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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

(MARK ONE)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM  TO       .

                        COMMISSION FILE NUMBER: 333-12091

                               -------------------
                      INTER*ACT ELECTRONIC MARKETING, INC.

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

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<S>                                                    <C>
           NORTH CAROLINA                                          56-1817510
(STATE OR OTHER JURISDICTION OF INCORPORATION          (I.R.S. EMPLOYER IDENTIFICATION NO.)
         OR ORGANIZATION)

         5032 PARKWAY PLAZA BLVD.                                      28217
        CHARLOTTE, NORTH CAROLINA                                    (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (704) 329-6900

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
      TITLE OF EACH CLASS                        NAME OF EACH  EXCHANGE ON WHICH REGISTERED
      -------------------                        ------------------------------------------
<S>                                                       <C>
            NONE                                                      NONE
</TABLE>

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      NONE

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

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

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

         As of March 31, 2000, the number of shares outstanding of the
registrant's Common Stock was 7,743,739. There is no trading market for the
Common Stock. Accordingly, the aggregate market value of the Common Stock held
by non-affiliates of the registrant is not determinable. See Part II, Item 5. of
this Report.

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                              CROSS REFERENCE SHEET
                                       AND
                                TABLE OF CONTENTS

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                                                                                 PAGE NUMBER
                                                                                OR REFERENCE

                                     PART I

<S>               <C>                                                               <C>
ITEM 1.  Business..............................................................
ITEM 2.  Properties............................................................
ITEM 3.  Legal Proceedings.....................................................
ITEM 4.  Submission of Matters to a Vote of Security Holders...................

                                     PART II

ITEM 5.  Market for Registrant's Common Equity and Related Stockholder
            Matters.............................................................
ITEM 6.  Selected Consolidated Financial Data...................................
ITEM 7.  Management's Discussion and Analysis of Financial Condition and
            Results of Operations...............................................
ITEM 8.  Financial Statements and Supplementary Data............................
ITEM 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure...................................................

                                    PART III

ITEM 10. Directors and Executive Officers of the Company........................
ITEM 11. Executive Compensation.................................................
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.........
ITEM 13. Certain Relationships and Related Transactions.........................

                                     PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K.......
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CAUTIONARY STATEMENT FOR PURPOSE OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

         The statements contained in this Annual Report on Form 10-K that are
not historical facts are forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995), which can be identified
by the use of forward-looking terminology such as believes, expects, may, will,
should, or anticipates or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. In addition, from time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forwarding-looking statements may be included in, but are not
limited to, various filings made by the Company with the Securities and Exchange
Commission, or press releases or oral statements made by or with the approval of
an authorized executive officer of the Company. Forward-looking statements are
based on management's current views and assumptions and involve risks and
uncertainties that could significantly affect expected results. The Company
wishes to caution the reader that factors, such as those listed below, in some
cases have affected and could affect the Company's actual results, causing
actual results to differ materially from those in any forward-looking statement.
These factors include: (i) the Company's limited operating history, significant
losses, accumulated deficit, negative cash flow from operations and expected
future losses, (ii) the dependence of the Company on its ability to establish,
maintain and expand relationships with consumer product manufacturers to promote
brands on the IEMN (as defined herein) and the uncertainty of market acceptance
for the IEMN, (iii) the uncertainty as to whether the Company will be able to
manage its growth effectively, (iv) the early stage of the Company's products
and services and technical and other problems that the Company may experience,
(v) risks related to the Company's leverage and debt service obligations, (vi)
risks inherent in the necessity for the Company to raise additional equity or
debt financing to fund continuing losses, (vii) the Company's dependence on
third parties, (viii) the intensely competitive nature of the consumer product
and promotional industry, (ix) risks that the Company's rights related to
patents, proprietary information and trademarks may not adequately protect its
business, (x) risks relating to the relocation of the Company's corporate
offices, including potential costs involved in the relocation as well as the
need for new employees to develop the skills necessary to develop the Company's
business and (xi) the possible inability of new management to perform their
respective roles. See Part II, Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors."

                                     PART I

ITEM 1. BUSINESS

         Inter*Act Electronic Marketing, Inc. ("Inter*Act" or the "Company"),
which changed its name from Inter*Act Systems, Incorporated effective July 1,
1999, believes it operates the world's largest fully electronic marketing
network linked to supermarket and pharmacy retailers' point-of-sale ("POS")
databases that serves on-line promotions and advertisements to shoppers
seamlessly in-store, at home and in the office. The Company's patented
technologies enable consumer products manufacturers ("Manufacturers") and
supermarket retailers ("Retailers") to use historical purchase behavior data to
develop targeted purchase incentives and messages which the Company delivers to
customers before shopping begins. The Company's proprietary system, called the
Inter*Act e-Marketing Network'sm' ("IEMN"), currently comprises approximately
4,000 server-based terminals located inside the front entrance of more than 20
retail chains in the U.S. and Europe, as well as a recently launched
Company-owned Internet web site called ShopperPerks.com'sm'. The Company's web
site and its in-store ShopperPerks'TM' portals are linked directly to each
store's point-of-sale scanning system via Company-owned in-store servers. This
on-line network gives the Company's business partners exclusive access to offer
all shoppers (whether Internet users or not) same-day, personalized savings that
are electronically downloaded to participating retailers' cash register systems.
Delivering highly targeted, pre-shopping promotions on the IEMN historically has
generated average consumer response, or redemption, rates above 25%, which the
Company believes is superior to the response rate of any other marketing or
advertising medium in the industry.

         The Company's primary objective is to become the preeminent electronic
marketing services provider in the consumer packaged goods industry in the U.S.
and Europe by serving the economic needs of Manufacturers, Retailers, and
consumers more efficiently than any other marketing vehicle. The Company
believes that the IEMN capitalizes on the convergence of major trends in the
Manufacturer and Retailer industries to better target and serve consumers.
Manufacturers are striving to increase the efficiency of their brand promotions
through highly targeted incentives and are seeking to offer promotions nearer to
the shopper purchase decision. Retailers are developing customer databases that
identify individual households and their product purchasing histories over time,
thereby allowing Retailers first to segment their customers by sales and
profitability and then reward them accordingly. Retailers are also seeking to
offer rewards to and communicate with their customers in-store as well as at
home and in the office. In addition to these industry trends, consumers are
seeking greater convenience in shopping without sacrificing savings. The Company
owns an extensive portfolio of patents and exclusive patent licenses that it
believes are significant barriers to other potential electronic marketing
competitors who may seek to deploy similar technology.

         As of December 31, 1999, the Company had installed systems in
approximately 2338 stores in the U.S. and the U.K. In the U.S. as of December
31, 1999, the Company has contracted to install systems in an additional 3200
stores. In Europe, the Company






<PAGE>


has entered into multi-year contracts with Sainsbury's, the second largest
Retailers in the United Kingdom; Boots, the largest pharmacy retailer in the
United Kingdom; and Delhaize, one of the largest grocers in Belgium. As of
December 31, 1999, the Company has contracted to install systems in 789 stores
of these chains, which collectively account for approximately 1,840 stores in
Europe. These installed European stores are typically three to four times larger
than a comparable U.S. store in terms of size and shopper traffic per store.

         The Company is compensated by Manufacturers who purchase access to the
IEMN on an exclusive category basis for the four-week cycles in which their
brand is promoted. Contracts were predominantly annual commitments for a flat
fee for 1999, but new contracts allowing for shorter promotion periods that
include flat fees and variable performance-based fees through the IEMN have been
entered into for 2000. All contracts call for continuous data reporting by the
Company on promotion results and category share movements. The Company has
altered its pricing format significantly for 2000. From late 1998 through all of
1999, the Company's pricing format was based on annual contracts for each
category of goods promoted under which the Manufacturer, for a flat fee, had
exclusivity with respect to that category of product for the year that the
contract ran. The Manufacturer would be able to promote for several cycles
within the contract period, with more cycles of promotion allowed for higher
flat fees paid. Because fewer Manufacturers promoted fewer products during 1999,
the Company introduced a pricing plan which allowed for shorter-term commitments
and a fee schedule combining a per-store promotion management fee with a
per-redemption fee. The Company anticipates that this format, along with a
significant increase in the installation of retail stores currently under
contract, should result in more contracts with Manufacturers being entered into
in 2000, but there is no assurance that this will occur.

INDUSTRY OVERVIEW

         Manufacturers have traditionally used marketing vehicles such as mass
media advertising (newspapers, printed circulars, television, radio, and
billboards), Free Standing Inserts ("FSI") coupons and direct marketing
techniques to reach consumers. Promo Magazine estimated that in 1998 the
promotion marketing industry's gross revenues were $85.4 billion, an increase of
7.6% from their survey of 1997 expenditures. A growing diversity of lifestyles
and an expansion in the amount of information delivered to increasingly
fragmented consumer segments have contributed to brand proliferation and a
perceived decline in brand loyalty. At the same time, changes in the workforce
and demographic shifts have made it increasingly difficult and expensive to
reach purchasing decision-makers using traditional mass distributed promotional
methods not targeted to specific consumer segments.

         Manufacturers have recognized the limitations of traditional
promotional vehicles. Despite the ineffectiveness of coupons and other mass
distributed promotional vehicles to reach consumers efficiently, they continue
to be prevalent promotional tools. According to Winston-Salem, NC-based coupon
clearinghouse CMS, Inc., 278 billion coupons were distributed in the United
States in 1998. Consumers continued to recognize the value of coupons by
redeeming them for an estimated $3.1 to $3.6 billion of savings in 1998, an
increase from 1997. The overall redemption rates of distributed coupons dropped
to around 1.7% in 1998, as reported by CMS, Inc., versus 1.9% in 1997. 1998
spending by Manufacturers on FSIs at $6.45 billion was still less than 1995 high
of $7 billion, though slightly more than the $6.24 billion spent in 1997, in
part because Manufacturers are said to be increasing coupon values to attract
consumers to use the FSIs. For grocery products, 3.54 billion coupons were
redeemed in 1998, a decline of 4.6% over the previous year.

         In spite of the decreasing effectiveness of the more traditional
promotional methods such as coupons and mass media, and the corresponding
decline in Manufacturers' spending on promotional incentives such as FSIs,
Manufacturers are maintaining a similar level of overall investment in brand
promotions by shifting their promotional dollars to more targeted vehicles. Not
only have Manufacturers recognized the value of targeted promotions, they have
also recognized the effectiveness of promotions delivered in close proximity to
the purchase decision. It is estimated that 70% of all brand purchase decisions
are made by consumers while they are in the store, according to Progressive
Grocer Magazine and the Point-of-Purchase Advertising Institute (POPAI).
In-store promotion has enjoyed rapid growth as Manufacturers have begun to shift
promotion spending to emerging in-store and e-commerce-oriented platforms. As
reported in the Annual Survey of Promotional Practices, 72% of Manufacturers
utilized in-store electronic promotion techniques in 1996 as compared with only
48% in 1994, spending $850 million on these promotions in 1996, an increase of
33% over 1994, according to Promo Magazine. In Promo Magazine's 1998 Annual
Report of the Promotion Industry, it reported that the distribution of in-store
electronic checkout, electronic shelf and handout coupons had an 8.3% share of
coupon distribution, up from 6.7% in 1996. The segment is projected to grow
eight percent annually and hit $1.1 billion by 2002, according to Veronis,
Suhler & Associates' Communications Industry Forecast

         Retailers have also begun to institute changes in their approach to
reaching their customers. Retailers have invested in technology to improve
efficiency and inventory management. Advances in point of sale technology, in
addition to providing efficiency at check-out and a means of price and inventory
control, also provide a platform for Retailers to identify and target their
customer base. This new technology has enabled Retailers to develop programs
that permit them to capture information about and communicate with targeted
segments of their customer base. However, they have had to rely on traditional
mass media to deliver their targeted ads and






<PAGE>


promotions.

         Today Retailers have begun to concentrate on retaining and growing the
30% of their customer base that accounts for an estimated 70% of total store
sales and 70% of their profits, according to a study released in 1999 by The
Partnering Group. Retailers are using loyalty-building frequent shopper card
programs ("frequent shopper card") in order to establish a direct means of
rewarding these most important customers and to make their product mix more
attractive to their highest-spending shoppers. The card programs are also
designed to counteract competition from other supermarkets, mass merchandisers,
warehouse clubs and specialty Retailers. These frequent shopper cards enable
participating customers to take advantage of product discounts offered by that
store or by regional chains without presenting a paper coupon. In an ACNielsen
survey cited in In-Store (February 1999) it was reported that 75% of households
contacted had a least one frequent shopper card. According to Supermarket News
77% of these households always used the card when shopping, and 82% of these
card holders say they use their cards every time they shop. In 1997 $172 million
was spent to develop frequent shopper card programs, with Retailers paying for
most of the programs. Approximately 10,000 grocery stores will be participating
in frequent shopper card programs by the spring of 2000, according to a study by
Retail Systems Consulting .

RATIONALE FOR THE IEMN NETWORK

         The IEMN is positioned to provide a competitive advantage to
Manufacturers and Retailers. It does this by (i) offering sophisticated
targeting of consumers in close proximity to the point of purchase decision at
the beginning of the shopping process, (ii) offering promotions to consumers
that are based on their past purchase history, (iii) providing comprehensive
data reporting feedback on promotion results and changes in a Manufacturer's
(and its competitors') category market share, and (iv) delivering the promotions
in a paperless electronic system that improves the efficiency of redemptions.
Promotions are offered to consumers on the Internet through the Company's
ShopperPerks web site as well as in-store through the ShopperPerks portals,
allowing access to promotions to the estimated 50-60% of shoppers who do not
have access to the Internet.

BENEFITS FOR RETAILERS

         The Company believes that the IEMN provides competitive advantages for
Retailers.

         Provides Inexpensive, In-Store and Internet-based Platform To Reward
The Most Valued Shoppers. As in many industries, a small number of loyal
customers account for a major portion of revenue and profits per store. Many
major supermarket chains have developed frequent shopper card marketing programs
to help them identify and reward these valuable customers. The Company believes
that the IEMN, working in conjunction with a store's frequent shopper card,
offers Retailers a unique and cost-efficient way to deliver in-store targeted
messages, promotional incentives and rewards to this important shopper segment.
In a study conducted by the Company utilizing data procured from three IEMN
stores, the average transaction size for a frequent shopper card holder who
visited a ShopperPerks portal was approximately twice as large as the average
transaction size of a frequent shopper card holder and approximately three times
as large as the average for all customers.

         Promotes Consumer/Retailer Communication. In addition to rewarding its
best customers, a store can use the IEMN more generally to capture information
from, and to communicate with, cardholders through questionnaires, interactive
games, electronic sweepstakes, tie-in promotions with local media, charities,
special events and other merchandising theme promotions. Access to the IEMN also
enhances the efforts by Retailers to promote acceptance and usage of their
frequent shopper cards. In addition, Retailers can use the IEMN platform as an
inexpensive alternative to direct mail as a means of communicating with their
best shoppers, either at home or immediately before shopping through the
ShopperPerks portals. The IEMN platform can also be used as a method of
communicating with employees.

         Stimulates Incremental Product Sales. The Company believes that the
IEMN stimulates incremental product sales for Retailers as a result of several
factors. The IEMN's location at the store entrance enables it to remind a
shopper of an item they may have forgotten or stimulate them to purchase items
in addition to those they intended to purchase. The IEMN also provides the
Retailer a channel to promote perishable foods and private label products.
Finally, the IEMN program is able to track the time lapse since the last
purchase of a particular product and remind a consumer to buy the needed item in
the store that day rather than in another class of trade, such as convenience
stores.

         Distributes, Redeems and Clears Promotions Electronically. Traditional
promotion of food and related products relies upon paper-based systems such as
FSIs and other paper coupon vehicles. Paper-based promotions require Retailers
to handle paper at checkout and bundle paper records that must be sent to third
party clearing businesses. With the IEMN, there is no paper for cashiers to
handle and no need for expensive third party clearing. See " -- Products and
Services - Inter*Act e-Marketing Network'sm' ("IEMN")."

         Generates Incremental Fee Revenue. Retailers receive revenue based upon
promotion redemptions, currently $0.04 or 0.08 per






<PAGE>


transaction. The Company believes that this fee produces high-margin revenue for
Retailers relative to the amount of floor space that the IEMN occupies.

         Cardless Program. The Company has also developed the technology to
deliver offers within stores without a frequent shopper program. This
functionality allows for the installation in virtually all retail channels and
adds consumer value as well as provide incremental income to the Retailer.

BENEFITS FOR MANUFACTURERS

         The Company believes that the IEMN provides Manufacturers with a more
efficient means to promote consumer goods than traditional methods of promotion
and advertising.

         Targets Incentives Based on Prior Purchase History. The Company
believes that Manufacturers would like to tailor promotional incentives by
individual households according to their degree of loyalty to the promoted
brand. In order for Manufacturers to offer targeted promotions they must have
access to household purchase history data and a targeting algorithm that can
match the desired promotions with the desired households. The IEMN provides
access to this household data through its connection to the retailer
point-of-sale system, which permits the Company's Target Engine Software ("TES")
to deliver different promotional strategies for the same product depending on
the buying habits of each customer. See " -- Technology and Software -- IEMN
Software".

         Delivers Promotions in Close Proximity to Brand Purchase Decisions. It
is estimated that 70% of all brand purchase decisions are made by consumers
while they are in the store according to Progressive Grocer Magazine and POPAI.
The Company believes that the IEMN's store entrance location, which provides a
shopping list of promotions immediately prior to shopping affords Manufacturers
the most opportune time to reach shoppers with a targeted incentive.

         The Company believes that the offering of personally customized
discounts to consumers in the store immediately prior to making purchase
decisions explains the historical average redemption rate for IEMN-offered
discounts of approximately 35% (which the Company believes is two to five times
higher than that of other in-store vehicles and approximately 18 times higher
than that of FSIs).

         Develops Manufacturer/Retailer Partnership. The Company believes that
its IEMN provides a new and unique platform for Manufacturers to maximize the
impact of account-specific (i.e., retail chain-specific) promotion dollars. For
example, a Manufacturer-sponsored sweepstakes promotion may be conducted
electronically via the IEMN and advertised jointly by the Manufacturer and
Retailer in a specific market area. In this way, the IEMN can serve as a bridge
between the Manufacturer and the Retailer's frequent shopper card program.

         Delivers Accountable Consumer Promotion Alternative. The Company
believes that the IEMN offers Manufacturers the lowest cost alternative among
coupon promotional strategies. This is because the IEMN's electronic scanning of
the frequent shopping card at checkout verifies that items for which promotions
were selected were actually purchased, virtually eliminating the problem of
mistaken and fraudulent redemption of paper coupons. Industry sources estimate
that this costs Manufacturers hundreds of millions of dollars per year through
other coupon promotion vehicles.

         Stimulates Incremental Product Sales. As a result of its front-end
location and targeted touch-screen promotional display, the Company believes
that the IEMN increases the sales volume of promoted products. Sales increases
are generally attributable to a promotion motivating consumers to trade up in
volume (e.g., buy two and get the third free), to try a new brand due to the
value of the offered incentive or to remind consumers to buy a specified brand
due to the on-screen prompt. Substantial sales increases at the product and
category level were attributed to the Company's IEMN in Information Resources
Inc. matched store studies ("IRI Studies") performed for several Manufacturers.
These studies showed that Manufacturers who promoted products on the IEMN
enjoyed significant product sales increases versus the same Manufacturer
products not promoted on the IEMN in comparable stores.

         Provides Promotion Flexibility. The IEMN allows Manufacturers to adjust
any attribute of a promotion virtually on a daily basis. Modifications to
Manufacturer promotions can be introduced to the IEMN remotely from the
Company's headquarters.

         Paperless and (virtually) Fraudless. IEMN is based on electronic
distribution of offers which ensures valid purchase and redemption of those
offers by consumers. Manufacturers historically have had issues with
misredemption of coupons, thus wasting part of the investment made in their
marketing efforts. In addition, Manufacturers utilizing the IEMN can control
redemption costs by capping their expenditure to a maximum number or dollar
level they wish to spend.

         Available To All Retail Channels. With the addition of the non-frequent
shopper program option of delivery of offers on IEMN,






<PAGE>


offers can now be provided in a variety of retail channels, assuming those
chains sign-on to IEMN. Additionally, the IEMN offers a wide range of
promotional alternatives that can be tailored to the unique needs of individual
brands. Beyond simply delivering incentives, the IEMN can reward consumers for
such things as multiple purchases, purchases over time, purchases of related
products or even an incentive on a second item with the purchase of a targeted
item. This flexibility is viewed as a powerful tool by the Manufacturers and
allows them to spend their promotional dollars in the most efficient manner
possible.

         Provides Detailed Promotion Analysis. Because the IEMN delivers
targeted incentives using consumers frequent shopper card numbers as an
identifier, the system also captures all consumer purchases using the system and
allows for detailed reporting back to the participating brands. At the end of a
promotion a Manufacturer can understand such things as total consumer purchases
by segment (for example, a loyal consumer versus a competitive buyer), the
number of consumers who bought the promoted item for the first time and even the
retention rate (how many new consumers for a brand came back on a subsequent
shopping trip and repurchased the item). The level of promotion analysis
provided by the IEMN is such that Manufacturers can use the data to further
refine marketing strategies and alter promotional tactics on future promotions,
further increasing both efficiency and effectiveness.

BENEFITS FOR CONSUMERS

         The Company believes that consumers who are introduced to the IEMN
continue their usage as they discover the following benefits:

                  Provides Increased Purchasing Power and Convenience. Consumers
         want to maximize the value of their shopping dollars through discounts
         and promotions, but at the same time wish to limit the amount of time
         they invest preparing for shopping. The IEMN eliminates the
         time-consuming exercise of locating, clipping and organizing individual
         coupons, and the consumer does not have to remember to bring any paper
         coupons to the store or track expiration dates. The IEMN is
         conveniently located inside the store entrance where it can easily be
         accessed at the beginning of shopping. In 60 to 90 seconds, the
         ShopperPerks portal will display several screens of customer-specific
         product promotions and will dispense a shopping list for the product
         discounts selected by the customer, which if redeemed could result in
         substantial savings to the consumer. The ShopperPerks.com web site
         allows shoppers to access incentives from home or in the office just
         before shopping, by using their mouse to select certain offers. These
         offers are sent to the store, either directly to the Point-of-Sale
         ("POS") cash register or to the Company's ShopperPerks portals in the
         case of Retailers with technology that requires printed coupons to be
         redeemed at the POS. ShoppersPerks web site users have the option of
         printing a reminder list as well.

                  Provides Personalized Discounts and Incentives. The IEMN is
         designed to deliver customer-selected incentives that are customized to
         an individual consumer's purchasing preferences. The Company believes
         that consumers prefer to select and redeem promotions on the IEMN that
         are targeted to their past purchasing history as evidenced by
         redemption rates of targeted promotions that are approximately twice
         the redemption rates of promotions that are randomly presented.

         In 1997, the Company contracted Yankelovich Partners to conduct a
telephone "Habits and Usage" study among 302 frequent shopper card holders
selected at random. The results of the study indicate that the IEMN system is an
attractive source of value to the customer with few barriers to trial and high
satisfaction rates promoting repeat usage. The study was conducted in the
Philadelphia market, where participating IEMN chains include the market leader
ACME (a division of Albertson's), SuperFresh (a division of A&P) and Laneco. The
conversion from trial to repeat usage (trial to acceptor) was 86%.

         Accordingly, the Company believes that consumer marketing support that
raises awareness of the IEMN will increase terminal and ShopperPerks web site
usage among existing and new frequent shopper card holders.

BUSINESS STRATEGY

         The Company's primary objective is to become the preeminent electronic
marketing services providerfor the consumer packaged goods industry in the U.S.
and Europe by integrating the economic interests of Manufacturers, Retailers and
consumers at a lower cost than any other in-store marketing vehicle. The Company
is pursuing the following principal business strategies to achieve this
objective:

INCREASE NATIONWIDE AND EUROPEAN INSTALLATION OF THE IEMN

         The Company is actively pursuing multi-year contracts with additional
major Retailers who have or plan to launch loyalty and/or e-commerce programs in
key geographic regions across the United States and throughout Europe. In
addition, the Company has developed an in-store terminal and ShopperPerks web
site platform that does not require a frequent shopper card in order to make its






<PAGE>


services available to a wider range of Retailers. The Company believes that
Manufacturers seek access to a promotion platform that incorporates such a
network of top Retailers, with or without loyalty marketing programs. The
Company believe that there has been some resistance among Manufacturers to using
the Company's services because they would like to use the IEMN when it hase more
stores and more chains installed. The Company believes that as the IEMN is
installed in more stores and chains the Manufacturers will be more receptive to
participating in the IEMN, but there is no assurance that this will be the case.

INCREASE MANUFACTURER ENROLLMENT ON THE IEMN

         During the year ended December 31, 1999, approximately 67 Manufacturers
promoted approximately 115 products through the IEMN in the United States and
Europe, the latter through a rollout at Sainsbury's and a pilot and rollout at
Boots the Chemist in the United Kingdom in 1999. The Company is continually
working to increase both the number of brands per Manufacturer and dollars
committed per brand as rollouts continue across the United States and Europe.

         The Company has altered its pricing format significantly for 2000. From
late 1998 through all of 1999, the Company's pricing format was based on annual
contracts for each category of goods promoted under which the Manufacturer, for
a flat fee, had exclusivity with respect to that category of product for the
year that the contract ran. The Manufacturer would be able to promote for
several cycles within the contract period, with more cycles of promotion allowed
for higher flat fees paid. Because fewer Manufacturers promoted fewer products
during 1999, the Company introduced a pricing plan which allowed for
shorter-term commitments and a fee schedule combining a per-store promotion
management fee with a per-redemption fee. The Company anticipates that this
format, along with a significant increase in the installation of retail stores
currently under contract, should result in more contracts with Manufacturers
being entered into in 2000, but there is no assurance that this will occur.

PROMOTE "TRUE" ELECTRONIC COMMERCE BENEFITS FOR RETAILERS, MANUFACTURERS AND
CONSUMERS

         In March 1999, the Company launched its Internet product, called the
Shopper Perks'sm' web site, in certain divisions of A&P in the New York and
Philadelphia metropolitan areas. With other chains connected or under contract
to connect to it in the near future, the product offers shoppers and the
consumer product promotion industry the first truly electronic home-to-store
transaction experience on a commercial scale. That is, the IEMN's
already-existing POS connection in participating Retailers allows in-store
electronic redemptions at the cash register from previously home-selected
promotions. Other Internet-based promotion systems require paper in one form or
another, primarily mailing coupons to the consumer or distributing paper in the
store to consumers for redemption on a subsequent store visit, or require paying
in advance by credit card and checking out discounted groceries separately from
other groceries. Importantly, the Company's in-store terminals and Shopper
Perks'sm' web site will complement each other by allowing consumers to print a
reminder list of selections either at home or at the in-store terminals, which
will "remember" what was selected at home. Also, the Company expects that its
in-store terminals will largely mirror the Internet offers and thereby provide
similar savings to the millions of grocery shoppers who do not have Internet
access. This system provides a marketing advantage for participating Retailers,
as consumers without Internet access have protested the availability of
discounts only for those with computers. The Company's IEMN platform addresses
that problem for Retailers by providing discounts for all shoppers in-store,
through the ShopperPerks portals, as well as on the Internet through
ShopperPerks. In addition, by not printing out coupons at home, the ShopperPerks
web site avoids the possibility of tampering with coupons, which can occur when
a "hacker" tampers with the universal product code and value of the coupon,
generally with the intent of increasing the discount amount.

NCR STRATEGIC ALLIANCES IN CONNECTION WITH HARDWARE

         The Company has developed and intends to develop relationships with
other companies with a common interest in certain products or services. In the
case of hardware, the Company has entered into an exclusive supply agreement
with NCR Corporation ("NCR"), which has developed terminals for use in retail
environments for displaying information, ordering specialty food and wine,
registering gift lists, connecting to the Internet, dispensing coupons, and
other uses depending on the software installed. With the Company's success in
contracting with Retailers for its in-store marketing services and its portfolio
of owned and licensed patents and with NCR's hardware, large field service
staff and retail sales force, NCR and the Company have entered into a terminal
supply agreement and may enter into additional agreements to supply goods and
services. The Company anticipates cost savings with respect to terminals
supplied by NCR, and that NCR's relations with grocery and other retailers will
allow the Company to deal with a wider range of the retail industry than that
with which the Company is currently operating. However, there is no assurance
that this will occur.

ENLIST IEMN RETAILERS TO ASSIST IN THE MANUFACTURER SALES EFFORT

         Substantially all of the Retailers who have installed the IEMN are
aiding the Company in its efforts to expand Manufacturer participation on the
IEMN. Retailer efforts include (i) the inclusion of IEMN promotional materials
in Retailer sales meetings with Manufacturers; (ii) the distribution of letters
to Manufacturers indicating Retailer support of the IEMN; and (iii) the
placement of






<PAGE>


ShopperPerks portals and sale literature in the lobbies or waiting rooms of
Retailer headquarters.

CONTINUE EXPANSION OF IEMN FUNCTIONALITY THROUGH INNOVATIVE PROPRIETARY SOFTWARE
DEVELOPMENT

         The Company's video touch-screen platform offers virtually unlimited
opportunity for the creation of innovative in-store promotions that appeal to
consumers and make the IEMN more personalized to each of them. The Company
intends to maximize this opportunity through aggressive proprietary software
development that anticipates and addresses the loyalty marketing goals of
Manufacturers and Retailers while simultaneously enhancing consumers' enjoyment
of an IEMN visit.

LEVERAGE THE COMPANY'S GROWING DATABASE ON CONSUMER SHOPPING PATTERNS

         Certain Manufacturers receive reports generated by the Company from its
extensive consumer behavior database. Each day the Company collects data on all
card-identified shoppers, whether or not they stopped at the Company's
terminals. For certain stores, this data is aggregated centrally at the
Company's headquarters. This information enables the Company to assist
Manufacturers in creating the optimal promotional strategy given the historical
impact of the IEMN and other promotions initiated by Manufacturers.

ACQUISITION OF INTELLECTUAL PROPERTY RIGHTS

         The Company has successfully acquired exclusive and non-exclusive
licenses to a number of patents covering various aspects of in-store promotion
in general and its business in particular. The Company believes that several of
its licensed patents are seminal in the electronic incentive distribution
industry and afford the Company the ability to aggressively protect its growing
business franchise. The Company has brought suit against Catalina Marketing
Corporation for infringement of several of its patents, and a subsidiary,
Catalina Marketing International, Inc., filed counterclaims against the Company.
There is no assurance as to the outcome of this litigation, and the cost of
litigating it is likely to be high. See Item 3, "Legal Proceedings".

EUROPEAN EXPANSION

         The Company believes that the European consumer promotion and retail
markets represent a substantial opportunity for the Company's products and
services. The Company, through a subsidiary, has entered into an exclusive
contract to commercially deploy the IEMN with Sainsbury's, one of the largest
Retailers in the United Kingdom. Rollout began in 1999, after a successful pilot
program, and will continue into 2000. The Company also entered into an exclusive
contract with Boots, the largest pharmacy retailer in the United Kingdom, which
piloted the ShopperPerks portals in early 1999 and began a rollout in the summer
of 1999, which will continue into 2000. The Company also has an exclusive
multi-year agreement with Delhaize, one of the largest grocers in Belgium, which
is to begin a pilot in the spring of 2000.

PRODUCTS AND SERVICES

INTER*ACT E-MARKETING NETWORK'sm' ("IEMN")

         A customer can access the IEMN by inserting his or her frequent shopper
card, as issued under the store's existing frequent shopper card program, into
the Company's ATM-like terminal(s) located near the entrance to the store. The
system identifies the customer and, based upon data gathered by the IEMN on that
customer's cumulative purchasing history, displays full color images of
promotions and discounts specifically selected for that customer. The IEMN may
also present several "universal" promotions (offered by either the Retailer or
Manufacturers) to all IEMN visitors. In the case of the Company's cardless
platform, all the promotions offered are universal and would be offered to all
shoppers or every "nth" shopper. On either the card or cardless in-store
platform, the customer selects desired promotions, usually price discounts,
multiple purchase bonuses or free product samples, by simply touching the
desired product icon displayed on the screen. When the selection process is
complete (in less than 60 seconds for most shoppers), the ShopperPerks portal
can deliver a "shopping list" of all selected promotions, which serves to remind
the customer of the selected promotions while shopping. After shopping, the
customer's purchases and frequent shopper card are electronically scanned at
checkout, and the IEMN (i) verifies that the promoted items were purchased, (ii)
immediately notifies the store register system to give the customer the selected
discounts and promotions and (iii) records all the customer's purchases for use
in more accurately targeting promotions during future visits. Due to
technological constraints unique to certain Retailers in approximately 500
stores, the IEMN delivers individual coupons rather than a shopping list. The
Company can tailor its technology to a wide range of Retailer requirements, and
has expanded its line of product offerings to include a IEMN platform that
doesn't require the Retailer to have a frequent shopper card program.

         The Company's contracts with Manufacturers provide them with the
opportunity to offer promotions on an exclusive basis for a particular product
category within four-week cycles during a year. These product categories are
generally based on standard industry classifications of household and consumer
products available in supermarkets. The purchaser of a particular category is
given the







<PAGE>


exclusive right to promote products in that category during each cycle
purchased. Categories are generally purchased nationally, although programs can
be developed with regional differences in mind.

