|EXHIBIT
99.2


Princeton eCom
Corporation and Subsidiaries



Consolidated
financial statementsAs of December 31, 2001Together with
auditors report
|----------------------------------------------------------------------------------------------------------------------------------------------------

|Report of
independent public accountants


To Princeton eCom Corporation:



We have audited the
accompanying consolidated balance sheets of Princeton eCom Corporation (a
Delaware corporation) and Subsidiaries, as of
 December  31, 2000 and 2001, and the related consolidated
statements of operations, stockholders  equity (deficit) and
cash flows for each of the three years in the period ended
 December  31, 2001.   These financial statements are the
responsibility of the Companys management.   Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.


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


In our opinion, the
financial statements referred to above present fairly, in all material respects,
the financial position of Princeton eCom Corporation and Subsidiaries
as of  December  31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
 December  31, 2001, in conformity with accounting principles
generally accepted in the  United States .



Philadelphia, PennsylvaniaMarch 28, 2002
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Princeton eCom
Corporation and Subsidiaries




Table of contents
|-----------------------------------------------------------------

|                                                          | 
|--------------------------------------------------------- | 
|Consolidated balance sheets                               | 
|As of December 31, 2000 and 2001                          | 
|Consolidated statements of operations                     | 
|For the years ended December 31, 1999, 2000 and 2001      | 
|Consolidated statements of stockholders equity (deficit) | 
|For the years ended December 31, 1999, 2000 and 2001      | 
|Consolidated statements of cash flows                     | 
|For the years ended December 31, 1999, 2000 and 2001      | 
|Notes to consolidated financial statements                | 
|December 31, 2001                                         | 
|                                                          | 
|                                                          | 

|Princeton eCom
     Corporation and Subsidiaries


Consolidated balance sheets
     As of December 31, 2000 and 2001
|--------------------------------------------------------------------------------------------------------------------

|                                                             | 2000 | 2001       
|------------------------------------------------------------ | ---- | -----------
|Assets                                                       |      |            
|Current assets:                                              |     
|Consumer deposits-                                           |     
|Cash                                                         |      | $8,201,841 
|Receivables from billers                                     |      | 1,346,278  
|                                                             |      |            
|Total consumer deposits                                      |      | 9,548,119  
|Cash and cash equivalents                                    |      | 16,102,840 
|Accounts receivable, net of allowance of $110,625            |     
|and $194,919                                                 |      | 3,731,764  
|Cash held in reserve at a third-party                        |      |           
|Prepaid expenses and other                                   |      | 1,458,803  
|                                                             |      |            
|Total current assets                                         |      | 30,841,526 
|Property and equipment, net                                  |      | 12,772,229 
|Restricted cash                                              |      |           
|Other assets, net                                            |      | 435,450    
|Software license                                             |      | 865,385    
|                                                             |      |            
|                                                             |      | $44,914,590
|                                                             |      |            
|Liabilities and stockholders deficit                        |     
|Current liabilities:                                         |     
|Consumer deposits payable                                    |      | $9,548,119 
|Service fees payable                                         |      | 1,687,015  
|Current debt obligations                                     |      | 15,793     
|Accounts payable                                             |      | 3,487,793  
|Accrued expenses                                             |      | 2,249,445  
|Deferred revenue                                             |      | 136,523    
|                                                             |      |            
|Total current liabilities                                    |      | 17,124,688 
|Deferred revenue                                             |      | 627,988    
|Other liabilities                                            |      | 310,960    
|                                                             |      |            
|Total liabilities                                            |      | 18,063,636 
|                                                             |      |            
|Series A-1 mandatorily redeemable convertible preferred      |     
|stock (liquidation value of $13,042,470)                     |      |           
|                                                             |      |            
|Series A mandatorily redeemable convertible preferred        |     
|stock                                                        |      | 24,004,409 
|                                                             |      |            
|Series B mandatorily redeemable convertible preferred        |     
|stock                                                        |      | 2,558,416  
|                                                             |      |            
|Series C mandatorily redeemable convertible preferred        |     
|stock                                                        |      | 33,971,002 
|                                                             |      |            
|Commitments and contingencies (Note 10)                      |      |            
|Stockholders deficit:                                       |      |            
|Common stock, $.01 par value, 100,000,000 shares authorized, |      |            
|2,286,746 and 29,784,636 shares issued                       |      |            
|and outstanding                                              |      | 22,867     
|Additional paid-in capital                                   |      | 30,525,274 
|Common stock warrants                                        |      | 4,832,949  
|Accumulated deficit                                          |      | (67,549,007
|Deferred compensation                                        |      | (1,514,956 
|                                                             |      |            
|Total stockholders deficit                                  |      | (33,682,873
|                                                             |      |            
|                                                             |      | $44,914,590
|                                                             |      |            
|                                                             |      |            

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





1
|----------------------------------------------------------------------------------------------

|Princeton eCom
Corporation and Subsidiaries



Consolidated statements
of operationsFor the years ended December 31, 1999, 2000 and 2001
|----------------------------------------------------------------------------------------------------------------------------------------

|                                    | 1999 | 2000         | 2001
|----------------------------------- | ---- | ------------ | ----
|Revenues:                           |      |              |     
|Payment and presentment             |     
|transactions                        |      | $3,686,663   |     
|Implementation and other            |     
|professional services               |      | 158,000      |     
|Interest                            |      | 1,465,857    |     
|                                    |      |              |     
|Total revenues                      |      | 5,310,520    |     
|                                    |      |              |     
|Operating expenses:                 |     
|Cost of services:                   |     
|Cost of payment and                 |     
|presentment transactions            |      | 3,537,914    |     
|Cost of implementation and          |     
|other professional services         |      | 151,680      |     
|Development costs                   |      | 3,393,865    |     
|Selling, general and                |     
|administrative:                     |     
|Other selling, general and          |     
|administrative                      |      | 8,536,788    |     
|Financing related costs             |      | 970,038      |     
|Noncash commissions related to      |     
|warrants                            |      |             |     
|Restructuring and asset             |     
|impairment charges                  |      |             |     
|Amortization of deferred            |     
|compensation                        |      | 1,285,792    |     
|                                    |      |              |     
|Total operating expenses            |      | 17,876,077   |     
|                                    |      |              |     
|Operating loss                      |      | (12,565,557  | )   
|Interest income                     |      |             |     
|Interest expense                    |      | 9,510        |     
|Amortization of original issuance   |     
|discount                            |      |             |     
|                                    |      |              |     
|Net loss                            |      | (12,575,067  | )   
|Accretion of preferred stock        |      |             |     
|Preferred stock dividends           |      |             |     
|Issuance of warrants treated as a   |     
|dividend                            |      |             |     
|Beneficial conversion feature       |     
|treated as a dividend               |      |             |     
|                                    |      |              |     
|Net loss applicable to common       |     
|stockholders                        |      | $(12,575,067 | )   
|                                    |      |              |     
|Basic and diluted net loss          |      |              |     
|applicable to common stockholders   |      |              |     
|per share                           |      | $(5.77       | )   
|                                    |      |              |     
|Shares used in computing, basic and |      |              |     
|diluted net loss applicable to      |      |              |     
|common stockholders per share       |      | 2,181,071    |     
|                                    |      |              |     

