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                    U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                  FORM 10-KSB

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<C>        <S>
   /X/     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR
           ENDED: DECEMBER 31, 1999

   / /     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE
           TRANSITION PERIOD FROM TO
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                       COMMISSION FILE NUMBER: 33-37751-D

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                               SOFTLOCK.COM, INC.

                 (Name of small business issuer in its charter)

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<S>                                            <C>
               DELAWARE                                     84-1130229
    (State or other jurisdiction of                      (I.R.S. Employer
    incorporation or organization)                     Identification No.)

                         FIVE CLOCK TOWER PLACE, SUITE 440
                           MAYNARD, MASSACHUSETTS 01754
                     (Address of principal executive offices)
                                    (Zip Code)
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Issuer's telephone number: (978) 461-5940

Securities to be registered under Section 12(b) of the Act: NONE

Securities registered under Section 12(g) of the Act: Common Stock, $.01 per
share

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

    Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for at least
the past 90 days. Yes /X/  No / /

    Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/

    Issuer's revenues for its most recent fiscal year: $83,790

    Aggregate market value of voting stock held by non-affiliates as of
March 14, 2000 was approximately: $216,000,000

    Shares of Common Stock, $0.01 par value, outstanding as of March 14, 2000:
12,862,841

    Part III incorporates certain information by reference in the Registrant's
definitive proxy statement to be filed with respect to its 2000 Annual Meeting
of Shareholders prior to April 29, 2000.

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                               TABLE OF CONTENTS

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                                     PART I

Item 1.    Description of Business.....................................      1

           Background..................................................      1
           Business of the Company.....................................      1
           Patents, Intellectual Property and Licensing................      6
           Competition.................................................      7
           Employees...................................................      8
           Customers...................................................      9
           Government Regulation.......................................      9
           Research and Development Expenditures.......................      9
           Recent Developments.........................................      9
           Risk Factors................................................     10
           Special Note Regarding Forward Looking Statements...........     17

Item 2.    Description of Property.....................................     17

Item 3.    Legal Proceedings...........................................     18

Item 4.    Submission of Matters to a Vote of Security Holders.........     18

                                     PART II

Item 5.    Market Price of the Registrant's Common Stock and Related
             Security
             Holder Matters............................................     19

           Market Information..........................................     19
           Holders.....................................................     19
           Dividends...................................................     19
           Recent Sales of Unregistered Securities.....................     20

Item 6.    Management's Discussion and Analysis of Financial Condition
             and Results of Operations.................................     21

           Background..................................................     21
           Corporate Structure.........................................     22
           Results of Operations.......................................     23
           Liquidity and Capital Resources.............................     25

Item 7.    Financial Statements........................................     26

Item 8.    Changes in and Disagreements with Auditors on Accounting and
             Financial Disclosure......................................     26

                                    PART III

Item 9.    Directors and Executive Officers, Promoters and Control
             Persons; Compliance With Section 16(a) of the Exchange
             Act.......................................................     27

Item 10.   Executive Compensation......................................     27

Item 11.   Security Ownership of Certain Beneficial Owners and
             Management................................................     27

Item 12.   Certain Relationships and Related Transactions..............     27

Item 13.   Exhibits, Financial Statements and Reports on Form 8-K......     27

           Signatures..................................................     30
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                               SOFTLOCK.COM, INC.
                                  FORM 10-KSB
                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

BACKGROUND

    SoftLock.com, Inc. ("SoftLock" or the "Company") was incorporated under the
name Fieldcrest Corporation in the State of Delaware in December 1989, for the
primary purpose of seeking out acquisitions of properties, businesses or merger
candidates, without limitation as to the nature of the business operations or
geographic area of the acquisition candidate. In August 1991, the Company
completed an initial public offering, receiving proceeds of $47,250 from the
sale of 4,725,000 Units, consisting of common stock and Class A and B Warrants
(the "Warrants"). The Company's offering was subject to the Colorado Securities
Act, which required the placement into escrow of $19,440 of the net proceeds of
the offering until the completion of a transaction or series of transactions
whereby at least fifty percent (50%) of the gross proceeds received from the
sale of Units in the offering was committed for use in one or more specific
lines of business. The escrow condition had not been satisfied as of the fourth
anniversary of the initial public offering, and accordingly, the Company
distributed those funds pro rata to those persons who were owners of the shares
of common stock purchased in the offering. The Warrants, which were included in
the Units sold in the public offering, expired February 12, 1999.

    On July 28, 1998, the Company and SoftLock Services, Inc. ("SSI")
consummated an Agreement and Plan of Reorganization whereby the Company acquired
all of the issued and outstanding common shares of SSI in exchange for the
issuance of 7,097,266 shares of the Company's common stock. The Company has
accounted for the transaction as a reverse acquisition. The fiscal year of the
Company was changed from March 31 to December 31 to correspond to the fiscal
year of SSI.

    Subsequent to the reverse acquisition of SSI, the Company changed its name
from Fieldcrest Corporation to SoftLock.com, Inc. to better reflect the ongoing
business of the Company. The Company's trading symbol was also changed to
"SLCK". The Company's common stock currently trades on the over the counter
Bulletin Board.

    Except as otherwise noted, all references to the "Company" include
SoftLock.com, Inc. and its subsidiary, SSI.

BUSINESS OF THE COMPANY

    The Company provides a system that combines content management and context
marketing to allow commercial web sites to securely market and sell digital
content. Publishers of digital content, including research reports, newsletters,
electronic books and software, use the Company's system to package and securely
distribute their products while protecting their intellectual property. The
Company markets digital content through strategic relationships with many
affiliates who offer the digital content on their web sites. When a prospective
consumer accesses the content, the consumer can preview selected portions of the
final product. The consumer can then instantly purchase access to the complete
product twenty-four (24) hours a day, seven (7) days a week via the World Wide
Web. The consumer then has permanent access to the product for the consumer's
own use. Consumers are encouraged to pass along the digital content they have
purchased, but recipients can only preview the selected portions of the final
product chosen by the content provider until they go through the purchase
process themselves.

    The Company's patented persistent security technology (US #5,509,070) for
information commerce prevents electronic shoplifting (piracy) not just during
the initial download, but when passed from one consumer to another, thus
allowing commercial web sites to sell their electronic information simply and
securely. Because content offered by the Company can be instantly purchased and
re-distributed, but not

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pirated, the technology is useful in many markets, but especially for
information "publishing" web sites (news, media, finance, research, etc.). The
Company believes that commercial "publishers" (a generic term for the owner of
the intellectual property, which includes traditional print publishers,
web-based information services, media and research sites) have hesitated to
place their most valuable content on the Internet because it has been too easy
to infringe their copyright, make unlimited numbers of copies, and redistribute
their information products. As a result, publishers either give away less
valuable content in hopes of generating traffic for advertising revenue or they
password-protect their web site and charge subscription fees for access. The
Company believes neither approach effectively works. Few sites are popular
enough for significant advertising rates and subscription sites exclude casual
users and deter first-time purchases. Both of these methods provide publishers
inadequate protection because content and passwords can still be pirated.

    The Company offers digital content through the SoftLock eMerchandising-TM-
system, providing the opportunity to widely market digital content while
protecting that digital content through patented technology. Rather than giving
content away or requiring visitors to subscribe to all of a site's content in
advance, publishers can charge for specific content on demand. The content can
be securely sampled, electronically purchased and redistributed, and the
Company's patented technology keeps intellectual property secure while
generating valuable marketing data and sales revenue. With the Company's
product, publishers are able to sell their most compelling and valuable content
and encourage redistribution, which turns the material tendency to "pass it on"
into an additional sales channel. The Company's products make every copy an
opportunity and may turn piracy into profits.

    The Company's comprehensive approach to the marketing, sale and distribution
of digital content is to provide:

    1.  Content packaging,

    2.  Context-driven marketing and

    3.  Commerce enabled distribution.

    This approach to the digital content market brings premium content and
context marketing together with distribution to create eMerchandising.

    The content packaging component of the eMerchandising system focuses on
preparing premium, branded content for secure sale on the Internet. This
component uses the Company's patented technology to secure the digital content
and protect it from piracy. In addition, the Company provides the categorization
of digital content making the content simpler to access by consumers and
providing consumers with ease of use. The Company also provides analysis of
content usage, allowing the Company to see and analyze the chain of distribution
when content is passed from one consumer to another and better understand the
relationships between consumers. Finally, the Company provides presentation
enhancement, including the design of content on the Internet.

    Context-driven marketing analyzes the content of publishers and the
potential audiences of that content. The Company compiles information based upon
consumers' purchasing patterns and uses that information to determine the best
channels to market particular content. Potential consumers are served content
targeted to their personal and work interests, job function, industry and buying
history, based upon information provided at the time of purchase.

    The commerce enabled distribution of content by the Company provides
customer service for consumers, credit card clearing and billing services and
physical distribution services. In connection with the other components of the
eMerchandising system, SoftLock is a comprehensive merchandising and
distribution system from marketing to collection and payment of fees.

                                       2
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    HOW IT WORKS

    The Company provides easy-to-use tools for publishers to securely market and
distribute their content. Publishers specify a few parameters (such as price,
which parts of the document are free in the sample and which parts must be
purchased) and control how the consumers view, edit and print their document.
The publisher receives all of the benefits of the marketing and merchandising
efforts of the SoftLock Affiliates, placing personalized content in front of
consumers when SoftLock believes they are most likely to buy--on content
relevant sites, on search engines and in emails from friends and colleagues. In
addition, the SoftLock patented technology is designed to protect the
publisher's intellectual property.

    The SoftLock system is designed to be unobtrusive, seamlessly integrated and
easy to use for consumers. When visiting a publisher's or SoftLock Affiliate's
web site, a consumer simply clicks on a standard hyperlink denoting the
publisher's content. The consumer is then able to view a sample portion of the
content and with a simple click is invited to purchase the content and pass it
on to another consumer.

    To purchase content, the consumer uses the link to WWW.SOFTLOCK.COM where
server software determines whether the requisite SoftLock client software is
installed on the consumer's computer (the SoftLock Plug-in). If not, after
obtaining permission from the consumer, the server automatically downloads and
installs the required software. After installation or activation (if the
software is already installed from a prior purchase), the consumer is taken
through a quick purchase process where name, address and credit card information
are gathered. Finally, the server provides instant and complete access to the
content by generating and installing a pass-key on the consumer's computer
system that is unique to that content and that consumer's computer.

    The SoftLock client software is designed to work in a straightforward
manner. Whenever a consumer attempts to display secured content, the SoftLock
Plug-in checks the consumer's computer for a valid pass-key for the respective
content on the particular computer. If a valid pass-key exists, the SoftLock
Plug-in will decrypt and completely display the content. If the pass-key is
missing or invalid, then the SoftLock Plug-in solely affords access to the
sample content and invites the consumer to initiate a purchase.

    Unlike proprietary viewing formats, the Company "locks" documents as Adobe
Acrobat-Registered Trademark- Portable Document Format (PDF) files--the
Internet's most popular standard. A forthcoming generation of the system will
enable clients to view content via the widely used HTML standard. Subsequent
releases of the SoftLock system are expected to add support for additional
formats.

    Throughout the process, both prospective consumers and purchasers are
encouraged to pass along the content to their friends and colleagues. Other than
the fact that the content is transmitted from a friend in e-mail rather than
from the publisher's web site, the SoftLock system operates exactly as it would
with an initial purchase. Once the content has been transmitted from a
purchaser's computer, SoftLock's persistent security software re-locks the
content, preventing piracy by the subsequent consumer. Once received and opened,
the content is displayed by the SoftLock Plug-in and the consumer may peruse the
sample and purchase the version of the content at any time simply by selecting a
link.

    EMERCHANDISING-TM-

    The SoftLock eMerchandising system is a comprehensive merchandising and
distribution solution. The Company's system markets and sells the digital
content through affiliates and consumers who pass the content on to other
consumers. The Company believes that consumers, as well as content providers and
SoftLock Affiliates benefit from the sale of content through SoftLock. Consumers
have the opportunity to preview content before they purchase, and upon purchase
they can immediately download the full product. SoftLock Affiliates earn a
commission for each sale of content, and content providers can have their
content securely marketed and sold on the Internet.

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    SoftLock's team of merchandisers create a customized merchandising plan that
places content providers' digital content when and where it is most likely to be
purchased, effectively merchandising intellectual property through a
point-of-sale system. The SoftLock eMerchandising system (i) actively markets
content by placing specific links on context-appropriate SoftLock Affiliate web
pages, (ii) qualifies and targets link placement, effectively pre-qualifying
customers and (iii) assists consumers in finding the information they desire
when they are most likely to purchase.

    VIRAL MARKETING

    The SoftLock transaction system is intended to leverage its geometric
expansion power to create a new, virtual sales channel for publishers. This
process of marketing by consumers passing content along to other consumers is
called Viral Marketing. Viral Marketing acts as a sales channel without
employees, bricks or mortar. The Company believes its patented system of
software products and vending services will advance information commerce through
Viral Marketing because it builds copyright protection, payment processing, and
a distribution system right into the product. Rather than resist the user's
natural tendency to redistribute digital content (as other systems do), the
Company's products are designed to make redistribution work to the publisher's
advantage in the following manner: (i) consumers can view a free sample of
content (for example, document abstracts and initial sections) and are
encouraged to send the sample to anyone who might be interested in it; (ii) a
quick e-commerce transaction "unlocks" the content using a SoftLock product-key;
and (iii) if consumers decide to pass the content along to friends, family or
colleagues, the content automatically "re-locks" and SoftLock's system invites a
subsequent purchase. By facilitating the electronic purchase of digital content
via sampling and redistribution, the Company's products can turn browsers into
customers and customers into defacto distributors.

    In addition to increasing sales, Viral Marketing also is expected to
decrease costs. Through Viral Marketing, consumers distribute the electronic
products themselves, so printing and distribution costs (i.e., manufacturing,
warehousing, shipping, returns, etc.), which are normally borne by the
publisher, are significantly reduced. Furthermore, significant reductions may be
realized in direct marketing expenditures since Viral Marketing is a hybrid of
direct marketing and sales systems.

    THE SOFTLOCK AFFILIATE NETWORK

    In an Internet-based affiliate program, vendors seek alliances with
referring web sites whose visitors are likely to purchase the vendor's products.
A link on the referring site allows a consumer to easily access and conveniently
purchase a desired product from the vendor. The vendor effects the sale and the
referring site earns a referral fee usually ranging from five to ten percent
(5-10%). Thus, the referring web site effectively acts as a distribution point
or "store" for the vendor. Affiliate programs can be win/win/win scenarios for
customers, vendors and referring sites. As a result, affiliate programs have
become a standard web-marketing tactic.

    The key reason affiliate programs are so successful is because they create
effective sales opportunities; vendors appear in front of their best prospects
where and when they are most likely to purchase. Historically, however, digital
content vendors have not been able to use this powerful medium because they were
unable to adequately protect their intellectual property.

    In response to vendor's digital content commerce needs, and in addition to
enabling vendors to create their own affiliate program, the Company has actively
developed its own Affiliate Network. The Company actively facilitates and
creates demand for information products (thereby increasing their sales and the
Company's commissions) through the SoftLock Affiliate Network. The Company's
Affiliate Network connects a wide variety of information providers to a wide
variety of affiliates to merchandise content to a vast array of end users. Below
is a theoretical example of how the SoftLock Affiliate Network works:

        TLG Inc., a financial information publisher, would not sell its valuable
    TLG Reports online because of piracy concerns. The Company's technology
    reduced these concerns and allowed TLG to

                                       4
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    sell their reports from their web site. Furthermore, by joining SoftLock's
    Affiliate Network, TLG was able to obtain exposure at a host of additional
    stores from which they could sell their reports.

        One of those stores was the web site of the Metropolitan Daily Press.
    The Metropolitan Daily Press was happy to place a link on the web page that
    displayed closing mutual fund prices. This link enabled its users to
    purchase TLG reports for $5.00. The Daily Press was offering value-added
    content (more than a simple listing of prices, it could offer cutting edge
    analysis from a respected research service) that made its site more
    attractive and useful to its users while earning a referral fee.

        Mary was a little nervous about her $20,000 investment in Funds R Us and
    noticed the TLG link while checking Fund prices on the Daily press web site.
    The sample report was so timely, appropriate and reasonably priced she
    readily purchased the full report. Indeed, the full report was so satisfying
    she sent it to 10 other people in her investment club, many of whom had
    never even visited the Daily Press web site. Nonetheless, their subsequent
    purchases translated into additional sales for TLG, referral fees for the
    Daily Press, and commissions for SoftLock.

    The Company believes all parties benefit from this system. Publishers obtain
membership to and the benefits of an Affiliate Network that offers a broad
distribution of stores from a wide variety of districts while avoiding up-front
fees, in-house management of e-commerce projects, acquisition of an e-commerce
infrastructure and affiliate employee management. Publishers are also able to
control the affiliates' terms and conditions of the sale of their digital
content.

    Affiliates, the Company believes, are more attractive to users by offering a
broader selection of more valuable content. Moreover, affiliates earn
commissions when consumers purchase the content, including fees earned when
consumers pass content on to their associates and colleagues. Finally,
affiliates enjoy enhanced publicity through pass-along sales as the initial
purchaser passes along content to individuals who may not even have visited the
affiliate's web site.