         The Company's primary source of revenue is the sale of product category
cycles to Manufacturers. The Company's revenue is generated from a fee charged
for each redeemed electronic incentive and a program management fee.

MANUFACTURER PRODUCTS

         Consumer Product Incentives. The Company's business primarily derives
revenue from the presentation, distribution and/or redemption of consumer
incentives offered by Manufacturers. Manufacturers can buy access to the
Inter*Act e-Marketing Network in the U.S. by paying a per-store promotion
management fee and then paying a redemption fee for promoted items that are
actually purchased by the consumer. In the U.K. Manufacturers pay for access to
the IEMN on an periodic basis, ranging from one to three or six cycles, with the
fee varying depending on whether the Manufacturer contracts for a full screen
promotion or for a single icon out of several on a screen. The per-store
promotion management fee for U.S. contracts is a flat fee per store. The
redemption fee is determined by the number of promotional cycles purchased with
the fee decreasing as more cycles are committed to. Manufacturers can also earn
category exclusivity on the IEMN for specified periods of time depending on the
number of cycles contracted for. If a specified number of cycles is purchased, a
manufacturer is also given renewal rights for subsequent promotional periods.
These two fees, combined with the incentive face value and retailer handling
fees (both paid by the Manufacturers) create the complete promotion budget for
the Manufacturer, and entitles the Manufacturer to: (1) category exclusivity
during the contract period, even during "off" cycles of no promotion on the
IEMN; (2) ongoing point-of-sale data analysis of not only the promoted brand
results, but also of the category and the market share dynamics of the
individual competitors (names masked); and (3) renewal rights on the following
year.

         This contrasts with previous Company formats in the U.S. market of
either a fully pay-on-redemption approach or an annual flat fee format. The
pay-on-redemption approach entitled Manufacturers to category exclusivity only
in the cycles during which they promoted, and which allowed Manufacturers to buy
as little as one cycle of promotion or as much as all 13 cycles . Under this
format, revenue was derived exclusively from promotion redemptions. With the
annual flat fee format, a Manufacturer had exclusivity in its category for the
entire contract year but had to commit to a long term contract regardless of the
level of redemption that occurred. The current hybrid approach, a per-store
management fee plus a redemption fee, allows for more flexibility for
Manufacturers and less percieved risk, yet locks in a certain revenue stream for
the Company by virtue of the program management fee. In addition, the data
reporting has become more comprehensive over time.

         Internet Promotion & In-Store Redemption. In March 1999, the Company
launched its Internet product, called "Shopper Perks'sm'", in certain divisions
of A&P. With other chains connected or under contract to connect to it in the
near future, the product offers shoppers and the consumer product promotion
industry the first electronic home-to-store transaction experience on a
commercial scale. That is, the IEMN's already-existing POS connection in
participating Retailers will allow in-store electronic redemptions at the cash
register from promotions previously selected at home or in the office. Other
Internet-based promotion systems require paper in one form or another, and
primarily mail coupons to the consumer or distribute paper in the store for
redemption on a subsequent store visit, or require payment in advance by
credit card and the shopper to pay separately for discounted groceries.

         Media and Advertising Related Products. The Company plans to introduce
an electronic billboard advertising product in 2000 to allow companies outside
the consumer products industry to promote on the IEMN. The advertising product
will offer such companies the ability to place an advertisement that is
unobtrusive to the core IEMN session (at side or bottom of screens) or as a
whole page promotion, often in conjunction with the Retailer, such as a discount
on amusement park admission to shoppers using the ShopperPerks portals. The
Company currently expects to structure its fees for this product on a cost per
thousand impressions basis.

RETAILER PRODUCTS

         Although the Company derives its revenue from sales of customer
incentives to consumer products manufacturers, it is an essential part of the
Company's strategy to make the IEMN one of the preferred loyalty marketing
vehicles of Retailers in the U.S. and Europe. To this end, the Company has
developed a variety of products designed to increase the effectiveness of
Retailers' communication with their top customers and to create a feeling of
value and excitement related to the ShopperPerks portal that will drive greater
traffic to the terminal and the Retailer's frequent shopper card program.
Although the Company feels that these products and services are clearly
value-added to its Retailer partners, it does not currently charge its Retailers
for any of these services.

         Customer Specific Messages. The Company offers Retailers the ability to
deliver targeted messages to specific groups of customers according to their
relative profitability to the store and/or purchasing tendencies or other
parameters. The product, called "Stamp Saver," is being positioned as an
alternative to or re-enforcement of Retailers' cardholder-specific direct mail
programs.






<PAGE>


         Private Label and Perimeter Department Promotions. The IEMN offers
Retailers the ability to permanently feature in-store promotions that grow their
most profitable segments, typically private label merchandise and perimeter
departments (e.g., bakery and deli).

         Games. The IEMN offers Retailers an electronic platform for sweepstakes
and games, such as the "spin and win" game, which is similar to a slot machine
with a touch-screen handle but that requires no wager to play. The prizes in
such sweepstakes and games are funded through the Retailers, which provide
private label products and third party consumer goods from local merchants,
radio stations which seek to cross promote on the IEMN, and others.

         Customer Give-Aways. The Company also offers promotions or prizes to
customers on an "Nth" terminal visitor basis (e.g., every tenth terminal
visitor). This functionality, called "Pre-wards," allows the Retailer to
generate excitement at the terminal through the element of potential surprise.
Additionally, this product creates another method for Retailers to offer prizes
that could drive customers to their perimeter departments or other areas where
they may want to increase traffic among their best customers.

         Employee Rewards. Through the IEMN Retailers conduct employee-only
communications allowing a convenient and accessible focal point for
disseminating news, information and rewards among other things.

RETAILER PARTNERS

         As of March 1, 2000, the Company had over 5,100 stores in the United
States under contract and had installed terminals in approximately 1,800 stores.
The Company has installed its in-store IEMN in A&P (consisting of A&P, Farmer
Jack, Food Emporium, Kohl's, Super Fresh and Waldbaum's stores), Albertson's
(ACME, Jewel, and Albertson's West Coast division) , Food Lion (Charlotte and
Virginia divisions), Gerland's, Grand Union, Laneco, Cub Foods, and Weis Markets
in the U.S., and Boots the Chemist and Sainsbury's in the U.K. The Company has
contracts for future installation in the remaining divisions of Food Lion, and
in the Marsh, Giant Eagle, Spartan, SuperValu, SuperValu New England, Giant of
Landover and Eagle Food supermarket chains in the U.S. In Europe, the Company
had almost 800 stores under contract and had installed terminals in
approximately 590 stores. The Company has installed its in-store IEMN in
Sainsbury's and at Boots the Chemist in the United Kingdom. The Company has
contracts for future installation in additional stores for these chains and also
in Delhaize of Belgium.

TECHNOLOGY AND SOFTWARE

IEMN SOFTWARE

         The Company maintains a staff of software developers and engineers.
This team continually refines and enhances IEMN functionality for both
Manufacturers and Retailers. It also has primary responsibility for developing
the unique interfaces required to connect the IEMN to each Retailer's
point-of-sale system. The Company's core targeting products are driven by its
proprietary Target Engine Software ("TES") which collects and analyzes each
shopper's cumulative market basket of purchases stored over a rolling time
period of between three and 15 months depending on the size of the store. On a
daily basis, TES tailors discounts and promotions for each customer based upon
previous purchase history. It also selects targeted customer groups to receive
special promotions as designated by retailers. Presently the Company is
developing software and hardware enhancements to enable the Company to collect
and analyze consumer data over longer periods in all stores, and to make
available to Retailers without a frequent shopper card program an in-store and
Internet cardless kiosk marketing program

         For each product category available on the IEMN, the TES classifies
each consumer as follows:

<TABLE>
<CAPTION>
         CLASSIFICATION             CONSUMER DESCRIPTION
         --------------             --------------------
         <S>                        <C>
         Brand loyal..............  Tends to purchase consistently the Manufacturer's brand within the
                                       product category
         Brand switcher...........  Tends to demonstrate little brand loyalty, buying several different
                                       brands over time within a category
         Brand competitive........  Tends to purchase consistently a competitor's brand
         Entry level..............  A consumer who has no record of purchasing products within the
                                       product category
         Related..................  A consumer who has bought a product related to the promoted product.
</TABLE>

         Customers are offered promotions with specific incentives on specific
products depending on their individual purchasing profiles. For example, a
customer classified as "brand competitive" can be offered a higher discount than
would a consumer classified as a `brand switcher', who in turn would receive a
higher discount than would a consumer classified as `brand loyal". In this way,
the TES offers Manufacturers the ability to execute different promotional
strategies for the same product simultaneously. Manufacturers






<PAGE>


have the flexibility to change the relative face values of redemptions for
each targeted category.

         IEMN software also enables event promotions (full screen(s) dedicated
to the promotion of a specific marketing campaign), sweepstakes and games,
full-motion videos and printed vouchers that shoppers can mail in for rebates or
other special promotions. The Company's current system release gives Retailers
the ability to target offers directly to a predetermined set of customers, such
as preferred shoppers.

IEMN HARDWARE


                          INTER*ACT e-MARKETING NETWORK
                     [IN-STORE CONFIGURATION & INTERACTION]


         A customer can access the IEMN by inserting his or her frequent shopper
card, as issued under the store's existing frequent shopper card program, into
the Company's ATM-like ShopperPerks portals located near the entrance to the
store. The system identifies the customer and, based upon data gathered by the
IEMN on that customer's cumulative purchasing history, displays full color
images of promotions and discounts specifically selected for that customer.
The IEMN may also present "universal" promotions (offered by either the
Retailer or Manufacturers) to all IEMN visitors. The customer selects desired
promotions, usually price discounts, multiple purchase bonuses or free product
samples, by simply touching the desired product icon displayed on the screen.
When the selection process is complete (in less than 60 seconds for most
shoppers), the ShopperPerks portal can deliver a "shopping list" of all selected
promotions, which serves to remind the customer of the selected promotions while
shopping. which serves to remind the customer of the selected promotions while
shopping. After shopping, the customer's purchases and frequent shopper card are
electronically scanned at checkout, and the IEMN (i) verifies that the promoted
items were purchased, (ii) immediately notifies the store register system to
give the customer the selected discounts and promotions and (iii) records all
the customer's purchases for use in more accurately targeting promotions during
future visits. Due to technological constraints unique to certain Retailers' POS
systems in approximately 500 stores, the IEMN delivers individual coupons rather
than a shopping list. The Company can tailor its technology to a wide range of
Retailer requirements, and has expanded its line of product offerings to include
a IEMN platform that doesn't require the Retailer to have a frequent shopper
card program..

         Internet users can access incentives offered through the Company's
ShopperPerks web site by calling up ShopperPerks.com and selecting the Retailer
location where she wishes to shop, or by clicking on the ShopperPerks "hot link"
on the web site of participating Retailers. With respect to the core
ShopperPerks product, the shopper types in her frequent shopper number and then
is






<PAGE>


offered a number of targeted and universal promotions categorized by product
category, which can be selected using the computer mouse. In addition, the
Company presents other information from the Retailer such as other promotions in
the stores, recipes and other information. The customer can set his own pace in
reading through and selecting incentives or reading other material on the web
site, at his option. When finished selecting the incentives the shopper would
like to use, the shopper closes the session and can choose to have a reminder
list printed to bring to the store. After shopping, the customer gives her
frequent shopper card to the cashier, and the discounts will automatically be
deducted from the total for any products selected on ShopperPerks and purchased
by the customer. The Company also has a ShopperPerks product for Retailers with
no loyalty card program, in which the shopper is assigned a number which allows
him to obtain incentives either by having coupons printed at the ShopperPerks
portal in the selected store, or by having the incentive values sent directly to
the POS, depending on the technology used by the particular Retailer.

         By not printing out coupons at home, the ShopperPerks web site avoids
the possibility of tampering with coupons, which can occur when a "hacker"
changes the universal product code coupon value, generally with the intent of
increasing the discount amount.

SALES AND MARKETING

         The primary focus of the Company's sales effort is to attract national
Manufacturers to contract for IEMN category cycles. The sales effort is
conducted primarily through the Company's direct sales force, all of whom are
experienced in packaged goods and marketing services sales. These people are
organized into three geographical teams based in the Northeast, the Central US
and the West Coast. Individual sales managers are located in key markets where
there is a concentration of Manufacturer customers, including Charlotte, San
Francisco, Chicago, Denver, Cincinnati, Atlanta, St. Louis, Cleveland,
Winston-Salem and Norwalk. The teams are headed by group sales directors who
report to the Senior Vice President, Brand Sales. The Company augments its
direct sales efforts through the development of strategic relationships with
prominent promotion agencies and food brokers at a local market level. Through
development of custom events and packages executed through individual retail
grocery chains, the Company can provide a unique offering to both of these
constituents, giving a competitive point of difference in the marketplace. This,
in turn, generates success stories for the sales managers that can be cultivated
into larger commitments at the manufacturer's national buying headquarters.

         The Company plans to continue to aggressively hire experienced,
well-trained industry sales professionals into key positions across the nation
and to invest in continuous training of the team.

         Retailer sales efforts are conducted through direct mail campaigns and
trade shows led by a senior executive and supported by senior management.
Ongoing Retailer service, support, and product sales are provided by the
Company's Client Services group. Client Service account executives typically
have substantial industry experience selling packaged goods to Retailers and are
responsible for maximizing each Retailer's use of IEMN retailer products.

         The Company has altered its pricing format significantly for 2000. From
late 1998 through all of 1999, the Company's pricing format was based on annual
contracts for each category of goods promoted under which the Manufacturer, for
a flat fee, had exclusivity with respect to that category of product for the
year that the contract ran. The Manufacturer would be able to promote for
several cycles within the contract period, with more cycles of promotion allowed
for higher flat fees paid. Because fewer Manufacturers promoted fewer products
during 1999, the Company introduced a pricing plan in late 1999 which allowed
for shorter-term commitments and a fee schedule combining a per-store promotion
management fee with a per-redemption fee. The Company anticipates that this
format, along with a significant increase in the number of IEMN installations
in retail stores currently under contract, should result in more contracts
with Manufacturers being entered into in 2000, but there is no assurance that
this will occur.

SUPPLY OF SHOPPERPERKS PORTALS

         The Company signed an exclusive terminal supply agreement during the
first quarter of 2000 with NCR Corporation ("NCR") to supply up to 10,000
terminals to the Company at discounted prices for a two-year period. For each
terminal sold to the Company, NCR will receive equity in the Company. The
Company and NCR anticipate that NCR will supply additional goods and/or services
to the Company in the future where such relationships would be expected to
provide cost savings to the Company.

INTELLECTUAL PROPERTY MATTERS

         The Company currently uses U.S. Patent No. 4,554,446 (the "'446
Patent") in its in-store consumer product promotion and couponing business
through license agreements with the holders of rights in this patent, which
provide the Company with exclusive right to use the patent. The term of such
agreement is for as long as the patent remains valid and enforceable, subject to
certain termination rights as set forth in such agreement. The Company has
brought suit against Catalina Marketing Corporation for infringement of the `446
Patent and certain other of the Company's patents, and a subsidiary, Catalina
Marketing International, Inc., filed counterclaims against the Company. There is
no assurance as to the outcome of this litigation, and the cost of litigating it
is likely to be high. See "Legal Proceedings".






<PAGE>


         The Company also has certain exclusive and nonexclusive rights for U.S.
Patent No. Re.34,915 for a "Paperless System for Distributing, Redeeming and
Clearing Merchandise Coupons" pursuant to a patent license agreement. The term
of such agreement is for as long as the patent remains valid and enforceable,
subject to certain termination rights as set forth in such agreement. Management
believes that by obtaining the rights to this patent the Company will experience
a significant competitive edge in the electronic coupon redemption industry in
the future.

         During 1998, the Company acquired by assignment all rights, title and
interest in and to (i) U.S. Patents Nos. 5,621,812; 5,638,457; 5,675,662;
5,237,620; 5,305,196; 5,448,471; 5,430,644; 5,659,469; 5,201,010; 5,327,508;
5,388,165; and 5,592,560; and related intellectual property rights; and (ii)
certain foreign counterpart patent applications, including PCT Application No.
PCT/US94/08221 and EPC Application #95906202.7. These patents and applications
generally disclose systems for targeted marketing in retail stores utilizing a
database including customer identification codes and purchase histories of
identified customers. Management believes that these patents will provide the
Company with a significant competitive advantage in its target market.

         The Company has obtained federal registration of the service marks
Inter*Act Loyalty Network'r' and the Company's hand logo along with other marks.
Inter*Act e-Marketing Network'sm' and ShopperPerks'sm' are service marks of the
Company and applications for federal registrations are pending. In addition, the
Company has applied to register several of its service and trade marks in
Europe. See "Patents, Proprietary Information and Trademarks."

CUSTOMERS AND COMPETITION

         The Company competes against a wide range of promotional media for
Manufacturers' advertising and promotional dollars, including television, radio,
print and direct mail. The Company also competes against providers of in-store,
point-of-sale, and Internet couponing marketing platforms, such as ActMedia,
Inc. ("ActMedia"), which provides automatic coupon dispensers in the aisles of
supermarkets and Catalina Marketing Corporation, together with its subsidiaries
and affiliates ("Catalina"), which provides an electronic marketing network that
delivers coupons to consumers at checkout lanes based on that day's purchases.
Internet couponing marketing platforms include Catalina's Supermarkets On-line,
which provides coupons for which consumers, upon purchase of a specified product
receive vouchers for redemption the next time the shopper shops at the store,
and Planet U, which predominantly supplies coupons selected by shoppers on its
web site to them by mail. WebHouse has recently introduced an Internet service
offering discounts on groceries which a customer pays for by credit card in
certain Retailers. The Company competes for promotional dollars based on several
factors, including its ability to deliver Internet and in-store discounts to
shoppers without access to the Internet, the ability to more accurately and
effectively target consumers, the ability to demonstrate Retailer support of the
system, the ability to influence buying behavior, promotion flexibility, and
price. Most of the Company's competitors are larger and have substantially
greater resources than the Company. In many of the grocery stores in which the
Company has installed its IEMN, ActMedia and Catalina also provide their
in-store promotion services. Catalina, Planet U, WebHouse and other Internet
couponing companies make their coupons or discounts available to shoppers in
many of the same grocery stores as well.

EMPLOYEES

         As of December 31, 1999, the Company had approximately 210 employees,
primarily full-time. None of the Company's employees is represented by a labor
union. The Company considers its relations with its employees to be good. The
Company's future success will depend in significant part on the continued
service of its key technical, sales and senior management personnel. Competition
for such personnel is intense and there can be no assurance that the Company can
retain its key managerial, sales and technical employees. The Company
anticipates that the nationwide commercialization of the IEMN will require the
hiring of a substantial number of new employees in connection with the planned
expansion of its business.

ITEM 2. PROPERTIES

         The Company is in the process of relocating its corporate offices to
Charlotte, North Carolina, where it will lease 30,606 square feet of office
space for a five-year lease term. Until that space opens up, the Company is
subleasing approximately 27,000 square feet of office space in Charlotte, with a
sublease that runs through July 2000. The Company will close its offices
Norwalk, Connecticut, where it leases 33,452 square feet of office space, in
April 2000. The Company also has a technology center in Greensboro, N.C., where
it leases approximately 3100 square feet through September 2000. The Company
leases 8,000 square feet of warehouse storage space in Central Islip, New York.
The lease runs through February 2002. The Company intends to lease other
warehouse storage space as necessary and believes that suitable space will be
readily available to meet its anticipated needs for the foreseeable future. The
Company believes this space is adequate to accommodate the Company's variable
storage requirements. The






<PAGE>


Company leases space in Hemel Hempstead, England for its European headquarters,
with a lease that expires in February 2009. The Company also leases regional
sales offices in Cincinnati, San Mateo and Winston-Salem.

ITEM 3. LEGAL PROCEEDINGS

         In February 1996, the Company filed suit against Catalina Marketing
Corporation ("Catalina Marketing") alleging that Catalina Marketing has
infringed United States Patent No. 4,554,446 under which the Company is
licensee. The Company is seeking money damages (including costs and expenses)
and a permanent injunction against Catalina Marketing to stop further
infringement of the patent. In May 1997, Catalina Marketing asserted a
counterclaim alleging that the Company is infringing a newly issued Catalina
Marketing Patent, U.S. Patent No. 5,612,868. The Company answered denying the
allegations and seeking declaratory judgment of non-infringement, invalidity and
unenforceability of the patent. The United States District Court in the District
of Connecticut has denied Catalina Marketing's motions for summary judgment, and
a scheduling order is pending. Although the ultimate outcome of the suit cannot
be predicted, the Company intends to pursue and defend the action vigorously.

         In January 1998, Catalina Marketing International, Inc. ("Catalina
International," a subsidiary of Catalina Marketing) filed suit against the
Company alleging that the Company has infringed United States Patent No.
4,674,041 Catalina International seeks money damages as well as injunctive
relief. . The Company intends to defend against Catalina International's claims
vigorously. This action has been consolidated with the litigation involving
Catalina Marketing for purposes of discovery and trial.

         On May 27, 1998, the Company filed a suit against Catalina Marketing
alleging that Catalina Marketing has infringed United States Patents Nos.
5,201,010; 5,338,165; 5,430,644; 5,448,471; 5,592,560; 5,621,812; 5,659,469; and
5,638,457 (collectively, the "Deaton Patents"), which the Company acquired in
1998. The Company is seeking monetary damages (including costs and expenses).
This action has been brought in the United States District Court in the District
of Connecticut. Catalina Marketing has also challenged some of the claims of six
of the Deaton Patents by provoking interference proceedings in the U.S. Patent
and Trademark Office. The Company intends to vigorously protect its rights under
the Deaton Patents both in the interference proceedings and in the new lawsuit.
See also "Patents, Proprietary Information and Trademarks," and "Intellectual
Property Matters".

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

         At a special meeting of the holders of the Company's 10% Series A
Mandatorily Convertible Preferred Stock (the "Series A Preferred Stock") held on
December 20, 1999, such shareholders approved the Statement of Rights and
Preferences of the Company's 14% Series B Senior Mandatorily Redeemable
Convertible Preferred Stock (the "Series B Preferred Stock") and the issuance of
up to 140,000 shares of Series B Preferred Stock. See Item 5. "Market for
Registrant's Common Equity and Related Stockholder Matters" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" in Part II of this Annual Report on
Form 10-K. The Statement of Rights and Preferences of the Series B Preferred
Stock is set forth in the Articles of Amendment to the Company's Articles of
Incorporation listed as Exhibit No. 3(a)(2) in Item 14 "Exhibits, Financial
Statement Schedules and Reports on Form 8-K" in Part IV of this Annual Report
on Form 10-K. The number of votes cast for and against the proposed amendment,
and the number of abstentions and broker nonvotes, were as follows:

<TABLE>
<CAPTION>
          For               Against          Abstentions                Broker Nonvotes
          ---               -------          -----------                ---------------
        <S>                 <C>               <C>                         <C>
         391,461            1,500                  0                            0
</TABLE>








<PAGE>

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


         At March 27, 2000, the Company had outstanding 7,743,739 shares of
common stock (the "Common Stock"), held by approximately 258 shareholders of
record. These shares were issued in a series of private offerings prior to
December 31, 1999. Issuances of Common Stock over the past three years include:
(i) 50,000 shares in August 1997 as partial consideration for the acquisition of
certain intellectual property recorded at $10.00 per share, (ii) 10,000 shares
issued in June 1997 in exchange for management services recorded at $10.00 per
share; and (iii) 15,184 shares issued in November 1999 in exchange for executive
recruiting services recorded at $8.50 per share. Such shares were issued in
reliance on exemptions from registration contained in Regulation D of the
Securities and Exchange Commission promulgated under the Securities Act of 1933,
as amended (the "1933 Act"), because the offers and sales of such shares were
limited to "Accredited Investors" (as defined in Regulation D) and up to 35
persons who were "qualified investors" (as defined in Regulation D).

         There is currently no established trading market for the Common Stock
or for any of the classes of the Company's preferred stock described below
(collectively the "Preferred Stock"). Inter*Act has no present intention to
list the Common Stock for trading on any securities exchange or any automated
dealer quotation system.

         The Company has not paid any cash dividends since its inception and
does not intend to pay cash dividends on its Common Stock or Preferred Stock in
the foreseeable future. The Company intends to retain future earnings to finance
its operations and fund the growth of its business. Any payment of dividends in
the future will be at the discretion of the Board of Directors of the Company
and will depend upon, among other things, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual and other
restrictions in respect of the payment of dividends, and other factors the
Company's Board of Directors deems relevant. The Company's ability to pay
dividends or make distributions to shareholders is also restricted by the
terms of the Indenture.

Series A Preferred Stock

         In 1998, the Board of Directors of Company established a series of
preferred stock of the Company--the 10% Series A Mandatorily Convertible
Preferred Stock (the "Series A Preferred Stock")--and approved the sale of up to
$40 million of Series A Preferred Stock in a private offering in reliance on
exemptions from registration of such shares contained in Regulation D of the
Securities and Exchange Commission promulgated under the Securities Act because
the offers and sales of such shares were limited to the Company's existing
shareholders and others who were "Accredited Investors" and up to 35 of the
Company's existing shareholders who were "qualified investors". During the year
ended December 31, 1998, the Company issued 177,878 shares of Series A Preferred
Stock at a purchase price of $100.00 per share resulting in approximately $17.8
million in gross proceeds, $100,000 of which was received in the form of
satisfaction of accounts payable and the balance of which was received in cash.

         In March 1999, the Board of Directors and shareholders of the Company
approved certain changes to the Series A Preferred Stock and the Board increased
the aggregate






<PAGE>



offering of Series A Preferred Stock to $70 million. Such changes consisted of
(i) a reduction in the conversion price from $10.00 to $8.50 per share of common
stock into which each share of Series A Preferred Stock is convertible, (ii) an
increase in the number of votes per share of Series A Preferred Stock from 10 to
the number of shares of common stock into which it is convertible (initially
11.7647), (iii) accrual of dividends on the Series A Preferred Stock
semi-annually, as opposed to quarterly, to be paid only in shares of Series A
Preferred Stock and (iv) the addition of anti-dilution provisions. Such changes
are applicable to all shares of Series A Preferred Stock issued prior to the
effective date of the changes and all additional shares of Series A Preferred
Stock issued in the private offering. During the year ended December 31, 1999,
the Company issued and sold 320,990 shares of Series A Preferred Stock at a
price of $100 per share for total cash proceeds of approximately $32.1 million,
all of which were received in cash. As of March 27, 2000, the Company had
issued and outstanding 498,868 shares of Series A Preferred Stock held by
approximately 103 shareholders of record.

         Dividends on the Series A Preferred Stock accrue from the date of
issuance, and holders of Series A Preferred Stock are entitled to receive
cumulative dividends at the rate of 10% per annum of the initial Liquidation
Preference per share, payable semi-annually on the last day of March and
September of each year, when, as and if declared by the Company's Board of
Directors. Dividends, to the extent declared by the Company's Board of
Directors, will be payable only in shares of Series A Preferred Stock. Accrued
dividends, payable in Series A Preferred Stock, were approximately $4.0 million
as of December 31, 1999.

         Each share of Series A Preferred Stock entitles the holder to such
number of votes on each such matter as shall equal the number of shares of
Common Stock into which such share of Series A Preferred Stock is convertible on
the record date with respect to such matter. Approval of holders of 75% of the
outstanding shares of Series A Preferred Stock will be required prior to the
Company's issuing any shares of a class of preferred stock that rank pari passu
with or senior to the Series A Preferred Stock, except that the Company may
issue up to $90 million of Series A Preferred Stock and preferred stock ranking
pari passu with the P Series A referred Stock without the approval of any
holders of Series A Preferred Stock. The Company may not amend or alter any of
the preferences of the Series A Preferred Stock without the approval of the
holders of 75% of the outstanding Series A Preferred Stock

         Each share of Series A Preferred Stock will automatically be converted
into a number of shares of Common Stock equal to the Liquidation Preference
($100 plus accrued dividends) on the date of conversion divided by the
Conversion Price ($8.50 per share) upon (i) the closing of a firm commitment
public offering of the Common Stock pursuant to a registration statement
declared effective under the 1933 Act, underwritten by a securities firm of
nationally recognized standing with an aggregate offering price to the public of
not less than $30 million and a price per share not less than the Conversion
Price, (ii) the closing of any transaction (including, without limitation, a
merger, consolidation, share exchange, sale, lease or other disposition of all
or substantially all of the corporation's assets) in connection with which the
previously outstanding Common Stock shall be changed into or exchanged for
different securities of the corporation or capital stock or other securities of
another corporation or interests in a noncorporate entity or other property
(including cash) or any







<PAGE>

combination of the foregoing or (iii) the vote of not less than 75% of the
outstanding shares of Series A Preferred Stock. Holders of Series A Preferred
Stock are entitled at any time to convert each share of Series A Preferred Stock
held by them into a number of shares of Common Stock equal to the Liquidation
Preference on the date of conversion divided by the Conversion Price.

Series B Preferred Stock, PIK Notes and Warrants

         In December 1999, the Company completed an exchange offer (the
"Exchange Offer") of 14% Senior Pay-in-Kind Notes Due 2003 of Inter*Act
Operating Co., Inc., a wholly owned subsidiary of the Company (the "PIK Notes"),
14% Series B Senior Mandatorily Redeemable Convertible Preferred Stock of the
Company (the "Series B Preferred Stock") and common stock purchase warrants (the
"Exchange Offer Warrants") for its outstanding Discount Notes. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" in Part II of this Annual Report on
Form 10-K. The Exchange Offer was effected in reliance on exemptions from
registration of the securities under Section 4(2) of the Securities Act because
the offering was limited to the Company's existing noteholders all of which were
institutional shareholders and Accredited Investors. In the Exchange Offer, each
holder of $1,000 principal amount of Discount Notes received $500 principal
amount of PIK Notes, one share of Series B Preferred Stock having an initial
liquidation preference of $500 and one Exchange Offer Warrant to purchase 17.96
shares of common stock for an exercise price of $.01. Because 100% of the
outstanding Discount Notes (other than those held by the Company) were tendered
in the Exchange Offer, the issuer of the PIK Notes, Inter*Act Operating Co.,
Inc., merged with and into its parent, the Company, on December 30, 1999.
Consequently, the PIK Notes are direct obligations of the Company.

         The PIK Notes mature on August 1, 2003 and accrue interest at a rate of
14% per annum from and after August 1, 1999, payable semiannually on February 1
and August 1 of each year, beginning February 1, 2000. The Company may, at its
option, elect not to make interest payments in cash prior to the date that is 18
months following the earlier of an initial public offering of the Company's
common stock or a Change in Control (as defined in the Indenture governing the
PIK Notes). To the extent that the Company does not pay interest in cash, the
interest accrued on the PIK Notes will be paid by the issuance of additional
promissory notes, which will have substantially the same terms, including date
of maturity and interest rate, as the PIK Notes.

         In the Exchange Offer, the Company issued to tendering holders of the
Company's Discount Notes 139,575 shares of Series B Preferred Stock. All such
shares were outstanding as of March 27, 2000 and held by two shareholders of
record. The shares of Series B Preferred Stock have a liquidation preference of
$500.00 per share and rank senior, as to dividends and liquidation preference,
to all other classes of the Company's capital stock. Dividends on the Series B
Preferred Stock accrue from August 1, 1999, at the rate of 14% per annum of the
liquidation preference (determined as of the respective dividend payment date)
per share, payable semi-annually on the first day of February and August of each
year, commencing on February 1, 2000, and are cumulative to the extent unpaid.
Accrued dividends on the Series B Preferred Stock were approximately
$4.0 million as of December 31, 1999.







<PAGE>


         Each share of Series B Preferred Stock will automatically be converted
into a number of shares of Common Stock equal to the Liquidation Preference
($500) plus accrued and unpaid dividends on the date of conversion divided by
$14.00 (adjusted as described below, the "Conversion Price") upon the closing of
a Qualified Public Offering. Holders of Series B Preferred Stock are entitled at
any time to convert each share of Series B Preferred Stock held by them into a
number of shares of Common Stock equal to the Liquidation Preference plus
accrued and unpaid dividends on the date of conversion divided by the Conversion
Price.

         Upon a Change of Control (as defined in the statement), each holder of
Series B Preferred Stock will have the right to require the Company to redeem
its Series B Preferred Stock at a price equal to the Liquidation Preference on
the date of redemption.

         The Company will not purchase or redeem any shares of Preferred Stock
unless the assets of the Company remaining after such redemption and any
corresponding reduction in capital, if any, shall be sufficient to pay any debts
of the Company for which payment has not been otherwise provided, or as may
otherwise be limited by applicable North Carolina law. However, the Company will
redeem all shares of the Series B Preferred Stock duly tendered for redemption
as soon thereafter as such redemption may be permitted by applicable North
Carolina law. To the extent that redemption of less than all of the shares of
Preferred Stock duly tendered for redemption is permitted, the Company will
redeem such shares on a pro rata basis based on the number of shares tendered.

         Holders of Series B Preferred Stock will generally vote together with
the holders of the Common Stock as a single class and will be entitled to cast
the number of votes for each share of Series B Preferred Stock held by them
equal to the number of shares of Common Stock into which the Series B Preferred
Stock is convertible.

