnel supporting them) are currently being provided by bigchalk.com, inc. under the agreements entered into in connection with the closing of our transaction with Bell & Howell Company. However, we provide our own infrastructure and operations for portions of our content notification sites and outsource other portions to third parties. We are in the planning stages of becoming independent from bigchalk.com for our infrastructure and operations. We expect that we will co-locate some of our infrastructure and operations between our own facilities and those of third parties. See Business - Risk Factors -- We Depend On bigchalk.com, inc. For Electric Library Technology And Related Technical System; -- We Could Experience System Failures And Capacity Constraints; -- Our Systems Face Security Risks And Our Customers Have Concerns About Their Privacy.

Intellectual Property and Licenses

We view our intellectual property assets, domain names, and related contractual agreements and licenses as highly important to our success. The Company relies on a combination of the intellectual property laws of patents, trademarks, copyrights and trade secrets to establish and protect its proprietary rights in its sites. We currently own seven United States patents and have two pending United States patent applications. We may consider filing international patent applications, as well as additional United States patent applications, in the future under the appropriate circumstances. We have secured federal trademark registrations in the United States for the trademarks Infonautics and Company Sleuth and several trademark applications are either pending or published for, among others, the trademarks Job Sleuth, Entertainment Sleuth, and Sleuth Center. We have secured trademark registrations in certain foreign countries and the European Community for the trademark Infonautics and have filed applications to register the trademark Infonautics in other countries. We will continue to evaluate the registration of additional trademarks, as appropriate, in the United States and foreign countries. In addition to trademark protection, we have registered and maintain numerous domain names for our current sites as well as for potential future ones. To date we have not registered any of our copyrights in the United States or elsewhere. We also rely on applicable federal law and state law for the protection of our trade secrets within the United States. See Business - Risk Factors -- If We Fail To Protect Our Proprietary Rights Or If We Infringe On The Proprietary Rights Of Others, We Could Lose Our Intellectual Property Rights Or Be Liable For Significant Damages.

In addition to intellectual property laws, the Company relies on confidentiality and non-disclosure agreements and other contractual agreements and provisions to establish and protect our proprietary rights. We enter into confidentiality and non-disclosure agreements with employees, consultants, independent contractors, and prospective and actual business partners where appropriate. We also enter into license agreements and other agreements with, among others, our marketing and content providers, our end-user customers, and our vendors of technology and services.

As a result of the closing of our transaction with Bell & Howell Company on December 15, 1999, we are now a party to several technology service and license agreements with bigchalk.com, inc. and BHIL. These agreements, all dated December 15, 1999, include:

• Technical Services Agreement between the Company and bigchalk.com, inc. under which bigchalk.com provides technical and data center support and services to us for Electric Library for individual end users. The term of this agreement is 3 years and may be renewed by the mutual written agreement of the parties.
• Content License Agreement between the Company and bigchalk.com, inc. under which bigchalk.com licenses content to us for use in Electric Library and any other Company-provided site for end users. The scope of use under the license is limited to the end user business. However, we may use the licensed content in Electric Library, any Sleuth sites, and any new sites of ours. The term of this agreement is 5 years.
• Software and Technology License Agreement between the Company and bigchalk.com, inc. under which bigchalk.com licenses to us (i) the six United States patents and one patent United States application transferred by us to bigchalk.com in the Bell & Howell transaction, (ii) any third party or Company-developed technology and software pertaining to the Electric Library business transferred by us to bigchalk.com, and (iii) Electric Library trademarks and domain names. The scope of use under the license is limited to the end user business. However, we may use the licensed patents, technology and software, and trademarks and domain names in Electric Library, any Sleuth sites, and any new sites of ours. The license is royalty free and perpetual, but bigchalk.com has a right to terminate the license on a change of control of the Company.
• Online Publishing License Agreements between the Company, BHIL, and bigchalk.com, inc. under which BHIL licenses to us and bigchalk.com the online publishing software and technology transferred by us to BHIL. The scope of use under the licenses permits all uses except for those by us or bigchalk.com in the online publishing market. The license is royalty free and perpetual.
• Info Sleuth Software and Technology Licenses between the Company and BHIL and bigchalk.com, inc. under which we license our Sleuth and related sites' technology and software to BHIL and bigchalk.com. The scope of use under the license is limited to the K-12 and public library segment for bigchalk.com and to the online publishing and post-secondary education segments for BHIL. The license is royalty free and perpetual, but we have a right to terminate the license on a change of control of Bell & Howell Information and Learning or bigchalk.com, respectively.

In addition to the terms and conditions in each of the agreements specified above, each of the Company, bigchalk.com, inc., and BHIL are party to certain non-competition agreements entered into in connection with the closing of the transaction with Bell & Howell Company. The non-competition agreements each have three year terms that expire December 15, 2002. With respect to us, our non-competition agreement with bigchalk.com restricts us from distributing products or services into the K-12, public library, or post-secondary education segments. The agreement also established exceptions from the non-competition for our activities with respect to end users. Our non-competition agreement with bigchalk.com and BHIL regarding online publishing restricts us and bigchalk.com from distributing online publishing services. See Business - Risk Factors -- We Depend On bigchalk.com, inc. For Our Published Content; -- We Depend On bigchalk.com, inc. For Electric Library Technology And Related Technical Systems.

