<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001

                           Commission File No. 0-21527


                            MEMBERWORKS INCORPORATED
                            ------------------------
             (Exact name of registrant as specified in its charter)


       DELAWARE                                         06-1276882
       --------                                         ----------
(State of Incorporation)                    (I.R.S. Employer Identification No.)

9 West Broad Street;
Stamford, Connecticut                                      06902
--------------------------------------                  ------------
(Address of principal executive offices)                (Zip Code)

                                 (203) 324-7635
                                 --------------
                         (Registrant's telephone number,
                              including area code)


Indicate by checkmark 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, and (2) has been subject to such filing requirements
for the past 90 days.

Yes   X     No
   -------    -----

The number of shares outstanding of the Registrant's capital stock:

14,279,333 shares of Common Stock, $0.01 par value as of January 31, 2002.
--------------------------------------------------------------------------
<PAGE>
                            MEMBERWORKS INCORPORATED
                               INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
         PART I.    FINANCIAL INFORMATION                                                             PAGE
         <S>                                                                                          <C>

         Item 1.    Financial Statements (Unaudited)

                    Condensed Consolidated Balance Sheets as of December 31,
                    and June 30, 2001                                                                  2

                    Condensed Consolidated Statements of Operations for the three and six
                    months ended December 31, 2001 and 2000                                            3

                    Condensed Consolidated Statements of Cash Flows for the six
                    months ended December 31, 2001 and 2000                                            4

                    Notes to Condensed Consolidated Financial Statements                               5


         Item 2.    Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                                               12

                    Forward Looking Statements                                                        16

         Item 3.    Quantitative and Qualitative Disclosures about Market Risk                        18

         PART II.   OTHER INFORMATION

         Item 1.    Legal Proceedings                                                                 19

         Item 4.    Submission of Matters to a Vote of Security Holders                               20

         Item 6.    Exhibits and Reports on Form 8-K                                                  20

         Signatures                                                                                   21
</TABLE>


                                       1
<PAGE>
                            MEMBERWORKS INCORPORATED

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                        December 31,        June 30,
                                                                                            2001              2001
                                                                                      --------------     -----------
                          ASSETS                                                        (unaudited)
<S>                                                                                   <C>                <C>
Current assets:
    Cash and cash equivalents                                                         $     47,300       $    22,736
    Marketable securities                                                                    3,201                 -
    Accounts receivable                                                                     12,758            20,446
    Prepaid membership materials                                                             4,191             3,903
    Prepaid expenses                                                                         4,195             5,857
    Membership solicitation and other deferred costs                                       135,223           154,059
                                                                                      ------------       -----------
             Total current assets                                                          206,868           207,001
Fixed assets, net                                                                           34,584            39,687
Goodwill, net                                                                               42,039            84,814
Intangible assets, net                                                                       8,875            14,283
Other assets                                                                                 2,126             2,676
                                                                                      ------------       -----------
             Total assets                                                             $    294,492       $   348,461
                                                                                      ============       ===========

         LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:

    Current maturities of long-term obligations                                       $        651       $       516
    Accounts payable                                                                        37,459            49,505
    Accrued liabilities                                                                     58,715            64,634
    Due to related parties                                                                       -             2,028
    Deferred membership fees                                                               208,273           243,024
                                                                                      ------------       -----------
             Total current liabilities                                                     305,098           359,707
Long-term liabilities                                                                        4,826             3,057
                                                                                      ------------       -----------
             Total liabilities                                                             309,924           362,764

Minority interest                                                                                -             6,505
Mandatorily redeemable convertible preferred securities of subsidiary                            -             5,157

Shareholders' deficit:
    Preferred stock, $0.01 par value - 1,000 shares
      authorized; no shares issued                                                               -                 -
    Common stock, $0.01 par value - 40,000 shares authorized;
      17,437 shares issued (17,308 shares at June 30, 2001)                                    174               173
    Capital in excess of par value                                                         108,894           107,835
    Accumulated deficit                                                                    (54,912)          (80,196)
    Accumulated other comprehensive loss                                                      (621)             (370)
    Treasury stock, 3,059 shares at cost (1,920 shares at June 30, 2001)                   (68,967)          (53,407)
                                                                                      ------------       -----------
             Total shareholders' deficit                                                   (15,432)          (25,965)
                                                                                      ------------       -----------
             Total liabilities and shareholders' deficit                              $    294,492       $   348,461
                                                                                      ============       ===========
</TABLE>

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


                                       2
<PAGE>
                            MEMBERWORKS INCORPORATED

           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                      (In thousands, except per share data)
<TABLE>
<CAPTION>
                                                                          Three months ended             Six months ended
                                                                              December 31,                  December 31,
                                                                     ---------------------------   ---------------------------
                                                                          2001           2000           2001           2000
                                                                     ------------   ------------   ------------    ------------
<S>                                                                  <C>            <C>            <C>             <C>
Revenues                                                             $    102,684   $    117,616   $    221,648    $   215,415

Expenses:
    Operating                                                              19,508         21,711         40,576         41,950
    Marketing                                                              57,444         76,637        134,234        137,891
    General and administrative                                             18,570         23,997         41,579         47,627
    Restructuring and other charges (Note 4)                                6,893              -          6,893              -
    Amortization of intangible assets                                         440          2,827          1,115          5,083
                                                                     ------------   ------------   ------------    -----------
Operating loss                                                               (171)        (7,556)        (2,749)       (17,136)
Gain on sale of subsidiary (Note 5)                                             -              -         65,608              -
Net loss on investment (Note 5)                                            (9,043)        (2,401)       (31,339)        (2,172)
Other income (expense), net                                                    54           (242)           (36)          (150)
                                                                     ------------   ------------   ------------    -----------
(Loss) income before equity in affiliate and minority interest             (9,160)       (10,199)        31,484        (19,458)
Equity in income of affiliate                                                   -              -              -             83
Minority interest (Note 6)                                                      -          2,932            450          4,950
                                                                     ------------   ------------   ------------    -----------
(Loss) income before income taxes                                          (9,160)        (7,267)        31,934        (14,425)
Provision for income taxes                                                      -              -            743              -
                                                                     ------------   ------------   ------------    -----------
(Loss) income before cumulative effect of accounting change                (9,160)        (7,267)        31,191        (14,425)
Cumulative effect of accounting change (Note 2)                                 -              -         (5,907)       (25,730)
                                                                     ------------   ------------   ------------    -----------
Net (loss) income                                                    $     (9,160)  $     (7,267)  $     25,284    $   (40,155)
                                                                     ============   ============   ============    ===========
Basic (loss) earnings per share:

