UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

X    Annual report  pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 for the fiscal year ended June 30, 2004 or

____ Transition report pursuant to Section 13 or15(d) of the Securities Exchange
     Act of 1934 for the transition period from ________ to _________.


                           Commission File No. 0-21527


                            MEMBERWORKS INCORPORATED
             (Exact name of registrant as specified in its charter)


DELAWARE                                                      06-1276882
------------------------                                 --------------------
(State of Incorporation)                                   (I.R.S. Employer
                                                          Identification No.)
680 Washington Boulevard
STAMFORD, CONNECTICUT                                            06901
----------------------------------------                      ----------
(Address of principal executive offices)                      (Zip Code)

                                 (203) 324-7635
              (Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.01 Par Value

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

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

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act).
[X] Yes   [ ] No

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant at December 31, 2003 was $128,298,966.  The aggregate market value of
the voting stock held by  non-affiliates  of the Registrant at June 30, 2004 was
$190,018,728.  The  aggregate  market  value was  computed by  reference  to the
closing price of the Registrant's  Common Stock as of that date. For purposes of
calculating this amount only, all directors, executive officers and shareholders
reporting beneficial ownership of more than 10% of the Registrant's Common Stock
are considered to be affiliates.

The  number of shares of Common  Stock  outstanding  as of August  13,  2004 was
10,263,269.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy  Statement for the 2004 Annual Meeting of  Stockholders of
MemberWorks  Incorporated  are  incorporated by reference in Parts II and III of
this report.


<PAGE>


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                                      INDEX

<S>                                                                                                            <C>

                                                                                                              PAGE

Part I   Item 1. Business                                                                                        1

         Item 2. Properties                                                                                      6

         Item 3. Legal Proceedings                                                                               6

         Item 4. Submission of Matters to a Vote of Security Holders                                             7

         Executive Officers of the Registrant                                                                    7

Part II  Item 5. Market for Registrant's Common Equity and Related Stockholder Matters                           8

         Item 6. Selected Financial Data                                                                        10

         Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations          10

         Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                    18

         Item 8. Financial Statements and Supplementary Data                                                    19

         Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           19

         Item 9A. Controls and Procedures                                                                       19

         Item 9B. Other Information                                                                             20

Part III Item 10. Directors and Executive Officers of the Registrant                                            20

         Item 11. Executive Compensation                                                                        20

         Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
                   Stockholder Matters                                                                          20

         Item 13. Certain Relationships and Related Transactions                                                20

         Item 14. Principal Accountant Fees and Services                                                        20

Part IV  Item 15. Exhibits and Financial Statement Schedules                                                    20

Signatures                                                                                                      22

Exhibit listing                                                                                                 23

</TABLE>



<PAGE>

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW
MemberWorks  Incorporated (the "Company"),  a Delaware Corporation,  began doing
business  as  Cardmember  Publishing  Corporation  in  1986,  was  organized  as
MemberWorks  Incorporated  in 1996 and has been doing  business  as  MemberWorks
Incorporated since then.

The Company is a marketing  services  leader,  bringing  value to  consumers  by
designing  innovative  membership  programs  that offer members easy access to a
variety  of  discounted   products  and  services   provided  by  the  Company's
participating  vendors.  In April 2004,  the Company  broadened the scope of its
business by acquiring  Lavalife Inc.  ("Lavalife"),  a personals  service.  As a
result of this  acquisition,  the  Company is now a leading  global  provider of
web-based and interactive voice response ("IVR") based personals  services.  The
acquisition of Lavalife  benefits the Company by providing  access to one of the
largest and fastest growing consumer  categories on the internet while expanding
its target market.  In addition,  it is the Company's  intention to cross-market
the products and services of the Company and Lavalife.

In the past, the Company operated in one business segment,  membership. With the
acquisition of Lavalife,  the Company analyzes its business in the following two
business  segments:  Membership and Personals.  See Note 20 of the  consolidated
financial statements contained in this 2004 Annual Report filed on Form 10-K for
additional financial information about the Company's business segments.

MEMBERSHIP
MEMBERSHIP PROGRAMS
The Company designs its membership  programs to address the particular needs and
preferences  of its  members by  combining  various  features  and  benefits  to
customize its membership  programs.  The Company's  membership  programs provide
substantial  benefits  to  the  Company's  members,  clients  and  vendors.  The
Company's  members benefit by receiving an array of programs and services in the
categories of health, shopping and personal security.

When  consumers  agree to enroll in a program,  they  generally  receive a trial
membership.  During this time, the member may use the program's services without
obligation,  as outlined in the marketing  solicitation.  Membership  materials,
which  include a membership  brochure  and a  membership  card with a membership
identification  number,  are either mailed or emailed to the consumer during the
trial period.  The brochure outlines in detail the benefits offered and contains
a toll-free number and a website address, which may be used to access membership
benefits and information. In the event that a consumer elects not to participate
in the  membership  program,  he or she can call a toll-free  number  during the
trial period to cancel the service  without  incurring any  additional  charges.
Trial  memberships  are  generally for a period of 7 to 30 days and there are no
conditions  with  respect to the ability of the  consumer  to  terminate a trial
membership.

If the  membership  is not  canceled  during the trial  period,  the consumer is
charged the annual or monthly  membership  fee,  depending  upon the  applicable
payment plan offered.  For annual members,  in the event that the members do not
cancel the membership after the initial one year membership term, they receive a
renewal  notice in  advance  of each  membership  year and are  charged  for the
succeeding  year's  membership  fee.  During  the  course of an  initial  annual
membership  term or renewal  term, a member may cancel his or her  membership in
the program  generally for a pro rata refund of the  membership fee based on the
remaining  portion  of the  membership  period at the time of the  cancellation.
Monthly  members are billed each month after the trial  period ends and continue
to be billed  each month  until the member  cancels.  The  Company's  membership
programs had approximately 5.6 million retail members as of June 30, 2004.

The Company has  traditionally  marketed its  membership  programs which have an
up-front annual membership fee.  However,  beginning in 2003 and continuing into
2004,  the Company  expanded its marketing of  membership  programs in which the
membership  fee  is  payable  monthly.  During  2004,  approximately  64% of the
Company's new member enrollments were in a monthly payment program and it is the
Company's  intention to further  increase the mix of monthly payment programs in
2005. Membership fees vary depending upon the particular services offered in the
membership program.