    The Company believes that although there are no specific charges to
affiliates or publishers for participation in the SoftLock Affiliate Network,
the Company benefits from its Affiliate Network. The Company's benefit results
from developing the SoftLock Affiliate Network to:

    - Create demand for content by facilitating sales opportunities. As in the
      above example, at the time and place that Mary was thinking about her
      mutual fund, she had an opportunity to purchase a report. It is far less
      likely that Mary would have sought out TLG's site on her own. Mary might
      not know the company, probably wouldn't know their URL, and, in light of
      other available investment information sites, might assume she would have
      to pay for an expensive subscription just to get the one report she
      desires.

    - Build a SoftLock brand identity. It is expected that as more stores join
      the SoftLock Affiliate Network, it will become more attractive to
      publishers and as more publishers join, it will become more valuable to
      affiliates. The Company anticipates that through this process, momentum
      will build, resulting in a critical mass of publishers and affiliates,
      making the SoftLock Affiliate Network the accepted and sought after means
      of selling digital content.

    The theoretical examples provided above illustrate how the Company's product
offerings are intended to operate. However, aspects of the Company's systems are
beyond the Company's control and may ultimately depend on acceptance by
publishers, consumers, affiliates and other parties.

    CONTEXT-DRIVEN MARKETING

    The Company believes that Viral Marketing will be a low-cost, highly
targeted, direct marketing mechanism. Consumers send sample content to
pre-qualified acquaintances based on the consumer's knowledge of the content and
of their acquaintance. Furthermore, since the recipient is familiar with the

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sender, it is anticipated that the receiver will be more likely to read the
sample content and be interested in and to purchase the content.

    Expanding upon this, the Company believes that its context-driven marketing
also offers publishers (and the Company) a unique source of marketing data. When
purchasing content, customers enter basic name and address information along
with credit card data. Proprietary Company technology also tracks the "lineage"
of document purchases (i.e., A sent a document to B; B purchased it and sent a
copy to C, etc.), and can cross correlate this lineage data with
publisher-supplied profiles of the content. For instance, profiles might range
from broad, classic demographic categories (i.e. "this document appeals to
30-35 year old females of median income") to very narrow document-specific
topics (i.e. "a report on Latin American derivative trading during weekends in
1997").

    Taken together, these data sources can reveal valuable "one-to-one" and
"community of interest" marketing information. Below is a theoretical example of
how the SoftLock Context-Driven Marketing works:

        A publisher might characterize a product as "interesting to 25-35 year
    old males in mid-level management positions at Fortune 500 companies." After
    the product had been sold for a time, an analysis of the Company's marketing
    database would show particular redistribution "lineages." For instance, it
    might show that Tom initially bought the product and then passed a locked
    sample to Mike. Mike subsequently bought the complete product and then
    passed the locked sample to Jim, who also ended up buying the complete
    product. Combining the publisher's "characterization" information with the
    "lineage" of this product tells us that Tom, Mike and Jim are a "community"
    interested in products for 25-35 year old males in mid-level positions in
    Fortune 500 companies. When Tom makes additional transactions through the
    Company's system, this data becomes even more valuable.

    The Company's method is expected to minimize customer privacy concerns. All
information obtained from the customer is routine and/or voluntarily submitted.
In the example above, Tom, Mike and Jim were not required to supply any
information beyond what is typical when paying by credit card. It is the
publisher who supplies the characterization information, and it is the Company
that derives the valuable community of interest and one-to-one data.
Furthermore, the Company believes that proprietary data security technology
built into its system will allow the Company to assure publishers and end-users
alike that the ability to misappropriate or abuse this data will be minimized.

    The theoretical examples provided above illustrate how the Company's product
offerings are intended to operate. However, aspects of the Company's systems are
beyond the Company's control and may ultimately depend on acceptance by
publishers, consumers, affiliates and other parties.

PATENTS, INTELLECTUAL PROPERTY AND LICENSING

    The Company's patent (US #5,509,070) was issued on April 16, 1996. Authored
by SSI's founder and the Company's Chief Technology Officer, Dr. Jonathan
Schull, the patent covers the computer and telecommunications technologies that
implement the Company's business. The patent protects the concept of a central
key vending system for context-locked digital content. These keys unlock
specific content in a particular context such that purchased content
automatically relocks and invites another purchase when it is moved to a new
context. The patent defines "context-specific" broadly, and explicitly addresses
non-hardware-based contexts, such as voiceprints. It also broadly defines
digital content to include essentially all digital information. A Continuation
in Part which also includes new material relating to the gathering and utility
of the Company's marketing data is pending with the U.S. Patent and Trademark
Office.

    The Company has a registered trademark for SoftLock and has registered the
following Internet domains: WWW.PASSWORDS.COM, WWW.PASSITON.COM,
WWW.SOFTLOCK.COM, and WWW.SELFPUBLISH.COM.

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    In August 1999, the Company entered into a Reproduction and License
Agreement with Adobe Systems Incorporated to license certain Adobe software
products so as to make them available through the Company's distribution
channels to consumers. The Company chose the Adobe software products because the
Adobe Acrobat Portable Document Format file is the most popular standard for
viewing digital content on the Internet. The Company believes that the Adobe
software products provide a viewing platform for digital content that is nearly
universally accepted and is not likely to splinter the market for a provider's
content because of short-sighted technology. The Adobe software products have
been successfully integrated into the SoftLock eMerchandising system.

    In November, 1999, the Company entered into a License Agreement with
Intel-Registered Trademark- Corporation to integrate the Intel Software
Integrity System-TM- into the SoftLock eMerchandising system. The Company chose
the Intel Software Integrity System to further enhance the SoftLock
eMerchandising system's persistent protection of digital content. The Company
believes that the Intel solution provides a valuable resource for the purchase
of digital content by utilizing tamper-resistant software and renewable
components to safeguard content providers' intellectual property. The Intel
system will be integrated seamlessly into future generations of the
eMerchandising system. The Company believes that the integration of the Software
Integrity System into the eMerchandising system will allow content providers and
members of the SoftLock Affiliate Network to offer premium digital content to
consumers that is not currently available due to security concerns.

    The Company's approach to redistributable, but non-pirateable, digital
products is applicable to the software and new media markets as well. While
these represent large markets, a relatively small number of well-entrenched,
well-financed distributors are already in place (Release Software, Time Warner,
Liquid Audio, Music Blvd, etc.). The Company's patent does have applicability to
these markets, and the Company believes there is a future business opportunity
to license the Company's patent to software and new media distributors and to
other emerging markets, such as computer based training.

COMPETITION

    The Company believes its strength lies in its integration of technologies
and services to create a complete sales, marketing, merchandising, distribution
and copyright protection solution. The Company does not appear to have any
direct competitors who have integrated comparable products and services.
However, the Company faces competition from providers in these three product and
service areas: content packaging, context-driven marketing and commerce enabled
distribution.

    CONTENT PACKAGING

    The Company defines content packaging as the manner in which copyright
protection, copyright enforcement and content recruitment (i.e. the obtaining of
content from publishers) are managed. This is also referred to as digital rights
management.

    The Company faces competition in the area of copyright protection and
copyright enforcement from companies such as Digimarc and Wave Systems. These
companies provide digital "watermark" services which electronically brand
documents with copyright protection. The Company believes that digital
watermarks do not prevent unauthorized re-distribution. Moreover, because
watermarks offer few clues to the pirate's identity, they may not provide
adequate deterrence. Watermarks are potentially useful in preventing commercial
webmasters from appropriating content that they do not own, but they may not
prevent end user piracy or facilitate information commerce. Also, while copy
protection or prevention techniques (i.e. the electronic disabling of copy
features) make piracy difficult, they may also inconvenience end-users who often
need to backup and restore data. The Company believes there is a need for
systems which prevent piracy while allowing, and even exploiting, the
exponential potential of end-user redistribution. This in turn requires that the
content be consistently protected. The Company's eMerchandising system is
designed to provide such protection.

                                       7
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    With regards to content recruitment, the Company faces competition from
companies such as Intertrust Technologies Corporation ("Intertrust"). The
Company believes that its eMerchandising system gives it a competitive advantage
in recruiting digital content because of the integration of copyright protection
and enforcement, merchandising, and ecommerce processing.

    CONTEXT-DRIVEN MARKETING

    Context-driven marketing refers to the manner in which digital content is
advertised, marketed, and merchandised on the internet. Various methods include
direct mail (e-Dialog), portal sites (such as Lycos, Excite, etc.), tracking
schemes / profiling (which is used by companies such as DoubleClick), and
Merchandising (referring to the look and positioning of ads, links, etc.).
Although it could be argued that each of these above companies are competitors
in each of their respective areas, none of the competitors use all of these
methods in conjunction with copyright protection and enforcement, and ecommerce.
SoftLock tailors each of these contextual approaches for each content provider
and affiliate in its eMerchandising system to maximize hits, and therefore
maximize revenues.

    COMMERCE ENABLED DISTRIBUTION

    Many companies today (e.g., CyberCash) provide e-commerce services for the
Internet. A few of these specialize in the vending of digital goods; among these
are Qpass and Reciprocal, Inc. Only a few of those, such as Reciprocal,
incorporate content protection technology into their offerings. Reciprocal uses
content protection technology from Intertrust, Xerox, and others. SoftLock uses
its own, patented system. The Company believes that no company besides SoftLock
combines all of these techniques with contextual marketing and merchandising
services.

    While management believes that the Company's method for the marketing,
distributing and selling of content on the Internet is unique, there are
numerous competitive methods and business models under which the Company's
prospective clients could choose to distribute and/or sell their content. Some
of these alternative methodologies are supported by companies with longer
operating histories, substantially greater personnel, financial and technical
resources and a more established customer base than the Company. Many of these
companies also have broader partner relationships that they could leverage,
including relationships with many of the Company's current and potential
partners. These companies also have significantly more established customer
support and professional services organizations than the Company does. In
addition, these companies may adopt aggressive pricing policies. Potential
competitors may bundle their products or incorporate a digital rights management
component into existing products in a manner that discourages users from
purchasing the Company's products. Furthermore, new competitors, or alliances
among competitors, may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than the Company.

EMPLOYEES

    During 1999, the Company aggressively hired personnel to fill key roles to
facilitate growth. As of December 31, 1999, the Company employed 28 persons in
its headquarters in Maynard, Massachusetts. The Company also employed two
full-time developers in home offices in Seattle, Washington. None of the
Company's employees are the subject of a collective bargaining agreement. The
Company believes that relations with its employees are good.

    As part of this aggressive growth and hiring plan, an employee benefits
program was implemented in August of 1999. This benefits program consisted of
medical and dental insurance plans, life insurance programs, disability
programs, and a 100% employee-funded 401(k) savings plan.

                                       8
<PAGE>
CUSTOMERS

    For the year ended December 31, 1999, the Company's two largest customers
accounted for 39% of revenue, all derived from the Company's legacy
eMerchandising system for digital documents on CD-ROM. In 1999, one of these
customers accounted for 21% of revenue, down from 22% in 1998, but still above
its 1997 percentage of revenue of 17%. The other significant customer accounted
for 18% of revenue in 1999. This customer did not provide revenue during 1998 or
1997.

GOVERNMENT REGULATION

    Exports of software products utilizing encryption technology are generally
restricted by the United States and various foreign governments. The Company
does not believe that its software solutions are subject to export control
regulations. However, changes in export control laws and regulations may impose
restrictions that affect the Company's ability to distribute its products and
services internationally, thus limiting the Company's ability to gain revenue
and grow its business.

RESEARCH AND DEVELOPMENT EXPENDITURES

    The Company recognized $1,823,141, $117,899 and $130,373 in research and
development expenses in 1999, 1998 and 1997, respectively. These costs include
the costs to develop, enhance, manage, monitor and operate the Company's online
operations. Included in these costs are noncash compensation and consulting
expenses related to the issuance of the Company's common stock and options in
exchange for services of $550,107, $9,861 and $468 in 1999, 1998 and 1997,
respectively.

    In addition, costs relating to the development of the eMerchandising website
of $1,444,360 were capitalized in 1999.

    Because the revenues recognized by the Company are generated by commissions
earned on content sales, none of these research and development costs are borne
directly by customers.

RECENT DEVELOPMENTS

    On March 8, 2000, the Company announced that it had entered into a letter of
intent to acquire all of the outstanding stock of Chili Pepper, Inc., a
Boston-based strategic marketing consulting firm. The completion of the
acquisition is contingent on, among other matters, the completion of due
diligence and the execution of definitive agreements.

                                       9
<PAGE>
RISK FACTORS

    The Company's financial condition and results of operations are subject to a
number of risks and uncertainties which are discussed below and in other
documents filed by the Company with the Securities and Exchange Commission (the
"Commission"). Prospective investors should carefully review all of the other
information set forth in this Annual Report on Form 10-KSB and the Exhibits
filed herewith.

   OUR LIMITED OPERATING HISTORY MAY IMPEDE YOUR ABILITY TO EVALUATE OUR
   BUSINESS.

    The Company was formed in 1989 but its operating history began with the
start-up of SSI in May 1992. As a result, the Company has only a limited
operating history on which investors can base an evaluation of the Company's
business and prospects and is subject to many of the risks common to enterprises
with a limited operating history, including potential under-capitalization,
limitations with respect to personnel, financial and other resources and limited
customers and revenues. The Company's likelihood of success must be considered
in the light of the risks, uncertainties, expenses, complications, delays and
difficulties frequently encountered by companies in their early stages of
development, particularly companies in the new and rapidly evolving markets,
such as online commerce, using new and unproven business models.

    The Company also expects that, as in many new industries, there will be
intense competition. The Company's potential customers and users have and will
continue to have many choices. The Company's potential customers may experiment
with many different products until it becomes apparent which products work best.
At this early stage of the Company's growth, its business and financial
condition could be materially adversely affected by cancellation or non-renewal
of existing or future client contracts. As a result, the Company's revenues
could fluctuate during any fiscal year, which may, in turn, cause the price at
which the Company's stock trades to be subject to substantial volatility.

   WE EXPECT THAT OUR CURRENT STRATEGY WILL RESULT IN CONTINUING NET LOSSES.

    The Company has incurred recurring net losses from operations since its
inception and has recorded limited revenues to date and expects to continue
incurring net losses through 2000 and 2001 as it continues to develop products
and expand its marketing strategy. For example, the Company incurred a net loss
of $6,598,955 for the fiscal year ended December 31, 1999, and its accumulated
deficit is $8,721,644 through December 31, 1999. The Company's planned
expenditures are expected to continue growing throughout 2000 and 2001. There
can be no assurance that the Company will achieve profitability in the future or
maintain profitability, if achieved, on a constant basis.

    The Company's business model is new and unproven, and the Company may not
succeed in generating sufficient revenue to sustain and grow its business.
Although the Company has begun to plan for revenue streams from other sources,
the success of the Company's business currently depends on its ability to
generate transaction fees in the form of commissions charged by the Company on
sales of electronic documents in commercial transactions. The volume of products
and services distributed using SoftLock's technology may be too small to support
or grow the Company's business. While some companies have decided to use the
Company's system, other companies may wish to use other technology based on
different business models, including the payment of a one-time license fee
without sharing in ongoing revenues. If the Company is unable to generate
revenues from transaction fees, the Company's business and operating results
could be materially adversely affected.

   THE MARKET FOR ONLINE COMMERCE IS NEW AND EMERGING AND IF IT DOES NOT GROW AS
   RAPIDLY AS WE ANTICIPATE, OUR PLANNED GROWTH AND FINANCIAL OBJECTIVES WILL
   NOT BE MET.

    The Company's business model is based on an analysis of consumer behavior
with respect to digital products and the development of an alternative channel
for the sale of digital content and a new transaction processing infrastructure.
The market for the purchase of products and services over the Internet,
especially the purchase of information content, is a new and emerging market.
The Company's

                                       10
<PAGE>
future revenues, profits and, in part, its business model, depend on the
willingness of consumers to conduct online commerce and the demands of companies
for securely distributing proprietary content on the Internet. Rapid growth in
the use of and interest in the Internet and other online services is a recent
phenomenon. This growth may not continue. A sufficiently broad base of consumers
may not adopt, or continue to use, the Internet as a medium of commerce. Demand
for and market acceptance of recently introduced products and services over the
Internet are subject to a high level of uncertainty, and there are few proven
products and services.

    Because the Company's transaction fees are derived from digital commerce
transactions, if digital commerce is not accepted for any reason, the Company's
revenues would not grow sufficiently and the Company's business and operating
results could be materially adversely affected. In addition, the Company's
methods of distribution for digital information may not be commercially accepted
for a number of reasons, including: (i) failure to develop the necessary
infrastructure for communication of digital information and for payment
processing, (ii) failure to develop or deploy enabling technologies, including
compression or broadband technology necessary for distribution of particular
digital content over the Internet, (iii) reduced demand for paid digital content
due to the widespread availability of free content online and the ability to use
and distribute this content without restriction; and (iv) insufficient speed,
access, and server reliability, as well as lengthy content download time.

   WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE ON
   FAVORABLE TERMS, IF AT ALL.