     (Loss) income before cumulative effect of accounting change     $      (0.62)  $      (0.48)  $      2.07     $     (0.95)
     Cumulative effect of accounting change                                     -              -         (0.39)          (1.70)
                                                                     ------------   ------------   ------------    -----------
     Basic (loss) earnings per share                                 $      (0.62)  $      (0.48)  $      1.68     $     (2.66)
                                                                     ============   ============   ============    ===========

Diluted (loss) earnings per share:

     (Loss) income before cumulative effect of accounting change     $      (0.62)  $      (0.48)  $      2.01     $     (0.95)
     Cumulative effect of accounting change                                    --             --         (0.38)          (1.70)
                                                                     ------------   ------------   ------------    -----------
     Diluted (loss) earnings per share                               $      (0.62)  $      (0.48)  $      1.63     $     (2.66)
                                                                     ============   ============   ============    ===========

Weighted average common shares used in (loss) earnings per share
calculations:
     Basic                                                                 14,789         15,274         15,084         15,124
                                                                     ============   ============   ============    ===========
     Diluted                                                               14,789         15,274         15,505         15,124
                                                                     ============   ============   ============    ===========
</TABLE>


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


                                       3
<PAGE>
                            MEMBERWORKS INCORPORATED

           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                       Six months ended
                                                                                         December 31,
                                                                                   --------------------------
                                                                                      2001            2000
                                                                                   ---------       ---------
<S>                                                                                <C>             <C>
OPERATING ACTIVITIES

    Net income (loss)                                                              $  25,284       $ (40,155)
    Adjustments to reconcile net income (loss) to net cash (used in) provided
     by operating activities:
        Cumulative effect of accounting change                                         5,907          25,730
        Gain on sale of subsidiary                                                   (65,608)             --
        Net loss on investment                                                        31,339           2,172
        Restructuring and other charges                                                1,585              --
        Minority interest                                                               (450)         (4,950)
        Equity in income of affiliate                                                     --             (83)
        Revenues before deferral                                                     206,697         233,866
        Revenues recognized                                                         (221,648)       (215,415)
        Marketing costs before deferral                                             (125,446)       (146,432)
        Marketing costs expensed                                                     134,234         137,891
        Depreciation and amortization                                                  6,677           9,375
        Other                                                                            688             968

    Changes in assets and liabilities:
        Accounts receivable                                                            6,358          (1,588)
        Prepaid membership materials                                                  (1,173)         (1,135)
        Prepaid expenses                                                              (2,087)         (3,275)
        Other assets                                                                      32           1,252
        Related party payables                                                            12              91
        Accounts payable                                                              (6,241)           (265)
        Accrued liabilities and other                                                    455          13,924
                                                                                   ---------       ---------
Net cash (used in) provided by operating activities                                   (3,385)         11,971
                                                                                   ---------       ---------

INVESTING ACTIVITIES

    Acquisition of fixed assets                                                       (2,999)         (7,993)
    Proceeds from sale of subsidiary, net of cash sold                                45,997              --
    Business combinations, net of cash acquired                                           --          (2,826)
                                                                                   ---------       ---------
Net cash provided by (used in) investing activities                                   42,998         (10,819)
                                                                                   ---------       ---------

FINANCING ACTIVITIES

    Net proceeds from issuance of stock and warrants                                   1,196           6,123
    Net borrowings from credit facility                                                   --            (485)
    Treasury stock purchases                                                         (15,665)         (5,129)
    Payments of long-term obligations                                                   (359)           (188)
                                                                                   ---------       ---------
Net cash (used in) provided by financing activities                                  (14,828)            321
                                                                                   ---------       ---------
Effect of exchange rate changes on cash and cash equivalents                            (221)            (36)
                                                                                   ---------       ---------
Net increase in cash and cash equivalents                                             24,564           1,437
Cash and cash equivalents at beginning of period                                      22,736          30,169
                                                                                   ---------       ---------
Cash and cash equivalents at end of period                                         $  47,300       $  31,606
                                                                                   =========       =========
</TABLE>


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


                                       4
<PAGE>
                            MEMBERWORKS INCORPORATED

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, such
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended December 31, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2002. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K with
respect to the fiscal year ended June 30, 2001.

Certain reclassifications have been made to prior period financial statements to
conform to the current presentation of the financial statements.

NOTE 2 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE

Adoption of SFAS 142

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is effective
for fiscal years beginning after December 15, 2001. Early adoption is permitted
for entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not been previously issued. The Company
adopted SFAS 142 effective July 1, 2001. SFAS 142 addresses how intangible
assets that are acquired individually or with a group of other assets should be
accounted for in the financial statements upon their acquisition and after they
have been initially recognized in the financial statements. SFAS 142 requires
that goodwill and intangible assets that have indefinite useful lives not be
amortized but rather tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives.

With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, only goodwill was
determined to have an indefinite useful life and no adjustments were made to the
amortization period or residual values of other intangible assets. The Company
determined that there was an impairment of goodwill of $5,907,000 at one of its
reporting units due to the change in methodology of calculating impairment under
SFAS 142 and recent downward trends in the operations of the reporting unit (see
Note 8). This amount was recorded as a cumulative effect of accounting change in
the statement of operations in the fiscal quarter ended September 30, 2001.