The Company's  programs are designed to offer members a combination  of everyday
savings, event-oriented discounts and peace of mind benefits, and are offered in
English,  French and Spanish.  The Company  partners  with  leading,  brand name
merchants  and  service  companies  to  offer  consumers  valuable  packages  of
members-only benefits.  Membership programs are packaged around popular spending
categories and typically offer  potential  savings well in excess of the program
fee. In addition,  membership programs are increasingly  customized for specific
clients. The Company's programs fall into the three categories described below.


                                       1
<PAGE>


HEALTHCARE
Health,  wellness, and self-improvement  programs offer significant savings on a
comprehensive  array  of  healthcare  products,  including  prescription  drugs,
vitamins and supplements, eye glasses and contact lenses, hearing aides, durable
medical  equipment,  and  select  consumer  products.  The  programs  also offer
discounts on professional  services,  including medical,  dental,  chiropractic,
alternative medicine, elder care and other personal health services.

SECURITY
Security and insurance  programs  offer  discounts on products and services that
enhance and  improve the  consumer's  sense of  security  and well being.  These
programs  offer  access to  services  that help manage  privacy  and  protection
including  identity theft insurance,  card  registration  and credit  reporting,
scoring, and monitoring. Insurance programs offer competitively priced insurance
products including life,  supplemental health,  accidental death, short-term and
long-term  disability,  warranty and identity theft  insurance  coverage.  Other
program benefits include 24-hour protection  services,  roadside  assistance and
financial, tax, and retirement planning.

DISCOUNTS
Discount  programs offer exclusive  access to members-only  savings with leading
brand  name  merchants  covering a wide range of  consumer  spending  categories
including travel,  transportation,  entertainment,  dining,  shopping,  home and
small business.  Savings are available through  discounted gift cards,  coupons,
promotion codes and rebates.

VENDORS
In most  cases,  the  products  and  services  accessed  through  the  Company's
membership  programs are offered and provided directly to members by independent
benefit  providers  or vendors.  The Company  evaluates  and engages  only those
vendors who can cost-effectively deliver high quality products and services. The
Company's participating vendors generally benefit by obtaining access to a large
number  of  demographically   attractive   consumers  with  minimal  incremental
marketing costs. Specifically, vendors gain access and marketing exposure to the
Company's  membership  base and, in almost all cases,  pursuant  to  contractual
arrangements  with the Company,  provide a members-only  discount on products or
services. The Company generally does not receive payments from these vendors for
rendering  services to the Company's  members and, in certain cases, the Company
pays its vendors a fee based on the number of members in the  Company's  program
or based on other agreed upon factors.

The  Company's  contracts  with its vendors are  generally for one year or more,
with subsequent  one-year renewal terms at the Company's  option. In most cases,
vendors  may cancel  contracts  with the  Company  only for cause and subject to
notice  provisions  to provide the Company time to locate a  substitute  vendor.
Most vendor  contracts  are  non-exclusive  but require  vendors to maintain the
confidentiality of the terms of the contract.

CLIENTS
The Company's programs are primarily marketed to customers through  arrangements
with  the  Company's   clients,   which   include  banks  and  other   financial
institutions,   e-commerce  companies,  direct  response  television  companies,
catalog  companies,  retailers  and other  organizations  with large  numbers of
individual  customers.  Clients  receive  royalty  payments in exchange  for the
clients  providing  new members or access to potential  members.  In some cases,
these  businesses lack the core competency to  successfully  design,  market and
manage membership programs.  As a result, these businesses seek to outsource the
implementation of membership  programs to providers,  such at the Company,  that
are able to apply  advanced  database  systems  to  capture,  process  and store
consumer and market  information,  are able to use their  experience  to provide
effective  membership  programs and are able to realize  economies of scale.  In
addition,  businesses  outsourcing  their  membership  programs  demand that the
program  provider  have the  expertise to continue to introduce  innovative  new
programs  and  have  resources,   such  as  extensive  vendor  networks  and  an
experienced   management  team,  to  launch  membership   programs  quickly  and
successfully.

Membership  programs  sponsored  by the  Company's  two  largest  clients,  West
Corporation and Citibank,  N.A. (and its affiliates),  accounted for 18% and 12%
of revenues, respectively, for the year ended June 30, 2004. A loss of either of
these  clients  could  have a  material  effect  on  the  Company's  results  of
operations.

MARKETING AND DISTRIBUTION
The Company solicits members for its programs primarily by direct marketing
methods, including inbound call marketing, referred to as MemberLink, online
marketing, outbound telemarketing, which it outsources to third party
contractors, and direct mail, which is mailed either at the Company's own
expense or at its client's expense. The Company has been able to effectively
diversify its distribution channels since its initial public offering in 1996,
at which time the Company's primary method of solicitation was outbound
telemarketing. For the year ended June 30, 2004, outbound telemarketing was the
source for approximately 10% of the Company's new member enrollments.


                                       2
<PAGE>



MemberLink  inbound call marketing occurs when clients' inbound callers who meet
certain  criteria are offered the Company's  membership  service programs by the
client's service representative or by a membership service representative of the
Company  through a call  transfer.  The Company pays the client either a royalty
for initial  and renewal  membership  fees or a fee per  marketing  offer or per
sale.  MemberLink  arrangements  generally  have been a more  efficient and cost
effective  way to  acquire  members  than  the  Company's  traditional  outbound
telemarketing marketing model.

Online  marketing  is  conducted  through  arrangements  with  Internet  service
providers  ("ISP's"),  online  retailers  and online  marketers.  The  marketing
methods  include  banner ads and pop-up boxes.  The Company buys  advertising or
pays the client either a royalty for membership  fees or a fee per impression or
per sale.

Substantially  all of the  information  necessary  for the  Company's  marketing
efforts is supplied by its clients in accordance  with strict  consumer  privacy
safeguards.  As a result,  the  Company's  ability to market a new program to an
existing  customer  base or an existing  program to a new  customer  base may be
dependent upon first obtaining client approval.

The Company's  contracts with its clients  typically grant the Company the right
to continue to provide membership  services directly to such clients' individual
account  holders even if the client  terminates  its contract  with the Company.
Many client  relationships  are pursuant to contracts  that may be terminated by
the client upon 30 to 90 days notice  without  cause and without  penalty.  Upon
such  termination,   the  Company  generally  has  the  right  to  continue  its
relationship  indefinitely with the client's  customers that have become program
members.

