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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

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

For the quarterly period ended July 1, 2000

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: 0-19902

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DAMARK INTERNATIONAL, INC.(Exact name of Registrant as specified in its charter)

Minnesota(State or other jurisdiction of incorporation
or organization)

41-1551116(IRS Employer Identification Number)301 Carlson Parkway, Suite 201
Minneapolis, Minnesota 55305(Address of principal executive offices)

952-258-2000(Registrant's telephone number
including area code)


7101 Winnetka Avenue North
Minneapolis, MN 55428(Former name, former address and former fiscal year, if changed since last report)

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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 Act of 1934 during the
preceding 12 months; and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

On August 3, 2000, there were 5,767,937 shares of Class A Common Stock and no shares of Class B Common Stock outstanding.

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DAMARK INTERNATIONAL, INC.

INDEX

|         |  |                       |  |                                                                                                                    |  | Page
|-------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ----
|Part I.  |  | FINANCIAL INFORMATION |  |                                                                                                                   
|         |  | Item 1:               |  | Financial Statements                                                                                               |  |     
|         |  |                       |  | Consolidated Statements of Operations (unaudited)
For the three and six months ended July 1, 2000 and July 3, 1999 |  | 3   
|         |  |                       |  | Consolidated Balance Sheets
As of July 1, 2000 (unaudited) and December 31, 1999                                   |  | 4   
|         |  |                       |  | Consolidated Statements of Cash Flows (unaudited)
For the six months ended July 1, 2000 and July 3, 1999           |  | 5   
|         |  |                       |  | Condensed Notes to Consolidated Financial Statements                                                               |  | 6   
|         |  | Item 2:               |  | Management's Discussion and Analysis of Financial Condition
and Results of Operations                              |  | 14  
|Part II. |  | OTHER INFORMATION     |  |                                                                                                                   
|         |  | Item 1:               |  | Legal Proceedings                                                                                                  |  | 21  
|         |  | Item 6:               |  | Exhibits and Reports on Form 8-K                                                                                   |  | 21  
|         |  |                       |  | Signature                                                                                                          |  | 22  
|         |  |                       |  |                                                                                                                    |  |     

2

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DAMARK INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

|                                                                                         |                                                                                            | Three months ended |        | Six months ended |  
|---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------ | ------ | ---------------- | -
|
|
|Net revenues:                                                                            |                                                                                            |                    |        |                  |  
|Product and other revenues                                                               |                                                                                            | $                  | 17,729 |                  | $
|Membership and related revenues                                                          |                                                                                            |                    | 34,044 |                  |  
|                                                                                         |                                                                                            |                    |        |                  |  
|                                                                                         | Total net revenues                                                                         |                    |        | 51,773           |  
|                                                                                         |                                                                                            |                    |        |                  |  
|Costs and expenses:                                                                      |                                                                                            |                    |        |                  |  
|Cost of products sold                                                                    |                                                                                            |                    | 16,680 |                  |  
|Operating and marketing expenses                                                         |                                                                                            |                    | 35,526 |                  |  
|General and administrative expenses                                                      |                                                                                            |                    | 11,673 |                  |  
|Restructuring charges                                                                    |                                                                                            |                    | 2,259  |                  |  
|                                                                                         |                                                                                            |                    |        |                  |  
|                                                                                         | Total costs and expenses                                                                   |                    |        | 66,138           |  
|                                                                                         |                                                                                            |                    |        |                  |  
|                                                                                         | Operating loss                                                                             |                    |        | (14,365          | )
|Interest expense, net                                                                    |                                                                                            |                    | 280    |                  |  
|Other expenses, net                                                                      |                                                                                            |                    | 31     |                  |  
|                                                                                         |                                                                                            |                    |        |                  |  
|                                                                                         | Loss before income taxes, extraordinary gain and cumulative effect of change in accounting |                    |        | (14,676          | )
|Income tax benefit                                                                       |                                                                                            |                    | 5,858  |                  |  
|                                                                                         |                                                                                            |                    |        |                  |  
|                                                                                         | Net loss before extraordinary gain and cumulative effect of change in accounting           |                    |        | (8,818           | )
|Extraordinary gain on condemnation of land, net of taxes of $153                         |                                                                                            |                    |       |                  |  
|Cumulative effect of change in accounting, net of taxes of $8,703                        |                                                                                            |                    |       |                  |  
|                                                                                         |                                                                                            |                    |        |                  |  
|                                                                                         | Net loss                                                                                   |                    | $      | (8,818           | )
|                                                                                         |                                                                                            |                    |        |                  |  
|Loss per common share, basic and diluted:                                                |                                                                                            |                    |        |                  |  
|                                                                                         | Loss before extraordinary gain and cumulative effect of change in accounting               |                    | $      | (1.53            | )
|                                                                                         | Extraordinary gain                                                                         |                    |        |                 |  
|                                                                                         | Cumulative effect of change in accounting                                                  |                    |        |                 |  
|                                                                                         |                                                                                            |                    |        |                  |  
|                                                                                         | Net loss                                                                                   |                    | $      | (1.53            | )
|                                                                                         |                                                                                            |                    |        |                  |  
|                                                                                         | Weighted average common shares outstanding                                                 |                    |        | 5,761            |  
|                                                                                         |                                                                                            |                    |        |                  |  
|Pro forma amounts assuming retroactive application of Staff Accounting Bulletin No. 101: |                                                                                            |                    |        |                  |  
|                                                                                         | Net loss                                                                                   |                    | $      | (8,818           | )
|                                                                                         |                                                                                            |                    |        |                  |  
|                                                                                         | Basic and diluted loss per common share                                                    |                    | $      | (1.53            | )
|                                                                                         |                                                                                            |                    |        |                  |  

See
accompanying condensed notes to consolidated financial statements.

3

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DAMARK INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