                                       5
<PAGE>
                            MEMBERWORKS INCORPORATED

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following pro forma net income and earnings per share have been prepared
assuming SFAS 142 was adopted as of July 1, 2000. Pro forma balances have been
adjusted to exclude goodwill amortization expense which is no longer recorded
under the provisions of SFAS 142 (in thousands, except per share data).
<TABLE>
<CAPTION>
                                                                      Three Months Ended             Six Months Ended
                                                                          December 31,                  December 31,
                                                                ----------------------------    -----------------------------
                                                                     2001           2000             2001             2000
                                                                ------------    ------------    -------------     -----------
<S>                                                             <C>             <C>             <C>               <C>
Net (loss) income from continuing operations:
     Reported net (loss) income from continuing operations      $     (9,160)   $     (7,267)   $      31,191     $   (14,425)
     Indefinite lived intangible asset amortization                       --           2,006               --           3,649
                                                                ------------    ------------    -------------     -----------
     Adjusted net (loss) income from continuing operations      $     (9,160)   $     (5,261)   $      31,191     $   (10,776)
                                                                ============    ============    =============     ===========

Basic (loss) earnings per share:
     Reported (loss) earnings per share                         $      (0.62)   $      (0.48)   $        2.07     $     (0.95)
     Indefinite lived intangible asset amortization                       --            0.13               --            0.24
                                                                ------------    ------------    -------------     -----------
     Adjusted (loss) earnings per share                         $      (0.62)   $      (0.34)   $        2.07     $     (0.71)
                                                                ============    ============    =============     ===========

Diluted (loss) earnings per share:

     Reported (loss) earnings per share                         $      (0.62)   $      (0.48)   $        2.01     $     (0.95)
     Indefinite lived intangible asset amortization                       --            0.13               --            0.24
                                                                ------------    ------------    -------------     -----------
     Adjusted (loss) earnings per share                         $      (0.62)   $      (0.34)   $        2.01     $     (0.71)
                                                                ============    ============    =============     ===========
</TABLE>

Adoption of SAB 101

The Company adopted Staff Accounting Bulletin 101, "Revenue Recognition in
Financial Statements" ("SAB 101") as of July 1, 2000. SAB 101 establishes the
Security and Exchange Commission's (the "Staff") preference that membership fees
should not be recognized in earnings prior to the expiration of refund
privileges. Effective July 1, 2000, the Company changed its method of accounting
for membership fee revenue to comply with the Staff's preferred method as
outlined in SAB 101. Membership fees, and the related direct costs associated
with acquiring the underlying memberships, are no longer recognized on a
pro-rata basis over the corresponding membership period, but instead are
recognized in earnings upon the expiration of membership refund privileges. The
cumulative effect of this change in accounting principle as of July 1, 2000 of
$25,730,000 was recorded in the fiscal quarter ended September 30, 2000. The
membership fees, net of estimated refunds and associated direct costs, which
were deferred as part of the cumulative effect adjustment at July 1, 2000 were
recognized in earnings during fiscal year 2001 as the underlying refund
privileges expired. During the three and six months ended December 31, 2000, the
Company recognized $22,142,000 and $53,877,000, respectively, of revenue which
was included as a component of the cumulative effect of accounting change booked
July 1, 2000.


                                       6
<PAGE>
                            MEMBERWORKS INCORPORATED

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3 - EARNINGS PER SHARE

Basic and diluted (loss) earnings per share amounts are determined in accordance
with the provisions of FASB Statement No. 128 "Earnings Per Share". The
following table sets forth the reconciliation of the numerators and denominators
in the computation of basic and diluted (loss) earnings per share (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                       Three months ended            Six months ended
                                                                           December 31,                 December 31,
                                                                     -----------------------       -----------------------
                                                                        2001          2000           2001           2000
                                                                     --------       --------       --------       --------
<S>                                                                  <C>            <C>            <C>            <C>
Numerator for basic and diluted (loss) earnings per share:

Net (loss) income before cumulative effect of accounting change      $ (9,160)      $ (7,267)      $ 31,191       $(14,425)
Cumulative effect of accounting change                                     --             --         (5,907)       (25,730)
                                                                     --------       --------       --------       --------
Net (loss) income                                                    $ (9,160)      $ (7,267)      $ 25,284       $(40,155)
                                                                     ========       ========       ========       ========


Denominator for basic (loss) earnings per share:

Weighted average number of common shares outstanding -  basic          14,789         15,274         15,084         15,124
Effect of dilutive securities:
   Options                                                                 --             --            421             --
                                                                     --------       --------       --------       --------
Weighted average number of common shares outstanding -  diluted        14,789         15,274         15,505         15,124
                                                                     --------       --------       --------       --------
Basic (loss) earnings per share                                      $  (0.62)      $  (0.48)      $   1.68       $  (2.66)
                                                                     ========       ========       ========       ========
Diluted (loss) earnings per share                                    $  (0.62)      $  (0.48)      $   1.63       $  (2.66)
                                                                     ========       ========       ========       ========
</TABLE>

The diluted (loss) earnings per common share calculation excludes the effect of
potentially dilutive shares when their effect is antidilutive. For the three and
six months ended December 31, 2001, the Company had 4,553,000 and 3,479,000,
respectively, of potentially dilutive stock options outstanding that are not
included in the calculation as they are antidilutive. For the three and six
months ended December 31, 2000, the Company had 3,075,000 and 3,041,000,
respectively, of potentially dilutive stock options outstanding that are not
included in the calculation as they are antidilutive.

NOTE 4 - RESTRUCTURING AND OTHER CHARGES

On October 11, 2001, the Company announced the implementation of several cost
saving initiatives due to a recent slowdown in consumer response rates and
increased economic uncertainty in both the U.S. and abroad. This restructuring
program includes a workforce reduction, the closing of the Company's United
Kingdom operations and the downsizing of the operational infrastructure
throughout the Company.

As a result of the restructuring program, the Company recorded restructuring and
other charges of $6,893,000 which are included in the operating loss for the
three months ended December 31, 2001.


                                       7
<PAGE>
                            MEMBERWORKS INCORPORATED

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The major components of the restructuring and other charges and the remaining
accrual balances as of December 31, 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                Total          Non-cash         Cash Charges          Liability
                                               Charges     Charges to date         to date             Balance
                                            ------------     ------------       -------------       ------------
<S>                                         <C>              <C>                <C>                 <C>
Workforce reduction                         $      2,214     $          -       $       1,098       $      1,116
Lease obligations                                  3,094                -                 152              2,942
Asset disposals                                    1,585            1,585                   -                  -
                                            ------------     ------------       -------------       ------------
  Total                                     $      6,893     $      1,585       $       1,250       $      4,058
                                            ============     ============       =============       ============
</TABLE>

Workforce Reduction

As part of the restructuring plan announced on October 11, 2001, the Company
reduced its workforce by approximately 190 regular employees, consisting of
membership service representatives and other professional personnel. As of
December 31, 2001, all 190 employees have been terminated.

Lease Obligations and Asset Write-Downs

In connection with the closing of the United Kingdom offices and the downsizing
of the Company's infrastructure, the Company recorded $73,000 for lease
terminations, $3,021,000 for non-cancelable lease obligations and $1,585,000 for
asset disposals and write-downs related to the closing of our United Kingdom
operations.

