<PAGE>   1
                       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, 1996     COMMISSION FILE NO. 0-21527



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




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

680 WASHINGTON BLVD.; SUITE 1100; STAMFORD, CONNECTICUT            06901
(Address of principal executive offices)                         (Zip Code)
</TABLE>

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

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 EACH THE REGISTRANT'S CLASSES OF CAPITAL
STOCK: 14,664,292 SHARES OF COMMON STOCK, $0.01 PAR VALUE AS OF JANUARY 31,
1997.
<PAGE>   2
                            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, 1996
         and June 30, 1996.                                                                   3

Condensed Consolidated Statements of Operations for the three
         month periods ended December 31, 1996 and 1995.                                      4

Condensed Consolidated Statements of Operations for the six
         month periods ended December 31, 1996 and 1995.                                      5

Condensed Consolidated Statements of Cash Flows for the six
         month periods ended December 31, 1996 and 1995.                                      6

Notes to Condensed Consolidated Financial Statements.                                     7 - 9


Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                             10 - 12

         Certain Factors That May Affect Future Results                                  12 - 13

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                                    14

Item 2.  Changes in Securities                                                                14

Item 6.  Exhibits and Reports on Form 8-K                                                     14
</TABLE>












<PAGE>   3
                            MEMBERWORKS INCORPORATED

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                   December 31,      June 30,
                                                                                       1996            1996
                                                                                   ------------      --------
                                                                                   (Unaudited)
<S>                                                                                  <C>             <C>
                                           ASSETS

Current assets:
       Cash and cash equivalents                                                     $ 35,926        $  4,312
       Accounts receivable                                                              5,377           6,439
       Prepaid membership materials                                                     1,418           1,065
       Prepaid expenses                                                                   326             204
       Membership solicitation and other deferred costs                                28,726          25,686
                                                                                     --------        --------
                       Total current assets                                            71,773          37,706
Fixed assets, net                                                                       5,559           3,261
Other assets                                                                              356             960
                                                                                     --------        --------
                                                                                     $ 77,688        $ 41,927
                                                                                     ========        ========

                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
       Notes payable                                                                 $    401        $    675
       Current maturities of capital lease obligations                                    316             316
       Accounts payable                                                                 9,912          10,433
       Accrued liabilities                                                             15,992          14,631
       Deferred membership fees                                                        35,113          30,628
                                                                                     --------        --------
                       Total current liabilities                                       61,734          56,683
Long-term capital lease obligations                                                       332             456
Notes payable                                                                             446             633
                                                                                     --------        --------
                       Total liabilities                                               62,512          57,772
Redeemable preferred stock                                                               --            20,487
                                                                                     --------        --------
                       Total liabilities and redeemable preferred stock                62,512          78,259
                                                                                     --------        --------

Stockholders' equity:
       Class A common stock, $0.01 par value -- 8,000,000 shares authorized; no
            shares issued
            (5,598,870 shares at June 30, 1996)                                          --                56
       Common stock, $.01 par value -- 32,000,000
            shares authorized;14,838,122 shares issued
            (258,235 shares at June 30, 1996)                                             148               3
       Capital in excess of par value                                                  59,347           3,602
       Deferred compensation                                                           (1,678)         (1,400)
       Accumulated deficit                                                            (42,368)        (38,320)
       Treasury stock, 173,830 shares at cost                                            (273)           (273)
                                                                                     --------        --------
                       Total stockholders' equity (deficit)                            15,176         (36,332)
                                                                                     --------        --------
                                                                                     $ 77,688        $ 41,927
                                                                                     ========        ========
</TABLE>


See notes to condensed consolidated financial statements.