         Exchange Offer Warrants to purchase an aggregate of 2,506,767 shares of
the Company's Common Stock were issued in the Exchange Offer and are outstanding
as of March 27, 2000. The Exchange Offer Warrants are not exercisable until
December 31, 2002. To the extent that the Company redeems any of the PIK
Notes prior to December 31, 2002, the number of shares of Common Stock into
which each Exchange Offer Warrant is exercisable will be reduced by an amount
equal to the product of (i) the number of shares into which such warrant is
exercisable immediately prior to such redemption and (ii) a fraction, the
numerator of which is the aggregate principal amount of PIK Notes redeemed and
the denominator of which is the aggregate principal amount of PIK Notes
outstanding immediately prior to such optional redemption. Consequently, if the
Company redeems all of the PIK Notes prior to December 31, 2002, the Exchange
Offer Warrants will not be exercisable for any shares of the Company's Common
Stock.

Series C Preferred Stock and Warrants

         In December 1999, the Company's Board of Directors designated an
additional series of preferred stock, the 10% Series C Mandatorily Redeemable
Convertible Preferred Stock ("Series C Preferred Stock") and authorized the
issuance and sale in a private offering up to 250,000 units consisting of one
share of Series C Preferred Stock and one warrant to purchase approximately
7.14 shares of the Company's common stock a price of $14.00 per share. As of
December 31, 1999, 70,120 units had been issued and sold for total proceeds







<PAGE>

of $7,012,000, all of which were received in cash. The shares of
Series C Preferred Stock have a liquidation preference of $100.00 per share and
rank, as to dividends and liquidation preference, equal to the Series A
Preferred Stock, junior to the Series B Preferred Stock and senior to the
Company's common stock. Dividends on the Series C Preferred Stock are payable
only in shares of Series C Preferred Stock and accrue from the date of
issuance, at the rate of 10% per annum of the liquidation preference, payable
semi-annually on the first day of March and September of each year, commencing
on the last day of March and September of each year, and are cumulative to
the extent unpaid. Accrued dividends, payable in Series C Preferred Stock,
were approximately $0.03 million as of December 31, 1999.

         Each share of Series C Preferred Stock will automatically be converted
into a number of shares of Common Stock equal to the Liquidation Preference on
the date of conversion divided by the Conversion Price (initially $14.00) upon
(i) the closing of a firm commitment public offering of the Common Stock
pursuant to a registration statement declared effective under the 1933 Act,
underwritten by a securities firm of nationally recognized standing with an
aggregate offering price to the public of not less than $30 million, (ii) the
closing of any any transaction (including, without limitation, a merger,
consolidation, share exchange, sale, lease or other disposition of all or
substantially all of the corporation's assets) in connection with which the
previously outstanding Common Stock shall be changed into or exchanged for
different securities of the corporation or capital stock or other securities of
another corporation or interests in a noncorporate entity or other property
(including cash) or any combination of the foregoing or (iii) the vote of not
less than 75% of the outstanding Series C Preferred Stock. Holders of Series C
Preferred Stock will be entitled at any time to convert each share Series C
Preferred Stock held by them into a number of shares of Common Stock equal to
the Liquidation Preference on the date of conversion divided by the Conversion
Price.

         The holders of Series C Preferred Shares will generally vote together
with the holders of the Common Stock as a single class on all matters submitted
to the shareholders of the Company for voting. Each share of Series C Preferred
Stock entitles the holder to such number of votes on each such matter as shall
equal the number of shares of Common Stock into which such Series C Preferred
Stock is convertible on the record date with respect to such matter. In
addition, approval of holders of a majority of the outstanding Series C
Preferred Stock will be required prior to the Company's issuing any shares of a
class of preferred stock that rank pari passu with or senior to the Series C
Preferred Stock. Except that the Company may issue up to an aggregate of $90
million of Series C Preferred Stock, Series C Preferred Stock and preferred
stock ranking pari passu with the Series C Preferred Stock without the approval
of any holders of Series C Preferred Stock. The Company may not amend or alter
any of the preferences of the Series C Preferred Stock without the approval of
the holders of a majority of the outstanding Series C Preferred Stock.

         At any time after November 1, 2005, the Series C Preferred Stock may be
redeemed at the option of the Company from time to time, in whole or in part,
upon not less than 30 days' notice to each registered holder of the Series C
Preferred Stock at a redemption price equal to the Liquidation Preference on the
date of redemption. Holders of Series C Preferred Stock will have the option to
convert such Series C Preferred Stock into shares of Common Stock prior to the
redemption. The Company does not intend to establish a sinking fund or







<PAGE>

otherwise set aside any amounts for the redemption of the Series C Preferred
Stock.

         On November 1, 2008, the Company will redeem each outstanding share of
Series C Preferred Stock, out of funds legally available for such redemption, at
a redemption price equal to its Liquidation Preference on the date of
redemption. Holders of shares of Series C Preferred Stock will have the option
to convert such Series C Preferred Stock into shares of Common Stock prior to
the redemption.

         At no time will the Company purchase or redeem any Series C Preferred
Shares unless the assets of the Company remaining after such redemption and any
corresponding reduction in capital, if any, are sufficient to pay any debts of
the Company for which payment has not been otherwise provided, or as may
otherwise be limited by applicable North Carolina law. However, the Company will
redeem all Series C Preferred Stock duly tendered for redemption as soon
thereafter as such redemption may be permitted by applicable North Carolina law.
To the extent that redemption of less than all of the Series C Preferred Stock
duly tendered for redemption is permitted, the Company will redeem such shares
(together with the Series A Preferred Stock) on a pro rata basis.

         The number of shares of the Common Stock for which the warrants issued
in the private offering are exercisable and the exercise price are subject to
adjustment upon the occurrence of certain events, including if the Company
issues additional common stock without consideration or at a price less than the
exercise price (except in certain circumstances) and if the Company declares and
pays on shares of its Common Stock a dividend payable in shares of Common Stock
or splits the then outstanding shares of common stock into a greater number of
shares.

         During the first quarter of 2000, the Company issued additional units
in the private offering for total proceeds of approximately $6.7 million.
Included in the additional units were 67,210 shares of Series C Preferred Stock
and warrants to purchase approximately 480,000 shares of common stock of the
Company at $14.00 per share. As of March 27, 2000 the Company had outstanding
137,330 shares of Series C Preferred Stock held by 54 shareholders of record.
Such shareholders held warrants to purchase an aggregate of approximately
980,900 shares of Common Stock at $14.00 per share.





<PAGE>



ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

         The following selected consolidated financial data of the Company are
qualified by reference to, and should be read in conjunction with, Part II, Item
8. "Financial Statements and Supplementary Data -- Consolidated Financial
Statements," including notes thereto, and Part II, Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
February 1997, the Company elected to change its fiscal year end from the last
Saturday in September to December 31, effective December 31, 1996. For
comparability purposes, the following summary consolidated financial data of the
Company for the year ended 1996 has been restated into a comparable twelve-month
period ended December 31, 1996. The consolidated financial data for the years
1994 through 1997 have been derived from audited consolidated financial
statements.

<TABLE>
<CAPTION>
                                                                                          Three Month        Fiscal Years Ended
                                                                                          Period Ended     -------------------
                                                   Year Ended December 31,                December 31,     Sept. 28,     Sept. 30,
                                           ---------------------------------------    ------------------ ------------- -------------
                                           1999         1998       1997       1996       1996       1995      1996    1995     1994
                                           ----         ----       ----       ----       ----       ----      ----    ----     ----
                                                                       (UNAUDITED)           (UNAUDITED)
                                                                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                       <C>        <C>         <C>         <C>        <C>        <C>       <C>      <C>      <C>
Consolidated Income Statement Data:
Gross sales...........................   $ 7,706    $ 7,082    $ 1,672      $ 823      $ 408      $ 78       $492    $ 255       $6
 Less: Retailer reimbursements........    (2,610)    (2,489)      (964)      (482)      (240)      (45)      (287)    (144)      (4)
                                          -------    -------      -----      -----      -----      ----      -----    -----      ---
   Net sales..........................     5,096      4,593        708        341        168        33        205      111        2
                                          -------    -------      -----      -----      -----      ----      -----    -----      ---
Operating Expenses:
   Direct costs.......................     9,538     10,216      5,784      3,030        939       275      2,298      903      262
   Selling, general and
   administrative expenses............    28,623     29,169     26,352      8,468      3,077     1,453      6,911    3,391    1,973
   Depreciation and amortization of
   intangibles........................     9,687      7,459      3,934      1,201        468        88        821      191       32
                                          -------    -------   --------   --------    -------   -------    -------  -------  ------
  Total operating expenses............    47,848     46,844     36,070     12,699      4,484     1,816     10,030    4,485    2,267
                                          -------    -------   --------   --------    -------   -------    -------  -------  ------
Operating loss........................   (42,752)   (42,251)   (35,362)   (12,358)    (4,316)   (1,783)    (9,825)  (4,374)  (2,265)
                                          -------    -------   --------   --------    -------   -------    -------  -------  ------
Other income (expense)
   Interest income....................       267      1,338      3,892      2,251      1,249         7      1,009       35        9
   Interest expense...................   (23,582)   (21,147)   (18,033)    (6,948)    (4,263)      (58)    (2,743)    (187)     (88)
   Other expense......................         2         --       (301)        --         --        --         --       --       --
                                          -------    -------   --------   --------    -------   -------    -------  -------  ------
   Total other expense................   (23,313)   (19,809)   (14,442)    (4,697)    (3,014)      (51)    (1,734)    (152)     (79)
                                          -------    -------   --------   --------    -------   -------    -------  -------  ------

Loss from operations before
   extraordinary item and income
   taxes..............................   (66,065)   (62,060)   (49,804)   (17,055)    (7,330)   (1,834)   (11,559)  (4,526)  (2,344)
Income taxes..........................        --         --        (10)        --         --        --         --       --       --
                                          -------    -------   --------   --------    -------   -------    -------  -------  ------
Net loss.before extraordinary item       (66,065)   (62,060)   (49,814)   (17,055)    (7,330)   (1,834)   (11,559)  (4,526)  (2,344)
Extraordinary item-gain on
extinguishment/restructuring of debt..     4,213         --         --         --         --        --         --       --       --
                                          -------    -------   --------   --------    -------   -------    -------  -------  ------
Net Loss                                 (61,852)   (62,060)   (49,814)   (17,055)    (7,330)   (1,834)   (11,559)  (4,526)  (2,344)
Preferred stock dividends accrued.....    (7,752)      (354)         --         --         --        --         --       --      --
                                          -------    -------   --------   --------    -------   -------    -------  -------  ------
Net loss attributable to Common Stock   $(69,604)  $(62,414)  $(49,814)  $(17,055)   $(7,330)  $(1,834)  $(11,559) $(4,526) $(2,344)
                                        =========  =========  =========  =========   ========  ========  ========= ======= =======

Loss Per Common Share Basic and
   diluted............................    $(9.00)    $(8.08)   $ (6.48)    $(2.46)   $ (0.96)   $(0.44)    $(1.91)  $(1.27)  $(0.83)
                                         ========   ========   ========   ========   ========   =======  ========== =======  ======

Weighted average number of common shares:
   Basic and Diluted..................     7,731      7,729      7,692      6,939      7,669     4,126       6,038   3,556    2,830
Other Data: (in whole numbers)
   Installed terminals at end
     of period........................     3,898      2,728      1,840        623        623        96         614      62        7
   Installed stores at end of period..     2,338      1,845      1,148        335        335        51         328      25        3
</TABLE>

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,                SEPT. 28,       SEPT. 28,
                                                    ---------------------------------------   ------------   -------------
                                                    1999          1998       1997      1996       1996       1995      1994
                                                    ----          ----       ----      ----       ----       ----      ----
                                                                              (DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:

<S>                                                <C>          <C>        <C>         <C>        <C>        <C>          <C>
   Working capital (deficit).................  $     627     $  7,006    $ 38,478    $ 86,370     $ 91,835   $ (753)   $    63
   Total assets..............................     55,113       60,491      81,023     106,054      107,757     2,178       644
   Total debt................................     74,155      117,373      91,406      77,095       72,923     2,042     1,893
   Common stock purchase warrants(1).........     11,367       27,436      27,436      24,464       24,464        --        --
   Stockholder's equity (deficit)............   (105,692)     (92,555)    (48,432)        643        7,934      (910)   (1,417)
</TABLE>







<PAGE>


---------
(1)   Reflects the effect of the valuation of the warrants issued in the Private
      Placement, which are exercisable for 9.429 shares of Common Stock per
      warrant. The exercise price of $.01 per share was deemed to have been paid
      at the time of issuance. See Notes 6 and 8 to the Notes to Consolidated
      Financial Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

         The following should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto, and other financial
information included elsewhere in this report. This report contains certain
statements regarding future operating results and anticipated growth, the
accuracy of which is subject to many risks and uncertainties. Such trends, and
their anticipated impact on the Company, could differ materially from those
discussed in this report. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in " -- Risk
Factors" and elsewhere in this report.

         The Company believes it operates the world's largest fully electronic
marketing network linked to supermarket and pharmacy retailers' point-of-sale
("POS") databases that serves on-line promotions and advertisements to shoppers
seamlessly in-store, at home and in the office. The Company's patented
technologies enable consumer products manufacturers ("Manufacturers") and
supermarket retailers ("Retailers") to use historical purchase behavior data to
develop targeted purchase incentives and messages which the Company delivers to
customers before shopping begins. The Company's proprietary system, called the
Inter*Act e-Marketing Network'sm' ("IEMN"), currently comprises approximately
4,000 server-based terminals located inside the front entrance of more than 20
retail chains in the U.S. and Europe, as well as a recently launched
Company-owned Internet web site called ShopperPerks.com'sm' The Company's web
site and its in-store ShopperPerks'TM' portals, are linked directly to each
store's point-of-sale scanning system via Company-owned in-store servers. This
on-line network gives Inter*Act's business partners exclusive access to offer
all shoppers (whether Internet users or not) same-day, personalized savings
that are electronically downloaded to participating retailers' cash register
systems. Delivering highly targeted, pre-shopping promotions on the IEMN
historically has generated average consumer response, or redemption, rates
above 25%, which the Company believes is superior to the response rate of any
other marketing or advertising medium in the industry.

         During, 1997, 1998 and to a limited extent in 1999, the Company
recognized revenue as electronic discounts were redeemed at store cash
registers. Manufacturers paid a fee to the Company for each redemption. The
fee was composed of (i) a retailer processing fee, (ii) a redemption fee and
(iii) the face value of the coupon. The Company, in turn, passed through both
the retailer processing fee, which was included in direct operating expenses,
and the face value of the coupon to the Retailer, while retaining the redemption
fee. The Company recorded as net sales the redemption fee and the retailer
processing fee paid by the Manufacturers.

         Beginning in 1998 and through 1999, the Company also had arrangements
with Manufacturers whereby the Company received a fixed payment over a fixed
period, generally one year. In these cases, the Company recognizes revenue on a
ratable basis over the fixed period during which it is providing service or
exclusivity to such Manufacturers, as well as the retailer processing fee paid
by the Manufacturers. The Company believes that the number of Manufacturer
promotions on the IEMN declined and its sales revenue increased less than
anticipated because of the introduction of this pricing format and resistance to
promoting, at a higher expenditure level, on the IEMN among Manufacturers that
wish to use a system installed in more stores and chains.

         Starting in 2000, the Company will be receiving variable fees from
Manufacturers for each product redeemed and fixed fees for project management of
each promotion. The Company will recognize revenue as electronic discounts are
redeemed at the store cash register and, for the project management fee, on a
ratable basis over the fixed period over which it is providing services or
exclusivity to such Manufacturers. The Company believes that more Manufacturers
will agree to promote more products on the IEMN with this new pricing format,
since the cost per product sold is expected to be lower, but there is no
assurance that this will be the case.

         Certain Manufacturers pay the Company in advance for a portion of
anticipated redemptions or a portion of the fixed contract amount, as applicable
and these amounts are recorded as deferred revenue until earned through
redemption activity during the contract period.

         Direct costs of the Company consist of such expenditures for direct
store support, paper used in the terminals to print shopping lists and recipes,
direct marketing costs, telecommunications between the stores and the Company
and retailer processing fees. Selling, general and administration expenses
include items relating to sales and marketing, administration, non-paid
promotional expenses and royalties payable under certain patent agreements.

         Non-paid promotional expenses represent consumer discounts and retailer
processing fees paid to the Retailer by the Company






<PAGE>


on promotions offered on the IEMN that are not funded by a Manufacturer
contract. Manufacturer participation in the IEMN to date has been characterized
by a substantial number of trial commitments leading to increasing dollar
commitments to the IEMN from those Manufacturers as the network approaches a
more national footprint. As the network grows and is more widely accepted by
Manufacturers, the Company believes that the need for non-paid promotions will
diminish and that revenues from Manufacturers will increase.

         To date, the Company has not generated significant operating revenue
relative to its expenses, has incurred significant losses and has experienced
substantial negative cash flow from operations. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development. The Company had an
accumulated stockholders deficit of $105.7 million as of December 31, 1999 and
has incurred losses of $69.6 million, $62.4 million, and $49.8 million
for the years ended December 31, 1999, 1998 and 1997, respectively. The Company
expects to incur substantial additional costs to install additional ShopperPerks
portals in retail supermarket stores and to sponsor selected promotions to
demonstrate the utility of the IEMN to consumers, Retailers and Manufacturers.
The Company expects to incur net losses in 2000 and may operate at a loss for
the foreseeable future. There can be no assurance that the Company will
achieve profitability or, if achieved, sustain such profitability.

YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998

         The Company had installed 3,898 terminals in 2,338 stores as of
December 31, 1999 as compared to 2,728 terminals in 1,845 stores as of December
31, 1998. The number of terminals and number of stores with terminals increased
as of December 31, 1999 as compared to 1998 largely as a result of the Company's
rollout of terminals in the United Kingdom. This was partially offset by a large
retailer closing stores in the United States on the East Coast and concerns by
Retailers over installing new technology during the second half of 1999 due to
Y2K issues.

         Manufacturers promoting on the IEMN system during the 1999 and 1998
periods decreased to approximately 67 from 100, respectively, while total
products promoted decreased to approximately 115 from 270, including the
European Manufacturers and products. The Company believes that the number of
Manufacturer promotions on the IEMN declined and it sales revenue increased only
slightly due to the introduction of the fixed fee, annual contract pricing
format and resistance to promoting at a higher expenditure level on the IEMN
among Manufacturers that wish to use a system installed in more stores and
chains. Net sales during the year ended December 31, 1999, increased to $5.1
million from $4.6 million in 1998, primarily as a result of the larger installed
base of ShopperPerks portals, and the higher amount of consumer redemptions per
promotion run by key manufacturers as the network approaches a more national
footprint in both the U.S. and U.K.

         Operating loss for the year ended December 31, 1999 was $42.8 million
versus an operating loss of $42.3 million in 1998. The increased loss was
primarily due to higher depreciation and amortization expense, partially offset
by reduced direct and selling, general and administrative costs. Depreciation
and amortization expense increased by $2.2 million reflecting the addition of
approximately $11.8 million for the installation of 2,262 and deinstallation of
400 terminals and intellectual property acquired during 1999. Direct costs
decreased $0.7 million due to cost cutting programs implemented during the year
reducing the costs associated with operating terminals installed in 1999
Non-paid promotions, which the Company historically has used to stimulate
customer usage, have been curtailed significantly in 1999 as the Company has
been able to offer products on its terminals which were paid for by
Manufacturers. Non-paid promotions declined from $4.7 million in 1998 to
$1.8 million in 1999. While the Company believes non-paid promotions will
continue to be a valuable tool, it expects non-paid promotions to continue to
decline as the network has a greater national footprint in the future.

         Net losses for the years ended December 31, 1999 were approximately
$61.8 million compared to $62.1 million in 1998. The net loss before the
extraordinary item for the year ended December 31, 1999 increased to $66.1
million from $62.1 million in 1998, primarily due to higher operating losses of
$0.5 million, increased non-cash interest expense of $2.4 million and decreased
interest income of $1.1 million. Interest income of $0.3 million for 1999
reflects a decreased average cash balance during 1999 compared to 1998. Non-cash
interest expense of $23.6 million during the year ended December 31, 1999
reflects the interest expense related to the Company's issuance of $142 million
of 14% Senior Discount Notes in 1996 for which the Company received net proceeds
of $90.8 million. The extraordinary gain of $4.2 million reflects a gain of $1.7
million for repurchase of notes in March 1999 and a $2.5 million gain for
restructuring of the 14% Senior Discount Notes in December 1999. (See " --
Liquidity and Capital Resources").

YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997

         The Company had installed 2,728 terminals in 1,845 stores as of
December 31, 1998 as compared to 1,840 terminals in 1,148






<PAGE>


stores as of December 31, 1997.

         Manufacturers promoting on the IEMN system during the 1998 and 1997
periods, increased to approximately 100 from 52, respectively, while total
products promoted increased to approximately 270 from 116, including the
European Manufacturers and products for 1998. Net sales during the year ended
December 31, 1998, increased to $4.6 million from $708,000 in 1997, primarily as
a result of the larger installed base of ShopperPerks portals, and the increased
number of promotions run by key manufacturers as the network approaches a more
national footprint.

         Operating loss for the year ended December 31, 1998 was $42.3 million
versus an operating loss of $35.4 million in 1997. The increased loss was
primarily due to higher depreciation and amortization expense, direct costs and
employee costs. Depreciation and amortization expense increased by $4.1 million
reflecting the addition of approximately $15.9 million in intellectual property
acquired and installation of 888 terminals during 1998. Direct costs increased
$4.4 million due to the costs associated with operating terminals installed in
1999, the full year costs related to terminals installed in 1998 and increased
retailer processing fees associated with the increased promotions during the
year. Employee costs increased as its number of employees grew 32%. Non-paid
promotions, which the Company historically has used to stimulate customer usage,
have been curtailed significantly in 1998 as the Company has been able to offer
a full range of products on its terminals which were paid for by Manufacturers.
Non-paid promotions declined from $6.3 million in 1997 to $4.7 million in 1998.
While the Company believes non-paid promotions will continue to be a valuable
tool, it expects non-paid promotions to continue to decline as the network has a
greater national footprint in the future.

         Net loss for the year ended December 31, 1998 increased by
approximately $12.3 million from $49.8 million in 1997 period to $62.1 million
primarily due to higher operating losses of $6.9 million, increased non-cash
interest expense of $3.1 million and decreased interest income of $2.6 million.
Non-cash interest expense of $21.1 million during the year ended December 31,
1998 reflects the interest expense related to the Company's issuance of $142
million of 14% Senior Discount Notes in 1996 for which the Company received net
proceeds of $90.8 million (See " -- Liquidity and Capital Resources"). Interest
income of $1.3 million for 1998 reflects a decreased average cash balance during
1998 compared to 1997.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1999, the Company had net working capital of $0.6
million, compared to working capital of $7.0 million at December 31, 1998. Total
cash and cash equivalents at December 31, 1999 and 1998 was $9.9 million and
$14.2 million, respectively. The Company's current level of indebtedness was
$74.2 million at December 31, 1999, representing long-term debt of $68.0 million
resulting the issuance of debt securities, capital lease obligations and accrued
dividends on the Series B Preferred Stock as well as current debt of
approximately $6.1 million from the purchase of intellectual property due to be
repaid on June 1, 2000, and capital lease obligations.

         Cash used in operating activities during the year ended December 31,
1999 was $30.4 million, as compared to $38.4 million and $22.2 million for the
years ended December 31, 1998 and 1997, respectively. Cash has been used
primarily for the development of the Company's IEMN technology, test marketing
and deploying the product and compensation of personnel.

         Cash used in investing activities during the year ended December 31,
1999, was $11.8 million, reflecting disbursements for net capital expenditures.
Such net capital expenditures were primarily for IEMN equipment and components,
fixtures, furniture and equipment for expansion in Europe, and other equipment.
For the years ended December 31, 1998 and 1997, cash used in investing
activities was $10.2 million and $20.9 million, respectively, primarily
reflecting disbursements for net capital expenditures. During 1999, the Company
installed approximately 1,170 ShopperPerks portals in approximately 493 stores
in the United States and the United Kingdom. The Company estimates that its
capital expenditures during 2000 will be approximately $10.0 to $20.0 million,
depending on the extent to which Retailers participate in the purchase of IEMN
equipment and the availability of third-party equipment financing, to be used
primarily for IEMN equipment purchases.

         Net cash provided by financing activities during the years ended
December 31, 1999 and 1998 was $37.9 million and $17.6 million, respectively,
resulting primarily from the net proceeds from private offerings of preferred
stock. No cash was provided by financing activities during the year ended
December 31, 1997.

         Since its inception in 1993, the Company has generated revenue well
below its expenses, primarily related to the development of its IEMN technology,
test marketing and deploying the product and compensation of personnel. To date,
the Company has funded its operations through private sales of equity and debt
securities. The Company will require additional equity or debt financing to fund
capital expenditures, working capital requirements and operating losses to be
incurred in connection with the increased commercialization of its IEMN.

         From inception through December 31, 1999, the Company's shareholders
have contributed approximately $166.2 million






<PAGE>


of equity to the Company through private offerings of common stock, the
conversion of approximately $2.0 million in stockholder debt to common stock and
private offerings of the preferred stock.

         The private offerings of common stock and conversion of stockholder
indebtedness occurred primarily from inception through 1996. During the year
ended December 31, 1997, the Company issued an aggregate of 60,000 shares of
common stock in exchange for intellectual property and services. No common stock
was issued during the year ended December 31, 1998. The Company issue
approximately 15,000 shares of common stock in exchange for services during the
year ended December 31, 1999.

         In 1996, the Company consummated a private offering of debt securities
(the "Private Placement") for which it received net proceeds of approximately
$90.8 million. The Private Placement consisted of 142,000 units representing
$142 million in aggregate principal amount of 14% Senior Discount Notes Due 2003
(the "Discount Notes") and warrants (the "Discount Note Warrants") to purchase
initially an aggregate of 1,041,428 shares of common stock of the Company at
$.01 per share. As required by the Warrant Purchase Agreement, the Discount Note
Warrants were adjusted effective September 30, 1997 to entitle the respective
holders to purchase an aggregate of 1,338,918 shares of common stock at $.01 per
share because the Company had not completed a qualifying initial public
offering. Accordingly, the Company recorded additional common stock purchase
warrants of $3.0 million reflecting the valuation of the additional 297,492
shares, or 2.095 shares issuable per warrant. In January 1997, the Company
exchanged for the outstanding Discount Notes issued in the Private Placement new
and identical Discount Notes that were registered under the Securities Act of
1933, as amended, and that do not bear legends restricting their transfer. The
first interest payment on the Discount Notes in the amount of $8.7 million was
scheduled to be paid in February 2000.

         In March 1999, the Company repurchased a portion of the Discount Notes
with an aggregate face value of approximately $2.4 million, for an aggregate of
$194,000 in cash. The Discount Note Warrants originally issued in connection
with the issuance of these Discount Notes were not repurchased by the Company
and continue to be outstanding. This repurchase of Discount Notes resulted in an
extraordinary gain on extinguishment of debt of $1.7 million. In October 1999,
the Company repurchased additional Discount Notes with a face value of
approximately $15.0 million for an aggregate of $3.0 million in cash. Discount
Note Warrants to purchase 141,435 shares of the Company's common stock
originally issued in connection with the issuance of these Discount Notes were
also repurchased by the Company in this transaction at no additional cost. In
December 1999, the $15.0 million of Discount Notes and related Discount Note
Warrants repurchased in October 1999 were resold by the Company for $3.0 million
cash. See Part III, Item 13 "Certain Relationships and Related Transactions."

         In December 1999, the Company completed an exchange offer (the
"Exchange Offer") of 14% Senior Pay-in-Kind Notes Due 2003 of Inter*Act
Operating Co., Inc., a wholly owned subsidiary of the Company (the "PIK Notes"),
14% Series B Senior Mandatorily Redeemable Convertible Preferred Stock of the
Company (the "Series B Preferred Stock") and common stock purchase warrants (the
"Exchange Offer Warrants") for its outstanding Discount Notes. In the Exchange
Offer, each holder of $1,000 principal amount of Discount Notes received $500
principal amount of PIK Notes, one share of Series B Preferred Stock having an
initial liquidation preference of $500 and one Exchange Offer Warrant to
purchase 17.96 shares of common stock for an exercise price of $.01. Because
100% of the outstanding Discount Notes (other than those held by the Company)
were tendered in the Exchange Offer, the issuer of the PIK Notes, Inter*Act
Operating Co., Inc., merged with and into its parent, the Company, on
December 30, 1999. Consequently, the PIK Notes are direct obligations of the
Company.

         The PIK Notes mature on August 1, 2003 and accrue interest at a rate of
14% per annum from and after August 1, 1999, payable semiannually on February 1
and August 1 of each year, beginning February 1, 2000. The Company may, at its
option, elect not to make interest payments in cash prior to the date that is 18
months following the earlier of an initial public offering of the Company's
common stock or a Change in Control (as defined in the Indenture governing the
PIK Notes). To the extent that the Company does not pay interest in cash, the
interest accrued on the PIK Notes will be paid by the issuance of additional
promissory notes, which will have substantially the same terms, including date
of maturity and interest rate, as the PIK Notes.

         As a result of the Exchange Offer, the Company's long-term debt at
December 31, 1999 was $68.0 million, reflecting a decrease in long-term debt of
$43.8 million as compared to long-term debt of $111.8 million at December 31,
1998. Further, the Exchange Offer resulted in an extension of the scheduled cash
interests payments until February 2003.

         In May 1998 the Company issued, in connection with the acquisition of
certain intellectual property, a note payable. This note, which was amended in
June 1999, bears interest currently at 10.0% per year on the $5.7 million
principal balance and is payable on June 1, 2000. If, prior to the maturity of
this note, the Company completes a qualifying initial public offering of Common
Stock or consummates a change of control, the then-outstanding principal balance
and accrued interest would be convertible into shares of the Company's common
stock at a conversion price of $8.50 per share, which management believes
represents the fair value of the Company's Common Stock at the time of the June
1999 amendment. This note is reflected as a current liability in the Company's
consolidated balance sheet as of December 31, 1999.






<PAGE>


         The Company's first private offering of preferred stock began in July
1998 when the Board of Directors authorized the sale of up to $40 million of 10%
Series A Mandatorily Convertible Preferred Stock (the "Series A Preferred
Stock"), first to the Company's shareholders and then to other investors at a
price of $100 per share. The Series A Preferred Stock originally offered was
convertible into common stock at a conversion rate of $10.00 per share of common
stock. As of December 31, 1998, the Company had issued and sold 177,878 shares
of Series A Preferred Stock for gross proceeds of approximately $17.8 million.
Of such proceeds, $17.7 million was received in cash and $1.0 million was
exchanged for outstanding accounts payable. Accrued dividends, payable in Series
A Preferred Stock, were approximately $354,000 as of December 31, 1998.

         In March 1999, the Board of Directors and shareholders of the Company
approved certain changes to the Series A Preferred Stock and the Board increased
the aggregate offering of Series A Preferred Stock to $70 million. Such changes
consisted of (i) a reduction in the conversion price from $10.00 to $8.50 per
share of common stock into which each share of Series A Preferred Stock is
convertible, (ii) an increase in the number of votes per share of Series A
Preferred Stock from 10 to the number of shares of common stock into which it is
convertible (initially 11.7647), (iii) accrual of dividends on the Series A
Preferred Stock semi-annually, as opposed to quarterly, to be paid only in
shares of Series A Preferred Stock and (iv) the addition of anti-dilution
provisions. Such changes are applicable to all shares of Series A Preferred
Stock issued prior to the effective date of the changes and all additional
shares of Series A Preferred Stock issued in the private offering. During the
fiscal year ended December 31, 1999, the Company issued and sold 320,990 shares
of Series A Preferred Stock at a price of $100 per share for total cash proceeds
of approximately $32.1 million, all of which were received in cash. Accrued
dividends, payable in Series A Preferred Stock, were $4.0 million as of December
31, 1999.

         In December 1999, the Company issued to tendering holders of the
Company's Discount Notes in the Exchange Offer described above 139,575 shares of
14% Series B Senior Mandatorily Redeemable Convertible Preferred Stock ("Series
B Preferred Stock"), all of which were issued and outstanding as of
December 31, 2000. The shares of Series B Preferred Stock have a liquidation
preference of $500.00 per share and rank senior, as to dividends and liquidation
preference, to all other classes of the Company's capital stock. Dividends on
the Series B Preferred Stock accrue from August 1, 1999, at the rate of 14% per
annum of the liquidation preference (determined as of the respective dividend
payment date) per share, payable semi-annually on the first day of February and
August of each year, commencing on February 1, 2000, and are cumulative to the
extent unpaid. Accrued dividends on the Series B Preferred Stock were
$4.1 million as of December 31, 1999.

         In December 1999, the Company's Board of Directors designated an
additional series of preferred stock, the 10% Series C Mandatorily Redeemable
Convertible Preferred Stock ("Series C Preferred Stock") and authorized the
issuance and sale in a private offering up to 250,000 units consisting of one
share of Series C Preferred Stock and one warrant to purchase approximately 7.14
shares of the Company's common stock a price of $14.00 per share. As of
December 31, 1999, 70,120 units had been issued and sold for total proceeds of
approximately $7.0 million, all of which were received in cash. The shares of
Series C Preferred Stock have a liquidation preference of $100.00 per share and
rank, as to dividends and liquidation preference, equal to the Series A
Preferred Stock, junior to the Series B Preferred Stock and senior to the
Company's common stock. Dividends on the Series C Preferred Stock are payable
only in shares of Series C Preferred Stock and accrue from the date of issuance,
at the rate of 10% per annum of the liquidation preference, payable
semi-annually on the first day of March and September of each year, commencing
on the last day of March and September of each year, and are cumulative to the
extent unpaid. Accrued dividends, payable in Series C Preferred Stock, were
$0.03 million as of December 31, 1999.