NOTE 5 - GAIN ON SALE OF SUBSIDIARY/LOSS ON INVESTMENT

In August 2001, the Company sold its investment in and advances to iPlace, Inc.
in exchange for $50,111,000 in cash, including $3,703,000 held in escrow, and
1,601,000 shares of Homestore.com common stock, including 451,000 shares held in
escrow. The fair value of the Homestore.com common stock as of the date of sale
was $34,540,000. The Homestore.com common stock received is unregistered. Once
the Homestore.com stock is registered, MemberWorks may only sell 1/12th of the
shares in any calendar month. In connection with this sale, the Company
recognized a gain of $65,608,000.

Subsequently, the investment in Homestore.com declined in value and management
determined that the decline was other than temporary. As a result, the Company
wrote down its investment in Homestore.com to its fair value and recognized a
loss of $22,296,000 in the first fiscal quarter of 2002 and a loss of $9,043,000
in the second fiscal quarter of 2002. As of December 31, 2001, the Company's
investment in Homestore.com is valued at $3,201,000.

NOTE 6 - MINORITY INTEREST

Prior to the sale of iPlace, Inc. in August 2001, the Company was the majority
shareholder of iPlace, Inc. with an approximate 58% ownership share. Minority
interest in the statement of operations for the six months ended December 31,
2001 represents approximately 42% of iPlace's losses incurred from July 1, 2001
through the date of the sale.


                                       8
<PAGE>
                            MEMBERWORKS INCORPORATED

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 - COMPREHENSIVE INCOME

The components of comprehensive (loss) income are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                  Three months ended           Six months ended
                                                                     December 31,                December 31,
                                                                -----------------------       -----------------------
                                                                  2001           2000           2001            2000
                                                                --------       --------       --------       --------
<S>                                                             <C>            <C>            <C>            <C>
Net (loss) income                                               $ (9,160)      $ (7,267)      $ 25,284       $(40,155)
   Unrealized loss on marketable securities                           --             --             --           (532)
   Reclassification adjustment for losses  included in net
   loss                                                               --            532             --            532
   Foreign currency translation (loss) gain                          (87)           106           (251)            22
                                                                --------       --------       --------       --------
Comprehensive (loss) income                                     $ (9,247)      $ (6,629)      $ 25,033       $(40,133)
                                                                ========       ========       ========       ========
</TABLE>

NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS

The gross carrying value and accumulated amortization of goodwill and other
intangibles are as follows (in thousands):
<TABLE>
<CAPTION>
                                            As of December 31, 2001         As of June 30, 2001
                                          ----------------------------  ----------------------------
                                          Gross Carrying  Accumulated   Gross Carrying  Accumulated
                                              Amount      Amortization      Amount      Amortization
                                          --------------  ------------  --------------  ------------
<S>                                       <C>             <C>           <C>             <C>
Amortized intangible assets:
   Membership and Client Relationships    $       13,194  $     (4,726) $      17,465   $    (5,642)
   Non-Compete Agreements                            238          (216)         3,009          (999)
   Other                                             950          (565)           950          (500)
                                          --------------  ------------  -------------   -----------
      Total amortized intangible assets   $       14,382  $     (5,507) $      21,424   $    (7,141)
                                          ==============  ============  =============   ===========
Unamortized intangible assets:
     Goodwill                             $       42,039                $      84,814
</TABLE>

The gross carrying amount and accumulated amortization of amortized intangible
assets at December 31, 2001 decreased from June 30, 2001 due to the sale of
iPlace.

The total intangible amortization expense reflected in the statement of
operations for the three and six months ended December 31, 2001 is $440,000 and
$1,115,000, respectively. The future intangible amortization expense for the
next five fiscal years is estimated to be as follows (in thousands):

<TABLE>
<CAPTION>
Fiscal Year:
<S>                                                  <C>
     2002                                            $       1,172
     2003                                                      697
     2004                                                      419
     2005                                                      275
     2006                                                      183
</TABLE>

The changes in the carrying amount of goodwill for the six months ended December
31, 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                                                      <C>
     Balance as of July 1, 2001                                          $      84,814
     Goodwill disposed during the first quarter due to sale of
       subsidiary                                                              (36,868)
     Impairment losses recorded in first quarter                                (5,907)
                                                                         -------------
     Balance as of December 31, 2001                                     $      42,039
                                                                         =============
</TABLE>

                                       9
<PAGE>
                            MEMBERWORKS INCORPORATED

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Goodwill was tested for impairment in the quarter ending September 30, 2001 in
connection with the adoption of SFAS 142. Due to the slow down in the business
of one of the Company's reporting units, future cash flows for this reporting
unit are expected to decline over the next few years. During the quarter ended
September 30, 2001, an impairment loss of $5,907,000 was recorded to write down
the goodwill related to this reporting unit to fair value. The impairment loss
was calculated utilizing the methodology set forth in SFAS 142. As prescribed by
SFAS 142, this write down is reflected in the statement of operations as a
cumulative effect of accounting change. The fair value of this subsidiary was
estimated by conducting a discounted cash flow analysis of the subsidiary's
future cash flows.

NOTE 9 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS

Accrued liabilities set forth in the accompanying condensed consolidated balance
sheets as of December 31, 2001 and June 30, 2001 include an allowance for
membership cancellations of $25,892,000 and $30,004,000, respectively.

NOTE 10 - LEGAL PROCEEDINGS

Except as set forth below, in management's opinion, there are no significant
legal proceedings to which the Company or any of its subsidiaries is a party or
to which any of their properties are subject. The Company is involved in other
lawsuits and claims generally incidental to its business. In addition, from time
to time, and in the regular course of its business, the Company receives
inquiries from various federal and/or state regulatory authorities.

In January 2001, an action was instituted by plaintiff Brandy L. Ritt against
the Company and other defendants in the Court of Common Pleas in Cuyahoga
County, Ohio. The suit, which seeks unspecified monetary damages, alleges that
the Company and the other defendants violated various provisions of Ohio's
consumer protection laws in connection with the marketing of certain membership
programs offered by the Company. The plaintiff's motion to have the suit
certified as a class action was denied on February 6, 2002. The Company believes
that the claims asserted against it are unfounded and the Company will
vigorously defend its interests against this suit.