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





2
|----------------------------------------------------------------------------------------------

|Princeton eCom
Corporation and Subsidiaries



Consolidated statements
of stockholders equity (deficit)For the years ended December  31, 1999 , 2000 and 2001
|--------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                               | Common Stock |            | Common StockWarrants |           
|------------------------------------------------------------------------------ | ------------ | ---------- | -------------------- | ----------
|
|Balance, December 31, 1998                                                     |              | 2,147,734  |                      | $   21,477
|Sale of common stock                                                           |              | 25,954     |                      | 260       
|Exercise of stock options                                                      |              | 21,246     |                      | 212       
|Deferred compensation   resulting from grant of options                        |              |           |                      |          
|Compensation resulting from nonemployee   option grants                        |              |           |                      |          
|Compensation resulting from options   granted in connection with terminated    |             
|employee                                                                       |              |           |                      |          
|Sale of common stock by majority   stockholder                                 |              |           |                      |          
|Amortization of deferred compensation, net   of forfeitures                    |              |           |                      |          
|Repayment of subscription receivable                                           |              |           |                      |          
|Net loss                                                                       |              |           |                      |          
|                                                                               |              |            |                      |           
|Balance, December 31, 1999                                                     |              | 2,194,934  |                      | 21,949    
|Sale of common stock                                                           |              | 28,971     |                      | 290       
|Exercise of stock options                                                      |              | 62,838     |                      | 628       
|Compensation resulting from nonemployee   option grants                        |              |           |                      |          
|Deferred compensation resulting from grant   of options                        |              |           |                      |          
|Amortization of deferred compensation                                          |              |           |                      |          
|Issuance of common stock warrant                                               |              |           |                      |          
|Noncash commissions relating to warrants                                       |              |           |                      |          
|Accretion of preferred stock redemption   value                                |              |           |                      |          
|Cumulative preferred stock dividends                                           |              |           |                      |          
|Beneficial conversion feature on preferred
             stock                  |              |           |                      |          
|Beneficial conversion feature treated as a
             dividend               |              |           |                      |          
|Repayment of subscription receivable                                           |              |           |                      |          
|Net loss                                                                       |              |           |                      |          
|                                                                               |              |            |                      |           
|Balance, December 31, 2000                                                     |              | 2,286,743  |                      | 22,867    
|Exercise of stock options and warrants                                         |              | 36,967     |                      | 370       
|Compensation expense resulting from
             option modification           |              |           |                      |          
|Amortization of deferred compensation, net
             of forfeitures         |              |           |                      |          
|Issuance of common stock warrants to 
             Series C holders            |              |           |                      |          
|Accretion of preferred stock to redemption
               value                |              |           |                      |          
|Cumulative preferred stock dividends                                           |              |           |                      |          
|Beneficial conversion feature treated as
             dividend                 |              |           |                      |          
|Paid in capital in connection with business
             acquisition           |              |           |                      |          
|Non-cash interest related to warrants                                          |              |           |                      |          
|Conversion of preferred stock and
             dividends into common stock     |              | 3,770,470  |                      | 37,704    
|Conversion of note payable and accrued
             interest into common stock |              | 24,525,000 |                      | 245,250   
|Surrender of common stock                                                      |              | (834,544   | )                    | (8,345    
|Surrender of common stock warrants                                             |              |           |                      |          
|Surrender of warrants to purchase Series C                                     |              |           |                      |          
|Issuance of warrants in connection with
             contract settlement       |              |           |                      |          
|Net loss                                                                       |              |           |                      |          
|                                                                               |              |            |                      |           
|Balance, December 31, 2001                                                     |              | 29,784,636 |                      | $ 297,846 
|                                                                               |              |            |                      |           

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





3
|----------------------------------------------------------------------------------------------

|Princeton eCom
Corporation and Subsidiaries



Consolidated statements of cash flows
     For the years ended December  31, 1999 , 2000 and 2001
|------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     | 1999 | 2000              | 2001
|---------------------------------------------------- | ---- | ----------------- | ----
|Operating activities:                                |      |                   |     
|Net loss                                             |      | $(12,575,067      | )   
|Adjustments to reconcile net                         |     
|loss to net cash used in                             |     
|operating activities-                                |     
|Depreciation and amortization                        |      | 547,933           |     
|Asset impairment change                              |      |                  |     
|Warrants to be issued in                             |     
|connection with restructuring                        |      |                  |     
|Non-cash interest on bridge                          |     
|notes                                                |      |                  |     
|Non-cash compensation expense                        |      | 875,444           |     
|Amortization of lease guaranty                       |      |                  |     
|Amortization of original                             |     
|issuance discount                                    |      |                  |     
|Amortization of deferred                             |     
|compensation, net                                    |      | 1,285,792         |     
|Noncash commissions relating                         |     
|to warrants                                          |      |                  |     
|Provision for bad debts                              |      | 34,317            |     
|Compensation expense related                         |     
|to note receivable forgiveness                       |      |                  |     
|Loss on disposal of assets                           |      | 11,195            |     
|Changes in operating assets                          |     
|and liabilities-                                     |     
|Consumer deposits                                    |      | (3,570,087        | )   
|Accounts receivable                                  |      | (643,704          | )   
|Prepaid expenses and other                           |     
|assets                                               |      | 621,024           |     
|Customer deposits payable                            |      | 3,570,087         |     
|Service fees payable                                 |      |                  |     
|Deferred revenue                                     |      |                  |     
|Accounts payable                                     |      | 1,163,044         |     
|Accrued expenses                                     |      | 1,255,275         |     
|Other liabilities                                    |      | (11,397           | )   
|                                                     |      |                   |     
|Net cash used in operating activities                |      | (7,436,144        | )   
|                                                     |      |                   |     
|Investing activities:                                |     
|Purchases of property and                            |     
|equipment                                            |      | (8,254,844        | )   
|Purchase of software license                         |      |                  |     
|Business acquisition, net of                         |     
|cash acquired                                        |      |                  |     
|Restricted cash                                      |      |                  |     
|                                                     |      |                   |     
|Net cash used in investing activities                |      | (8,254,844        | )   
|                                                     |      |                   |     
|Financing activities:                                |     
|(Decrease)/increase in bank                          |     
|overdraft                                            |      | 15,006,110        |     
|Proceeds from convertible note                       |     
|and warrant                                          |      |                  |     
|Proceeds from sale of preferred                      |     
|stock, net                                           |      |                  |     
|Advances under accounts                              |     
|receivable funding                                   |      |                  |     
|Payments on capital leases                           |      | (29,441           | )   
|Proceeds from sale of common                         |     
|stock                                                |      | 538,848           |     
|Proceeds from repayment of                           |     
|subscription receivable                              |      | 171,804           |     
|Proceeds from exercise of stock                      |     
|options and warrants                                 |      | 3,667             |     
|                                                     |      |                   |     
|Net cash provided by financing activities            |      | 15,690,988        |     
|                                                     |      |                   |     
|Net increase (decrease) in cash and cash equivalents |      |                  |     
|Cash and cash equivalents, beginning of year         |      |                  |     
|                                                     |      |                   |     
|Cash and cash equivalents, end of year               |      | $                |     
|                                                     |      |                   |     

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





4
|----------------------------------------------------------------------------------------------

|Princeton eCom
Corporation and Subsidiaries



Notes to consolidated
financial statements 
December 31, 2001



1. Background,
liquidity and basis of presentation:


On January 25, 1984, Princeton eCom
Corporation (the Company) was incorporated in the State of Delaware as Princeton TeleCom
Corporation. In March 1999, the Company changed its name to Princeton eCom Corporation.
The Company, which operates in one business segment, is a provider of comprehensive
electronic bill presentment and payment services to financial institutions and large
businesses who generate a significant number of recurring bills. The Companys current
customers consist primarily of financial institutions, utilities, telephone companies,
cable companies, credit card companies, mortgage companies and an international package
delivery company (billers).