                                       3
<PAGE>   4
                            MEMBERWORKS INCORPORATED

           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                         Three months ended December 31,
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                         1996            1995
                                                                       --------        --------
<S>                                                                    <C>             <C>
Revenues
       Membership fees                                                 $ 18,424        $ 14,089

Expenses
       Operating                                                          4,026           2,893
       Marketing                                                         11,936           9,626
       General and administrative                                         4,132           3,229
       Other income, net principally interest                              (200)            (18)
                                                                       --------        --------

Total expenses                                                           19,894          15,730
                                                                       --------        --------

Loss before income taxes                                                 (1,470)         (1,641)

Provision for income taxes                                                 --              --
                                                                       --------        --------

Net loss                                                               $ (1,470)       $ (1,641)
                                                                       ========        ========

Net loss per share (note 2)                                            $  (0.14)       $  (0.13)
                                                                       ========        ========

Weighted average common and common equivalent shares outstanding         
   (note 2)                                                              14,128          12,741     
                                                                       ========        ========
</TABLE>


See notes to condensed consolidated financial statements.


                                        4
<PAGE>   5

                            MEMBERWORKS INCORPORATED

           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                          Six months ended December 31,
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                         1996            1995
                                                                       --------        --------
<S>                                                                    <C>             <C>
Revenues
       Membership fees                                                 $ 35,620        $ 26,768

Expenses
       Operating                                                          7,803           5,381
       Marketing                                                         23,160          18,753
       General and administrative                                         7,933           5,289
       Other (income) expense, net principally interest                    (208)            282
                                                                       --------        --------

Total expenses                                                           38,688          29,705
                                                                       --------        --------

Loss before income taxes                                                 (3,068)         (2,937)

Provision for income taxes                                                 --              --
                                                                       --------        --------

Net loss                                                               $ (3,068)       $ (2,937)
                                                                       ========        ========

Net loss per share (note 2)                                            $  (0.31)       $  (0.24)
                                                                       ========        ========

Weighted average common and common equivalent shares outstanding         
   (note 2)                                                              13,137          12,741
                                                                       ========        ========
</TABLE>


See notes to condensed consolidated financial statements.


                                       5
<PAGE>   6
                            MEMBERWORKS INCORPORATED

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

<TABLE>
<CAPTION>
                                                                                   Six months ended December 31,
                                                                                   -----------------------------
                                                                                       1996            1995
                                                                                   ------------    -------------
<S>                                                                                  <C>             <C>
OPERATING ACTIVITIES
       Net loss                                                                      $ (3,068)       $ (2,937)
       Adjustments to reconcile net loss to net cash provided by
              operating activities:
              Membership solicitation and other deferred costs                        (29,225)        (21,908)
              Amortization of membership solicitation and other deferred costs         26,184          21,187
              Deferred membership fees                                                  4,485           3,185
              Depreciation and amortization                                               577             448
              Other                                                                       190             443

Change in assets and liabilities affecting operating cash flows:
       Accounts receivable                                                              1,062          (1,206)
       Prepaid membership materials                                                      (353)           (243)
       Prepaid expenses                                                                  (122)           (236)
       Other assets                                                                       (14)           (162)
       Accounts payable                                                                  (521)            539
       Accrued liabilities                                                              1,361           1,054
                                                                                     --------        --------
Net cash provided by operating activities                                                 556             164
                                                                                     --------        --------

INVESTING ACTIVITIES
       Acquisition of fixed assets                                                     (2,256)           (716)
       Investment in and advances to joint venture                                       --               (32)
                                                                                     --------        --------
Net cash used in investing activities                                                  (2,256)           (748)
                                                                                     --------        --------

FINANCING ACTIVITIES
       Proceeds from issuance of note payable                                            --               420
       Payments of notes payable                                                         (461)         (6,969)
       Payments of capital lease obligations                                             (124)            (78)
       Proceeds from issuance of Common Stock and warrants                             36,439               1
       Proceeds from the exercise of options and warrants                                   9            --
       Proceeds from issuance of preferred stock                                         --            12,887
       Redemption of preferred stock                                                   (2,549)         (4,000)
       Preferred stock dividends                                                         --              (402)
                                                                                     --------        --------
Net cash provided by financing activities                                              33,314           1,859
                                                                                     --------        --------

Net increase in cash and cash equivalents                                              31,614           1,275
Cash and cash equivalents at beginning of period                                        4,312           5,323
                                                                                     --------        --------
Cash and cash equivalents at end of period                                           $ 35,926        $  6,598
                                                                                     ========        ========
</TABLE>

See notes to condensed consolidated financial statements.