|(Amounts in thousands except per share data) |                                                                                                                                                                 | July 1,
2000                         |                                            | December 31,
1999 |        
|-------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------------ | ----------------- | -------
|ASSETS                                       |                                                                                                                                                                
|Current Assets:                              |                                                                                                                                                                 |                                      |                                            |                   |        
|                                             | Cash and cash equivalents                                                                                                                                       |                                      | $                                          | 449               |        
|                                             | Trade accounts receivable, net                                                                                                                                  |                                      |                                            | 28,860            |        
|                                             | Merchandise inventories, net                                                                                                                                    |                                      |                                            | 1,352             |        
|                                             | Deferred membership solicitation and catalog costs                                                                                                              |                                      |                                            | 30,870            |        
|                                             | Deferred income taxes                                                                                                                                           |                                      |                                            | 1,360             |        
|                                             | Officer note receivable                                                                                                                                         |                                      |                                            | 1,720             |        
|                                             | Other                                                                                                                                                           |                                      |                                            | 1,267             |        
|                                             |                                                                                                                                                                 |                                      |                                            |                   |        
|                                             |                                                                                                                                                                 | Total current assets                 |                                            |                   | 65,878 
|Property and equipment, net                  |                                                                                                                                                                 |                                      | 23,086                                     |                   |        
|Deferred income taxes                        |                                                                                                                                                                 |                                      | 23,462                                     |                   |        
|Officer note receivable                      |                                                                                                                                                                 |                                      |                                           |                   |        
|Other assets, net                            |                                                                                                                                                                 |                                      | 167                                        |                   |        
|                                             |                                                                                                                                                                 |                                      |                                            |                   |        
|                                             |                                                                                                                                                                 | Total assets                         |                                            | $                 | 112,593
|                                             |                                                                                                                                                                 |                                      |                                            |                   |        
|LIABILITIES AND SHAREHOLDERS' EQUITY         |                                                                                                                                                                
|Current Liabilities:                         |                                                                                                                                                                 |                                      |                                            |                   |        
|                                             | Accounts payable                                                                                                                                                |                                      | $                                          | 14,208            |        
|                                             | Accrued liabilities                                                                                                                                             |                                      |                                            | 44,103            |        
|                                             | Deferred membership income, net                                                                                                                                 |                                      |                                            | 46,548            |        
|                                             | Borrowings under revolving credit facility                                                                                                                      |                                      |                                            | 11,543            |        
|                                             |                                                                                                                                                                 |                                      |                                            |                   |        
|                                             |                                                                                                                                                                 | Total current liabilities            |                                            |                   | 116,402
|Commitments and contingencies (Note 8)       |                                                                                                                                                                 |                                      |                                            |                   |        
|Shareholders' Equity:                        |                                                                                                                                                                 |                                      |                                            |                   |        
|                                             | Class A Common Stock, $.01 par, 20 million shares authorized; 5,766 and 5,520 shares issued and outstanding at July 1, 2000 and December 31, 1999, respectively |                                      |                                            | 58                |        
|                                             | Class B Common Stock, $.01 par, 2 million shares authorized; none issued and outstanding                                                                        |                                      |                                            |                  |        
|                                             | Series C Junior Participating Preferred Stock, $.01 par, 400,000 shares authorized; none issued and outstanding                                                 |                                      |                                            |                  |        
|                                             | Paid-in capital                                                                                                                                                 |                                      |                                            | 56,360            |        
|                                             | Accumulated deficit                                                                                                                                             |                                      |                                            | (60,227           | )      
|                                             |                                                                                                                                                                 |                                      |                                            |                   |        
|                                             |                                                                                                                                                                 | Total shareholders' equity (deficit) |                                            |                   | (3,809 
|                                             |                                                                                                                                                                 |                                      |                                            |                   |        
|                                             |                                                                                                                                                                 |                                      | Total liabilities and shareholders' equity |                   | $      
|                                             |                                                                                                                                                                 |                                      |                                            |                   |        

See
accompanying condensed notes to consolidated financial statements.

4

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DAMARK INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

|                                    |                                                                                  | Six Months Ended                                |                                         
|----------------------------------- | -------------------------------------------------------------------------------- | ----------------------------------------------- | ----------------------------------------
|
|
|OPERATING ACTIVITIES:               |                                                                                  |                                                 |                                         
|                                    | Net loss                                                                         |                                                 | $                                       
|                                    | Adjustments to reconcile net loss to net cash provided by (used for) operations: |                                                 |                                         
|                                    |                                                                                  | Extraordinary gain on condemnation of land, net |                                         
|                                    |                                                                                  | Cumulative effect of change in accounting, net  |                                         
|                                    |                                                                                  | Depreciation and amortization                   |                                         
|                                    |                                                                                  | Deferred income taxes                           |                                         
|                                    |                                                                                  | Loss on disposal of property and equipment      |                                         
|                                    |                                                                                  | Changes in working capital items:               |                                         
|                                    |                                                                                  |                                                 | Trade accounts receivable, net          
|                                    |                                                                                  |                                                 | Merchandise inventories, net            
|                                    |                                                                                  |                                                 | Other current assets                    
|                                    |                                                                                  |                                                 | Accounts payable and accrued liabilities
|                                    |                                                                                  |                                                 | Deferred membership income, net         
|                                    |                                                                                  |                                                 |                                         
|                                    | Net cash (used for) provided by operations                                       |                                                 |                                         
|                                    |                                                                                  |                                                 |                                         
|INVESTING ACTIVITIES:               |                                                                                  |                                                 |                                         
|                                    | Property and equipment additions                                                 |                                                 |                                         
|                                    | Proceeds from sale of property and equipment                                     |                                                 |                                         
|                                    | Issuance of officer note receivable                                              |                                                 |                                         
|                                    | Other, net                                                                       |                                                 |                                         
|                                    |                                                                                  |                                                 |                                         
|                                    | Net cash used for investing activities                                           |                                                 |                                         
|                                    |                                                                                  |                                                 |                                         
|FINANCING ACTIVITIES:               |                                                                                  |                                                 |                                         
|                                    | Borrowings under revolving credit facility, net                                  |                                                 |                                         
|                                    | Repurchase and retirement of common stock                                        |                                                 |                                         
|                                    | Net proceeds from employee exercise of stock options and issuance of stock       |                                                 |                                         
|                                    |                                                                                  |                                                 |                                         
|                                    | Net cash provided by (used for) financing activities                             |                                                 |                                         
|                                    |                                                                                  |                                                 |                                         
|                                    | Net increase (decrease) in cash and cash equivalents                             |                                                 |                                         
|                                    | Cash and cash equivalents, beginning of period                                   |                                                 |                                         
|                                    |                                                                                  |                                                 |                                         
|                                    | Cash and cash equivalents, end of period                                         |                                                 | $                                       
|                                    |                                                                                  |                                                 |                                         
|SUPPLEMENTAL CASH FLOW INFORMATION: |                                                                                  |                                                 |                                         
|                                    | Interest paid during the period                                                  |                                                 | $                                       
|                                    |                                                                                  |                                                 |                                         
|                                    | Income taxes refunded during the period                                          |                                                 | $                                       
|                                    |                                                                                  |                                                 |                                         
|                                    | Non-cash property and equipment additions                                        |                                                 | $                                       
|                                    |                                                                                  |                                                 |                                         

See
accompanying condensed notes to consolidated financial statements.

5

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DAMARK INTERNATIONAL, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared by Damark International, Inc. (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). The information furnished in these financial statements includes normal recurring adjustments and reflects all adjustments, which
are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make
the information presented not misleading, these financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 1999
Annual Report on Form 10-K filed with the SEC.

The
Company's fiscal year ends on December 31; however, each quarter ends on the last Saturday of a thirteen-week period. As a result, the operating results for the
first half of 2000 and 1999 included 183 and 184 days, respectively. Management believes that the difference in days does not materially affect the comparability of financial results for the
periods presented.

In
January 2000, the Company announced that it would wind-down its non-member catalog marketing and merchandising activities. Going forward, catalog
mailings will be limited to members of the Company's shopping clubs. The wind-down was substantially completed by the end of the second quarter. The Company will continue to operate its
membership services business which recently started doing business as Provell. The order capture, product fulfillment and customer service capabilities developed by the Company were redeployed into a
subsidiary named ClickShip Direct, Inc. ("ClickShip"), which was formed in January 2000. The Company currently plans to separate ClickShip as an independent company (the manner and tax
treatment of which has not yet been finalized) during the third or fourth quarter of 2000.

