U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-KSB



xANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



FOR THE FISCAL YEAR ENDED: March 31, 2005



oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]



FOR THE TRANSITION PERIOD FROM ______________ TO ______________



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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|-------------------------------------------------------------- |  | ---------------------------------
|DELAWARE                                                       |  | 84-1130229                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



FIVE CLOCK TOWER PLACE, SUITE 440

MAYNARD, MASSACHUSETTS 01754

(Address of principal executive offices)

(Zip Code)



Issuer's telephone number: (516) 318-0583



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 o



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.  o



Part III incorporates certain information by reference from the definitive proxy statement for the Registrant's Annual Meeting to be held on May 17, 2001.











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TABLE OF CONTENTS



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|                                                                                                                               |    |  | Page
|Part I                                                                                                                         |   
|Item 1.     Description of Business                                                                                            | 3 
|Background                                                                                                                     | 3 
|Business of the Company                                                                                                        | 4 
|Patents, Intellectual Property and Licensing                                                                                   | 6 
|Competition                                                                                                                    | 6 
|Employees                                                                                                                      | 7 
|Customers                                                                                                                      | 7 
|Government Regulation                                                                                                          | 8 
|Research and Development Expenditures                                                                                          | 8 
|Recent Developments                                                                                                            | 8 
|Risk Factors                                                                                                                   | 9 
|Special Note Regarding Forward Looking Statements                                                                              | 14
|Item 2.     Description of Property                                                                                            | 14
|Item 3.     Legal Proceedings                                                                                                  | 15
|Item 4.     Submission of Matters to a Vote of Security Holders                                                                |   
|                                                                                                                               |    |  |     
|Part II                                                                                                                        |   
|Item 5.     Market Price of the Registrants Common Stock and Related Security Holder Matters                                  | 15
|Market Information                                                                                                             | 15
|Holders                                                                                                                        | 15
|Dividends                                                                                                                      | 15
|Recent Sales of Unregistered Securities                                                                                        | 15
|Item 6.     Management's Discussion and Analysis of Financial Condition and Results of Operations                              | 17
|Background                                                                                                                     | 17
|Corporate Structure                                                                                                            | 18
|Results of Operations                                                                                                          | 18
|Liquidity and Capital Resources                                                                                                | 21
|Item 7.     Financial Statements                                                                                               | 22
|Item 8.     Changes in and Disagreements with Auditors on Accounting and Financial Disclosure                                  | 22
|                                                                                                                               |    |  |     
|Part III                                                                                                                       |   
|Item 9.     Directors and Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act | 23
|Item 10.   Executive Compensation                                                                                              | 23
|Item 11.   Security Ownership of Certain Beneficial Owners and Management                                                      | 23
|Item 12.   Certain Relationships and Related Transactions                                                                      | 23
|Item 13.   Exhibits, Financial Statements and Reports on Form 8-K                                                              | 23
|Signatures                                                                                                                     | 26





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SOFTLOCK.COM, INC.

FORM 10-KSB

PART I



ITEM 1. DESCRIPTION OF BUSINESS.



BACKGROUND



SoftLock.com, Inc. was incorporated under the name Fieldcrest Corporation in the State of Delaware in December 1989. The primary purpose of Fieldcrest Corporation at that time was to seek out acquisitions of properties, businesses or merger candidates. In August 1991, Fieldcrest Corporation completed an initial public offering, receiving proceeds of $47,250 from the sale of 4,725,000 units, consisting of common stock and warrants. The offering was subject to the Colorado Securities Act. This Act 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. Accordingly, Fieldcrest Corporation 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, Fieldcrest Corporation and SoftLock Services, Inc. completed an Agreement and Plan of Reorganization under which Fieldcrest Corporation acquired all of the issued and outstanding common shares of SoftLock Services in exchange for the issuance of 7,097,266 shares of common stock. Fieldcrest Corporation accounted for the transaction as a reverse acquisition. The fiscal year of Fieldcrest Corporation was changed from March 31 to December 31 to correspond to the fiscal year of SoftLock Services Inc.



Subsequent to the reverse acquisition of SoftLock Services, Inc., we changed our name from Fieldcrest Corporation to SoftLock.com, Inc. to better reflect our ongoing business. Our trading symbol was then changed to "SLCK" and our stock began trading on the over the counter bulletin board.



On May 12, 2000, the Company acquired certain assets of Chili Pepper, Inc., a Boston-based strategic marketing consulting firm in exchange for 193,289 shares of the Company's common stock, with an aggregate value of $1,404,365, and $351,090 in cash. The cash portion was paid from the Company's cash holdings. The acquisition was accounted for as a purchase. On March 2, 2001, the Company announced the discontinuance of its Chili Pepper operations.



On September 14, 2000, our stock began trading on the Nasdaq SmallCap market.



On December 4, 2000, we announced that we would begin doing business under the name "Digital Goods." We also changed our trading symbol to "DIGS" on December 11, 2000.



On February 26, 2001, the Company launched Amplifi, our suite of digital content marketing services.



On April 16, 2002, the Registrant filed a voluntary petition for relief under Chapter 11 of the United State Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Massachusetts (Case No. 02-42381-HJB). The Registrant will continue to manage the assets of the business as "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.  On April 18, 2002, the Company issued a press release relating to the foregoing. A copy of the release is incorporated in its entirety herein by reference.



Except as otherwise noted, the term "we" refers to SoftLock.com, Inc. and its subsidiary, SoftLock Services.





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BUSINESS OF THE COMPANY



We provided a system that combines digital rights management, which is the management of copyright protection, and digital content marketing, along with an eCommerce solution. The system allows content publishers and commercial web sites to securely market and sell digital content. Publishers of digital content, including research reports, newsletters and electronic books, use our system to package and securely distribute their products while protecting their intellectual property. We market digital content through a suite of tools including:



- an affiliate retailer network



- a customized search engine registration capability



- contextual mapping of product offerings



- customized targeted email campaigns, and



- our own Passalong viral marketing system.



When a prospective consumer accesses content from an affiliated website, 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. Recipients can only preview the selected portions of the final product chosen by the content provider until they go through the purchase process themselves.