                                       6
<PAGE>   7
                            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 generally accepted accounting principles for interim
financial information. Accordingly, they 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 month and six month periods ended
December 31, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 1997. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Registration Statement on Form S-1, with respect to the fiscal year
ended June 30, 1996.

NOTE 2 - EARNINGS PER SHARE

Earnings per share is determined by dividing net loss, after preferred stock
dividends and accretion, by the weighted average number of common shares
outstanding during the period plus, when their effect is dilutive, common stock
equivalents.

1995 per share information represents pro forma earnings per share amounts. Pro
forma earnings per share is determined by dividing net loss, after adding back
preferred stock dividends paid when applicable, by the weighted average number
of common stock and common stock equivalents outstanding during the period.
Common stock equivalents include stock options, warrants and preferred stock
which was converted into common stock upon the closing of the initial public
offering of the Company's Common Stock. Refer to Note 4 - Stockholders' Equity.
The pro forma weighted average number of shares has been adjusted to reflect as
outstanding all common stock and common stock equivalents issued during the
twelve month period preceding the initial public offering of the Company's
Common Stock using the treasury stock method, as well as the number of shares
which would be necessary in order to redeem the Series E and F Preferred Stock.

Supplementary earnings per share information for the six months ended December
31, 1996 and the three months ended December 31, 1996 is ($0.27) and ($0.14),
respectively. The net loss used in the calculation of supplementary earnings per
share is ($3,605) and ($1,980) for the six and three month periods ended
December 31, 1996, respectively. The net loss excludes accretion related to the
Series A, B, C, D and H Preferred Stock and preferred stock dividends on Series
E and F Preferred Stock as the conversion and redemption of these securities is
assumed to have occurred at the beginning of each respective period. The
weighted average shares used in the calculation of supplementary earnings per
share includes the number of shares of common stock whose proceeds were to be 
used to retire the Series E and F Preferred Stock as outstanding for the 
entire period.

NOTE 3 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS

The allowance for membership cancellations set forth in the accompanying
condensed consolidated balance sheets as of June 30, 1996 and December 31, 1996
was $10,117,000 and $12,666,000, respectively.


                                        7
<PAGE>   8
                           MEMBERWORKS INCORPORATED
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                 (Continued)


NOTE 4 - STOCKHOLDERS' EQUITY

Changes in stockholders' equity for the six months ended December 31, 1996 were
as follows (in thousands, except share data):





<TABLE>
<CAPTION>
                                                                 Additional  
                    Class A Common Stock       Common Stock         Paid     Accumulated       Deferred     Treasury            
                     Shares      Amount     Shares     Amount    in Capital    Deficit       Compensation     Stock        Total 
                    ---------    ------   ----------   ------    ----------    --------      ------------   --------      -------- 

<S>                <C>            <C>     <C>           <C>        <C>         <C>              <C>           <C>         <C>      
Balance - June      
  30, 1996          5,598,870     $56        258,235    $  3       $ 3,602     $(38,320)        $(1,400)      $(273)      $(36,332)

Issuance of         
  Common Stock                             2,400,000      24        36,415                                                  36,439

Conversion of      
  Class A common
  stock into 
  Common Stock     (5,598,870)    (56)     5,598,870      56                                                                    --

Exercise of         
  warrants and
  options                                    117,649       1             8                                                       9

Preferred stock:

   Accretion of     
     discount                                                                        (53)                                      (53)

   Accretion to    
     redemption
     value                                                                          (364)                                     (364)

   Accumulated     
     dividends                                                                       (54)                                      (54)