    The Company anticipates that it will continue to incur operating losses,
negative cash flows from operations and capital expenditures through 2000 and
into 2001. The Company, based upon its current operating plan, anticipates that
its currently available funds will be sufficient to satisfy its anticipated
needs for working capital, capital expenditures and business expansion through
2000. The Company's cash requirements, however, depend upon many factors,
including, but not limited to, the Company's net cash flows from operations, the
length of time it may take for the Company to develop a market for its products
or services, the market acceptance of its products and services and the response
of competitors who may develop competing products or services at lower costs.
There can be no assurance as to the length of time proceeds from recent
financings will satisfy the Company's cash requirements. The Company currently
does not have any commitments for additional financing. To the extent that the
proceeds from recent equity financings are insufficient to fund the Company's
activities, the Company anticipates that it will be necessary to raise
additional capital through other means or to substantially reduce or eliminate
current and planned software development programs and other operating expenses.

   IF WE FAIL TO PROPERLY MANAGE GROWTH, OUR BUSINESS COULD BE ADVERSELY
   AFFECTED.

    The Company's goal is to continue its development of an alternative channel
for the sale of digital content through the development of new tools for
publishers, an improved transaction processing infrastructure, and a number of
related marketing initiatives in 2000 and 2001. The Company also may acquire
other companies that are synergistic to the business of the Company. Such
expansion could place a significant burden on the Company's existing resources,
and may require the Company to implement additional operating, software
development and financial controls, install additional reporting and management
information systems for transaction processing, customer service, and financial
reporting, improve coordination among marketing, software development, and
finance functions, increase capital expenditures and to hire additional
personnel. There can be no assurance that the Company will be able to
successfully manage any substantial expansion of its business, including
attracting and retaining qualified personnel. A failure to do so could have a
material adverse effect on the Company's financial condition and operating
results.

                                       11
<PAGE>
   IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR
   BUSINESS COULD SUFFER.

    The Company's success depends in part on its ability to enforce intellectual
property rights for its technology and software, both in the United States and
abroad. In addition to the protection provided by the patent, the Company's
software is protected by copyright and the use of contractual restrictions (such
as confidentiality agreements) and license agreements that restrict the
unauthorized distribution of the Company's proprietary data. While the Company
has attempted to limit unauthorized use of its software products or the
dissemination of its proprietary information, there can be no assurance that the
Company will be able to retain its proprietary software rights or prohibit the
unauthorized use of proprietary information. The Company may file additional
applications for patents, copyrights and trademarks as management deems
appropriate. There can be no assurance that any patents, copyrights or
trademarks the Company may obtain will be sufficiently broad to protect the
Company's products, or that applicable law will provide effective injunctive
remedies to stop infringement on the Company's patents (if obtained), trademarks
or copyrights. In addition, there can be no assurance that any patent, trademark
or copyright obtained by the Company will not be challenged, invalidated, or
circumvented, that intellectual property rights obtained by the Company will
provide competitive advantages, or that the Company's competitors will not
independently develop technologies or products that are substantially equivalent
to those of the Company.

    In addition, if the Company's software products infringe upon the rights of
others, the Company may be subject to suit for damages or an injunction to cease
the use of such products. Except as noted under "Legal Risks," below, the
Company is not currently aware of any claims or infringements of the Company's
software products upon the rights of others.

   THE COMPANY FACES LEGAL RISKS ARISING OUT OF ITS PROPRIETARY TECHNOLOGY OR
   THE PATENTS OF OTHERS AND OUT OF LIABILITY FROM FAILURES OF THE COMPANY'S
   SOFTWARE OR SYSTEM.

    The Company faces the risk of patent-related suits, including legal actions
that might be pursued to litigate or defend the Company's patent, and the
outcomes and expenses cannot be predicted with confidence. Liability lawsuits
are also risks to be considered. The Company has developed software technology
to protect intellectual property, but there can be no assurance that such
technology will not be breached, resulting in lost revenues for which the
Company might be held responsible. Similarly, the software that incorporates the
Company's technology can have adverse consequences that might lead to claims of
liability against the Company.

   IF THE COMPANY FAILS TO COMPETE WITH COMPETITORS AND MAINTAIN ITS TECHNOLOGY,
   THE COMPANY WILL NOT ACHIEVE ITS FINANCIAL OBJECTIVES.

    There are many software developers and companies concentrating their efforts
on the issues related to the digital distribution of software and content. New
technology and solutions that address these issues are regularly being proposed
and tested. While management believes that the Company's method for the
marketing, distribution and sale of content on the Internet is unique, there are
numerous competitive methods and business models under which the Company's
prospective clients could choose to distribute and/or sell their content.

    Potential competitors may bundle their products or incorporate a digital
rights management component into existing products in a manner that discourages
publishers from using the Company's products. Furthermore, new competitors or
alliances among competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements than the Company.

    Some of the Company's competitors have longer operating histories and
significantly greater financial, technical, marketing, and other resources than
the Company. Many of these companies have a more extensive customer base and
have broader partner relationships that they could leverage, including
relationships with many of the Company's current and potential partners. These
companies also have

                                       12
<PAGE>
significantly more established customer support and professional services
organizations than the Company. In addition, these companies may adopt
aggressive pricing policies. There can be no assurance that the Company will be
able to convince its prospective customers of the merits of the Company's system
or that the Company will be able to compete with these competitors successfully.

   THE COMPANY MAY SUFFER LOSSES ARISING FROM INFRINGEMENT UPON THE USE OF ITS
   DOMAIN NAMES.

    The Company currently holds the Internet domain name "www.softlock.com," as
well as various other related names. Domain names generally are regulated by
Internet regulatory bodies. The regulation of domain names in the United States
and in foreign countries is subject to change. Recently, new policies regarding
resolution procedures for domain name disputes have been adopted. Furthermore,
regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. As a result, the Company may not acquire or maintain the "softlock.com"
domain name in all of the countries in which the Company may conduct business.

    The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore, the
Company could be unable to prevent third parties from acquiring domain names
that infringe or otherwise decrease the value of the Company's trademarks and
other proprietary rights.

   IF OUR TECHNOLOGY IS NOT ADOPTED BY THIRD PARTIES, WE MAY FAIL TO ACHIEVE
   PROFITABILITY.

    If third parties, i.e. publishers and content providers, do not use the
Company's technology and create a market for digital commerce, SoftLock's
business and operating results could be materially adversely affected. The
Company's business and operating results could be materially adversely affected
to the extent publishers and content providers fail, in whole or in part, to:
(i) use the Company's technology, (ii) develop infrastructure for the sale and
delivery of digital goods and services, (iii) generate transaction fees from the
sale of digital content and services; and (iv) promote brand preference for
SoftLock products and services. The Company may not generate sufficient revenue
to grow its business unless it maintains relationships with existing users and
significantly increases the number of companies that use its technology for the
sale of digital content. The Company's ability to attract new users will depend
on a variety of factors, including: (i) the performance, reliability and
security of the Company's products and services; (ii) the scalability of the
Company's products and services--(the ability to rapidly increase deployment
size from a limited number of end-users to a very large number of end-users);
(iii) the cost-effectiveness of the Company's products and services; and
(iv) the Company's ability to market its products and services effectively.

    The Company's ability to attract new users will also depend on the
performance of its initial users and the overall success of the SoftLock
eMerchandising system. Many potential users may resist working with the Company
until its, and the Company's, users, content, products and services have been
successfully introduced into the market and have achieved market acceptance. The
Company may not be able to attract a critical mass of users that will develop
products and services and the Company's eMerchandising system may not achieve
widespread deployment to users that the Company believes is necessary for it to
become successful.

    In addition, the Company may not be able to establish relationships with
important potential new users if it has already established relationships with
other users who are their competitors. Therefore, it is important that the
Company is perceived as a neutral and trusted technology and service provider.
In addition, the Company requires publishers and content providers operating
within the SoftLock eMerchandising system to comply with specifications
administered by the Company. Potential users may be unwilling to be subject to
the control of these specifications.

                                       13
<PAGE>
   IF THE COMPANY'S TECHNOLOGY CANNOT PREVENT SECURITY BREACHES, WE MAY LOSE
   REVENUES.

    Security breaches of the Company's technology could result in decreased
demand for the Company's technology by its licensees and their customers, or
could also result in litigation. The secure and trusted management of
proprietary or confidential information over the Internet is essential to
establishing and maintaining confidence in the SoftLock eMerchandising system.
Without this confidence, potential or current licensees may not use the
Company's technology and their customers may not trust and use SoftLock's
licensee's products. Therefore, security concerns and security breaches of the
Company's and its licensee's software and products could materially adversely
affect the Company's business and operating results. Advances in computer
capabilities, new discoveries, or other developments could result in a
compromise or breach of the security technology, including cryptography
technology, that the Company and its licensees use to protect customer digital
content and transaction data. Security breaches could damage the Company's
reputation and expose it to a risk of loss or litigation. The Company's
insurance policies may not be adequate to reimburse the Company for losses
caused by security breaches. SoftLock cannot guarantee that its security
measures will prevent security breaches.

   IF THERE ARE DEFECTS AND ERRORS IN THE COMPANY'S TECHNOLOGY, WE MAY LOSE
   REVENUES.

    Defects and errors in current or future products could result in delayed or
failed deployment of the Company's technology, lost revenues, or a delay in or
failure to achieve market acceptance. Any of these scenarios could seriously
harm the Company's business and operating results. Complex software products
like the Company's often contain errors or defects, including errors relating to
security, particularly when first introduced or when new versions or
enhancements are released. Because this is a system used for commerce, the
Company believes that standards for reliability and performance may be very
high.

    If the Company's products or content contain errors or defects not
discovered in the process of development, it could seriously undermine the
perceived trust and security needed for a commercial system and could delay or
prevent market acceptance of digital commerce resulting in material adverse
affects to the Company's business and operating results.

    The development and use of the Company's products and services expose the
Company to substantial risks of product liability claims because the Company's
products and services are to be used in sensitive and valuable digital commerce
transactions and because the Company requires its partners to comply with the
Company's specifications. Although the Company's license agreements typically
contain provisions designed to limit the Company's exposure to product liability
claims, it is possible that these limitations of liability provisions may not be
effective as a result of existing or future laws or unfavorable judicial
decisions. A product liability claim brought against the Company, even if not
successful, would likely be time consuming and costly to defend and could
significantly harm our business and operating results.

   THE COMPANY'S RELIANCE UPON THIRD-PARTY SOFTWARE CREATES ADDITIONAL
   TECHNOLOGICAL RISK.

    The Company integrates third-party software with its software. The Company
could be seriously harmed if the providers from which it licenses software
ceased to deliver and support reliable products, enhance their current products,
or respond to emerging industry standards. In addition, the third-party software
may not continue to be available to the Company on commercially reasonable
terms, or at all. The loss of, or inability to maintain or obtain this software,
could result in shipment delays or reductions, or could force the Company to
limit the features available in its current or future product and service
offerings. Either alternative could have a material adverse affect on the
Company's business and operating results.

   THE MARKET FOR DIGITAL RIGHTS MANAGEMENT IS FRAGMENTED AND SUBJECT TO RAPID
   TECHNOLOGICAL CHANGE.

    The market for digital rights management is fragmented and marked by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, and changes in

                                       14
<PAGE>
customer demands. To succeed, the Company must develop and introduce, in
response to customer and market demands, new releases of its software that offer
features and functionality that the Company does not currently provide. Any
delays in the Company's ability to develop and release enhanced or new products
could have a material adverse affect on the Company's business and operating
results. In the past, the Company has experienced delays in new product
releases, and it may experience similar delays in the future.

    In addition, if standards for digital rights management are not adopted or
complied with, content providers may delay distributing content until they are
confident that the technology by which the content is to be distributed will be
commercially accepted. Standards for the distribution of various digital content
might not develop or might be found to violate antitrust laws or fair use of
copyright policies. In addition, the failure to develop a standard among device
manufacturers may affect the market for digital goods and services. As a result,
customers may delay purchasing products or services that include the Company's
technology if they are uncertain of commercial acceptance of the standards with
which the Company's technology complies. Consequently, if a standard format for
the secure delivery of content on the Internet is not adopted, or if the
standards are not compatible with the Company's digital rights management
technology, its business and operating results could be materially adversely
affected.

   GOVERNMENT REGULATION MAY IMPAIR THE COMPANY'S PROFITABILITY AND RESTRICT
   GROWTH.

    Exports of software products utilizing encryption technology are generally
restricted by the United States and various foreign governments. Changes in
export laws and regulations may impose restrictions on the Company's ability to
distribute products and services internationally, limiting SoftLock's ability to
gain revenue and grow its business

    It is possible that Congress or individual states could enact laws
regulating or taxing Internet commerce. In addition, several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers in a manner similar to long distance telephone
carriers and to impose access fees on these companies. Access fees, sales taxes
or any other taxes or fees could increase the cost of transmitting data over the
Internet and reduce the number or amount of transactions from which we get our
transaction fees.

   OUR BUSINESS PROSPECTS MAY BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO
   ATTRACT AND RETAIN QUALIFIED PROFESSIONALS.

    The Company's success depends largely on the skills, experience, and
performance of the members of senior management and other key personnel. None of
the Company's senior management and other key personnel must remain employed for
any specific time period. Only the President and Chief Executive Officer and
Chief Technology Officer are subject to employment agreements. If the Company
loses one or more of its key personnel, its business and operating results could
be significantly harmed. In addition, the Company's future success will depend
largely on the Company's ability to continue attracting, integrating, and
retaining highly skilled personnel. In addition, competition for highly
qualified sales and marketing personnel is intense. The Company may not be able
to hire enough qualified individuals in the future or in a timely manner. New
employees require extensive training and typically take at least four (4) to six
(6) months to achieve full productivity.

   THE COMPANY'S SHARES ELIGIBLE FOR FUTURE SALE MAY RESULT IN A DECREASE IN THE
   PRICE OF THE COMPANY'S COMMON STOCK.

    Of the 12,862,841 shares of the Company's common stock issued and
outstanding as of March 14, 2000, 11,159,060 shares are "restricted securities"
as that term is defined under Rule 144 promulgated under the Securities Act of
1933 ("the Act"). In addition, the Company has outstanding 53,431 shares of
Series A Preferred Stock which are convertible into 5,343,100 shares of common
stock. The Company also

                                       15
<PAGE>
has outstanding 46,875 shares of Series B Preferred Stock which are convertible
into 4,687,500 shares of common stock. The Series A Preferred Stock will
complete the one-year holding period of Rule 144 in December 2000 through
February 2001. The Company has committed to file a registration statement with
the SEC by April 15, 2000 to register the shares of the common stock issuable
upon conversion of the Series B Preferred Stock and to use its reasonable best
efforts to have the registration statement declared effective by July 15, 2000.
The Company has also committed to file an application to have its common stock
listed for trading on the Nasdaq SmallCap Market by April 15, 2000. The holders
of the Series B Preferred Stock have agreed not to sell any of the shares of
common stock so registered until the earlier of (i) four months after the date
such registration statement becomes effective or (ii) November 1, 2000.

    Sales of substantial amounts of shares of common stock by shareholders
pursuant to Rule 144 through the registration statement filed for the holders of
Series B Preferred Stock or otherwise could adversely affect the then market
price of the Company's securities and make it more difficult for the Company to
sell equity securities in the future at a time and price which it deems
appropriate. The Company is unable to predict the effect that sales made in the
future under Rule 144 or otherwise may have on the then prevailing market price
of the common stock. Nonetheless, the possibility exists that the sale of these
shares may have a depressive effect on the price of the Company's common stock
and may affect the Company's ability to obtain additional financing on favorable
terms, if at all, in the future.

   LOW VOLUME TRADING; POSSIBLE VOLATILITY OF STOCK PRICE.

    The Company's common stock is listed for trading on the Over the Counter
Bulletin Board, has traded in only small volumes and has been subject to a
certain amount of volatility in the price. While the Company intends to apply
for listing on the Nasdaq SmallCap Market, no assurance can be given that a more
active market will develop or that a shareholder will be able to liquidate his
investment without considerable delay, if at all. Even if a more active market
should develop, the price may remain volatile. Factors such as those discussed
in this "Risk Factors" section may have a significant impact upon the market
price of the Company's common stock. There can be no assurance that the
Company's trading price will remain at any particular level, and if the trading
price were to fall sufficiently, many brokerage firms may not be willing to
effect transactions in the Company's securities, particularly because low-priced
securities are subject to a Commission rule that imposes additional sales
practice requirements on broker-dealers who sell low-priced (generally those
below $5 per share) securities. Consequently, unless and until the market price
for the Company's common stock increases significantly, or until the Company's
common stock is admitted for trading on Nasdaq or another exchange, brokerage
firms may be reluctant to trade the Company's common stock.

   PENNY STOCK REGULATIONS MAY AFFECT AN INVESTOR'S ABILITY TO SELL THE
   COMPANY'S COMMON STOCK AND THE PRICE OF THE STOCK.

    If the Company were unable to meet the Nasdaq listing or maintenance
requirements and the price per share of the Company's common stock were to drop
below $5.00 per share, then the Company's common stock would become subject to
certain "penny stock" rules promulgated by the Commission. Under such rule,
broker-dealers who recommend "penny stocks" to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. Securities are exempt from this rule if the market
price is at least $5.00 per share.