Our patented persistent security technology (US #5,509,070 issued April 16, 1996) for information commerce prevents electronic shoplifting (piracy) not just during the initial download, but when passed from one consumer to another. This allows for the sale of electronic information simply and securely. Because content offered by us can be instantly purchased and re-distributed, but not pirated, the technology is useful in many markets, but especially for information "publishing" web sites, such as news, media, finance, research, etc. We believe 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. We believe 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 our total eCommerce solution. The eCommerce solution provides 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. At the same time, our patented technology keeps intellectual property secure while generating valuable marketing data and sales revenue. With our product, publishers are able to sell their most compelling and valuable content and encourage redistribution. The material tendency to "pass it on" turns into an additional sales channel.



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



1.  Digital Rights Management, ("DRM")



2.  Digital content marketing and



3.  Commerce enabled distribution.



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This approach to the distribution of digital content is intended to bring security and premium content marketing together with an eCommerce solution to create our total eCommerce solution.



The content packaging component of DRM focuses on preparing premium, branded content for secure sale on the Internet. This component uses our patented technology to secure the digital content and protect it from piracy. In addition, we provide the categorization of digital content making the content simpler to access by consumers and providing consumers with ease of use.



Digital content marketing uses technology to bring the content to the point of demand rather then requiring the user to find us through the use of a portal strategy. 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, based on information that they provide during a search, based on the web site they are visiting or based upon information provided at the time of purchase.



The commerce enabled distribution of content provides customer service for consumers, credit card clearing and billing services and physical distribution services. In connection with the other components of the system, we believe that we offer a comprehensive solution to market and distribute quality digital content on the internet.



Amplifi, our suite of digital content marketing services, is the first interactive marketing and eCommerce solution that provides all the technology tools and expert services content that providers need to effectively target, reach and sell consumers digital products. The Company offers a wide range of standard and supplemental services to ensure that content offers are managed for the best placement and visibility to generate maximum sales. Our content partners can promote their title in a variety of ways including from their own Web store. All customer products are automatically listed in our catalog and are placed in topical iStores targeted to specific consumer audiences. Services and tools under the Amplifi suite include store design, hosting and management, passalong friend to friend viral marketing, Digital Goods' affiliate network, optimization for search engines and contextual mapping to match product promotions to online news articles and key analytical reporting to help customers quantify bottom line results.



VIRAL MARKETING



The Digital Goods transaction system is intended to leverage its geometric expansion power to create a new, virtual sales channel for publishers. Presenting offers for digital goods to as many targeted consumers as possible is critical to the cost-effective acquisition of digital content buyers. The most effective way to get content to the right consumer is by personal referral. Consumers are far more likely to respond to content offers that have been recommended by a friend or a colleague rather than a generic promotion. We have in Passalong, a unique, patented technology, which captures friend to friend referrals via electronic medium. Consumers who have either purchased content or browsed offer pages are encouraged to share with others. They may attach the content to an email or forward it via a hyperlink button. The email recipient may preview the sample and purchase or pass it along. We believe that this is a powerful tool to increase the customer's brand awareness, build customer loyalty and generate maximum revenue without incurring any additional customer acquisition costs.



THE DIGITAL GOODS AFFILIATE NETWORK



The affiliate network is a community of merchants who have agreed to add hyperlinks for topically relevant Digital Goods content to their own web site. When the content is registered in our system, it is incorporated automatically into our product catalog. Our affiliate community can then search the catalog. Content partners boost their product visibility to affiliates and, in turn, to consumers, with special placement of featured titles. When affiliates log into the network library to download links, they have an increased likelihood of giving this content premium placement.







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We also offer content partners the opportunity to showcase their titles in a customized storefront. The affiliate network is invited to add links to these partner-specific storefronts to further highlight and promote the titles. The key reason affiliate programs can be successful is because they create effective sales opportunities. Content partners appear in front of their best prospects where and when they are most likely to purchase.



PATENTS, INTELLECTUAL PROPERTY AND LICENSING



The Company's patent (US #5,509,070) was issued on April 16, 1996. Authored by Softlock Service'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 Digital Goods and SoftLock and has registered the following Internet domains: WWW.DIGITALGOODS.COM, WWW.DIGIGOODS.COM, WWW.SOFTLOCK.COM, WWW.PASSWORDS.COM, WWW.PASSITON.COM, and WWW.SELFPUBLISH.COM as well as a number of other domain names.



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 Company's DRM system.



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. 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 has very few direct competitors who have integrated comparable products and services. However, the Company faces external competition from providers in the product and service areas around digital rights management and digital content marketing. To this end, the Company is actively partnering with other digital rights management companies to offer the Company's digital content marketing tools attached to various rights management technologies.



DIGITAL RIGHTS MANAGEMENT



The Company defines digital rights management, or DRM, as the manner in which copyright protection and copyright enforcement are managed.







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The Company faces competition in the area of copyright protection and copyright enforcement from many companies such as Adobe, Microsoft, Intertrust and Content Guard. 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 DRM system is designed to provide such protection. The Company also believes that its system gives it a competitive advantage in recruiting digital content because of the integration of copyright protection and enforcement, marketing, and eCommerce processing.



DIGITAL CONTENT MARKETING



The Company believes that it does not currently have any competitors who have integrated the full suite of technology tools offered in its Amplifi suite of digital content marketing services. Various companies offer portions of the services such as direct mail (eDialog), portal sites (such as Lycos, Excite, etc.), tracking schemes/profiling (which is used by companies such as DoubleClick) as well as others. 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. Digital Goods tailors each of these content marketing approaches for each content provider in its Amplifi content marketing services system to maximize hits, and therefore maximize revenues.



COMMERCE ENABLED DISTRIBUTION



Many companies today (e.g., CyberCash) provide eCommerce 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. We use our own, patented system. The Company believes that no company besides Digital Goods combines all of these techniques with digital content marketing.



While management believes that the Company's method for the marketing, distribution 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



At December 31, 2000, the Company employed 63 persons in its headquarters in Maynard, Massachusetts. The Company also employed two full-time employees in home offices in Seattle, Washington. In addition, the Company, from time to time, uses contract labor to assist in technology development efforts. None of the Company's employees are the subject of a collective bargaining agreement. The Company believes that relations with its employees are good. The Company announced on March 30, 2001 that it would eliminate 20 positions in the month of March, bringing its total workforce to 43.  The Company has since terminated all employees.



CUSTOMERS



The Company no longer has active customers since bankruptcy filing of April of 2002.





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GOVERNMENT REGULATION



Exports of software products utilizing encryption technology are generally restricted by the United States and various foreign governments. We do not believe that our 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 $4,612,728, $1,823,141 and $117,899 in research and development expenses in 2000, 1999 and 1998, 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 $16,543, $550,107 and $9,861 in 2000, 1999 and 1998, respectively.