   Conversion of   
     preferred 
     stock into
     Common Stock                          6,463,368      64        18,853                                                  18,917

   Redemption of    
     preferred 
     stock                                                                          (509)                                     (509)

Deferred           
  compensation                                                         469                         (278)                       191

Net loss                                                                         (3,068)                                    (3,068)

                    ---------     ---     ----------    ----       -------     --------         -------       -----       -------- 

                           --     $--     14,838,122    $148       $59,347     $(42,368)        $(1,678)      $(273)      $ 15,176
                    =========     ===     ==========    ====       =======     ========         =======       =====       ======== 
</TABLE>
                                

                                        8
<PAGE>   9
                           MEMBERWORKS INCORPORATED

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                 (Continued)



NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)

On August 15, 1996, the Company amended its certificate of incorporation to
increase the authorized number of shares of capital stock to 41,000,000. A total
of 32,000,000 shares were designated as Common Stock, par value $0.01, 8,000,000
shares were designated as Class A common stock, par value $0.01 and 1,000,000
shares were designated as Preferred Stock, par value $0.01.

On August 13, 1996, the Board of Directors authorized the automatic
reclassification and conversion of Class A common stock into Common Stock upon
the closing of the Company's initial public offering and the elimination of
Class A common stock.

On August 13, 1996, the Board of Directors authorized the automatic
reclassification and conversion of Class B common stock into Common Stock.

On September 11, 1996, the Board of Directors approved a 7.2 for 1 stock split
of the Company's Common Stock which became effective on September 25, 1996.

Effective October 18, 1996, the Company sold 2,400,000 shares of its Common
Stock at $17.00 per share in an initial public offering. Net proceeds of the
offering, after deducting underwriting discounts and commissions and estimated
offering expenses, aggregated approximately $36,439,000. Approximately
$2,549,000 of the proceeds of the offering were used to redeem all outstanding
shares of Series E and Series F Preferred Stock. The remaining $33,890,000 was
retained for general corporate purposes including acquisition of new members,
program development, capital expenditures and working capital.

Consummation of this initial public offering resulted in the automatic
conversion of Series A, B, C, D, and H Preferred Stock into Common Stock.

Concurrent with the closing of the initial public offering, the Company settled
litigation with a former executive and co-founder of the Company pursuant to the
terms of an agreement dated September 13, 1996, and paid the former executive
$165,000, representing severance, bonus and legal expenses.

NOTE 5 - STOCK OPTIONS AND WARRANTS

The Company has granted 43,200 options to purchase Common Stock during the six
month period ended December 31, 1996 pursuant to an agreement with an executive
officer. 14,400 options were granted on each of the following dates based upon
the achievement of certain performance goals: October 9, 1996, November 22, 1996
and December 30, 1996. These options have a stated exercise price of $2.78 per
share and vest ratably over a four year period from date of grant. In connection
with these grants, the Company will recognize compensation expense of $469,000
over the four-year vesting period.

Concurrent with the closing of the public offering, 3,533 shares of Common Stock
were issued pursuant to the exercise of a warrant by a selling stockholder.

On November 22, 1996, warrants to acquire 113,227 shares of Common Stock at
$0.0014 per share were exercised.


                                        9
<PAGE>   10
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




THREE MONTHS ENDED DECEMBER 31, 1996 VS. THREE MONTHS ENDED DECEMBER 31, 1995

         REVENUES. Revenues increased 31% to $18.4 million for the quarter ended
December 31, 1996 from $14.1 million for the quarter ended December 31, 1995 due
to an increase in the Company's membership base and an increase in the weighted
average program fee. The Company's membership base increased to 1.7 million
members at December 31, 1996 from 1.3 million members at December 31, 1995. The
increase in the Company's membership base was due to an increase in the members
enrolled in existing programs and the continued roll-out of new programs
introduced in fiscal 1996. The increase in the weighted average program fee was
due to an increase in the percentage of members enrolled in programs with higher
fees. Revenues from renewals increased to $8.0 million in 1996 from $5.5 million
in 1995. As a percentage of individual membership revenues, these amounts
represented 44% in 1996 and 40% in 1995.