         During the first quarter of 2000, the Company issued 67,210 additional
units in this private offering for total proceeds of approximately $6.7 million.
Included in the additional units were 67,210 shares of Series C Preferred Stock
and warrants to purchase an additional 480,070 shares of common stock of the
Company at $14.00 per share.

         The Company will require additional equity or debt financing to fund
capital expenditures, working capital requirements and operating losses to be
incurred in connection with the increased commercialization of its IEMN. In
1999, the Company entered into an agreement with a leasing company to lease up
to $3.0 million of terminals and related equipment in the U.S., with a right of
first refusal on up to $10.0 million in additional lease financing. The Company
is working with its leasing source and other third parties to secure additional
lease financing for the purchase of IEMN equipment in the United States and
Europe. In addition, the Company is negotiating with private investors for
additional equity and debt capital. There is no assurance that such additional
equipment financing or additional capital can be obtained. If additional funds
are raised through the issuance of equity securities, shareholders may
experience dilution, or such equity securities may have rights, preferences or
privileges senior to the common stock. If additional funds are raised through
debt financing, such financing will increase the financial leverage of the
Company and earnings would be reduced by the associated interest expense.

         If the Company is unsuccessful in raising additional capital or
equipment or other debt financing, the Company may be






<PAGE>


unable to continue its planned IEMN installations, expand either the number and
dollar amount of Manufacturer commitments, or respond to competitive pressures,
any of which could have a material adverse effect on the Company's results of
operations and financial condition. However, the Company believes that existing
cash and cash equivalents, cash received from sales of preferred stock since
December 31, 1999 and reduced or delayed operating and capital expenditures will
be sufficient to meet the Company's operating requirements into the second
quarter of 2001.

RISK FACTORS

         The information contained in this report should be read in conjunction
with the following factors.

LIMITED OPERATING HISTORY; SIGNIFICANT LOSSES; ACCUMULATED DEFICIT; FUTURE
LOSSES

         The Company was incorporated in February 1993 and has concentrated its
efforts on the development, testing and deployment of the IEMN, on capital
formation and on the recruitment of management and other key employees.
Accordingly, the Company has a limited operating history upon which an
evaluation of the Company and its prospects can be based. To date, the Company
has generated minimal operating revenue relative to its expenses, has incurred
significant losses and has experienced substantial negative cash flow from
operations. The Company had an accumulated stockholders' deficit of $105.7
million as of December 31, 1999 and has incurred net losses of $69.6 million and
$62.4 million for the years ended December 31, 1999 and 1998, respectively. The
Company expects to incur substantial additional costs to install and operate
additional ShopperPerks portals and to sponsor selected promotions to
demonstrate the utility of the IEMN to consumers, Retailers and Manufacturers.
The Company expended $2.4 million and $4.5 million for the years ended December
31, 1999 and December 31, 1998, respectively, to sponsor promotions. The Company
will incur net losses in fiscal 2000 and may operate at a loss for the
foreseeable future. There can be no assurance that the Company will ever be able
to achieve profitability or, if achieved, sustain such profitability.

         The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in the early
stages of their development. To address these risks, the Company must, among
other things, effectively manage any growth that may occur, successfully
commercialize its product by securing new and renewal commitments from
Manufacturers, respond to competitive developments and attract and retain
management and other key personnel.

ABILITY TO OBTAIN BRAND CONTRACTS; LENGTHY SALES CYCLE

         All or substantially all the Company's revenue is expected to be
derived for the foreseeable future from fees paid by Manufacturers that promote
products on the IEMN. However, many Manufacturers currently participating in the
IEMN are doing so at relatively low promotional dollar commitments to test the
IEMN's effectiveness. Accordingly, the Company's future success will depend
substantially on its ability to establish, maintain and expand relationships
with Manufacturers to promote their products using the IEMN. Moreover, it is
critical that the Company obtain additional commitments from Manufacturers of
major brands in the most popular consumer product categories, as it has recently
done with Procter & Gamble and General Mills, and to develop long-term
relationships with these Manufacturers in order to ensure that an appropriate
mix of products is displayed on the IEMN.

         In addition, the Company has experienced a lengthy sales cycle in
marketing the IEMN to Manufacturers. In most cases, the time between initial
contact with the Manufacturer and the execution of the final contract, if any,
exceeds five months. The Company could fail to obtain such commitments or could
experience substantial delays in obtaining such commitments, and, once such
commitments are received, the Company could fail to maintain relationships
through renewal contracts. There can be no assurance that the Company will
obtain additional commitments on a timely basis from any Manufacturers and
maintain long-term relationships with these Manufacturers to participate in the
IEMN. Even if the Company obtains initial commitments from additional major and
other Manufacturers, these contracts typically have had short-term durations,
and there can be no assurance that such Manufacturers will make the IEMN a
component of their long-term promotional strategies. Any of the foregoing events
could result in the Company incurring substantially greater losses for a longer
period than expected and could have a material adverse effect on the Company's
business, results of operations and financial condition. As a result, even
short-term difficulties in implementing its strategies could have a material
adverse effect on its results of operations and financial condition.

         In order to enhance its prospects of enrolling Manufacturers in the
IEMN, the Company has elected in the past, and expects to elect in the future,
to sponsor from time to time, at its own cost, selected product promotions in
certain stores to continue to demonstrate the effectiveness of the IEMN. Since
these promotional expenditures are classified as selling, general and
administrative expenses and are incurred to attract Manufacturers and enhance
future revenue, the Company's current losses will be increased in the period of
the expenditures and, if the expected future revenue does not materialize,
liquidity difficulties currently experienced by the Company could become more
significant. See " -- Limited Operating History; Significant Losses; Accumulated
Deficit; Future






<PAGE>


Losses."

UNCERTAINTY OF MARKET ACCEPTANCE

         Because the utility and the ultimate attractiveness of the IEMN to
Manufacturers are substantially dependent on the number of shoppers using the
system, the number of stores in which the Company has installed its IEMN
significantly affects its revenue generation potential. The Company's
profitability and the success of its growth plans will be significantly affected
by its ability to contract with additional Retailers for the installation of the
IEMN and to install the system in such stores in a rapid and orderly manner.
While the Company has contractual commitments from 19 supermarket chains and one
pharmacy chain in the U.S. and Europe as of March 1, 2000, there can be no
assurance that Retailers who currently, or in the future, have ShopperPerks
portals installed or are connected to the ShopperPerks web site will retain the
IEMN in their stores or that the Company will be able to continue to increase
the number of stores in which the IEMN is installed.

         The Company also is dependent on the level of general acceptance and
usage by consumers. Consumer acceptance and usage are dependent on many factors,
such as actual and perceived ease of use, access to terminals during peak
shopping periods, reliability of the Company's IEMN and perceived attractiveness
of the product offerings of the IEMN. There can be no assurance that an adequate
number of consumers will use the IEMN at a level sufficient to support the IEMN
on an ongoing basis or at a level that will attract additional Manufacturers.

         Inasmuch as demand by Manufacturers, Retailers and consumers is
substantially interrelated, any significant continuous lack or lessening of
demand by any one of these constituencies could have an adverse effect on
overall market acceptance. See Part I, Item 1. "Business -- Business Strategy."

MANAGEMENT OF GROWTH

         The Company's rapid growth has placed, and is expected to continue to
place, significant pressure on the Company's managerial, operational and
financial resources. To manage its growth, the Company must continue to
strengthen its management, implement and improve its operational and financial
systems and expand, train and manage its employee base. The Company also will be
required to develop and manage multiple relationships with various customers,
business partners and other third parties. The Company's systems, procedures or
controls may not be adequate to support the Company's operations and Company
management may not be able to achieve the rapid expansion necessary to exploit
potential market opportunities for the Company's products and services. Any
significant problems in the Company's commercialization of the IEMN could create
a negative image in the consumer product promotion and discounting business that
may be impossible to overcome. The Company's future operating results will also
depend on its ability to expand its sales and marketing and research and
development organizations, to implement and manage new distribution channels to
penetrate markets and to expand its support organization. The Company's failure
to manage growth effectively will have a material adverse effect on the
Company's business, operating results and financial condition.

RISKS RELATING TO SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS

         The Company is highly leveraged with indebtedness that is substantial
in relation to its stockholders' equity. As of December 31. 1999, the Company
had an aggregate of $74.2 million of indebtedness and stockholders' deficit of
$105.7 million. See Part II, Item 6. "Selected Consolidated Financial Data.".

         The Company's high degree of leverage could have important consequences
including but not limited to the following: (i) the Company's ability to obtain
additional financing for capital expenditures, working capital, general
corporate purposes or other purposes (including potential acquisitions) may be
impaired in the future; and (ii) the Company's flexibility to adjust to changing
market conditions and ability to withstand competitive pressures could be
limited, and the Company may be more vulnerable to a downturn in general
economic conditions of its business, or be unable to carry out capital spending
that is important to its growth strategy.

        The Company recently restructured certain indebtedness. See, Liquidity
and Capital Resources." The Company has a note payable in the amount of
approximately $5.7 million in connection with the acquisition of certain
intellectual property. The note principal, together with accrued interest
payable at 10% per year as restructured in 1999, is payable on June 1, 2000.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to this note and its other indebtedness will ultimately
depend on its financial and operating performance, which in turn is subject to
prevailing economic and competitive conditions and to certain financial,
business and other factors that may be beyond its control, including operating






<PAGE>


difficulties, increased operating costs, product prices, the response of
competitors, regulatory developments and delays in implementing its strategy.
The Company's ability to meet its debt service and other obligations will depend
on the extent to which the Company can implement successfully its business
strategy of achieving large-scale commercialization of the IEMN. There can be no
assurance that the Company will be able to implement fully its strategy or that
the anticipated results of its strategy will be realized. See Part I, Item 1.
"Business -- Business Strategy."

         If the Company's cash flow and capital resources are insufficient to
fund its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, seek to obtain additional equity capital, or
restructure its debt. There can be no assurance that the Company's cash flow and
capital resources will be sufficient for payment of interest on and principal of
its indebtedness in the future, or that any such alternative measures would be
available at reasonable costs or would permit the Company to meet its scheduled
debt service obligations. In the absence of adequate operating results and/or
capital resources, the Company could face substantial liquidity problems and
might be required to dispose of material assets or operations to meet its debt
service and other obligations, and there can be no assurance as to the timing of
such sales or the proceeds which the Company could realize therefrom.

NEED FOR ADDITIONAL FINANCING

         The Company will need to procure additional financing, the amount and
timing of which will depend on a number of factors including the pace of
expansion of the Company's markets and customer base, services offered, and
development efforts and the cash flow generated by its operations. In the event
that such additional financing is not obtained, the Company believes that
existing cash and cash equivalents, cash received from sales of Series C
Preferred Stock since December 31, 1999 and reduced or delayed operating and
capital expenditures will be sufficient to meet the Company's operating
requirements into the second quarter of 2001. See "Liquidity and Capital
Resources." The Indenture limits the ability of the Company to incur additional
indebtedness in certain circumstances. If additional funds are raised through
debt financing, such financing will increase the financial leverage of the
Company and earnings would be reduced by the associated interest expense.
There can be no assurance that additional financing will be available when
needed on terms favorable to the Company. Any future debt financing or issuance
of preferred stock by the Company would be senior to the rights of the holders
of Common Stock, and any future issuance of Common Stock would result in the
dilution of the then existing stockholders' proportionate equity interests in
the Company. If adequate funds are not available on acceptable terms, the
Company may be unable to continue its planned IEMN installations, expand either
the number and dollar amount of Manufacturer commitments, or respond to
competitive pressures, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition.

DEPENDENCE ON THIRD PARTIES

         The Company's success is dependent upon its ability to obtain and
maintain favorable contracts with Retailers and Manufacturers. The Company has
derived and will continue to derive substantially all its revenue from the
participation of Manufacturers on the IEMN and from the operation of the IEMN in
supermarkets. Any decrease in Manufacturers' promotional expenditures in general
or the decision of Manufacturers to promote their products through marketing
strategies that do not include the IEMN could result in a smaller overall market
for the Company's services. In addition, the Company's terminals will be
primarily manufactured by a single supplier, NCR Corporation, under an exclusive
two-year contract. The Company is also dependent on its suppliers of
ShopperPerks portals and servers. In addition, the Company is dependent upon
the condition and performance of its Retailer partners. Consequently, factors
affecting the advertising and promotional strategy of Manufacturers or the
condition of its Retail partners or suppliers, such as labor disputes or supply
problems, could have a material adverse effect on the Company's business,
results of operations or financial condition.


COMPETITION

         The consumer product advertising and promotional business is intensely
competitive. Many media outlets compete for the advertising and promotional
dollars Manufacturers spend to promote their products. The Company's services
compete against these media outlets, such as television, radio, newspapers and,
most directly, coupons. A number of new, electronic marketing products and
services also have been introduced, including electronic shelf markers,
computer-screen equipped shopping carts, battery-powered coupon dispensers,
electronic marketing networks, Internet coupons and frequent shopper programs. A
number of potential competitors have failed because of a lack of acceptance,
lack of capital, technical problems or a combination of these factors. While the
Company believes it provides a cost-effective targeted marketing service, there
are many factors a Manufacturer will take into account in allocating advertising
or promotional expenditures, and there can be no assurance that the Company's
services will compete effectively against alternative marketing outlets. Most of
the Company's competitors in the consumer product promotional and advertising
business are larger, possess significantly greater financial resources and have
longer operating histories than the Company. See Part I, Item 1. "Business --
Customers and Competition".






<PAGE>


PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS

         The Company's success and ability to compete are dependent upon its
proprietary systems and technology. The Company holds licenses to United States
patents which cover various aspects of its systems and methods of distributing
promotions, and the Company also has an additional patent application pending.
Inter*Act e-Marketing Network'sm' is a service mark of the Company. However,
it is possible that patent rights held by the Company may be held invalid or
that disputes with third parties over the scope of licensed patents and other
proprietary rights may occur, including the Company's trademarks. Certain
aspects of the Company's services may not be adequately protected from
infringement or copying and there can be no assurance that the Company's
licensed patents or its trademarks would be upheld if challenged or that
competitors might not develop similar or superior processes or services outside
the protection of any patents licensed to the Company. In addition, litigation
may be necessary to enforce or protect the Company's intellectual property
rights or to defend against claims of infringement or invalidity. The Company is
presently in litigation with Catalina Marketing Corporation and its affiliates
with each side claiming infringement of its respective patents. See Part I, Item
3. "Legal Proceedings." Misappropriation of the Company's intellectual property
or any potential litigation on the Company's rights to its intellectual property
could have a material adverse effect on the Company's business, results of
operations and financial condition. See Part I, Item 1. "Business --
Intellectual Property Matters"

RELOCATION OF COMPANY'S HEADQUARTERS

         The Company's operations and financial condition depend in part on
operating in a location where the operating costs for salaries, real estate,
utilities and other such expenditures are reasonable. The Company recently moved
its headquarters from Norwalk, Connecticut to Charlotte, North Carolina in
anticipation of reducing such operating costs over the long-term. The relocation
has resulted in an expected turnover of employees and expenditures for retention
bonuses, travel, and the relocation of the Company's network operations first
from Norwalk to the short-term offices being subleased, then to the Company's
permanent office in Charlotte. It is uncertain that the operating costs in the
new location will result in significant savings in the long-term. See Part I,
Item 2, "Properties"; "Risk Factors -- New Management; Dependence on Key
Employees."

NEW MANAGEMENT; DEPENDENCE ON KEY EMPLOYEES

         The Company's business operating results and financial condition depend
in significant part upon the continued contributions of its management and other
key technical personnel and sales people. Most of the Company's management and
sales force has been hired by the Company in the last twelve months. The
Company's President and Chief Operating Officer has served in such capacity
since August 1999. The Company's Chief Financial Officer has served in such
capacity since December 1999, and its Senior Vice President, Retail Sales, has
held that position since September 1998. The Company's Senior Vice President and
Chief Technical Officer has served since October 1998 and its Senior Vice
President of Brand Sales since February 1999. The Company's Chairman and Chief
Executive Officer, Mr. Stephen Leeolou, was elected to such position on June 12,
1996. See Part III, Item 10. "Directors and Executive Officers of the Company".

         An inability of new management and other recently hired employees of
the Company to adjust quickly to, and to perform as expected in, their
respective roles within the Company or an inability of the Company to attract
and retain employees with such skills could have a material adverse effect on
the Company's business, results of operations and financial condition.

         The Company is also highly dependent on certain key technical employees
and on its ability to recruit, retain and motivate high quality technical
personnel. The Company's future success will depend on its ability to retain
key managers and employ additional qualified senior managers. Competition for
such personnel is intense and the inability to attract and retain additional
qualified employees or the loss of current key employees and managers could
materially and adversely affect the Company's business, results of operations
and financial condition.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

         The Company has experienced fluctuations in its quarterly operating
results and may continue to do so in the future. Some of the factors that may
affect the quarterly operating results of the Company include (i) the timing and
nature of expansion efforts in both new and existing markets, (ii) the
introduction of new products or services and the market response to those
introductions, (iii) relationships with Retailers, (iv) relationships with
Manufacturers, (v) seasonal trends, particularly in the retail grocery industry,
(vi) changes in pricing policies or service offerings, (vii) changes in the
level of marketing and other operating expenses to support future growth, (viii)
the mix of product and promotional offerings on the IEMN, (ix) competitive
factors and (x) general economic conditions.






<PAGE>


Consequently, quarterly revenues and operating results may fluctuate
significantly, and the Company believes that period-to-period comparisons of
results will not necessarily be meaningful and should not be relied upon as an
indication of future performance.

RELATIONSHIP WITH DIRECTORS, OFFICERS AND PRINCIPAL SHAREHOLDERS; POTENTIAL
CONFLICTS OF INTEREST; CONTROL BY SIGNIFICANT SHAREHOLDER

         The directors, officers and principal shareholders of the Company have
potential conflicts of interest in certain transactions with the Company and
between the Company and certain parties controlled by or otherwise related to
directors, officers or principal shareholders. These transactions include asset
purchases, private purchases of stock, loans to the Company, licensing of
proprietary rights, option grants, consulting agreements and other transactions.
See Part III, Item 13. "Certain Relationships and Related Transactions." With
respect to future transactions, the Company currently has not adopted or
formulated any procedures to resolve conflicts of interest other than customary
board practices such as relying on the judgment of disinterested directors, when
appropriate.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements and supplementary financial information that
are required to be included pursuant to this Item 8. are listed in and follow
the Index to Financial Statements following Item 14 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

          None

                                                 PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         The following table sets forth certain information about each of the
Company's executive officers and directors.

<TABLE>
<CAPTION>
         NAME                       AGE     POSITION
         ----                       ---     --------
<S>                                 <C>     <C>
Stephen R. Leeolou...............   44      Chairman of the Board of Directors, Chief Executive Officer
                                            and Treasurer
Lee D. Armbuster.................   44      President and Chief Operating Officer
Thomas J. McGoldrick.............   54      Executive Vice President, Chief Financial Officer and Chief
                                            Administrative Officer
Donald J. Anderson...............   52      Senior Vice President and Chief Technical Officer
Michael T. Leeolou...............   42      Senior Vice President, Retail Services
Mary Braunsdorf..................   42      Senior Vice President, General Counsel and Secretary
Gary Schneider...................   49      Senior Vice President U.S. Brand Sales
                                   ----
Poul E. Heilmann.................   39      Senior Vice President Global Marketing
Van E. Snowden...................   44      Senior Vice President Business Development
Robert M. DeMichele..............   54      Director
William P. Emerson, Jr...........   46      Director
Haynes G. Griffin................   52      Director
Richard A. Horvitz...............   47      Director
Richard P. Ludington.............   52      Director
L. Richardson Preyer, Jr. .......   51      Director
Brian A. Rich....................   38      Director
Stuart S. Richardson.............   52      Director
Robert A. Silverberg.............   63      Director
</TABLE>

         Stephen R. Leeolou has been a director of the Company since its
inception in 1993 and Chairman of the Board of Directors and Treasurer of the
Company since August 1995. In June 1996, Mr. Leeolou became Chief Executive
Officer of the Company. Mr. Leeolou was a co-founder and served as a director
and executive officer of Vanguard Cellular Systems, Inc. from its inception in
1984 until May 1999 when it was acquired by AT&T Corporation. Stephen R. Leeolou
is the brother of Michael T. Leeolou.

         Lee D. Armbuster has been President and Chief Operating Officer of the
Company since August 1999. Prior to joining the Company, Mr. Armbuster served as
Executive Vice President and General Manager of Laneco, a division of Super
Value, Inc. Corporation since May, 1998. From February 1995 through May 1998
he was Executive Vice President in charge of Marketing and Merchandising of the
same company.






<PAGE>


         Thomas J. McGoldrick has been Executive Vice President, Chief Financial
Officer and Chief Administrative Officer of the Company since December 1999.
Prior to joining the Company, Mr. McGoldrick served as President of Geneva
Management Services, a management consulting firm.

         Donald J. Anderson has been Senior Vice President and Chief Technical
Officer of the Company since October 1998. Prior to joining the Company, he
served as Vice President -- Information Services of Vanguard Cellular Systems,
Inc. since 1995. In this capacity, Mr. Anderson was responsible for all computer
network and software development operations. Prior to his position with
Vanguard, Mr. Anderson was Vice President -- Development and Operations for
Capital Data Systems from 1992 through 1995 and was responsible for development
of paging and natural gas billing systems.

         Michael T. Leeolou has been Senior Vice President, U.S. Retail Sales
since November, 1999 and Vice President, Retail Services of the Company, since
September 1996. From September 1995 through August 1996, Mr. Leeolou was a
Regional Sales Manager for Geotek Communications, Inc. From January 1990 through
August 1995, he was a Senior Account Executive with AT&T. Michael T. Leeolou is
the brother of Stephen R. Leeolou.

         Mary Braunsdorf has been a Senior Vice President of the Company since
November 1999 and General Counsel of the Company since March 1998. She became
Secretary of the Company in November 1998. Prior to joining the Company, Ms.
Braunsdorf served as corporate counsel for Timex Corporation since 1989 and also
served as Assistant Secretary for Timex and certain of its subsidiaries.

         Gary Schneider has been Senior Vice President U.S. Brand Sales of the
Company since November, 1999. Prior to joining the Company in February 1999, Mr.
Schneider was a consultant with Coopers & Lybrand L.L.P. concentrating in
the packaged goods industry from 1996 to 1998. Prior thereto, Mr. Schneider
was Vice President - Sales Strategy with Coca-Cola Foods.

         Poul E. Heilmann has been Senior Vice President Global Marketing of
the Company since November, 1999. Prior to joining the Company in August
1999, Mr. Heilmann served as Director of Marketing of Kash N'Karry Food
Stores, a subsidiary of Delhaize America, Inc. from 1997 to 1999, and as
Director of Marketing of Food Lion, Inc. from 1994 to 1997.

         Van E. Snowdon has been Senior Vice President Business Development
of the Company since November, 1999. Prior to joining the Company,
Mr. Snowdon served as President and Chief Executive Officer
of International Wireless Communications, Inc. from March 1998 to September
1999. Prior thereto, Mr. Snowdon was President of Vanguard's International
Division.

         Robert M. DeMichele has been a director of the Company since 1995 and
has served as President, Chief Executive Officer and a director of Lexington
Global Asset Managers, Inc., a diversified financial services holding company,
since 1995. Prior thereto, Mr. DeMichele was President, Chief Executive Officer
and a director of Piedmont Management Company, Inc., formerly the parent
corporation of Lexington Global Asset Managers, Inc. Mr. DeMichele also serves
as a director of Chartwell Reinsurance Co. and the Navigators Group, Inc.

         William P. Emerson, Jr. has been a director of the Company since its
inception in 1993. During 1995, Mr. Emerson served as Chairman of the Company's
Board of Directors. Mr. Emerson has served as the President and Chief Executive
Officer of Wilmington Shipping Company since 1991. Wilmington Shipping Company
services the international trade community through various divisions that
provide steamship line agents, customs brokers and freight forwarders, and a
warehouse and container maintenance and repair station.

         Haynes G. Griffin has been a director of the Company since its
inception in 1993 and served as Chairman of the Board of Directors of the
Company from 1993 through 1995. Mr. Griffin currently serves as Chairman and
Chief Executive Officer of Prospect Partners, LLC, a venture capital
firm. Mr. Griffin was a co-founder and Chairman of the Board of Vanguard and
served as an executive officer and director of Vanguard from its inception in
1984 until May 1999 when it was acquired by AT&T Corporation. Mr. Griffin is a
member of the Board of Directors of Lexington Global Asset Managers, Inc.

         Richard A. Horvitz has been a director of the Company since April 1999.
Mr. Horvitz is Chairman and Chief Executive Officer of Moreland Management,
Co., a management advisory firm. Mr. Horvitz is also Vice Chairman and a trustee
of LJR Trust, which is a general partner of LJR Limited Partnership.

         Richard P. Ludington has been a director of the Company since its
inception in 1993. Mr. Ludington is presently in the private practice of law.
From 1996 to 1997, Mr. Ludington was Vice President-Real Estate of The
ForestLand Group, L.L.C., a timberland investment company. Prior thereto, Mr.
Ludington served as Southeast Regional Director for The Conservation Fund, a






<PAGE>


nonprofit organization that creates partnerships with private and public sector
corporations and organizations to help protect America's outdoor environment.

         L. Richardson Preyer, Jr. has been a director of the Company since its
inception in 1993. Mr. Preyer currently serves as President [and Vice Chairman]
of Prospect Partners, [LLC], a venture capital firm. Mr. Preyer was a
co-founder of Vanguard and served as a director and executive officer of
Vanguard from its inception in 1983 until May 1999 when it was acquired by AT&T
Corporation. Mr. Preyer is a cousin of Stuart S. Richardson.

         Brian A. Rich has been a director of the Company since 1996. Mr. Rich
is currently a business consultant. From July 1995 through December 1998, Mr.
Rich served as Managing Director and Group Head of Toronto Dominion Capital, the
U.S. merchant bank affiliate of Toronto Dominion Bank. Prior thereto, Mr. Rich
was a managing director of the Communications Finance Group of Toronto Dominion
Bank in New York.

         Stuart S. Richardson has been a director of the Company since 1995 and
has served as Chairman of Lexington Global Asset Managers, Inc., a diversified
financial services holding company, since 1995. Prior thereto, Mr. Richardson
was an executive of Piedmont Management Company, Inc., formerly the parent
corporation of Lexington Global Asset Managers, Inc., and served as its Vice
Chairman from 1986 to 1995. Mr. Richardson also serves as a director of
Chartwell Reinsurance Co. Mr. Richardson is a cousin of L. Richardson
Preyer, Jr.

         Robert A. Silverberg has been a director of the Company since 1996. Mr.
Silverberg served as Executive Vice President and Director of Vectra Bank from
1995-1998. Prior thereto, Mr. Silverberg was Chairman of the Board and President
of First Denver Corporation and Chairman of the Board of its subsidiary, First
National Bank of Denver. Mr. Silverberg was also the President and Chairman of
the Board of 181 Realty Company, a commercial real estate holding company
and from 1996 to 1998 served as a managing partner of Silverberg Investment
Co. LLLP.

         In addition to the executive officers of the Company mentioned above,
Peter F. Kelly has served as Managing Director of the Company's
European operations since December 1999. Prior to joining the Company, Mr. Kelly
served as Business Unit Head-Retail for Europe with IBM (U.K), Ltd. Prior
thereto, Mr. Kelly served as Trading Director for Tesco, the United Kingdom's
largest grocery retailer.

         The Company's bylaws provide that the number of directors shall be not
less than seven nor more than 12, such number within the foregoing range to be
fixed from time to time by the Board of Directors or shareholders. The number is
presently fixed at 12, and there are presently two vacancies on the Board. The
holders of a majority of the Company's Common Stock have entered into a voting
agreement whereby LJR Limited Partnership is entitled to designate one director
of the Company. Pursuant to this arrangement, Richard A. Horvitz was elected as
a director of the Company in June 1999. See Part III, Item 13. " Certain
Relationships and Related Transactions."

COMMITTEES

         The Compensation and Stock Option Committee of the Board of Directors
consists of Messrs. DeMichele (Chairman), Horvitz, Preyer and Richardson. This
Committee recommends employee salaries and incentive compensation to the Board
of Directors and administers the Company's stock option plans.

         The Nominating Committee of the Board of Directors was created in June
1999 and presently consists of Stephen R. Leeolou, Richard A. Horvitz and Brian
A. Rich. This Committee considers and makes recommendations to the Board
regarding the appropriate size of the Board and recommends nominees to be
considered as directors of the Company.

         The Audit Committee of the Board of Directors consists of Messrs.
Silverberg (Chairman), Emerson and Ludington. The Audit Committee makes
recommendations to the Board of Directors concerning its review of the Company's
internal controls and accounting system and its review of the annual audit, and
regarding the selection of independent auditors.





<PAGE>


Item 11. EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

        The following table sets forth all compensation paid by the Company for
services rendered in all capacities to the Company during the periods indicated
to its Chairman and Chief Executive Officer, its four most highly compensated
individuals serving as executive officers of the Company at December 31, 1999
and two additional individuals who served as executive officers of the Company
during the year and would have been included in the table but for the fact that
they were no longer employed by the Company at December 31, 1999 (collectively,
the "Named Officers").

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                                                                      SECURITIES
                  NAME AND                                                                          OTHER             UNDERLYING
             PRINCIPAL POSITION                   YEAR        SALARY ($)       BONUS ($)        COMPENSATION          OPTIONS (#)
             ------------------                   ----        ----------       ---------        ------------          -----------
<S>                                             <C>          <C>            <C>               <C>                   <C>
Stephen R. Leeolou                                 1999         50,000              --               --                800,000(1)
     Chairman of the Board                         1998         51,923              --               --                   --
     Chief Exec. Officer & Treasurer               1997         50,000              --               --                   --
Lee D. Armbuster                                   1999        110,904          40,000               --                200,000
     President                                     1998             --              --               --                   --
     Chief Operating Officer                       1997             --              --               --                   --
Donald J. Anderson                                 1999        125,000          10,000               --                 85,000(2)
     Senior Vice President                         1998         30,126              --               --                 50,000
     Chief Technical Officer                       1997             --              --               --                 10,000(3)
Michael T. Leeolou                                 1999        145,000          31,750               --                110,000(4)
     Senior Vice President                         1998        138,327          35,000               --                 80,000
     U.S. Retail Sales                             1997             --              --               --                 30,000
Mary Braunsdorf                                    1999        118,998          10,000               --                 45,000(5)
     Senior Vice President                         1998         76,366              --               --                 15,000
     General Counsel and Secretary                 1997             --              --               --                   --
Gary Schneider                                     1999        116,827          10,000           133,817 (6)            60,000
     Senior Vice President                         1998             --              --               --                   --
     U.S. Brand Sales                              1997             --              --                                    --
Richard A. Vinchesi                                1999         98,365          30,000               --                152,000(7)
     Senior Vice President, Chief                  1998        160,962          20,000               --                100,000
     Operating Officer and Chief                   1997        142,538              --               --                 52,000
     Financial Officer (through August
     1999)
Thomas A. Manna                                    1999        145,000          40,000               --                   --
     Vice President, National Sales                1998        150,577          77,500               --                   --
     (through January 1999)                        1997        105,962          155,000              --                 70,000
</TABLE>





<PAGE>



Footnotes to Summary Compensation Table

(1)  Includes special option to purchase 475,000 shares, exercisable only upon
     an initial public offering or sale of the Company.

(2)  Includes 60,000 options granted in previous years that were repriced in
     1999 from $10.00 to $8.50 per share.

(3)  Granted in his capacity as a consultant to the Company.

(4)  Includes 110,000 options granted in previous years that were repriced in
     1999 from $10.00 to $8.50 per share.

(5)  Includes 15,000 options granted in previous years that were repriced in
     1999 from $10.00 to $8.50 per share.

(6)  Mr. Schneider received this amount as a relocation allowance in connection
     with his relocation to the Company's headquarters in Charlotte, North
     Carolina.

(7)  Includes 152,000 options granted in previous years that were repriced in
     1999 from $10.00 to $8.50 per share.


Option Grants, Exercises and Holdings and Fiscal Year-end Option Values. The
following table summarizes all option grants during the year ended December 31,
1999 to the Named Officers. Except as otherwise indicated in the table below,
the options become exercisable, 20% each year, over a period of five years from
the date of grant, commencing on the first anniversary of the date of grant. All
options expire ten years from the date of grant.