The Company also  delivers  its  membership  service  programs  through  loyalty
arrangements  with  client  partners.  The  Company  works  with its  clients to
incorporate elements from one or more of the Company's standard service programs
and designs a custom program for the client. The client then either provides the
customized  membership  program to its  customers  as a  value-added  feature or
resells the customized  membership  program.  In some cases, the client provides
loyalty  memberships  to its  customers  free of  charge  and pays the  periodic
membership fee to the Company for each  customer's  membership.  In other cases,
the client  charges a reduced fee to its  customer.  The client pays the Company
the  membership  fees for the  customers who receive the  customized  membership
program.  Under the Company's loyalty programs, the Company does not pay for the
marketing  costs to  solicit  memberships.  Instead,  the  client  offering  the
memberships  is responsible  for  marketing,  usually with the assistance of the
Company.

MEMBERSHIP SERVICE
The Company  believes  that  providing  high  quality  service to its members is
extremely important in order to retain members and to strengthen the affinity of
the clients' customers that were offered the membership program.  Currently, the
Company  maintains four  membership  call centers  located in Montreal,  Canada,
Houston, Texas, Omaha, Nebraska and Chicago,  Illinois, with a total of over 700
membership service  representatives.  All new membership service representatives
are  required to attend  on-the-job  training.  Through its  training  programs,
systems and software, the Company seeks to provide members with friendly,  rapid
and effective answers to questions. Members can access their benefits 24 hours a
day via the program's web site or automated telephone response  technology.  The
Company also works  closely with its clients'  customer  service staff to ensure
that their  representatives  are knowledgeable in matters relating to membership
service programs offered by the Company.

COMPETITION
The Company  believes that the principal  competitive  factors in the membership
services industry include the ability to identify,  develop and offer innovative
membership  programs,  the quality and breadth of membership  programs  offered,
competitive prices and in-house marketing expertise.  The Company's  competitors
offer  membership  programs which provide services similar to, or which directly
compete with,  those  provided by the Company.  Some of these  competitors  have
substantially  larger  customer bases and greater  financial and other resources
than those of the Company.  To date, the Company has  effectively  competed with
such  competitors.  However,  there  can  be no  assurance  that  the  Company's
competitors  will not  increase  their  emphasis  on  programs  similar to those
offered by the  Company  to more  directly  compete  with the  Company;  provide
programs  comparable  or  superior  to those  provided  by the  Company at lower
membership  prices;  adapt more  quickly  than the Company to evolving  industry
trends or changing market  requirements;  or that new competitors will not enter
the market or that other  businesses  will not  themselves  introduce  competing
programs.  Such increased  competition may result in price  reductions,  reduced
marketing  margins  or loss of  market  share,  any of  which  could  materially
adversely  affect the  Company's  business,  financial  condition and results of
operations.   Additionally,   because  contracts  between  clients  and  program
providers are often  exclusive with respect to a particular  service,  potential
clients may be prohibited from contracting with the Company to promote a program
if the  services  provided  by the  Company's  program are similar to, or merely
overlap with, the services provided by an existing program of a competitor.


                                       3
<PAGE>


PERSONALS
On April 1, 2004, the Company completed the acquisition of all of the assets and
outstanding  capital  stock of  Lavalife,  a  leading  provider  of  online  and
IVR-based   interactive   personals   services.   Lavalife  now  operates  as  a
wholly-owned  subsidiary of the Company. The purchase price,  excluding fees and
expenses,  was Cdn$152.5 million,  or $116.5 million,  and is subject to certain
purchase price  adjustments.  The  acquisition  was funded with cash on hand and
borrowings under the Company's senior secured credit facility.

Lavalife's open-minded approach to dating allows members to choose how they want
to "click with other singles" by offering different levels of dating. Lavalife
offers both web-based, IVR-based, and most recently, cellular phone-based
personals services to its customers. These services allow customers to interact
with each other from anywhere in real time by phone, email, text chat or video.
To acquire new users and retain existing customers, Lavalife relies on its
innovative products, marketing relationships with major media groups,
advertising campaigns in large markets, a widely recognized brand name and an
advanced technology infrastructure. These interactive services allow customers
who want to enhance their social lives to search for a date, meet new people and
communicate with other customers in a real time, "Anywhere", "Anytime" and
"Anyhow" environment. As of June 30, 2004, Lavalife had approximately 600,000
active customers.

Lavalife  employs  a  transactional  business  model,  in  which  customers  buy
non-refundable  credits up front and spend those  credits only when they want to
interact  with  other  customers.  Lavalife's  competitors  generally  employ  a
subscription  business  model,  in which customers pay a fixed periodic fee. The
Company believes a transactional model is more attractive to new customers,  who
will join due to a lower  initial cost and the ability to easily  control  their
spending.  The customer  determines when to use the credits to communicate  with
other  customers.  Furthermore,  once a  customer  has an account  balance,  the
customer  has a strong  financial  incentive  to return  to use their  remaining
credits.  To further encourage return visits,  Lavalife  continues to expand its
existing  service  offerings  and  introduce  innovative   interactive  products
including video and real time online social networking.

Lavalife  maintains  a call center  located in  Toronto,  Canada with a total of
almost 200 call center representatives.

The  personals  business  is very  competitive  and highly  fragmented.  Primary
competitors  of the various  brands that  comprise  personals  include  numerous
online and offline dating and matchmaking services (both free and paid), some of
which operate  nationwide and some of which operate  locally,  and the personals
sections of  newspapers  and  magazines.  In addition to  broad-based  personals
services,  there are numerous niche websites and offline personals services that
cater to specific demographic groups.

TECHNOLOGY
The  Company  has  invested   substantially  in  new  technology,   including  a
sophisticated  customer  service platform  ("CRM"),  data warehousing and mining
capabilities, and various Internet applications which work together to allow the
Company to effectively and efficiently service its members. The Company receives
new  member  information  from  its  clients  daily,  and  that  information  is
maintained on core infrastructure  systems that drive information  constantly to
CRM,  fulfillment,  billing and data warehousing systems.  This allows for rapid
fulfillment of member information kits as well as other benefits. All membership
information  is  maintained  on a  state-of-the-art  CRM  system,  which  allows
extremely  responsive  targeted call center  interactions.  The Company receives
confirmation of billing data from the Company's merchant processors on a regular
basis,  permitting  the Company to update the status of each  member,  including
member profile information.