Note 2. Cumulative Effect of Change in Accounting Principle

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101Revenue Recognition in Financial
Statements ("SAB 101"). The Company adopted SAB 101 effective January 1, 2000 and recorded a non-cash charge of $22.9 million ($14.2 million net of taxes).
Prior to the adoption of SAB 101, membership revenues with respect to clubs for which the Company had an ongoing obligation were recorded on the balance sheet net of direct solicitation and other
costs and amortized into income over the membership period, generally twelve months. Revenues and related expenses on clubs for which the Company had no significant ongoing obligation were recognized
immediately, net of an accrual for future anticipated returns, once any trial period had elapsed.

Effective
January 1, 2000 with the adoption of SAB 101, the Company defers all membership revenues, net of estimated returns, and amortizes them into revenue on a straight line
basis after the trial period has elapsed and over the remaining membership period, generally twelve months. The allowance for returns is established based on the Company's most recent return
experience which is updated each quarter. Most of the Company's members can return their membership at any time prior to expiration of the membership term and receive a pro-rated refund
for the remaining portion of the

6

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membership period. Second quarter and first half activity in the deferred membership income and accrued membership returns accounts is summarized as follows (000's):

Quarter ended July 1, 2000:

|                           |  | Balance at
April 1, 2000 |        | Additions |   | Reductions |  | Adjustments(1) |         | Balance at
July 1, 2000
|-------------------------- |  | ------------------------ | ------ | --------- | - | ---------- |  | -------------- | ------- | -----------------------
|Deferred membership income |  | $                        | 48,067 |           | $ | 25,754     |  | $              | (30,657 | )                      
|                           |  |                          |        |           |   |            |  |                |         |                        
|Accrued membership returns |  | $                        | 26,501 |           | $ | 24,265     |  | $              | (22,243 | )                      
|                           |  |                          |        |           |   |            |  |                |         |                        

Six months ended July 1, 2000:

|                           |  | Balance at
Dec. 31, 1999 |        | Additions |   | Reductions |  | Adjustments(2) |         | Balance at
July 1, 2000
|-------------------------- |  | ------------------------ | ------ | --------- | - | ---------- |  | -------------- | ------- | -----------------------
|Deferred membership income |  | $                        | 24,749 |           | $ | 43,568     |  | $              | (62,943 | )                      
|                           |  |                          |        |           |   |            |  |                |         |                        
|Accrued membership returns |  | $                        | 16,911 |           | $ | 55,338     |  | $              | (52,432 | )                      
|                           |  |                          |        |           |   |            |  |                |         |                        

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During
the second quarter and first half of 2000, the Company recognized $10.6 million and $27.4 million, respectively, of net revenue which was included as a component
of the "cumulative effect of change in accounting" adjustment.

Effective
with the adoption of SAB 101, the Company also defers the recognition of costs and revenues associated with extended warranty service contracts until the end of the return
period, generally three months. Previously, such revenues and costs were recognized immediately.

In
accordance with SAB 101, the cost of membership kits and vouchers are expensed when distributed. Refundable fees for commissions paid to clients and transaction processing costs,
net of expected refunds, together with direct response advertising costs (i.e., telemarketing and direct mail), are capitalized as part of deferred membership solicitation costs and are amortized as
expense in the same manner in which the related revenue is recognized. Other direct and indirect costs incurred with enrolling customers are expensed when incurred. Membership solicitation costs
incurred to obtain new members are generally less than the initial fee. However, if membership solicitation costs were to exceed membership fees, an adjustment would be made to the extent of any
impairment.

Note 3. Earnings Per Common Share

Basic earnings per share ("EPS") is computed based on the weighted average shares of common stock outstanding during the applicable periods while diluted EPS
is computed based on the weighted average shares of common stock outstanding plus potentially dilutive securities outstanding during the

7

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applicable periods. Potentially dilutive securities include stock options which have been granted to employees and directors of the Company.

|                               |                   | Net loss |   | Weighted average
shares outstanding |   | Per share amount | 
|------------------------------ | ----------------- | -------- | - | ----------------------------------- | - | ---------------- | 
|Quarter ended July 1, 2000:    |                   |          |   |                                     |   |                  | 
|                               | Basic and diluted |          | $ | (8,818                              | ) | 5,761            | 
|                               |                   |          |   |                                     |   |                  | 
|Six months ended July 1, 2000: |                   |          |   |                                     |   |                  | 
|                               | Basic and diluted |          | $ | (34,979                             | ) | 5,702            | 
|                               |                   |          |   |                                     |   |                  | 
|Quarter ended July 3, 1999:    |                   |          |   |                                     |   |                  | 
|                               | Basic and diluted |          | $ | (1,436                              | ) | 5,993            | 
|                               |                   |          |   |                                     |   |                  | 
|Six months ended July 3, 1999: |                   |          |   |                                     |   |                  | 
|                               | Basic and diluted |          | $ | (2,342                              | ) | 5,990            | 
|                               |                   |          |   |                                     |   |                  | 

For
the three and six months ended July 1, 2000 and July 3, 1999, there were no potentially dilutive securities. Options to purchase 1,506,247 and 1,867,167 shares of
the Company's Class A Common Stock (the "Common Stock"), respectively, were not included in the computation of diluted loss per share as their inclusion would have been
anti-dilutive.

Note 4. Shareholders' Equity

During the first half of 1999, the Company repurchased approximately 230,000 shares of its Common Stock in open market transactions at an aggregate cost of
approximately $1.7 million. During the fourth quarter of 1999, the Board authorized a one million share open market repurchase program. Through July 1, 2000, no shares have been
repurchased under this program.

Note 5. Restructuring Charges

In conjunction with the restructuring of the Company's catalog operations discussed in Note 1, approximately 150 jobs were eliminated, primarily in
catalog marketing, merchandising and in closing the Brooklyn Center, Minnesota telemarketing center.

As
a result of these activities, the Company recorded a pre-tax restructuring charge of $9.0 million during the first half of 2000. Included in the charge is
approximately $1.3 million related to employee severance and termination costs (with no remaining balance to be paid at July 1, 2000), $1.9 million for future lease and other
minimum commitments with no future benefit and $5.8 million for accelerated depreciation expense as a result of changes in the estimated useful lives of fixed assets that will only be used
during certain transition periods. During the third and fourth quarters of 2000, the Company expects to record an additional $200,000 to $400,000 of incremental depreciation expense as an additional
component of the restructuring charge.

Note 6. Business Segments

During the first six months of 2000 and 1999, the Company operated in two business segments: Membership Services and Catalog Retail. These reportable operating
segments are strategic business units that offer different products and services and are managed separately based on fundamental

8

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differences in their operations. Both operating segments sell exclusively to customers in the U.S. A Corporate segment is also used to account for certain unallocated items, capital allocation and
taxes. The disaggregated financial information presented below is consistent with the basis and manner in which management evaluates results for purposes of assistance with internal operating
decisions.