<TABLE>
<CAPTION>

                                                            Option Grants During 1999
                             --------------------------------------------------------------------------------------
                                                                                        Potential Realizable Value
                             Number of       Percent of                                       Value  at Assumed
                               Shares      Total Options    Exercise                       Annual Rates of Stock
                             Underlying     Granted to       or Base                      Price Appreciation for
                              Options      Employees in     Price Per   Expiration             Option Term(1)
                             Granted(#)       1999 (%)       Share         Date           5% ($)        10% ($)
                             ----------       --------       -----         ----           ------        -------
         Name
         ----
<S>                        <C>               <C>           <C>        <C>           <C>             <C>
Stephen R. Leeolou            800,000           44.37         8.50       9/15/09      14,276,483      10,837,449
Lee D. Armbuster              200,000           11.09         8.50        9/1/09       1,070,000       2,702,000
Donald J. Anderson             10,000(3)         0.55         8.50       4/30/07         408,538       1,013,003
                               50,000(3)         2.77         8.50      11/20/98
                               12,500            0.69         8.50       7/21/09
                               12,500            0.69         8.50       9/15/09
Michael T. Leeolou             30,000(3)         1.66         8.50       4/30/07         496,654       1,215,019
                               80,000(3)         4.44         8.50       4/20/08
Mary Braunsdorf                15,000(3)         0.83         8.50       4/20/08         230,662         579,542
                               30,000            1.66         8.50       7/21/09
Gary Schneider                 50,000            2.77         8.50       7/21/09         321,000         810,600
                               10,000            0.55         8.50       9/15/09
Richard A. Vinchesi, Jr.       55,800(3)         3.09         8.50       8/20/01         239,016         578,845
</TABLE>







<PAGE>


<TABLE>
<CAPTION>

                                                            Option Grants During 1999
                             --------------------------------------------------------------------------------------
                                                                                        Potential Realizable Value
                             Number of       Percent of                                       Value  at Assumed
                               Shares      Total Options    Exercise                       Annual Rates of Stock
                             Underlying     Granted to       or Base                      Price Appreciation for
                              Options      Employees in     Price Per   Expiration             Option Term(1)
                             Granted(#)       1999 (%)       Share         Date           5% ($)        10% ($)
                             ----------       --------       -----         ----           ------        -------
         Name
         ----
<S>                        <C>               <C>           <C>        <C>           <C>             <C>
Thomas A. Manna                 0                0             N/A           N/A           N/A             N/A
</TABLE>


(1)  Amounts represent hypothetical gains that could be achieved for the
     respective aggregate options granted to each Named Officer if exercised
     at the end of the option term. These gains are based on assumed rates of
     stock price appreciation, mandated by rules promulgated by the Securities
     and Exchange Commission, of 5% and 10% compounded annually from the date
     the respective options were granted to their expiration date, and are not
     intended to forecast possible future appreciation, if any, in the price of
     the Company's Common Stock. The gains shown are net of the option exercise
     price, but do not include deductions for federal or state income taxes or
     other expenses associated with the exercise of the options or the sale of
     the underlying shares. The actual gains, if any, on the exercise of the
     stock options will depend on the future performance of the Common Stock,
     the option holder's continued employment through the option period and
     the date on which the options are exercised.

(2)  Includes special option to purchase 475,000 shares granted to Mr. Leeolou
     that become exercisable only upon an initial public offering or sale of
     the Company.

        No Named Officers exercised any stock options during 1999. The following
table sets forth information concerning all option holdings for the year ended
December 31, 1999, with respect to the Named Officers.

    AGGREGATED OPTIONS/SAR EXERCISES IN 1999 AND YEAR-END 1999 OPTION VALUES


<TABLE>
<CAPTION>
                                                                          Number of Securities
                                                                         Underlying Unexercised        Value of in-the-Money
                                  Shares                                 Options/SARs at Fiscal     Options/SARs at Fiscal Year-
                                Acquired on       Value Realized              Year-End (#)                   End($)(1)
                               Exercise (#)            ($)             Exercisable/Unexercisable     Exercisable/Unexercisable
                               ------------       ---------------      -------------------------     -------------------------
Name
----
<S>                        <C>                <C>                  <C>                               <C>
Stephen R. Leeolou                   0                  0                   202,000/800,000             1,721,700/4,400,000
Lee D. Armbuster                     0                  0                         0/200,000                     0/1,100,000
Donald J. Anderson                   0                  0                     20,000/65,000                 110,000/357,500
Michael T. Leeolou                   0                  0                     56,000/64,000                 326,000/364,000
Mary Braunsdorf                      0                  0                      6,000/39,000                  33,000/214,500
Gary Schneider                       0                  0                          0/60,000                       0/330,000
Richard A. Vinchesi, Jr.             0                  0                          75,000/0                       431,700/0
Thomas A. Manna                      0                  0                          21,000/0(2)                     84,000/0
</TABLE>

(1)  There is no trading market for the Common Stock. Management estimated the
     fair market value of the Common Stock to be $14.00 share at December 31,
     1999.

(2)  These options expired, without exercise, on January 7, 2000.







<PAGE>


        Stock Compensation Plans. The Company has a 1994 Stock Compensation Plan
that provides for the issuance of shares of Common Stock to key employees,
consultants and directors pursuant to stock options that meet the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (incentive stock
options), options that do not meet such requirements (nonqualified stock
options) and stock bonuses. All options under the plan must be granted at an
exercise price not less than fair market value. Stock bonuses may be in the form
of grants of restricted stock. The aggregate number of shares of Common Stock
that may be issued pursuant to the plan may not exceed 330,000 shares, subject
to adjustment upon occurrence of certain events affecting the Company's
capitalization. As of December 31, 1999, there were no shares available for
future grants under the 1994 Stock Compensation Plan.

        The Company also has a 1996 Nonqualified Stock Option Plan that provides
for the issuance of shares of Common Stock to key employees, consultants and
directors pursuant to nonqualified stock options. All options must be granted at
an exercise price not less than $5.50 per share. The aggregate number of shares
of Common Stock that may be issued pursuant to the plan may not exceed 600,000
shares of Common Stock, subject to adjustment upon occurrence of certain events
affecting the Company's capitalization. This plan is subject to shareholder
approval. As of December 31, 1999, 15 shares were available for future grants
under the 1996 Nonqualified Stock Option Plan.

        The Company also has established the 1997 Long-Term Incentive Plan that
provides for the issuance of shares of Common Stock to officers, supervisory
employees, directors or consultants pursuant to incentive and nonqualified stock
options and restricted and unrestricted stock awards. All options under the plan
must be granted at an exercise price not less than the fair market value of the
Common Stock at the time of the grant. No stock awards or stock appreciation
rights have been granted under the plan. In June 1999, the Board of Directors
authorized an increase in the aggregate number of shares that may be issued
pursuant to this plan from 670,000 to 1,470,000, subject to certain adjustments
affecting the Company's capitalization. As of December 31, 1999, 1,918 shares
were available for future grants under this plan.

        The foregoing plans are administered by the Compensation and Stock
Option Committee of the Board of Directors, which is authorized, subject to the
provisions of the Plan, to determine to whom and at what time options and
bonuses may be granted and the other terms and conditions of the grant.

DIRECTOR COMPENSATION

        In July 1999 each of the nonemployee directors of the Company was
granted a nonqualified stock option, exercisable for 5,000 shares of Common
Stock of the Company at an exercise price of $8.50 per share as compensation for
services rendered. The directors were not otherwise compensated for their
service as directors during 1999 except for the repricing of existing options
that reduced the exercise price of such options from $10.00 to $8.50.

EMPLOYMENT AND OTHER AGREEMENTS

        All of the Company's employees, including the Named Officers, are
employees at will. Each of the Named Officers and each employee of the Company
is required to sign non-compete and non-disclosure agreements covering such
items as ownership and authorship of all work and materials, trade secrets,
confidential information, unfair business practices and covenants not to
compete.

        Effective November 2, 1999, the Company entered into an Employment
Agreement with Steve Leeolou who is Chairman of the Board, Chief Executive
Officer and Treasurer of the







<PAGE>


Company. The Agreement is for a term of three years and provides for an annual
salary of $50,000 for the first year with subsequent increases in salary as may
be approved by the Board of Directors of the Company. Under the terms of the
Agreement, Mr. Leeolou's salary will be reviewed at least annually and the
annual increase shall be not less than 5% of the then Base Salary. Upon the
occurrence of a "Liquidity Event," which is defined as (i) completion of an
initial public offering by the Company, or (ii) a sale of all or substantially
all of the Company, by means of a merger, a share exchange, a sale of assets or
otherwise, for an aggregate equity value (excluding debt) of not less than
$200,000,000. Mr. Leeolou's salary shall be increased to $250,000 per annum.

        The Agreement also contains a provision providing for a severance
payment equal to 2.99 times Mr. Leeolou's average annual total cash compensation
for the immediately preceding two fiscal years if he is terminated without cause
following a change in control, or if Mr. Leeolou's responsibilities are
substantially diminished, he is required to change his residence or his travel
obligations are substantially increased without his consent following a change
in control.

         In January 1999, Mr. Manna resigned from his position with the Company.
Pursuant to the terms of a Severance and Release Agreement (the "Severance
Agreement") between Mr. Manna and the Company, the Company agreed to pay Mr.
Manna's annual salary of $150,577 for a period of 12 months. The Company also
agreed to pay $40,000 to Mr. Manna in equal installments of $5,000 per month
and to extend the exercise period for his vested options for a period of one
year.

         In 1999, the Board of Directors adopted a Key Employee Severance Plan
for the purpose of improving the ability of the Company to attract and retain
highly qualified, high impact key employees. Pursuant to the Plan, an employee
of the Company who is identified as a participant by the Board of Directors or
Compensation Committee becomes entitled to receive a severance payment if the
participant is terminated without cause following a change in control of the
Company or if the participant terminates his or her employment because of
a change in position or employment conditions following a change in control.
The severance payment would be equal to the participant's average annual
base salary for the immediately two preceding two fiscal years multiplied by
a number ranging from 1.00 to 2.99. Each of the Named Officers presently
serving and other key employees have been named as participants in the plan.
The multiples with respect to Named Officers presently serving are: Stephen
R. Leeolou (2.99), Lee D. Armbuster (1.75), Donald J. Anderson (1.25),
Michael T. Leeolou (1.25), Mary Braunsdorf (1.25), and Gary Schneider (1.25).

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

        Robert DeMichele, Richard Horvitz, L. Richardson Preyer, Jr. and Stuart
S. Richardson are members of the Company's Compensation and Stock Option
Committee and have provided capital to the Company and engaged in related
transactions. See Part III, Item 13. "Certain Relationships and Related
Transactions".

INDEMNIFICATION MATTERS

        The North Carolina Business Corporation Act (the "Business Corporation
Act") provides for mandatory indemnification against reasonable expenses for a
director or officer who is wholly successful in the defense of any proceeding to
which he is a party because he is or was a director or officer of a corporation.
Additionally, as permitted by the Business Corporation Act, the Company's Bylaws
provide for indemnification of the Company's directors and Indemnified Officers
(executive officers who are also directors and any other officer, employee or
agent of the Company who is designated by the Board as an Indemnified Officer)
against any and all liability and expenses in any proceeding, including
reasonable attorneys' fees, arising out of their status or activities as
directors and officers, except for liability or litigation expense incurred on
account of activities that at the time taken were not in good faith or were
known or reasonably should have been known by such director or officer or
employee to be clearly in conflict with the best interests to the Company or
that such director or officer had reason to believe were unlawful.

        At present, there is no pending litigation or proceeding involving any
director or officer, employee or agent of the Company where indemnification will
be required. The Company is not aware of any threatened litigation or proceeding
which may result in a claim for such indemnification.







<PAGE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following tables set forth the beneficial ownership of each class
of the Company's voting securities by each person known by the Company to be the
owner of 5% or more of the shares of each class, by each person who is a
director or Named Officer of the Company and by all directors and officers of
the Company as a group. Ownership of the Company's Common Stock is set forth in
the first table and ownership of each of the Company's three classes of
preferred stock-- the 10% Series A Mandatorily Convertible Preferred Stock
("Series A Preferred Stock"), the 14% Series B Senior Mandatorily Convertible
Preferred Stock ("Series B Preferred Stock") and the 10% Series C Mandatorily
Convertible Preferred Stock ("Series C Preferred Stock")- - is set forth in the
second table.

<TABLE>
<CAPTION>
                                                                   COMMON STOCK BENEFICIALLY OWNED (1)
                                                                   -----------------------------------
                         SHAREHOLDER                                 SHARES                    PERCENT
                         ------------                                -------                   -------
<S>                               <C>                                <C>                       <C>
Vanguard Cellular Operating Corp. (2)                                2,920,114                 33.22%
Piedmont Acorn Investors Limited Partnership (3) (4)                   787,285                 10.16%
Clearing Systems, Inc.                                                 792,548                 10.23%
William P. Emerson, Jr. (5)                                            304,612                  3.91%
Haynes G. Griffin (6)                                                  389,677                  5.00%
Richard A. Horvitz (7)                                                 126,429                  1.61%
Stephen R. Leeolou (8)                                                 582,649                  7.30%
Richard P. Ludington (9)                                               118,567                  1.53%
L. Richardson Preyer, Jr. (10)                                         396,677                  5.09%
Brian A. Rich (11)                                                      11,000                      *
Stuart S. Richardson (12)                                              420,122                  5.31%
Robert A. Silverberg (13)                                               41,714                      *
Robert M. DeMichele (14)                                               224,857                  2.84%
Michael T. Leeolou (15)                                                 73,961                      *
Mary Braunsdorf (16)                                                     6,000                      *
Gary Schneider                                                               0                      -
Donald Anderson (17)                                                    20,000                      *
Richard A. Vinchesi (18)                                                85,000                  1.09%
Thomas A. Manna (19)                                                         0                      -
All Directors and Officers as a group                                2,502,039                  28.67%
(18 persons) (20)

---------
  * Owns less than 1% of the total outstanding shares of class.







<PAGE>



Footnotes to Common Stock Ownership Table

(1) Applicable percentage of ownership is based on outstanding shares of Common
Stock as of March 27, 2000. Beneficial ownership is determined in accordance
with the rules of the Commission and includes voting and investment power with
respect to securities. Shares of Common Stock issuable under options or warrants
currently exercisable or exercisable within 60 days of March 27, 2000 are deemed
outstanding for purposes of computing the percentage ownership of the person
holding such options or warrants, but are not deemed outstanding for purposes of
computing the percentage of any other person. Except for shares held jointly
with a person's spouse or subject to applicable community property laws, or as
indicated in these footnotes, each stockholder identified in the tables
possesses sole voting and investment power with respect to all shares shown as
beneficially owned by such stockholder.

(2) Includes 900,113 shares of Common Stock that Vanguard has the right to
acquire at $23.50 per share under an amended and restated warrant. Also includes
145,455 shares of Common Stock that Vanguard has the right to acquire at $8.50
per share under other warrants.

(3) These shares are owned of record by Piedmont Acorn Investors Limited
Partnership. Lunsford Richardson, Jr. is the general partner of Piedmont Acorn
Investors Limited Partnership and may also be deemed to beneficially own such
shares. Includes 2,500 shares of Common Stock that Piedmont Acorn has the right
to purchase under presently exercisable warrants.

(4) The descendants of Lunsford Richardson, Sr., their spouses, trusts, and
corporations in which they have interests and charitable organizations
established by such descendants (collectively referred to as the "Richardson
Family") beneficially own approximately 1,593,176 shares, or 19.43%, of the
Common Stock. Such number of shares of Common Stock includes 784,785 shares and
presently exercisable warrants to purchase 2,500 shares held by Piedmont Acorn
Investors Limited Partnership, 50,000 shares and presently exercisable warrants
to purchase 145,357 shares held by the Smith Richardson Foundation, Inc., 50,000
shares and presently exercisable warrants to purchase 109,643 shares held by
Piedmont Harbor-Piedmont Associates Limited Partnership, 268,741 shares and
presently exercisable warrants to purchase 9,915 shares held directly by L.
Richardson Preyer, Jr., 73,421 shares held in family trusts for Mr. Preyer and
his children, 44,600 and 18,500 shares Mr. Preyer and Mr. Stuart S. Richardson,
respectively, have the right to acquire under presently exercisable options
granted to them under the Company's stock option plans, and 35,714 shares that
Mr. Richardson has the right to acquire under presently exercisable warrants.
The individuals and institutions constituting the Richardson Family have
differing interests and may not necessarily vote their shares in the same
manner. Furthermore, trustees and directors have fiduciary obligations (either
individually or jointly with other fiduciaries) under which they must act on the
basis of fiduciary requirements which may dictate positions that differ from
their personal interests.

(5) Includes 47,200 shares of Common Stock that Mr. Emerson has the right to
acquire under presently exercisable options granted to him under the Company's
stock option plans. Also includes 500 shares that Mr. Emerson has the right to
purchase under presently exercisable warrants. Includes 30,000 shares of Common
Stock held by a trust for the benefit of his children and 5,000 shares of Common
Stock held by an entity controlled by Mr. Emerson. Includes 1,375 shares that
such entity has the right to purchase under presently exercisable warrants. Does
not include 5,000 shares of Common Stock held by members of his immediate family
for which Mr. Emerson disclaims beneficial ownership.

(6) Includes 37,600 shares of Common Stock that Mr. Griffin has the right to
acquire under presently exercisable options granted to him under the Company's
stock option plans. Includes 10,905 shares of Common Stock held in trusts for
the benefit of Mr. Griffin's children. Also includes 9,915 shares that Mr.
Griffin has the right to purchase under presently exercisable warrants. Does not
include 85,702 shares of Common Stock owned by a partnership of which his
brother is general partner. Mr. Griffin disclaims beneficial ownership of such
shares.

(7) Includes 5,000 shares of Common Stock that Mr. Horvitz has the right to
acquire under presently exercisable stock options granted to him under the
Company's stock option plans. Includes 121,429 shares of Common Stock that LJR
Limited Partnership has the right to acquire under presently exercisable
warrants. Mr. Horvitz is Vice Chairman and a trustee LJR Trust, a general
partner of LJR Limited Partnership.








<PAGE>



(8) Includes 202,000 shares of Common Stock that Mr. Stephen Leeolou has the
right to acquire under presently exercisable stock options granted to him under
the Company's stock option plans. Also includes 29,559 shares that Mr. Leeolou
has the right to purchase under presently exercisable warrants. Includes 8,928
shares that a partnershp controlled by Mr. Leeolou has the right to purchase
under presently exercisable warrants. Includes 17,961 shares of Common Stock
held by trusts for the benefit of his children for which Mr. Michael T. Leeolou
serves as trustee. Such shares are also reported as beneficially owned by Mr.
Michael T. Leeolou.

(9) Includes 23,000 shares of Common Stock that Mr. Ludington has the right to
acquire under presently exercisable stock options granted to him under the
Company's stock option plans and 17,113 shares of Common Stock held by a trust
for the benefit of his children.

(10) Includes 44,600 shares of Common Stock that Mr. Preyer has the right to
acquire under presently exercisable options granted to him under the Company's
stock option plans. Includes 73,421 shares of Common Stock held in trusts
for the benefit of Mr. Preyer and his children, a portion of which (10,908
shares) are also reported as beneficially owned by Mr. Richardson. Also
includes 9,915 shares that Mr. Preyer has the right to purchase under presently
exercisable warrants.

(11) Includes 11,000 shares of Common Stock that Mr. Rich has the right to
acquire under presently exercisable options granted to him under the Company's
stock option plans.

(12) Includes 35,714 shares that Mr. Richardson has the right to purchase under
presently exercisable warrants. Includes 10,908 shares of Common Stock held in
trust for Mr. Preyer's children for which Mr. Richardson serves as trustee. Such
shares are also reported as beneficially owned by Mr. Preyer. Includes 50,000
shares of Common Stock held by the Smith Richardson Foundation, of which Mr.
Richardson serves as one of eight trustees and 145,357 shares that the
Foundation has the right to purchase under presently exercisable warrants.
Includes 50,000 shares of Common Stock held by Piedmont Harbor-Piedmont
Associates Limited Partnership, of which Mr. Richardson serves as a general
partner, and 109,643 shares that such Partnership has the right to purchase
under presently exercisable warrants. The shares held by the Smith Richardson
Foundation are also reported as beneficially owned by Robert M. DeMichele. Mr.
Richardson disclaims beneficial ownership of the shares held by the Foundation.
Includes 18,500 shares of Common Stock that Mr. Richardson has the right to
acquire under the presently exercisable options granted to him under Company's
stock option plans.

(13) Includes 11,000 shares of Common Stock that Mr. Silverberg has the right to
acquire under presently exercisable options granted to him under the Company's
stock option plans. Includes 20,000 shares of Common Stock owned by an entity
controlled by Mr. Silverberg. Also includes 10,714 shares that such entity has
the right to purchase under presently exercisable warrants.

(14) Includes 50,000 shares of Common Stock held by the Smith Richardson
Foundation, of which Mr. DeMichele serves as one of eight trustees and 145,357
shares that the Foundation has the right to purchase under presently exercisable
warrants. The shares held by the Smith Richardson Foundation are also reported
as beneficially owned by Stuart S. Richardson. Mr. DeMichele disclaims
beneficial ownership of the shares held by the Foundation. Includes 18,500
shares of Common Stock that Mr. DeMichele has the right to acquire under
presently exercisable options granted to him under the Company's stock option
plans. Also includes 1,000 shares that Mr.
DeMichele has the right to acquire under presently exercisable warrants.

(15) Includes 56,000 shares of Common Stock that Mr. Michael Leeolou has the
right to acquire under presently exercisable stock options granted to him under
the Company's stock option plans. Also includes 17,961 shares of Common Stock
held by trusts for the benefit of Mr. Stephen Leeolou's children for which Mr.
Michael Leeolou serves as trustee. Such shares are also reported as beneficially
owned by Mr. Stephen Leeolou.

(16) Includes 6,000 shares of Common Stock that Ms. Braunsdorf has the right to
acquire under presently exercisable options granted to her under the Company's
stock option plans.







<PAGE>



(17) Includes 20,000 shares of Common Stock that Mr. Anderson has the right to
acquire under presently exercisable options granted to him under the Company's
stock option plans.

(18) Includes 75,000 shares of Common Stock that Mr. Vinchesi has the right to
acquire under presently exercisable options granted to him under the Company's
stock option plans. Mr. Vinchesi's employment with the Company terminated in
August, 1999.

(19) Mr. Manna's employment with the Company terminated in January, 1999.

(20) Includes 500,400 shares of Common Stock that may be purchased under
presently exercisable options granted to directors and officers under the
Company's stock option plans and 484,049 shares that such directors and officers
have the right to purchase under presently exercisable warrants.


</TABLE>
<TABLE>
<CAPTION>
                                                   PREFERRED STOCK BENEFICIALLY OWNED
                                                   ----------------------------------
                                     SERIES A PREFERRED     SERIES B PREFERRED    SERIES C PREFERRED
          SHAREHOLDER                 SHARES    PERCENT     SHARES     PERCENT     SHARES    PERCENT
          -----------                 ------    -------     -------    -------     -------   -------
<S>                                   <C>         <C>       <C>         <C>         <C>       <C>
Vanguard Cellular Operating Corp.     80,000      16.04%    18,000      12.90%         0        --
Piedmont Acorn Investors Limited      75,681      15.17%         0        --           0        --
Partnership (2) (5)
Smith Richardson Foundation (3) (5)   50,000      10.02%         0        --      20,000      14.56%
Piedmont Harbor-Piedmont Associates   22,478       4.51%         0        --      15,000      10.92%
Limited Partnership (4) (5)
LJR Limited Partnership (6)           75,000      15.03%     5,000       3.58%    17,000      12.38%
United Opportunities Fund                  0        --           0        --      41,750      30.40%
Richard M. Cundiff                    25,000       5.01%         0        --           0        --
William P. Emerson, Jr                     0        --           0        --           0        --
Haynes G. Griffin                     11,250        *          300        *        1,000        *
Richard A. Horvitz (7)                75,000      15.03%     5,000       3.58%    17,000      12.38%
Stephen R. Leeolou (8)                27,500       5.51%     2,000       1.43%     5,000       3.64%
Richard P. Ludington                   1,000        *            0        --           0        --
L. Richardson Preyer, Jr. (9)         24,500       4.91%       400        *        1,000        *
Brian A. Rich                              0        --           0        --           0        --
Stuart S. Richardson (10)             72,478      14.53%       700        *       40,000      29.13%
Robert A. Silverberg (11)              2,500        *          400        *        1,500       1.09%
Robert DeMichele (12)                 50,000      10.02%         0        --      20,000      14.56%
Michael T. Leeolou (13)                    0        --           0        --           0        --
Mary Braunsdorf                            0        --           0        --           0        --
</TABLE>







<PAGE>



<TABLE>
<CAPTION>
                                                    PREFERRED STOCK BENEFICIALLY OWNED
                                                   ----------------------------------
                                        SERIES A PREFERRED     SERIES B PREFERRED    SERIES C PREFERRED
          SHAREHOLDER                    SHARES    PERCENT     SHARES     PERCENT     SHARES    PERCENT
          -----------                   ------    -------     -------    -------     -------   -------
<S>                                     <C>         <C>       <C>         <C>         <C>       <C>
Gary Schneider                                0      --            0       --             0      --
Donald Anderson                               0      --            0       --             0      --
Richard A. Vinchesi (14)                      0      --            0       --             0      --
Thomas A. Manna (15)                          0      --            0       --             0      --
All Directors and Officers as a group   214,378     42.97%     8,800      6.30%      65,500    47.70%
(18 persons)
</TABLE>

* Owns less than 1% of the total outstanding shares of class.

Footnotes to Preferred Stock Table

(1) Applicable percentage of ownership is based on outstanding shares of each
series of preferred stock as of March 27, 2000. Does not include accrued
dividends payable in shares on the Series A and Series C Preferred Stock.
Beneficial ownership is determined in accordance with the rules of the
Commission and includes voting and investment power with respect to securities.
Except for shares held jointly with a person's spouse or subject to applicable
community property laws, or as indicated in these footnotes, each stockholder
identified in the tables possesses sole voting and investment power with respect
to all shares shown as beneficially owned by such stockholder.

(2) These shares are owned of record by Piedmont Acorn Investors Limited
Partnership. Lunsford Richardson, Jr. is the general partner of Piedmont Acorn
Investors Limited Partnership and may also be deemed to beneficially own such
shares.

(3) Lunsford Richardson, Jr. is a trustee of the Foundation. Messrs. DeMichele
and Richardson are trustees of the Foundation.

(4) Lunsford Richardson, Jr. and Stuart S. Richardson are general partners of
this partnership.

(5) As of March 27, 2000, the descendants of Lunsford Richardson, Sr., their
spouses, trusts, and corporations in which they have interests and charitable
organizations established by such descendants (collectively referred to as the
"Richardson Family") beneficially own approximately 172,659 shares, or 34.61%,
of the Series A Preferred Stock, 1,100 shares, or less than one percent of the
Series B Preferred Stock and 41,000 shares, or 29.86%, of the Series C Preferred
Stock. Such number of shares includes: 75,681 shares of Series A Preferred Stock
owned by Piedmont Acorn Investors Limited Partnership; 22,478 shares of Series A
Preferred Stock and 15,000 shares of Series C Preferred Stock held by Piedmont
Harbor-Piedmont Associates Limited Partnership; 50,000 shares of Series A
Preferred Stock and 20,000 shares of Series C Preferred Stock held by the Smith
Richardson Foundation; 700 shares of Series B Preferred Stock and 5,000 shares
of Series C Preferred Stock held directly by Stuart S. Richardson; and 24,500
shares of Series A Preferred Stock, 400 shares of Series B Preferred Stock and
1,000 shares of Series C Preferred Stock held directly by L. Richardson Preyer,
Jr. and his famliy trusts. The individuals and institutions constituting the
Richardson Family have differing interests and may not necessarily vote their
shares in the same manner. Furthermore, trustees and directors have fiduciary
obligations (either individually or jointly with other fiduciaries) under
which they must act on the basis of fiduciary requirements which may dictate
positions that differ from their personal interests.

(6) Mr. Horvitz is Vice Chairman and Trustee of LJR Trust, the general partner
of LJR Limited Partnership.

(7) All shares are held by LJR Limited Partnership. See Note (6).







<PAGE>


(8) Includes 10,000 shares of Series A Preferred Stock and 1,250 shares of
Series C Preferred Stock that are held by a family partnershp controlled by Mr.
Leeolou.

(9) Includes 19,000 shares of Series A Preferred Stock held in a family trust
for the benefit of Mr. Preyer and his children.

(10) Includes 50,000 shares of Series A Preferred Stock and 20,000 shares of
Series C Preferred Stock held by the Smith Richardson Foundation, of which Mr.
Richardson serves as one of eight trustees and 22,478 shares of Series A
Preferred Stock and 15,000 shares of Series C Preferred Stock held by Piedmont
Harbor-Piedmont Associates Limited Partnership, of which Mr. Richardson serves
as a general partner. The shares held by the Smith Richardson Foundation are
also reported as beneficially owned by Robert M. DeMichele. Mr. Richardson
disclaims beneficial ownership of the shares held by such foundation and
partnership.

(11) Includes 2,500 shares of Series A Preferred Stock, 400 shares of Series B
Preferred Stock and 1,500 shares of Series C Preferred Stock owned by various
enties controlled by Mr. Silverberg.

(12) Includes 50,000 shares of Series A Preferred Stock and 20,000 shares of
Series C Preferred Stock held by the Smith Richardson Foundation, of which Mr.
DeMichele serves as one of eight trustees.The shares held by the Smith
Richardson Foundation are also reported as beneficially owned by Stuart S.
Richardson. Mr. DeMichele disclaims beneficial ownership of the shares held by
such foundation.

(15) Mr. Vinchesi's employment with the Company terminated in August, 1999.

(16) Mr. Manna's employment with the Company terminated in January, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company was incorporated in 1993 and in April of that year
purchased certain technology and other assets, including software and trademarks
and service marks under which the IEMN was developed, and assumed certain
liabilities, of Clearing Systems, Inc. ("CSI") in exchange for 816,902 shares of
the Company's authorized Common Stock. CSI is a Delaware corporation founded in
1992 whose principal shareholders are Paul A. Nash, a former director and
executive officer of the Company, and Michael R. Jones, a former director of the
Company. CSI was the shell corporation under which certain of the Company's
technology was first developed and has had no business operation. On June 15,
1993, Mr. Jones assigned to the Company his rights as licensee of certain patent
rights, including the patent presently used in the Company's business. See Part
I, Item 1. "Business -- Intellectual Property Matters."

         From time to time after such purchase, the Company has obtained capital
for its business by issuing shares of its Common Stock in private transaction
and directors, officers, and principal shareholders of the Company and members
of their immediate families and certain related entities have purchased shares.
The first of these transactions was consummated April 1993, whereby the Company
issued 1,999,998 shares of its Common Stock at a purchase price of approximately
$1.02 per share to certain individual investors including Messrs. Preyer,
Griffin, Leeolou, Emerson, and Ludington.

         In connection with their April 1993 purchases of Common Stock, the
initial investors agreed to lend the Company an aggregate of $1.6 million. These
loans were made to the Company in 1994 and included loans made by the following
investors in the amounts indicated: Mr. Preyer, $196,722; Mr. Griffin, $196,722;
Mr. Leeolou, $196,722; Mr. Emerson, $177, 050; and Mr. Ludington, $65,574. Also
included were loans made by Alonzo Family Partners, Ltd., a limited partnership
owned by the brother of Haynes G. Griffin and certain members of the brother's
immediate family, which purchased part of an initial investor's interest and






<PAGE>


agreed to fulfill a portion his loan commitment. The promissory notes issued for
such loans, bearing interest with rates from prime plus 2% to 15%, were
exchanged for 8.5% convertible notes in 1995 in the same principal amount and
with a conversion price of $5.00 per share.

         Vanguard Cellular Systems, Inc. (together with its subsidiaries,
"Vanguard") made a series of investments in the Company's equity and debt
securities beginning in 1995. In 1999, Vanguard was acquired by AT&T Corporation
("AT&T"). Prior to the acquisition by AT&T, Stephen R. Leeolou, the Chairman and
Chief Executive Officer of the Company, was President and Chief Executive
Officer of Vanguard and five of the Company's other directors (Mr. Preyer, Mr.
Griffin, Mr. Richardson, Mr. DeMichele and Mr. Silverberg) were also directors
of Vanguard. Since the acquisition of Vanguard by AT&T, there has been no
overlapping of management of the Company.

         In May 1995, Vanguard, purchased 400,000 shares of Common Stock of the
Company at a purchase price of $5.00 per share. In connection with such
purchase, Vanguard received a warrant to purchase up to an additional 10.27% of
the Common Stock of the Company (the "Vanguard Warrant"). The Vanguard Warrant
was restructured in 1996 to provide Vanguard with the right to buy 900,113
shares at any time before May 5, 2005 at $23.50 per share.

         In October 1995, the Board of Directors approved a private offering of
Common Stock at a purchase price of $5.50 per share, pursuant to which $18.1
million of Common Stock was sold. Purchasers included Mr. Preyer (45,454
shares), Mr. Griffin (45,454 shares), Mr. Leeolou (45,454 shares) Mr. DeMichele
(10,000 shares), Alonzo Family Partners, Ltd. (36,363 shares), Shipyard
Associates, a general partnership of which certain of Mr. Emerson's family
members and an entity affiliated with Mr. Emerson were general partners,
Vanguard (1,454,546 shares), Toronto Dominion Investments, Inc. ("TDI") (363,636
shares), and Piedmont Acorn Investors Limited Partnership (786,286 shares). In
connection with this offering, purchasers of $250,000 or more of Common Stock
received warrants to purchase a number of shares of Common Stock equal to 5% of
the shares purchased in the offering and purchasers of $1,000,000 or more of
Common Stock received warrants to purchase a number of shares of Common Stock
equal to 10% of the shares purchased in the offering. Purchasers of Common Stock
in this offering who were also purchasers of Common Stock in 1994 and earlier
1995 offerings (excluding Vanguard) were also offered warrants (at a purchase
price of $.01 per warrant share) to purchase Common Stock. The exercise price of
the warrants in this offering was stated to equal the average sales price of the
next $2 million of Common Stock issued and sold by the Company. Purchasers and
recipients of warrants in this offering included Mr. Preyer (2,773 shares), Mr.
Griffin (2,773 shares), Mr. Leeolou (2,773 shares), Mr. DeMichele (1,000
shares), Vanguard (145,455 shares), Piedmont Acorn Investors Limited Partnership
(78,629 shares), TDI (36,364 shares), Shipyard Associates (13,750 shares), Smith
Richardson Foundation, Inc. (2,500 shares) and Piedmont Harbor-Piedmont
Associates Limited Partnership (2,500 shares). Since the issuance of the
warrants, the Company has not sold $2 million of common stock but did sell in
excess of $2 million of Series A Preferred Stock convertible into common stock
at a conversion price of $8.50 per share. Therefore, in June 1999 the Board of
Directors declared that the exercise price for these warrants to be $8.50 per
share. These warrants expire on December 31, 2000.