The Company has incurred significant
operating losses and expects to incur operating losses into 2002. As of December 31,
2001, the Company had an accumulated deficit of $153,238,442 and during 2001 the Company
incurred a net loss of $69,572,974. Since its inception, the Company has incurred costs
to develop and enhance its technology, establish marketing and customer relationships and
build its capital infrastructure and administrative organization. Management believes
that additional financing will be required for the Company to fund its operations and
continue to execute its strategy. In January and February 2002, the Company received proceeds of
$2,500,000 from the sale of Series A-1 mandatorily redeemable convertible preferred stock
(Series A-1). Additionally, the Company received an unconditional commitment from its
investors to provide additional proceeds of $8.5 million in 2002. Management believes that
its current cash and cash equivalents, proceeds received from the sale of Series A-1 and
the capital available under the investor commitment will be sufficient to fund its
operations through March 31, 2003.


To the extent that significant
increased revenues are not realized, the Companys business, results of operations and
financial condition will be materially and adversely affected. In addition, the Companys
business model is unproven and evolving and could be subject to possible changing
governmental regulations (see Note 9). The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.



2. Significant accounting
policies:


Principles of
consolidation



The accompanying consolidated
financial statements include the accounts of Princeton eCom Corporation and its
subsidiaries. All material intercompany balances and transactions have been eliminated.



5
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Use of estimates



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



Revenue recognition



Payment and presentment fee revenues
primarily consist of transaction fees charged to billers and financial institutions based
on contractual rates. Transaction fees are recognized as the services are performed.
Professional service fees consist of professional consulting services provided to
customers on a time and materials basis. Revenues from professional consulting services
are recognized as the services are performed. Fees earned for implementation services are
deferred and recognized as revenue over the term of the ongoing transaction service
period. Interest on the overnight investment of funds received from consumers pending
payment processing is recorded as revenue as earned.



Cash and cash equivalents



Cash and cash equivalents include
highly liquid investments with original maturities of three months or less and funds
received from consumers pending payment processing. The Company maintains cash and cash
equivalents with various major financial institutions. At times such amounts may exceed
the FDIC limits. The Company limits the amount of credit exposure with any one financial
institution and management believes that no significant concentration of credit risk
exists with respect to cash investments. As of December 31, 2000 and 2001, the Company
had $17,670,572 and $3,194,828 of cash equivalents, respectively.



Property and equipment



Property and equipment are recorded
at cost. Property and equipment capitalized under capital leases are recorded at the
present value of the minimum lease payments due over the term of the lease. Depreciation
and amortization are provided using the straight-line method over the estimated useful
lives or the lease term, whichever is shorter. Expenditures for maintenance, repairs and
betterments that do not prolong the useful life of an asset have been charged to
operations as incurred. Additions and betterments that substantially extend the useful
life of the asset are capitalized. Upon sale or other disposition of assets, the cost and
related accumulated depreciation and amortization are removed from the respective
accounts, and the resulting gain or loss, if any, is included in operating results.


Impairment of property
and equipment


The Company follows Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles held and used by the Company be
reviewed for possible impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. SFAS No. 121 also requires that
long-lived assets held for sale or disposal be reported at the lower of the carrying
amount or fair value less cost to sell. If changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, future undiscounted cash flows
expected to result from the use of the asset and its disposition must be estimated to
determine if the carrying value is impaired.


6
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In accordance with SFAS No. 121,
based upon a review of the Companys long-lived assets in December 2001, the Company
recorded a noncash impairment charged of $3,137,610 related to the write-down of a
portion of the asset value of the Companys property and equipment (see Note 3). An
impairment was recognized as the future undiscounted cash flows for the Company were
estimated to be insufficient to recover the related carrying values of the property and
equipment. As such, the carrying values of these assets were written down to the
Companys estimates of their fair value. Fair value was based on the present value of
estimated expected future cash flows using a discount rate of 30 percent. Management
believes this provision will be adequate to cover any future losses incurred relating to
these assets. However, actual losses could vary significantly from these estimates.


Restricted cash


Restricted cash relates to
outstanding letters of credit required by certain operating lease agreements.



Other assets



Other assets primarily consists of
prepaid lease guarantee and deposits. In December 1999, the Company entered into a lease
for their primary operating facility. In order to induce an existing shareholder, New
Century Equity Holdings Corp., (NCEH) to guarantee the lease, the Companys then Chief
Executive Officer sold NCEH 28,972 shares of Common stock from his personal account at
$27.60 per share, which was below the then estimated fair market value of $41.41 per
share. The in-the-money value of the common stock sold to NCEH of approximately $400,000
has been recorded as a deferred asset with a corresponding credit to additional paid-in
capital. The deferred asset is being amortized to rent expense over the ten-year lease
term. In 2000 and 2001, the Company recognized $40,000 and $40,000, respectively, of rent
expense related to this deferred asset. The guaranty will automatically terminate upon an
initial public offering, as defined, at which time any unamortized balance will be
recognized as a charge to operations.



Software license



On October 19, 1999, the Company
entered into an agreement with Bottomline Technologies, Inc. (Bottomline) pursuant to
which the Company agreed to purchase a five-year license to certain Bottomline software
products. The Bottomline agreement became effective in April 2000 when the Company took
possession of the license and paid Bottomline a $1,000,000 nonrefundable license fee. In
accordance with Statement of Position (SOP) 98-1 Accounting for costs of Computer
Software Developed or Obtained for Internal Use, the Company capitalized the license
into fixed assets. Amortization of the license fee was $134,615 and $173,077 for the
years ended December 31, 2000 and 2001. (see Note 3).


7
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Consumer deposits


Consumer deposits represent assets
held on behalf of consumers for the satisfaction of payment processing. Receivables from
billers are created when payment processing has been completed and funds are subsequently
drawn from consumer deposit accounts by the consumers financial institutions. Management
believes that receivables from billers are fully realizable assets because contractual
agreements permit reversals from biller accounts or stipulate that the biller is
obligated to reimburse the Company for such payments.



Deferred rent



Rent expense on leases is recorded
on a straight-line basis over the lease period. The excess of rent expense over the
actual cash paid is recorded as deferred rent.



Development costs


Research and development costs are
charged to expense as incurred.


Advertising and
marketing expense



The Company charges to expense
advertising and marketing costs as incurred. Advertising and marketing expense was
$457,346, $1,266,903, and $3,663,696 for the years ended December 31, 1999, 2000, and
2001, respectively.