The
Membership Services operating segment develops, markets and manages leading edge membership and customer relationship management programs that provide purchase price discounts and
other benefits related to consumer and small business needs in the areas of shopping, travel, hospitality, entertainment, health/fitness and finance.

The
Company's Catalog Retail operating segment includes the results of operations from the wind-down of the Company's non-member catalog business and of its
newly formed subsidiary ClickShip Direct, Inc. The catalog business offered brand name, value-priced merchandise through a variety of catalog titles in the categories of computers, home office,
consumer electronics, home décor, home improvement and sports/fitness and provides outsourcing of order fulfillment and customer care services to retailers, direct marketers, and
manufacturers. Services provided by ClickShip Direct include online and offline order-capture, payment processing, inventory receipt, warehousing, merchandise shipment,
after-the-sale customer service and support and returns management.

The
Catalog Retail segment provided certain discounts to members of thePreferred Buyers' Club®and Insiders®membership programs managed by the
Membership Services segment. The Catalog Retail segment experienced significantly higher
advertising leverage on catalogs sent to club members due to the fact that member response rates were typically up to two times higher than those of other customer segments. In addition, member sales
per catalog were typically two to three times higher than those of other customer segments. For these reasons, discounts were allocated entirely to the Catalog Retail segment.

Selected
statement of operations and statement of cash flows data for the three and six months ended July 1, 2000 and July 3, 1999 by business segment are set forth
below. Amounts related to Membership Services reflect the impact of SAB 101 effective January 1, 2000 (see Note 2).

|                                         |                            | Catalog
Retail(1)                          |        | Membership
Services |      | Corporate |       | Consolidated |        
|---------------------------------------- | -------------------------- | ------------------------------------------ | ------ | ------------------- | ---- | --------- | ----- | ------------ | -------
|
|Three Months Ended July 1, 2000          |                            |                                            |        |                     |      |           |       |              |        
|Net revenues(1)                          |                            | $                                          | 17,729 |                     | $    | 34,044    |       | $            |       
|Cost of products sold                    |                            |                                            | 16,680 |                     |      |          |       |              |       
|Restructuring charges                    |                            |                                            | 2,259  |                     |      |          |       |              |       
|Other expenses(2), (3)                   |                            |                                            | 22,785 |                     |      | 24,414    |       |              |       
|                                         |                            |                                            |        |                     |      |           |       |              |        
|                                         | Operating (loss) income    |                                            |        | (23,995             | )    |           | 9,630 |              |        
|Interest and other expense, net          |                            |                                            | 18     |                     |      | 13        |       |              | 280    
|                                         |                            |                                            |        |                     |      |           |       |              |        
|                                         | (Loss) income before taxes |                                            |        | (24,013             | )    |           | 9,617 |              |        
|Income tax benefit                       |                            |                                            |       |                     |      |          |       |              | 5,858  
|                                         |                            |                                            |        |                     |      |           |       |              |        
|                                         | Net (loss) income          |                                            |        | (24,013             | )    |           | 9,617 |              |        
|Depreciation and amortization            |                            |                                            | 3,391  |                     |      | 119       |       |              |       
|Net changes in working capital and other |                            |                                            | 20,126 |                     |      | 281       |       |              | (12,952
|                                         |                            |                                            |        |                     |      |           |       |              |        
|                                         |                            | Net cash provided by (used for) operations |        | $                   | (496 | )         | $     | 10,017       |        
|                                         |                            |                                            |        |                     |      |           |       |              |        

9

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|                                         |                                                   | Catalog
Retail(1)                          |        | Membership
Services |       | Corporate |       | Consolidated |      
|---------------------------------------- | ------------------------------------------------- | ------------------------------------------ | ------ | ------------------- | ----- | --------- | ----- | ------------ | -----
|
|Three Months Ended July 3, 1999          |                                                   |                                            |        |                     |       |           |       |              |      
|Net revenues(1)                          |                                                   | $                                          | 77,692 |                     | $     | 34,554    |       | $            |     
|Cost of products sold                    |                                                   |                                            | 55,558 |                     |       |          |       |              |     
|Other expenses(2), (3)                   |                                                   |                                            | 30,229 |                     |       | 27,401    |       |              | 1,310
|                                         |                                                   |                                            |        |                     |       |           |       |              |      
|                                         | Operating (loss) income                           |                                            |        | (8,095              | )     |           | 7,153 |              |      
|Interest and other expense, net          |                                                   |                                            |       |                     |       |          |       |              | 374  
|                                         |                                                   |                                            |        |                     |       |           |       |              |      
|                                         | (Loss) income before taxes and extraordinary gain |                                            |        | (8,095              | )     |           | 7,153 |              |      
|Income tax benefit                       |                                                   |                                            |       |                     |       |          |       |              | 893  
|                                         |                                                   |                                            |        |                     |       |           |       |              |      
|                                         | Net (loss) income before extraordinary gain       |                                            |        | (8,095              | )     |           | 7,153 |              |      
|Extraordinary gain(4)                    |                                                   |                                            | 450    |                     |       |          |       |              | (153 
|                                         |                                                   |                                            |        |                     |       |           |       |              |      
|                                         | Net (loss) income                                 |                                            |        | (7,645              | )     |           | 7,153 |              |      
|Depreciation and amortization            |                                                   |                                            | 1,482  |                     |       | 530       |       |              | 48   
|Net changes in working capital and other |                                                   |                                            | 8,233  |                     |       | 5,261     |       |              | (548 
|                                         |                                                   |                                            |        |                     |       |           |       |              |      
|                                         |                                                   | Net cash provided by (used for) operations |        | $                   | 2,070 |           | $     | 12,944       |      
|                                         |                                                   |                                            |        |                     |       |           |       |              |      

|                                          |                                                                    | Catalog
Retail(1)                          |        | Membership
Services |         | Corporate |        | Consolidated |        
|----------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------ | ------ | ------------------- | ------- | --------- | ------ | ------------ | -------
|
|Six Months Ended July 1, 2000             |                                                                    |                                            |        |                     |         |           |        |              |        
|Net revenues(1)                           |                                                                    | $                                          | 57,112 |                     | $       | 70,183    |        | $            |       
|Cost of products sold                     |                                                                    |                                            | 48,496 |                     |         |          |        |              |       
|Restructuring charges                     |                                                                    |                                            | 8,998  |                     |         |          |        |              |       
|Other expenses(2), (3)                    |                                                                    |                                            | 53,458 |                     |         | 49,183    |        |              |       
|                                          |                                                                    |                                            |        |                     |         |           |        |              |        
|                                          | Operating (loss) income                                            |                                            |        | (53,840             | )       |           | 21,000 |              |        
|Interest and other expense, net           |                                                                    |                                            | 91     |                     |         | 36        |        |              | 511    
|                                          |                                                                    |                                            |        |                     |         |           |        |              |        
|                                          | (Loss) income before taxes and other                               |                                            |        | (53,931             | )       |           | 20,964 |              |        
|Income tax benefit                        |                                                                    |                                            |       |                     |         |          |        |              | 12,700 
|                                          |                                                                    |                                            |        |                     |         |           |        |              |        
|                                          | Net (loss) income before cumulative effect of change in accounting |                                            |        | (53,931             | )       |           | 20,964 |              |        
|Cumulative effect of change in accounting |                                                                    |                                            |       |                     |         | (22,904   | )      |              | 8,703  
|                                          |                                                                    |                                            |        |                     |         |           |        |              |        
|                                          | Net (loss) income                                                  |                                            |        | (53,931             | )       |           | (1,940 | )            |        
|Depreciation and amortization             |                                                                    |                                            | 8,198  |                     |         | 397       |        |              | 16     
|Net changes in working capital and other  |                                                                    |                                            | 35,281 |                     |         | 15,300    |        |              | (40,037
|                                          |                                                                    |                                            |        |                     |         |           |        |              |        
|                                          |                                                                    | Net cash provided by (used for) operations |        | $                   | (10,452 | )         | $      | 13,757       |        
|                                          |                                                                    |                                            |        |                     |         |           |        |              |        