    The SEC has adopted regulations that generally define a "penny stock" to be
an equity security that has a market price of less than $5.00 per share, subject
to certain exceptions. Such exceptions include equity securities listed on
Nasdaq and equity securities of a company that has: (a) net tangible assets of
at least $2,000,000, if such company has been in continuous operation for more
than three years, or (b) net tangible assets of at least $5,000,000, if such
company has been in continuous operation for less than three years, or
(c) average revenue of at least $6,000,000 for the preceding three years. Unless
an exemption is

                                       16
<PAGE>
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a risk of disclosure schedule explaining the penny
stock market and the risks associated therewith.

   MANAGEMENT EXERCISES SIGNIFICANT CONTROL OVER THE COMPANY.

    The officers and directors own approximately 23% of the Company's currently
outstanding common stock. As a result, if the officers and directors act
together, they will have significant influence on the outcome of all matters
requiring shareholder approval (including the election and removal of directors
and any merger, consolidation or sale of all or substantially all of the
Company's assets) and significant influence on the management and affairs of the
Company. Such influence could discourage others from initiating potential
merger, takeover or other change of control transactions. As a result, the
market price of the Company's common stock could be adversely affected.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

    Some of the statements under "Description of Business," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Report and in the Company's periodic filings
with the Commission constitute forward-looking statements. These statements
involve known and unknown risks, significant uncertainties and other factors
what may cause actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, those listed under "Risk
Factors" and elsewhere in this Report.

    In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates." "predicts," "potential" or "continue" or the negative
of such terms or other comparable terminology.

    The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward-looking statements are
based on assumptions that the Company will obtain or have access to adequate
financing for each successive phase of its growth, that the Company will market
and provide software products on a timely basis, that there will be no material
adverse competitive or technological change in condition of the Company's
business, that demand for the Company's software products and services will
significantly increase, that the Company's Chief Executive Officer and other
significant employees will remain employed as such by the Company, that the
Company's forecasts accurately anticipate market demand and that there will be
no material adverse change in the Company's operations, business or governmental
regulation affecting the Company or its suppliers. The foregoing assumptions are
based on judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the Company's control.

    Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements.

ITEM 2. DESCRIPTION OF PROPERTY.

    Through December 31, 1999, the Company's principal offices were located in
Maynard, Massachusetts and consisted of approximately 15,600 square feet. The
offices were leased at a monthly rental of $7,448, which escalates to $14,219
during the second year and $21,114 for the third through the seventh year of the
lease. The Company is also obligated to pay additional amounts for the annual
operation and maintenance of the building and for taxes.

    Management believes that the Company's insurance policies provide adequate
coverage for the contents at all facilities. The lessor of each of the Company's
leased facilities is responsible for the building

                                       17
<PAGE>
structure itself. The Company could have material adverse consequences if its
facilities were destroyed by fire or other disaster without a recovery system in
place.

ITEM 3. LEGAL PROCEEDINGS.

    Other than as set forth below, the Company is not a party to any legal
proceedings which management believes to be material, and there are no such
proceedings which are known to be contemplated for which the Company anticipates
a material risk of loss.

    The Company is one of approximately 18 defendants in an action in the United
States District Court for the Southern District of New York entitled INTERACTIVE
GIFT V. COMPUSERVE INC. ET AL, filed August 23, 1995. The action alleges
infringement of the so-called Freeny patent. The plaintiff seeks judgment
declaring the validity of its patent and further declaring that each of the
defendants has infringed the plaintiff's patent, enjoining further infringement
and treble damages plus attorneys fees and costs and disbursements.

    The Company answered the plaintiff's complaint and counterclaimed for a
declaratory judgment that the plaintiff's patent is invalid, unenforceable and
is not infringed by the Company. On May 13, 1998, Judge Barbara S. Jones signed
a 44-page Opinion & Order in the action. The Opinion & Order provides the
Court's determination of the claim scope under MARKHAM V. WESTVIEW
INSTRUMENTS, INC. On March 12, 1999, the Court entered a stipulated order and
judgment that, based on the interpretation of the claims of the Freeny patent as
determined by the Court, the Company has not in the past infringed, nor is it
now infringing, any claim of the Freeny patent because no method, system or
apparatus of the Company includes any of five specific limitations set forth in
the Court's May 13, 1998 Order. Judgment has been entered in the Company's favor
and the patent owner's claims have been dismissed on the merits. The patent
owner has filed a Notice of Appeal to the Court of Appeals for the Federal
Circuit, arguing error by the District Court. The appeal (number 99-1324) stands
fully briefed and oral argument was scheduled for February 7, 2000.

    Although the Company and its counsel are unable to predict the ultimate
outcome of the appeal with any reasonable degree of certainty, the Company and
the other defendants will continue to defend their positions vigorously.

    Other patent-related suits are possible, including legal actions which might
be pursued to litigate or defend the Company's patent, and the outcomes and
expenses cannot be predicted with confidence. Liability lawsuits are also a risk
to be considered. The Company has developed software technology to protect
intellectual property, but there can be no assurance that such technology will
not be breached, resulting in lost revenues for which the Company might be held
responsible. Similarly, the software which incorporates the Company's tools can
have adverse consequences which might lead to claims of liability against the
Company.

    The Company is subjected to this and other litigation from time to time in
the ordinary course of business. Although the amount of the liability, if any,
with respect to such litigation can not be determined, in the opinion of
management, such liability, if any, will not have a material adverse effect on
the Company's financial condition, results of operations or cash flows.

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

    No matter was submitted to a vote of security holders during the fourth
quarter of 1999.

                                       18
<PAGE>
                                    PART II

    ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.

MARKET INFORMATION

    The Company's common stock began trading on the Over the Counter Bulletin
Board during the third quarter of 1996.

    The following table sets forth the high and low closing bid prices for the
Company's common stock for the past two (2) years. The quotations reflect
inter-dealer prices, with retail mark-up, mark-down or commissions, and may not
represent actual transactions.

<TABLE>
<CAPTION>
                                                             HIGH BID   LOW BID
                                                             --------   --------
<S>                                                          <C>        <C>
1998
    First Quarter                                             $ 0.01     $    0.01
    Second Quarter                                            $ 0.04     $    0.01
    Third Quarter (1)                                         $ 2.00     $    1.13
    Fourth Quarter                                            $ 5.63     $    1.03
1999
    First Quarter                                             $ 7.94     $    4.50
    Second Quarter                                            $12.63     $    6.75
    Third Quarter                                             $ 7.44     $    2.63
    Fourth Quarter                                            $ 5.25     $    3.13
2000
    First Quarter (through February 29)                       $13.88     $    3.63
</TABLE>

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

(1) The acquisition of SSI was consummated and announced on July 28, 1998. On
    August 10, 1998, the Company effected a one for fifty reverse stock split.

    On March 14, 2000, the last reported bid and asked prices for the common
stock were $21.75 and $22.125, respectively.

HOLDERS

    As of March 14, 2000, the Company had approximately 257 holders of record of
the Company's common stock.

DIVIDENDS

    The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements, debt covenants and financial condition. Since its inception, the
Company has not paid any dividends on its common stock and does not anticipate
paying such dividends in the foreseeable future. The Company intends to retain
earnings, if any, to finance its operations.

    Preferred Series A shareholders are entitled to receive, if and when
declared by the Board, quarterly dividends of $10.20 per preferred share per
year. Unpaid dividends are cumulative but do not bear interest. There were no
unpaid dividends as of December 31, 1999. If all the Preferred Stock is
automatically converted into common stock as a result of a qualified public
offering and the Company provides the purchasers with an opportunity to register
their shares of common stock resulting from the conversion, all within two years
of the date of closing, then no dividends are payable.

    Preferred Series B shareholders are entitled to receive dividends when and
as declared by the Board.

                                       19
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES

    Beginning in November 1998, the Company commenced a private placement
offering of up to 1,600,000 shares of its common stock at an offering price of
$1.25 per share, pursuant to Section 4(2) of the Securities Act of 1933 (the
"Act") and Regulation D promulgated thereunder. From January 4, 1999 to
February 22, 1999, the Company sold 1,540,000 shares of its common stock
resulting in net proceeds of $1,882,210. The Company offered the shares on a
"best efforts" basis through officers and directors of the Company and through
selected members of the National Association of Securities Dealers, Inc. A total
of $40,520 in commissions was paid to NASD members in connection with the
offering. All of the certificates evidencing the shares of the Company's common
stock received as a result of the offering were impressed with the form of
restrictive legend utilized by the Company, and stop transfer instructions have
been noted against the transfer of such certificates.

    Beginning in May 1999, the Company commenced a private placement offering of
up to 1,200,000 shares of its common stock at an offering price of $5 per share,
pursuant to Section 4(2) of the Act and Regulation D promulgated under the Act.
From May 1999 to June 1999, the Company sold 235,000 shares of its common stock
resulting in net proceeds of $1,155,136. The Company offered the shares on a
"best efforts" basis through officers and directors of the Company and through
selected members of the National Association of Securities Dealers, Inc. The
shares were offered for sale to accredited investors only, pursuant to the
exemptions from registration contained in Section 4(2) of the Act and
Regulation D promulgated under the Act. All of the certificates evidencing the
shares of the Company's common stock received as a result of the offering were
impressed with the form of restrictive legend utilized by the Company, and stop
transfer instructions have been noted against the transfer of such certificates.

    Beginning in October, 1999, the Company commenced a private placement
offering of up to 1,200,000 shares of its common stock at an offering price of
$1.25 per share, pursuant to Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder. On November 15, 1999 the offering was
increased to 1,600,000 shares. From October 25, 1999 until November 29, 1999 the
Company sold 1,600,000 shares of its common stock resulting in net proceeds of
$1,988,557. The Company offered the shares on a "best efforts" basis through
officers and directors of the Company. The shares were offered for sale to
accredited investors only, pursuant to the exemptions from registration
contained in Section 4(2) of the Act and Regulation D promulgated under the Act.
All of the certificates evidencing the shares of the Company's common stock
received as a result of the offering were impressed with the form of restrictive
legend utilized by the Company, and stop transfer instructions have been noted
against the transfer of such certificates.

    On January 10, 2000, the Company announced that pursuant to closings on
December 30, 1999 and January 7, 2000, it had issued 36,765 shares of Series A
Preferred Stock (the "Series A Preferred") to a group of four investors: SI
Venture Fund II, L.P. ("SI"), Apex Investment Fund IV, L.P., Apex Strategic
Partners IV, LLC (collectively, "Apex") and RSA Security Inc. ("RSA") for a
purchase price of $102 per share for an aggregate purchase price of $3,750,030.
Each share of the Series A Preferred is convertible into 100 shares of the
Company's common stock. In connection with the placement of the Series A
Preferred, we issued 1,964 warrants convertible into the Series A Preferred
Stock. In February 2000, SI exercised all of those warrants.

    In connection with the Series A Preferred transaction, the Company entered
into a Series A Preferred Stock Purchase Agreement dated as of December 30, 1999
as supplemented on January 7, 2000 with SI, Apex and RSA, and a Shareholders'
and Rights Agreement with the purchasers and the President and Chief Executive
Officer and the Chief Technology Officer of the Company. The Company also filed
a Certificate of Designation with the Delaware Secretary of State that states
the powers, preferences and rights of the Series A Preferred

    On February 14, 2000, the Company announced that pursuant to closings on
February 10, 2000, it had issued 46,875 shares of Series B Preferred Stock (the
"Series B Preferred") to a group of investors,

                                       20
<PAGE>
including affiliates of Tudor Investment Corp. and Ritchie Capital as well as
investors in an earlier round of financing, SI Venture Fund II, L.P. and Apex
Investment Fund IV, L.P. for a purchase price of $160 per share for an aggregate
purchase price of $7,500,000. Each share of the Series B Preferred is
convertible into 100 shares of the Company's common stock. These investors were
also issued two warrants, one of which becomes exercisable for an aggregate of
312,500 shares of common stock if as of August 15, 2000 the Company's
registration statement for the shares of common stock issuable upon conversion
of the Series B Preferred Stock was not declared effective and the Nasdaq
listing application for the common stock was not accepted and the second of
which would become exercisable for an aggregate of an additional 312,500 shares
of common stock if as of November 15, 2000 these two conditions were not met.

    The Company also announced that Ascent Venture Partners III, L.P. ("Ascent")
had purchased 14,706 shares of the Company's Series A Preferred Stock for $102
per share for an aggregate purchase price of $1,500,000. In connection with the
investment by Ascent, the Company agreed to appoint an Ascent representative to
its Board of Directors.

    In connection with the Series B Preferred transaction, the Company entered
into a Series B Preferred Stock and Warrant Purchase Agreement dated as of
February 10, 2000 with the investors and an Amended and Restated Shareholders'
and Rights Agreement with the investors, the holders of the Series A Preferred
Stock and the Company's President and Chief Executive Officer and its Chief
Technology Officer. The Company also filed a Certificate of Designation with the
Delaware Secretary of State that states the powers, preferences and rights of
the Series B Preferred.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS.

BACKGROUND

    The Company was incorporated under the name Fieldcrest Corporation in the
State of Delaware in December 1989, for the primary purpose of seeking out
acquisitions of properties, businesses or merger candidates, without limitation
as to the nature of the business operations or geographic area of the
acquisition candidate.

    On July 28, 1998, the Company and SoftLock Services, Inc. consummated an
Agreement and Plan of Reorganization whereby the Company acquired all of the
issued and outstanding common shares of SSI in exchange for the issuance of
7,097,266 shares of the Company's common stock. The Company has accounted for
the transaction as a reverse acquisition. The fiscal year of the Company was
changed from March 31 to December 31 to correspond to the fiscal year of SSI.

    Subsequent to the reverse acquisition of SSI, the Company changed its name
from Fieldcrest Corporation to SoftLock.com, Inc. to better reflect the ongoing
business of the Company. The Company's trading symbol was also changed to
"SLCK". The Company's common stock currently trades on the over the counter
Bulletin Board.

    Except as otherwise noted, all references to the "Company" include
SoftLock.com, Inc. and its subsidiary, SSI.

    The Company provides a sales and merchandising system for digital content on
the Internet and has been vending passwords to unlock secure digital content
since 1992. The eMerchandising system, which had its "soft opening" in
October 1999, has updated the Company's offerings and allows publishers of
electronic content to securely sell their digital content from their own Web
sites using this eMerchandising system and through the SoftLock Affiliate
Network

    The SoftLock eMerchandising system promotes the secure distribution of
digital information by taking advantage of consumers' natural tendency to pass
along relevant content to colleagues, friends and family. The Company's patented
(US #5,509,070) technology prevents electronic shoplifting (piracy) while the
"locked" content is securely sampled, electronically purchased, and
redistributed.

                                       21
<PAGE>
    When a prospective consumer receives premium digital content from the
Company, or one of its affiliates, the consumer can sample a portion of the
final product (i.e. "demo" the product). The consumer can then instantly
purchase the complete product via access to the World Wide Web. The consumer
then has permanent access to the product for personal use. The consumer is also
encouraged to copy the product and redistribute the product to friends or
colleagues because SoftLock digital content automatically returns to the locked
state, or "demo" mode, when copied from one computer to another. Such practice
invites another purchase of the full content.

    The SoftLock Affiliate Network is a distribution system enabling the
SoftLock Content Providers to securely sell documents through SoftLock Affiliate
web sites. The Company assists in brokering and merchandising content, remits
payments to Content Providers and SoftLock Affiliates, and also provides reports
and customer service.

    SoftLock Content Providers include traditional print publishers, web-based
information services, financial/business research, magazines, books, newspapers,
and new media companies.

CORPORATE STRUCTURE

    The Company currently consists of SoftLock.com, Inc. and its wholly owned
operating subsidiary SoftLock Services, Inc. In 1998, the Company underwent a
stock transfer and exchange of 7,097,266 shares of restricted common stock for
all of the issued and outstanding shares of SSI, wherein the owners of SSI
became the majority owners of the Company. Prior to this transaction, the
Company operated as a shell company organized to locate and acquire an operating
company. All operations presented herein are those of the acquired operating
company. This transaction also resulted in a change in reporting year from
March 31 to December 31, the fiscal year end of SSI.

                                       22
<PAGE>
RESULTS OF OPERATIONS

    The following table sets forth various items as a percentage of revenues for
the years ended December 31, 1999, 1998 and 1997.

<TABLE>
<CAPTION>
                                                                            YEAR ENDED
                                                              --------------------------------------
                                                                1999           1998           1997
                                                              --------       --------       --------
<S>                                                           <C>            <C>            <C>
Statement of operations data
  Revenue...................................................     100%           100%           100%
  Cost of revenue...........................................      26%            21%            18%
  Gross profit..............................................      74%            79%            82%
Total operating expenses....................................    8002%           768%           835%
Operating loss..............................................   (7928)%         (690)%         (753)%
  Other income, net.........................................      53%            13%            17%
Loss before income taxes....................................   (7876)%         (676)%         (736)%
  Income taxes..............................................       0%             0%             0%
Net loss....................................................   (7876)%         (676)%         (736)%
</TABLE>

    DECEMBER 31, 1999 AS COMPARED TO DECEMBER 31, 1998

    Total revenues for the year ended December 31, 1999 ("1999") were $83,790, a
23.4% decrease as compared to $109,402 earned during the year ended
December 31, 1998 ("1998"). In 1999, revenue from password vending (the process
by which documents are "unlocked" in the Company's legacy system) decreased to
$50,290 from $60,240 in 1998, a 16.5% decrease. Revenues from licensing, custom
tools and programming, and consulting and speaking decreased to $33,500 in 1999
from $49,162 in 1998, a 31.9% decrease. These decreases are consistent with the
Company's strategy to derive future revenues primarily from commissions from the
SoftLock eMerchandising system.