In addition, costs relating to the development of our eCommerce website of $272,876 and $1,444,360 were capitalized in 2000 and 1999, respectively.



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 November 10, 2000, the Company entered into a Shareholder Agreement with the holders of approximately 97% of the Company's Series B Preferred Stock under which these stockholders agreed, subject to various conditions, that they will not trade in the Company's securities until June 1, 2001. In return, the Company issued warrants to purchase an aggregate of 1,825,040 shares of the Company's common stock at an exercise price of not less than $2.25 per share.



On December 4, 2000, the Company announced that it would begin doing business under the name "Digital Goods." The Company also changed its trading symbol to "DIGS".



On December 21, 2000, the Company issued 36,649 shares of Series C Preferred Stock to a group of investors including Tudor Funds, Apex Venture Partners, Ascent Venture Partners, Ritchie Capital Management and SI Venture Partners for a purchase price of $191 per share and an aggregate purchase price of $7,000,000. Each share of Series C is convertible into 100 shares of the Company's common stock. Each investor was also issued three warrants: a warrant for additional shares of Series C Preferred Stock and two warrants for common stock. The warrants for Series C Stock are immediately exercisable for an aggregate of 9,162 shares of Series C Preferred Stock. One form of common stock warrant is exercisable for an aggregate of 244,339 shares of common stock on or after August 1, 2001 if a registration statement covering the common stock that is issuable upon conversion of the Series C Preferred Stock is not declared effective by the SEC by that date. The second form of common stock warrant is exercisable for an aggregate of 244,339 shares of common stock on or after October 15, 2001 if that same registration statement has not been declared effective by the SEC by that date.



On February 21, 2001, the Company launched Amplifi, its suite of digital content marketing services. The launch of Amplifi completed the Company's transition from a digital rights management vendor to a content marketing and eCommerce services company.



In the first quarter of 2001, the Company ceased operations at its Chili Pepper location. Since its acquisition, key systems and employees at Chili Pepper were incorporated into the interactive marketing group at the Company to support the Company's Amplifi-TM- suite of eComerce and content marketing products. The remaining operations at the Chili Pepper Boston office, which employed seven people, was discontinued. All other assets will continue to be used in other parts of the Company's operations. Chili Pepper accounted for approximately $568,716 of the Company's net revenues in 2000.





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On April 16, 2002, the Registrant filed a voluntary petition for relief under Chapter 11 of the United State Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Massachusetts (Case No. 02-42381-HJB). The Registrant will continue to manage the assets of the business as "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.



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. 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.



WE WILL 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 and negative cash flows from operations and capital expenditures through 2001 and 2002. The Company, based upon its current operating plan, does not anticipate that its currently available funds will be sufficient to satisfy its anticipated needs for working capital, capital expenditures and business expansion through the end of the year. 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. The Company is actively seeking additional investments through both strategic and financial investors. The Company currently does not have any commitments for additional financing. In addition, the Company is actively seeking a merger or acquisition partner. 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.



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 2001 and 2002 as it continues to develop products and expand its marketing strategy. For example, the Company incurred a net loss of $15,373,788 for the fiscal year ended December 31, 2000, and its accumulated deficit is $24,095,432 through December 31, 2000. The Company cannot assure you that it will ever 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 service revenues from its Amplifi content marketing services and 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 the Company'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.





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WE MAY BE DE-LISTED FROM THE NASDAQ SMALL CAP MARKET IF OUR NET TANGIBLE ASSETS ARE NOT SUFFICIENT OR THE PRICE OF OUR COMMON STOCK REMAINS BELOW ONE DOLLAR FOR A PERIOD OF THIRTY CONSECUTIVE BUSINESS DAYS.



Stocks traded on the Nasdaq Small Cap Market must meet certain listing requirements to remain listed. If the price of our common stock were to remain below one dollar for thirty (30) consecutive business days, we could be de-listed. We could also be de-listed if the value of our net tangible assets were to fall below two million dollars. In December 2000, we received a letter from Nasdaq indicating that the Company might be de-listed if it did not satisfy the listing requirements. At that time, the Company took steps to meet the listing requirements. The Company cannot assure you that it will be able to satisfy the listing requirements during the current fiscal year. De-listing would impair your ability to sell your shares of the Company's common stock.



THE COMPANY'S AVAILABLE FUNDS LIKELY WILL NOT SATISFY ANTICIPATED NEEDS.



The current operating plan does not anticipate that currently available funds will be sufficient to satisfy anticipated needs for working capital and capital expenditures. The Company has encountered recent difficulties attracting capital and is not generating positive cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Continuation of the Company is dependent upon achieving sufficiently profitable operations and obtaining adequate financing. The Company cannot assure you that sufficient profitability or new financing can be obtained.



IF OUR AMPLIFI SUITE OF DIGITAL CONTENT MARKETING SERVICES IS NOT ACCEPTED BY IF OUR COMPETITORS SIGN EXCLUSIVE LICENSES WITH MAKERS OF NEW READER DEVICES, WE WOULD BE PREVENTED FROM PROVIDING CONTENT TO THOSE DEVICES. OUR INABILITY TO OFFER PRODUCTS COMPATIBLE TO POPULAR HARDWARE WOULD HURT OUR OPERATING RESULTS.



The market for providing digital content on the internet is marked by rapid technological change, both within the distribution technology as well as within the reader devices available to consumers. For instance, if a new reader device is introduced and we are not able to provide content to such devices due to exclusive arrangements the device maker may have with our competitors, our business could be seriously harmed and our operating results could be 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 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. 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.



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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 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, the Company cannot assure you that we will be able to retain our 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. We cannot assure you that any patents, copyrights or trademarks the Company may obtain will be sufficiently broad to protect the Company's products. We also cannot assure you that applicable law will provide effective injunctive remedies to stop infringement on the Company's patents (if obtained), trademarks or copyrights. In addition, the Company cannot assure you 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.



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



If third parties, such as publishers and content providers, do not use the Company's technology and create a market for digital commerce, our 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 the Company's 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 Company's distribution 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 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 Company's system to comply with specifications administered by the Company. Potential users may be unwilling to be subject to the control of these specifications.





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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. It 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 COMPANY FACES LEGAL RISKS ARISING OUT OF ITS PROPRIETARY TECHNOLOGY AND PATENTS AND FROM FAILURES OF ITS 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. The outcomes and expenses of these actions cannot be predicted with confidence. Liability lawsuits are also risks to be considered. The Company has developed software technology to protect intellectual property, but we cannot assure you that this 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.