         In connection with its investment in the aforementioned offering, the
Company, Vanguard and shareholders representing a majority of the outstanding
common stock, including the directors of the Company who owned common stock,
entered into a voting agreement in November 1996 pursuant to which such
shareholders agreed to vote their shares in all elections of directors so as to
elect to the Board of Directors six persons nominated by Vanguard. The Voting
Agreement terminated upon the acquisition of Vanguard by AT&T in 1999.

         On December 28, 1995, the Company issued to CSI a $375,000 note,
convertible into shares of Common Stock at the rate of $5.50 per share and
bearing interest at the rate of 8.5% per annum, in satisfaction of certain
obligations of the Company to CSI for consulting services rendered. In January
1996, at CSI's request the convertible note was partitioned and distributed to
certain creditors of CSI, including Mr. Nash ($90,000) and Mr. Jones ($216,000).
In connection with Mr. Nash's agreement to assign his interest in a terminal
design to the Company, Mr. Nash's note was prepaid by the Company in January
1996.

         Effective February 1, 1996, the holders of the 8.5% convertible notes
issued in 1995 converted the principal thereof into shares of Common Stock at
the conversion price of $5.00 per share and accepted Common Stock in lieu of
one-half of the accrued interest thereon at the rate of $5.50 per share. Shares
issued to converting noteholders pursuant to this conversion and interest
payment included the following: Mr. Preyer, 40,864 shares; Mr. Griffin, 40,864
shares; Mr. Leeolou, 40,864 shares; Mr. Emerson, 36,778 shares; Mr. Ludington,
13,620 shares; and Alonzo Family Partners, Ltd., 7,350 shares.

         Effective May 31, 1996, other promissory notes issued in 1994 to Mr.
Emerson, Mr. Griffin, Mr. Leeolou, Mr. Preyer and Mr. Ludington, including
accrued interest, were exchanged for shares of the Common Stock at the rate of
$5.50 per share. Shares issued to exchanging noteholders pursuant to such
exchange included the following: Mr. Emerson, 11,169 shares; Mr. Griffin, 12,410
shares; Mr. Leeolou, 12,410 shares; Mr. Preyer, 12,410 shares; and Mr.
Ludington, 4,136 shares.






<PAGE>


         In June 1996, the Company entered into a management services agreement
with Vanguard for a two year term pursuant to which Vanguard agreed to provide
services to the Company from time to time to assist the Company in developing
accounting, human resources, information management, legal compliance, sales
training, research and development, business development and operation
procedures, and systems and programs. In 1996 and 1997, the Company issued an
aggregate of 20,000 shares of Common Stock to Vanguard as compensation for
services under this agreement. In June 1998, the Company and Vanguard entered
into a new management services agreement pursuant to which the Company agreed to
reimburse Vanguard a pro-rata portion of the salary and benefits paid by
Vanguard to its employees providing services to the Company at the Company's
request, based on their time devoted to the Company, plus Vanguard's
out-of-pocket expenses. For the fiscal years December 31, 1999, 1998 and 1997,
the Company reimbursed Vanguard $21,000, $78,000, and $218,000 respectively,
for services rendered to the Company.

         In connection with their respective investments, Vanguard and TDI each
entered into agreements providing certain rights to have their shares of the
Company's Common Stock registered under the Securities Act. If the Company
proposes to make a registered public offering of any of its securities under the
Securities Act, other than certain specified types of offerings, the Company
will be obligated to give written notice of the proposed registration to
Vanguard and TDI. Upon receipt of such written notice of the proposed
registration, Vanguard and TDI will be entitled to request that all or a portion
of their Common Stock be included in such registration offering (a "Piggyback
Registration") except in certain specified circumstances. The agreements also
provide that, at any time after six months from the date the first registration
statement filed under the Securities Act by the Company becomes effective, the
shareholder is entitled to request registration for sale under the Securities
Act of all or a portion of its Common Stock (a "Demand Registration"), provided
that the shareholder shall not be entitled to request any Demand Registration
within the 12-month period immediately following the date of any previous
request for a Demand Registration. These rights to Piggyback and Demand
Registrations expire at such time as the recipient's shares subject to such
registration rights may be sold pursuant to Rule 144(k) of the Securities Act.

         In August 1996, the Company issued in a private placement transaction
(the "Private Placement") 142,000 units, each consisting of a 14% Senior
Discount Note due 2003 with a principal amount at maturity of $1,000
(collectively, the "Discount Notes") and a warrant to purchase 7.334 shares
(adjusting to 9.429 shares at September 30, 1997 if the Company did not complete
a qualified initial public offering of common stock by that date) of common
stock of the Company at $.01 per share (collectively, the "Discount Note
Warrants"). Vanguard purchased 18,000 of the units sold in the Private
Placement.

         In July 1998, the Board of Directors approved a private offering of
Series A Preferred Stock at $100 per share. See Item 5. of Part II "Market for
Registrant's Common Equity and Related Stockholder Matters" and Item 7. of
Part II "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." Purchasers in the
private offering included the following: Mr. Leeolou, 27,500 shares;
Mr. Griffin, 11,250 shares; Mr Ludington, 1,000 shares; Mr. Silverberg,
2,500 shares; Mr. Preyer, 24,500 shares; and Vanguard, 80,000 shares.
In addition, Richardson Family entities purchased 72,478 shares of
Series A Preferred Stock in the private offering. See Part III, Item 12,
"Security Ownership of Certain Beneficial Owners and Management."

         In March 1999, LJR Limited Partnership ("LJR") purchased 75,000 shares
of Series A Preferred Stock in the private offering. In connection with its
investment, LJR was granted the right to have an advisor attend meetings of the
Board of Directors and committee meetings and was also granted registration
rights similar to those granted to Vanguard and TDI. In addition, the Company
and a majority of the holders of its voting stock entered into an agreement
pursuant to which LJR is entitled to designate one director on the Company's
Board of Directors. Richard A. Horvitz was designated as that director. LJR's
rights to its Board representative and advisor terminates upon consummation of
an initial public offering of the Company's Common Stock.

         In October 1999, the Company repurchased for an aggregate of $3.0
million in cash Discount Notes issued in the Private Placement in 1996 with a
face value of approximately $15.0 million. Discount Note Warrants to purchase
141,435 shares of the Company's common stock originally issued in connection
with the issuance of these Discount Notes were also repurchased by the Company
in this transaction at no additional cost. In December 1999, the Company
effected an exchange offer (the "Exchange Offer") of Senior Pay-in-Kind Notes
Due 2003 of Inter*Act Operating Co., Inc., a wholly owned subsidiary of the
Company, 14% Series B Senior Mandatorily Convertible Preferred Stock of the
Company and common stock purchase warrants for its outstanding Discount Notes.
See Item 7. of Part II "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." A
condition of the noteholders agreeing to tender in the Exchange Offer was that
the Company raise $10 million in cash, $3 million of which was permitted to be
raised through the resale for $3 million in cash for the $15 million in face
value of Discount Notes and related Discount Note Warrants repurchased by the
Company in October 1999; the balance was expected to be raised through the
issuance of equity securities. Prior to the consummation of the Exchange Offer
in December 1999, the Company sold in a private offering 70,012 shares of
Series C Preferred Stock at $100 per share for aggregate proceeds of $7 million.
See Item 5. of Part II "Market for Registrant's Common Equity and Related
Stockholder Matters" and Item 7. of Part II "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Purchasers of the Series C Preferred Stock in December
1999 included the following: Mr. Leeolou, 5,000 shares; Mr. Griffin,
1,000 shares; Mr. Richardson, 5,000 shares; and Mr. Silverberg, 1,500 shares.
In addition, LJR Limited Partnership purchased 17,000 shares and Richardson
Family entities purchased 35,000 shares. The Company then

                                           72




<PAGE>


offered to the initial purchasers of the Series C Preferred Stock in December
1999 a portion of the Discount Notes and related Discount Note Warrants
repurchased by the Company in October 1999 to be resold by the Company in order
to raise the additional $3 million necessary to consummate the Exchange Offer.
The balance of the Discount Notes and related Discount Note Warrants were
offered and sold to an unrelated institutional noteholder. The purchase price
for these Discount Notes and related Discount Note Warrants was $.20 per $1.00
of Discount Note face value, which was the same price at which the Company
purchased these Discount Notes and related Discount Note Warrants in October,
1999. Purchasers and amounts paid included the following: Mr. Leeolou, $400,000;
Mr. Griffin, $60,000; Mr. Preyer, $80,000; Mr. Richardson, $140,000;
Mr. Silverberg, $80,000; and LJR Limited Partnership, $1,000,000. Following
these purchases, the Discount Notes were exchanged for Series B Preferred Stock,
PIK Notes and Exchange Offer Warrants in the Exchange Offer.

         Stock options have been granted under the Company's stock option plans
from time to time the Company directors and officers. See Part III, Item 10,
"Directors and Executive Officers of the Registrant" and Part III, Item 11,
"Executive Compensation."

                                           73





<PAGE>




                                     PART IV


Item 14. Exhibits, Financial Statement Schedules and Reports ore Form 8-K

    (a) List of documents filed as part of this report:

        1. The financial statements listed on page F-1.

        2. All schedules are omitted because they are not applicable, not
        required or the requested information is included in the Consolidated
        Financial Statements or notes thereto.

        3. Exhibits to this report are listed below and in the accompanying
        Index to Exhibits.


<TABLE>
<CAPTION>
EXHIBIT NO.                                     DESCRIPTION
----------                                       -----------
<S>               <C>
     *3 (a)(1)    Restated Articles of Incorporation of the Company, effective
                  September 10, 1999, filed as Exhibit 3(a) to the Company's
                  Quarterly Report on Form 10-Q for the period ended September
                  30, 1999.
      3 (a)(2)    Articles of Amendment of the Company, dated December 22,
                  1999 and effective December 22, 1999.
      3 (a)(3)    Articles of Merger of Inter*Act Operating Co., Inc. into the
                  Company, dated December 29, 1999 and effective December 30,
                  1999.
     *3 (b)       Amended and Restated Bylaws of the Company, filed as Exhibit
                  3(b) to the Company's Annual Report on Form 10 K for the
                  fiscal year ended December 31, 1998.
     *4 (a)(1)    Specimen Certificate of the Company's Common Stock, filed as
                  Exhibit 4(a) to the Company's Registration Statement on Form
                  S-4 (No. 333-12091).
     *4 (a)(2)    Specimen Certificate of the Company's 10% Series A
                  Mandatorily Convertible Preferred Stock, filed as Exhibit
                  4(a)(2) To the Company's Annual Report on Form 10-K for the
                  fiscal year ended December 31, 1998.
      4 (a)(3)    Specimen Certificate of the Company's 14% Series B Senior
                  Mandatorily Convertible Preferred Stock.
      4 (a)(4)    Specimen Certificate of the Company's 10% Series C
                  Mandatorily Convertible Preferred Stock.
      4 (b)       Indenture dated as of December 15, 1999. between the Company
                  and State Street Bank and Trust Company, as trustee,
                  relating to $70,000,000 in principal amount of
                  Senior-Paid-In-Kind Notes due 2003.
      4 (b)(1)    First Supplemental Indenture dated as of December 30, 1999
                  to Indenture dated as of December 15, 1999, between the
                  Company and State Street Bank and Trust Company, as trustee,
                  relating to $70,000,000 in principal amount of
                  Senior-Paid-in-Kind Notes due 2003.
    *10 (a)(1)    Shareholders' Agreement dated April 16, 1993, between the
                  Company and its shareholders, filed as Exhibit 10(m) to the
                  Company's Registration Statement on Form S-4 (No.
                  333-12091).
    *10 (a)(2)    Amendment No. l to Shareholders' Agreement dated June 17.
                  1994, between the Company and its shareholders, filed as
                  Exhibit 10(n) to the Company's Registration Statement on
                  Form S-4 (No. 333-12091).
    *10 (a)(3)    Registration Rights Agreement dated May 5, 1995, between the
                  Company and Vanguard Cellular Systems, Inc., filed as
                  Exhibit 10(c) to the Company's Registration Statement on
                  Form S-4 (No. 333-12091).
    *10 (a)(4)    Amendment No. 1 to Registration Rights Agreement dated
                  October 1995, between the Company and Vanguard Cellular
                  Systems, Inc., filed as Exhibit 10(d) to the Company's
                  Registration Statement on Form S-4 (No. 333-12091).
    *10 (a)(5)    Subscription Agreement dated October 1995, between the
                  Company and Vanguard Cellular Systems, Inc., filed as
                  Exhibit 10(f) to the Company's Registration Statement on
                  Form S-4 (No. 333-12091).
    *10 (a)(6)    Registration Rights Agreement dated March 1996 between the
                  Company and Toronto Dominion Investments, Inc., filed as
                  Exhibit 10(e) to the Company's Registration Statement on
                  Form S-4 (No. 333-12091).
    *10 (a)(7)    Exchange and Registration Rights Agreement dated July 30,
                  1996, between the Company and the Initial Purchasers, filed
                  as Exhibit 10(o) to the Company's Registration Statement on
                  Form S-4 (No. 333-12091).
    *10 (a)(8)    Amended and Restated Common Stock Purchase Warrant granted
                  to Vanguard Cellular Operating Corp, filed as Exhibit l0(k)
                  to the Company's Registration Statement on Form S-4 (No.
                  333-12091).
    *10 (a)(9)    Warrant Agreement dated August 1, 1996, between the Company
                  and Fleet National Bank, as Warrant Agent, filed as Exhibit
                  10(l) to the Company's Registration Statement on Form S-4
                  (No, 333-12091).
    *10 (a)(10)   Voting Agreement among the Company, Vanguard Cellular
                  Operating Corp. and certain shareholders dated as of
                  November 1, 1996, filed as Exhibit 10(ii) to the Company's
                  Quarterly Report on Form 10-Q for the period ended June 30,
                  1998.
    *10 (a)(11)   Amendment No. 1 to Voting Agreement among the Company, Vanguard
                  Cellular Operating, Corp. and certain shareholders, dated September 30,
                  1998, filed as Exhibit 10(a)(11) to the Company's Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1998.
    *10 (a)(12)   Form of Rights Offering Subscription Agreement for the
                  Company's 10% Series A Mandatorily Convertible Preferred
                  Stock filed as Exhibit 10(a)(12) to the Company's Annual
                  Report on Form 10-K for the fiscal year ended
</TABLE>



<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.                                     DESCRIPTION
----------                                       -----------
<S>               <C>
                  December 31, 1998.
     10 (a)(13)   Warrant Agreement, dated as of December 15, 1999, between
                  the Company and American Stock Transfer & Trust Company, as
                  Warrant Agent.
    10 (a)(14)    Exchange and Registration Rights Agreement, dated as of
                  December 15, 1999, between Inter*Act Operating Co., Inc, and
                  certain noteholders.
     10 (a)(15)   Registration Rights Agreement, dated as of December 15,
                  1999, between the Company and the holders of the Company's
                  14% Series B Senior Mandatorily Convertible Preferred Stock.
     10 (a)(16)   Stockholders Agreement, dated as of December 15, 1999,
                  between the Company and certain stockholders.
     10 (a)(17)   Form of Subscription Agreement for the Company's 10% Series
                  C Mandatorily Convertible Preferred Stock and Common Stock
                  Warrants.
     10 (a)(18)   Form of Common Stock Warrant.
    *10 (b)(1)    Company's 1994 Stock Compensation Plan, filed as Exhibit
                  10(i) to the Company's Registration Statement on Form S-4
                  (No. 333-12091).
    *10 (b)(2)    Form of Incentive Stock Option Agreement under the 1994
                  Stock Compensation Plan, filed as Exhibit 10(k) to the
                  Company's Registration Statement on Form S-4 (No. 333-12091).
    *10 (b)(3)    Company's 1996 Nonqualified Stock Option Plan, filed as
                  Exhibit 10(g) to the Company's Registration Statement on
                  Form S-4 (No. 333-12091).
    *10 (b)(4)    Form of Nonqualified Stock Option Agreement under the 1996
                  Nonqualified Stock Option Plan, filed as Exhibit 10(h) to
                  the Company's Registration Statement on Form S-4 (No.
                  333-12091).
    *10 (b)(5)    Company's 1997 Long-Term Incentive Plan, as amended, filed
                  as Exhibit 10(b)(5) to the Company's Quarterly Report on
                  Form 10-Q for the period ended June 30, 1999.
    *10 (b)(6)    Form of Incentive Stock Option Agreement to the 1997
                  Long-Term Incentive Plan, filed as Exhibit 10(aa) to the
                  Company's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1997.
    *10 (b)(7)    Form of Nonqualified Stock Option Agreement to the 1997
                  Long-Term Incentive Plan Fled as Exhibit 10(bb) to the
                  Company's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1997.
    *10 (b)(8)    Key Employee Severance Plan, filed as Exhibit 10(b)(8) to
                  the Company's Quarterly Report cm Form 10-Q for the period
                  ended June 30, 1999.
    *10 (b)(9)    Form of Severance Agreement for Key Employees, filed as
                  Exhibit 10(b)(9) to the Company's Quarterly Report on Form
                  10-Q for the period ended June 30, 1999.
    *10 (c)(1)    Assignment of License Agreement dated June 15, 1993 among
                  Gerald Singer and Arthur Murphy as Licensors, Michael R.
                  Jones as Licensee and Network Licensing, Inc. as Assignee,
                  filed as Exhibit 10(q) to the Company's Registration
                  Statement on Form S-4 (No. 333-12091).
    *10 (c)(2)    Security Agreement dated June 16, 1993 between Michael R.
                  Jones and Network Licensing, Inc, filed as Exhibit 10(r) to
                  the Company's Registration Statement on Form S-4 (No. 233-12091).
    *10 (c)(3)    Sublicense dated June 16, 1993 between Network Licensing,
                  Inc. and the Company, filed as Exhibit 10(s) to the
                  Company's Registration Statement on Form S-4 (No. 333-12091).
    *10 (c)(4)    Settlement Agreement and Mutual General Release dated as of
                  September 6, 1994 among Gerald R. Singer, Arthur J. Murphy,
                  Lenora Singer, Joan Murphy, Network Licensing, Inc. and the
                  Company, filed as Exhibit 10(t) to the Company's
                  Registration Statement on Form S-4 (No. 333-12091).
    *10 (c)(5)    Amended and Restated Patent Rights Assignment/Consulting
                  Agreement dated as of March 29, 1995 between Joseph F.
                  Stratton and the Company, filed as Exhibit 10(u) to the
                  Company's Registration Statement on Form S-4 (No.
                  333-12091).
    *10 (c)(6)    Agreement Regarding Licensing matters dated as of January
                  22, 1996 among Michael R. Jones, Network Licensing, Inc. and
                  the Company, filed as Exhibit 10(v) to the Company's
                  Registration Statement on Form S-4 (No. 333-12091).
    *10 (c)(7)    Letter Agreement dated July 22, 1996 between Gerald Singer,
                  Arthur J. Murphy and the Company, filed as Exhibit 10(w) to
                  the Company's Registration Statement on Form S-4 (No.
                  333-12091).
    *10 (c)(8)    Assignment dated as of July 23, 1996 from Network Licensing,
                  Inc, to the Company, filed as Exhibit 10(x) to the Company's
                  Registration Statement on Form S-4 (No. 333-12091).
    *10 (c)(9)    Patent License Agreement dated August 20, 1997, between the
                  Company and Coupco, Inc, filed as Exhibit 10(cc) to the
                  Company's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1997 (Portions of this exhibit have been
                  omitted pursuant to a request for confidential treatment).
    *10 (c)(10)   Patent Purchase Agreement dated May 22, 1998, between the
                  Company, Credit Verification Corporation and David W. Deaton,
                  filed as Exhibit 10(hh) to the Company's Quarterly Report on Form
                  10-Q for the period ended June 30, 1998 (Portions of this
                  exhibit have been omitted pursuant to a request for
                  confidential treatment).
    *10 (c)(11)   Letter Agreement dated October 2, 1998 between Leona R.
                  Singer, Trustee under the Gerald And Leona R. Singer Family
                  Trust, Arthur J. Murphy and the Company, filed as Exhibit
                  10(c)(11) to the Company's Annual Report on

</TABLE>





<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.                                     DESCRIPTION
----------                                       -----------
<S>               <C>
                  Form l0-K for the fiscal year ended December 31, 1998.
    *10 (d)(1)    Letter Agreement dated March 17, 1997 between the Company
                  and Thomas A. Manna, filed as Exhibit 10(ee) to the
                  Company's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1997.
    *10 (d)(2)    Severance and Release Agreement dated January 23, 1999
                  between the Company and Thomas A. Manna, filed as Exhibit
                  10(d)(2) to the Company's Annual Report on Form 10-K for the
                  fiscal year ended December 31, 1998.
    *10 (d)(3)    Form of Employment, Noncompetition and Nondisclosure
                  Agreement, filed as Exhibit 10(aa) to the Company's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1997.
     10 (d)(4)    Nonqualified Stock Option Agreement dated September 15, 1999
                  between the Company and Stephen R. Leeolou.
     10 (d)(5)    Incentive Stock Option Agreement dated September 15, 1999
                  between the Company and Stephen R. Leeolou.
     10 (d)(6)    Nonqualified Stock Option Agreement dated September 15, 1999
                  between the Company and Stephen R, Leeolou.
     10 (d)(7)    Employment Agreement dated November 2, 1999 between the
                  Company and Stephen R. Leeolou.
     10 (d)(8)    Nonqualified Stock Option Agreement dated November 2, 1999
                  between the Company and Stephen R. Leeolou.
     10 (e)(1)    Global Master Agreement dated January 26, 2000 between the
                  Company and NCR Corporation.
     10 (e)(2)    Addendum to Master Agreement dated January 26, 2000 between
                  the Company and NCR Corporation (Portions of this exhibit have
                  been omitted pursuant to a request for confidential
                  treatment).
    *21           List of Subsidiaries of the Company, filed as Exhibit 21 to
                  the Company's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1997.
     27           Financial Data Schedule.
</TABLE>

---------

* Incorporated by reference to the statement or report indicated.

    (b) Reports on Form 8-K.

    The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the fourth quarter of 1999.

    (c) Exhibits.

    See (a)3 of this Item 14 for a listing of Exhibits filed as a part of this
Report.

    (d) Additional Financial Statement Schedules.

    None. Additional financial statement schedules are not filed herewith, as
the information required therein is either not applicable, or can be found in
the Consolidated Financial Statements or the Notes thereto.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT

Neither an annual report covering the Company's last fiscal year nor
    proxy materials with respect to any annual or other meeting of security
    holders have been sent to security holders. The Company currently
    anticipates that it will send to security holders a copy of this annual
    report on Form 10-K the year ended December 31, 1999 at a future date.






<PAGE>



                                      SIGNATURES

         Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                               INTER*ACT ELECTRONIC MARKETING, INC.

                               By: /s/ Thomas J. McGoldrick
                                  .............................................
                               THOMAS J. McGOLDRICK, EXECUTIVE VICE PRESIDENT
                               AND CHIEF FINANCIAL OFFICER

March 30, 2000

         Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Company in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
         SIGNATURE                                                     TITLE                            DATE
         ---------                                                     -----                            ----
<S>                                                  <C>                                            <C>
  /s/ Stephen R. Leeolou                             Chairman of the Board of Directors,            March 28, 2000
 .................................                   Chief Executive Officer and
      (STEPHEN R. LEEOLOU)                           Treasurer

 /s/ Thomas J. McGoldrick                            Executive Vice President and Chief             March 28, 2000
 .................................                   Financial Officer (principal
      (THOMAS J. McGOLDRICK)                         accounting and principal financial officer)


  /s/ Robert M. DeMichele                            Director                                       March 28, 2000
 .................................
      (ROBERT M. DeMICHELE)

 /s/ William P. Emerson, Jr.                         Director                                       March 28, 2000
 .................................
      (WILLIAM P. EMERSON, JR.)

 /s/ Haynes G. Griffin                               Director                                       March 28,  2000
 .................................
      (HAYNES G. GRIFFIN)

 /s/ Richard A. Horvitz                              Director                                       March 30, 2000
 .................................
      (RICHARD A. HORVITZ)

 /s/ Richard P. Ludington                            Director                                       March 30, 2000
 .................................
      (RICHARD P. LUDINGTON)

  /s/ L. Richardson Preyer, Jr.                      Director                                       March 28, 2000
 .................................
    (L. RICHARDSON PREYER, JR.)

                                                     Director                                       March   , 2000
 .................................
       (BRIAN A. RICH)

  /s/ Stuart S. Richardson                           Director                                       March 30, 2000
 .................................
      (STUART S. RICHARDSON)

                                                     Director                                       March   , 2000
 .................................
      (ROBERT A. SILVERBERG)
</TABLE>






<PAGE>


INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                                           PAGE
<S>                                                                                                                        <C>
Report of Independent Public Accountants                                                                                    F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998                                                                F-3
Consolidated Statements of Operations for each of the three years in the period ended December 31, 1999                     F-4
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999                     F-5
Consolidated  Statements of Stockholders'  Equity (Deficit) and  Comprehensive  Income for each of the three years in
   the period ended December 31, 1999                                                                                       F-6
Notes to Consolidated Financial Statements                                                                                  F-7
</TABLE>

                                                                            F-1



<PAGE>



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Inter*Act Electronic Marketing, Inc.:

We have audited the accompanying consolidated balance sheets of Inter
Act*Electronic Marketing, Inc. (a North Carolina corporation) (formerly Inter
Act*Systems, Inc.) and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit)
and comprehensive income and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Inter*Act Electronic Marketing,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.

                                                             ARTHUR ANDERSEN LLP



New York, New York
March 30, 2000

                                                                             F-2





<PAGE>


INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                                             December 31,
                                                                                                  ---------------------------------
                                            ASSETS                                                    1999                 1998
                                            ------                                                    ----                 ----
                                                                                                  (In thousands, except share data)
<S>                                                                                                <C>                  <C>
Current assets:
   Cash and cash equivalents                                                                       $     9,939          $    14,166
   Receivables, net                                                                                      1,715                3,667
   Other current assets                                                                                  4,206                2,964
                                                                                                   -----------          -----------
                  Total current assets                                                                  15,860               20,797

Property, plant and equipment, net                                                                      31,222               28,102
Bond issuance costs, net                                                                                    96                2,776
Patents, licenses and trademarks, net                                                                    7,812                8,771
Other noncurrent assets                                                                                    123                   45
                                                                                                   -----------          -----------
                  Total assets                                                                     $    55,113          $    60,491
                                                                                                   ===========          ===========

                        LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                        ----------------------------------------------

Current liabilities:
   Accounts payable                                                                                $     5,351          $     3,075
   Accrued expenses                                                                                      3,415                3,016
   Current portion of long-term                                                                          6,135                5,554
   Deferred revenue                                                                                        332                2,146
                                                                                                   -----------          -----------
                  Total current liabilities                                                             15,233               13,791

Long-term debt, net of discount                                                                         63,949              111,819
Accrued dividends                                                                                        4,071                 --
                                                                                                   -----------          -----------
                  Total liabilities                                                                     83,253              125,610
                                                                                                   -----------          -----------

Common stock purchase warrants                                                                          11,367               27,436
                                                                                                   -----------          -----------
14% Series B Senior Mandatorily Redeemable Convertible Preferred Stock, no par value, authorized
   140,000 shares; 139,575 and 0 shares issued and outstanding at December 31, 1999 and
   1998, respectively                                                                                   59,146                 --
                                                                                                   -----------          -----------
10% Series C Mandatorily Redeemable Convertible Preferred Stock, no par value, authorized
   250,000 shares; 70,120 and 0 shares issued and outstanding at December 31, 1999 and 1998,
   respectively                                                                                          7,039                 --
                                                                                                   -----------          -----------

Committments and Contingencies (Note 4 and 15)

Stockholders' equity (deficit):
   10% Series A Mandatorily Convertible Preferred stock, no par value, authorized 700,000
     shares; 498,868 and 177,878 shares issued and outstanding at December 31, 1999 and
     1998, respectively                                                                                 53,199               18,142
   Common stock, no par value, authorized 50,000,000 shares; 7,743,739 and 7,728,555 shares
     issued and outstanding at December 31, 1999 and 1998, respectively                                 28,380               28,251
   Additional paid-in capital                                                                           22,468                  768
   Deferred compensation                                                                                    --                 (416)
   Accumulated other comprehensive income (loss)                                                            26                  (19)
   Accumulated deficit                                                                                (209,765)            (139,281)
                                                                                                   -----------          -----------
                  Total stockholders' equity (deficit)                                                (105,692)             (92,555)
                                                                                                   -----------          -----------

                  Total liabilities and stockholders' equity (deficit)                             $    55,113          $    60,491
                                                                                                   ===========          ===========
</TABLE>



The accompanying notes are an integral part of these balance sheets.