Income taxes



Income taxes are accounted for using
the liability method in accordance with SFAS No. 109, Accounting for Income Taxes.
Accordingly, deferred income tax assets and liabilities are determined based on
differences between the financial statement carrying amounts of assets and liabilities
and their respective income tax basis, measured using enacted tax rates.



Restatement of
certificate of incorporation and stock split



In December 2001, the Company
declared the following reverse stock split on common stock. Also, in December 2001, the
Companys Certificate of Incorporation was amended to authorize 25,000,000 shares of
preferred stock and 100,000,000 shares of common stock. The increase in authorized
capital stock and the reverse stock split have been retroactively reflected in the
consolidated financial statements.



Stock compensation



The Company has elected to follow
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its employee stock options.
Under APB No. 25, if the exercise price of the Companys employee stock options equals or
exceeds the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. If the exercise price of an option is below the
market price of the underlying stock on the date of grant, compensation cost is recorded
and is recognized in the statements of operations over the vesting period (see Note 8).
In 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 established a fair value based method of
accounting for stock-based compensation plans. SFAS No. 123 requires that a companys
financial statements include certain disclosures about stock-based employee compensation
arrangement regardless of the method used to account for the plan.


8
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Net loss per share



Basic EPS is computed by dividing
net loss by the weighted average number of shares of common stock outstanding for the
period. Diluted EPS includes the dilutive effect, if any, from the potential exercise or
conversion of securities such as stock options, warrants, shares issuable to Intuit, Inc.
(see Note 3), and convertible preferred stock, which would result in the issuance of
additional shares of common stock. For each of the three years in the period ended
December 31, 2001, the impact of stock options, warrants to acquire common stock shares
issuable to Intuit, Inc. and the conversion of mandatorily convertible preferred stock
was not considered as the effect on net loss per share would be anti-dilutive.



Fair value of financial
instruments



The Companys financial instruments
consist of consumer deposits, cash and cash equivalents, accounts receivable, prepaid
expenses and other, consumer deposits payable, accounts payable, accrued expenses and
deferred revenue. Management believes the carrying value of these assets and liabilities
are representative of their fair value due to the relatively short-term nature of those
instruments.



Comprehensive loss



The Company follows SFAS No. 130,
Reporting Comprehensive Income. This statement requires the classification of items of
other comprehensive income by their nature and disclosure of the accumulated balance of
other comprehensive income, separately from retained earnings and additional paid-in
capital, in the equity section of the balance sheet. The only comprehensive loss item for
the years ended December 31, 1999, 2000 and 2001, was net loss.



Supplemental cash flow
information



For the years ended December 31,
1999, 2000 and 2001, the Company paid interest of $9,510, $5,929 and $116,289,
respectively.


Reclassification


Certain items in the prior year
financial statements were reclassified to conform to the 2001 financial statement
presentation.


9
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Recent accounting
pronouncements


In July 2001, the FASB issued SFAS
No. 141 Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles will be
evaluated against this new criteria and may result in certain intangibles being subsumed
into goodwill, or alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. SFAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain intangibles. Under
a nonamortization approach goodwill and certain intangibles will not be amortized into
results of operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value of
goodwill and certain intangibles is more than its fair value. The provisions of each
statement which apply to goodwill and intangible assets acquired prior to June 30, 2001
was adopted by the Company on January 1, 2002. The adoption of these accounting standards
will not have a material effect on the Companys consolidated financial position or
results of operations.


In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations, which is effective for fiscal
year beginning after June 15, 2002. SFAS No. 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and retirement
of assets. Management does not expect that the adoption of SFAS No. 143 will have a
significant impact on the consolidated financial position and results of operations.


In August 2001, the FASB issued SFAS
No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144).
SFAS No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121 and APB Opinion No. 30
Reporting the Results of Operations and Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transitions. SFAS No. 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly acquired, and
broadens the presentation of discontinued operations. Management does not expect that the
adoption of this accounting standard will have a material effect on the Companys
consolidated financial position or results of operations.


3. Business acquisition,
asset impairments, and restructuring charges:


Business acquisition


On May 15, 2001, the Company
acquired all of the outstanding shares of Venture Finance Software Corporation (VFSC)
formerly known as WebQuicken, Inc., a wholly owned subsidiary of Intuit, Inc., for an
aggregate purchase price of $13,542,925, including transaction costs of $528,000. VFSC
operated in the Internet commerce industry developing and deploying server-based personal
finance products including WebQuicken. The Company had three payment options; (1) issue
Common Stock, (2) cash payment or (3) combination of Common Stock and cash payment. Also,
the consideration was not to be exchanged until the earlier of 20 days after an Initial
Public Offering by the Company or February 1, 2002. The purchase price was determined
based on the Companys decision to issue only common stock. Accordingly, the Company
measured the purchase price as of May 15, 2001 based on the fair value of 2,285,279
shares of Common Stock to be issued in the future. The Company determined that the fair
value of its Common Stock on May 15, 2001 was approximately $5.70 per share. The
acquisition was recorded using the purchase method of accounting. The accompanying
statements of operations include the operating results for the acquisition from May 15, 
2001 through December 31, 2001. A summary of the allocation of the purchase price to the
net assets acquired is as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           | 
|-------------------------- | 
|Purchase price             | 
|                           | 
|Purchase price allocation: | 
|Cash                       | 
|Property and equipment     | 
|Acquired technology        | 
|                           | 
|                           | 
|                           | 

|10
|--

|The allocation of the purchase price
to identifiable acquired technology has been determined by management based on an
analysis of factors such as historical operating results, discounts on cash flow
projections and specific evaluations of products, customers, and other information. The
acquired technology was being amortized over five years based on its estimated useful
life. During 2001, the Company recorded $460,944 of amortization expense on acquired
technology, which is included in other selling, general, and administrative expense in
accompanying consolidated statements of operation.


The following unaudited pro forma
operating results have been presented assuming the acquisition occurred on January 1,
2000. The pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which actually would have resulted
had the acquisitions been made on January 1, 2000 or of results which may occur in the
future.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     | Year ended December 31
|-------------------- | ----------------------
|
|Revenues             |                       
|Loss from operations |                       
|Net loss per share   |                       
|                     |                       

|During 2001, the Company recorded
Restructuring and Asset Impairment charges as follows:
|----------------------------------------------------------------------------------------

|                                           | 
|------------------------------------------ | 
|Acquired technology impairment             | 
|VFSC-related fixed assets impairment       | 
|Other fixed assets impairment (see Note 2) | 
|Other assets impairment                    | 
|Restructuring charge                       | 
|                                           | 
|                                           | 
|                                           | 

|11
|--

|VFSC asset impairments



Subsequent to the VFSC acquisition
date and through September 30, 2001, the Company made significant investments in
software, hardware and property and equipment to build-out the VFSC business. In
accordance with SFAS No. 121, the Company continuously evaluates whether later events and
circumstances have occurred that indicate that the remaining useful life of its
long-lived assets may warrant revision or that the remaining balance may not be
recoverable. Management determined that as of September 30, 2001, its long-lived assets
related to the VFSC acquisition had been impaired. The impairment was measured by the
Company due to the following factors:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(a) |  | The
Company had accumulated costs significantly in excess of the amount originally expected
|--- |  | -------------------------------------------------------------------------------------------