In March 2001, an action was instituted by plaintiff Teresa McClain against
Coverdell & Company ("Coverdell"), a wholly-owned subsidiary of the Company,
Monumental Life Insurance Company and other defendants in the United States
District Court for the Eastern District of Michigan, Southern Division. The
suit, which seeks unspecified monetary damages, alleges that Coverdell and the
other defendants violated the Michigan Consumer Protection Act and other
applicable Michigan laws in connection with the marketing of Monumental Life
Insurance Company insurance products. The complaint includes a claim that the
suit should be certified as a class action and the plaintiff has filed a motion
for class certification to which all of the defendants have filed opposing
papers regarding the same. The court has not ruled on the motion. The Company
believes that the claims asserted against Coverdell are unfounded and the
Company and Coverdell will vigorously defend their interests against this suit.

In June 2001, actions were instituted by plaintiffs Judith Jeselskis and Marcia
Walters against the Company and other defendants in Circuit Court of the Tenth
Judicial District, Highlands County Civil Division, Florida, and Circuit Court
of the Sixth Judicial Circuit, Pinellas County Civil Division, Florida,
respectively. The suits, which seek unspecified monetary damages, allege that
the Company and the other defendants violated the Florida Deceptive and Unfair
Trade Practices Act, in connection with the marketing of certain membership
programs offered by the Company. While the respective complaints include claims
that the suits should be certified as class actions, the plaintiffs have not
filed motions for class certification. The Company believes that the allegations
made in this lawsuit are unfounded and the Company will vigorously defend its
interests against the suits.


                                       10
<PAGE>
                            MEMBERWORKS INCORPORATED

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In July 2001, an action was instituted by Alan Stone against the Company and
other defendants in Superior Court of the State of California, County of Orange.
The suit, which seeks unspecified monetary damages, alleges that the Company and
the other defendants violated California business practices law. While the
complaint includes a claim that the suit should be certified as a class action,
the plaintiff has not filed a motion for class certification. The Company
believes that the allegations made in this lawsuit are unfounded and the Company
will vigorously defend its interests against this suit.


                                       11
<PAGE>
                            MEMBERWORKS INCORPORATED

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

MemberWorks addresses the needs of organizations seeking to leverage the
expertise of an outside provider in offering membership service programs.
Membership service programs offer selected products and services from a variety
of vendors intended to enhance existing relationships between businesses and
consumers. The Company derives its revenues principally from annually renewable
membership fees. The Company receives full payment of annual fees at or near the
beginning of the membership period, but recognizes revenue as the member's
refund privilege expires. Similarly, the costs associated with soliciting each
new member, as well as the cost of royalties, are recognized as the related
revenue is recognized. Profitability and cash flow generated from renewal
memberships exceed that of new memberships due to the absence of solicitation
costs associated with new member procurement.

THREE MONTHS ENDED DECEMBER 31, 2001 VS. THREE MONTHS ENDED DECEMBER 31, 2000

REVENUES. Revenues decreased 13% to $102.7 million for the quarter ended
December 31, 2001 from $117.6 million for the quarter ended December 31, 2000
due to the effect of the timing of amortization of revenues deferred in prior
periods and the effect of the sale of iPlace, Inc. Revenues before deferral
decreased 16% to $101.2 million for the quarter ended December 31, 2001 from
$120.5 million for the quarter ended December 31, 2000 due to the effect of the
sale of iPlace and a decrease in the net members during the quarter. The
Company's membership base decreased to approximately 6.5 million members at
December 31, 2001 from 7.8 million members at December 31, 2000. The decrease in
the Company's membership base was due to a lower level of new member marketing,
the sale of iPlace and the closing of the United Kingdom operations. As a
percentage of total revenues, renewal revenues were 56% in 2001 and 46% in 2000.
As a percentage of total revenues before deferrals, renewal revenues were 56% in
2001 and 45% in 2000.

OPERATING EXPENSES. Operating expenses decreased 10% to $19.5 million in 2001
from $21.7 million in 2000 primarily due to the effect of the sale of iPlace,
Inc. As a percentage of revenues before deferral, operating expenses increased
to 19.3% in 2001 from 18.0% in 2000 primarily due to the effect of lower
revenues reported this quarter.

MARKETING EXPENSES. Marketing expenses decreased 25% to $57.4 million in 2001
from $76.6 million in 2000 and, as a percent of revenue, decreased to 55.9% in
2001 from 65.2% in 2000. These decreases were due to the effect of a lower level
of new member marketing and the sale of iPlace, Inc. The lower level of new
member marketing resulted in an increase in the ratio of renewal member revenues
to total revenues. Marketing expenses related to renewal revenues are typically
lower than expenses related to new member revenues. Expenses related to new
member marketing, as a percent of new member revenues, increased in 2001
compared to 2000 primarily due to a decrease in consumer response rates.
Marketing expenses before deferral decreased 25% to $55.1 million in 2001 from
$73.7 million in 2000 and, as a percent of revenues, decreased to 54.4% in 2001
from 61.2% in 2000. These decreases were due to the effect of a lower level of
new member marketing and the sale of iPlace, Inc.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 23% to $18.6 million in 2001 from $24.0 million in 2000 primarily due
to the effect of the sale of iPlace, Inc. As a percentage of revenues before
deferral, general and administrative expenses decreased to 18.3% in 2001 from
19.9% in 2000 due to the sale of iPlace, Inc. and cost saving initiatives
related to the restructuring.


                                       12
<PAGE>
                            MEMBERWORKS INCORPORATED

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

RESTRUCTURING AND OTHER CHARGES. In October 2001, the Company implemented
certain cost saving initiatives due to a recent slowdown in consumer response
rates and increased economic uncertainty in both the U.S. and abroad. This
restructuring program includes a workforce reduction of approximately 190
employees, the closing of the Company's United Kingdom operations and the
downsizing of the operational infrastructure throughout the Company. As a result
of this restructuring program, the Company recorded restructuring and other
charges of $6.9 million during the second quarter ending December 31, 2001.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
decreased to $0.4 million in 2001 from $2.8 million in 2000 due to the adoption
of SFAS 142, which no longer requires the amortization of indefinite lived
intangible assets. Excluding the amortization of indefinite lived intangible
assets in 2000, amortization of goodwill and other intangibles would have been
$0.8 million.

OTHER INCOME/EXPENSE, NET. Other income/expense, net is primarily composed of
interest income from cash and cash equivalents and interest expense on the
Company's borrowings under its line of credit. Other income was $0.1 million in
2001 compared to expense of $0.2 million in 2000 due to the increase in the
Company's cash balance. In addition, the Company had no borrowings under its
line of credit during the quarter.