Employees

As of March 25, 2001, the Company had 38 full-time employees and 8 part-time and hourly employees. From time to time, we also employ independent consultants and contractors to support our research and development, marketing and support efforts. None of our employees are bound by an employment agreement that prevents the person from terminating his or her relationship at any time for any reason. Further, none of our employees are represented by a labor union, and we consider our employee relations to be good. Despite the recent downturn in the U.S. economy, competition for qualified personnel in our industry is intense, particularly for software development and other technical personnel. We believe that our future success will depend in part on our continued ability to attract, hire, and retain qualified personnel. See Business - Risk Factors -- Our Success Depends On Our Key Personnel, Who We May Be Unable To Retain, And Our Ability To Recruit Enough Qualified Personnel To Meet Our Hiring Needs.

Executive Officers of the Registrant

Executive officers of the Company are elected by the Board of Directors on an annual basis and serve until their successors have been duly qualified and elected. There are no family relationships among any of the executive officers or directors of the Company. The following table sets forth certain information concerning our executive officers:

Van Morris has been President and Chief Executive Officer of the Company since March 31, 1998. Mr. Morris originally joined us as President and Chief Operating Officer in September 1995. From 1992 until he joined the Company, Mr. Morris held various vice president and general management positions at Legent Corporation, a systems management software company, Goal Systems, a systems management company, UCCEL, and IBM. Mr. Morris is a director of bigchalk.com, inc.

Federica F. O'Brien joined the Company as Director of Finance in June 1996. Ms. O'Brien was appointed Acting Chief Financial Officer and Treasurer in June 1998 and was named Vice President & Chief Financial Officer in September 1999. Prior to joining us, Ms. O'Brien was a Business Assurance Manager with Coopers & Lybrand L.L.P. and she is a certified public accountant.

Gerard J. Lewis, Jr. was named Vice President & General Counsel and Assistant Secretary of the Company in February 1997. From May 1996 to February 1997, Mr. Lewis served us as Corporate Counsel & Director of Business Development. Prior to joining us in May 1996, Mr. Lewis was in private law practice with Reed Smith Shaw & McClay LLP in Philadelphia, Pennsylvania, where he practiced in the intellectual property and technology law and related corporate areas since 1992. Mr. Lewis was appointed Secretary of the Company in September 1999.

Ram Mohan was named Vice President and Chief Technical Officer in January 1999. From May 1997 to December 1998, Mr. Mohan served us as Director of Software Product Development. Mr. Mohan was hired by us in 1995 as a senior Engineer. Prior to joining us, Mr. Mohan worked with First Data Corporation, Unisys Corporation and KPMG Peat Marwick in a variety of engineering, technical and leadership positions.

Risk Factors

You should consider carefully the following factors in addition to the other information contained or incorporated by reference in this Annual Report in evaluating our business and prospects.

WE HAVE LOST MONEY IN THE PAST, BUT WE EXPECT TO BECOME BREAKEVEN OR PROFITABLE IN THE FUTURE.

We have lost money in the past and if we cannot cut costs sufficiently and increase revenues, we may never become profitable. However, we have implemented efforts to reduce costs to the extent necessary in order to become profitable. The Company's current and future expense levels are based largely on the Company's estimates of future revenues and are to a certain extent fixed. The Company has recently decreased certain expenses, and may not be able to significantly decrease expenses further. Additionally, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Although we plan to reduce costs, we may from time to time spend money to grow the registered user base of our sites on a cost-effective basis. If our cost cutting and marketing efforts, are unsuccessful, our business, financial condition and results of operations would be materially adversely affected.

A portion of our revenues may be derived from barter agreements. Approximately 5% of our revenues in 2000 were derived from agreements where we traded advertisements on our sites in exchange for advertisements on other web sites without receiving any cash payments. We have generally discontinued this practice, however.

FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY RESULT IN A FAILURE TO MEET ANALYSTS' AND INVESTORS' EXPECTATIONS, CAUSING OUR SHARE PRICE TO DECLINE OR FLUCTUATE WIDELY.

Our share price may decline or fluctuate widely as a result of fluctuations in our quarterly operating results and any corresponding failure to meet analysts' and investors' expectations. We may experience significant fluctuations in future quarterly operating results that may be caused by:

• introduction or enhancement of sites by us and our competitors;
• market acceptance of new sites;
• the mix of distribution channels through which our sites are distributed;
• seasonality of the markets and customers we market to; and
• interruptions in our services.

As a result, we believe that comparing our quarterly results will not necessarily be informative and is not an indication of future performance.

IF WE FAIL TO MEET THE LISTING REQUIREMENTS OF THE NASDAQ SMALLCAP MARKET, WE MAY BE UNABLE TO SUSTAIN A TRADING MARKET FOR OUR STOCK WHICH WOULD AFFECT THE LIQUIDITY OF YOUR SHARES.

If we do not continue to meet the Nasdaq Stock Market's SmallCap listing requirements, our stock could be traded on the over-the-counter market, which would cause our shareholders to have less liquidity. In addition, we would be less visible in the public markets. Since January 5, 1999, our stock has been traded on the Nasdaq SmallCap Market. We must maintain, among other requirements, one of three financial requirements to stay listed on the Nasdaq SmallCap Market. We currently meet the market capitalization requirement. From January 1, 2000 through December 31, 2000, our stock price has varied from a high close of $15.938 per share to a low close of $0.563 per share. Although we have met the Nasdaq SmallCap Market's listing requirements during the majority of 2000, given the volatility in our stock price as well as the stock market in general, it is possible that we may no longer meet these listing requirements and may be unable to maintain our listing on the Nasdaq SmallCap Market.

WE HAVE A LIMITED OPERATING HISTORY WITH OUR BUSINESS FOLLOWING THE BELL & HOWELL TRANSACTION WHICH OFFERS LITTLE INFORMATION TO EVALUATE US AND OUR LONG TERM PROSPECTS.