                                                                             F-3






<PAGE>


INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                               Year Ended December 31,
                                                                                   --------------------------------------------
                                                                                       1999              1998             1997
                                                                                       ----              ----             ----
                                                                                        (In thousands, except per share data)
<S>                                                                                 <C>              <C>                <C>
Gross sales                                                                         $       7,706    $       7,082      $     1,672
   Less: Retailer reimbursements                                                           (2,610)          (2,489)            (964)
                                                                                  ---------------  ---------------   --------------
              Net sales                                                                     5,096            4,593              708
                                                                                  ---------------  ---------------   --------------

Operating expenses:
   Direct costs                                                                             9,538           10,216            5,784
   Selling, general and administrative expenses                                            28,623           29,169           26,352
   Depreciation and amortization of intangible assets                                       9,687            7,459            3,934
                                                                                  ---------------  ---------------   --------------
              Total operating expenses                                                     47,848           46,844           36,070
                                                                                  ---------------  ---------------   --------------

Operating loss                                                                            (42,752)         (42,251)         (35,362)
                                                                                  ---------------  ---------------   --------------

Other income (expense):
   Interest income                                                                            267            1,338            3,892
   Interest expense                                                                       (23,582)         (21,147)         (18,033)
   Other expense                                                                                2               --             (301)
                                                                                  ---------------  ---------------   --------------
              Total other expense                                                         (23,313)         (19,809)         (14,442)
                                                                                  ---------------  ---------------   --------------

Loss before extraordinary items and income taxes                                          (66,065)         (62,060)         (49,804)
Income taxes                                                                                   --               --              (10)
                                                                                  ---------------  ---------------   --------------
              Net loss before extraordinary items                                         (66,065)         (62,060)         (49,814)

Extraordinary items - gain on extinguishment of debt                                        4,213               --               --
                                                                                  ---------------  ---------------   --------------
              Net loss                                                                    (61,852)         (62,060)         (49,814)

Preferred stock dividends accrued                                                          (7,752)            (354)              --
                                                                                  ---------------  ---------------   --------------
Net loss attributable to common stock                                               $     (69,604)   $     (62,414)     $   (49,814)
                                                                                  ===============  ===============   ==============

Per share information:
   Net loss per common share before extraordinary items:
     Basic and Diluted                                                              $       (9.54)   $       (8.08)     $     (6.48)
                                                                                  ===============  ===============   ==============

   Extraordinary items - gain on extinguishment of debt                                      0.54               --               --
                                                                                  ===============  ===============   ===============

   Net loss per common share:
     Basic and Diluted                                                              $       (9.00)   $       (8.08)     $     (6.48)
                                                                                  ===============  ===============   ==============

   Common shares used in computing per share amounts:
     Basic and Diluted                                                                      7,731            7,729            7,692
                                                                                  ===============  ===============   ==============
</TABLE>




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

                                                                            F-4




<PAGE>


INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                              Year Ended December 31,
                                                                                --------------------------------------------------
                                                                                  December 31,      December 31,      December 31,
                                                                                      1999              1998              1997
                                                                                --------------------------------------------------
                                                                                                   (In thousands)
<S>                                                                               <C>               <C>                <C>
Cash flows from operating activities:
   Net loss                                                                       $    (61,852)      $    (62,060)     $   (49,814)
   Items not affecting cash and cash equivalents:
   Gain on extinguishment of debt                                                       (4,213)                --               --
   Depreciation and amortization                                                        10,258              7,985            3,934
   Loss on disposal of assets                                                                2                113            1,097
   Non-cash interest on discounted bonds                                                22,324             20,413           17,972
   Equity in earnings of affiliate, net                                                     --                 --              301
   Other items, net                                                                        136                156              319
   Changes in working capital:
     Receivables, net                                                                   (1,905)            (2,854)            (196)
     Other current assets                                                                  239                 99           (2,260)
     Accounts payable and accrued expenses                                               2,885             (3,883)           6,416
     Deferred revenues                                                                   1,776              1,607               60
                                                                                --------------     --------------    -------------
           Net cash used in operating activities                                       (30,350)           (38,424)         (22,171)
                                                                                --------------     --------------    -------------

Cash flows from investing activities:
   Expenditures for property, plant and equipment                                      (11,846)            (8,085)         (20,110)
   Proceeds from disposal of assets                                                          5                 --               --
   Patent acquisition costs                                                                 --             (2,090)            (800)
                                                                                --------------     --------------    -------------
           Net cash used in investing activities                                       (11,841)           (10,175)         (20,910)
                                                                                --------------     --------------    -------------

Cash flows from financing activities:
   Net proceeds from issuance of 10% Series A Mandatorily Convertible
     Preferred Stock, net                                                               31,402             17,688               --
   Net proceeds from issuance of 10% Series C Mandatorily Redeemable
     Convertible Preferred Stock                                                         7,012                 --               --
   Payment of obligation under capital lease                                              (226)                --               --
   Long-term debt repayments - extinguishment of debt                                     (194)              (125)              --
   Payment of debt issuance costs                                                          (95)                --               --
                                                                                --------------     --------------    -------------
           Net cash provided by financing activities                                    37,899             17,563               --
                                                                                --------------     --------------    -------------

Foreign exchange effects on cash and cash equivalents                                       65                 (9)             (14)
                                                                                --------------     --------------    -------------
Net decrease in cash and cash equivalents                                               (4,227)           (31,045)         (43,095)

Cash and cash equivalents at beginning of period                                        14,166             45,211           88,306
                                                                                --------------     --------------    -------------
Cash and cash equivalents at end of period                                        $      9,939       $     14,166      $    45,211
                                                                                ==============     ==============    =============

Supplemental disclosures of cash flow information:
   Cash paid during the period for:
     Interest                                                                     $      1,060       $         45      $        39
                                                                                ==============     ==============    =============

Supplemental disclosures of non-cash investing and financing activities:
   Issuance of common stock in consideration of certain obligations               $        129       $         --      $       600
                                                                                ==============     ==============    =============
   Issuance of 14% Senior Pay-in-Kind Notes in connection with the
     extinguishment of long-term debt                                             $     69,789       $         --      $        --
                                                                                ==============     ==============    =============
   Issuance of common stock purchase warrants in connection with the issuance
     of 14% Senior Discount Notes                                                 $         --       $         --      $     2,972
                                                                                ==============     ==============    =============
   Issuance of common stock purchase warrants in connection with the issuance
     of 14% Senior Pay-in-Kind Notes                                              $     10,641       $         --      $        --
                                                                                ==============     ==============    =============
   Issuance of 14% Series B Senior Mandatorily Redeemable Convertible Preferred
     Stock in connection with the extinguishment of long-term debt                $     69,789       $         --      $        --
                                                                                ==============     ==============    =============
   Issuance of warrants in connection with the issuance of 14% Series B Senior
     Mandatorily Redeemable Convertible Preferred Stock                           $     10,641       $         --      $        --
                                                                                ==============     ==============    =============
   Issuance of warrants in connection with the issuance of 10% Series C
     Mandatorily Redeemable Convertible Preferred Stock                           $        879       $         --      $        --
                                                                                ==============     ==============    =============
   Dividends payable in preferred stock (Note 9 and 10)                           $      3,681       $        354      $        --
                                                                                ==============     ==============    =============
   Accrued dividends payable in cash (Note 9 and 10)                              $      4,071       $        --       $        --
                                                                                ==============     ==============    =============
   Obligation under capital lease for acquired equipment                          $      1,436       $        --       $        --
                                                                                ==============     ==============    =============
   Issuance of note payable for patent acquisition                                $         --       $      5,679      $        --
                                                                                ==============     ==============    =============
</TABLE>

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

                                                                            F-5




<PAGE>


INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
INCOME (In thousands)

<TABLE>
<CAPTION>
                                               Series A                                                                Accumulated
                                            Preferred Stock         Common Stock       Additional                         Other
                                         ---------------------  -------------------      Paid-in       Deferred        Comprehensive
                                           Shares     Amount      Shares     Amount      Capital     Compensation      Income(Loss)
                                         --------    --------   --------    --------   ---------    ------------     ------------

<S>                                       <C>       <C>         <C>         <C>        <C>           <C>             <C>
Balance at December 31, 1996                   --    $     --      7,669    $ 27,651   $     768      $     (723)       $      --
  Issuance of common stock                     --          --         60         600          --              --               --
  Amortization of deferred compensation        --          --         --          --          --             153               --
  Net loss                                     --          --         --          --          --              --               --
  Other comprehensive income (loss) -
   Foreign currency translation
     adjustment                                --          --         --          --          --              --              (14)
                                         --------    --------   --------    --------   ---------    ------------     ------------

Balance at December 31, 1997                   --          --      7,729      28,251         768            (570)             (14)


  Issuance of preferred stock                 178      17,788         --          --          --              --               --
  Preferred stock dividends accrued            --         354         --          --          --              --               --
  Amortization of deferred compensation        --          --         --          --          --             154               --
  Net loss                                     --          --         --          --          --              --               --
  Other comprehensive income (loss) -
   Foreign currency translation
     adjustment                                --          --         --          --          --              --               (5)
                                         --------    --------   --------    --------   ---------    ------------     ------------

Balance at December 31, 1998                  178      18,142      7,729      28,251         768            (416)             (19)

  Issuance of common stock in exchange
   for services                                --          --         15         129          --              --               --
  Issuance of preferred stock, net            321      31,402         --          --          --              --               --
  Issuance of warrants in connection
   with the issuance of 14% Senior
   Pay-In Kind Notes and 14% Series B
   Senior Mandatorily Redeemable
   Convertible Preferred Stock                 --          --         --          --      21,282              --               --
  Issuance of warrants in connection
   with the issuance of 10% Series C
   Mandatorily Redeemable Convertible
  Preferred Stock                             --          --         --          --         879              --               --
   Preferred stock dividends accrued on
   10% Series A Mandatorily
   Convertible Preferred Stock                 --       3,655         --          --          --              --               --
  Preferred stock dividends accrued on
   14% Series B Mandatorily Redeemable
   Convertible Preferred Stock                 --          --         --          --          --              --               --
  Preferred stock dividends accrued on
   10% Series C Mandatorily Redeemable
   Convertible Preferred Stock                 --          --         --          --          --              --               --
  Reversal of deferred compensation
    for cancelled options                      --          --         --          --       (461)             416               --
  Net loss                                     --          --         --          --          --              --               --
  Other comprehensive income (loss) -
   Foreign currency translation
     adjustment                                --          --         --          --          --              --               45
                                         --------    --------   --------    --------   ---------    ------------     ------------

Balance at December 31, 1999                  499    $ 53,199      7,744    $ 28,380   $  22,468      $       --       $      26
                                         ========    ========   ========    ========   =========      ==========        =========
</TABLE>


<TABLE>
<CAPTION>
                                                             Total
                                                         Stockholders'
                                          Accumulated        Equity        Comprehensive
                                             Deficit        (Deficit)      Income (Loss)
                                         -------------    -------------   --------------

<S>                                      <C>               <C>               <C>
Balance at December 31, 1996              $    (27,053)     $       643
  Issuance of common stock                          --              600
  Amortization of deferred compensation             --              153
  Net loss                                     (49,814)         (49,814)     $   (49,814)
  Other comprehensive income (loss) -
   Foreign currency translation
     adjustment                                     --              (14)             (14)
                                         -------------    -------------   --------------

Balance at December 31, 1997                   (76,867)         (48,432)     $   (49,828)
                                                                          ==============

  Issuance of preferred stock                       --           17,788
  Issuance of common stock                          --               --
  Preferred stock dividends accrued               (354)              --
  Amortization of deferred compensation             --              154
  Net loss                                     (62,060)         (62,060)     $   (62,060)
  Issuance of Preferred Stock                       --               (5)              (5)
                                         -------------    -------------   --------------

Balance at December 31, 1998                  (139,281)         (92,555)     $   (62,065)
                                                                          ==============
  Issuance of common stock in exchange
   for services                                     --             129
  Issuance of preferred stock, net                  --          31,402
  Issuance of warrants in connection
   with the issuance of 14% Senior
   Pay-In Kind Notes and 14% Series B
   Senior Mandatorily Redeemable
   Convertible Preferred Stock                      --          21,282
  Issuance of warrants in connection
   with the issuance of 10% Series C
   Mandatorily Redeemable Convertible
   Preferred Stock                                (879)             --
  Preferred stock dividends accrued on
   10% Series A Mandatorily
   Convertible Preferred Stock                  (3,655)             --
  Preferred stock dividends accrued on
   14% Series B Mandatorily Redeemable
   Convertible Preferred Stock                  (4,071)         (4,071)
  Preferred stock dividends accrued on
   10% Series C Mandatorily Redeemable
   Convertible Preferred Stock                     (27)            (27)
  Reversal of deferred compensation
  for cancelled options                             --             (45)
  Net loss                                     (61,852)        (61,852)      $   (61,852)
  Other comprehensive income (loss) -
   Foreign currency translation
     adjustment                                     --               45               45
                                         -------------    -------------   --------------

Balance at December 31, 1999              $   (209,765)    $  (105,692)      $   (61,807)
                                          =============    ============      ============
</TABLE>



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

                                                                             F-6




<PAGE>


INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)

1. BUSINESS DESCRIPTION

Inter*Act Electronic Marketing, Inc. ("Inter*Act" or the "Company"), which
changed its name from Inter*Act Systems, Incorporated effective July 1, 1999,
believes it operates the world's largest fully electronic marketing network
linked to supermarket and pharmacy retailers' point-of-sale ("POS") databases
that serves on-line promotions and advertisements to shoppers seamlessly
in-store, at home and in the office. The Company's patented technologies enable
consumer products manufacturers ("Manufacturers") and supermarket retailers
("Retailers") to use historical purchase behavior data to develop targeted
purchase incentives and messages which the Company delivers to customers before
shopping begins. The Company's proprietary system, called the Inter*Act
e-Marketing Network'sm' ("IEMN"), currently comprises approximately 4,000
server-based terminals located inside the front entrance of more than 20 retail
chains in the U.S. and Europe, as well as a recently launched Company-owned
Internet web site called ShopperPerks.com. The Company's web site and its
in-store ShopperPerks'TM' portals, are linked directly to each store's
point-of-sale scanning system via Company-owned in-store servers. This on-line
network gives Inter*Act's business partners exclusive access to offer all
shoppers (whether Internet users or not) same-day, personalized savings that are
electronically downloaded to participating retailers' cash register systems.
Delivering highly targeted, pre-shopping promotions on the IEMN historically has
generated average consumer response, or redemption, rates above 25%, which the
Company believes is superior to the response rate of any other marketing or
advertising medium in the industry.

         Certain factors could affect Inter*Act's actual future financial
results. These factors include: (i) the Company's limited operating history,
significant losses, accumulated deficit and expected future losses, (ii) the
dependence of the Company on its ability to establish, maintain and expand
relationships with manufacturers to promote brands on the IEMN and the
uncertainty of market acceptance for the IEMN, (iii) the uncertainty as to
whether the Company will be able to manage its growth effectively, (iv) the
early stage of the Company's products and services and technical and other
problems that the Company has experienced and may experience, (v) risks related
to the Company's substantial leverage and debt service obligations, (vi) the
Company's dependence on third parties such as those who manufacture IEMN
terminals, (vii) the intensely competitive nature of the consumer product and
promotional industry and (viii) risks that the Company's rights related to
patents, proprietary information and trademarks may not adequately protect its
business (See Note 15 for a description of litigation concerning intellectual
property).

         From inception to December 31, 1999, the Company has incurred recurring
losses and has experienced negative operating cash flow, and there is no
assurance that the product the Company has developed will achieve widespread
success in the marketplace. In addition to increasing its revenues, the Company
intends to raise additional equity or debt capital to fund its ongoing expansion
plans. There is no assurance that such additional capital or continued equipment
financing can be obtained. In the event that such additional financing is not
obtained, the Company believes that existing cash and cash equivalents, cash
received from sales of preferred stock since December 31, 1999 (See Note 10) and
reduced or delayed operating and capital expenditures will be sufficient to meet
the Company's operating requirements into the second quarter of 2001.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The financial statements include the consolidated accounts of the
Company and its wholly and majority-owned subsidiaries: Network Licensing, Inc.
("NLI"), Inter*Act International Holdings, Inc. ("Inter*Act International"),
Inter*Act Holdings, Ltd., ("Inter*Act Holdings"), Inter*Act U.K. Ltd.
("Inter*Act U.K.") and Inter*Act France, Ltd. ("IAEM S.A.S."). Network
Licensing, Inc. was incorporated in 1993; Inter*Act International, Inter*Act
Holdings and Inter*Act U.K. were incorporated during 1997; and IAEM S.A.S. was
incorporated during 1999. All intercompany accounts and transactions have
been eliminated in consolidation.

REVENUE RECOGNITION

         REDEMPTION-BASED

         During 1997, 1998 and to a limited extent in 1999, the Company had
arrangements with manufacturers whereby revenue was recognized as electronic
discounts are redeemed at store cash registers. Manufacturers pay a fee to the
Company for each redemption. The fee is composed of (i) a retailer processing
fee, (ii) a redemption fee and (iii) the face value of the coupon. The Company,
in turn, passes through both the retailer processing fee, which is included in
direct operating expenses, and the face value of the coupon to the Retailer,
while retaining the redemption fee. The Company records as net sales the
redemption fee and the retailer processing fee paid by the Manufacturers.

                                                                             F-7




<PAGE>


INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)

         FIXED FEE ARRANGEMENTS

         Beginning in 1998 and through 1999, the Company also has arrangements
with Manufacturers whereby the Company receives a fixed payment over a fixed
period. In these cases, the Company recognizes revenue on a ratable basis over
the fixed period during which they are providing service or exclusivity to
the Manufacturers, as well as the retailer processing fee paid by the
Manufacturers.

         DEFERRED REVENUE

         Certain Manufacturers pay the Company in advance for a portion of
anticipated redemptions or a portion of the fixed contract amount, as
applicable, and these amounts are recorded as deferred revenue until earned
through redemption activity during the contract period.

CASH AND CASH EQUIVALENTS

         Cash and cash equivalents, which at December 31, 1999 and 1998 were
primarily comprised of money market funds and overnight repurchase agreements,
are stated at cost, which approximates market value. Highly liquid investments
with original maturities of three months or less are considered cash
equivalents.

RECEIVABLES, NET

         Accounts receivable included in current assets are stated net of
allowances for doubtful accounts of approximately $300 and $127 at December 31,
1999 and 1998, respectively. The Company recorded approximately $190, $80 and
$30 for bad debt expense for the years ended December 31, 1999, 1998 and 1997,
respectively.

PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred; costs of major
renewals and improvements are capitalized. At the time property and equipment
are retired or otherwise disposed of, the cost and accumulated depreciation are
eliminated from the assets and accumulated depreciation accounts and the profit
or loss on such disposition is reflected in income.

         Depreciation is generally provided on the straight-line method for
financial reporting purposes over the estimated useful lives of the underlying
assets. Machinery and equipment are depreciated over a period ranging from 3 to
5 years and leasehold improvements are amortized using the straight-line method
over the term of the lease or the estimated useful life of the improvements,
whichever is shorter. In-store machinery and equipment are depreciated over five
years.

         The Company capitalizes certain payroll costs associated with the
development of internal computer systems in accordance with Statement of
Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." These costs are included within property, plant
and equipment in the accompanying consolidated balance sheets. These costs are
amortized on a straight-line basis over the estimated useful lives of the
related computer systems or software, not to exceed five years.

RESEARCH AND DEVELOPMENT COSTS

         Research and development costs incurred by the Company are included in
selling, general and administrative expenses. Such costs for the years ended
December 31, 1999, 1998 and 1997 were $71, $297 and $646, respectively.

                                                                             F-8




<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)

BOND ISSUANCE COSTS

         Bond issuance costs as of December 31, 1999 are costs incurred by the
Company associated with a private placement of debt and preferred securities
exchanged during 1999 for the securities issued in a private placement in 1999
(the "Exchange Offer") (See Notes 6 and 7), and are being amortized over 4 years
using the effective interest rate method. Bond issuance costs as of December 31,
1998 were incurred by the Company associated with a private placement offering
of 14% Senior Discount Notes (the "1996 Private Placement") (See Note 7) and
were being amortized over seven years using the effective interest rate method.
During 1999, the Company restructured the 1996 Private Placement debt, and the
remaining unamortized debt issuance costs associated with those bonds were
written off as part of the gain on this restructuring (See Note 6). The Company
recorded interest expense on the amortization of bond issuance costs of $570,
$526 and $464 for the years ended December 31, 1999, 1998 and 1997,
respectively.

PATENTS, LICENSES AND TRADEMARKS

         Acquisition costs for patents, licenses and trademarks and legal fees
incurred for the improvement and protection of the Company's patents, licenses
and trademarks have been deferred and are being amortized over fifteen years or
the remaining life of the patent, license or trademark, whichever is less, using
the straight-line method. Accumulated amortization was $1,739 and $780 at
December 31, 1999 and 1998, respectively. The Company recorded amortization
expense related to patents, licenses and trade marks of $959, $686 and $131 for
the years ended December 31, 1999, 1998 and 1997, respectively.

FOREIGN CURRENCY TRANSLATION

         Assets and liabilities of foreign subsidiaries have been translated
using the exchange rates in effect at the balance sheet dates. Results of
operations of foreign entities are translated using the average exchange rates
prevailing throughout the period. Local currencies are considered functional
currencies of the Company's foreign operating entities. Translation effects are
accumulated as part of the cumulative foreign translation adjustment, which is
reflected in equity as accumulated other comprehensive income (loss). Gains and
losses from foreign currency transactions are included in net loss for the
period. The Company did not incur material foreign exchange gains or losses
during any period presented. The Company has not entered into any derivative
transactions to hedge foreign currency exposure.

LONG-LIVED ASSETS

         The Company accounts for long-lived assets according to Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This standard
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. Management believes there is no impairment of
long-lived assets as of December 31, 1999.

INCOME TAXES

         The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes. It also requires the company
to adjust its deferred tax balances in the period of enactment for the effect of
enacted changes in tax rates and to provide a valuation allowance against such
deferred tax assets that are not, or more likely than not, to be realized (See
Note 13).

STOCK-BASED COMPENSATION

         The Company has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," by continuing to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," while providing the required pro forma disclosures as if the fair
value method had been applied (See Note 14).

                                                                             F-9




<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)

NET LOSS PER SHARE

         The Company follows the provisions of SFAS No. 128, "Earnings Per
Share" (See Note 11). In accordance with SFAS No. 128, net loss per common share
amounts ("basic EPS") were computed by dividing net loss by the weighted average
number of common shares outstanding and contingently issuable shares (which
satisfy certain conditions) and excluded any potential dilution. Net loss per
common share amounts, assuming dilution ("diluted EPS"), were computed by
reflecting potential dilution from the exercise of stock options and warrants.
SFAS No. 128 requires the presentation of both basic EPS and diluted EPS on the
face of the income statement. In all periods presented, the impact of
convertible preferred stock (See Note 10), stock options and warrants was
anti-dilutive, and basic and diluted EPS are the same.

COMPREHENSIVE INCOME (LOSS)

         The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which requires companies to report all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income is the total of net income and all other nonowner changes
in equity (or other comprehensive income) such as unrealized gains/losses on
securities classified as available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of annual financial
statements. The Company has chosen to disclose comprehensive income (loss),
which for 1999, 1998 and 1997 includes its net loss and foreign currency
translation adjustments, in the accompanying consolidated statements of
stockholders' equity (deficit) and comprehensive income.

SEGMENT REPORTING

         The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Pursuant to this
pronouncement, reportable operating segments are determined based on the
Company's management approach. The management approach, as defined by SFAS No.
131, is based on the way that the chief operating decision maker organizes the
segments within an enterprise for making operating decisions and assessing
performance. The Company's results of operations are reviewed by the chief
operating decision maker on a consolidated basis and the Company operates in
only one segment. The Company has presented required geographical segment data
in Note 16, and no additional segment data has been presented.

USE OF ESTIMATES

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

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - NEW ACCOUNTING PRONOUNCEMENT

         In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137,
is effective for all fiscal years beginning after June 15, 2000 and will not
require retroactive restatement of prior period financial statements. This
statement requires the recognition of all derivative instruments as either
assets or liabilities in the balance sheet measured at fair value. Derivative
instruments will be recognized as gains or losses in the period of change. If
certain conditions are met where the derivative instrument has been designated
as a fair value hedge, the hedge items may also be marked to market through
earnings, thus creating an offset. If the derivative is designed and qualifies
as a cash flow hedge, the changes in fair value of the derivative instrument may
be recorded in comprehensive income. The Company does not presently make use of
derivative instruments.

                                                                            F-10




<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)

3. PROPERTY, PLANT AND EQUIPMENT, NET

         Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>

                                                                               December 31,
                                                                      -------------------------------
                                                                         1999                1998
                                                                      -------------------------------
<S>                                                                    <C>                <C>
Land and buildings                                                     $        83        $        87
Machinery and equipment
      In-Store                                                              40,743             32,637
      Other                                                                 10,392              6,708
                                                                   ---------------    ---------------
      Total machinery and equipment                                         51,135             39,345
                                                                   ---------------    ---------------
                                                                            51,218             39,432
Less: accumulated depreciation and amortization                            (19,996)           (11,330)
                                                                   ---------------    ---------------
Property, plant and equipment, net                                     $    31,222        $    28,102
                                                                   ===============    ===============
</TABLE>

         Depreciation expense was approximately $8,728, $6,773 and $3,800 for
the years ended December 31, 1999, 1998 and 1997, respectively.

4. LEASES

         The Company leases office facilities and equipment under various
operating lease agreements expiring through year 2008. Future minimum lease
payments under noncancelable operating leases at December 31, 1999 were
as follows:

<TABLE>
<CAPTION>

                                         Operating Lease
                                           Commitments
                                         ----------------
<S>                                        <C>
2000                                       $     1,044
2001                                               904
2002                                               432
2003                                               322
2004                                               311
Thereafter                                       1,529
</TABLE>

         Rent expense of $950, $476 and $383 was recognized for the years ended
December 31, 1999, 1998 and 1997, respectively, and is included in selling,
general and administrative expenses.

5. RELATED PARTY TRANSACTIONS

         The Company has been party to various agreements with Vanguard Cellular
Systems, Inc. (together with its subsidiaries, "Vanguard"), which made a series
of investments in the Company's equity and debt securities beginning in 1995. As
of December 31, 1998, Vanguard was the Company's largest shareholder. In 1999,
Vanguard was acquired by AT&T Corp. Prior to the acquisition by AT&T Corp., the
Company's Chairman and Chief Executive Officer was also President and Chief
Executive Officer of Vanguard and six of the Company's directors were also
directors of Vanguard. Since the acquisition of Vanguard by AT&T Corp., there
has been no similar common management of the Company and AT&T Corp.

         Pursuant to management services agreements with Vanguard from 1996
through 1998, the Company received certain management services and assistance
for which the Company compensated Vanguard by issuing Vanguard 10,000 shares of
common stock in 1996 and an additional 10,000 shares in 1997. In addition, the
Company paid Vanguard approximately $21, $78 and $218 during the years ended
December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999, all
management services agreements with Vanguard have been terminated.

                                                                            F-11




<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)

         In connection with an investment of $8,000 in common stock in 1996, the
Company, Vanguard and shareholders representing a majority of the outstanding
common stock entered into a voting agreement in November 1996 (the "Voting
Agreement") pursuant to which such shareholders agreed to vote their shares in
all elections of directors so as to elect to the Board of Directors six persons
nominated by Vanguard. The Voting Agreement terminated upon the acquisition of
Vanguard by AT&T Corp. in 1999.

         See Note 9 for a description of a special common stock purchase warrant
issued to Vanguard and certain registration rights to which Vanguard is
entitled.

6.  RESTRUCTURING OF DEBT

         During 1999, the Company repurchased certain of the 1996 Senior
Discount Notes (See Note 7) at less than their face value as part of an overall
undertaking to restructure this debt. In December 1999, the Company completed an
exchange offer (the "Exchange Offer") of Senior Pay-in-Kind Notes Due 2003 of
Inter*Act Operating Co., Inc., a wholly owned subsidiary of the Company (the
"PIK Notes"), 14% Series B Senior Mandatorily Redeemable Convertible Preferred
Stock of the Company (the "Series B Preferred Stock") and common stock purchase
warrants (the "Exchange Offer Warrants") for its outstanding Senior Discount
Notes. In the Exchange Offer, each holder of $1,000 principal amount of Senior
Discount Notes received $500 principal amount of PIK Notes, one share of Series
B Preferred Stock having an initial liquidation preference of $500 (See Note 10)
and one Exchange Offer Warrant to purchase 17.96 shares of common stock for an
exercise price of $.01 (See Note 9). Because 100% of the outstanding Discount
Notes (other than those held by the Company) were tendered in the Exchange
Offer, the issuer of the PIK Notes, Inter*Act Operating Co., Inc., merged with
and into its parent, the Company, on December 30, 1999. Consequently, the PIK
Notes are direct obligations of the Company.

         The gain on restructuring of this debt, including the effect of the
repurchase of certain notes, unamortized debt issuance costs (See Note 2) and
unaccreted debt discount related to the Discount Note Warrants (See Note 9) is
included as an extraordinary item in the accompanying statement of operations
for 1999.

7. LONG-TERM DEBT

<TABLE>
<CAPTION>
         Long-term debt consisted of the following:

                                                                        December 31,
                                                          ------------------------------------
                                                                 1999                 1998
                                                          ------------------------------------
<S>                                                        <C>                  <C>
1996 14% Senior Discount Notes(a)                             $      --            $   111,819
Note payable for patent acquisition(b)                              5,657                5,554
1999 14% Senior Pay-In-Kind Notes (c)                              63,217                 --
Obligation under capital lease                                      1,210                 --
                                                          ---------------       --------------
                                                                   70,084              117,373
Less: Current portion of long-term debt                             6,135                5,554
                                                          ---------------       --------------
                                                              $    63,949          $   111,819
                                                          ===============       ==============
</TABLE>

   (a) In August 1996, the Company, through the 1996 Private Placement, issued
       142,000 units, each consisting of a 14% Senior Discount Note due 2003
       (collectively, the "Discount Notes") with a principal amount at maturity
       of $1,000 and a warrant to purchase 7.334 shares (adjusting to 9.429
       shares at September 30, 1997 if the Company did not complete a qualified
       initial public offering of common stock by that date) of common stock of
       the Company at $.01 per share. The gross proceeds of $94,800 were
       allocated by the Company to the value of the warrants of approximately
       $24,500 (See Note 9) and to the Discount Notes of approximately $70,300.
       Expenses of the offering of approximately $3,900 were capitalized as bond
       issuance costs and are being amortized over the remaining term of the
       Discount Notes (See Note 2). The Company did not complete a qualified
       initial public offering of common stock by September 30, 1997; as a
       result, the Company recorded additional common stock purchase warrants
       and related debt discount of $3,000, reflecting the valuation of an
       additional 297,490 shares, or 2.095 shares issuable per warrant.

                                                                            F-12




<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)


       The Discount Notes were to accrue cash interest at a rate of 14% per
       annum, commencing on August 1, 1999, payable semi-annually on
       February 1 and August 1 of each year commencing on February 1, 2000. The
       debt discount related to the difference between the face value of the
       notes ($142,000) and the proceeds of the 1996 Private Placement ($94,800)
       was accreted over the period to August 1, 1999. The debt discount related
       to the portion of the 1996 Private Placement allocated to the value of
       the warrants ($27,400 in aggregate) was being accreted over the full term
       of the Discount Notes to August 1, 2003. Interest expense on the notes,
       including the accretion of debt discount and amortization of issuance
       costs, was being recognized at a constant rate of interest over the life
       of the Notes. Discount accretion of $14,500, $20,400 and $17,500 and
       amortization of bond issuance costs of approximately $570, $526 and $464
       have been recognized as interest expense during the years ended
       December 31, 1999, 1998 and 1997, respectively.

       See Note 6 for a description of the repurchase of a portion of, and the
       restructuring of all of, these notes during 1999.

   (b) In 1998, the Company incurred a note payable in the amount of
       approximately $5,679 in connection with the acquisition of certain
       intellectual property. This note, which currently bears interest at 10.0%
       per year, was originally payable on June 1, 1999 and was amended and
       extended to June 1, 2000. If, prior to the maturity of this note, the
       Company completes a qualifying initial public offering of common stock
       or a change in control, as defined, the note would then be convertible
       into a number of shares of the Company's common stock, equal to the
       then-outstanding principal balance and accrued interest divided by $8.50.

   (c) In December 1999, the Company completed an exchange offer described in
       Note 6, whereby the Discount Notes were exchanged for the PIK Notes,
       Series B Preferred Stock and the Exchange Offer Warrants. The PIK Notes
       mature on August 1, 2003 and accrue interest at a rate of 14% per annum
       from and after August 1, 1999, payable semiannually on February 1 and
       August 1 of each year, beginning February 1, 2000. The Company may, at
       its option, elect not to make interest payments in cash prior to the date
       that is 18 months following the earlier of an initial public offering of
       the Company's common stock or a Change in Control (as defined in the
       Indenture governing the PIK Notes). To the extent that the Company does
       not pay interest in cash, the interest accrued on the PIK Notes will be
       paid by the issuance of additional promissory notes, which will have
       substantially the same terms, including date of maturity and interest
       rate, as the PIK Notes.

       In the event that the Company has not commenced a public offering by 180
       days after the date of the exchange offer, the Company has agreed with
       the holders of the PIK Notes, to (i) file with the Securities and
       Exchange Commission on or prior to 180 days after the Exchange Date (the
       "Target Filing Date") a registration statement (the "Exchange Offer
       Registration Statement") relating to a registered exchange offer (the
       "Registered Exchange Offer") for the PIK Notes and (ii) use its best
       efforts to cause the Exchange Offer Registration Statement to be declared
       effective by no later than 90 days after the Target Filing Date. If (i)
       the applicable Registration Statement is not filed with the Commission by
       the Target Filing Date, (ii) the Exchange Offer Registration Statement or
       a Shelf Registration Statement is not declared effective within 90 days
       of the Target Filing Date, (iii) neither the Registered Exchange Offer is
       consummated nor the Shelf Registration Statement is declared effective
       within 60 days of the Target Effective Date, or (iv) after a Registration
       Statement is declared effective, the Registration Statement thereafter
       ceases to be effective or usable (subject to certain exceptions) in
       connection with resale of PIK Notes (each such event referred to in
       clauses (i) through (iv), a "Registration Default"), additional cash
       interest will accrue on the PIK Notes at the rate of 0.50% per annum of
       the principal amount of the PIK Notes on the immediately preceding
       February 1 or August 1 with respect to the first 90-day period following
       a Registration Default. Thereafter, interest will increase by an
       additional one-half of one percent per annum for each subsequent 90-day
       period until the Registration Default has been cured. Additional interest
       will be payable in cash semi-annually, in arrears, on February 1 and
       August 1 of each year from the date on which any Registration Default
       occurs to the date on which all Registration Defaults have been cured.
       Such interest is payable in addition to any other interest payable on
       each February 1 and August 1, commencing August 1, 2000.

   (d) During 1999, the Company entered various capital lease agreement with
       initial terms of 36 months for the acquisiton of machinery and equipment.

                                                                            F-13




<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)

8. COMMON STOCK

         The Company issued 15,184 shares of common stock during the year ended
December 31, 1999 in exchange for executive recruiting services. The issuance of
these shares was recorded at $8.50 per share, which management believes
approximates the fair market value of the shares when issued.

         The Company issued no shares of common stock during the year ended
December 31, 1998.

         During the year ended December 31, 1997, the Company issued 60,000
shares of Common Stock, consisting of 50,000 shares for partial consideration in
the acquisition of certain intellectual property and 10,000 shares issued
pursuant to a management service agreement the Company had with a former related
party. The issuance of these shares was recorded at $10.00 per share, which
management believes approximated the fair market value of the shares when
issued.

9. COMMON STOCK PURCHASE WARRANTS

VANGUARD WARRANT

         Pursuant to a warrant issuance associated with a common stock
investment in 1995 (the "Vanguard Warrant"), as restructured prior to the 1996
Private Placement (See Note 7), Vanguard has the right to buy 900,113 shares at
any time before May 5, 2005 at $23.50 per share, which was, in the opinion of
management, the fair market value of the related common stock at the date of the
restructuring of the Warrant. The Vanguard Warrant also provides that Vanguard
may pay the exercise price either in cash or, if the fair market value of the
common stock at the time of exercise is greater than the exercise price, by
surrendering any unexercised portion of the Vanguard Warrant and receiving the
number of shares equal to (i) the excess of fair market value per share at the
time of exercise over the exercise price per share multiplied by (ii) the number
of shares surrendered.

         The Company and Vanguard have entered into a Registration Rights
Agreement relating to certain warrants and shares of common stock of the Company
owned by Vanguard. In addition, the agreement allows Vanguard certain
"piggyback" registration rights on any security offerings the Company may
undertake. The agreement terminates on the earlier of five years from date of
the Company's first registration statement becomes effective or at such time as
Vanguard may sell its securities pursuant to Rule 144 under the Securities Act.