|(b) |  | A
significant current period operating loss and cash flow loss combined with a projection
that demonstrated continuing losses associated with assets acquired.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|The expected undiscounted cash flows
directly related to the VFSC assets was negative. As of September 30, 2001, the Company
recorded an impairment charge of $10,673,638 which reduced acquired technology and
VFSC-related fixed assets to $0 as of September 30, 2001. The impairment charge was
determined based upon the estimated fair value of the business using a discounted cash
flow analysis compared to the tangible net book value of the Company. The following table
displays the components of the VFSC asset impairment charges recorded of the Company:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    | 
|------------------- | 
|Acquired technology | 
|Fixed assets        | 
|                    | 
|                    | 
|                    | 

|In December 2001, the Company
decided to exit the VFSC business. The Company terminated 28 employees and 6
subcontractors in December 2001 (see Restructuring charge below) and on February 28,
2002, the Company entered into a Modification, Release and Termination Agreement, an
Asset Purchase Agreement and a Software License Agreement (together the Termination
Agreements) with Intuit, Inc. As a result of the Termination Agreements, the Company and
Intuit agreed that no shares of common stock would be issued to Intuit in the future and
that the Company would continue to maintain ownership of certain assets acquired from
Intuit in May 2001. Intuit agreed to repurchase hardware and other equipment for $35,612.
Additionally, the Company granted to Intuit, Inc. a license for presentment of electronic
bills desktop software and retained ownership of the licensed software purchased in May
2001. The license fee paid to the Company was $33,000. Additionally, the Company agreed
to pay $328,000 to Intuit, Inc. for consulting services performed during 2001, which was
accrued at December 31, 2001.


12
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Other asset impairment


As discussed in Note 2, the Company
capitalized a $1,000,000 nonrefundable software license fee in 1999. During 2000 and
through the third quarter of 2001, the Company utilized the software to generate revenues
from one significant customer. During the third quarter of 2001, the significant customer
informed the Company that it was exiting its strategy to resell this product to its
business customers. As a result of the lost customer and in accordance with SFAS No. 121,
the Company determined that the software license fee had been impaired and recorded an
impairment charge in the amount of $692,308 (carrying value including $307,692 of
accumulated amortization) which reduced the asset to $0.


During 2001, the Company entered
into a software license agreement that required upfront payments of $1,950,000. These
payments were capitalized into fixed assets in accordance with SOP 98-1. The Company
utilized the software to provide a solution to several large customers. Based upon
significant changes in market conditions, during the third quarter of 2001, the Company
decided to stop providing the solution to its customers. In accordance with SFAS No. 121,
the Company recorded an impairment charge in the amount of $1,603,333 (carrying value
including $346,667 of accumulated amortization,) which reduced the asset to $0.



Restructuring charge



The Company implemented a strategic
restructuring plan in the fourth quarter of 2001 (including exiting the VFSC business)
and the first quarter of 2002 and recorded a restructuring charge of $7,784,040 in
December 2001. The focus of the Companys restructuring plan was to streamline its
operations by reducing operating expenses primarily through workforce reductions and
renegotiating significant contracts and leases. The Company expects to complete the
restructuring program by March 31, 2002. There can be no assurance that management will
be successful in implementing the restructuring plan or that the Company will not have
further restructurings or be profitable in the future. In accordance with Emerging Issues
Task Force No. 94-3 Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity, the components of the restructuring charge is as
follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     | 
|-------------------- | 
|Employee separations | 
|Contract settlements | 
|Facility closings    | 
|                     | 
|                     | 
|                     | 
|                     | 

|13
|--

|The Company recorded charges during
2001 associated with voluntary and involuntary employee separations totaling
approximately 164 employees. Included in the employee separation charge is the noncash
charge in the amount of $750,000, which reflects the forgiveness of a note receivable due
from a former executive.


Contract settlements include
settlements of purchase commitments and contractual agreements with vendors and property
owners. Approximately 88 percent of the contract settlements relate to buyouts of real
estate lease agreements.


Facility closings reflect the costs
associated with the consolidation of offices as a result of employee separations and
product rationalization. In connection with the cancellation of an office lease, the
Company agreed to issue warrants to the landlord to purchase 250,000 shares of the
Companys common stock at $0.01 per share. The Company recorded restructuring charges of
$198,028 in the accompanying consolidated statement of operations in relation to the
granting of warrants. The costs of the buyout of real estate lease agreements are
included in contract settlements.



4. Property and
equipment:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 |  | December 31
|-------------------------------- |  | -----------
|
|Computer and telephone equipment |  |            
|and software                     |  | 3-5 years  
|Furniture and fixtures           |  | 5 years    
|Leasehold improvements           |  | Lease term 
|                                 |  |            
|                                 |  |            
|Less-Accumulated                 | 
|depreciation and amortization    |  |            
|                                 |  |            
|                                 |  |            
|                                 |  |            

|Depreciation and amortization
expense for the years ended December 31, 1999, 2000 and 2001, was $547,933, $2,274,220
and $6,531,765, respectively. As of December 31, 2000 and 2001, the Company had property
and equipment under capitalized lease obligations of $134,069, net of accumulated
amortization of $118,276 and $134,069, respectively.




5. Accrued expenses:


Other accrual liabilities consist of
the following:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | December 31
|------------------------ | -----------
|
|Accrued restructuring    |            
|Accrued software license |            
|Other                    |            
|                         |            
|                         |            
|                         |            

|14
|--

|6. Current debt
obligations:


On September 4, 2001, the Company
entered into an accounts receivable funding agreement (funding agreement) with a
financial institution. The funding agreement allows the Company to sell accounts
receivable to the financial institution. The Company receives an advance of 80 percent of
the accounts receivable balance sold. The accounts receivable balance is sold with full
recourse. The Company is subject to a 12 percent annual interest rate on all funds
received while the sold accounts receivable remains outstanding. The 20 percent that is
held back by the financial institution has been classified as cash held in reserve at a
third-party on the accompanying consolidated balance sheet as of December 31, 2001. As
the accounts receivable are sold with full recourse, the Company has accounted for the
funds received as a current debt obligation of $1,349,685 in the accompanying
consolidated balance sheet as of December 31, 2001.


In connection with the funding
agreement, the financing institution was issued fully vested warrants to purchase 125,000
shares of the Companys common stock at an exercise price of $1.00 per share. The Company
recorded noncash commissions related to warrants of $56,807 relating to the grant of the
warrants in the accompanying consolidated statement of operations.


7. Bridge note, warrant,
and mandatorily redeemable convertible preferred stock:



Accounting for bridge
note and warrant




On November 13, 2001, the Company
issued a $3,100,000 bridge note to NCEH, the Companys CEO and one other investor. The
bridge note was convertible into a subsequent series of mandatorily redeemable preferred
stock at the offering price of a subsequent closing of mandatorily redeemable preferred
stock. The bridge note bore interest at 15 percent and the principal was due on November
13, 2002. The bridge note also bore a prepayment penalty of 50 percent. On December 14,
2001, in connection with the sale of Series A-1, the principal amount of the notes held
by NCEH and one other investor ($3,000,000) and the prepayment penalty ($1,500,000)
totaling $4,500,000 was converted into common stock. The note payable to the Companys
CEO ($100,000) plus accrued interest ($25,000) was unpaid and included in accrued
expenses as of December 31, 2001.