PROVISION FOR INCOME TAXES. The Company was not required to record a provision
for income taxes for the three months ended December 31, 2001 and 2000 due to
tax losses realized in those periods.

SIX MONTHS ENDED DECEMBER 31, 2001 VS. SIX MONTHS ENDED DECEMBER 31, 2000

REVENUES. Revenues increased 3% to $221.6 million for the six months ended
December 31, 2001 from $215.4 million for the six months ended December 31, 2000
primarily due to the effect of the timing of amortization of revenues deferred
in prior periods. Revenues before deferral decreased 12% to $206.7 million for
the six months ended December 31, 2001 from $233.9 million for the six months
ended December 31, 2000. The Company's membership base decreased to
approximately 6.5 million members at December 31, 2001 from 7.8 million members
at December 31, 2000 due to a lower level of new member marketing, the sale of
iPlace, Inc. and the closing of the United Kingdom operations. As a percentage
of total revenues, renewal revenues were 54% in 2001 and 45% in 2000. As a
percentage of total revenues before deferrals, renewal revenues were 56% in 2001
and 45% in 2000.

OPERATING EXPENSES. Operating expenses decreased 3% to $40.6 million in 2001
from $42.0 million in 2000 primarily due to the sale of iPlace, Inc. As a
percentage of revenues before deferral, operating expenses increased to 19.6% in
2001 from 17.9% in 2000 primarily due to the effect of lower revenues reported
in 2001.

MARKETING EXPENSES. Marketing expenses decreased 3% to $134.2 million in 2001
from $137.9 million in 2000 and, as a percent of revenue, decreased to 60.6% in
2001 from 64.0% in 2000. These decreases were due to the effect of a lower level
of new member marketing and the sale of iPlace, Inc. The lower level of new
member marketing resulted in an increase in the ratio of renewal member revenues
to total revenues. Marketing expenses related to renewal revenues are typically
lower than expenses related to new member revenues. Expenses related to new
member marketing, as a percent of new member revenues, increased in 2001
compared to 2000 primarily due to a decrease in consumer response rates.
Marketing expenses before deferral decreased 14% to $125.4 million in 2001 from
$146.4 million in 2000 and, as a percent of revenues, decreased to 60.7% in 2001
from 62.6% in 2000. These decreases were due to the effect of a lower level of
new member marketing and the sale of iPlace, Inc.


                                       13
<PAGE>
                            MEMBERWORKS INCORPORATED

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 13% to $41.6 million in 2001 from $47.6 million in 2000 primarily due
to the effect of the sale of iPlace, Inc. As a percentage of revenues before
deferral, general and administrative expenses decreased to 20.1% in 2001 from
20.4% in 2000 primarily due to the effect of the sale of iPlace, Inc. and cost
saving initiatives related to the restructuring.

RESTRUCTURING AND OTHER CHARGES. In October 2001, the Company implemented
certain cost saving initiatives due to a recent slowdown in consumer response
rates and increased economic uncertainty in both the U.S. and abroad. This
restructuring program includes a workforce reduction of approximately 190
employees, the closing of the Company's United Kingdom operations and the
downsizing of the operational infrastructure throughout the Company. As a result
of this restructuring program, the Company recorded restructuring and other
charges of $6.9 million during the second quarter ending December 31, 2001.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
decreased to $1.1 million in 2001 from $5.1 million in 2000 due to the adoption
of SFAS 142, which no longer requires the amortization of indefinite lived
intangible assets. Excluding the amortization of indefinite lived intangible
assets in 2000, amortization of goodwill and other intangibles would have been
$1.4 million.

OTHER EXPENSE/INCOME, NET. Other expense/income, net is primarily composed of
interest income from cash and cash equivalents and interest expense on the
Company's borrowings under its line of credit. Other expense decreased to less
than $0.1 million in 2001 from expense of $0.2 million in 2000 due to the
increase in the Company's cash balance. In addition, the Company had no
borrowings under its line of credit during the six months ended December 31,
2001.

PROVISION FOR INCOME TAXES. In connection with the gain on the sale of iPlace,
the Company recorded a provision for alternative minimum taxes of approximately
$0.7 million. The Company was not required to record a provision for income
taxes for the six months ended December 31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

Operating cash flow before changes in assets and liabilities was negative $0.7
million for the six months ended December 31, 2001 compared to positive $3.0
million in 2000. The decrease in operating cash flow before changes in assets
and liabilities was primarily due to a decrease in revenues before deferral, net
of marketing costs before deferral, and the costs incurred related to the
restructuring. The decrease was partially offset by decreased losses incurred
related to iPlace, Inc. and the United Kingdom. Revenues before deferral
decreased 12% to $206.7 million for the six months ended December 31, 2001 from
$233.9 million for the six months ended December 31, 2000. The Company's
membership base decreased to approximately 6.5 million members at December 31,
2001 from 7.8 million members at December 31, 2000 due to a slow down in new
member marketing, the sale of iPlace, Inc. and the closing of the United Kingdom
operations. Marketing expenses before deferral decreased 14% to $125.4 million
in 2001 from $146.4 million in 2000 and, as a percent of revenues, decreased to
60.7% in 2001 from 62.6% in 2000. These decreases were due to the effect of a
lower level of new member marketing and the sale of iPlace, Inc. The lower level
of new member marketing resulted in an increase in the ratio of renewal member
revenues to total revenues. Marketing expenses related to renewal revenues are
typically lower than expenses related to new member revenues. Expenses related
to new member marketing, as a percent of new member revenues, increased in 2001
compared to 2000 primarily due to a decrease in consumer response rates. Changes
in assets and liabilities decreased cash by $2.6 million for 2001 and increased
cash by $9.0 million in 2000. In total, cash used in operations was $3.4 million
for the six months ended December 31, 2001 compared to cash provided by
operations of $12.0 million in 2000.


                                       14
<PAGE>
                            MEMBERWORKS INCORPORATED

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Net cash provided by investing activities was $43.0 million in 2001 compared to
cash used in investing activities of $10.8 million in 2000. Net cash provided by
investing activities reflected the receipt of $46.0 million in net proceeds from
the sale of iPlace, Inc. Capital expenditures were $3.0 million in 2001 and $8.0
million in 2000.