In  providing  quality  service  to  its  members,   the  Company's   management
information  systems interact with the Company's advanced call routing system in
order to  display  member  profile  information  prior to  answering  the  call,
allowing  the  Company's  membership  service  representatives  to have the best
possible   information   prior   to   serving   the   members.   The   Company's
telecommunications   systems  also  monitor  the  performance   quality  of  its
membership  service  representatives  and other aspects of its business  through
sophisticated  reporting  capabilities.  In addition,  the  Company's  marketing
experts use  proprietary  systems in  combination  with  advanced  systems  from
outside  vendors  to  review,  analyze  and model the  demographics  of lists of
prospective  members  supplied by clients in order to determine  which customers
are most likely to enroll in a membership.


                                       4
<PAGE>


Lavalife  recently  upgraded its integrated  network to support both its IVR and
web  operations.  The  Lavalife  infrastructure  for both the IVR and the web is
built on state of the art, industry standard,  high capacity technology designed
to support the significant level of member interaction and a quality experience.
The technology supports such high demand features as live chat, voice messaging,
quick  response  searches  for "who's  online  now" and instant  messaging.  The
network operations centers,  located in Toronto,  Canada and Sydney,  Australia,
allow the personals  business to scale both its web and IVR operations,  as well
as support text messaging operations,  with full remote management  capabilities
of all services.

GOVERNMENT REGULATION
The Company  markets its  membership  programs and  personals  services  through
various   distribution   channels   including   refundable   royalty   payments,
telemarketing,  direct mail,  non-refundable  royalty payments,  and advertising
costs. These channels are regulated at both the state and federal levels and the
Company  believes that these  marketing  methods may  increasingly be subject to
such regulation,  particularly in the area of consumer  privacy.  Regulation may
limit the  Company's  ability  to  solicit  new  members or to offer one or more
products or services to existing members. The telemarketing  industry has become
subject to an increasing  amount of federal and state  regulation.  For example,
the Federal  Telephone  Consumer  Protection Act of 1991 limits the hours during
which  telemarketers  may call  consumers  and  prohibits  the use of  automated
telephone dialing equipment to call certain telephone numbers. Additionally, the
Federal  Telemarketing  and Consumer Fraud and Abuse  Prevention Act of 1994 and
Federal Trade Commission ("FTC") regulations,  including the Telemarketing Sales
Rule, as amended, promulgated thereunder,  prohibit deceptive, unfair or abusive
practices in telemarketing  sales. Both the FTC and state attorneys general have
authority  to  prevent  marketing  activities  deemed by them to be  "unfair  or
deceptive acts or practices." Further,  some states have enacted laws and others
are  considering  enacting  laws targeted  directly at regulating  telemarketing
and/or Internet marketing practices, and there can be no assurance that any such
laws, if enacted,  will not adversely  affect or limit the Company's  current or
future   operations.   Compliance  with  these   regulations  is  generally  the
responsibility of the Company,  and the Company could be subject to a variety of
enforcement  and/or  private  actions  for  any  failure  to  comply  with  such
regulations.  The  Company's  provision of  membership  programs  and  personals
services requires the Company to comply with certain state regulations,  changes
in which could materially increase the Company's operating costs associated with
complying with such  regulations.  Noncompliance  with any rules and regulations
enforced by a federal or state  consumer  protection  authority  may subject the
Company  or its  management  to fines  or  various  forms  of civil or  criminal
prosecution,  any of which could have a material adverse affect on the Company's
business,  financial condition and results of operations.  Also, the media often
publicizes  perceived  noncompliance  with consumer  protection  regulations and
violations  of notions of fair  dealing  with  consumers  making the  membership
programs industry susceptible to peremptory charges of regulatory  noncompliance
and unfair dealing by the media.

The Company currently  maintains rigorous security and quality controls that are
intended to ensure that all of its marketing  practices meet or exceed  industry
standards and all applicable state and federal laws and regulations. The Company
only  collects and maintains  customer data that is necessary to administer  its
business  activities,  such as a customer's name,  address and encrypted billing
information  and only public  information  is used for  marketing  and  modeling
purposes,  such as  demographic,  neighborhood  and lifestyle  data. The Company
neither  resells  any  confidential  consumer  information  that is  obtained or
derived  in its  marketing  efforts  nor  purchases  consumer  information  from
financial or other institutions.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
See Note 20 of the  consolidated  financial  statements  contained  in this 2004
Annual Report on Form 10-K for financial information about geographic areas.

EMPLOYEES
As of June 30, 2004, the Company employed 1,414 persons on a full-time basis and
202 on a part-time basis.  None of the Company's  employees are represented by a
labor union. The Company believes that its employee relations are good.

AVAILABLE INFORMATION
The Company's Internet address is http://www.memberworks.com. Information on the
Company's website is not a part of this Annual Report on Form 10-K.

The  Company  makes  available,  free of charge on or through its  website,  the
Company's annual reports on Form 10-K,  quarterly reports on Form 10-Q,  current
reports on Form 8-K,  Section 16 filings and all  amendments to those reports as
soon as reasonably  practicable after such material is electronically filed with
or furnished to the Securities and Exchange Commission ("SEC"). You may read and
copy any  document  filed with the SEC at its public  reference  facility at 450
Fifth  Street,   N.W.,   Washington,   D.C.  20459.   Please  call  the  SEC  at
1-800-SEC-0330 for further  information on the operation of the public reference
facility.



                                       5
<PAGE>





ITEM 2.  PROPERTIES

A summary of key information with respect to the Company's leased  facilities is
as follows:


         LOCATION                                         YEAR OF LEASE
         MEMBERSHIP                SQUARE FOOTAGE           EXPIRATION
         Omaha, NE                      93,123          2009 through 2015
         Stamford, CT                   63,559                2006
         Montreal, Canada               48,193                2011
         Houston, TX                    41,591                2006
         Atlanta, GA                    13,717                2005
         Chicago, IL                    11,676                2005

         PERSONALS
         Toronto, Canada                73,926                2009

The Stamford, Connecticut office serves as the Company's corporate headquarters.
All other  locations  serve as the  operational  offices  for the  Company.  The
Company  believes that its properties are generally in good condition,  are well
maintained and are suitable and adequate to carry on its business.