Although our company and original business were established in 1992, we have only closed our transaction with Bell & Howell Company in December 1999. As a result, we have little more than a year of operating history as a company with our current business. If we do not successfully address the risks and difficulties that companies like ours with little operating history with their current businesses encounter, then our business may not grow and our revenues may decline. Our success depends upon our ability to address those risks successfully, which include:

• whether we can continue to expand marketing and distribution for our sites to support an increasing customer base;
• whether we can retain and attract talented employees to support and market our existing sites and develop and market new sites, and experienced management to execute our strategy; and
• whether we can respond quickly and effectively to competitive and technological changes.

AS WE OPERATE IN A NEW AND DEVELOPING MARKET OF PROVIDING ELECTRONIC INFORMATION, THE MARKET FOR OUR SITES MAY NOT GROW FAST ENOUGH AND OUR PROFITABILITY WILL BE IMPAIRED.

We depend on revenues derived from the Company Sleuth, Job Sleuth, and Entertainment Sleuth sites and Electric Library and we may not receive these revenues if we do not continue to develop a market for these sites. Specifically, we currently derive subscription-based revenues from our fee based Electric Library site. Our Electric Library customers are primarily individual end users and we may not receive revenues from Electric Library if we do not continue to develop a market for it. Our content notification sites such as Company Sleuth, Job Sleuth and Entertainment Sleuth, and non-Electric Library search and reference sites, are free to the user. These sites are intended to be primarily advertising and e-commerce supported. Our ability to earn significant revenues from our content notification and non-Electric Library search and reference sites will depend in part on their acceptance by a substantial number of users in order to attract advertising revenues and their inclusion in e-commerce programs as well as market conditions. Furthermore, if we develop these markets slower than expected, our financial growth and profitability will be impaired.

RAPID TECHNOLOGY CHANGE MAY RENDER OUR SITES NONCOMPETITIVE OR OBSOLETE.

If we are not able successfully to respond to the rapid technological change of the Internet, we may not be able to compete effectively. The Internet may not continue to expand as quickly as needed to remain a viable commercial marketplace, or may suffer periodic setbacks in this regard, because of factors that may inhibit its ability to handle increased levels of activity. These factors are:

• inadequate development of the necessary reliable infrastructure;
• delayed development of complementary products and technologies; and
• delays in the development or adoption of new standards and protocols.

The introduction of new technologies and the emergence of new industry standards and practices can render our existing sites obsolete and unmarketable. Additionally, it could require us to make significant unanticipated investments in research and development. We are dependent on our ability to keep pace with:

• the latest technologies and technological development;
• changing customer requirements; and
• frequent new product introductions.

OUR BUSINESS MODEL IS EVOLVING AND DEPENDS ON WEB ADVERTISING, E-COMMERCE PROGRAMS, AND SUBSCRIPTIONS, ALL OF WHICH ARE SUSCEPTIBLE TO CHANGE AND MARKET CONDITIONS.

We expect to derive our revenues from advertising and e-commerce sources for our content notification and search and reference sites, in addition to the subscription based revenue we currently derive from Electric Library. Few standards have been widely accepted to measure the effectiveness of Web advertising and e-commerce programs. In the absence of these standards, it may be difficult to attract advertisers for our sites and reliably report the results of Web advertising and e-commerce programs. Potential advertisers and e-commerce partners may also be reluctant to participate in Web advertising and e-commerce programs in the absence of these standards. We may be able to support and grow our sites and services if the market for Web advertising and e-commerce programs fails to develop or develops more slowly than expected. Currently, there are many different pricing models used to sell advertising on the Internet and for e-commerce programs. Unless and until any industry standards emerge, it will be difficult for us to predict the terms of and results from advertising and e-commerce programs.

We derive our subscription-based revenue from Electric Library. We depend in part on third party Web sites and services with which we have agreements to generate new subscribers to Electric Library. These agreements with third party Web sites and services may not generate the anticipated number of new customers we seek for Electric Library, even though these agreements may require us to make payments. Typically, these agreements provide the Electric Library site with promotion and placement on the third parties' web sites. These agreements usually require us to pay the third parties a fixed fee plus a variable fee based on the number of qualified users who enroll for our service. One or more of these agreements may not generate enough revenue to cover the associated costs, and a significant shortfall could affect our ability to make the required payments under these agreements. Additionally, one or more of these agreements may not be renewed. If they are not renewed, this could reduce our acquisition rate for new subscribers. We may also choose to limit spending on customer acquisition. If we do not incur marketing costs, then our revenues may decline. In particular, our Interactive Marketing Agreement with America Online, Inc. expired May 11, 2000. See Business - Markets, Customers and Distribution. Our acquisition rates for new subscribers to Electric Library and Encylopedia.com could slow because the America Online agreement was not renewed.

OUR ACCURACY IN TRACKING AND MEASURING ADVERTISING, IMPRESSIONS, PAGE VIEWS, AND REGISTERED USERS IS IMPORTANT TO THE SUCCESS OF OUR BUSINESS.

We must accurately track and measure a variety of metrics that are important to the success of our business. These metrics include the size of advertising inventories, the number of advertising impressions, the number of page views, and the number of registered users of our sites. We depend in part on third parties to provide some of these metrics. If they are unable to provide these metrics in the future, we would be required to perform them ourselves or obtain them from another provider. This could cause us to incur additional costs or cause interruptions in our business during the time we are replacing these services. We provide some of these metrics ourselves. In order to continue to deliver accurate metrics ourselves, we must continue to monitor and update our tracking systems. This could cause us to incur additional costs or cause interruptions in our business during the time we are updating our tracking systems. Our failure accurately to track and provide advertising, page view, and registered user metrics could cause us to not obtain new advertisers or affiliates or lose existing ones. Any corrections we make to advertising, page view, and registered user metrics we have previously used could cause us to fail to obtain new advertisers or affiliates, lose existing ones, or renegotiate terms of contracts with existing ones.