10

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|                                         |                                                   | Catalog
Retail(1)                          |         | Membership
Services |       | Corporate |        | Consolidated |      
|---------------------------------------- | ------------------------------------------------- | ------------------------------------------ | ------- | ------------------- | ----- | --------- | ------ | ------------ | -----
|
|Six Months Ended July 3, 1999            |                                                   |                                            |         |                     |       |           |        |              |      
|Net revenues(1)                          |                                                   | $                                          | 162,042 |                     | $     | 59,632    |        | $            |     
|Cost of products sold                    |                                                   |                                            | 117,129 |                     |       |          |        |              |     
|Other expenses(2), (3)                   |                                                   |                                            | 57,904  |                     |       | 48,655    |        |              | 1,310
|                                         |                                                   |                                            |         |                     |       |           |        |              |      
|                                         | Operating (loss) income                           |                                            |         | (12,991             | )     |           | 10,977 |              |      
|Interest and other expense, net          |                                                   |                                            |        |                     |       |          |        |              | 675  
|                                         |                                                   |                                            |         |                     |       |           |        |              |      
|                                         | (Loss) income before taxes and extraordinary gain |                                            |         | (12,991             | )     |           | 10,977 |              |      
|Income tax benefit                       |                                                   |                                            |        |                     |       |          |        |              | 1,360
|                                         |                                                   |                                            |         |                     |       |           |        |              |      
|                                         | Net (loss) income before extraordinary gain       |                                            |         | (12,991             | )     |           | 10,977 |              |      
|Extraordinary gain(4)                    |                                                   |                                            | 450     |                     |       |          |        |              | (153 
|                                         |                                                   |                                            |         |                     |       |           |        |              |      
|                                         | Net (loss) income                                 |                                            |         | (12,541             | )     |           | 10,977 |              |      
|Depreciation and amortization            |                                                   |                                            | 3,025   |                     |       | 1,029     |        |              | 97   
|Net changes in working capital and other |                                                   |                                            | 10,610  |                     |       | (1,714    | )      |              | (935 
|                                         |                                                   |                                            |         |                     |       |           |        |              |      
|                                         |                                                   | Net cash provided by (used for) operations |         | $                   | 1,094 |           | $      | 10,292       |      
|                                         |                                                   |                                            |         |                     |       |           |        |              |      

---

11

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Selected
balance sheet data by business segment is as follows:

|                                                     |                              | Catalog
Retail |        | Membership
Services |   | Corporate |        | Consolidated |       
|---------------------------------------------------- | ---------------------------- | -------------- | ------ | ------------------- | - | --------- | ------ | ------------ | ------
|
|At July 1, 2000                                      |                              |                |        |                     |   |           |        |              |       
|Cash and cash equivalents                            |                              | $              | 9      |                     | $ |          |        | $            | 440   
|Non-cash current assets                              |                              |                | (5,866 | )                   |   | 49,669    |        |              | 21,626
|Net property, equipment and other assets             |                              |                | 21,850 |                     |   | 1,760     |        |              | 23,105
|                                                     |                              |                |        |                     |   |           |        |              |       
|                                                     | Total assets                 |                | $      | 15,993              |   | $         | 51,429 |              | $     
|                                                     |                              |                |        |                     |   |           |        |              |       
|Non-interest bearing current liabilities             |                              | $              | 13,985 |                     | $ | 90,874    |        | $            |      
|Short-term borrowings                                |                              |                |       |                     |   |          |        |              | 11,543
|Investment in segment/shareholders' equity (deficit) |                              |                | 2,008  |                     |   | (39,445   | )      |              | 33,628
|                                                     |                              |                |        |                     |   |           |        |              |       
|                                                     | Total liabilities and equity |                | $      | 15,993              |   | $         | 51,429 |              | $     
|                                                     |                              |                |        |                     |   |           |        |              |       
|At December 31, 1999                                 |                              |                |        |                     |   |           |        |              |       
|Cash and cash equivalents                            |                              | $              |       |                     | $ |          |        | $            | 3,927 
|Non-cash current assets                              |                              |                | 52,933 |                     |   | 36,406    |        |              | 3,159 
|Net property, equipment and other assets             |                              |                | 20,273 |                     |   | 5,331     |        |              | 4,017 
|                                                     |                              |                |        |                     |   |           |        |              |       
|                                                     | Total assets                 |                | $      | 73,206              |   | $         | 41,737 |              | $     
|                                                     |                              |                |        |                     |   |           |        |              |       
|Non-interest bearing current liabilities             |                              | $              | 32,046 |                     | $ | 62,330    |        | $            | 2,253 
|Investment in segment/shareholders' equity (deficit) |                              |                | 41,160 |                     |   | (20,593   | )      |              | 8,850 
|                                                     |                              |                |        |                     |   |           |        |              |       
|                                                     | Total liabilities and equity |                | $      | 73,206              |   | $         | 41,737 |              | $     
|                                                     |                              |                |        |                     |   |           |        |              |       

Note 7. Extraordinary Gain

During the second quarter of 1999, the State of Minnesota condemned and acquired approximately 17 acres of land from the Company in conjunction with a highway
expansion project. As a result, the Company recorded an extraordinary gain of $297,000, net of taxes, or $.05 per share.

Note 8. Legal Matters

On October 25, 1996, a currentPreferred Buyers' Club® member commenced an action against
the Company in a New Jersey state court. This action was styled on his behalf and on behalf of a class of the Company's customers, each of which is a member of the Company's Preferred Buyers' Club®.The plaintiff alleges that he and the other members of the proposed class have not received their full anticipated
benefits asPreferred Buyers' Club®members. The complaint alleges various violations of state consumer fraud and contract law and seeks
compensatory and punitive damages. Discovery has been completed. The court has denied a motion for an injunctive or damages class certification on a national basis and has granted a certification for
a damages class consisting ofPreferred Buyers' Club®members in New Jersey alone. The case is scheduled for trial in the fall of 2000. The
Company believes it has factual and legal defenses and is defending the action aggressively. Discovery has been completed and management believes that the resolution of this action will not have a
material adverse effect on the financial condition or results of operations of the Company.