    Cost of sales decreased to $21,902 in 1999 from $23,166 in 1998. The
resulting net decrease arose from fewer transactions, thus fewer incremental
fees for the processing of passwords. The decrease in gross margin in the year
is attributable to fixed transaction costs being spread over a smaller amount of
revenue.

    Gross profit was $61,888, or 73.9% of revenue in 1999, as compared with
$86,236, or 78.8% of revenue in 1998

    Operating expenses totaled $6,705,092 for 1999 as compared with $840,751 for
1998, an increase of $5,864,341. The increase is primarily due to costs
associated with significant staffing increases (from 10 employees at the end of
1998 to 30 employees as of the end of 1999) to support the SoftLock
eMerchandising system, related operating and consulting costs, research and
development costs, and other miscellaneous administrative costs. Included in
operating expenses are costs related to noncash compensation and consulting in
the amount of $2,770,155 and $221,593 in 1999 and 1998, respectively.

    Research and development costs increased to $1,823,141 in 1999 versus
$117,899 in 1998, an increase of $1,705,242. This increase is related to the
additional staffing, as well as outside consulting, in connection with the
research and development of the eMerchandising system and related proprietary
software. Included in research and development expenses are costs related to
noncash compensation and consulting in the amount of $550,107 and $9,861 in 1999
and 1998, respectively.

    Selling and marketing costs increased to $1,181,155 in 1999 as compared to
$168,788 in 1998, an increase of $1,012,367. This increase is primarily
attributable to additional staffing and outside consulting costs associated with
the enrollment of Content Providers and Affiliates for the SoftLock Affiliate
Network. Included in selling and marketing expenses are costs related to noncash
compensation and consulting in the amount of $278,582 and $12,812 in 1999 and
1998, respectively.

                                       23
<PAGE>
    General and administrative costs in 1999 were $3,700,796 as compared to
$554,064 in 1998, an increase of $3,146,732. This increase relates primarily to
additional staffing and outside consulting costs incurred in the building of the
management infrastructure and support team for the eMerchandising system.
Included in the above costs are salaries and wages, consulting, and all other
related operating expenses. Also included general and administrative expenses
are costs related to noncash compensation and consulting in the amount of
$1,941,466 and $198,920 in 1999 and 1998, respectively.

    Other income increased to $44,249 in 1999 from $14,443 in 1998. This change
relates primarily to investment earnings on the Company's cash reserves which
increased as a result of the Company's $1,882,210 private placement completed in
the first quarter, its $1,155,136 private placement completed in the second
quarter, its $1,988,558 private placement completed in the fourth quarter, and
its $3,210,604 preferred stock offering in the fourth quarter.

    Net loss increased to $6,598,955 in 1999 from $740,072 in 1998. The increase
resulted primarily from the increase in operating expenses. The Company's
business plan called for higher losses in 1999 as the Company continued to
develop products, hire the personnel to grow the business and expand its
marketing strategy. The company anticipates that it will incur significant
operating losses through 2000 and into 2001.

    Management anticipates that the trend toward increased quarterly operating
expenses will continue in order to support increased marketing and promotional
efforts, to develop and release new products, to continue to build a strong
management team, to raise necessary capital, and otherwise create the
infrastructure that the Company will need to provide its services in the future.

    DECEMBER 1998 AS COMPARED TO DECEMBER 31, 1997

    Revenues in 1998 versus the year ending December 31, 1997 ("1997") were down
1.2%, from $110,774. This decrease is attributed to the nearly offsetting
changes in license and custom software design fees, which decreased by nearly
44% (approximately $32,000) from $73,600 in 1997 to $41,500 in 1998, and an
increase in revenue from the Company's primary product, the sale of passwords
and vouchers, of nearly 82% (approximately $27,000), from $37,174 in 1997 to
$67,902 in 1998, reflecting an increase in both the number and value of
passwords sold.

    Gross profit in 1997 was $90,428, or 81.6% of revenue. Although gross profit
as a percentage of password sales increased for 1998, it was offset by the
decline in licensing sales which generate a higher contribution to gross margin.

    Operating expenses in 1998 were 9.1% lower than in 1997, which totaled
$924,823. The primary reason for the decline relates to 1997 expenditures for
outside consultants engaged by the company to advise on corporate structuring
and financial strategies. Overall, outside consulting decreased by nearly
$220,000 (77.2%) from $281,600 in 1997 to $64,200 in 1998. Savings from the
reduction in the use of these outside consultants were partially offset by the
cost of regulatory compliance as a result of the Company becoming an SEC
reporting company in July of 1998 and the hiring of additional key personnel in
the fourth quarter of 1998. Also included in 1997 operating expenses was
$135,000 of noncash compensation related to outside consulting costs.

    Research and development costs decreased to $117,899 in 1998 from $130,373
in 1997, a decrease of $12,474. This decrease is mainly due to reduced outside
consulting costs.

    Selling and marketing costs increased to $168,788 in 1998 from $162,588 in
1997, an increase of $6,200. This increase is mainly related to additional
salaries, with an offsetting decrease in outside consulting expenses.

    General and administrative costs decreased to $554,064 in 1998 from $631,862
in 1997, a decrease of $77,798. This decrease is mainly due to a reduction in
outside consulting costs.

                                       24
<PAGE>
    Other income decreased from $19,117 in 1997 to $14,443 in 1998, a decrease
of $4,674. This decrease is primarily due to $9,733 of interest expense for 1998
as compared with $833 of interest expense in 1997. This increase in interest
expense is partially offset by an increase in interest income of $4,224 from
$19,859 in 1997 to $24,083 in 1998.

    Net loss in 1998 of $740,072 was $75,206 lower as compared to the net loss
in 1997 which was $815,278. This decrease in net loss was mainly attributable to
the decrease in consulting costs in 1998 as compared to 1997.

LIQUIDITY AND CAPITAL RESOURCES

    The following is a summary of the Company's cash flows:

<TABLE>
<CAPTION>
                                               1999         1998        1997
                                            -----------   ---------   ---------
<S>                                         <C>           <C>         <C>
Operating.................................  $(3,867,494)  $(510,847)  $(546,515)
Investing.................................     (844,002)     (3,607)     (8,570)
Financing.................................  $ 8,246,064   $ 555,732   $ 458,699
</TABLE>

    Cash used in operations totaled $3,867,494 in 1999 as compared with $510,847
in 1998. The increase in cash used relates to the net loss sustained during the
year, plus working capital changes. At December 31, 1999, working capital
(current assets minus current liabilities) totaled $2,296,432.

    Cash used in operations totaled $546,515 for 1997, as compared with $510,847
1998. The company, which was classified as a company in the development stage
until 1998, has incurred significant and recurring operating losses since
inception, including $740,072 in 1998 and $815,278 in 1997. In addition, at
December 31, 1998, the Company had working capital (current assets minus current
liabilities) and stockholders' equity deficits of $22,147 and $6,671,
respectively, as compared to working capital and stockholders' equity surpluses
of $29,456 and 46,829 in 1997. The majority of the decrease in working capital
from 1997 to 1998 can be attributed to an increase in accrued expenses.

    Investing activities for the year ended December 31, 1999 included $225,090
of leasehold improvements related to the building-out of the new main office and
$79,182 of computer and software purchases. Also included in investing
activities is $510,411 of cash payments for website development costs related to
capitalized website development costs of $1,444,360. Investments in 1998 and
1997 were $3,607 and $8,570, respectively, for various computer and office
equipment.

    The Company's primary source of liquidity continues to be proceeds from the
sale of securities in private and preferred placements. A total of $5,025,903
was raised, after commissions and expenses of the offering, in 1999 through the
issuance of 3,375,000 common shares. A total of $3,210,604 was raised, after
commissions and expenses of the offering, in 1999 through the issuance of 31,863
shares of Series A preferred stock. These funds will be used to finance
continued operations, product development and marketing. Net proceeds from the
issuance of common stock in 1998 and 1997, net of issuance costs, were $558,762
and $458,699, respectively.

    On April 30, 1999, the Company entered into a Master Agreement of Terms and
Conditions for Lease with TLP Leasing Programs, Inc. (the "Master Agreement").
The Master Agreement provides the Company with a source of financing in the
amount of $400,000 with which to obtain certain equipment. As of December 31,
1999 the Company has utilized $257,787 of the lease line of credit.

    On August 20, 1999 the Company entered into a Master Equipment Lease
Agreement with DDI Leasing, Inc. that provided the Company with $74,679 of
financing to obtain additional equipment.

    The Company, based upon its current operating plan, anticipates that its
currently available funds will be sufficient to satisfy its anticipated needs
for working capital, capital expenditures and business expansion through 2000.
The Company's cash requirements depend upon many factors, including, but not

                                       25
<PAGE>
limited to, the Company's net cash flows from operations, the length of time it
may take for the Company to develop a market for its products or services, the
market acceptance of these products or services and the response of competitors
who may develop competing products or services at lower costs. The Company may
require additional funding over the next twelve months. To the extent that the
Company is unable to raise additional financing, the Company may be required to
eliminate current and planned software development programs and other operating
expenses. There can be no assurance that the Company would be able to secure
additional funding sources, or that financing would be made available on terms
favorable to the Company. The failure to acquire additional funding when
required could have a material adverse effect on the Company.

    The Company plans to continue to develop, improve and enhance its product
offerings as part of its continuous plan for research and development.

ITEM 7. FINANCIAL STATEMENTS.

    The Financial Statements set forth on pages F-1 to F-19 of this Report are
incorporated herein by reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
  DISCLOSURE.

    The Company retained the services of new principal independent auditors
during the past year. Comiskey & Company, P.C. ("Comiskey") were previously the
principal accountants to audit the financial statements of the Company. On
January 7, 2000, that firm's appointment as principal auditors was terminated
and the firm of Deloitte & Touche LLP was engaged as principal auditors. The
decision to change auditors was recommended by the Audit Committee of the
Company's Board of Directors and approved by the Board.

    The Company delivered to Comisky a copy of its disclosure related to the
change in auditors in connection with its Report on Form 8-K. Comiskey's
response letter, which stated that it did not disagree with the Company's
statement, was filed with such Report on Form 8-K.

    The Company engaged Deloitte & Touche LLP as its new independent auditors
effective January 7, 2000. During the two most recent fiscal years and through
January 7, 2000, the Company has not consulted with Deloitte & Touche LLP
concerning the Company's financial statements, including the application of
accounting principles to a specified transaction (proposed or completed) or the
type of audit opinion that might be rendered on the Company's financial
statements or any matter that was either the subject of a "disagreement" or
"reportable event" (as such terms are defined in Item 304 of Regulation S-B)
with the previous independent accountants. During the Company's two most recent
fiscal years, and during the subsequent interim period, no "reportable events"
(as described in Item 304 (a)(1)(iv) of Regulation S-B) have occurred.

                                       26
<PAGE>
                                    PART III

    ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

    The information contained under the caption "Executive Compensation "in the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission prior to April 29,
2000, is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION.

    The information contained under the caption "Executive Compensation "in the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission prior to April 29,
2000, is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

    The information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for the 2000
Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission prior to April 29, 2000, is incorporated herein by
reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    The information contained under the caption "Certain Relationships and
Related Transactions" in the Company's Proxy Statement for the 2000 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission prior to April 29, 2000, is incorporated herein by reference.

ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.

    (a) The following documents are filed as a part of this Form 10-KSB:

       Consolidated Financial Statements of SoftLock.com, Inc.:

       Independent Auditors' Report

       Consolidated Balance Sheets--December 31, 1999 and 1998 (Restated)

       Consolidated Statements of Operations--Years ended December 31, 1999,
       1998 (Restated) and 1997

       Consolidated Statements of Stockholders' Equity--Years ended
       December 31, 1999, 1998 (Restated) and 1997

       Consolidated Statements of Cash Flows--Years ended December 31, 1999,
       1998 (Restated) and 1997

       Notes to Consolidated Financial Statements--December 31, 1999, 1998
       (Restated) and 1997

    Exhibits required to be filed are listed below and, except where
incorporated by reference, immediately follow the Financial Statements.

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------   ------------------------------------------------------------
<C>                     <S>

         2.1            Plan and Agreement of Reorganization among Fieldcrest Corp.,
                        SoftLock Services, Inc. and Jonathan Schull, dated May 22,
                        1998 (incorporated by reference to Exhibit 2.1 to the
                        Company's Annual Report on Form 10-KSB for the fiscal year
                        ended March 31, 1998.)
</TABLE>

                                       27
<PAGE>
<TABLE>
<C>                     <S>
         3.3            Amended and Restated Certificate of Incorporation
                        (incorporated by reference to Exhibit 3(i) to the
                        Registrant's Quarterly Report for the quarter ended
                        June 30, 1999.)

         3.4            Amended and Restated Bylaws (incorporated by reference to
                        Exhibit 3(ii) to the Registrant's Quarterly Report for the
                        quarter ended June 30, 1999.)

         3.5            Certificate of Designation of Powers, Preferences and Rights
                        of the Series A Preferred Stock (incorporated by reference
                        to Exhibit 99.4 of the Company's Current Report on Form 8-K
                        dated as of December 30, 1999).

         3.6            Amendment No. 1 to Certificate of Designation for Series A
                        Preferred Stock filed with the Delaware Secretary of State
                        as of January 13, 2000 (incorporated by reference to
                        Exhibit 99.2 of the Company's Current Report on Form 8-K
                        dated as of February 10, 2000).

         3.7            The Company's Certificate of Correction to Certificate of
                        Designation of Powers, Preferences and Rights of the
                        Series B Preferred Stock, (incorporated by reference to
                        Exhibit 99.5 of the Company's Current Report on Form 8-K
                        dated February 10, 2000).

        10.1            Employment Agreement, dated July 27, 1998, between SoftLock
                        Services, Inc. and Jonathan Schull (incorporated by
                        reference to Exhibit 10.1 to the Registrant's Current Report
                        on Form 8-K, dated July 28, 1998.)

        10.2            Employment Agreement, dated September 2, 1998, between
                        SoftLock Services, Inc. and Keith Loris (incorporated by
                        reference to Exhibit 10.2 to the Registrant's Annual Report
                        on Form 10-KSB for the fiscal year ended December 31, 1998).

        10.3            1998 Stock Option Plan (incorporated by reference to
                        Exhibit 10.3 to the Registrant's Annual Report on
                        Form 10-KSB for the fiscal year ended December 31, 1998).

        10.4            Lease, dated March 4, 1999, between SoftLock.com, Inc. and
                        Wellesley/Rosewood Maynard Mills Limited Partnership
                        (incorporated by reference to Exhibit 10.4 to the
                        Registrant's Annual Report on Form 10-KSB for the fiscal
                        year ended December 31, 1998).
</TABLE>

                                       28
<PAGE>
<TABLE>
<C>                     <S>
        10.5            Stock Option, dated October 25, 1996, granted by SoftLock
                        Services, Inc. to Maurice R. LaFlamme (incorporated by
                        reference to Exhibit 10.5 to the Registrant's Annual Report
                        on Form 10-KSB for the fiscal year ended December 31, 1998).

        10.6            Series A Preferred Stock Purchase Agreement by and among the
                        Purchasers, SoftLock.com, Inc. and SoftLock Services,
                        (incorporated by reference to Exhibit 99.3 of the Company's
                        Current Report on Form 8-K dated as of December 30, 1999).

        10.7            Supplement to Series A Preferred Stock Purchase Agreement
                        (incorporated by reference to Exhibit 99.5 of the Company's
                        Current Report on Form 8-K dated as of December 30, 1999).

        10.8            Supplement to Series A Preferred Stock Purchase Agreement
                        (incorporated by reference to Exhibit 99.6 of the Company's
                        Current Report on Form 8-K dated as of February 10, 2000).

        10.9            Amended and Restated Shareholders' and Rights Agreement
                        (incorporated by reference to Exhibit 99.3 of the Company's
                        Current Report on Form 8-K dated February 10, 2000).

        10.10           Series B Preferred Stock and Warrant Purchase Agreement by
                        and among the purchasers listed on the Schedule of
                        Purchasers, SoftLock.com, Inc. and SoftLock Services, Inc.
                        (incorporated by reference to Exhibit 99.4 of the Company's
                        Current Report on Form 8-K dated February 10, 2000).

        10.11           Form of Warrant exercisable under certain conditions on
                        August 15, 2000 (incorporated by reference to Exhibit 99.7
                        of the Company's Current Report on Form 8-K dated
                        February 10, 2000).

        10.12           Form of Warrant exercisable under certain conditions on
                        November 15, 2000 (incorporated by reference to
                        Exhibit 99.8 of the Company's Current Report on Form 8-K
                        dated February 10, 2000).

        21              Subsidiaries of the Company

        27              Financial Data Schedule
</TABLE>

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

(b) During the quarter ended December 31, 1999, the Company did not file any
    Current Reports on Form 8-K.