THE COMPETITION WE FACE FROM OTHER PROVIDERS OF ELECTRONIC INFORMATION IS INTENSE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY OR SUCCESSFULLY ATTRACT AND RETAIN CUSTOMERS.

Competition in our business of providing electronic information is intense. We may not be successful in attracting and retaining customers which would cause revenues to decline. Our competitors, Yahoo!, America Online, About.com, Britannica.com, and Northern Light, may have greater resources and name recognition than us. Many of these companies have substantially greater experience and larger existing customer bases than we do. Accordingly, our competitors may succeed in:

• responding more quickly to new or emerging technologies;
• responding more rapidly to changes in customer requirements;
• devoting greater resources to the development, promotion and sale of their products or services than us; and
• establishing relationships with affiliates, advertisers, content providers, and others who have not entered into agreements with us.

Our competitors may also succeed in developing services and products which are superior to ours and also may prove more successful in marketing their products or services to the same customers we intend to market our products or services to.

IF WE ARE UNABLE TO RETAIN OUR ELECTRIC LIBRARY CUSTOMERS AFTER THEIR SUBSCRIPTION PERIOD HAS ENDED OR MAINTAIN THE PRICE OF ELECTRIC LIBRARY, OUR REVENUES MAY DECLINE.

If our retention and renewal rates or pricing decreases significantly, our revenues from Electric Library may decline. Our Electric Library marketing strategy and objectives depend in part on our ability to retain and renew customers after their subscription period has ended. In the end-user market, industry experience indicates that a significant number of subscribers to Electric Library will likely end their subscriptions over time, but tend to be replaced by new subscribers. Also, we may reduce the selling price of Electric Library due to factors such as increased competition or loss of customers.

BIGCHALK.COM, INC. OR A THIRD PARTY COULD PURCHASE THE ELECTRIC LIBRARY END USER BUSINESS FROM US, WHICH WOULD GENERATE CASH FOR THE COMPANY AND CAUSE OUR REVENUES TO DECLINE.

Our agreements with Bell & Howell Company give bigchalk.com, inc. a right of first refusal and exclusive call option to purchase the Electric Library site and end user business from us. This right and option expire December 15, 2001. We can sell the Electric Library site and end user business to a third party on terms negotiated with the third party if bigchalk.com declines to purchase that site and business by matching the terms. If the Electric Library site and end user business have not already been purchased, bigchalk.com has the right to acquire that site and business for a purchase price equal to the preceding 12 months net revenue for the site and business multiplied by two. If a third party or bigchalk.com purchase the Electric Library site and business, we would receive cash and our revenues would likely decline.

WE NEED TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB SITES AND SERVICES IN ORDER TO GROW OUR BUSINESS.

In order to promote and grow our sites, we depend in part on establishing and maintaining distribution relationships with high-traffic Web sites. There is intense competition for placements on these sites. We may not be able to enter into placement agreements on commercially reasonable terms or at all. Even if we enter into distribution relationships with these Web sites, they may not attract significant numbers of users. Therefore, our sites may not receive additional users from these relationships. Moreover, we may have to pay significant fees to establish these relationships. Our business would be harmed if we do not establish and maintain additional strategic relationships on commercially reasonable terms. It would also be harmed if any of our strategic relationships do not result in increased use of our sites.

WE DEPEND ON BIGCHALK.COM, INC. FOR OUR PUBLISHED CONTENT AND IF WE ARE UNABLE TO LICENSE ADDITIONAL CONTENT ON A COST-EFFECTIVE BASIS, WE MAY BE UNABLE TO RETAIN OUR CURRENT CUSTOMERS AND ATTRACT NEW CUSTOMERS.

We license published content for Electric Library, and our other sites if we request, from bigchalk.com, inc. Our content license from bigchalk.com makes them our preferred provider of content of this type and gives them a right of first refusal to provide this type of content to us. If we were to lose the content license with bigchalk.com, our ability to deliver Electric Library, and possibly other sites, would be harmed. The loss of the bigchalk.com content license could require us to change Electric Library and any other site using the content licensed from bigchalk.com. These changes may cause interruptions in our business and could cause us to incur substantial costs to replace any lost content.

Our future success also partially depends on our ability to license additional content on a cost-effective basis from sources other than bigchalk.com. If we are unable to license content at a reasonable cost, our ability to deliver our sites could be impaired which could cause us to lose current customers or fail to attract new customers.

IF WE ARE UNABLE TO RETAIN ACCESS TO FREE OR LOW COST WEB-BASED CONTENT, THEN OUR ABILITY TO PROVIDE OUR CONTENT NOTIFICATION SITES IN A COST EFFICIENT MANNER WILL BE IMPAIRED.

If we are not able to continue to access and provide Web-based content as we have been, our ability to provide low cost or free services like our content notification sites will be impaired. For example, if we have to pay fees or develop technology in order to access and provide Web-based content, our costs will rise. If we are not able to access and provide Web-based content on favorable terms, our ability to deliver the Company Sleuth, Job Sleuth, and Entertainment Sleuth sites for free will be impaired. We access and provide links to Web-based content in our content notification sites. We access this content mainly by searching selected Web sites and then providing links to relevant content from the individual sites, such as Company Sleuth or Sports Sleuth. Usually, we pay no fee, or a small fee, for accessing Web-based content in this manner. Our ability to continue to use Web-based content in this manner without cost, or for small fees, is fundamental to our goal of providing free, or low cost, content notification sites.