Net cash used in financing activities was $14.8 million in 2001 versus net cash
provided by financing activities of $0.3 million in 2000. The increase in cash
used in financing activities was due to an increase in the number of treasury
shares acquired under the Company's stock repurchase program. The Company
purchased 1,142,000 shares for $15.7 million in 2001 and 181,000 shares for $5.1
million in 2000. On October 25, 2001, the Board of Directors authorized an
additional 1 million shares to be purchased under the buyback program. As of
December 31, 2001, the Company had 556,000 shares available for repurchase under
its buyback program. On January 24, 2002, the Board of Directors authorized an
additional 1 million shares to be purchased under the buyback program.

As of December 31, 2001, the Company had cash and cash equivalents of $47.3
million. In addition, the Company has a $28 million bank credit facility which
bears interest at the higher of the base commercial lending rate for the bank or
the Federal Funds Rate plus 0.5% per annum. There were no borrowings outstanding
under this bank credit facility as of December 31, 2001. The available bank
credit facility is temporarily limited to the sum of the compensating balance
and eligible securities on deposit with the bank. Such limitations may be
imposed and removed based on certain financial covenants. The bank credit
facility requires MemberWorks to maintain a compensating balance of $10.0
million in addition to certain financial covenants. The Company believes that
existing cash balances, together with its available bank credit facility, will
be sufficient to meet its funding requirements for at least the next twelve
months.

In August 2001, the Company received 1.6 million shares of Homestore.com common
stock at a market value of $34.5 million. The Homestore.com common stock
received is unregistered. Once the Homestore.com stock is registered,
MemberWorks may only sell 1/12th of the shares in any calendar month. During the
six months ended December 31, 2001, the Company wrote down its investment in
Homestore.com to its fair value as of December 31, 2001 and recognized a loss of
$31.3 million. Accordingly, the net gain on the sale of iPlace Inc. was $34.3
million.

The Company did not have any material commitments for capital expenditures as of
December 31, 2001. The Company intends to utilize cash generated from operations
and its funds available under its credit facility to fulfill any capital
expenditure requirements for the remainder of fiscal 2002.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations" ("SFAS 141"), which is effective for business
combinations initiated after June 30, 2001. SFAS 141 eliminates the pooling of
interest method of accounting for business combinations and requires that all
business combinations occurring on or after July 1, 2001 are accounted for under
the purchase method. The Company has evaluated the impact of SFAS 141 and
believes that it will not have a material impact on its financial statements.

In July 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), which is effective for fiscal years beginning after
December 15, 2001. Early adoption is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not been previously issued. The Company adopted SFAS 142
effective July 1, 2001. SFAS 142 addresses how intangible assets that are
acquired individually or with a group of other assets should be accounted for in
the financial statements upon their acquisition and after they have been
initially recognized in the financial statements. SFAS 142 requires that
goodwill and intangible assets that have indefinite useful lives not be
amortized but rather tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives.


                                       15
<PAGE>
                            MEMBERWORKS INCORPORATED

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, only goodwill was
determined to have an indefinite useful life and no adjustments were made to the
amortization period or residual values of other intangible assets. The Company
determined there was an impairment of goodwill of $5.9 million at one of its
reporting units due to the change in methodology of calculating impairment under
SFAS 142 and recent downward trends in the operations of the reporting unit.
This amount was recorded as a cumulative effect of accounting change in the
statement of operations in the fiscal quarter ended September 30, 2001.

In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which is effective for fiscal years
beginning after June 15, 2002. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The adoption of SFAS 143 will
not have a material impact on the Company's financial statements.

In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which is effective
for fiscal years beginning after December 15, 2001. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of." The adoption of SFAS 144 will not have a material
impact on Company's financial statements.

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that are
based on current expectations, estimates, forecasts and projections about the
industry in which MemberWorks operates and the Company's management's beliefs
and assumptions. These forward-looking statements are made pursuant to safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not guarantees of future performance and are
based on a number of assumptions and estimates that are inherently subject to
significant risks and uncertainties, many of which are beyond our control,
cannot be foreseen and reflect future business decisions that are subject to
change. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements. Among the many
factors that could cause actual results to differ materially from the
forward-looking statements are:

-        The Company's ability to integrate into the Company's management and
         operations and operate successfully acquired businesses;

-        Changes in the marketing techniques of credit card issuers;

-        Unanticipated cancellation or termination of marketing agreements and
         the extent to which we can continue successful development and
         marketing of new products and services;

-        The Company's ability to develop and implement operational and
         financial systems to manage rapidly growing operations;

-        The Company's ability to obtain financing on acceptable terms to
         finance the Company's growth strategy and to operate within the
         limitations imposed by financing arrangements;

-        Further changes in the already competitive environment for the
         Company's products or competitors' responses to the Company's
         strategies;

-        Changes in the growth rate of the overall U.S. economy, or the
         international economies where MemberWorks does business, such that
         consumer spending and related consumer debt are impacted;

-        Additional government regulation of the Company's industry; and

-        New accounting pronouncements


                                       16
<PAGE>
                            MEMBERWORKS INCORPORATED

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

MemberWorks cautions that such factors are not exclusive. All of the
forward-looking statements made in this Quarterly Report on Form 10-Q are
qualified by these cautionary statements and readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this Quarterly Report on Form 10-Q. Except as required under the Federal
Exchange Commission, MemberWorks does not have any intention or obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise.


                                       17
<PAGE>
                            MEMBERWORKS INCORPORATED

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate

The Company has a $28.0 million bank credit facility which bears interest at the
higher of the base commercial lending rate for the bank or the Federal Funds
Rate plus 0.5% per annum. There were no borrowings outstanding under this bank
credit facility as of December 31, 2001. Management believes that an increase in
the commercial lending rate or the Federal Funds rate would not be material to
the Company's financial position or its results of operations. If the Company is
not able to renew its existing credit facility agreement, which matures on
April 1, 2002, it is possible that any replacement lending facility obtained
by the Company may be more sensitive to interest rate changes. The Company does
not currently hedge interest rates with respect to its outstanding debt.