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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 significantly more established customer support and professional services organizations than the Company. In addition, these companies may adopt aggressive pricing policies. The Company cannot assure you that it 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 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 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. This could limit the Company'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.





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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 which 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 the 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, 2000, the Company's principal offices were located in Maynard, Massachusetts and consisted of approximately 15,000 square feet. The offices were leased at a monthly rental of $7,448 for the first nine months of 2000 and escalated to $14,219 for the remainder of 2000. Payments escalate to $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. In May 2000, in conjunction with the acquisition of Chili Pepper, the Company assumed a five (5) year operating lease for office space in Boston, Massachusetts that consisted of approximately 1,000 square feet. Payments of $2,667 were made for the first three months, escalating to $2,750 for year two, $2,833 for year three, $2,917 for year four and $3,000 for year five. On February 1, 2001 the Company terminated that lease with a penalty of $5,333, and moved its operations to a 1,500 square feet location, also in Boston. The new lease is a six (6) month term with a monthly rental of $8,750. The Company is recording the expense on all of its escalating leases on a straight-line basis over the entire life of the lease.



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 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.



On April 16, 2002, the Registrant filed a voluntary petition for relief under Chapter 11 of the United State Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Massachusetts (Case No. 02-42381-HJB). The Registrant will continue to manage the assets of the business as "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.





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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 that the Company and 17 other defendants infringed on the U.S. Patent No. 4,528,643 held by E-Data Inc. The plaintiff seeks judgment declaring the validity of its patent and further declaring that each of the defendants has infringed the plaintiff's patent, enjoinment of further infringement and treble damages plus attorneys' fees and costs and disbursements.



On April 16, 2002, the Registrant filed a voluntary petition for relief under Chapter 11 of the United State Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Massachusetts (Case No. 02-42381-HJB). The Registrant will continue to manage the assets of the business as "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code



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



In December 2000, the holders of more than two-thirds of each of the Series A Preferred Stock and Series B Preferred Stock consented to an amendment to the Company's Certificate of Incorporation, authorizing 76,523 shares of Series C Preferred Stock.



PART II



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



MARKET INFORMATION



The Company is presently quoted on Pinksheets.com.



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 under 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 those 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 under 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 those certificates.





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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 under 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 those 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 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 and 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 46,876 shares of Series B Preferred Stock 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 Venture Fund II, L.P. and Apex Investment Fund IV, L.P. for a purchase price of $160 per share and 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. These warrants did not become effective.



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 and 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.



On November 10, 2000, the Company issued warrants to purchase an aggregate of 1,825,040 shares of the Company's Common Stock at an exercise price of not less than $2.25 per share to the holders of 97% of the Company's Series B Preferred Stock.





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On December 22, 2000, the Company announced that pursuant to a closing on December 21, 2000, it had issued 36,649 shares of Series C Preferred Stock to a group of investors, including Tudor Funds, Apex Venture Partners, Ascent Venture Partners, Ritchie Capital Management and SI Venture Partners for a purchase price of $191 per share and an aggregate purchase price of $7,000,000. Each share of Series C Preferred is convertible into 100 shares of the Company's common stock. Each investor was also issued three warrants: a warrant for additional shares of Series C Preferred Stock and two warrants for common stock. The warrants for Series C Preferred Stock are immediately exercisable for an aggregate of 9,162 shares of Series C Preferred Stock. One form of common stock warrant is exercisable for an aggregate of 244,339 shares on or after August 1, 2001 if a registration statement covering the common stock that is issuable upon conversion of the Series C Preferred Stock is not declared effective by the SEC by that date. The second form of common stock warrant is exercisable for an aggregate of 244,339 shares on or after October 15, 2001 if that same registration statement has not been declared effective by the SEC by October 15, 2001.



In connection with the Series C transaction, the Company entered into a Series C Preferred Stock and Warrant Purchase Agreement dated as of December 21, 2000 with the Series C investors and an Amended and Restated Shareholders' and Rights Agreement with the Series C investors, the holders of the Series A Preferred Stock and the Series B Preferred Stock. The Company also filed a Certificate of Designation with the Delaware Secretary of State that states the powers, preferences and rights of the Series C Preferred Stock.



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



BACKGROUND



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 2002 and 2003 as it continues to develop products and expand its marketing strategy.



The Company, based upon its current operating plan, does not anticipate that its currently available funds will be sufficient to satisfy its anticipated needs for working capital, capital expenditures and business expansion through the end of the year. The Company has encountered recent difficulties attracting capital and is not generating positive cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Continuation of the Company is dependent on (1) achieving sufficiently profitable operations and (2) obtaining adequate financing. Management is exploring several alternatives including the raising of additional capital from strategic and financial investors, the repositioning of the Company's product and service offerings or the merger or sale of the Company. However, we cannot assure you that the Company will be successful in accomplishing these objectives.



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 completed an Agreement and Plan of Reorganization under which the Company acquired all of the issued and outstanding common shares of SoftLock Services 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 SoftLock Services.



Subsequent to the reverse acquisition of SoftLock Services, 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 Nasdaq SmallCap market and its trading symbol currently is "DIGS". On December 4, 2000, the Company announced that it would begin doing business under the name "Digital Goods."



Except as otherwise noted, all references to the "Company" include SoftLock.com, Inc. doing business as Digital Goods and its subsidiary, SoftLock Services.



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Since 1992, the Company has been vending passwords to unlock secure digital content on CD-ROM. In October 1999, the Company introduced its internet distribution system allowing publishers of electronic content to securely sell their digital content from their own Web sites using the Company's Amplifi suite of digital content marketing tools including the Digital Goods Affiliate Network.



The Digital Goods Solution 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.



When a prospective consumer receives premium digital content the consumer can sample a portion of the final 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 digital content using our patented DRM technology 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 Digital Goods Affiliate Network is a distribution system enabling the content providers to securely sell documents through affiliate web sites. The Company remits payments to content providers and to its affiliates, and also provides reports and customer service.



Providers of digital content 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. d/b/a Digital Goods 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 SoftLock Services, wherein the owners of SoftLock Services 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 SoftLock Services.