IF WE FAIL TO PROTECT OUR PROPRIETARY RIGHTS OR IF WE INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS, WE COULD LOSE OUR INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES.

Our efforts to establish and protect our proprietary rights may be inadequate to prevent misappropriation or infringement of our intellectual property. Our success depends in large part on proprietary software technology and software developed by us and licensed from third parties. While we have alternatives to third party technology and software, there is a risk that our licensors or third parties could take actions that would have a material adverse effect on the value of our intellectual rights or our ability to continue to provide our sites.

We may incur substantial costs in asserting any patent rights, in defending suits against us related to patents, and in taking licenses to patents asserted against us. We are aware that many patents have recently been issued in the United States, and that more are likely to be issued, relating to various elements of electronic commerce including online shopping, advertising, and affiliate marketing. We could be subject to demands or suits from the holders of these patents. In addition to patents, we may also incur substantial costs in asserting our other intellectual property rights against third parties, in defending suits against us related to our other intellectual property rights, and in taking licenses to other intellectual property asserted against us.

In order to establish and protect our proprietary rights in our sites, we rely on patents, trademarks, copyrights and trade secrets. We also routinely enter into confidentiality and non-disclosure agreements with our employees, consultants, advisors and partners. However, these parties may not honor these agreements. Further, we may not successfully protect our rights to unpatented trade secrets, know-how and confidential information. Others may also independently develop substantially equivalent or even superior proprietary information and techniques, or otherwise gain access to our trade secrets, know-how and confidential information. While we believe that our services and the proprietary rights developed by us or licensed to us do not infringe on the rights or others, we cannot be sure that others will not bring an infringement claim against us or those licensing information to us. Any patents we now hold, or any patents that may issue from patent applications we file, may not be broad enough to protect what we believe are our proprietary rights. Also, any current or future patents may not give us any competitive advantages.

We have licensed in the past, and may license in the future, some of our trademarks and other proprietary rights to third parties. While we attempt to ensure that the quality of its trademarks and technology is maintained by our licensees, our licensees may take actions that could materially and adversely affect the value of our proprietary rights or the reputation of our sites.

The laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. Because the nature of online services and the Internet is global, we cannot control the ultimate destination of our services. As policing the unauthorized use of our technology and proprietary rights is often difficult and expensive anywhere in the world, we cannot be sure our proprietary rights will be honored everywhere.

WE DEPEND ON BIGCHALK.COM, INC. FOR ELECTRIC LIBRARY TECHNOLOGY AND RELATED TECHNICAL SYSTEMS.

We depend on bigchalk.com, inc. to license the Electric Library site and related software, technology, and systems to us. The license is royalty free and perpetual, but bigchalk.com has a right to terminate the license on a change of control of the Company. The loss of this license could hurt our business and cause our revenues to decline. We also depend on bigchalk.com to provide technical and data center support and services to us for Electric Library for individual end users. The term of this agreement is three years and may be renewed by the mutual written agreement of the parties. The loss of this agreement could hurt our business and force us to provide technical and data center support and services ourselves, or hire a third party to provide those services. This could cause our business to suffer interruptions and us to incur substantial costs.

WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS WHICH WOULD CAUSE INTERRUPTIONS IN THE SITES WE PROVIDE TO OUR CUSTOMERS AND ULTIMATELY CAUSE US TO LOSE CUSTOMERS.

Any delay or failure to the systems we use to deliver our sites to our customers would interfere with their ability to access and use our sites. We have occasionally suffered failures of the computer hardware and software and telecommunications systems that we use to deliver our sites to customers. These failures have caused interruptions in the functioning of our sites for our customers. Also, the growth of our customer base as well as the number of sites we provide, or both, may strain the systems we use to deliver our services to customers to the point where the system may perform poorly or fail.

We are also dependent on our ability and that of our service providers, including bigchalk.com, inc., to maintain our systems in effective working order and to protect them against damage from:

• fire;
• natural disaster;
• power loss;
• telecommunications failure; or
• similar events.

The systems we currently use to deliver our services to our customers, except for external telecommunications systems, are located in Philadelphia and King of Prussia, Pennsylvania. Although we maintain property insurance, claims could exceed the coverage obtained.

We, along with our customers and our service providers, test and perform quality assurance efforts in connection with our sites. We may, however, find errors in our sites or our upgrades to them that could result in:

• loss of or delay in market acceptance and sales;
• diversion of development resources;
• injury to our reputation; or
• increased service and support costs.

OUR SYSTEMS FACE SECURITY RISKS AND OUR CUSTOMERS HAVE CONCERNS ABOUT THEIR PRIVACY.

We have taken security precautions with respect to our systems and sites. Still, they may be vulnerable to unauthorized access and use by hackers or other persons or organizations, computer viruses, and other disruptive problems. The consequences to us of any security breaches or problems could include misappropriation of our customers' information, misappropriation of our sites, misappropriation of our intellectual property and other rights, as well as disruption and interruption in the use of our systems and sites. Unauthorized access to and theft of customer information as well as denial of service attacks of various Internet and online services have occurred in the past, and will likely occur again in the future. In order to maintain our security precautions or to correct problems caused by security breaches we may need to spend significant capital or other resources. We intend to continue to put industry-standard security measures in place for our systems and sites. Nevertheless, those measures may be circumvented and in order continually to monitor and maintain these measures we may cause disruption to and interruption in our customer's use of our systems and sites. These disruptions and interruptions could harm our business.