ITEM 3.  LEGAL PROCEEDINGS

Except as set forth below,  in  management's  opinion,  there are no significant
legal  proceedings to which the Company or any of its subsidiaries is a party or
to which any of their  properties are subject.  The Company is involved in other
lawsuits and claims  generally  incidental  to its business  including,  but not
limited to, various suits, including previously disclosed suits, brought against
the Company by individual  consumers  seeking monetary and/or  injunctive relief
relating to the marketing of the Company's programs.  In addition,  from time to
time, and in the regular course of its business,  the Company receives inquiries
from various federal and/or state regulatory authorities.

In March 2001, an action was  instituted  by plaintiff  Teresa  McClain  against
Coverdell & Company  ("Coverdell"),  a  wholly-owned  subsidiary of the Company,
Monumental  Life  Insurance  Company and other  defendants  in the United States
District  Court for the Eastern  District of Michigan,  Southern  Division.  The
suit, which seeks unspecified  monetary damages,  alleges that Coverdell and the
other  defendants  violated  the  Michigan  Consumer  Protection  Act and  other
applicable  Michigan  laws in connection  with the marketing of Monumental  Life
Insurance  Company insurance  products.  The Court certified a class of Michigan
residents.  The Court has now signed an Order granting preliminary approval of a
settlement  agreement  that has been signed by all parties.  The Court will hold
the  Fairness/Approval  hearing on November 22, 2004. The  settlement  agreement
will have no financial or other material impact on Coverdell's business.

On January 24, 2003,  the Company filed a motion with the Superior Court for the
Judicial District of Hartford, Connecticut to vacate and oppose the confirmation
of an arbitration award issued in December 2002. The arbitration,  filed against
the Company by MedValUSA  Health  Programs,  Inc.  ("MedVal") in September 2000,
involved claims of breach of contract, breach of the duty of good faith and fair
dealing,  and violation of the Connecticut Unfair Trade Practices Act ("CUTPA").
Even though the arbitrators  found that the Company was not liable to MedVal for
any  compensatory  damages,  they awarded  $5.5 million in punitive  damages and
costs  against the Company  solely under CUTPA.  The Company  believes that this
arbitration  award is unjustified and not based on any existing legal precedent.
Specifically,  the  Company  is  challenging  the award on a number of  grounds,
including  that it  violates a  well-defined  public  policy  against  excessive
punitive  damage awards,  raises  constitutional  issues and disregards  certain
legal  requirements  for a valid award under CUTPA. The hearing on the Company's
motion was held on February 10,  2003.  On June 22,  2003,  the  Superior  Court
denied the Company's motion to vacate the award, and the Company filed an appeal
of that  decision.  While the  Company  intends to take  action to  prevent  the
enforcement of the award by, among other things,  vigorously pursuing an appeal,
there can be no assurance  that the Company will be  successful  in its efforts.
The  Company  has  made  no  provision  in its  financial  statements  for  this
contingency because it believes that a loss is not probable. If the Company were
ultimately  unsuccessful  in  this  or  other  available  appeals,  and a  final
non-appealable  court order  confirming the arbitration  award is rendered,  the
payment  of the award  could  have a material  adverse  effect on the  Company's
results of operations in the period in which the final order is entered.

On October  21,  2003,  the  Florida  Attorney  General's  Office  filed a civil
complaint  against  the  Company  based  upon  concerns  that  some of its  past
marketing  practices may have violated  various consumer laws. On June 28, 2004,
the  Company  announced  that it had  reached a  voluntary  settlement  with the
Florida Attorney  General's  office to alleviate  concerns that some of its past
marketing  practices may have confused some  consumers.  In connection  with the
settlement, the Company agreed to formalize its existing national Best Marketing
Practices  in the  state of  Florida  and to pay the state of  Florida  costs of
investigation  of $950,000.  The Company  expects that the  agreement  will have
little  new  effect  on its  business  in  Florida  as the  agreement  serves to
formalize the Company's  already existing  national  marketing best practices in
the state.


                                       6
<PAGE>

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

No matters were submitted to a vote of security holders during the quarter ended
June 30, 2004.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive  officers of the  registrant  of the Company and their  respective
ages as of July 31, 2004 are as follows:


<TABLE>
<CAPTION>

NAME                      AGE           POSITION
--------------------      ---           -------------------------------------------------------
<S>                       <C>           <C>
Gary A. Johnson           49            President and Chief Executive Officer, Director
Vincent DiBenedetto       47            Executive Vice President, Health and Insurance Services
James B. Duffy            50            Executive Vice President and Chief Financial Officer
</TABLE>

GARY A.  JOHNSON,  a co-founder of the Company,  has served as President,  Chief
Executive Officer and a director since its inception.

VINCENT  DIBENEDETTO  joined the Company in October 2000 and currently serves as
Executive Vice President,  Health and Insurance  Services.  Prior to joining the
Company, Mr. DiBenedetto was President of Discount Development Services, L.L.C.,
a subsidiary of the Company which was acquired in October 2000.

JAMES B.  DUFFY has  served as  Executive  Vice  President  and Chief  Financial
Officer since he joined the Company in 1996.



                                       7
<PAGE>




                                     PART II

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

MARKET INFORMATION
The Company's  Common Stock is listed on the NASDAQ National  Market  ("NASDAQ")
under the symbol MBRS. The following table sets forth for the periods  indicated
the high and low closing sale prices per share as reported on the NASDAQ.

        FISCAL YEAR ENDED JUNE 30, 2004:                  HIGH         LOW
          First Quarter                                 $38.22       $19.75
          Second Quarter                                 34.00        24.16
          Third Quarter                                  36.77        26.96
          Fourth Quarter                                 35.02        26.89

        FISCAL YEAR ENDED JUNE 30, 2003:                  HIGH         LOW
          First Quarter                                 $18.80       $12.48
          Second Quarter                                 19.53        16.65
          Third Quarter                                  20.71        14.00
          Fourth Quarter                                 24.00        19.30

HOLDER AND DIVIDEND INFORMATION
As of August 13, 2004,  there were  40,000,000  shares of the  Company's  Common
Stock  authorized  of  which  10,263,269  shares  were   outstanding,   held  by
approximately 1,705 stockholders of record. The Company has not declared or paid
any cash  dividends  to date and  anticipates  that all of its  earnings  in the
foreseeable  future will be retained for use in its  business and to  repurchase
its common  stock  under the stock  repurchase  program.  The  Company's  future
dividend  policy will depend on the Company's  earnings,  capital  requirements,
financial  condition,  requirements  of the  financing  agreements  to which the
Company  is a party  and  other  factors  considered  relevant  by the  Board of
Directors.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS


<TABLE>
<CAPTION>
                                                                                               NUMBER OF SECURITIES
                                                                                              REMAINING AVAILABLE FOR
                                              NUMBER OF SECURITIES                             FUTURE ISSUANCE UNDER
                                               TO BE ISSUED UPON       WEIGHTED-AVERAGE      EQUITY COMPENSATION PLANS
                                                  EXERCISE OF         EXERCISE PRICE OF             (EXCLUDING
PLAN CATEGORY                                 OUTSTANDING OPTIONS    OUTSTANDING OPTIONS      SECURITIES REFLECTED IN
                                                                                                       (A))
                                             ----------------------- ---------------------  ----------------------------
                                                      (a)                       (b)                        (c)
<S>                                          <C>                     <C>                    <C>
Equity compensation plans approved by
   security holders                                  1,772,000            $      22.35                 837,000
Equity compensation plans not approved by
   security holders (1)                              1,533,000            $      17.50                  63,000
                                             ----------------------- ---------------------  ----------------------------
Total                                                3,305,000            $      20.10                 900,000
                                             ======================= =====================  ============================
</TABLE>

    (1) These  shares  represent  an increase in the share  reserve  during 2002
    under the 1996 Stock Option Plan.  These options have an exercise  price per
    share that is equal to or greater  than the fair market value at the date of
    grant and they generally become  exercisable over a four to five year period
    and expire at the earlier of termination of employment or ten years from the
    date of grant.

RECENT SALES OF UNREGISTERED SECURITIES
In April  2004,  the  Company  completed  the sale of $150.0  million  aggregate
principal  amount of 9.25% Senior Notes due 2014  ("Senior  Notes") to qualified
institutional  buyers  pursuant to Rule 144A of the  Securities  Act of 1933, as
amended.  Net proceeds from this offering were $142.4 million.  A portion of the
proceeds was used to repay  amounts  borrowed  under the senior  secured  credit
facility to fund a portion of the Lavalife  acquisition.  The Company intends to
use the remaining  proceeds for general  corporate  purposes,  including working
capital,  future  acquisitions and purchases of the Company's common stock under
the Company's stock buyback program to the extent  permitted under the indenture
governing the Senior Notes and under the senior secured credit facility.



                                       8
<PAGE>




PURCHASES OF EQUITY SECURITIES BY THE ISSUER
The following  table  summarizes the shares of the Company's  equity  securities
purchased by or on behalf of the Company:

<TABLE>
<CAPTION>
                                                                                      (c) Total Number       (d) Maximum
                                                                                         of Shares         Number of Shares
                                                                                      Purchased as Part    that May Yet be
                                          (a) Total Number                               of Publicly       Purchased Under
                                               of Shares       (b) Average Price       Announced Plans      the Plans or
  Period                                       Purchased          Paid per Share        or Programs (1)         Programs
  --------------------------------------- -------------------- -------------------- --------------------- -------------------
<S>                                       <C>                  <C>                   <C>                  <C>
  April 1, 2004 to April 30, 2004                         -                 -                       -            1,316,607
  May 1, 2004 to May 31, 2004                       213,700               $28.63              213,700            1,102,907
  June 1, 2004 to June 30, 2004                     109,400               $28.77              109,400              993,507
                                          -------------------- -------------------- --------------------- -------------------
  Total                                             323,100               $28.68              323,100              993,507
                                          ==================== ==================== ===================== ===================
</TABLE>

(1)  During 2004, the Board of Directors  authorized the following share amounts
     to be  purchased  under the  Company's  stock  buyback  program  originally
     authorized during fiscal 1997:

     July 2003 - authorized an additional 1,000,000 shares, no expiration, which
     authorized shares have been repurchased by the Company.

     September 2003 - authorized an additional  1,000,000 shares, no expiration,
     which authorized shares have been repurchased by the Company.

     January 2004 - authorized an additional 1,000,000 shares, no expiration.



                                       9
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

The selected  consolidated  statements of operations  data for each of the years
ended June 30, 2004  through 2000 and the selected  consolidated  balance  sheet
data as of June 30,  2004  through  2000 set forth  below are  derived  from the
audited   consolidated   financial  statements  of  the  Company.  The  selected
consolidated  financial  information of the Company is qualified by reference to
and  should  be read in  conjunction  with  Item 8,  "Financial  Statements  and
Supplementary  Data,"  and Item 7,  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations," appearing elsewhere herein.


<TABLE>
<CAPTION>
                                                                                   YEAR ENDED JUNE 30,
                                                              --------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)                              2004         2003        2002        2001         2000

CONSOLIDATED OPERATING DATA:
<S>                                                            <C>          <C>         <C>         <C>          <C>
Revenues                                                       $  488,739   $  456,881   $ 427,602  $   475,726    $ 330,107
Operating income (loss)                                            52,870       22,286      11,889      (33,324)      (1,440)
Net income (loss) before provision for income taxes                46,598       40,595      43,918      (26,757)      10,333
Provision for income taxes                                         18,638       16,239           -            -            -
Net income (loss) before cumulative effect of accounting                        24,356
   change                                                          27,960                   43,918      (26,757)      10,333
Net income (loss)                                                  27,960       24,356      38,011      (52,487)      10,333

COMMON STOCK DATA:
Diluted earnings (loss) before cumulative effect of accounting
   change per share                                             $    2.29   $     1.84   $    2.95  $     (1.75)   $    0.61
Diluted earnings (loss) per share                               $    2.29   $     1.84   $    2.55  $     (3.44)   $    0.61
Diluted weighted average common shares outstanding                 13,208       13,233      14,909      15,248        16,993

                                                                                        JUNE 30,
                                                              --------------------------------------------------------------
                                                                   2004         2003        2002        2001         2000
CONSOLIDATED FINANCIAL POSITION DATA AND LIQUIDITY:
Cash and cash equivalents                                       $ 159,496   $   72,260   $  45,502  $    21,745   $   30,169
Total assets                                                      453,162(1)   248,505     280,817      348,461      316,772
Long-term liabilities                                             246,943        8,273       3,627        3,057        1,083
Shareholders' (deficit) equity                                    (46,083)     (20,283)    (20,630)     (25,965)      19,021
Cash flow provided by operating activities                         47,948       48,533      17,014       12,022       44,910

(1) In 2004, the Company completed the acquisition of all of the assets and
    capital stock of Lavalife Inc.
</TABLE>


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

OVERVIEW

The Company is a leader in bringing  value to consumers by designing  innovative
membership  programs  that offer  members easy access to a variety of discounted
products and services provided by the Company's  participating vendors. In April
2004, the Company broadened the scope of its business by acquiring  Lavalife,  a
personals  service.  As a result of this  acquisition,  the Company is a leading
global provider of web-based and IVR based personals  services.  The acquisition
of Lavalife  benefits the Company by providing  access to one of the largest and
fastest growing  consumer  categories on the internet while expanding its target
market.