         OPERATING EXPENSES. Operating expenses consist of costs incurred in
servicing the Company's membership base, including personnel, telephone and
computer processing costs, as well as expenses associated with the production
and distribution of membership information kits. Operating expenses increased
39% to $4.0 million in 1996 from $2.9 million in 1995. As a percentage of
revenues, operating expenses increased to 21.9% in 1996 from 20.5% in 1995.
These increases were primarily due to the Company opening a new membership
service facility in Houston, Texas which commenced operations during the June
1996 quarter.

         MARKETING EXPENSES. Marketing expenses consist of fees to telemarketers
to solicit potential members, royalties to clients, direct mail costs and other
solicitation expenses. Marketing expenses increased 24% to $11.9 million in 
1996 from $9.6 million in 1995. The increase was due primarily to increased
solicitation costs and increased royalty expense associated with the larger
membership base. As a percentage of revenues, marketing expenses decreased to
64.8% in 1996 from 68.3% in 1995. The decrease was due to an increase in
renewal revenues as a percentage of total revenues and the favorable effect of
an increase in the weighted average program fee.
        
         In addition to marketing expenses, the Company also monitors overall
membership solicitation and other deferred costs, which are amortized ratably
over the membership period. These costs increased 41% to $15.1 million in 1996
from $10.7 million in 1995 primarily due to increased marketing efforts incurred
to expand the membership base.

         GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consist of personnel and facilities expenses associated with the
Company's executive, sales, marketing, finance, product and account management
functions. General and administrative expenses increased 28% to $4.1 million in
1996 from $3.2 million in 1995. The increase was attributable to the cost
incurred for additional personnel in all areas and related facilities costs. The
additional personnel were necessary to support the Company's growth and
expansion. As a percentage of revenues, general and administrative expenses
decreased to 22.4% in 1966 from 22.9% in 1995.

         OTHER (INCOME) EXPENSE, NET. Other (income) expense, net is primarily
composed of interest income from cash and cash equivalents, partially offset by
financing charges relating to notes payable, equipment leases and other debt.
Other income, net of $200,000 was reported in 1996 compared to $18,000 reported
in 1995. The increase in other income, net was due to the increase in cash and
cash equivalents resulting from the proceeds of the initial public offering
completed on October 23, 1996. The Company invests in short-term,
investment-grade, interest bearing securities, and the amount of interest income
fluctuates based upon the amount of funds available for investment and
prevailing interest rates.

         PROVISION FOR INCOME TAXES. The Company was not required to record a
provision for income taxes for the quarters ended December 31, 1996 and 1995 due
to its net operating losses.



                                     10
<PAGE>   11


SIX MONTHS ENDED DECEMBER 31, 1996 VS. SIX MONTHS ENDED DECEMBER 31, 1995

         REVENUES. Revenues increased 33% to $35.6 million for the six months
ended December 31, 1996 from $26.8 million for the six months ended December 31,
1995 due to an increase in the Company's membership base and an increase in the
weighted average program fee. The Company's membership base increased to 1.7
million members at December 31, 1996 from 1.3 million members at December 31,
1995. The increase in the Company's membership base was due to an increase in
the members enrolled in existing programs and the continued roll-out of new
programs introduced in fiscal 1996. The increase in the weighted average program
fee was due to an increase in the percentage of members enrolled in programs
with higher fees. Revenues from renewals increased to $15.4 million in 1996 from
$10.6 million in 1995. As a percentage of individual membership revenues, these
amounts represented 44% in 1996 and 40% in 1995.