In general, users of the Internet and online services are very concerned about the security and privacy of their communications and transaction data transmitted over those services. These concerns may inhibit the growth of the Internet and other online services generally, and our sites in particular. We intend to continue to put industry-standard measures in place in order securely to transmit and store our customers' private and confidential information and transaction data including, for example, their credit card numbers. These measures could be circumvented, however, and the consequence of a security breach in this regard could hurt our reputation, expose us to a risk of damages and litigation, and possible liability. These kinds of breaches could harm our business.

OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL, WHO WE MAY BE UNABLE TO RETAIN, AND OUR ABILITY TO RECRUIT ENOUGH QUALIFIED PERSONNEL TO MEET OUR HIRING NEEDS.

The loss of the services of existing personnel, as well as the failure to recruit additional key technical, managerial, and sales personnel in a timely manner, would be detrimental to our business. Furthermore, we may incur substantial expenses in connection with hiring and retaining employees. We are highly dependent on the performance of our executive officers and key employees. Some of our officers and all of our other employees have not entered into employment agreements with us. There is intense competition for qualified personnel. Therefore, we may not be able to attract and retain the qualified personnel necessary for the development of our business and to manage growth effectively.

WE MAY BE SUBJECT TO GOVERNMENT REGULATION AND LEGAL LIABILITIES WHICH MAY BE COSTLY AND MAY INTERFERE WITH OUR ABILITY TO CONDUCT BUSINESS.

GOVERNMENT REGULATION IN THE U.S.

We are not currently subject to direct regulation by any United States or state government agency other than the laws and regulations applicable to businesses generally. Also, there are few laws or regulations directly applicable to access to or commerce on the Internet. We believe these laws and regulations do not seriously affect our operations and that we are materially in compliance with them. Because of the increasing popularity and use of the Internet, federal and state governments may adopt laws or regulations in the future with respect to commercial online services and the Internet, with respect to:

• user privacy;
• copyrights and other intellectual property rights and infringement;
• domain names;
• pricing;
• content regulation;
• defamation;
• taxation; and
• the characteristics and quality of products and services.

Laws and regulations directly applicable to online commerce or Internet communications are becoming more prevalent. Laws and regulations such as those listed above could expose the Company to substantial liability, if enacted. For example, provisions of the Communications Decency Act of 1996 may apply to us. Although portions of that Act were struck down as unconstitutional by the U.S. Supreme Court, other portions of it remain in effect. Other recently enacted United States laws, such as the federal Digital Millennium Copyright Act and various federal laws aimed at protecting children, their privacy, and the content made available to them could expose us to substantial liability, too. Furthermore, various proposals at the federal, state and local level could, if enacted, impose additional taxes on the sale of goods and services through the Internet. These laws, regulations, and proposals could also slow the growth in use of the Internet, decrease the acceptance of the Internet as a communications and commercial medium, require us to incur significant compliance expenses, and adversely affect our opportunity to derive financial benefit from our activities. Also, our content providers, other licensors and contractual partners, or insurance may not indemnify or cover us in all cases for violations of any of these laws or regulations.

GOVERNMENT REGULATION OUTSIDE THE U.S.

Although transmission of our sites primarily originates in Pennsylvania and the United States, the Internet is global in nature. Therefore, governments of foreign countries might try to regulate our transmissions or prosecute us for violations of their laws covering a variety of topics, many of which are the same as those described above for United States laws and regulations. For example, Germany has taken actions to restrict the free flow of material deemed to be objectionable on the Internet. The European Union has adopted privacy, copyright, and database directives that may impose additional burdens and costs on us. We may incur substantial costs in responding to charges of violations of local laws by foreign governments. The effect of this could be to slow the growth in use of the Internet, decrease the acceptance of the Internet as a communications and commercial medium, require us to incur significant compliance expenses, and adversely affect our opportunity to derive financial benefit from our activities.

OUR STOCK PRICE MAY VARY SIGNIFICANTLY WHICH MAY MAKE IT DIFFICULT TO RESELL YOUR SHARES WHEN YOU WANT TO AT PRICES YOU FIND ATTRACTIVE.

If our stock price continues to vary significantly, the price of our common stock may decrease in the future regardless of our operating performance. Additionally, you may be unable to resell your shares of common stock following periods of volatility because of the market's adverse reaction to this volatility. The following factors may contribute to this behavior:

• actual or anticipated variations in quarterly operating results;
• announcements of new technologies or new services by us or our competitors;
• changes in financial estimates and recommendations by securities analysts;
• the operating and stock price performance of other companies that investors may view as comparable to us;
• news relating to our industry as a whole; and
• news relating to trends in our markets.

The stock market in general, and the market for Internet-related companies, including ours, in particular, have experienced extreme volatility. This volatility often has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may cause the price of our stock to drop, regardless of our performance.

YOUR HOLDINGS MAY BE DILUTED IN THE FUTURE BY THE EXERCISE OF OUR OUTSTANDING WARRANTS.

Your holdings may be diluted in the future by the exercise of outstanding warrants. As of December 31, 2000, the following warrants were outstanding:

• a warrant to purchase 522,449 shares of common stock issued to the purchaser of the debenture at an exercise price of $5.97; this conversion price does not fluctuate with the market price of the common stock but is subject to adjustment from time to time pursuant to anti-dilution provisions similar to those described above; and
• two warrants to purchase 100,000 shares each of common stock at exercise prices of $5.15 and $6.25 respectively.

Purchasers of common stock could therefore possibly experience substantial dilution of their investment upon the exercise of the warrants.