Foreign Currency

The Company has international sales and facilities in the United Kingdom and
Canada and therefore, is subject to foreign currency rate exposure.
Historically, international sales have been denominated in British pounds
sterling and the Canadian dollar. The functional currencies of the Company's
foreign operations are the local currencies. Assets and liabilities of these
subsidiaries are translated into U.S. dollars at exchange rates in effect as of
the Balance Sheet date. Income and expense items are translated at average
exchange rates for the period. Accumulated net translation adjustments are
recorded in shareholders' equity. Foreign exchange transaction gains and losses
are included in the results of operations, and were not material for all periods
presented. As a result, the Company's financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
condition. To the extent the Company incurs expenses that are based on locally
denominated sales volume paid in local currency, the exposure to foreign
exchange risk is reduced. The Company has determined that the impact of a
near-term 10% appreciation or depreciation of the U.S. dollar would have an
insignificant effect on its financial position, results of operations and cash
flows. The Company does not maintain any derivative instruments to mitigate the
exposure to translation and transaction risk. However, this does not preclude
the Company's adoption of specific hedging strategies in the future. MemberWorks
will assess the need to utilize financial instruments to hedge currency
exposures on an ongoing basis.

Fair Value

In August 2001, MemberWorks acquired stock in Homestore.com valued at $34.5
million in exchange for its interest in iPlace, Inc. The carrying value of this
investment is affected by changes in the quoted market prices of Homestore.com
common stock. The investment in Homestore.com declined in value and management
determined that the decline was other than temporary. As a result, the Company
wrote down its investment in Homestore.com to its fair value and recognized a
loss of $31.3 million during the six months ended December 31, 2001. MemberWorks
does not use derivative financial instruments for speculative or trading
purposes. However, this does not preclude the Company's adoption of specific
hedging strategies in the future.


                                       18
<PAGE>
                            MEMBERWORKS INCORPORATED

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Except as set forth below, in management's opinion, there are no significant
legal proceedings to which the Company or any of its subsidiaries is a party or
to which any of their properties are subject. The Company is involved in other
lawsuits and claims generally incidental to its business. In addition, from time
to time, and in the regular course of its business, the Company receives
inquiries from various federal and/or state regulatory authorities.

In January 2001, an action was instituted by plaintiff Brandy L. Ritt against
the Company and other defendants in the Court of Common Pleas in Cuyahoga
County, Ohio. The suit, which seeks unspecified monetary damages, alleges that
the Company and the other defendants violated various provisions of Ohio's
consumer protection laws in connection with the marketing of certain membership
programs offered by the Company. The plaintiff's motion to have the suit
certified as a class action was denied on February 6, 2002. The Company believes
that the claims asserted against it are unfounded and the Company will
vigorously defend its interests against this suit.

In March 2001, an action was instituted by plaintiff Teresa McClain against
Coverdell & Company ("Coverdell"), a wholly-owned subsidiary of the Company,
Monumental Life Insurance Company and other defendants in the United States
District Court for the Eastern District of Michigan, Southern Division. The
suit, which seeks unspecified monetary damages, alleges that Coverdell and the
other defendants violated the Michigan Consumer Protection Act and other
applicable Michigan laws in connection with the marketing of Monumental Life
Insurance Company insurance products. The complaint includes a claim that the
suit should be certified as a class action and the plaintiff has filed a motion
for class certification to which all of the defendants have filed opposing
papers regarding the same. The court has not ruled on the motion. The Company
believes that the claims asserted against Coverdell are unfounded and the
Company and Coverdell will vigorously defend their interests against this suit.

In June 2001, actions were instituted by plaintiffs Judith Jeselskis and Marcia
Walters against the Company and other defendants in Circuit Court of the Tenth
Judicial District, Highlands County Civil Division, Florida, and Circuit Court
of the Sixth Judicial Circuit, Pinellas County Civil Division, Florida,
respectively. The suits, which seek unspecified monetary damages, allege that
the Company and the other defendants violated the Florida Deceptive and Unfair
Trade Practices Act, in connection with the marketing of certain membership
programs offered by the Company. While the respective complaints include claims
that the suits should be certified as class actions, the plaintiffs have not
filed motions for class certification. The Company believes that the allegations
made in this lawsuit are unfounded and the Company will vigorously defend its
interests against the suits.

In July 2001, an action was instituted by Alan Stone against the Company and
other defendants in Superior Court of the State of California, County of Orange.
The suit, which seeks unspecified monetary damages, alleges that the Company and
the other defendants violated California business practices law. While the
complaint includes a claim that the suit should be certified as a class action,
the plaintiff has not filed a motion for class certification. The Company
believes that the allegations made in this lawsuit are unfounded and the Company
will vigorously defend its interests against this suit.


                                       19
<PAGE>
                            MEMBERWORKS INCORPORATED

                     PART II. OTHER INFORMATION (CONTINUED)


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

a) MemberWorks Incorporated's 2001 Annual Meeting of Stockholders was held on
   November 15, 2001.

b) At the annual meeting the following Class II Directors were elected to the
   Board of Directors as follows:

        Stephen J. Clearman:    For -       14,495,958
                                Against -        7,161
                                Abstain -            0
                                Nonvotes -     719,024
        Michael R. O'Brien:     For -       14,495,958
                                Against -        7,161
                                Abstain -            0
                                Nonvotes -     719,024
        Michael T. McClorey:    For -       14,495,958
                                Against -        7,161
                                Abstain -            0
                                Nonvotes -     719,024

   Class I Directors, Marc S. Tesler and Alec L. Ellison, and Class III
   Directors, Gary A. Johnson and Dennis P. Walker, continue to serve as
   Directors of the Company.

c) The ratification of PricewaterhouseCoopers LLP as the Company's independent
   auditors was also approved at the annual meeting as follows:

                           For -            13,677,281
                           Against -           825,577
                           Abstain -               261
                           Nonvotes -          719,024

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a)  Exhibits
    None

b)  Reports on Form 8-K
    On November 6, 2001, the Company filed a Current Report on Form 8-K/A under
    Item 2 "Acquisition or Disposition of Assets" and Item 7 "Financial
    Statements and Exhibits" a press release announcing the completion of the
    sale of iPlace, Inc. to Homestore.com, Inc. and pro forma financial
    statements of the Company.


                                       20
<PAGE>
                            MEMBERWORKS INCORPORATED

                                   SIGNATURES

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

                                       MEMBERWORKS INCORPORATED
                                       (Registrant)


Date: February 12, 2002           By:  /s/ Gary A. Johnson
                                       -----------------------------------------
                                       Gary A. Johnson, President, Chief
                                       Executive Officer and Director


      February 12, 2002           By:  /s/ James B. Duffy
                                       -----------------------------------
                                       James B. Duffy, Executive Vice President
                                       and Chief Financial Officer (Principal
                                       Financial and Accounting Officer)


                                       21