         OPERATING EXPENSES. Operating expenses consist of costs incurred in
servicing the Company's membership base, including personnel, telephone and
computer processing costs, as well as expenses associated with the production
and distribution of membership information kits. Operating expenses increased
45% to $7.8 million in 1996 from $5.4 million in 1995. As a percentage of
revenues, operating expenses increased to 21.9% in 1996 from 20.1% in 1995.
These increases were primarily due to the new membership service facility in
Houston, Texas which commenced operations during the June 1996 quarter.

         MARKETING EXPENSES. Marketing expenses consist of fees to telemarketers
to solicit potential members, royalties to clients, direct mail costs and other
solicitation expenses. Marketing expenses increased 24% to $23.2 in 1996 from
$18.8 million in 1995. The increase was due primarily to increased solicitation
costs and increased royalty expense associated with the larger membership base.
As a percentage of revenues, marketing expenses decreased to 65.0% in 1996 from
70.1% in 1995. The decrease was due to the favorable effect of an increase in
the weighted average program fee and an increase in renewal revenues as a
percentage of total revenues.

         In addition to marketing expenses, the Company also monitors overall
membership solicitation and other deferred costs, which are amortized ratably
over the membership period. These costs increased 33% to $29.2 million in 1996
from $21.9 million in 1995 primarily due to increased marketing efforts incurred
to expand the membership base.

         GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consist of personnel and facilities expenses associated with the
Company's executive, sales, marketing, finance, product and account management
functions. General and administrative expenses increased 50% to $7.9 million in
1996 from $5.3 million in 1995. As a percentage of revenues, general and
administrative expenses increased to 22.3% in 1996 from 19.8% in 1995. The 
increase was attributable to the cost incurred for additional personnel in all 
areas and related facilities costs. The additional personnel were necessary to 
support the Company's growth and expansion.

         OTHER (INCOME) EXPENSE, NET. Other (income) expense, net is primarily
composed of interest income from cash and cash equivalents, partially offset by
financing charges relating to notes payable, equipment leases and other debt.
Net interest income of $208,000 was reported in 1996 compared to net interest
expense of $282,000 reported in 1995. Interest income increased due to the
increase in cash and cash equivalents resulting from the proceeds of the initial
public offering completed on October 23, 1996. In addition, interest expense
decreased due to the reduction of notes payable in September 1995. The Company
invests in short-term, investment-grade, interest bearing securities, and the
amount of interest income fluctuates based upon the amount of funds available
for investment and prevailing interest rates.

         PROVISION FOR INCOME TAXES. The Company was not required to record a
provision for income taxes for the six month periods ended December 31, 1996 and
1995 due to its net operating losses.



                                       11
<PAGE>   12


LIQUIDITY AND CAPITAL RESOURCES

          Historically, the Company has funded operations primarily through
private sales of securities. The Company sold 2,400,000 shares of its Common
Stock in an initial public offering on October 18, 1996. Net proceeds of the
offering (after deducting underwriting discounts and commissions and estimated
offering expenses) approximated $36.4 million. Approximately $2.5 million of the
net proceeds was utilized to redeem all outstanding shares of Series E and
Series F Preferred Stock on October 23, 1996.

         Net cash provided by operating activities was $556,000 and $164,000 for
the six months ended December 31, 1996 and 1995, respectively. These results
were attributable to the Company's strategy to use substantially all of its cash
generated from operating activities to fund costs required to increase its
membership base. The Company's capital expenditures were $2,256,000 in 1996 and
$716,000 in 1995. The increased expenditures were primarily related to an
upgrade of the Company's mainframe computer system and the Company's new
membership services facility opened in the June 1996 quarter.

         On January 24, 1997, the Company's Board of Directors authorized the
repurchase, as conditions warrant, of up to 150,000 shares of the Company's
Common Stock. The repurchased shares will be used to provide Common Stock
required for exercises of options granted by the Company under its employee
stock option plans.
        