On April 12, 2001, the Company
issued a $22,500,000 bridge note to NCEH and other investors. The bridge note was
convertible into a subsequent series of mandatorily redeemable preferred stock at the
offering price of a subsequent closing of mandatorily redeemable preferred stock. The
bridge note bore interest at 12 percent prior to the due date of September 15, 2001 and
18 percent thereafter. In connection with the bridge note, the note holders were issued
warrants to purchase 3,251,445 shares of Series C mandatorily redeemable preferred stock
(Series C) at an exercise price of $3.46 per share.


The Company allocated the proceeds
from the bridge note to the note and the warrant based on their relative fair values. The
fair value of the note was determined based on a discounted cash flow analysis using a
discount rate of 30 percent. The fair value of the warrant was based on the Black-Scholes
option-pricing model. As a result, the Company allocated $20,232,483 to the note and
$2,267,518 to the warrant.


15
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The Company recognized interest
expense on the note of $4,292,518 in 2001, of which $2,025,000 was accrued coupon
interest and $2,267,518 was amortization of the debt discount. On December 14, 2001, in
connection with the close of Series A-1 mandatorily redeemable preferred stock, the
principal amount of the note and coupon interest was converted into common stock and the
warrants were cancelled.


Also, in connection with the April
12, 2001 bridge notes, the Company agreed to issue warrants to purchase an additional
5,202,312 shares of Series C at an exercise price of $3.46 per share. These additional
shares were issuable only in the event the Company failed to consummate a subsequent
series of mandatorily redeemable preferred stock by September 15, 2001. The Company did
not account for the additional warrants on the commitment date as management determined
that a subsequent series of mandatorily redeemable preferred stock would be completed
prior to September 15, 2001. However, due to unfavorable market conditions, the
subsequent series of mandatorily redeemable preferred stock did not occur until December
14, 2001. Accordingly, the Company issued warrants to purchase 5,202,312 shares of Series
C effective September 15, 2001. Management determined that the value of the warrants was
zero and in connection with the recapitalization on December 14, 2001, all of the
warrants were cancelled.


On June 1, 2000, the Company issued
a $5,000,000 bridge note to NCEH. The bridge note was convertible into shares of Series C
at the Series C offering price. The bridge note bore interest at 10 percent and the
principal was due on July 1, 2001. In connection with the bridge note, NCEH was issued
warrants to purchase 96,574 shares of the Companys common stock at an exercise price of
$12.94 per share. On December 14, 2001, in connection with the sale of Series A-1,
warrants to purchase 91,552 shares of the remaining warrants were cancelled. The Company
allocated the proceeds from the bridge note to the note and the warrant based on their
relative fair values. The fair value of the note was determined based on a discounted
cash flow analysis using a discount rate of 30 percent. The fair value of the warrant was
determined based on the Black-Scholes option-pricing model. As a result, the Company
allocated $2,885,569 to the note and $2,114,431 to the warrant.


The Company recognized interest
expense on the note of $427,630 in 2000, of which $104,168 was accrued coupon interest
payable in cash as of December 31, 2000, and $323,462 was amortization of the debt
discount.


Mandatorily redeemable
preferred stock



As of December 31, 2001, the Company
has authorized 25,000,000 shares of Preferred stock with a par value of $.01 per share,
of which 19,000,000 shares have been designated as Series A-1.


On December 14, 2001, the Company
sold 8,500,000 shares of Series A-1 to NCEH and one other existing investor at $1.00 per
share for proceeds of $7,560,241, net of offering costs of $939,759, and NCEH and one
other investor converted the November 13, 2001 bridge note plus prepayment penalty into
4,500,000 shares of Series A-1. The offering costs will be accreted using the effective
interest method through the December 2006 redemption date of Series A-1.


16
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The Series A-1 are convertible at
any time into common stock at the holders option at a conversion rate, as defined
(one-to-one at December 31, 2001). All outstanding shares of the Series A-1 are
automatically convertible into common stock upon the closing of a qualified underwritten
public offering, as defined. The Series A-1 have voting rights equivalent to the number
of common shares into which they are convertible. The holders of Series A-1 are entitled
to certain registration rights, as defined.


The Series A-1 are redeemable, upon
the receipt of notice of the election of two-thirds of the Series A-1 holders to redeem
the Series A-1, at the option of the holders in December 2006. The holders of Series A-1
are entitled to liquidation preferences equal to the original purchase price of $1.00 per
share, plus all accrued but unpaid dividends. The holders of the Series A-1 are entitled
to receive cumulative dividends at an annual rate of 8 percent.


As of December 31, 2000, the Company
had authorized 15,000,000 shares of Preferred stock with a par value of $.01 per share.
The authorized shares were designated as 3,753,846 shares of Series A mandatorily
redeemable convertible preferred stock (Series A), 487,805 shares of Series B mandatorily
redeemable convertible preferred stock (Series B) and 7,555,556 shares of Series C.


The Series A, Series B, and Series C
were convertible at any time into common stock at the holders option at a conversion
rate, as defined (one-to-one at December 31, 2000). All outstanding shares of the Series
A, Series B, and Series C were automatically convertible into common stock upon the
closing of a qualified underwritten public offering, as defined. The Series A, Series B,
and Series C had voting rights equivalent to the number of common shares into which they
were convertible. The holders of Series A, Series B, and Series C were entitled to
certain anti-dilution and registration rights, as defined.


The Series A, Series B, and Series C
were redeemable, upon the receipt of notice of the election of two-thirds of the Series C
holders to redeem the Series C, at the option of the holders in March 2005. The holders
of Series A, Series B and Series C were entitled to liquidation preferences equal to the
original purchase prices of $6.50, $5.33 and $4.50 per share, respectively, plus all
accrued but unpaid dividends. The holders of the Series C were entitled to receive
cumulative dividends at an annual rate of 8 percent. The Company has recorded cumulative
dividends of $1,020,000 for the year ended December 31, 2000 and $2,606,667 for the
period from January 1, 2001 through December 14, 2001. The holders of Series A and Series
B were not entitled to cumulative dividends.


In March 2000, the Company sold
3,753,846 shares of Series A for $6.50 per share and 487,805 shares of Series B for $5.33
per share to NCEH for aggregate proceeds of $26,489,241, net of offering costs of
$510,759. The offering costs were being accreted using the effective interest method
through the March 2005 redemption date of the Series A and Series B. The Company recorded
accretion of $73,584 for the year ended December 31, 2000 and $99,614 from January 1,
2001 through December 14, 2001. On December 14, 2001, in connection with the sale of
Series A-1, the Series A and Series B converted into 7,804 shares of the Companys common
stock.