12

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Note 9. Subsequent Event

At July 1, 2000 the Company had a revolving line of credit and letter of credit facility that had been used for general working capital and other
corporate purposes. On July 28, 2000, the Company replaced this revolving line of credit with a new $15 million commercial credit facility which reduces to $10 million on
January 1, 2001. The facility is available for working capital and general corporate needs and contains a $2 million sublimit to accommodate the issuance of standby letters of credit.
Borrowings outstanding under the new line of credit bear interest at the reference rate of interest plus 0.5% or LIBOR plus 3.25% and are secured by all assets of the Company. The credit facility
includes covenants which require the Company to satisfy certain financial tests and ratios on a monthly basis and limits the downstreaming of funds to ClickShip to $8.0 million.

Note 10. Recently Issued Accounting Pronouncement

SFAS No. 133, "Accounting for Derivative Investments and Hedging Activities", establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 will be effective for the Company beginning January 1, 2001. Management
believes the adoption of SFAS No. 133 will not have a material impact on the Company's financial position or results of operations.

13

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## 

DAMARK INTERNATIONAL, INC.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS

Results of Operations

The data presented below are derived from the Company's consolidated financial statements and notes thereto and should be read in conjunction therewith. The
Company operates in two business segments, Membership Services and Catalog Retail. These reportable operating segments offer different products and services and are managed separately based on
fundamental differences in their operations. A Corporate segment is also used to account for taxes, capital allocation and certain unallocated items.

|                                                     |                                                          | Three months ended |       |         |         | Six months ended |        |         |       
|---------------------------------------------------- | -------------------------------------------------------- | ------------------ | ----- | ------- | ------- | ---------------- | ------ | ------- | ------
|
|Statement of Operations Data:                        |                                                          |                    |       |         |         |                  |        |         |       
|Net revenues:                                        |                                                          |                    |       |         |         |                  |        |         |       
|                                                     | Catalog Retail(1)                                        |                    | $     | 17,729  |         | $                | 77,692 |         | (77.2 
|                                                     | Membership Services                                      |                    |       | 34,044  |         |                  | 34,554 |         | (1.5  
|                                                     |                                                          |                    |       |         |         |                  |        |         |       
|                                                     |                                                          | Total              |       |         | 51,773  |                  |        | 112,246 |       
|Costs and expenses:                                  |                                                          |                    |       |         |         |                  |        |         |       
|                                                     | Catalog Retail cost of products sold                     |                    |       | 16,680  |         |                  | 55,558 |         | (70.0 
|                                                     | Catalog Retail expenses(2)                               |                    |       | 22,785  |         |                  | 30,229 |         | (24.6 
|                                                     | Restructuring charges                                    |                    |       | 2,259   |         |                  |       |         | N/A   
|                                                     | Membership Services expenses(2)                          |                    |       | 24,414  |         |                  | 27,401 |         | (10.9 
|                                                     | Corporate expenses                                       |                    |       |        |         |                  | 1,310  |         | N/A   
|                                                     |                                                          |                    |       |         |         |                  |        |         |       
|                                                     |                                                          | Total              |       |         | 66,138  |                  |        | 114,498 |       
|                                                     |                                                          |                    |       |         |         |                  |        |         |       
|Operating (loss) income:                             |                                                          |                    |       |         |         |                  |        |         |       
|                                                     | Catalog Retail                                           |                    |       | (23,995 | )       |                  | (8,095 | )       | (196.4
|                                                     | Membership Services                                      |                    |       | 9,630   |         |                  | 7,153  |         | 34.6  
|                                                     | Corporate                                                |                    |       |        |         |                  | (1,310 | )       | N/A   
|                                                     |                                                          |                    |       |         |         |                  |        |         |       
|                                                     |                                                          | Total              |       |         | (14,365 | )                |        | (2,252  | )     
|Interest expense, net                                |                                                          |                    | 280   |         |         | 255              |        | 9.8     | %     
|Other expense, net                                   |                                                          |                    | 31    |         |         | 119              |        | (73.9   | )%    
|                                                     |                                                          |                    |       |         |         |                  |        |         |       
|                                                     | Loss before income taxes and other                       |                    |       | (14,676 | )       |                  | (2,626 | )       | (458.9
|Income tax benefit                                   |                                                          |                    | 5,858 |         |         | 893              |        | 556.0   | %     
|                                                     |                                                          |                    |       |         |         |                  |        |         |       
|                                                     | Net loss before extraordinary gain and cumulative effect |                    |       | (8,818  | )       |                  | (1,733 | )       | (408.8
|Extraordinary gain, net of taxes                     |                                                          |                    |      |         |         | 297              |        | N/A     |       
|Cumulative effect of accounting change, net of taxes |                                                          |                    |      |         |         |                 |        | N/A     |       
|                                                     |                                                          |                    |       |         |         |                  |        |         |       
|                                                     | Net loss                                                 |                    | $     | (8,818  | )       | $                | (1,436 | )       | (514.1
|                                                     |                                                          |                    |       |         |         |                  |        |         |       
|Statement of Cash Flows Data:                        |                                                          |                    |       |         |         |                  |        |         |       
|Net cash (used for) provided by operations:          |                                                          |                    |       |         |         |                  |        |         |       
|                                                     | Catalog Retail(2)                                        |                    | $     | (496    | )       | $                | 2,070  |         | (124.0
|                                                     | Membership Services(2)                                   |                    |       | 10,017  |         |                  | 12,944 |         | (22.6 
|                                                     | Corporate                                                |                    |       | (7,374  | )       |                  | (1,444 | )       | (410.7
|                                                     |                                                          |                    |       |         |         |                  |        |         |       
|                                                     |                                                          | Total              |       | $       | 2,147   |                  | $      | 13,570  |       
|                                                     |                                                          |                    |       |         |         |                  |        |         |       

---

14

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General

In January 2000, the Company announced that it would wind-down its non-member catalog marketing and merchandising activities.
Going forward, catalog mailings will be limited to members of the Company's shopping clubs. The wind-down was substantially completed by the end of second quarter 2000, at which time the
Company discontinued taking catalog orders from non-member customers. The Company will continue to operate its membership services business which recently started doing business as
Provell. The order capture, product fulfillment and customer service capabilities developed by the Company were redeployed into a subsidiary named ClickShip Direct, Inc. ("ClickShip"), that was
formed in January 2000. The Company currently plans to separate ClickShip as an independent, publicly traded company through a distribution of shares to the Company's shareholders during the
third or fourth quarter of 2000.

Provell
will continue to develop, market, and manage membership programs that provide purchase price discounts and other benefits related to consumer and small business needs in areas
of shopping, travel, hospitality, entertainment, health/fitness and finance. Arrangements have been made with third parties to supply the members of the Company's shopping clubs with benefits at least
equal to those formerly provided by the Company's catalog operations. A dedicated management team sources
products available on a direct-from-supplier basis, avoiding the need to own, store, and fulfill inventory from a Company-owned location. Provell also outsources teleservices
orders and customer service with carefully selected telemarketing providers, including ClickShip.