In the past, the Company operated in one business segment, Membership.  However,
with the  acquisition of Lavalife,  management  analyzes the Company's  business
based on the following two business  segments:  Membership  and  Personals.  For
additional financial  information about of these business segments,  see Note 20
to the consolidated financial statements.

Membership  service  programs offer consumers a variety of products and services
from  selected  vendors  for an annual or  monthly  fee.  Revenues  are  derived
principally  from  recurring  fees which are  billed to the member  either on an
annual or monthly basis.  In the case of annually  billed  membership  fees, the
Company receives full payment at or near the beginning of the membership period,
but recognizes the revenues as the member's refund privilege expires. Membership
fees that are billed monthly are recognized when earned.  Profitability and cash
flow generated from renewal  memberships  exceed that of new  memberships due to
the absence of solicitation costs associated with new member procurement.

                                       10
<PAGE>

The personals  service business segment employs a transactional  business model,
in which users buy non-refundable  credits up front and spend those credits only
when they want to interact  with other users.  Personals  services  revenues are
generally recognized when the services are used.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those policies that are important to the
Company's financial condition and results of operations and involve subjective
or complex judgments on the part of management, often as a result of the need to
make estimates. The following areas require the use of judgments and estimates:
membership cancellation rates, deferred marketing costs, valuation of goodwill
and other intangible assets, estimation of remaining useful lives of intangible
assets and valuation of deferred tax assets. Estimates in each of these areas
are based on historical experience and various assumptions that the Company
believes are appropriate. Actual results may differ from these estimates. The
Company believes the following represent the critical accounting policies of the
Company as contemplated by Financial Reporting Release No. 60, "Cautionary
Advice Regarding Disclosure about Critical Accounting Policies." For a summary
of all of the Company's significant accounting policies, see Note 2 to the
consolidated financial statements located in this 2004 Annual Report on Form
10-K.

MEMBERSHIP REVENUE RECOGNITION
Revenues are billed  primarily  through credit and debit cards.  Members who are
enrolled in a monthly  payment plan may cancel their  membership at any time, at
which time, the billings will be  discontinued.  Revenues from these  membership
programs  are  recognized  when  earned.  Members who are  enrolled in an annual
payment  plan may cancel  their  membership  in the program at any time and will
receive a pro rata refund of the fee paid based on the remaining  portion of the
membership  period.  In accordance with Staff Accounting  Bulletin 104, "Revenue
Recognition"  ("SAB  104"),  deferred  revenues are  recorded,  net of estimated
cancellations,  and are amortized as revenues upon the  expiration of membership
refund  privileges.  An allowance for  membership  cancellations  is established
based on  management's  estimates and is updated  regularly.  In determining the
estimate  of  allowance  for  membership   cancellations,   management  analyzes
historical  cancellation  experience,  current  economic  trends and  changes in
customer  demand for the  Company's  products and  services.  Actual  membership
refunds are charged  against the allowance  for  membership  cancellations  on a
current basis. If actual cancellations differ from the estimate,  the results of
operations would be impacted.

MEMBERSHIP SOLICITATION AND OTHER DEFERRED COSTS
The Company's  marketing  expenses are comprised of refundable royalty payments,
non-refundable  royalty payments,  advertising  costs,  telemarketing and direct
mail.  Refundable  royalty  payments are deferred and charged to operations over
the membership  period in order to match the marketing costs with the associated
revenues from membership  fees.  Advertising  costs and  non-refundable  royalty
payments,  which  include  fee per  offer,  fee per sale and fee per  impression
marketing  arrangements,  are  expensed  when  incurred.  Telemarketing,   which
includes  the cost of third party  vendors to solicit  members on the  Company's
behalf,  and direct mail, which includes the cost of printing and mailing direct
mail pieces,  are direct response  advertising  costs which are accounted for in
accordance with American Institute of Certified Public Accountants  Statement of
Position 93-7,  "Reporting on Advertising  Costs" ("SOP 93-7").  Under SOP 93-7,
direct  response  advertising  costs are deferred and charged to operations over
the  membership  period,  which is the period of  expected  future  benefit,  as
revenues from membership fees are recognized.

Total  membership  solicitation  costs  incurred  to  enroll  a new  member  are
generally less than the estimated  total net membership  revenues.  However,  if
total  membership   solicitation  costs  were  to  exceed  total  estimated  net
membership revenues, an adjustment would be made to the membership  solicitation
and other deferred costs balance to the extent of any impairment.

VALUATION OF GOODWILL AND OTHER INTANGIBLES
The Company  reviews the carrying  value of its  goodwill  and other  intangible
assets and  assesses the  remaining  estimated  useful  lives of its  intangible
assets  in  accordance  with  Financial   Accounting  Standards  Board  ("FASB")
Statement No. 142,  "Goodwill and Other  Intangible  Assets"  ("SFAS 142").  The
Company reviews the carrying value of its goodwill and other  intangible  assets
for  impairment by comparing  such amounts to their fair values.  The Company is
required to perform this  comparison  at least  annually or more  frequently  if
circumstances  indicate  possible  impairment.  When determining fair value, the
Company  utilizes  various  assumptions,  including  projections  of future cash
flows.  A change in these  underlying  assumptions  would  cause a change in the
results of the tests and,  as such,  could  cause fair value to be less than the
carrying amounts. In such an event, the Company would then be required to record
a corresponding charge which would negatively impact earnings.  Goodwill at July
1, 2003,  2002 and 2001,  was tested for  impairment  during the quarters  ended
September 30, 2003, 2002 and 2001, respectively. The Company concluded that none
of its goodwill was impaired as of July 1, 2003 or 2002. As of July 1, 2001, the
Company  determined  that there was an impairment of goodwill of $5.9 million at
one of its  reporting  units due to the  change in  methodology  of  calculating
impairment  under SFAS 142 concurrent  with downward trends in the operations of
the  reporting  unit.  This  amount  was  recorded  as a  cumulative  effect  of
accounting change in the statement of operations in 2002.