RESULTS OF OPERATIONS



The following table sets forth various items as a percentage of revenues for the years ended December 31, 2000, 1999 and 1998.



|                             |  |            |  |      |  |     
|---------------------------- |  | ---------- |  | ---- |  | ----
|                             |  | Year Ended
|                             |  | 2000       |  | 1999 |  | 1998
|Statement of operations data |  |            |  |      |  |     
|Net revenue                  |  | 100%       |  | 100% |  | 100%
|Cost of revenue              |  | 51%        |  | 26%  |  | 21% 
|Gross profit                 |  | 49%        |  | 74%  |  | 79% 



DECEMBER 31, 2000 AS COMPARED TO DECEMBER 31, 1999



Total net revenues increased to $675,657 for the year ended December 31, 2000 ("2000"), as compared to $83,790 for the year ended December 31, 1999 ("1999"). The increase is primarily a result of increased revenue from the Company's internet distribution system and password vending to $66,971 from $50,290 in 1999, a 33% increase, and the addition, in 2000, of digital content and other marketing services amounting to $588,266, including $568,716 from our Chili Pepper operations.





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Gross profit was $332,012, including $319,202 from our Chili Pepper operations for the twelve months ended December 31, 2000, or 49% of revenue, as compared to $61,888 for 1999, or 74% of revenue. This decrease in gross profit is attributable to an increase in the volume of digital content and other marketing services performed in 2000, the gross margin of which was 44% during the year. In addition, gross margin was negatively impacted by an increase in license fees associated with the Company's digital rights management services, and an increase in both the fixed and variable credit card transaction fees associated with a higher number of transactions, a majority of which had a lower average commission per unit.



Operating expenses increased to $15,963,392 for the year ended December 31, 2000, as compared to $6,705,092 for the year ended December 31, 1999. This increase of $9,258,300 is primarily due to costs associated with significant staffing increases (from 30 employees at the end of 1999 to 65 employees as of the end of 2000) to support the DRM and digital content marketing systems, 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 $602,613 and $2,770,155 in 2000 and 1999, respectively.



Research and development costs increased to $4,612,728 for the year ended December 31, 2000, as compared to $1,823,141 for the year ended December 31, 1999. This increase of $2,789,587 is related to the additional staffing, as well as outside consulting, in connection with the research and development of the DRM and digital content marketing systems and related proprietary software. Included in research and development expenses are costs related to noncash compensation and consulting in the amounts of $16,543 and $550,107 for the year ended December 31, 2000 and 1999, respectively.



Selling and marketing costs increased to $4,613,629 for the year ended December 31, 2000, as compared to $1,181,155 for the year ended December 31, 1999. This increase of $3,432,474 is attributable to additional staffing and outside consulting costs associated with the enrollment of Content Providers and Affiliates for the Digital Goods Affiliate Network, as well as, costs relating to advertising and re-branding efforts. Included in selling and marketing expenses are costs related to noncash compensation and consulting in the amount of $81,348 and $278,582 in 2000 and 1999, respectively.



General and administrative costs increased to $5,140,802 for the year ended December 31, 2000, as compared to $3,700,796 for the year ended December 31, 1999. This increase of $1,440,006 relates primarily to additional staffing and outside consulting costs incurred in the building of the management infrastructure and support team for the DRM and digital content marketing systems. Included in the above costs are salaries and wages, consulting, and all other related operating expenses. Also included in general and administrative expenses are costs related to noncash compensation and consulting in the amount of $504,722 and $1,941,466 in 2000 and 1999, respectively.



Impairment of goodwill was $1,596,233 in 2000. In October 2000, the Chili Pepper operations began to fall significantly short of projected revenue targets. This was due in part to a downturn in the Internet industry, specifically the amount of dollars companies had available to spend on advertising and site launch activities.



Based upon a review of the Chili Pepper operations, including an analysis of the projected cash flows and after further review of the economic environment of the target market served by the Chili Pepper operations, management believed that an impairment event had occurred as described under SFAS 121. The Company performed the analysis required to determine the impairment charge associated with the goodwill. Based on such analysis, the Company recognized an impairment of $1,596,233 relating to the unamortized goodwill.



Further supporting this analysis was a board decision in the first quarter of 2001 to cease operations at its Chili Pepper location. Since its acquisition, key systems and employees at Chili Pepper have been incorporated into the interactive marketing group at the Company to support the Company's Amplifi-TM- suite of eComerce and content marketing products. The remaining operations at the Chili Pepper Boston office, which employed seven people, was discontinued. All other assets will continue to be used in other parts of the Company's operations.





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Other income, net increased to $257,592 for the year ended December 31, 2000, as compared to $44,249 for the year ended December 31, 1999. This change relates primarily to investment earnings on the Company's cash reserves, which increased as a result of the Company's private placement offerings of preferred stock, which occurred during the first and fourth quarter of 2000.



Net loss increased to $15,373,788 for the year ended December 31, 2000, as compared to $6,598,955 for the year ended December 31,1999. The increase resulted primarily from the increase in operating expenses. Net loss attributable to common shareholders was $25,241,141 in 2000. This included beneficial conversion and accretion on preferred stock of $9,867,353. Net loss attributable to common shareholders was $9,809,559 in 1999, which included beneficial conversion on preferred stock on $3,210,604. The company anticipates that it will incur significant operating losses through 2001 and 2002.



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 were consistent with the Company's strategy to derive future revenues primarily from commissions from the Digital Goods DRM system.



Gross profit was $61,888, or 73.9% of revenue in 1999, as compared with $86,236, or 78.8% of revenue in 1998. The decrease in gross margin in the year is attributable to fixed transaction costs being spread over a smaller amount of revenue.



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 Digital Goods DRM 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.



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.





20





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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.



Management anticipates that operating expenses will begin to decrease on a quarterly basis as the Company begins to implement various cost saving strategies. The Company will continue to support increased marketing and promotional efforts, to develop and release new products, attempt to identify investors to raise necessary capital, and otherwise create the infrastructure that the Company will need to provide its services in the future. There can be no assurance that additional cost saving strategies will not be necessary and that such strategies, when implemented, will cause the Company to scale back some of the items noted above.