         Working capital at December 31, 1996 was $10.0 million compared to
negative working capital of $19.0 million at June 30, 1996. This improvement
reflects the receipt of net proceeds from the initial public offering. 
Because of ongoing costs in connection with soliciting new members, the Company
expects to incur operating and net losses at least through fiscal 1997. The
Company believes that the net proceeds from the initial public offering,
together with its existing cash balances and funds generated from operations
will be sufficient to meet its  funding requirements for at least the next 18
months.
        


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

         This Quarterly Report contains forward-looking statements that involve
risks and uncertainties, including the statements in Liquidity and Capital
Resources regarding expectations of future losses and the adequacy of funds to
meet funding requirements. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. A number of
uncertainties exist that could affect the Company's future operating results,
including, without limitation, the Company's history of losses, the Company's
ability to retain existing clients and attract new clients, the Company's
dependence on membership renewals, intense competition, the Company's continuing
ability to develop new programs which generate consumer interest, and general
economic factors.

         The Company has incurred significant operating losses since its
inception. Although the Company has experienced revenue growth in recent
periods, such growth rates may not be sustainable and are not indicative of
future operating results. There can be no assurance that the Company will
achieve or maintain profitability in the future.

         The Company obtains substantially all of the information necessary to
the Company's marketing efforts from customer lists supplied by its clients.
Clients provide the lists to the Company for use in marketing a single, specific
program which has been pre-approved by the client. As a result, the Company's
ability to market a new program to an existing customer base or an existing
program to a new customer base is dependent on first obtaining approval from a
client. There can be no assurance that one or more of the Company's key or other
clients will not terminate its relationship with the Company or that clients
will provide additional customer lists to the Company for use in further
marketing new or existing membership programs. Termination or expiration of a
key client relationship could have a material adverse effect on the future
revenues from existing programs of which such client's customers are members and
on the Company's ability to further market new or existing programs through such
client.



                                       12
<PAGE>   13


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS (CONT'D)

         The Company generally incurs losses and negative cash flow during the
initial year of an individual membership program, as compared to renewal years,
due primarily to higher marketing costs associated with initial member
procurement. In addition, the Company experiences a higher percentage of
cancellations during the initial membership period as compared to renewal
periods. There can be no assurance that a particular program will generate
sufficient renewals to become profitable or that memberships, if renewed, will
not be canceled. Failure of one or more of the Company's programs to generate
recurring and sustained membership renewals would have a material adverse effect
on the Company's business, financial condition and results of operations.

         The Company's business is substantially dependent on its ability to
develop and successfully introduce new programs which generate consumer
interest. Failure to introduce new programs in a timely manner could result in
the Company's competitors acquiring additional market share for a program in a
particular area of consumer interest. The announcement or introduction of new
programs by the Company or others, or the failure by the Company to introduce
new programs which have broad consumer appeal, could have a material adverse
effect on the Company's business, financial condition and results of operations.


                                       13
<PAGE>   14


                            MEMBERWORKS INCORPORATED


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

                  Refer to Note 4 to the condensed consolidated financial
statements.

Item 2.  Changes in Securities

                  Refer to Note 4 to the condensed consolidated financial
statements.

Item 6.  Exhibits and Reports on Form 8-K

                  (a)      Exhibits
                                    11 - Statement re: Computation of Per 
                                         Share Earnings (Unaudited)
                                    27 - Financial Data Schedule

                  (b)      Reports on Form 8-K
                                    No reports on Form 8-K were filed by the
                                    Company during the quarter ended December
                                    31, 1996.



                                       14











<PAGE>   15


                                   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.


<TABLE>
<S>                                                 <C>
                                                              MEMBERWORKS INCORPORATED
                                                              (Registrant)


Date: February 14, 1997                              By:      /s/ Gary A. Johnson
                                                              --------------------------------------
                                                              Gary A. Johnson, President, Chief
                                                              Executive Officer and Director


Date: February 14, 1997                              By:      /s/ James B. Duffy
                                                              --------------------------------------
                                                              James B. Duffy, Senior Vice President,
                                                              Chief Financial Officer
</TABLE>




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