1996 EQUITY OFFERING WARRANTS

         In connection with a private placement of common stock in 1996,
purchasers of certain minimum amounts received warrants to purchase shares of
the Company's common stock. Warrants to purchase an aggregate of 323,216 shares
of common stock were issued in this offering. Such warrants expire on December
31, 2000 and initially provided that the exercise price would equal the sales
price of the next $2,000 of common stock issued and sold by the Company. Since
the issuance of the warrants, the Company has not sold $2,000 of common stock
but did sell over $2,000 of Series A Preferred Stock convertible into common
stock at a conversion price of $8.50 per share (See Note 10). Accordingly, in
June 1999, the Company's Board of Directors declared the exercise price for
these warrants to be $8.50 per share.

                                                                            F-14




<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)

DISCOUNT NOTE WARRANTS

         In August 1996, the Company issued in a private placement transaction
(the 1996 "Private Placement") 142,000 units, each consisting of a 14% Senior
Discount Note due 2003 with a principal amount at maturity of $1,000
(collectively, the "Discount Notes") (See Notes 2, 6 and 7) and a warrant to
purchase 7.334 shares (adjusted to 9.429 shares at September 30, 1997 when the
Company did not complete a qualified initial public offering of common stock by
that date) of common stock of the Company at $.01 per share (the "Discount Note
Warrants"). As of December 31, 1999, Discount Note Warrants to purchase an
aggregate of 1,338,918 shares of the Company's Common Stock are outstanding and
are exercisable on or after the earliest to occur of (i) August 1, 2000, (ii) a
change of control of the Company, (iii) (a) 90 days after the closing of an
initial public offering of common stock of the Company or (b) upon the closing
of the initial public offering but only in respect of warrants required to be
exercised to permit the holders thereof to sell shares in the initial public
offering, (iv) a consolidation, merger or purchase of assets involving the
Company or any of its subsidiaries that results in the common stock of the
Company becoming subject to registration, (v) an extraordinary cash dividend
paid by the Company or (vi) the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company. The number of shares of
the common stock for which a Discount Note Warrant is exercisable is subject to
adjustment upon the occurrence of certain events.

         Holders of Discount Note Warrants (or common stock issued in respect
thereof) are entitled to certain registration rights.

         After August 1, 2001, the Company may be required, under certain
circumstances, to purchase, at fair market value, the outstanding Discount Note
Warrants and underlying common stock issued. Depending on the fair market value
at that time, there may be a charge to earnings in connection with the
repurchase of the Discount Note Warrants and Underlying Common Stock.

         Management of the Company believed, based on independent third party
valuations, that the value of the Company's common stock at the date of the
initial issuance of the Discount Note Warrants was $23.50 per share and,
accordingly, allocated approximately $24,500 of the proceeds of the 1996 Private
Placement to the value of the Discount Note Warrants based on 142,000 units
consisting of warrants to purchase 7.334 shares of common stock per unit with an
exercise price of $.01 per share. Effective September 30, 1997, the Company
recorded an additional $3,000, reflecting the valuation of an additional 297,490
shares, or 2.095 (9.429 less 7.334) shares issuable per Discount Note Warrant,
when the Company did not complete a qualifying initial public offering by that
date. In connection with the Company's restructuring of the related Discount
Notes, the carrying amount of the warrants still outstanding was reduced to
$11,367. This aggregate amount is classified between liabilities and
stockholders' equity (deficit) in the accompanying consolidated balance sheets.
The value of the original Discount Note Warrants and the incremental value of
the 2.095 additional Note Warrants issued per unit of the Notes effective
September 30, 1997 were, from their issuance through the date of the
restructuring of the related Discount Notes, accounted for as an additional debt
discount subject to accretion as described in Note 7. As part of the
restructuring of the Discount Notes described in Note 6, the remaining
unaccreted portion of this carrying amount was written off and included in the
determination of the gain on restructuring.

EXCHANGE OFFER WARRANTS

         In December 1999, the Company completed an exchange offer (the
"Exchange Offer") of Senior Pay-in-Kind Notes Due 2003 of Inter*Act Operating
Co., Inc. (See Note 6), Series B Preferred Stock and common stock purchase
warrants exercisable at $.01 per share (the "Exchange Offer Warrants")
for its outstanding Discount Notes. As of December 31, 1999, Exchange Offer
Warrants to purchase an aggregate of 2,506,767 shares of the Company's common
stock were outstanding. The Exchange Offer Warrants are not exercisable until
December 31, 2002. To the extent that the Company redeems any of the PIK Notes
prior to December 31, 2002, the number of shares of common stock into which each
Exchange Offer Warrant is exercisable will be ratably reduced. Consequently, if
the Company redeems all of the PIK Notes prior to December 31, 2002, the
Exchange Offer Warrants will not be exercisable for any shares of the Company's
common stock. The number of shares of the common stock for which an Exchange
Offer Warrant is exercisable is subject to adjustment upon the occurrence of
certain events. The value of the Exchange Offer Warrants of $21,282 (which
represents the difference between the exercise price of $.01 per share and the
fair market value of the Company's common stock of $8.50 per share at the date
of issuance) has been credited to Additional Paid-In

                                                                            F-15




<PAGE>


INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)



Capital and accounted for as additional debt discount associated with the PIK
Notes and as a discount on the Series B Preferred Stock, with
one-half of the aggregate value allocated to each of the related debt and
preferred securities. The accretion of the amount allocated to the PIK
Notes is being charged to interest expense and the accretion of the
amount allocated to the Series B Preferred stock is being charged to preferred
stock dividends using the effective interest rate method.

         Holders of Exchange Offer Warrants (or common stock issued in respect
thereof) or Series B Preferred Stock are entitled, following an initial public
offering, to certain registration rights with respect to the common stock issued
or issuable upon the exercise of the warrants or the conversion of the preferred
stock and any other common stock held by such holders. If the Company does not
comply with the various registration rights, certain monetary damages are
provided for in the Exchange Offer. Furthermore, the holders of Exchange Offer
Warrants and Series B Preferred Stock have certain "piggy back" registration
rights.

1999 EQUITY OFFERING WARRANTS

         In December 1999, the Company issued in a private offering 70,120
units, each consisting of one share of Series C Preferred Stock (See Note 10)
and one warrant to purchase approximately 7.14 shares of the Company's common
stock at a price of $14.00 per share. As of December 31, 1999, warrants to
purchase an aggregate of 500,857 shares of common stock had been issued in this
offering and were outstanding. Such warrants are presently exercisable and
expire ten years from the date of issuance if unexercised. The intrinsic value
of these warrants, calculated using the Black-Scholes Option Pricing Model with
similar variables as those used for the Company's options and described in
Note 14, of $879 has been credited to Additional Paid-In Capital and charged
as a preferred stock dividend during the year ended December 31, 1999.

         The number of shares of the common stock for which these warrants are
exercisable and the exercise price are subject to adjustment upon the occurrence
of certain events, including if the Company issues additional common stock
without consideration or at a price less than the exercise price (except in
certain circumstances) and if the Company declares and pays on shares of its
common stock a dividend payable in shares of common stock or splits the then
-outstanding shares of common stock into a greater number of shares. In the
event of certain adjustments to the exercise features of these warrants, there
may be further charges to preferred stock dividends, depending on the impact of
those adjustments on the value of the warrants then outstanding.

         Holders who would retain the common stock upon the exercise of these
warrants and conversion of any outstanding Series C Preferred Stock in excess
of one percent of the total outstanding shares of common stock of the Company
have certain registration rights with respect to the shares common stock
issued or issuable upon exercise of the warrants or conversion of the Series C
Preferred Stock.

         During the first quarter of 2000, the Company issued 67,210 additional
units in this private offering, including warrants to purchase an additional
479,879 shares of common stock of the Company at $14.00 per share.

10. PREFERRED STOCK

10% SERIES A MANDATORILY CONVERTIBLE PREFERRED STOCK

         During the third quarter of 1998, the Company's Board of Directors
designated a series of preferred stock, the 10% Series A Mandatorily Convertible
Preferred Stock ("Series A Preferred Stock"), and authorized the issuance and
sale of up to $40 million of Series A Preferred Stock in a private offering at
$100 per share. As initially designated, the shares of Series A Preferred
Stock accrued dividends quarterly from the date of issuance at the rate of 10%
per annum payable in cash, by delivery of shares of Series A Preferred Stock, or
by a combination thereof at the Company's option. The holder of each share of
Series A Preferred Stock was initially entitled to ten votes per share. The
shares had certain voluntary and mandatory conversion rights into the Company's
common stock (at a conversion price per share of common stock equal to $10.00,
plus accrued and unpaid dividends) under certain events, such as an initial
public stock offering. During 1998, the Company issued 177,878 shares of
Series A Preferred Stock at a price of $100 per share, for total proceeds of

                                                                            F-16




<PAGE>


INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)


approximately $17,788. Of the total proceeds in 1998, $17,688 was received in
cash and $100 was exchanged for the forgiveness of accounts payable in the same
amount.

         In March 1999, the Board of Directors and shareholders of the Company
approved certain changes to the Series A Preferred Stock and authorized an
increase in the private offering from $40 million to $70 million. Changes to the
Series A Preferred Stock consisted of (i) a reduction in the conversion price
from $10.00 to $8.50 per share of common stock into which each share of Series A
Preferred Stock is convertible, (ii) an increase in the number of votes per
share of Series A Preferred Stock from 10 to the number of shares of common
stock into which it is convertible (initially 11.7647), (iii) accrual of
dividends on the Series A Preferred Stock semiannually, as opposed to quarterly,
to be paid only in shares of Series A Preferred Stock and (iv) the addition of
antidilution provisions. Such changes were applicable to all shares of Series A
Preferred Stock issued prior to the effective date of the changes and are
applicable to all additional shares of Series A Preferred Stock issued in the
private offering.

         During 1999, the Company issued 320,990 shares of Series A Preferred
stock at a price of $100 per share for total proceeds of approximately $32,099.
As of December 31, 1999, the Company had 498,868 shares of Series A Preferred
Stock outstanding. Accrued dividends, payable in Series A Preferred Stock, were
$4,009 and $354 as of December 31, 1999 and 1998, respectively.

         Holders who would retain the common stock upon the conversion of any
outstanding Series A Preferred Stock in excess of one percent of the total
outstanding shares of common stock of the Company have certain registration
rights with respect to the shares of common stock issued or issuable upon the
conversion of the Series A Preferred Stock.

14% SERIES B SENIOR MANDATORY REDEEMABLE CONVERTIBLE  PREFERRED STOCK

         In December 1999, the Company's Board of Directors designated a new
series of preferred stock, the 14% Series B Senior Mandatorily Redeemable
Convertible Preferred Stock ("Series B Preferred Stock"), and authorized the
issuance of 139,575 shares of Series B Preferred Stock to tendering holders of
the Company's Discount Notes in the Exchange Offer (See Note 6). As of December
31, 1999, all 139,575 shares of Series B Preferred Stock were issued and
outstanding.

         The shares of Series B Preferred Stock have a liquidation preference of
$500 per share and rank senior, as to dividends and liquidation preference,
to all other classes of the Company's capital stock. Dividends on the Series B
Preferred Stock accrue from August 1, 1999, at the rate of 14% per annum of the
liquidation per share, payable semi-annually on the first day of February and
August of each year, commencing on February 1, 2000, and are cumulative to the
extent unpaid. Accrued dividends on the Series B Preferred Stock were $4,071 as
of December 31, 1999.

         Holders of Series B Preferred Stock are entitled to vote their shares
at the rate of the number of shares of common stock into which each share of
Series B Preferred Stock is convertible (initially 35.71). Each share of Series
B Preferred Stock automatically converts into a number of shares of common stock
equal to the liquidation preference plus accrued and unpaid dividends on the
date of conversion divided by a conversion price of $14.00 (subject to certain
adjustments) upon the closing of a public offering of the Company's common
stock. Holders of Series B Preferred Stock may also voluntarily convert their
shares at any time. The number of shares of the common stock for which each
share of Series B Preferred Stock is convertible and the conversion price are
subject to adjustment upon the occurrence of certain events, including if the
Company issues additional common stock without consideration or at a price less
than the conversion price (except in certain circumstances) and if the Company
declares and pays on shares of its common stock a dividend payable in shares of
common stock or splits the then outstanding shares of common stock into a
greater number of shares. Upon a change in control, holders of Series B
Preferred Stock have the right to require the Company to redeem the stock at the
liquidation preference at the date of the change in control. Accordingly, the
Series B Preferred Stock is classified between liabilities and stockholders'
equity (deficit) in the accompanying consolidated balance sheets.

         Holders of Series B Preferred Stock have certain registration rights
with respect to the shares of common stock issued or issuable upon the
conversion of the Series B Preferred Stock.

                                                                            F-17




<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)

10% SERIES C MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

         In December 1999, the Company's Board of Directors designated an
additional series of preferred stock, the 10% Series C Mandatorily Redeemable
Convertible Preferred Stock ("Series C Preferred Stock") and authorized the
issuance and sale in a private offering up to 250,000 units consisting of one
share of Series C Preferred Stock and one warrant to purchase approximately 7.14
shares of the Company's common stock at a price of $14.00 per share
(See Note 9). As of December 31, 1999, 70,120 units of had been sold for total
proceeds of approximately $7,012.

         The shares of Series C Preferred Stock have a liquidation preference of
$100 per share and rank, as to dividends and liquidation preference, equal to
the Series A Preferred Stock, junior to the Series B Preferred Stock and senior
to the Company's common stock. Dividends on the Series C Preferred Stock are
payable only in shares of Series C Preferred Stock and accrue from the date of
issuance, at the rate of 10% per annum of the liquidation preference, payable
semi-annually on the first day of March and September of each year, commencing
on the last day of March and September of each year, and are cumulative to the
extent unpaid.

         Holders of Series C Preferred Stock are entitled to vote their shares
at the rate of the number of shares of common stock into which each share of
Series C Preferred Stock is convertible (initially 7.14). Each share of Series C
Preferred Stock automatically converts into a number of shares of common stock
equal to the liquidation preference plus accrued and unpaid dividends on the
date of conversion divided by a conversion price of $14.00 (subject to certain
adjustments) upon the closing of a public offering of the Company's common
stock. Holders of Series C Preferred Stock may also voluntarily convert their
shares at any time. The number of shares of the common stock for which each
share of Series C Preferred Stock is convertible and the conversion price are
subject to adjustment upon the occurrence of certain events, including if the
Company issues additional common stock without consideration or at a price less
than the conversion price (except in certain circumstances) and if the Company
declares and pays on shares of its common stock a dividend payable in shares of
common stock or splits the then outstanding shares of common stock into a
greater number of shares. The Company is required to redeem all then outstanding
shares of Series C Preferred stock at the liquidation value on November 1, 2008.
Accordingly, the Series C Preferred Stock is classified between liabilities and
stockholders' equity (deficit) in the accompanying consolidated balance sheets.

         Certain holders of Series C Preferred Stock have certain registration
rights with respect to the shares of common stock issued or issuable upon the
conversion of the Series C Preferred Stock.

         As of December 31, 1999, the Company had 70,120 shares of Series C
Preferred Stock outstanding. Accrued dividends, payable in Series C Preferred
Stock, were $27 as of December 31, 1999.

         During the first quarter of 2000, the Company issued 67,210 additional
units in this private offering for total proceeds of approximately $6,721,000.
Included in the additional units were 67,210 shares of Series C Preferred Stock
and warrants to purchase an additional 479,879 shares of common stock of the
Company at $14.00 per share.

11. NET LOSS PER SHARE

         A reconciliation between the net loss and common shares of the basic
and diluted EPS computations is as follows:

<TABLE>
<CAPTION>
                                         Year Ended                       Year Ended                        Year Ended
                                      December 31, 1999                December 31, 1998                 December 31, 1997
                                 ----------------------------- -------------------------------- -------------------------------
                                                      Per Share                         Per Share                        Per Share
                                  Net Loss   Shares     Amount     Net Loss    Shares     Amount    Net Loss    Shares     Amount
                                 ---------   ------   ---------    --------    ------   ---------   --------    ------   ---------
<S>                               <C>         <C>       <C>       <C>          <C>        <C>       <C>         <C>        <C>
Basic EPS
Net loss attributable to
   common stock                   $(69,604)   7,731     $(9.00)   $(62,414)    7,729      $(8.08)   $(49,814)   7,692      $(6.48)

Effect on Dilutive Securities:
  Warrants                             --        --      --            --         --       --            --        --         --
  Stock Options                        --        --      --            --         --       --            --        --         --
                                   ------       ---    -----       ------        ---     -----       ------       ---      -----
Diluted EPS
Net loss attributable to common
  stock and assumed option
  exercise                        $(69,604)   7,731     $(9.00)   $(62,414)    7,729      $(8.08)   $(49,814)   7,692      $(6.48)
                                  ========    =====     ======    =========    =====      =======   ========    =====      ======
</TABLE>

                                                                            F-18




<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)

         There were no reconciling items to be reported by the Company in the
calculation for basic EPS and diluted EPS for all periods presented. Inclusion
of the Company's convertible preferred stock, outstanding common stock purchase
warrants and stock options (See Notes 8, 10 and 14) would have an antidilutive
effect on earnings per share and, as a result, they are not included in the
calculation of diluted EPS for any period presented.

12. DEFERRED COMPENSATION

         During 1996, the Company issued options to purchase 48,000 shares of
common stock at an exercise price of $7.50 per share under the 1996 Nonqualified
Stock Option Plan (See Note 14), which was an exercise price below the
then-estimated fair market value of the Company's common stock on the date of
grant. Accordingly, the Company recorded a deferred compensation charge of $768,
which was being amortized ratably over the five-year vesting period of the
related options. Accumulated amortization was $352 at December 31, 1998.
Amortization expense of deferred compensation was $154 for each of the years
ended December 31, 1998 and 1997. During 1999, due to the termination of the
employee who had received these options, 28,800 of these options were
cancelled, and the remaining 19,200 options which were fully vested were
retained by the former employee, with an expiration date of August 2001. As a
result, the remaining deferred compensation and $45 of previously recognized
compensation was reversed.

13. INCOME TAXES

         The components of cumulative deferred tax assets and liabilities were
as follows:

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                             -------------------------------
                                                                                1999                1998
                                                                             -------------------------------
<S>                                                                         <C>                   <C>
Cumulative Amounts:
Deferred Tax Assets:
  Accrued Bonus/Deferred Compensation/other                                   $      507          $      324
  Amortization of Warrant Expense                                                  4,164               2,759
  Interest Accretion                                                              11,528               8,090
  Other                                                                              108                 113
  Bond Issuance Cost Amortization                                                    605                 408
  Net Operating Loss Carryforward                                                 62,416              43,179
                                                                         ---------------     ---------------
  Total Deferred Tax Assets                                                       79,328              54,873
                                                                         ---------------     ---------------

Deferred Tax Liabilities:
  Depreciation                                                                   (2,024)              (1,488)
                                                                         ---------------     ---------------
  Total Deferred Tax Liabilities                                                 (2,024)              (1,488)
                                                                         ---------------     ---------------
  Net Deferred Tax Asset before Valuation Allowance                               77,304              53,385
                                                                         ---------------     ---------------
  Valuation Allowance                                                            (77,304)            (53,385)
                                                                         ---------------     ---------------
  Net Deferred Tax Asset                                                      $       --          $       --
                                                                         ===============     ===============

         In accordance with the provisions of Internal Revenue Code Section 382,
utilization of the Company's net operating loss carryforwards could be limited
in years following a change in the Company's ownership, which could occur at the
time of an initial public offering. Net operating losses incurred after the date
of the change of ownership are not limited unless another change in ownership
occurs. At December 31, 1999, the amount of net operating loss carryforward is
approximately $135,000. The net operating loss carryforwards will expire in
varying amounts through 2019.

         Creditable foreign taxes paid by the Company or its subsidiaries will
be subject to Internal Revenue Code Section 904, Limitation on Foreign Tax
Credit, because the Company does not have a Federal Income Tax liability. The
Foreign Tax Credit limitation may be carried back two years and forward five
years. The Company has the option of deducting these foreign taxes in lieu of
the credit. In general, since the Company does not have a federal tax liability,
the deduction method will increase the amount of net operating losses which are
available to be carried forward twenty years. Through December 31, 1999, the
Company has not paid or accrued foreign taxes.

                                                                            F-19




<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)


         SFAS No. 109 requires a valuation allowance to be recorded when it is
more likely than not that some or all of the deferred tax assets may not be
realized. At each of the balance sheet dates, a valuation allowance for the full
amount of the net deferred tax asset was recorded. This valuation allowance is
recorded due to both the uncertainty of future income and the possible
application of Internal Revenue Code Section 382 limitations on the use of the
net operating loss carryforwards.

14. STOCK OPTION PLANS

         The Company has in place the 1994 Stock Compensation Plan, which
provides for the issuance of shares of common stock to key employees,
consultants and directors pursuant to stock options that meet the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (incentive stock
options), options that do not meet such requirements (nonqualified stock
options) and stock bonuses. All options under the plan must be granted at an
exercise price not less than fair market value. Stock bonuses may be in the form
of grants of restricted stock. The aggregate number of shares of common stock
that may be issued pursuant to the plan may not exceed 330,000 shares, subject
to adjustment upon occurrence of certain events affecting the Company's
capitalization. As of December 31, 1999, there were no remaining shares
available for future grants under this plan.

         The Company also has in place the 1996 Nonqualified Stock Option Plan,
which provides for the issuance of shares of common stock to key employees,
consultants and directors pursuant to nonqualified stock options. All options
must be granted at an exercise price not less than $5.50 per share. The
aggregate number of shares of common stock that may be issued pursuant to the
plan may not exceed 600,000 shares, subject to adjustment upon occurrence of
certain events affecting the Company's capitalization. As of December 31, 1999,
an aggregate of 15 shares remain available for future grants under this plan.

         The Company also has in place the 1997 Long-term Incentive Plan
("Long-term Incentive Plan") for the purpose of promoting the long-term
financial performance of the Company by providing incentive compensation
opportunities to officers, executives or supervisory employees, directors or
consultants of the Company or any subsidiary. The plan allows for the Company to
grant stock options for the purchase of shares of stock to grantees under the
plan in such amounts as the Compensation Committee of the Board of Directors, in
its sole discretion, determines. The stock options granted under the Plan will
be designated as either: (i) Incentive Stock Options or (ii) Nonqualified Stock
Options. The purchase price for shares acquired pursuant to the exercise will be
determined at the time of grant; however, it will not be less than the fair
market value of the shares at the time of the grant. The Long-term Incentive
Plan also allows the Company to grant Stock Appreciation Rights in any amount,
at its sole discretion, either alone or in combination with other awards granted
under the Plan. An aggregate of 670,000 shares of common stock are reserved for
issuance pursuant to awards under this plan. As of December 31, 1998, options to
purchase 580,350 shares of common stock were issued and outstanding under the
Long-term Incentive Plan, all at an exercise price of $10.00 per share.
Management believes that these options were granted at fair market value of
common stock at the dates of grant. No Stock Appreciation Rights were awarded
through December 31, 1998. The awards vest annually over five years from the
date of grant with the exception of 63,500 options, which became immediately
exercisable. During 1999, the Board of Directors and shareholders approved an
amendment to the Long-Term Incentive Plan to increase the number of shares of
common stock reserved for issuance under the 1997 Plan to be increased from
670,000 to 1,470,000.

         During 1999, options to purchase 501,100 shares of the Company's common
stock with original exercise prices of $10.00 per share were amended to change
the exercise prices to $8.50 per share which, in the opinion of the Company's
management, represented the fair market value of the Company's common stock on
the date of amendment. As of December 31, 1999 an aggregate of 1,918 shares
remain available for future grants under this plan.

         In 1999, the Board of Directors approved the grant of a special
nonqualified option outside of the Company's option plans to the Chief Executive
Officer to purchase up to 475,000 shares of the Company's common stock at an
exercise price of $8.50 per share, which was the Board's determination of the
fair market value of the common stock at the time of the grant. The option vests
ratably over three years but may not be exercised unless the Company completes a
public offering of its common stock or a sale of all or substantially all of the
Company. In connection with the option, the Chief Executive Officer was granted
certain registration rights with respect to the shares issuable upon the
exercise of the option. Because the option's exercisability is subject to the
occurrence of certain contingent events, there may be a charge to compensation
expense upon the occurrence of one or both of those events based on the fair
market value of the Company's common stock at the date of those occurrences.

                                                                            F-20




<PAGE>


INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)


         The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with SFAS No. 123 (See Note 2), the Company's
net loss and net loss per share would have been changed to the following pro
forma amounts:


</TABLE>
<TABLE>
<CAPTION>
                                                                        Year Ended         Year Ended         Year Ended
                                                                       December 31,       December 31,       December 31,
                                                                           1999               1998               1997
                                                                       ------------       ------------       ------------
<S>                          <C>                    <C>                    <C>               <C>                <C>
  Net Loss:                  As Reported                                 $(69,604)         $(62,414)          $(49,814)
                             Pro Forma                                    (71,120)          (63,186)           (50,353)

  Net Loss Per Share:        Basic and Diluted      As Reported             (9.00)            (8.08)             (6.48)
                             Basic and Diluted      Pro Forma               (9.22)            (8.18)             (6.55)
</TABLE>

         Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. A summary
of the status of the Company's stock option plans for the years ended December
31, 1999 and 1998, the three month period ended December 31, 1996 and the fiscal
year ended September 28, 1996 is presented in the table and narrative below:

<TABLE>
<CAPTION>

                                                            Year Ended                 Year Ended                Period Ended
                                                         December 31, 1999          December 31, 1998          December 31, 1997
                                                         -----------------          -----------------          -----------------
                                                                     Wtd Avg                    Wtd Avg                     Wtd Avg
                                                         Shares     Ex Price       Shares      Ex Price       Shares       Ex Price
                                                         ------     --------       ------      --------       ------       --------
<S>                                                    <C>             <C>       <C>            <C>            <C>         <C>
    Outstanding at beginning of year                   1,475,250       7.79      1,259,900      $  7.34        821,100     $  5.40
    Granted                                            1,347,020       8.50        388,100        10.00        543,400       10.00
    Exercised                                                 --         --             --           --             --         --
    Forfeited                                           (100,180)      6.46        (10,500)        7.22         (2,200)       5.23
    Expired                                             (324,008)      8.78       (161,750)        9.60       (102,900)       5.91
                                                                                 ---------                   ---------
    Outstanding at end of year                         2,398,082       7.82      1,475,250         7.79      1,259,400        7.34
                                                       =========                 =========                   =========
    Exercisable at end of year                           927,407       6.77        766,890         6.51        571,250        6.16
                                                       =========                 =========                   =========
    Weighted average fair value of options granted           N/A       7.82            N/A          7.79            N/A        7.34
</TABLE>

         The options outstanding at December 31, 1998 have exercise prices
between $1.86 and $10.00, with a weighted average exercise price of $7.79 and a
weighted average remaining contractual life of 7.9 years.

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes Option Pricing Model with the following weighted-average
assumptions used for grants in the years ended December 31, 1999, 1998 and
1997, respectively: risk free interest rates of 6.15, 5.09, and 6.49%;
and expected dividend yields of 0%, expected lives of 5 years, and expected
stock volatility of 30, 20, and 0 for each respective period.

         The foregoing plans are administered by the Compensation and Stock
Option Committee of the Board of Directors, which is authorized, subject to the
provisions of the plans, to determine to whom and at what time options and
bonuses may be granted and the other terms and conditions of the grant.

                                                                            F-21




<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)


15. COMMITMENTS AND CONTINGENCIES

COMMITMENTS FOR TECHNOLOGY

         The Company is party to several patent licensing agreements relating to
its in-store consumer product promotion and couponing business. With respect to
one license agreement under which the Company is assignee, the Company is
required to pay a royalty of 2% of the gross collected revenues of the Company,
to the extent derived from the Company's exploitation of the patent, with such
royalty decreasing to 1% of such revenues after $10 million in aggregate
royalties have been paid to the licensors. This license agreement requires that
certain minimum monthly payments be made to the licensors, and be exceeded
within approximately two years, in order to avoid triggering a termination right
on the part of the licensors. With respect to another license agreement, the
Company is required to pay the licensor a royalty of .8% of the gross collected
revenues of the Company to the extent derived from the Company's exploitation of
the patent, until such time as the licensor has received the aggregate sum of
$600 after which no additional royalty payments are required. Under a third
agreement, the Company is required to pay the licensor a royalty of 1% of the
gross revenues related to the Company's exploitation of the patent subject to
certain minimum annual payments, should the Company wish to maintain exclusive
rights under such patent. Under these agreements, the Company recorded royalty
payments of $330, $475 and $398 for the years ended December 31, 1999, 1998 and
1997, respectively.

LITIGATION

         During the fiscal year ended September 28, 1996, a lawsuit was filed
and settled against the Company alleging certain patent infringement. The
Company expressly denied any wrongdoing and settled the case to avoid lengthy
litigation costs. Under the settlement agreement, the Company was required to
pay $400 and in return, received, among other things, the worldwide, perpetual
right to use such patent, dismissal with prejudice and release of all related
claims. The cost of the settlement of $400 was expensed during the fiscal year
ended September 28, 1996.

         In February 1996, the Company filed suit against Catalina Marketing
Corporation ("Catalina") alleging that Catalina has a patent under which the
Company is licensee. The Company alleges that Catalina is infringing the patent
by making, using and offering for sale devices and systems that incorporate and
employ inventions covered by that patent. The Company is seeking an injunction
against Catalina to stop further infringement of the patent, treble damages and
the costs and expenses incurred in connection with the suit. The complaint has
been amended to add additional detail, and Catalina has answered denying the
allegations and raised certain affirmative defenses. In May 1997, Catalina
asserted a counterclaim alleging that the Company is infringing a newly issued
Catalina Patent. The Company has answered denying the allegations, raising
affirmative defenses. Discovery on the claims and counterclaims will proceed,
and various motions are pending before the United States District Court. The
Company intends to pursue the action vigorously.

         In January 1998, Catalina Marketing International, Inc. ("Catalina
International"), an affiliate of Catalina, filed suit against the Company
alleging that the Company has infringed a patent which Catalina International
acquired by assignment in December 1997. Catalina International alleges that the
Company is infringing this patent by making, using and offering for sale devices
and systems that incorporate and employ inventions covered by this patent. In
February 1998, Catalina International amended its complaint to join as
additional parties' defendant entities who have manufactured kiosks pursuant to
an agreement with the Company. Catalina International seeks injunctive and
declaratory relief as well as unspecified money damages against all defendants,
and has filed a motion for preliminary injunction against the Company seeking to
stop alleged infringement of this patent pending trial. Various other motions
are pending in the United States District Court. The Company intends to defend
against Catalina International's claims vigorously, and to pursue available
remedies against Catalina International. This action was recently consolidated
with the litigation involving the patents described above for purposes of
discovery and trial.

                                                                            F-22





<PAGE>

INTER*ACT ELECTRONIC MARKETING, INC.
(formerly Inter*Act Systems, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(dollars in thousands, except share, per share and per note data)


         On May 27, 1998, the Company filed a new suit against Catalina alleging
that Catalina has infringed a series of patents collectively referred to as the
"Deaton Patents", which the Company acquired by assignment in May 1998 (See Note
7b). The Company alleges that Catalina is infringing the Deaton Patents by
making, using, selling and offering for sale devices and systems that
incorporate and employ inventions covered by the Deaton Patents. The Company is
seeking an injunction against Catalina to stop further infringement of these
patents, treble damages and the costs and expenses incurred in connection with
the suit. Catalina has answered denying the allegations and raising certain
affirmative defenses. Catalina has also challenged some of the claims of six of
the Deaton Patents by provoking an interference proceeding in the U.S. Patent
and Trademark Office. The Company intends to vigorously protect its rights under
the Deaton Patents both in the interference proceeding and in the new lawsuit.

16. SEGMENT DATA

         As described in Note 2, the Company observes the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
While the Company's results of operations are primarily reviewed on a
consolidated basis, the chief operating decision maker also manages the
enterprise in two geographic segments: (i) North American and (ii) Europe. The
following represents selected consolidated financial information for the
Company's segments for the year ended December 31, 1999 (the Company's results
of operations Europe were not material during 1997:

<TABLE>
<CAPTION>

                                                              For the Year Ended December 31, 1999
                    Operating Data            North America           Europe          Eliminations        Consolidated
                    --------------            -------------           ------          ------------        ------------
             <S>                              <C>                    <C>              <C>                  <C>
              Net sales                       $      2,466           $   2,630        $   -                $     5,096
              Loss from operations                 (37,569)             (5,382)            -                     42,951
              Depreciation                           8,378               1,309            -                      9,687
              Capital Expenditures                   3,029               8,817            -                     11,846
              Identifiable Assets                   57,678              10,845         (15,222)                 47,301
</TABLE>


<TABLE>
<CAPTION>
                                                              For the Year Ended December 31, 1998
                    Operating Data            North America           Europe          Eliminations        Consolidated
                    --------------            -------------           ------          ------------        ------------
             <S>                              <C>                    <C>              <C>                  <C>
              Net sales                       $      2,632           $   2,241        $     (280)          $     4,593
              Loss from operations                 (41,150)             (1,101)            -                   (42,251)
              Depreciation                           7,182                 277             -                     7,459
              Capital Expenditures                   6,538               1,547             -                     8,085
              Identifiable Assets                   59,864               1,873            (1,596)               60,141
</TABLE>
                                                                            F-23


                       STATEMENT OF DIFFERENCES

The trademark symbol shall be expressed as.......................... 'TM'
The registered trademark symbol shall be expressed as...............  'r'
The service mark symbol shall be expressed as....................... 'sm'
The section symbol shall be expressed as............................ 'SS'