ClickShip
provides outsourcing of order fulfillment and customer care services to retailers, direct marketers, and manufacturers. Services include online and offline order-capture,
payment processing, inventory receipt, warehousing, merchandise shipment, after-the-sale customer service and support and returns management.

In
conjunction with the restructuring of the Company's catalog operations, the Company's Brooklyn Center, Minnesota telemarketing center was closed in January 2000.
Approximately 150 jobs were eliminated as part of the restructuring, primarily in catalog marketing, merchandising and the telemarketing center. As a result of these activities, the Company recorded a
pre-tax restructuring charge of $9.0 million during the first half of 2000. Included in the charge is approximately $1.3 million related to employee severance and termination
benefits (with no remaining balance to be paid at July 1, 2000), $1.9 million for future lease and other minimum commitments with no future benefit and $5.8 million for
accelerated depreciation expense as a result of changes in the estimated useful lives of fixed assets that will only be used during certain transition periods. During the third and fourth quarters of
2000, the Company expects to record an additional $200,000 to $400,000 of incremental depreciation expense as an additional component of the restructuring charge.

Membership Services

This segment's results reflect the adoption of SAB 101 effective January 1, 2000. Prior to the adoption of SAB 101, membership revenues with respect to
clubs for which the Company had an ongoing obligation were recorded on the balance sheet, net of direct solicitation costs, and amortized into income over the membership period, generally twelve
months. Revenues and related expenses on clubs for which the Company had no significant ongoing obligation were recognized immediately, net of an accrual for future anticipated returns, once any trial
period had elapsed. Effective January 1, 2000, the Company defers the recognition of revenues and direct solicitation costs on all membership programs and amortizes such revenues and costs,
after the trial period has elapsed, over the membership period, generally twelve months. The Company also defers the recognition of costs and revenues associated with extended warranty service
contracts until the end of the return period, generally three months. Previously, extended warranty revenues and costs were recognized immediately.

15

---

The Company recorded a non-cash charge of $22.9 million ($14.2 million net of taxes) related to the adoption of SAB 101. See Note 2 to the Consolidated Financial
Statements.

The
Company has been able to maintain its membership base by accelerating its member prospecting, and replacing its member acquisition leads which have been lost due to the
wind-down of its catalog retail business. Provell's expanded client roster now includes several of the nation's largest financial institutions, as well as a number of premier consumer
marketing organizations. The Company's membership base has increased from 1.9 million members at the end of the second quarter of 1999 to 2.2 million members at the end of the second
quarter of 2000.

Membership
revenues were $34.0 million for second quarter 2000, a 1.5% decrease from second quarter 1999 revenues. Revenues for the six months ended July 1, 2000 were
$70.2 million, a 17.7% increase over the prior year comparable period. Second quarter operating income increased 34.6% to $9.6 million in 2000 as compared to $7.2 million in 1999.
First half 2000 operating income increased 91.3% to $21 million as compared to $11.0 million in 1999. On a pro forma basis, assuming SAB 101 had been adopted retroactively, second
quarter 1999 membership revenues and operating income would have been $31.7 million and $7.8 million, respectively. For the half, 1999 membership revenues and operating income would have
been $45.6 million and $1.1 million, respectively. Operating income for 1999 reflects a charge of $5.7 million and $10.8 million for the quarter and first half,
respectively, for commissions to the Catalog Retail segment. In conjunction with the catalog wind-down, these costs are no longer being incurred. The exclusion of the inter-segment charge
in 2000 and lower than anticipated operating costs accompanied by an increase in the Company's membership base, expanded membership club offerings and club price increases each contributed to the
revenue and operating income growth during the first half of 2000.

Costs
and expenses incurred by the Company's Membership Services segment include direct membership solicitation costs, payments to external vendors to provide certain club benefits,
customer service costs, commissions and success fees paid to clients for use of their customer lists and general and administrative expenses, and in 1999, inter-segment charges from the Catalog Retail
segment (see above discussion).

Segment
costs and expenses decreased 10.9% for the second quarter in comparison to second quarter 1999 and remained relatively consistent for first half 2000 in comparison to first
half 1999 with a 1.1% increase. Costs and expenses as a percentage of net revenues decreased to 71.7% in second quarter 2000 as compared to 79.3% in second quarter 1999. First half costs and expenses
as a percentage of net revenues were 70.0% in 2000 as compared to 81.6% in 1999. The decrease in costs and expenses was due primarily to the inter-segment charges included in costs and expenses in
1999 (see above discussion). The company has also benefited from improved leveraging of costs over a larger membership and revenue base and increased revenues from membership renewals. Profitability
from
renewal memberships exceeds that of new membership acquisitions due to the absence of membership solicitation costs associated with renewals.

Catalog Retail

The wind-down of the Company's non-member Catalog Retail operations was substantially completed during the second quarter. As of
July 1, 2000 the Company is no longer taking non-member catalog orders but will continue to process customer returns and further liquidate inventories. During the second quarter of
2000, the Company continued to mail catalogs slotted with product on hand and used other liquidation means to substantially reduce inventory levels. The wind-down of Catalog Retail
activities and related liquidations resulted in substantially lower revenues during the second quarter and first half of 2000 in comparison to 1999. This segment generated revenues of
$17.7 million and $57.1 million during the second quarter and first half of 2000, respectively, a decrease of 77.2% and 64.8% from revenues of $77.7 million and
$162.0 million generated during the second quarter and first

16

---

half of 1999, respectively. Revenues generated from Catalog wind-down activities totaled $17.2 million and $56.1 million for the second quarter and first half, respectively,
while ClickShip generated $9.6 million and $18.0 million of revenues during the second quarter and first half, respectively. Included in ClickShip's second quarter revenues were
approximately $6.8 million of revenues from services provided to its parent, Damark, for activities related to the winding down of non-member and member catalog activities and
$2.3 million of revenues pursuant to an agreement entered into to provide ongoing customer care services to Provell's members. ClickShip's first half revenues included $13.6 million from
Provell non-member catalog wind-down activities and $3.4 million from ongoing Provell customer care activities. Catalog Retail wind-down activities generated
gross product margins of 5.9% in the second quarter of 2000 as compared to 28.5% in second quarter 1999 and 15.1% for the first half of 2000 as compared to 27.7% for the first half of 1999. The 2000
margin percentages were negatively impacted by liquidation activities associated with the catalog wind-down. The segment reported a net loss of $24.0 million in second quarter 2000
and $53.9 million for the first half of 2000 as compared to a net loss of $8.1 million in second quarter 1999 and $12.5 million for the first half of 1999.

Operating
expenses as a percentage of segment net revenues increased to 128.5% in second quarter 2000 from 38.9% in second quarter 1999. For the six month period ended July 1,
2000, operating expenses were 93.6% of net revenues as compared to 35.7% for the comparable period in the prior year. The increase was due primarily to a decrease in advertising leverage as
advertising costs were leveraged against significantly reduced revenue levels as a result of the Company's efforts to liquidate its inventory levels. In addition, the second quarter and first half
1999 expenses included inter-segment transfers of costs from the Catalog Retail segment to the Membership Services segment of $5.7 million and $10.8 million, respectively (see previous
discussion).