LIQUIDITY AND CAPITAL RESOURCES



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



|          |      |              |      |   |             |  |   |          
|--------- | ---- | ------------ | ---- | - | ----------- |  | - | ---------
|          | 2000 |              | 1998 |   | 1999       
|Operating | $    | (11,751,078) |      | $ | (3,867,494) |  | $ | (510,847)
|Investing | $    | (703,790)    |      | $ | (844,002)   |  | $ | (3,607)  
|Financing | $    | 16,061,187   |      | $ | 8,246,064   |  | $ | 555,732  



Cash used in operations totaled $11,751,078 in 2000 as compared with $3,867,494 in 1999. The increase in cash used primarily relates to the net loss sustained during the year, less $1,138,960 in depreciation and amortization charges, $602,628 in noncash compensation and consulting expenses and $106,002 in deferred rent expense. The loss was further offset by a net change in cash from working capital of $156,739, which included an increase in accrued compensation and benefits of $437,931 and accounts payable of $194,970, offset by a decrease in accounts receivable, prepaid and other current assets and other accrued expenses of $169,566, $143,003 and $(163,593), respectively. At December 31, 2000, working capital (current assets minus current liabilities) totaled $5,438,546.



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.



Investing activities for the year ended December 31, 2000 included $283,559 for computers, software and other equipment, $22,708 for leasehold improvements and $12,009 for furniture.



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 were $3,607 for various computer and office equipment.





21





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The Company's primary source of liquidity continues to be proceeds from the sale of private placements of preferred securities. A total of $16,256,344 was raised, after commissions and expenses of the offering, in 2000 through the issuance of 19,608, 46,876 and 36,649 shares of Series A, Series B and Series C preferred stock, respectively. These funds are being used to finance continued operations, product development and marketing. 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.



On April 30, 1999, the Company entered into a Master Agreement of Terms and Conditions for Lease, amended in 2000 with TLP Leasing Programs, Inc. (the "Master Agreement"). The Master Agreement provides the Company with a source of financing in the amount of $900,000 with which to obtain certain equipment. As of December 31, 2000 the Company has utilized $806,344 of the lease line of credit.



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 2001 and 2002 as it continues to develop products and implement its marketing strategy. For example, the Company incurred a net loss of $15,373,788 for the fiscal year ended December 31, 2000, and its accumulated deficit is $24,095,432 through December 31, 2000. The Company, based upon its current operating plan, does not anticipate that its currently available funds will be sufficient to satisfy its anticipated needs for working capital, capital expenditures and business expansion through the end of the year. The Company has encountered recent difficulties attracting capital and is not generating positive cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Continuation of the Company is dependent on (1) achieving sufficiently profitable operations and (2) obtaining adequate financing. Management is exploring several alternatives including the raising of additional capital from strategic and financial investors, the repositioning of the Company's product and service offerings or the merger or sale of the Company. However, there can be no assurances that the Company will be successful in accomplishing these objectives.



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 of the Company are set forth on pages F-1 to F-21 of this Report as part of this Annual Report on Form 10-KSB.



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



On January 7, 2000, Comiskey & Company, P.C.'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. In connection with the audits of the Company's two fiscal years ended December 31, 1998, and with respect to the subsequent period through the date of termination, there were no disagreements with Comiskey on any matter of accounting principles or practices, financial statements disclosure, or auditing scope or procedures, which disagreements, if not resolved to their satisfaction, would have caused them to make reference in connection with their opinion to the subject matter of the disagreement.



Comiskey's reports on the consolidated financial statements of the Company as of and for the two fiscal year periods ended December 31, 1998 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.



The Company delivered a copy of the Report on Form 8-K (that was filed with the SEC on January 13, 2000) to Comiskey on January 10, 2000 and requested Comiskey to furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agreed with the statements made by the Company in that Form 8-K and, if not, stating the respects in which it does not agree. A copy of the response letter of Comiskey is attached to that Form 8-K.



22





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The Company engaged Deloitte & Touche LLP as its new independent auditors effective January 7, 2000. During the 1999 and 1998 fiscal years and through January 7, 2000, the Company had 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.



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 2001 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission prior to April 19, 2001, 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 2001 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission prior to April 19, 2001, 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 2002 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission prior to April 19, 200, 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 2001 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission prior to April 19, 2002, 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, 2000 and 1999



Consolidated Statements of Operations--Years ended December 31, 2000, 1999 and 1998



Consolidated Statements of Stockholders' Equity--Years ended December 31, 2000, 1999 and 1998



Consolidated Statements of Cash Flows--Years ended December 31, 2000, 1999 and 1998



Notes to Consolidated Financial Statements--December 31, 2000, 1999 and 1998



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





23





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Exhibit Number          Description



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.)



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).



*3.8.........

The Company's Certificate of Designation for Series C Preferred Stock filed with the Delaware Secretary of State as of December 20, 2000.



*3.9.........

By-Law Amendment to the Company's Amended and Restated Bylaws.



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).



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).





24





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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).



10.13........

Amended and Restated Shareholders' and Rights Agreement dated December 21, 2000, by and among the Company and the the holders of shares of Series A, B and C Preferred Stock (incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K dated January 5, 2001).



10.14........

Series C Preferred Stock and Warrant Purchase Agreement by and among the Company and certain investors (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated January 5, 2001).



10.15........

Form of Series C Preferred Stock Warrant (incorporated by referenced to Exhibit 10.3 of the Company's Current Report on Form 8-K dated January 5, 2001).



10.16........

Form of Warrant exercisable under certain conditions on August 1, 2001 (incorporated by reference to Exhibit 10.4 of the Company's Current Report on Form 8-K dated January 5, 2001).



10.17........

Form of Warrant exercisable under certain conditions on October 15, 2001 (incorporated by reference to Exhibit 10.5 of the Company's Current Report on Form 8-K dated January 5, 2001).



21...........

Subsidiaries of the Company



*23.1........

Consent of Independent Auditors



*31.1........

Section 302 Certifications



*32.1........

Section 906 Certifications



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

*   Filed herewith.



(b) During the quarter ended December 31, 2000, the Company filed two Current Reports on Form 8-K. The Reports on Form 8-K filed on November 14, 2000 and December 4, 2000 are incorporated herein by reference.



(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.



25





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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.



SOFTLOCK.COM, INC.



Date:  June 26, 2008

By:   /s/ Richard Schaefer

Richard Schaefer



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.



SIGNATURES                                                           TITLE                                                          DATE





/s/ Richard Schaefer                                            Chief Executive Officer                                     June 26, 2008

Richard Schaefer





26





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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:





Independent Auditors' Report

F-2



Consolidated Balance Sheets

F-3



Consolidated Statements of Operations

F-4



Consolidated Statements of Changes in Stockholders' Equity

F-5 to F-6



Consolidated Statements of Cash Flows

F-7 to F-8



Notes to Consolidated Financial Statements

F-9 to F-22





27





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INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders of

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, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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 SoftLock.com, Inc. as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.