(c) Required exhibits are attached hereto or are incorporated by reference and
    are listed in Item 13(a)(3) of this Report.

(d) Required financial statements are attached hereto and are listed in Item 13
    of this Report.

                                       29
<PAGE>
                                   SIGNATURES

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

<TABLE>
<S>                                            <C>
Date: March 30, 2000                           SOFTLOCK.COM, INC.

                                               By:/s/ DOUGLAS R. JOHNSON
                                               --------------------------------------------
                                               Douglas R. Johnson,
                                               EXECUTIVE VICE PRESIDENT AND
                                               CHIEF FINANCIAL OFFICER
</TABLE>

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

<TABLE>
<CAPTION>
                     SIGNATURES                                    TITLE                    DATE
                     ----------                                    -----                    ----
<S>                                                    <C>                             <C>
/s/ KEITH LORIS                                        Chief Executive Officer,        March 30, 2000
-------------------------------------------            President and Director
Keith Loris

/s/ DOUGLAS R. JOHNSON                                 Executive Vice President and    March 30, 2000
-------------------------------------------            Chief Financial Officer
Douglas R. Johnson                                     (Principal Financial and
                                                       Accounting Officer)

/s/ JONATHAN SCHULL                                    Chief Technology Officer and    March 30, 2000
-------------------------------------------            Director
Jonathan Schull

/s/ FRANCIS J. KNOTT                                   Chairman of the Board and       March 30, 2000
-------------------------------------------            Director
Francis J. Knott

/s/ SCOTT GRIFFITH                                     Director                        March 30, 2000
-------------------------------------------
Scott Griffith

/s/ RICHARD N. GOLD                                    Director                        March 30, 2000
-------------------------------------------
Richard N. Gold

/s/ ADAM RIN                                           Director                        March 30, 2000
-------------------------------------------
Adam Rin

/s/ GEOFFREY DE LESSEPS                                Director                        March 30, 2000
-------------------------------------------
Geoffrey De Lesseps

/s/ LEIGH MICHL                                        Director                        March 30, 2000
-------------------------------------------
Leigh Michl
</TABLE>

                                       30
<PAGE>

                             FINANCIAL STATEMENTS

     As required under Item 7. Financial Statements, the consolidated
financial statements of the Company are provided in this separate section.
The consolidated financial statements included in this section are as follows:

                                    Contents
<TABLE>
<CAPTION>

<S>                                                                  <C>
Independent Auditors' Report...............................................  F-1

Consolidated Balance Sheets................................................  F-2

Consolidated Statements of Operations......................................  F-3

Consolidated Statements of Changes in Stockholders' Equity (Deficit).......  F-4

Consolidated Statements of Cash Flows......................................  F-5

Notes to Consolidated Financial Statements.........................  F-6 to F-19
</TABLE>


<PAGE>


INDEPENDENT AUDITORS' REPORT


To Management and the Board of Directors
SoftLock.com, Inc.
Maynard, Massachusetts

We have audited the accompanying consolidated balance sheets of SoftLock.com,
Inc. and subsidiary (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders'
equity (deficit), and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 9, the accompanying 1998 financial statements have been
restated.


Boston, Massachusetts
March 13, 2000


                                       F-1
<PAGE>


<TABLE>
<CAPTION>

SOFTLOCK.COM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
-------------------------------------------------------------------------------------------------------------
                                                                                     1999            1998
ASSETS                                                                                          (AS RESTATED,
                                                                                                  SEE NOTE 9)
<S>                                                                               <C>               <C>
CURRENT ASSETS:
  Cash                                                                            $3,695,409        $160,841
  Accounts receivable                                                                  5,979           4,619
  Prepaid expenses and other current assets                                          274,831            --
                                                                                  ----------        --------

           Total current assets                                                    3,976,219         165,460

PROPERTY AND EQUIPMENT - Net                                                         620,769          16,324

WEBSITE AND PRODUCT DEVELOPMENT COSTS                                              1,444,360            --

SECURITY DEPOSITS                                                                     31,888           1,058

PREPAID ROYALTIES                                                                     65,579            --
                                                                                  ----------        --------

TOTAL ASSETS                                                                      $6,138,815        $182,842
                                                                                  ==========        ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable - website and product development                                $291,131              --
  Other accounts payable                                                             311,922         106,114
  Accrued expenses - website and product development                                 489,065              --
  Other accrued expenses                                                              91,058             781
  Accrued compensation and benefits                                                  383,621          77,694
  Current portion of obligations under capital leases                                112,990           3,018
                                                                                  ----------        --------

           Total current liabilities                                               1,679,787         187,607
                                                                                  ----------        --------

OBLIGATIONS UNDER CAPITAL LEASES, Less current portion                               227,981           1,906
                                                                                  ----------        --------

OTHER LONG-TERM LIABILITIES                                                           56,294            --
                                                                                  ----------        --------

COMMITMENTS AND CONTINGENCIES (Note 7)

REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK
  (Aggregate liquidation preference of $3,250,000 in 1999, Note 4)                 3,210,604            --
                                                                                  ----------        --------
STOCKHOLDERS' EQUITY (DEFICIENCY):
  Common stock, $0.01 par value; 50,000,000 shares authorized; 12,819,582 and
    7,955,580 shares issued and outstanding at
    December 31, 1999 and 1998, respectively                                         128,195          79,556
  Deferred compensation                                                           (2,834,952)       (475,711)
  Deferred royalties                                                                (639,866)           --
  Additional paid-in capital                                                      13,301,296       2,781,053
  Accumulated deficit                                                             (8,721,644)     (2,122,689)
  Notes receivable from officer and directors                                       (268,880)       (268,880)
                                                                                  ----------       ----------

           Total stockholders' equity (deficiency)                                   964,149          (6,671)
                                                                                  ----------        --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                        $6,138,815        $182,842
                                                                                  ==========        ========
</TABLE>

See notes to consolidated financial statements.


                                      F-2
<PAGE>


<TABLE>
<CAPTION>

SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------------------------------------------------

                                                                                    1999             1998             1997
                                                                                                (AS RESTATED)
<S>                                                                                <C>            <C>             <C>
NET REVENUES                                                                       $83,790        $109,402        $110,774

COST OF REVENUES                                                                    21,902          23,166          20,346
                                                                                    ------          ------          ------

GROSS PROFIT                                                                        61,888          86,236          90,428
                                                                                    ------          ------          ------

OPERATING EXPENSES:
  Research and development (including noncash compensation
    and consulting expenses of $550,107, $9,861 and $468, respectively)          1,823,141         117,899         130,373
  Selling and marketing (including noncash compensation
    and consulting expenses of $278,582, $12,812 and $1,000, respectively)       1,181,155         168,788         162,588
  General and administrative (including noncash compensation and
    consulting expenses of $1,941,466, $198,920 and $244,073, respectively)      3,700,796         554,064         631,862
                                                                                 ---------         -------         -------

           Total operating expenses                                              6,705,092         840,751         924,823
                                                                                 ---------         -------         -------

OPERATING LOSS                                                                  (6,643,204)       (754,515)       (834,395)
                                                                                -----------       ---------       ---------

OTHER INCOME (EXPENSE):
  Interest expense                                                                 (23,472)         (9,733)           (833)
  Interest income                                                                   68,283          24,083          19,859
  Other income (expense)                                                              (562)             93              91
                                                                                    ------          ------          ------

           Total other income                                                       44,249          14,443          19,117
                                                                                    ------          ------          ------

LOSS BEFORE INCOME TAX EXPENSE (BENEFIT)                                        (6,598,955)       (740,072)       (815,278)

INCOME TAX EXPENSE (BENEFIT)                                                          --              --              --
                                                                                    ------          ------          ------

NET LOSS                                                                        (6,598,955)       (740,072)       (815,278)
                                                                                -----------       ---------       ----------

BENEFICIAL CONVERSION FEATURE ON
  CONVERTIBLE PREFERRED STOCK                                                   (3,210,604)           --              --
                                                                                -----------       ---------       ----------
NET LOSS ATTRIBUTABLE TO COMMON
  STOCKHOLDERS                                                                 $(9,809,559)      $(740,072)      $(815,278)
                                                                               ===========       =========       =========

BASIC AND DILUTED NET LOSS PER COMMON
  SHARE                                                                             $(0.94)         $(0.10)         $(0.14)
                                                                                    ======          ======          ======

BASIC AND DILUTED WEIGHTED-AVERAGE SHARES
  OUTSTANDING                                                                   10,400,995       7,594,513       5,853,337
                                                                                ==========       =========       =========
</TABLE>

See notes to consolidated financial statements.


                                      F-3
<PAGE>

<TABLE>
<CAPTION>
SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
-----------------------------------------------------------------------------------------------------------------------------------

                                                                                                                    Deferred
                                                                                                  Additional      Compensation
                                                                           Common Stock            Paid-in            and
                                                                       Shares         Amount       Capital          Expense
<S>                                                                 <C>             <C>           <C>                <C>
BALANCE, JANUARY 1, 1997                                             5,661,342      $ 56,614      $ 954,541          $ --

  Issuance of common stock for cash, net of
    issuance costs                                                     748,269         7,482        451,217            --
  Issuance of common stock in exchange for
    notes payable                                                        5,952            60         20,774            --
  Issuance of common stock in exchange for services                     39,605           396         44,858            --
  Grant of options for services                                           --            --          162,384            --
  Net loss                                                                --            --             --              --
                                                                     ----------      --------      ---------       ---------

BALANCE, DECEMBER 31, 1997                                           6,455,168        64,552      1,633,774            --

  Issuance of common stock for cash, net of
    issuance costs                                                     702,099         7,021        551,741            --
  Issuance of common stock in reverse acquisition                      788,580         7,886        (18,216)           --
  Debt converted to common stock                                         9,733            97         16,936            --
  Deferred compensation and expense - option
    grants (as restated)                                                  --            --          596,818        (596,818)
  Amortization of deferred compensation (as restated)                     --            --             --           121,107
  Net loss (as restated)                                                  --            --             --              --
                                                                     ----------      --------      ---------       ---------

BALANCE, DECEMBER 31, 1998 (As restated, see Note    )               7,955,580        79,556      2,781,053        (475,711)

  Issuance of common stock for cash, net of issuance costs           3,375,000        33,750      4,992,153            --
  Issuance of common stock for cashless exercise of                    919,333         9,193         (9,193)           --
  Issuance of common stock for exercise of options                     211,882         2,118         34,811            --
  Issuance of common stock in exchange for services                    133,273         1,333        878,113            --
  Deferred compensation and consulting expenses - option
    grants                                                                --            --        3,821,159      (3,821,159)
  Amortization of deferred compensation and expenses                      --            --             --         1,461,918
  Beneficial conversion feature related to redeemable
    convertible preferred stock                                           --            --       (3,210,604)           --
  Accretion of Series A preferred beneficial conversion feAture           --            --        3,210,604            --
  Stock issued for prepaid royalties (Note 6)                          224,514         2,245        825,650            --
  Change in fair value of prepaid royalties (Note 6)                      --            --          (22,450)           --
  Net loss                                                                --            --             --              --
                                                                     ----------      --------      ---------       ---------

BALANCE, DECEMBER 31, 1999                                          12,819,582      $128,195    $13,301,296     $(2,834,952)
                                                                    ==========      ========    ===========     ===========

</TABLE>

See notes to consolidated financial statements.
<TABLE>
<CAPTION>
                                                                                                    Notes
                                                                                                  Receivable
                                                                                                     From
                                                                                                   Officer
                                                                     Deferred   Accumulated          and
                                                                     Royalty      Deficit         Directors          Total
<S>                                                                    <C>        <C>             <C>              <C>
BALANCE, JANUARY 1, 1997                                               $--        $(567,339)      $(268,880)      $ 174,936

  Issuance of common stock for cash, net of
    issuance costs                                                      --             --              --           458,699
  Issuance of common stock in exchange for
    notes payable                                                       --             --              --            20,834
  Issuance of common stock in exchange for services                     --             --              --            45,254
  Grant of options for services                                         --             --              --           162,384
  Net loss                                                              --         (815,278)           --          (815,278)
                                                                   ----------   ------------      ----------     -----------

BALANCE, DECEMBER 31, 1997                                              --       (1,382,617)       (268,880)         46,829

  Issuance of common stock for cash, net of
    issuance costs                                                      --             --              --           558,762
  Issuance of common stock in reverse acquisition                       --             --              --           (10,330)
  Debt converted to common stock                                        --             --              --            17,033
  Deferred compensation and expense - option
    grants (as restated)                                                --             --              --              --
  Amortization of deferred compensation (as restated)                     --            --             --           121,107
  Net loss (as restated)                                                --         (740,072)           --          (740,072)
                                                                   ----------   ------------      ----------     -----------

BALANCE, DECEMBER 31, 1998 (As restated, see Note   )                   --       (2,122,689)       (268,880)         (6,671)

  Issuance of common stock for cash, net of issuance costs              --             --              --         5,025,903
  Issuance of common stock for cashless exercise of                     --             --              --              --
  Issuance of common stock for exercise of options                      --             --              --            36,929
  Issuance of common stock in exchange for services                     --             --              --           879,446
  Deferred compensation and consulting expenses - option
    grants                                                              --             --              --              --
  Amortization of deferred compensation and expenses                    --             --              --         1,461,918
  Beneficial conversion feature related to redeemable
    convertible preferred stock                                         --             --              --        (3,210,604)
  Accretion of Series A preferred beneficial conversion feAture         --             --              --         3,210,604
  Stock issued for prepaid royalties (Note 6)                       (662,316)          --              --           165,579
  Change in fair value of prepaid royalties (Note 6)                  22,450           --              --              --
  Net loss                                                              --       (6,598,955)           --        (6,598,955)
                                                                   ----------   ------------      ----------     -----------

BALANCE, DECEMBER 31, 1999                                         $(639,866)   $(8,721,644)      $(268,880)       $964,149
                                                                   ==========   ============      ==========     ===========
</TABLE>

See notes to consolidated financial statements.


                                      F-4
<PAGE>

<TABLE>
<CAPTION>

SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
-------------------------------------------------------------------------------------------------------------

                                                                      1999            1998           1997
                                                                                 (AS RESTATED)

<S>                                                               <C>              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                        $(6,598,955)     $(740,072)     $(815,278)
  Adjustments to reconcile net loss to net cash used for
    operating activities:
      Depreciation                                                     61,202          8,281         12,880
      Noncash compensation and consulting expense                   2,187,610        121,107        228,472
      Noncash interest charges relating to equity issuances              --            9,733           --
      Loss on sale of property and equipment                              533           --             --
      Deferred rent expense                                            56,294           --             --
      Increase (decrease) in cash from:
        Accounts receivable                                            (1,359)          --             --
        Prepaid expenses and other current assets                    (174,831)           205            414
        Accounts payable                                              205,808         39,925         12,471
        Accrued compensation and benefits                             305,927         49,193         14,526
        Other accrued expenses                                         90,277            781           --
                                                                  -----------      ---------      ---------

           Net cash used for operating activities                  (3,867,494)      (510,847)      (546,515)
                                                                  -----------      ----------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Payment of security deposits                                        (30,830)          --             --
  Website development costs                                          (510,411)          --             --
  Purchases of property and equipment                                (304,272)        (3,607)        (8,570)
  Proceeds from sale of property and equipment                          1,511           --             --
                                                                  -----------      ----------      ---------

           Net cash used for investing activities                    (844,002)        (3,607)        (8,570)
                                                                  -----------      ----------      ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on long-term debt                                (27,372)          --             --
  Proceeds from issuance of note payable                              500,000           --             --
  Payments on note payable                                           (500,000)          --             --
  Net Proceeds from issuance of Series A preferred, net of
    issuance costs                                                  3,210,604           --             --
  Proceeds from issuance of common stock, net of issuance costs     5,025,903        558,762        458,699
  Proceeds from exercise of stock options                              36,929           --             --
  Deficit assumed in reverse acquisition                                 --           (3,030)          --
                                                                  -----------      ----------      ---------

           Net cash provided by financing activities                8,246,064        555,732        458,699
                                                                  -----------      ----------      ---------

NET INCREASE (DECREASE) IN CASH                                     3,534,568         41,278        (96,386)

CASH, BEGINNING OF YEAR                                               160,841        119,563        215,949
                                                                  -----------      ----------      ---------

CASH, END OF YEAR                                                  $3,695,409       $160,841       $119,563
                                                                   ==========       ========       ========

                                                                                                  (Continued)
</TABLE>



                                      F-5
<PAGE>


<TABLE>
<CAPTION>
SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------------------------------------------
                                                           1999        1998       1997
                                                                  (AS RESTATED)
<S>                                                      <C>           <C>        <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
    Cash paid during the year for interest               $ 10,990       $440       $833
                                                         ========       ====       ====

    Cash paid during the year for taxes                  $  2,196       $513       $794
                                                         ========       ====       ====

SUMMARY OF NONCASH FINANCING AND
  INVESTING ACTIVITIES:
    Payable and accrued website development costs        $780,196   $   --     $   --
                                                         ========      ====       ====

    Issuance of common stock for web development costs   $153,753   $   --     $   --
                                                         ========   ========   ========

    Issuance of common stock for prepaid royalties       $805,450   $   --     $   --
                                                         ========   ========   ========

    Capital lease obligation - property and equipment    $363,419     $4,924   $   --
                                                         ========   ========   ========

    Issuance of common stock for services and notes      $725,693    $14,058    $66,088
                                                         ========   ========   ========

    Issuance of common stock options in exchange for
      services                                           $   --     $   --     $162,384
                                                         ========   ========   ========
</TABLE>

See notes to consolidated financial statements.
                                                                     (Concluded)


                                      F-6
<PAGE>


SOFTLOCK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
-------------------------------------------------------------------------------


1.   DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
     SIGNIFICANT ACCOUNTING POLICIES

     DESCRIPTION OF THE BUSINESS - SoftLock.com, Inc. (the "Company") provides
     a channel for the distribution and sale of documents over the
     Internet. The Company's software tools and services allow publishers to
     freely distribute their content on the Internet. When end-users wish to
     view the complete documents, they must purchase a password from the
     Company's transaction processing system.