Corporate

Corporate expenses for the three and six months ended July 3, 1999 include a pre-tax charge of $1.3 million for the implementation of
a revised vacation and sick time policy. The charge includes $300,000 which was previously recorded by the Catalog Retail and Membership Services segments and transferred to the Corporate segment
during second quarter 1999.

The
Company incurred interest expense of $280,000 and $255,000 during the second quarter of 2000 and 1999, respectively. Interest expense of $478,000 and $544,000 was incurred during
the first half of 2000 and 1999, respectively. Declines in installment receivable and inventory balances in 2000 as compared to 1999 borrowing levels were partially offset by the need for increased
borrowings to fund the wind-down of the Company's non-member catalog operations and ClickShip start up costs.

The
Company's effective tax rate was 39.9% for second quarter 2000 and 37.9% for the first six months of 2000 as compared to 34.0% for the second quarter and first half of 1999. The
increase in the effective tax rate is the result of additional state income taxes associated with the restructuring of the Company's operations. Despite incurring net losses in recent quarters, the
Company has not recorded a deferred tax valuation allowance since management believes that its operating and tax planning strategies will allow the Company to generate sufficient income in early
future years in order to realize this asset. Should the Company's operating and tax planning strategies fail to produce sufficient taxable income in early future years, the Company will record a
valuation allowance for all or a portion of its net deferred tax asset as required by generally accepted accounting principles.

Extraordinary Gain

The State of Minnesota condemned and acquired approximately 17 acres of land from the Company in conjunction with a highway expansion project. As a result, the
Company recorded an extraordinary gain of $297,000, net of taxes, or $.05 per share during the second quarter of 1999.

17

---

Liquidity and Capital Resources

Cash Flow

Net cash used for operations totaled $15.8 million for the first half of 2000 as compared to net cash provided by operations of $9.8 million for
the same period in 1999. The increase in cash used for operations in 2000 was the result of an increased net loss in 2000 due primarily to the wind-down activities in the Catalog Retail
segment. Cash generated by working capital changes was $9.0 million in 2000 as compared to $9.5 million in 1999. Declines in inventory and receivable balances partially offset by
declines in current liability balances contributed to the cash generated by working capital changes in 2000 and 1999.

Capital Expenditures

During the first half of 2000, the Company's capital expenditures were approximately $7.1 milion, compared to $2.2 million during 1999. During the
balance of 2000, capital expenditures will continue to be made to support the activities and infrastructure of ClickShip, and to enhance Provell's infrastructure and operational efficiencies. The
Company is in the process of expanding its distribution facility by 320,000 square feet at an approximate cost of $12 million ($2.3 million had been funded as of July 1, 2000) in
order to meet the increased capacity needs anticipated for ClickShip. Management estimates that an additional $7 million in infrastructure enhancements will be invested for ClickShip during
2000. Management also estimates that $6 million to $8 million will be invested in the Membership Services business during 2000, consisting of $1 million to $2 million for
leasehold improvements and furniture for a new corporate headquarters and an additional $5 million to $6 million for systems development and infrastructure enhancements.

Financing

At July 1, 2000 the Company had a revolving line of credit and letter of credit facility that had been used for general working capital and other
corporate purposes. On July 28, 2000, the Company replaced the revolving line of credit with a new $15 million commercial credit facility which reduces to $10 million on
January 1, 2001. The facility is available for working capital and general corporate needs and contains a $2 million sublimit to accommodate the issuance of standby letters of credit.
Borrowings
outstanding under the under the line of credit bear interest at the reference rate of interest plus 0.5% or LIBOR plus 3.25% and are secured by all assets of the Company. The credit facility includes
covenants which require the Company to satisfy certain financial tests and ratios on a monthly basis and limits the downstreaming of funds to ClickShip to $8.0 million.

ClickShip
is actively working to procure at least $20 million of mortgage proceeds to fund its distribution center expansion, other capital expenditures and operations.
Management expects to complete an agreement in September or October 2000. In addition, additional financing needs are anticipated to fund ClickShip's operations. If such financing is not
obtained, the Company will need to defer further capital expansion or other planned business expansion activities.

Assuming
the above financing is obtained, the Company anticipates that cash generated from operations, and available borrowing capacity under the new credit facility will be
sufficient to fund its operations and Provell capital expenditures for the remainder of 2000.

Stock Repurchases

During the first half of 1999, the Company repurchased approximately 230,000 shares of its Common Stock in open market transactions at an aggregate cost of
approximately $1.7 million. During the fourth quarter of 1999, the Board authorized a one million share open market repurchase program. Through July 1, 2000, no shares have been
repurchased under this program.

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Seasonality

Like most retailing businesses, the Company's Catalog Retail segment was subject to significant seasonal variations in consumer demand. Historically, the
Company's net retail revenues were the highest during the fourth quarter and a significant portion of its earnings were realized during that period. The Company's annual operating results were
affected by holiday spending patterns, as well as the timing and effectiveness of catalog mailings and general economic and other conditions. Because the wind-down of the
non-member catalog operations is complete, management expects the seasonal variations in consumer demand to have a less significant impact on the Company's membership
business while fourth quarter consumer demand will continue to have a significant impact on ClickShip's business.

Inflation

Excluding increases in postage and paper costs, inflation has not had, and the Company does not expect it to have, a material impact on operating results.
There can be no assurances, however, that the Company's business will not be affected by inflation in the future.

Forward-Looking Information

Certain of the matters discussed herein are "forward-looking statements" intended to qualify for the safe harbor provisions from liability provided by the
Private Securities Litigation Reform Act of 1995. Important factors exist that could cause results to differ materially from those anticipated by some of the statements herein. In addition to
statements that are forward-looking by reason of context, the words "believe", "expect", "anticipate", "intend", "designed", "goal", "priority", "will" and similar expressions identify forward-looking
statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from expectations, including those
identified below:



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Shareholders,
potential investors and other readers are urged to consider these and other factors in evaluating the forward-looking statements made herein, all of which speak only as
of the date on which they are made and as to which the Company has no obligation to update publicly.

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Part II. Other Information

Item 1. Legal Proceedings

On October 25, 1996, a currentPreferred Buyers' Club® member commenced an action against
the Company in a New Jersey state court. This action was styled on his behalf and on behalf of a class of the Company customers, each of which are members of the Company's Preferred Buyers' Club®.The plaintiff alleges that he and the other members of the proposed class have not received their full anticipated
benefits asPreferred Buyers' Club®members. The complaint alleges various violations of state consumer fraud and contract law and seeks
compensatory and punitive damages. The court has preliminarily denied a motion for an injunctive or damages class certification on a national basis and has preliminarily granted a certification for a
damages class consisting ofPreferred Buyers' Club®members in New Jersey alone. The case is scheduled for trial in the fall of 2000.
Discovery has been completed and the Company believes that the resolution of this action will not have a material adverse effect on the financial condition or results of operations of the Company.

Item 6. Exhibits and Reports on Form 8-K







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Signature

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

|                      |  | DAMARK INTERNATIONAL, INC.
|--------------------- |  | --------------------------
|Date: August 15, 2000 |  | By:                       

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