IF WE ARE UNABLE SUCCESSFULLY TO INTEGRATE FUTURE ACQUISITIONS OR MEGERS INTO OUR OPERATIONS, THERE COULD BE AN ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.

We may acquire or merge into complementary businesses, products and technologies in the future. Some of the risks attendant to these acquisitions and mergers are:

• difficulties and expenses of integrating the operations and personnel of acquired or merged companies into our operations while preserving the goodwill of the acquired or merged entity;
• the additional financial resources that may be needed to fund the operations of acquired or merged companies, and the potentially dilutive effect on your shares from these additional financial resources;
• the potential disruption of our business;
• our management's ability to maximize our financial and strategic position by incorporating acquired or merged technology or businesses; and the difficulty of maintaining uniform standards, controls, procedures and policies.

POTENTIAL INADEQUACY OF INSURANCE

Although we maintain general liability insurance, claims could exceed the coverage obtained or might not be covered by our insurance. In addition, while we typically obtain representations from our technology and content providers and contractual partners as to the ownership of licensed technology and informational content and obtain indemnification to cover any breach of these representations we still may not receive accurate representations or adequate compensation for any breach of such representations. We may have to pay a substantial amount of money for claims which are not covered by indemnification.

INFONAUTICS MAY HAVE TO REGISTER UNDER THE INVESTMENT COMPANY ACT.

The Investment Company Act of 1940 broadly defines an investment company generally as any issuer that is engaged in, or proposes to engage in, the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the issuer's total assets. Infonautics believes it is not an investment company under the Investment Company Act of 1940. However, if it is determined that Infonautics is an investment company and it is unable to rely on an exclusion or exemption from the Investment Company Act of 1940 or unable to obtain relief from the Securities and Exchange Commission, it could be required to register under the Investment Company Act of 1940 which would make operating Infonautics business in its current format difficult or impossible.

ITEM 2. PROPERTIES

Our headquarters are currently located in approximately 30,000 square feet of office space in King of Prussia, Pennsylvania that we lease from American Baptist Churches USA. Effective at the end of January 2001, we terminated our lease for approximately 2,400 square feet in New York, New York.

ITEM 3. LEGAL PROCEEDINGS

The Company was not a party to any material legal proceedings as of December 31, 2000.

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

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Class A Common Stock has traded on The Nasdaq Stock Market under the symbol INFO since our initial public offering on April 30, 1996. Effective January 5, 1999, trading in our shares moved from the Nasdaq National Market to the Nasdaq SmallCap Market. We have retained our symbol INFO on the SmallCap market. Prior to that time, there was no public market for our Class A Common Stock. The following table sets forth the high and low last reported sale prices for our Class A Common Stock for the period indicated as reported by The Nasdaq Stock Market.

As of March 26, 2001, the Company had 162 shareholders of record and approximately 5,000-6,000 beneficial owners.

We have not declared or paid dividends on our Common Stock and we do not intend to do so in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The selected data presented below under the caption Consolidated Statements of Operations Data with respect to each of the five years in the period ended December 31, 2000 and under the caption Consolidated Balance Sheet Data are derived from our the consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP, independent accountants. The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and accompanying Notes included elsewhere in this Annual Report on Form 10-K.

Item 7 contains, in addition to historical information, forward-looking statements by Infonautics with regard to its expectations as to financial results and other aspects of its business that involve risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "may," "should," "anticipate," "believe," "plan," "estimate," "expect" and "intend," and other similar expressions are intended to identify forward-looking statements. These include, for example, statements regarding the merger with Tucows Inc., any conditions that apply to the merger, the consequences of the merger, and the costs and fees related to the merger, the continued listing of the Company's stock on the Nasdaq Small Cap Market, the sufficiency of Infonautics' liquidity, including cash resources and capital, the number of registered users and subscribers, monetization of users and subscribers, traffic to our sites, gross margins, current and future expenses and costs, future revenues and shortfalls in revenues, costs of revenue, pricing and its effects on our business, use of system resources and marketing effects, technology and systems, growth and expansion plans, product development plans, sales and marketing plans, our business models, changes in our marketing partners, capital expenditures, seasonality, effects of the U.S. economy, operating results, licensing and service contracts with bigchalk.com, inc., the transaction with bigchalk.com, inc., the Company's equity interest in bigchalk.com, inc., the Company's other equity interest and the derivative collar agreement, and the Company's status under the Investment Company Act of 1940.

These statements are based on management's current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Factors that may cause such a difference include, but are not limited to, the risks set forth in the Company's filings with the Securities and Exchange Commission from time to time. The sections of this Annual Report entitled "Business" and "Risk Factors," as well as other sections, contain a discussion of some of the factors that could contribute to these differences. All forward-looking statements included in this document are based on information available to Infonautics as of the date of this document, and Infonautics assumes no obligation to update or revise these cautionary statements or any forward-looking statements. These statements are not guarantees of future performance and you should not rely on them.

Infonautics, Inc. (including its subsidiaries, "Infonautics," the "Company," "we," or "our") is a provider of personalized information agents and Web sites. We deliver information over the Internet. We began generating Web-based revenues in the first quarter of 1996 with the introduction of the Electric Library site to the end-user market, followed by a version designed for the educational market where it was sold to schools, libraries and other educational institutions. In October of 1998, we entered the market for free, advertising supported, Internet-based content services with the launch of Company Sleuth. We also have supplied e-commerce-based online publishing services to publishers and other content creators to offer their content for sale over the Web directly to customers.