     The Company was incorporated in Delaware under the name Fieldcrest Corp. As
     is more fully described below, the Company effected various stock splits
     and a Plan and Agreement of Reorganization with SoftLock Services, Inc. All
     share and per share amounts have been restated to reflect these
     transactions.

     The accompanying financial statements include all of the accounts of the
     Company and its wholly owned subsidiary, SoftLock Services, Inc. All
     intercompany activity has been eliminated.

     BASIS OF PRESENTATION - As reflected in the consolidated financial
     statements, during the years ended December 31, 1999, 1998 and 1997, the
     Company incurred net losses of $6,598,955, $740,072 and $815,278,
     respectively, and management expects that the Company will continue to
     incur losses in the future. As a result of operating losses through
     December 31, 1999, the Company had an accumulated deficit of $8,721,644.
     Through December 31, 1999, the Company had funded its operating losses
     primarily from the sale of preferred and common stock amounting to
     approximately $8,245,000 and debt financing approximating $500,000.

     The Company is actively seeking additional financing to fund operating
     losses and significant investments in the business, including the hiring of
     additional personnel. As disclosed in Note 8, subsequent to year end the
     Company has raised approximately $9,420,000 through the issuance of common
     stock and Series A and B preferred stock. These funds will be used to fund
     technology development and deployment costs, marketing and distribution
     costs and operating expenses. Management believes that the existing cash
     balances will be sufficient to finance the Company's operations and other
     cash needs through at least December 31, 2000. However, there can be no
     assurance that the Company will be successful in its efforts to raise
     additional financing on favorable terms after December 31, 2000 or that
     management will achieve their financial projections.

     PLAN AND AGREEMENT OF REORGANIZATION - As of July 28, 1998, the Company
     consummated a Plan and Agreement of Reorganization (the "Agreement")
     whereby it acquired all of the issued and outstanding shares of common
     stock of SoftLock Services, Inc. in exchange for 7,097,266 shares of the
     Company's "restricted" common stock. As a result, SoftLock Services, Inc.
     became the wholly owned subsidiary of the Company, and the former
     shareholders of SoftLock Services, Inc. became 90% shareholders in the
     Company. Existing options of SoftLock Services, Inc. were exchanged for
     options in the Company for identical rights and in the same ratio as the
     exchange of common shares.

     The transaction has been accounted for as a reverse acquisition with
     SoftLock Services, Inc. as the accounting acquirer. The Company adopted the
     fiscal year end of December 31, which is the reporting year of the
     accounting acquirer.


                                      F-7
<PAGE>


1.   DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
     SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     STOCK SPLITS - As of July 28, 1998, and in connection with the Agreement
     described above, SoftLock Services, Inc. exchanged one share of stock for
     224.7348 shares of SoftLock.com, Inc. and, on August 10, 1998, effected a
     50-for-1 reverse stock split. All share and per share amounts have been
     restated to reflect these transactions retroactively to inception.

     USE OF ESTIMATES - The preparation of the Company's financial statements in
     conformity with generally accepted accounting principles requires the
     Company's management to make estimates and assumptions that affect the
     amounts reported in these financial statements and accompanying notes.
     Actual results could differ from those estimates.

     CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
     investments with original maturities of three months or less when purchased
     to be cash equivalents.

     PROPERTY AND EQUIPMENT - Purchased property and equipment is recorded at
     cost. Capital lease property and equipment is recorded at the lesser of
     cost or the present value of the minimum lease payments required.
     Expenditures for renewals and improvements are capitalized, while
     expenditures for repairs and maintenance are charged to operations as
     incurred. Depreciation and amortization of property and equipment are
     computed using the straight-line method over the estimated useful lives of
     the related assets (three to seven years) and over the terms of the related
     leases (two to three years). Leasehold improvements are being amortized
     over the lesser of the lease term or their useful lives.

     IMPAIRMENT OF LONG-LIVED ASSETS - The Company evaluates its long-lived
     assets for impairment whenever events or changes in circumstances indicate
     that the carrying amount of such assets may not be recoverable.
     Recoverability of assets to be held and used is measured by a comparison of
     the carrying amount of an asset to the future undiscounted cash flows
     expected to be generated by the asset. If such assets are considered to be
     impaired, the impairment to be recognized is measured by the amount by
     which the carrying amount of the asset exceeds the fair value of the asset.
     Assets to be disposed of are reported at the lower of the carrying amount
     or fair value, less costs to sell.

     WEBSITE AND PRODUCT DEVELOPMENT COSTS - Website and product development
     costs include the costs to develop, enhance, manage and monitor the
     Company's Cybersales solution and online operations. Such costs are
     considered to relate to software developed for internal use.

     In March 1998, the American Institute of Certified Public Accountants
     issued Statement of Position ("SOP") No. 98-1, "Accounting for Costs of
     Computer Software Developed or Obtained for Internal Use," which provides
     guidance on accounting for the costs of computer software developed or
     obtained for internal use. In accordance with its provisions, the Company
     adopted the SOP effective January 1, 1999. In accordance with the SOP,
     development costs incurred during 1999 have been capitalized and all
     related design costs have been expensed as incurred. Upon adoption,
     development costs incurred prior to the initial application of the SOP can
     not be adjusted to reflect the capitalization of such costs. Amortization
     of the capitalized costs of approximately $1,444,400 is computed using the
     straight-line method over the estimated useful life of the asset (three
     years).

     REVENUE RECOGNITION - Revenue from product sales is recognized when
     software tools and passwords are provided to customers. The Company also
     enters into license agreements for certain of its products. Revenues from
     such agreements are recognized based on the terms of the agreement. Revenue
     from the Company's online sales are recognized based on the net amount due
     the Company on sales made by affiliates at the time the Company receives
     authorization for the sale and payment by the customer.


                                      F-8
<PAGE>


1.   DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
     SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     COMPREHENSIVE INCOME (LOSS) - The Company does not have any items of
     comprehensive income (loss) other than the net losses as reported.

     INCOME TAXES - Pursuant to Statement of Financial Accounting Standards
     ("SFAS") No. 109, "Accounting for Income Taxes," income taxes are provided
     for the tax effects of transactions reported in the financial statements
     and consist of taxes currently due plus deferred taxes. Deferred tax assets
     and liabilities are recognized for the expected future tax consequences of
     events that have been included in the Company's financial statements or tax
     returns. Deferred tax assets and liabilities are determined based on the
     difference between the financial statement carrying amounts and tax bases
     of existing assets and liabilities, using enacted tax rates in effect in
     the years in which the differences are expected to reverse.

     ADVERTISING AND MARKETING - Advertising and marketing costs are charged to
     operations in the year incurred. Total advertising and marketing costs were
     $1,181,155, $168,788 and $162,588 in 1999, 1998 and 1997, respectively.

     NET LOSS PER COMMON SHARE - Basic loss per common share is computed using
     the weighted-average number of common shares outstanding. Shares issued in
     the reverse acquisition described above have been treated as outstanding
     since inception. Diluted loss per common share reflects the potential
     dilution if common equivalent shares outstanding (common stock options,
     preferred shares, warrants) were exercised or converted into common stock
     unless the effects are antidilutive. All common stock equivalents (options,
     warrants and preferred stock) that were outstanding during 1999, 1998 and
     1997 were not included in the computation of earnings per share due to a
     net loss on all three years presented, and, therefore, their effect would
     be antidilutive.

     RESEARCH AND DEVELOPMENT - Research and development costs are expensed as
     incurred. Such expenses amounted to $1,823,141, $117,899 and $130,373 in
     fiscal years 1999, 1998 and 1997, respectively.

     FAIR VALUES OF FINANCIAL INSTRUMENTS - Unless otherwise indicated, the fair
     values of all reported assets and liabilities which represent financial
     instruments (none of which are held for trading purposes) approximate the
     carrying values of such instruments due to the short-term nature of such
     instruments.

     CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS - The Company's revenues
     are derived from various customers who generally are not required to
     provide collateral for amounts owed to the Company. The Company's customers
     are dispersed over a wide geographic area.

     Major customers accounted for the following percentages of the Company's
     revenues:

<TABLE>
<CAPTION>

                               1999              1998              1997
       <S>                      <C>               <C>               <C>
       Customer A               21%               22%               17%
       Customer B               18                --                --
</TABLE>

     No other customers accounted for more than 10% of revenues in any of the
     years presented.

     STOCK-BASED COMPENSATION - As permitted by SFAS No. 123, "Accounting for
     Stock-Based Compensation," the Company accounts for stock option grants
     using the intrinsic value method in accordance with Accounting Principles
     Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
     Accordingly, compensation expense related to employee options is recorded
     only if, on the grant date, the fair value of the underlying equity exceeds
     the option exercise price. SFAS No. 123 is used to account for nonemployee
     stock options.


                                      F-9
<PAGE>


1.   DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
     SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     SEGMENTS - In 1998, the Company adopted provisions of SFAS No. 131,
     "Disclosures About Segments of an Enterprise and Related Information." The
     standard requires the reporting of certain information about operating
     segments including the basis for the presentation and segment profit or
     loss. The Company currently operates as a single operating segment.

     RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD - In June of 1998, the
     Financial Accounting Standards Board (the "FASB") issued SFAS No. 133,
     "Accounting for Derivative Instruments and Hedging Activities," which was
     amended in June 1999 and is effective for fiscal years beginning after June
     15, 2000. The new standard requires that all companies record derivatives
     on the balance sheet as assets or liabilities, measured at fair value.
     Gains or losses resulting from changes in the values of those derivatives
     are accounted for depending on the use of the derivative and whether it
     qualifies for hedge accounting. Management is currently assessing the
     impact of SFAS No. 133 on the financial statements of the Company. The
     Company will adopt this accounting standard on January 1, 2001, as
     required. At December 31, 1999, the Company did not have any derivative
     instruments.

     RECLASSIFICATIONS - Certain reclassifications have been made to the 1997
     and 1998 financial statements to conform to the 1999 presentation.

2.   PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following at December 31:

<TABLE>
<CAPTION>

                                                 1999                1998
       <S>                                     <C>                <C>
       Leasehold improvements                  $225,090           $    --
       Office equipment                         485,030              44,472
                                                -------              ------

       Total property and equipment             710,120              44,472
       Less accumulated depreciation            (89,351)            (28,148)
                                                -------             -------

       Property and equipment - net            $620,769             $16,324
                                               ========             =======
</TABLE>


      Included in property and equipment is certain equipment held under capital
      leases with a net carrying value of $340,971 and $4,924 as of December 31,
      1999 and 1998, respectively.

3.   COMMITMENTS

     In October 1999, the Company completed the relocation of its corporate
     office to Maynard, Massachusetts, from Rochester, New York. The Company
     leases approximately 15,000 square feet as its principal operating location
     under a seven-year operating lease agreement. The agreement provides for a
     yearly escalating, monthly rental of $7,448 for the first 12 months,
     $14,219 for months 13 through 24, and $21,114 for months 25 and forward.
     The Company is recording the expense on a straight-line basis over the
     entire life of the lease. The lease also requires the Company to pay
     certain incremental costs incurred by the lessor and shared costs of the
     property. Rent expense for each of the years ended December 31, 1999, 1998
     and 1997 totaled $95,943, $17,690 and $16,800, respectively.


                                      F-10
<PAGE>


3.    COMMITMENTS (CONTINUED)

      At December 31, 1999, the aggregate minimum rental payments due under
      noncancelable operating leases are as follows:
<TABLE>
      <S>                           <C>
      2000....................     $  113,375
      2001....................        194,152
      2002....................        253,667
      2003....................        253,370
      2004....................        253,370
      2005 and thereafter.....        443,398
                                     --------
      Total...................     $1,511,332
                                   ==========
</TABLE>

Minimum payments due under capitalized leases as of December 31, 1999 are as
follows:

<TABLE>
     <S>                                        <C>
     2000......................................  $ 146,032
     2001......................................    140,276
     2002......................................    108,188
     2003......................................      4,692
                                                 ---------
     Total.....................................    399,188
     Less amount representing interest.........     58,217
                                                 ---------
     Present value of minimum payments.........    340,971
     Less current portion......................    112,990
                                                 ---------
     Total long-term capital lease obligation..  $ 227,981
                                                 =========
</TABLE>

     The Company has an Employment Agreement (the "Agreement") with one officer
     of the Company. The Agreement provides for the following financial
     committments: (i) a minimum base salary of $160,000 per annum subject to
     an annual review by the Board of Directors; (ii) severance and provisions
     for the acceleration of options granted. The term of the Agreement shall be
     indefinite subject to the termination provisions of the Agreement.

4.   REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK

     In December 1999, the Company issued 31,863 shares of Series A preferred
     stock, $0.01 par value redeemable convertible preferred stock, in exchange
     for $3,210,604 (net of issuance costs of $39,396).

     On September 2, 1999, the Company entered into a nonbinding term sheet (the
     "Term Sheet") with SI Venture Associates, LLC ("SI Ventures"), in which SI
     Ventures agreed to acquire shares of the Company's Series A preferred stock
     for $1.25 million, provided that the Company could identify a second
     venture capital investor to contribute at least another $1.25 million. In
     connection with the Term Sheet, SI Ventures provided to the Company a
     $500,000 bridge loan (the "Bridge Loan"). The Series A preferred stock is
     convertible into shares of the Company's common stock. Series A
     shareholders have, among other rights, certain registration rights, rights
     of first refusal to participate in subsequent equity financings, the right
     to appoint one director to the Company's Board, voting rights on certain
     significant matters and redemption rights.


                                      F-11
<PAGE>


4.   REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK (CONTINUED)

     CONVERSION RIGHTS - Each share of Series A preferred stock is initially
     convertible into 100 shares of the Company's common stock, subject to
     certain antidilution adjustments described below, at any time at the
     holder's option at a conversion price of $1.02 per share of common stock.
     The Series A preferred stock will automatically convert into shares of the
     Company's common stock upon the earlier of (i) immediately prior to the
     consummation of an underwritten public offering with aggregate proceeds to
     the Company in excess of $20 million at a public offering price per share
     that is at least four times the then effective conversion price (a
     "Qualified Public Offering"), or (ii) at the election of the holders of
     two-thirds of the outstanding shares of the preferred stock. If the Company
     issues any equity securities or the right to purchase equity securities at
     a price below the conversion price then in effect (subject to certain
     exceptions), the conversion price will be reduced on the weighted-average
     basis.

     The Company allocated the entire net proceeds received from the issuance of
     the Series A preferred stock of $3,210,604 to the beneficial conversion
     feature on the issuance of Series A preferred stock. The beneficial
     conversion feature was calculated at the issuance date of the Series A
     preferred stock based on the difference between the conversion price of
     $1.02 per share and the estimated fair value of the common stock at that
     date. This amount, however, was limited to the proceeds received from
     issuing the beneficial convertible security. As the Series A preferred
     stock was immediately convertible, the Company also recorded accretion of
     $3,210,604 to additional paid-in capital.

     DIVIDEND RIGHTS - Holders of the preferred stock are entitled to receive,
     prior to any distribution to common shareholders, if and when and as
     declared by the Board out of legally available funds, quarterly dividends
     at a rate of $10.20 per preferred share per year. Unpaid dividends are
     cumulative but do not bear interest. However, if all the preferred stock is
     automatically converted into common stock as a result of a qualified public
     offering and the Company provides the purchasers with an opportunity to
     register their shares of common stock resulting from the conversion, all
     within two years of the date of closing, then no dividends are payable.

     VOTING AND REGISTRATION RIGHTS - Generally, holders of Series A preferred
     stock vote with the common shareholders as a single class on any matter
     submitted to the shareholders with the holders of the Series A preferred
     stock having that number of votes equal to the whole number of common
     shares into which each share of Series A preferred stock is then
     convertible. However, holders of the Series A preferred stock have the
     right to elect by majority vote one Class III member of the Board of
     Directors subject to the provisions of the Shareholders' Agreement. The
     Series A preferred stockholders also have certain registration rights.

     REDEMPTION RIGHTS - The Company is required to redeem the Series A
     preferred stock for $102 per share plus any accrued but unpaid dividends at
     the election of a majority of the Series A preferred stock in two equal
     annual installments beginning on the fourth anniversary of the closing date
     of the Series A preferred stock subject to the availability of legally
     sufficient funds.