The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



Boston, Massachusetts

March 2, 2001





28





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Softlock.COM, INC.

A Development Stage Company

Table of Contents

March 31, 2005



FINANCIAL STATEMENTS



Balance Sheet

F-1

Statements of Operations

F-2

Statement of Changes in Stockholder's Deficiency

F-3

Statements of Cash Flows

F-4



NOTES TO INTERIM FINANCIAL STATEMENTS

F-5-7











29





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Softlock.COM, INC.

A Development Stage Company

Balance Sheet

March 31, 2005





|                                                                                                                                                                                                 |  |   |         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | --------
|ASSETS                                                                                                                                                                                           |  |  
|Current assets:                                                                                                                                                                                  |  |   |         
|Cash and cash equivalents                                                                                                                                                                        |  | $ | 0       
|Total assets                                                                                                                                                                                     |  | $ | 0       
|                                                                                                                                                                                                 |  |   |         
|                                                                                                                                                                                                 |  |   |         
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                             |  |   |         
|Commitments and Contingencies                                                                                                                                                                    |  |   |         
|Redeemable Preferred Stock:                                                                                                                                                                      |  |   |         
|Series E Convertible Redeemable Preferred Stock $1,100,000 redemption value net
of $163,000 of offering costs, authorized 2,000 shares; issued and outstanding 1,100 shares                      |  | $ | 937     
|                                                                                                                                                                                                 |  |   |         
|Total liabilities                                                                                                                                                                                |  |   | 937     
|                                                                                                                                                                                                 |  |   |         
|                                                                                                                                                                                                 |  |   |         
|Stockholders' equity                                                                                                                                                                             |  |   |         
|Preferred stock, no par value; authorized 1,000,000 shares Series D Convertible Preferred Stock, $1,000 stated
par value per share, authorized 5,000 shares, issued and outstanding 2,496 shares |  |   | 2,496   
|Series F Convertible Preferred Stock, $1,000 stated par value per share, authorized 2,000 shares, issued and
outstanding 945 shares                                                              |  |   | 945     
|Series G Convertible Preferred Stock, $1,000 stated par value per share, authorized 500 shares, issued and
outstanding 400 shares                                                                |  |   | 400     
|Common stock, no par value, authorized 25,000,000 shares, issued and outstanding 11,591,215 shares                                                                                               |  |   | 11,025  
|Additional paid-in capital                                                                                                                                                                       |  |   | 2,839   
|(Deficit) accumulated during the development stage                                                                                                                                               |  |   | (18,642)
|Total stockholders' equity                                                                                                                                                                       |  |   | (937)   
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                       |  | $ | 0       







See notes to unaudited interim financial statements.

F-1



---

Softlock.COM, INC.

A Development Stage Company

Statements of Operations





|                                                     |                                   |            |                                   |   |           
|---------------------------------------------------- | --------------------------------- | ---------- | --------------------------------- | - | ----------
|                                                     | For the Year
Ended
March 31, 2005 |            | For the Year
Ended
March 31, 2004
|                                                     |                                   |            |                                   |   |           
|Revenues                                             | $                                 | --         |                                   | $ | --        
|General and administrative expense                   |                                   | --         |                                   |   | --        
|Interest                                             |                                   | --         |                                   |   | --        
|Net (loss)                                           | $                                 | --         |                                   | $ | --        
|                                                     |                                   |            |                                   |   |           
|Basic and diluted (loss) per share                   | $                                 | (0.00)     |                                   | $ | (0.00)    
|                                                     |                                   |            |                                   |   |           
|Weighted average number of common shares outstanding |                                   | 11,591,215 |                                   |   | 11,591,215







See notes to financial statements.

F-2



---

Softlock.COM, INC.

A Development Stage Company

Statement of Changes in Stockholders Equity

For the Ended March 31, 2005



|                                       |  |                 |  |              |       |        |            |                      |   |        |    |   |                            |    |   |                                                    |    |   |       |   
|-------------------------------------- |  | --------------- |  | ------------ | ----- | ------ | ---------- | -------------------- | - | ------ | -- | - | -------------------------- | -- | - | -------------------------------------------------- | -- | - | ----- | --
|                                       |  |                 |  |              |       |        |            |                      |   |        |    |   |                            |    |   | (Deficit)
Accumulated
During the
Development
Stage |    |   |      
|                                       |  |                 |  |              |       |        |            |                      |   |        |    |   |                            |    |   |                                                    |    |  
|                                       |  |                 |  |              |       |        |            |                      |   |        |    |   | Additional
Paid-in
Capital |    |   |                                                    |   
|                                       |  | Preferred Stock |  | Common Stock |       |        |            | Stockholders
Equity
|                                       |  | Shares          |  | Amount       |       | Shares |            | Amount               |   |        |   
|Balance March 31, 2003                 |  | 3,841           |  | $            | 3,841 |        | 11,591,215 |                      | $ | 11,025 |    | $ | 2,839                      |    | $ | (18,642)                                           |    | $ | (937)
|                                       |  |                 |  |              |       |        |            |                      |   |        |    |   |                            |    |   |                                                    |    |   |       |   
|Issuance of                            |  |                 |  |              |       |        |            |                      |   |        |    |   |                            |    |   |                                                    |    |   |       |   
|Preferred Stock                        |  | --              |  |              | --    |        |            | --                   |   |        | -- |   |                            | -- |   |                                                    | -- |   |       | --
|Common Stock                           |  | --              |  |              | --    |        |            | --                   |   |        | -- |   |                            | -- |   |                                                    | -- |   |       | --
|Capital contributions from stockholder |  | --              |  |              | --    |        |            | --                   |   |        | -- |   |                            | -- |   |                                                    | -- |   |       | --
|                                       |  |                 |  |              |       |        |            |                      |   |        |    |   |                            |    |   |                                                    |    |   |       |   
|Net (loss)                             |  | --              |  |              | --    |        |            | --                   |   |        | -- |   |                            | -- |   |                                                    | -- |   |       | --
|                                       |  |                 |  |              |       |        |            |                      |   |        |    |   |                            |    |   |                                                    |    |   |       |   
|Balance March 31, 2004                 |  | 3,841           |  | $            | 3,841 |        | 11,591,215 |                      | $ | 11,025 |    | $ | 2,839                      |    | $ | (18,642)                                           |    | $ | (937)
|                                       |  |                 |  |              |       |        |            |                      |   |        |    |   |                            |    |   |                                                    |    |   |       |   
|Issuance of                            |  |                 |  |              |       |        |            |                      |   |        |    |   |                            |    |   |                                                    |    |   |       |   
|Preferred Stock                        |  | --              |  |              | --    |        |            | --                   |   |        | -- |   |                            | -- |   |                                                    | -- |   |       | --
|Common Stock                           |  | --              |  |              | --    |        |            | --                   |   |        | -- |   |                            | -- |   |                                                    | -- |   |       | --
|Capital contributions from stockholder |  | --              |  |              | --    |        |            | --                   |   |        | -- |   |                            | -- |   |                                                    | -- |   |       | --
|                                       |  |                 |  |              |       |        |            |                      |   |        |    |   |                            |    |   |                                                    |    |   |       |   
|Net (loss)                             |  | --              |  |              | --    |        |            | --                   |   |        | -- |   |                            | -- |   |                                                    | -- |   |       | --
|                                       |  |                 |  |              |       |        |            |                      |   |        |    |   |                            |    |   |                                                    |    |   |       |   
|Balance March 31, 2005                 |  | 3,841           |  | $            | 3,841 |        | 11,591,215 |                      | $ | 11,025 |    | $ | 2,839                      |    | $ | (18,642)                                           |    | $ | (937)