17
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In August 2000, the Company sold
6,111,112 shares of Series C to new investors at $4.50 per share for proceeds of
$27,174,359, net of offering costs of $325,641, and NCEH converted the June 1, 2000
bridge note into 1,111,111 shares of Series C. The offering costs were being accreted
using the effective interest method through the March 2005 redemption date of the Series
C. The Company recorded accretion of $26,643 for the year ended December 31, 2000 and
$68,129 from January 1, 2001 through December 14, 2001. In connection with the conversion
of the bridge note, the Company recorded a beneficial conversion feature as a preferred
stock dividend for the difference between the carrying amount of the bridge note and the
fair value of the common shares to be issued upon conversion in the amount of $1,790,969.
Also in August 2000, the Company sold 333,333 shares of Series C at $4.50 per share to
the Companys Chief Executive Officer for cash of $750,000 and a full recourse note of
$750,000. The note accrued interest at 6.18 percent. In December 2001, the note was
forgiven and the Company recorded a charge to selling, general and administrative expense
of $750,000. The note receivable was recorded as a reduction of the Series C on the
December 31, 2000 consolidated balance sheets. On December 14, 2001, in connection with
the sale of Series A-1, the Series C converted into 3,762,666 shares of the Companys
common stock.



Series A and Series B
conversion price adjustment




In connection with the sale of
Series C, the conversion prices of the Series A and Series B were adjusted to $23.30 per
share from $33.65 and $27.60, respectively. These conversion price adjustments created a
contingent beneficial conversion feature for financial reporting purposes. Upon the
issuance of the Series C, the Company recorded a discount on the Series A and Series B of
$10,666,667 and $479,556, respectively, for the beneficial conversion feature. This
beneficial conversion feature is being treated as a preferred stock dividend. During
2000, the Company recorded a deemed preferred stock dividend in the amount of $11,146,223.


In connection with the issuance of
the April 12, 2001 bridge note, the conversion prices of the Series A and Series B were
adjusted to $17.91 per share from $23.30. These conversion price adjustments created a
beneficial conversion feature for financial reporting purposes. Upon the issuance of the
bridge note, the Company recorded a discount on the Series A and Series B of $7,213,873
and $781,503, respectively, for the beneficial conversion feature. This beneficial
conversion feature is treated as a preferred stock dividend. During 2001, the Company
recorded a deemed preferred stock dividend in the amount of $7,995,376.


8. Common stock and
common stock warrants:



Common stock



On September 4, 1998, the Company
entered into an agreement with NCEH whereby NCEH acquired 481,686 shares of the Companys
common stock for $10,000,000. NCEH was also given the right to purchase 25,954 shares of
the Companys common stock, as defined. This right was exercised on March 30, 1999. In
addition, this agreement provides for, among other things, the right of first refusal on
certain equity transactions.



18
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In February 1999, the Companys then
Chairman of the Board sold 19,701 shares of his holdings of the Companys common stock to
certain NCEH affiliates and to a former director of the Company at $27.60 per share. In
addition, in July 1999, the Companys then Chief Executive Officer sold 28,972 shares of
his holdings of the Companys common stock to NCEH in connection with NCEHs guarantee of
the lease on the Companys new operating facility (see Note 2).


In March 2000, the Company sold
28,971 shares of common stock to a director of the Company at $33.65 per share.


In connection with the
recapitalization of the Company in December 2001, certain investors surrendered 834,544
shares of common stock back to the Company.


Common stock warrants


In August 2000, the Company agreed
to grant warrants to certain Series C investors to purchase 178,636 shares of common
stock at $0.05 per share in exchange for certain future performance obligations. In 2000,
one of the Series C investors satisfied a portion of the obligation and the Company
recorded a noncash commission charge of $2,718,518 related to the granting of 116,837
fully vested warrants. During 2001, 8,701 shares under these fully vested warrants were
exercised. On December 14, 2001, in connection with the sale of Series A-1, the remaining
warrants to purchase 108,136 shares were cancelled.


In connection with the sale of
Series C, the Company agreed to grant warrants to the Series C investors to purchase
438,646 shares of common stock at $0.05 per share if certain criteria were not met by the
Company by a certain period of time. In April 2001, the Company determined that the
criteria would not be met in the specified time period and the Company recorded a deemed
preferred dividend of $2,486,378 related to the granting of 438,646 fully vested warrants
to purchase common stock. During 2001, 25,803 shares under these fully vested warrants
were exercised. On December 14, 2001, in connection with the sale of Series A-1, warrants
to purchase 322,534 shares of the remaining warrants were cancelled.


In connection with the issuance of
the April 12, 2001 bridge note, the Series C holders were entitled to an adjustment of
their conversion price from $23.30 to $17.91. However, in exchange for fully vested
warrants to purchase 755,606 shares of common stock at $17.91 per share, the Series C
holders waived the conversion price adjustment. The Company recorded a deemed preferred
dividend of $2,817,557 relating to the grant of the warrants. On December 14, 2001, in
connection with the sale of Series A-1, the warrants were cancelled.



9. Stock
options:



Effective August 17, 2000, the
Company adopted the 2000 Stock Option Plan (the Plan). The Plan provides for the granting
of incentive and nonqualified stock options to employees and consultants of the Company.
The Compensation Committee of the Board of Directors administers the Plan and awards
grants and determines the terms of such grants at its discretion. The Company has
reserved 1,924,557 shares of common stock for issuance pursuant to the Plan. The Plan
supercedes the 1996 Stock Option Plan and the 1998 Non-Employee Director Plan. All
available and unissued shares previously authorized under the 1996 Stock Option Plan and
the 1998 Non-Employee Director Plan expired on August 17, 2000.


19
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Information with respect to the
Companys common stock options is as follows:
|-----------------------------------------------------------------------------

|                                | Shares | Exerciseprice | Weightedaverageexerciseprice
|------------------------------- | ------ | ------------- | ----------------------------
|Balance, December 31, 1998      |        | 423,557       |                             
|Granted at fair market value    |        | 200,918       |                             
|Granted below fair market value |        | 127,671       |                             
|Exercised                       |        | (21,170       | )                           
|Canceled                        |        | (69,820       | )                           
|                                |        |               |                             
|Balance, December 31, 1999      |        | 661,156       |                             
|Granted at fair market value    |        | 645,326       |                             
|Granted below fair market value |        | 400,273       |                             
|Exercised                       |        | (62,613       | )                           
|Canceled                        |        | (81,685       | )                           
|                                |        |               |                             
|Balance, December 31, 2000      |        | 1,562,457     |                             
|Granted at fair market value    |        | 453,989       |                             
|Exercised                       |        | (2,463        | )                           
|Canceled                        |        | (557,741      | )                           
|                                |        |               |                             
|Balance, December 31, 2001      |        | 1,456,242     |                             
|                                |        |               |                             

|All options have terms ranging from
five to ten years and generally vest over four years. The weighted average remaining
contractual life of all options outstanding as of December 31, 2001, was 7.11 years. The
total number of shares available for future grant under the Plan as of December 31, 2001,
was 1,137,133.