     LIQUIDATION PREFERENCE - Upon any liquidation, dissolution, winding up or
     any merger, consolidation, sale of assets, reorganization or other
     transaction in which control of the Company is transferred, each holder of
     Series A preferred stock is entitled to receive, prior to the common
     shareholders, $102 per share plus accrued but unpaid dividends. However, if
     the preferred shareholder would receive higher value in the liquidation
     transaction if the shares were converted into common stock, then the
     holders of the Series A preferred stock will receive the higher amount
     along with the common shareholders.

     FURTHER ADJUSTMENTS - The dividend rate, redemption price, liquidation
     preference and conversion price are subject to adjustment for stock splits
     and other stock distributions.


                                      F-12
<PAGE>


5.   INCOME TAXES

     The components of the provision (benefit) for income taxes consist of the
     following for the year ended December 31:
<TABLE>
<CAPTION>

                                                 1999           1998           1997
     <S>                                   <C>            <C>            <C>
     Current income taxes paid or payable   $      --      $      --      $      --
     Federal deferred                         1,809,500        210,700        298,200
     State deferred                             358,400         37,200         49,800
     Increase in valuation allowance         (2,167,900)      (247,900)      (348,000)
                                            -----------    -----------    -----------

     Provision (benefit) for taxes          $      --      $      --      $      --
                                            ===========    ===========    ===========
</TABLE>

     A reconciliation of the statutory federal rate to the effective rate for
     all years is as follows:

<TABLE>

      <S>                                         <C>
      Statutory federal rate                       34%
      State, net of federal benefit                 6
      Valuation allowance                         (40)
                                                 -----

      Effective rate                              -- %
                                                 =====
</TABLE>

     Deferred income taxes are provided on temporary timing differences between
     financial statement and income tax reporting. The components of deferred
     income tax assets and liabilities are as follows for the years ended
     December 31:

<TABLE>
<CAPTION>
                                              1999          1998            1997
     <S>                                  <C>            <C>            <C>
     Total deferred tax liabilities     $      --      $      --      $      --
     Deferred tax assets:
     Deferred compensation                     --           60,700         60,700
     Property and equipment                  14,000          4,500          4,300
     Net operating loss carryforwards     2,757,200        702,400        316,000
     Research and development credits        83,300           --             --
     Investment tax credit                   11,800           --             --
     Other                                   10,800           --             --
                                         ----------       --------       --------
     Total deferred tax assets            2,877,100        767,600        381,000

     Less valuation allowance            (2,877,100)      (767,600)      (381,000)
                                         ----------       --------       --------

     Net deferred tax assets            $      --      $      --      $      --
                                        ===========    ===========    ===========
</TABLE>

     As of December 31, 1999 the Company has federal net operating loss
     carryforwards totaling approximately $6.8 million, which expire between
     2012 and 2019, and research and development and investment tax credits of
     $94,500, which expire in 2014. Because of the Company's limited operating
     history, management has provided in each of the last three years a 100%
     allowance against the Company's net deferred tax assets.


                                      F-13
<PAGE>


6.   STOCKHOLDERS' EQUITY

     DEBT CONVERTED TO STOCK - During the third quarter of 1998, a total of
     9,733 shares of common stock were issued upon conversion of debt totaling
     $17,033.

     STOCK OFFERING - In June 1998, the Company sold 642,099 shares of its
     common stock at a price of $0.78 per share for a total of $500,000.

     In February 1999, the Company completed the issuance of 1,600,000 shares of
     common stock for net cash proceeds of $1,882,210 in a private placement of
     its common stock under Section 4(2) of the Securities Act of 1933, as
     amended (the "Act") and Regulation D promulgated thereunder.

     In June 1999, the Company issued a total of 235,000 shares of common stock
     for net cash proceeds of $1,155,136 in a private placement of its common
     stock under the Act and Regulation D promulgated thereunder.

     In December 1999, the Company issued a total of 1,600,000 shares of common
     stock for net cash proceeds of $1,988,557 in a private placement of its
     common stock under the Act and Regulation D promulgated thereunder.

     NOTE RECEIVABLE - EXERCISE OF OPTION - In June 1996, key employees entered
     into promissory notes with the Company totaling $268,880 in order to
     exercise options granted to them. These loans are due June 2006, and bear
     interest at 7.04% per annum. Loans are collateralized by a pledge of the
     shares purchased.

     PREPAID ROYALTIES - In December 1999, the Company entered into an agreement
     with Intel for the use of certain of Intel's technology. In connection with
     such agreement, the Company paid $75,000 and issued 224,514 shares of its
     common stock to Intel. Under the agreement, the Company has the right to
     recoup a portion of the shares issued if Intel fails to meet its
     performance obligations; the portion that may be recouped decreases as
     follows: termination by or before 6/30/00 - 80%, 9/30/00 - 60%, 12/31/00 -
     40%, and 3/31/01 - 20%. None of the stock shall be recouped after June 30,
     2001. Accordingly, at December 31, 1999, 44,900 shares of the stock issued
     were nonforfeitable. The Company has recorded the nonforfeitable shares and
     the cash paid as a prepaid royalty at December 31, 1999. As a result, as of
     December 31, 1999, current and long-term prepaid royalties include
     approximately $240,000 which represents the $75,000 cash paid and the fair
     value as of the measurement date of the 44,900 shares of nonforfeitable
     stock. The fair value of the forfeitable shares has been recorded as a
     reduction of stockholders' equity. The value of such forfeitable shares
     will be remeasured at each reporting period until such shares become
     nonforfeitable.

     STOCK OPTION PLAN - In January 1997, the shareholders of SoftLock Services,
     Inc. approved the 1996 Stock Option Plan (the "96 Plan"). When the 1998
     Stock Option Plan (the "98 Plan") was approved on July 28, 1998 by the
     shareholders of the Company, the options issued by SoftLock Services, Inc.
     under the 96 Plan were replaced by options to purchase shares of the
     Company, and were deemed included in the 98 Plan. The termination of the 96
     Plan resulted in no changes to the vesting or exercise provisions to the
     holders of options under that plan, except that the number and price per
     share of the 96 options were adjusted for the stock transfer and exchange
     and subsequent stock splits.


                                      F-14
<PAGE>


6.   STOCKHOLDERS' EQUITY (CONTINUED)

     STOCK OPTION PLAN (CONTINUED) - The 98 Plan was established to attract,
     retain and provide equity incentives to selected persons to promote the
     financial success of the Company. A total of 3,000,000 common shares were
     reserved for grants under this plan. On June 8, 1999, the Board approved an
     increase to 5,000,000 shares of common stock to be reserved under this
     plan. This increase was approved by shareholders on June 30, 1999. The
     options may be granted as either incentive stock options or Non-Qualified
     Stock Options. The Company has issued options for 1,150,500, 1,368,343 and
     724,619 shares of its common stock for the years ended December 31, 1999,
     1998 and 1997, respectively, and has 1,791,038 options still available for
     grant at December 31, 1999.

     Also outstanding at December 31, 1998 were 1,011,307 options, originally
     issued by SoftLock Services, Inc. and replaced with options to purchase
     shares of SoftLock.com, Inc. These options were issued and outstanding
     prior to the 96 Plan and, therefore, were not included under the 98 Plan.
     These options were exercised for 919,333 common shares in a cashless
     exercise completed on March 30, 1999.

     A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
                                                                      Weighted-     Weighted-
                                                                       Average       Average
                                                       Number of      Exercise        Fair
                                                        Options        Price         Value
<S>                                                <C>              <C>             <C>
     Outstanding as of January 1, 1997                  1,011,307        $0.18
       Granted                                            724,619         0.47         $0.20
       Exercised                                             --            --
       Forfeited                                             --            --
                                                        ---------        -----

     Outstanding as of December 31, 1997                1,735,926         0.30
       Granted                                          1,368,343         0.94         $0.43
       Exercised                                             --            --
       Forfeited                                             --            --
                                                        ---------        -----

     Outstanding as of December 31, 1998                3,104,269         0.58
       Granted                                          1,150,500         3.18         $5.13
       Exercised                                       (1,223,189)        0.18
       Forfeited                                          (14,500)        4.73
                                                        ---------        -----

     Outstanding as of December 31, 1999                3,017,080        $1.71
                                                        =========        =====
</TABLE>


                                      F-15
<PAGE>


6.   STOCKHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
            OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                                       WEIGHTED-
                                        AVERAGE       WEIGHTED-
                       RANGE OF        REMAINING       AVERAGE         NUMBER
       NUMBER OF       EXERCISE          LIVES         EXERCISE       CURRENTLY
        OPTIONS         PRICES          (YEARS)         PRICE        EXERCISABLE
    <S>            <C>                   <C>           <C>          <C>
       163,606      $0.18 - $0.24         7.0           $0.24          163,600
     1,660,024      $0.78 - $0.89         8.5            0.87          697,961
       374,950      $1.83 - $2.02         9.1            1.96          219,936
       637,000      $2.79 - $4.00         9.5            3.11          208,000
       121,500      $4.38 - $6.55         9.6            4.41           29,875
        60,000      $7.48 - $7.71         9.5            7.26           15,000
      =========                                                       =========
     3,017,080                                                       1,334,372
     =========                                                       =========
</TABLE>

     The options vest over periods up to five years.

     As described in Note 1, the Company uses the intrinsic value method to
     measure compensation expense associated with grants of stock options to
     employees. Had the Company used the fair value method to measure
     compensation for grants made, pro forma net loss and net loss per share for
     years indicated would have been as follows:

<TABLE>
<CAPTION>

                                                    1999            1998          1997
     <S>                                     <C>               <C>            <C>
     Net loss attributable to common stock   $  (10,456,192)   $  (838,722)   $  (834,397)
                                             ==============    ===========    ===========
     Diluted net loss per common share       $        (1.01)   $     (0.11)   $     (0.14)
                                             ==============    ===========    ===========
</TABLE>

     The fair value of options is estimated on the date of grant using the
     Black-Scholes option-pricing model. Key assumptions used to apply this
     pricing model for the years indicated are as follows:

<TABLE>
<CAPTION>

                                                           1999                1998               1997
     <S>                                                 <C>                 <C>                <C>
     Risk-free interest rate                               6.00%              5.62%              5.77%
     Expected life of option grants                      10 years           10 years           10 years
     Expected volatility of underlying stock                107%                35%                 0%
     Expected forfeiture rate                                 0%                 0%                 0%
</TABLE>

     It should be noted that the option-pricing model used was designed to value
     readily tradable stock options with relatively short lives. The options
     granted to employees are not tradable and have contractual lives of up to
     10 years. However, management believes the assumptions used to value the
     options and the model applied yield a reasonable estimate of the fair value
     of the grants made under the circumstances.


                                      F-16
<PAGE>


7.   COMMITMENTS AND CONTINGENCIES

     The Company is one of 18 defendants in an action in the United States
     District Court for the Southern District of New York entitled Interactive
     Gift vs. CompuServe Inc. et al, filed August 23, 1995. The action alleges
     infringement of the so-called Freeny patent. The plaintiff seeks judgment
     declaring the validity of its patent and further declaring that each of the
     defendants has infringed the plaintiff's patent; enjoining further
     infringement; and treble damages plus attorney's fees and costs and
     disbursements. The Company has answered the plaintiff's complaint and has
     counter-claimed for a declaratory judgment that the plaintiff's patent is
     invalid, unenforceable, and is not infringed upon by the Company.

     On March 12, 1999, the court entered a stipulation order and judgment that,
     based on the interpretation of the claims of the subject patent as
     determined by the court in earlier orders, the Company has not in the past
     infringed, nor is it now infringing on any of the provisions established in
     the patent. Judgment has been entered in the Company's favor and the
     present patent owner's claims have been dismissed on its merits by the
     court. As of the date of these financial statements, the patent owner has
     appealed this decision.

     The Company is subject to this and other litigation from time to time in
     the ordinary course of business. Although the amount of the liability, if
     any, with respect to such litigation cannot be determined, in the opinion
     of management, such liability, if any, will not have a material adverse
     effect on the Company's financial condition, results of operations or cash
     flows.

8.   SUBSEQUENT EVENTS

     On January 7, 2000, the Company received $500,004 in exchange for 4,902
     shares of the Company's Series A preferred stock.

     In connection with the Series A Preferred transaction, the Company entered
     into a Series A Preferred Stock Purchase Agreement dated as of December 30,
     1999 as supplemented on January 7, 2000 (the "Purchase Agreement") with SI,
     Apex and RSA (collectively, the "Purchasers") and a Shareholders and Rights
     Agreement (the "Shareholders Agreement") with the Purchasers and the
     president and chief executive officer and the chief technology officer of
     the Company. The Company also filed a Certificate of Designation with the
     Delaware Secretary of State that states the powers, preferences and rights
     of the Series A Preferred.

     On February 10, 2000, the Company issued 46,875 shares of Series B
     preferred stock (the "Series B Preferred") to a group of investors,
     including affiliates of Tudor Investment Corp. and Ritchie Capital, as well
     as investors in an earlier round of financing, SI and Apex Investment Fund
     IV, L.P. (collectively, the "investors") for a purchase price of $160 per
     share for an aggregate purchase price of $7,500,000. These investors were
     also issued two warrants, one of which becomes exercisable for an aggregate
     of 312,500 shares of common stock if, as of August 15, 2000, the Company's
     registration statement for the shares of common stock issuable upon
     conversion of the Series B Preferred was not declared effective and the
     NASDAQ listing application for the common stock was not accepted, and the
     second of which would become exercisable for an aggregate of an additional
     312,500 shares of common stock if, as of November 15, 2000, these two
     conditions were not met.


                                      F-17
<PAGE>


8.   SUBSEQUENT EVENTS (CONTINUED)

     Ascent Venture Partners III, L.P. ("Ascent") also purchased 14,706 shares
     of the Company's Series A Preferred for $102 per share for an aggregate
     purchase price of $1,500,000 in February 2000. In connection with the
     investment by Ascent, the Company agreed to appoint an Ascent
     representative to its Board of Directors.

     In connection with the Series B Preferred transaction, the Company entered
     into a Series B Preferred Stock and Warrant Purchase Agreement dated as of
     February 10, 2000 (the "Purchase Agreement") with the investors and an
     Amended and Restated Shareholders and Rights Agreement (the "Amended
     Shareholders Agreement") with the investors, the holders of the Series A
     Preferred and the Company's president and chief executive officer and its
     chief technology officer. The rights and preferences of the Series B
     Preferred are similar to those of the Series A Preferred (see Note 4).

     As disclosed in Note 4, the Company will record, immediately upon issuance,
     a preferred stock dividend representing the value of the beneficial
     conversion feature on the issuance of Series A and B preferred stocks. Such
     amount will be limited to the proceeds received from issuing the beneficial
     conversion securities or approximately $9,420,000.

     Proceeds received by the Company in connection with the issuance of the
     Series A and Series B Preferred above were as follows:

<TABLE>
     <S>                                                      <C>
     Proceeds from issuance of 19,608 shares of
       Series A preferred stock, net of estimated
       issuance costs                                         $1,969,769

     Proceeds from issuance of 46,875 shares of
       Series B preferred stock, net of estimated
       issuance costs                                          7,450,000
                                                               ---------

     Total  proceeds                                          $9,419,769
                                                              ==========
</TABLE>

     On March 8, 2000, the Company announced that it had entered into a letter
     of intent to acquire all the outstanding stock of Chili Pepper, Inc., a
     Boston-based strategic marketing consulting firm. The completion of the
     acquisition is contingent on, among other things, the completion of due
     diligence and the execution of definitive agreements.



                                      F-18
<PAGE>


9.   RESTATEMENT

In accordance with generally accepted accounting principles, quoted market
prices, if available, should be used for purposes of recording stock
issuances and determining compensation costs related to stock option grants.
The Company had historically determined the fair market value of its common
stock based on a 90 day weighted average calculation of both its private and
public equity transactions. This method was used based on management's belief
that such calculated amount was more representative of the market price of
the Company's common stock when compared to the Company's quoted market price
on the Over the Counter Bulletin Board. As a result, during 1998 the Company
had priced its private stock issuances and set the exercise price of its
stock option grants at amounts that differed from quoted market prices on the
date of issuance.

Subsequent to the issuance of the Company's 1998 consolidated financial
statements, management determined that certain stock issuances and exercise
prices set for option grants during 1998 should have been accounted for using
quoted market prices. Therefore the accompanying 1998 consolidated financial
statements have been restated from the amounts previously reported to reflect
the recording of such transactions using quoted market prices and to provide
certain additional disclosures relating to equity issuances and stock-based
compensation. A summary of the significant effects of the restatement is as
follows:

<TABLE>
<CAPTION>
                                          AS PREVIOUSLY          AS
FOR THE YEAR ENDED DECEMBER 31, 1998        REPORTED           RESTATED        DIFFERENCE

<S>                                      <C>                <C>              <C>
Operating loss                           $  (632,114)       $  (754,515)      $  (122,401)
Net loss                                    (609,232)          (740,072)         (130,840)
Additional paid-in capital                 2,174,502          2,781,053           606,551
Deferred compensation                           --             (475,711)         (475,711)
Accumulated deficit                       (1,991,849)        (2,122,689)         (130,840)
Net loss per common share                       (.08)              (.10)             (.02)
</TABLE>


                                   * * * * * *


                                      F-19