See notes to financial statements.

F-3



---

Softlock.COM, INC.

A Development Stage Company

Statements of Cash Flows



|                                          |  |                                   |    |                                   |   |   
|----------------------------------------- |  | --------------------------------- | -- | --------------------------------- | - | --
|                                          |  | For the Year
Ended
March 31, 2005 |    | For the Year
Ended
March 31, 2004
|Cash flows from operating activities:     |  |                                   |    |                                   |   |   
|Net (loss)                                |  | $                                 | -- |                                   | $ | --
|Net cash provided by operating activities |  |                                   | -- |                                   |   | --
|                                          |  |                                   |    |                                   |   |   
|Cash flows from investing activities:     |  |                                   |    |                                   |   |   
|Net cash provided by investing activities |  |                                   | -- |                                   |   | --
|                                          |  |                                   |    |                                   |   |   
|Cash flows from financing activities:     |  |                                   |    |                                   |   |   
|Net cash provided by financing activities |  |                                   | -- |                                   |   | --
|                                          |  |                                   |    |                                   |   |   
|Net increase in cash and cash equivalents |  |                                   | -- |                                   |   | --
|Cash and cash equivalents - beginning     |  |                                   | -- |                                   |   | --
|Cash and cash equivalents - ending        |  | $                                 | 0  |                                   | $ | 0 







See notes to financial statements.

F-4



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Softlock.COM, INC.

A Development Stage Company

Notes to Financial Statements

March 31, 2005





1 -

ORGANIZATION AND BUSINESS



Softlock.COM, Inc., a development stage company (the "Company"), was incorporated in the State of Delaware on December 1, 1989.  All activities of the Company to date relate to its organization, initial funding and share issuance.  The Company is looking to acquire an existing company or acquire the technology to begin operations.



The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business.  The Company has had no revenue and has incurred accumulated net losses through March 31, 2005 of $18,642.  These factors, among others, raise substantial doubt about the Companys ability to continue as a going concern.  In addition, the Companys development activities since inception have been financially sustained through stockholder loans and contributions.  The ability of the Company to continue as a going concern is dependent upon managements plan to find a suitable acquisition/merger candidate, raise additional capital from the sale of common stock, receive additional loans from its shareholders and, ultimately, the achievement of significant operating revenues.  The accompanying financial statements do not include any adjustments that might be required should the Company be unable to recover the value of its assets or satisfy its liabilities.



2 -

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



a.

Use of Estimates - The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.



b.

Cash Equivalents - For purposes of the statement of cash flows, the Company considers highly liquid financial instruments purchased with a maturity of three months or less to be cash equivalents.  There are no cash equivalents at the balance sheet date.



c.

Income Taxes  The Company utilizes the liability method of accounting for income taxes.  Under the liability method deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and the tax basis of the assets and liabilities and are measured using the enacted tax rates and laws that will be in effect, when the differences are expected to reverse.  An allowance against deferred tax assets is recognized, when it is more likely than not, that such tax benefits will not be realized.



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SoftLock.COM, INC.

A Development Stage Company

Notes to Financial Statements

March 31, 2005





d.

Loss Per Common Share - Basic loss per share is calculated using the weighted-average number of common shares outstanding during each reporting period. Diluted loss per share includes potentially dilutive securities such as outstanding options and warrants, using various methods such as the treasury stock or modified treasury stock method in the determination of dilutive shares outstanding during each reporting period.  The Company does not have any potentially dilutive instruments.



e.

Fair Value of Financial Instruments - The carrying value of current assets and liabilities approximates fair value due to the short period of time to maturity.



3 -

CAPITAL STOCK



The preferred stock of the Company shall be issued by the Board of Directors of the Company in one or more classes or one or more series within any class and such classes or series shall have such voting powers, full or limited, or no voting powers, and such designations, preferences, limitations or restrictions as the Board of Directors of the Company may determine, from time to time.



Holders of shares of common stock shall be entitled to cast one vote for each share held at all stockholders' meetings for all purposes, including the election of directors.  The common stock does not have cumulative voting rights.



No holder of shares of stock of any class shall be entitled as a matter of right to subscribe for or purchase or receive any part of any new or additional issue of shares of stock of any class, or of securities convertible into shares of stock of any class, whether now hereafter authorized or whether issued for money, for consideration other than money, or by way of dividend.



F-6



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Softlock.COM, INC.

A Development Stage Company

Notes to Financial Statements

March 31, 2005





4 -

RECENT ACCOUNTING PRONOUNCEMENTS



During the year ended March 31, 2005, the Company adopted the following accounting pronouncements, which had no impact on the financial statements or results of operations:



SFAS No. 143, Accounting for Asset Retirement Obligations;



SFAS No.145, Rescission of FASB Statements 4, 44, and 64, amendment of Statement 13, and Technical Corrections;



SFAS No. 146, Accounting for Exit or Disposal Activities;



SFAS No. 147, Acquisitions of Certain Financial Institutions; and



SFAS No. 148, Accounting for Stock Based Compensation.



SFAS No.149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities;



SFAS No.150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity



In addition, during the year ended March 31, 2005, FASB Interpretations No. 45 and No. 46, along with various Emerging Issues Task Force Consensuses (EITF) were issued and adopted by the Company and had no impact on its financial statements.









F-7