On March 28, 2001, the Company announced that it signed a definitive merger agreement with privately held Tucows Inc., a leading provider of wholesale digital products to Internet service providers and web hosting companies worldwide. In consideration of the merger, the Company will issue approximately 50 million shares of Class A common stock to the Tucows shareholders who will own roughly 80% of the merged company at closing. Upon completion of the merger, which is subject to Company and Tucows shareholder approval, certain regulatory approvals, and certain other closing conditions, Infonautics will remain a public company and is expected to adopt the Tucows name. The transaction is expected to close during the third quarter of 2001.

On December 15, 1999, we closed a transaction with Bell & Howell Company ("Bell & Howell") and its wholly owned subsidiary, Bell and Howell Information and Learning Company ("BHIL"), following approval of the transaction by our shareholders on November 30, 1999. In the transaction, we contributed our Electric Library K-12 and public library business and assets and liabilities into what is now bigchalk.com, inc. ("bigchalk.com"), an Internet education company. Also in the transaction, BHIL contributed its ProQuest K-12 and public library business and certain assets and liabilities into bigchalk.com. As part of the transaction, we also sold our e-commerce online archive business to BHIL and granted a two year option to bigchalk.com to purchase our Electric Library end-user business.

As a result of the transaction and taking into account subsequent private placements into bigchalk.com, we currently own approximately 11% of bigchalk.com's stock on a diluted basis. The majority of bigchalk.com's stock is owned by Series A & B preferred shareholders. Other shareholders are Bell & Howell, BHIL, board members and employees of bigchalk.com.

During 2000, we generated most of our revenue from Electric Library end-user subscriptions. This accounted for approximately 80% of total revenues. We generated the remaining 20% of revenues from advertising and e-commerce activities on the Infonautics Network. During 2000, we generated approximately 52% of total revenues from the educational market and 35% from the end-user market of Electric Library. Approximately 4% was from advertising and other e-commerce revenues generated from the Infonautics Network and the remaining revenue was generated from the e-commerce online archive business as well as products which the Company was no longer actively pursuing.

Revenues from online monthly end-user subscriptions are recognized in the month the subscription service is provided, and for annual end-user subscriptions, revenues are recognized ratably over the term of the subscription. Potential individual subscribers are given a free trial period, after which the Company has typically charged a fee of $9.95 per month for monthly subscriptions and $59.95 per year for annual subscriptions, both for virtually unlimited usage. During March 2001, the Company discontinued its monthly subscription offer and added a two-year subscription for $99.95.

Advertising revenues on the Infonautics Network sites are derived principally from short-term advertising contracts in which Infonautics typically guarantees a minimum number of impressions to advertisers over a specified period of time for a fixed fee. Revenues from advertising sales are recognized ratably over the term of the contract during the period in which the advertising is displayed.

E-commerce revenues consist of referral fees from partners. Revenues are earned when subscribers register with a partner's site, through a direct link from the Infonautics Network. The revenues from e-commerce are recognized in the same period that the subscribers register with the partner site. There is typically no minimum guarantee, and Infonautics has no further obligations after the users' registrations.

E-mail revenues consist of advertisements placed in e-mails which are sent to subscribers of the Infonautics Network. Infonautics typically guarantees a minimum number of e-mail impressions to advertisers over a specified period of time for a fixed fee. Revenues from e-mail sales are recognized ratably in the period in which the e-mails are sent, provided that no significant obligations remain.

Partner revenues are derived from the creation of customized content notification sites through Infonautics partners. The partners sell or provide the custom site to their customers. The revenues recognized include any initial fees which are deferred and recognized ratably over the contract and monthly minimum guaranteed revenues from the partners which are contractually agreed for terms of less than one year.

Approximately 5% of Infonautics' 2000 revenues were from barter advertisements or e-commerce. These are agreements whereby Infonautics trades advertisements on the Infonautics Network sites in exchange for advertisements on third-party web sites. Barter advertising revenues and expenses are recorded at the fair market value of services provided or received, whichever is more determinable in the circumstances. Revenue from barter advertising transactions is recognized as income when advertisements are delivered. Barter expense is recognized when Infonautics advertisements are run on third-party web sites, which typically coincides with the time that barter revenue is recognized. Barter expense is included in sales and marketing. Barter revenues are expected to be a nominal percentage of the Company's overall revenues in 2001.

The Company currently uses two primary sources of content: published content licensed from bigchalk.com, inc. and Web-based content that we link to directly or purchase from the provider. Bigchalk.com licenses content to the Company for use in the Electric Library site for end-users, and, if the Company requests, in its content notification sites and for any new Company sites. To date, the Company has only licensed content from bigchalk.com for use on the Electric Library site for end-users. The bigchalk.com content license has a five year term and grants the Company a non-exclusive, worldwide, royalty bearing license to use the full text licensed content subject to its terms. The royalty payable by the Company to bigchalk.com for the licensed content is based on an initially fixed percentage of net revenues derived from sales made to our customers of sites that include the licensed titles, which approximates our historical royalty percentage. Annually following the initial 12 months of the content license, the percentage of net revenues is subject to a proportionate adjustment based on a formula.

In addition to the content licensed directly from bigchalk.com or third party content providers, the Company also accesses certain Web-based content in its content notification sites. Web-based content is accessed primarily by searching selected third party Web sites for relevant content and then providing links to that content from the Company's sites. In most cases, clicking on the link to that content takes a user of the Company's site directly to the third party Web site where the content is located. Typically, the Company pays no fee or a nominal fee for these links to content on third party Web sites.

REVENUES. Revenue was $11.2 million in 2000, $23.2 million in 1999 and $14.9 million in 1998, representing a decrease of 52% in 2000, and an increase of 56% in 2000. The decrease in 2000 is a result