20
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The following table summarizes
information relating to the Plan as of December 31, 2001 based upon each exercise price:
|-----------------------------------------------------------------------------------------------------------------------

|Outstanding stock options | Exercisable stock options
|------------------------- | -------------------------
|
|$       0                 | .16                      
|7                         | .79                      
|17                        | .98                      
|18                        | .90                      
|20                        | .78                      
|23                        | .38                      
|27                        | .69                      
|33                        | .77                      
|41                        | .57                      
|                          |                          
|$.16-41                   | .57                      
|                          |                          

|In connection with certain options
granted to employees during the years ended December 31, 1999, and 2000, the Company
recorded $1,819,467 and $2,439,476 of deferred compensation, respectively. These amounts
represent the difference between the fair market value of the Companys common stock on
the date of grant and the exercise price of options to purchase 127,671 and 400,273
shares, respectively, of the Companys common stock. Deferred compensation is amortized
over the vesting periods of the options, which range from immediate vesting to periods of
up to four years. For the years ended December 31, 1999, 2000 and 2001, $1,285,792,
$2,201,701 and $652,409 of deferred compensation, net of forfeitures, was charged to
expense, respectively.



Pro forma information provided below
has been determined as if the Company had accounted for its employee stock options in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation. The
determination of the fair value of the options noted above was estimated at the date of
grant using a Black-Scholes options pricing model with the following weighted-average
assumptions for the years ended December 31, 1999, 2000, and 2001: risk-free interest
rate of 4.9 percent, 5.6 percent, and 6.1 percent, respectively, dividend yield of 0
percent, volatility factor of the expected market price of the Companys common stock of
70 percent, and an expected life of the options of four years.


The weighted- average fair value of
the options granted is as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | Year ended December 31 |        | 
|------------------------------- | ---------------------- | ------ | 
|
|Granted at fair market value    |                        | $37.56 | 
|Granted below fair market value |                        | 42.34  | 

|21
|--

|For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense over the
option vesting periods. The Companys pro forma information is as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 | Year ended December 31
|-------------------------------- | ----------------------
|
|Net loss applicable to common    |                       
|stockholders, as reported        |                       
|Net loss per share, as reported  |                       
|Pro forma net loss applicable to |                       
|common stockholders              |                       
|Pro forma net loss per share     |                       
|                                 |                       

|10. Commitments and
contingencies:



Lease commitments



The Company leases facilities and
equipment under noncancellable operating leases with expiration dates through December
2009. Rent expense for the years ended December 31, 1999, 2000, and 2001, was $147,561,
$1,431,570, and $2,114,340, respectively. Future minimum lease payments as of December
31, 2001, are as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | Operating leases
|---------------------------- | ----------------
|2002                         |                 
|2003                         |                 
|2004                         |                 
|2005                         |                 
|2006                         |                 
|2007 and thereafter          |                 
|                             |                 
|Total minimum lease payments |                 
|                             |                 

|Litigation



The Company is involved, from time
to time, in various legal matters and claims which are being defended and handled in the
ordinary course of business. None of these matters are expected, in the opinion of
management, to have a material adverse effect on the financial position or results of
operations of the Company.



Employment agreements




The Company has employment
agreements with certain officers of the Company. In August 2000, the Company entered into
an employment agreement with its Chief Executive Officer. The agreements provide for,
among other things, salaries, bonuses, severance payments, and certain other payments
payable upon a change in control, as defined. In December 2001, the Companys chief
executive officers employment was terminated. The Company has recorded the severance as
part of the restructuring charge in 2001 (see Note 3).


22
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Government regulation



Management believes, based upon
consultation with legal counsel, that the Company is not required to be licensed by the
Office of the Comptroller of the Currency, the Federal Reserve Board or other federal or
state agencies that regulate or monitor banks or other providers of electronic commerce.
However, the Company may be periodically examined by banking authorities since the
Company is a supplier of services to financial institutions. Laws regulating Internet
commerce may be enacted to address issues such as, trust accounting, user privacy,
pricing, content, taxation and the characteristics and quality of online products and
services, among other things. If enacted, these laws could have a material adverse effect
on the Companys business.



11. Income taxes:



The reconciliation of the statutory
federal income tax rate to the Companys effective income tax rate is as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | Year ended December 31
|---------------------------------- | ----------------------
|
|Statutory federal income tax rate  |                       
|State income taxes, net of federal |                       
|tax benefit                        |                       
|Nondeductible expenses             |                       
|Valuation allowance                |                       
|                                   |                       
|                                   |                       
|                                   |                       

|23
|--

|Deferred taxes are determined based
upon the estimated future tax effects of differences between the financial statements and
income tax basis of assets and liabilities given the provisions of the enacted tax laws.
The tax effect of temporary differences that give rise to deferred taxes are as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | December 31
|---------------------------------------------- | -----------
|
|Deferred tax assets:                           |            
|Net operating loss carryforwards               |            
|Deferred compensation                          |            
|Development costs                              |            
|Accruals and reserves not currently deductible |            
|Property and equipment                         |            
|Restructuring reserve                          |            
|                                               |            
|                                               |            
|                                               |            
|Deferred tax liabilities:                      |            
|Property and equipment                         |            
|Other                                          |            
|                                               |            
|                                               |            
|                                               |            
|                                               |            
|Less- Valuation allowance                      |            
|                                               |            
|Net deferred tax asset                         |            
|                                               |            

|Due to the uncertainty surrounding
the realization of the net deferred tax asset, management has provided a full valuation
allowance. As of December 31, 2001, the Company has net operating loss carryforwards of
approximately $96,100,000 for federal tax purposes, which will begin to expire in 2003,
and $94,000,000 for state tax purposes, which have begun to expire. The Tax Reform Act of
1986 contains provisions that may limit the net operating loss carryforwards available in
any given year in the event of a 50 percent cumulative change in ownership over a
three-year period.



12. Employee benefit
plan:



The Company has a Section 401(k)
retirement savings plan (the 401(k) Plan). The 401(k) Plan allows employees to contribute
2 percent to 15 percent of their annual compensation subject to statutory limitations.
Company contributions to the 401(k) Plan are discretionary. Effective January 1999, the
Company began matching contributions of 50 to 100 percent of the first 6 percent of
employee compensation. For the years ended December 31, 1999, 2000, and 2001, the Company
made matching contributions of $171,522, $235,162, and $440,435, respectively, to the
401(k) Plan.



13. Concentration of
credit risk:



For the years ended December 31,
1999, 2000, and 2001, the Company had two, one, and one customer(s) which accounted for
12 percent, 19 percent, and 20 percent of service fee revenues, respectively. At December
31, 2000 and 2001, the Company had aggregate accounts receivable for these customers of
$676,497 and $887,448, respectively. The loss of one or more of these customers could
have a materially adverse effect on the Companys business.


24
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. Related-party
transactions:



During 1999, the Companys then
Chief Executive Officer sold certain of his holdings of the Companys common stock to
NCEH (see Note 8).


In connection with the Series A and
Series B financing, the Company paid $975,000 to a director and shareholder of the
Company. This amount was charged to financing costs on the accompanying consolidated
statements of operations.


In connection with the Series C
financing, the Company issued a $750,000 note receivable to the Companys Chief Executive
Officer (see Note 7).


The Company provides services to a
customer who is also a stockholder. The payment and presentment transaction fees and
implementation and other professional service fees recognized from this customer were
$945,000 and $360,948, respectively, for the year ended December 31, 2000 and $2,101,978
and $435,787, respectively, for the year ended December 31, 2001. The total accounts
receivable, accrued expenses, and deferred revenue for this customer were $1,179,953,
$500,000, and $139,052, respectively, as of December 31, 2000 and $1,169,825, $500,000,
and $114,600, respectively, as of December 31, 2001.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------