                                       11
<PAGE>

INCOME TAXES
The Company accounts for income taxes under the provisions of FASB Statement No.
109,  "Accounting  for Income Taxes."  Deferred tax assets and  liabilities  are
recognized for future tax consequences  attributable to differences  between the
financial  statement  carrying  amounts of existing  assets and  liabilities and
their respective tax bases. The Company assesses the realization of deferred tax
assets considering  various  assumptions,  including estimates of future taxable
income and ongoing tax strategies. A change in these underling assumptions could
impact the results of operations.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                PERCENT INCREASE
                                                                           -------------------------
REVENUES:                                2004         2003         2002      '04 VS. `03 '03 VS. `02
                                      -----------  -----------  ---------- ------------- -----------
<S>                                   <C>          <C>          <C>         <C>         <C>
Membership                            $   471,049  $   456,881  $  427,602        3%          7%
Personals                                  17,690            -           -        NM          NM
                                      -----------  -----------  ---------- -------------------------
Total                                 $   488,739  $   456,881  $  427,602        7%          7%
                                      ===========  ===========  ========== =========================
NM = Not Meaningful
</TABLE>


MEMBERSHIP
Revenues increased 3% in 2004 primarily due to an increase in the weighted
average program price point per retail member. The net active retail members
decreased 11% in 2004 to 5.6 million primarily due to a decrease in marketing
expenses in 2004. The decline in the net active retail members may impact future
revenues and profitability. Revenues in 2003 benefited from the completion of
the migration of members that participate in a full-money-back refund policy
program to a pro rata refund policy program, which did not have an impact on
2003.

Revenues  increased 7% in 2003  primarily  due to the effect of the migration of
members that  participate  in a  full-money-back  refund policy program to a pro
rata  refund  policy  program as well as an  increase  in the  weighted  average
program price point per retail  member.  As a result of the Company's  strategic
initiative  to move its members to a pro rata refund  policy  program,  revenues
which  would  have  been  recognized  at the end of a  membership  year  are now
recognized ratably during the membership year as the refund privileges expire in
accordance  with SAB 104. In addition,  2002  revenues  included $9.4 million of
revenues from iPlace,  Inc.,  which was sold in the first quarter of 2002. As of
June 30, 2003, the Company had 6.3 million net active retail members compared to
6.6 million as of June 30, 2002.

Beginning in 2003 and continuing  through 2004, the Company increased the mix of
programs  marketed with a monthly payment plan and decreased the mix of programs
marketed with an annual payment plan.  This change was initiated due to improved
consumer  response  rates  to  the  Company's  marketing  efforts  and  improved
profitability of monthly payment plan programs. The mix of members enrolled in a
monthly  payment plan program was 64% in 2004,  27% in 2003 and 17% in 2002. The
Company  expects to  continue to increase  the mix of programs  marketed  with a
monthly payment plan in 2005.

Revenues  from members  enrolled in different  payment  programs are  summarized
below:


<TABLE>
<CAPTION>
                                                                                PERCENT
                                                                          INCREASE/(DECREASE)
                                                                        ------------------------
REVENUES:                           2004         2003         2002      '04 VS. `03  '03 VS. `02
                                 -----------  -----------  ----------   ------------ -----------
<S>                              <C>          <C>          <C>              <C>         <C>
Monthly payment plans            $   160,599  $    76,859  $   41,273       109%        86%
Annual payment plans:
   Initial year                      113,231      163,604     180,672      (31)%        (9)%
   Renewal year                      197,219      216,418     205,657       (9)%         5%
                                 -----------  -----------  ----------   ------------------------
Total                            $   471,049  $   456,881  $  427,602        3%          7%
                                 ===========  ===========  ==========   ========================
</TABLE>


                                       12
<PAGE>



PERSONALS
Revenues  were $17.7  million in 2004 and  represent  the  revenues of Lavalife,
which was  acquired  by the Company on April 1, 2004.  There were  approximately
600,000 active customers as of June 30, 2004.


<TABLE>
<CAPTION>
                                                                              PERCENT INCREASE
                                                                         --------------------------
OPERATING INCOME:                    2004         2003         2002      '04 VS. `03  '03 VS. `02
                                  ----------- ------------  ---------   ------------  -------------
<S>                               <C>          <C>          <C>              <C>          <C>
Membership                        $    52,533  $    22,286  $   11,889       136%         87%
Personals                                 337            -           -        NM          NM
                                 ------------  -----------  ----------   --------------------------
Total                             $    52,870  $    22,286  $   11,889       137%         87%
                                 ============  ===========  ==========   ===========================
NM = Not Meaningful
</TABLE>

MEMBERSHIP
Operating income increased 136% in 2004 primarily due to a decrease in marketing
expenses  incurred of 11% while revenues  increased 3%. Marketing  expenses were
$248.9  million in 2004 versus  $280.7  million in 2003 and, as a percentage  of
revenues,  marketing  expenses  were  53% in  2004  versus  61% in  2003.  These
decreases  were  primarily  due to the  decrease in the level and mix of members
enrolled through the higher cost outbound telemarketing channel. The decrease in
members enrolled through the outbound  telemarketing  channel was not completely
offset by an increase  in the level of members  enrolled  through the  Company's
more profitable Online and MemberLink channels.  Operating income was reduced by
an increase in  operating  expenses  and  general and  administrative  expenses.
Operating  expenses increased 12% in 2004 and, as a percent of revenues were 19%
in 2004 and 17% in 2003,  primarily due to increased  member service call center
related costs  incurred to improve the value and quality of services  offered to
the retail membership base. General and administrative  expenses increased 9% in
2004,  and as a percent of revenues were 17% in 2004 and 16% in 2003,  primarily
due to increased employee related expenses.

Operating income increased 87% in 2003 primarily due to decreased general and
administrative expenses in 2003 and a $6.9 million restructuring charge recorded
in 2002 (see Note 5 of the consolidated financial statements contained in this
Annual Report on Form 10-K). General and administrative expenses decreased 6% to
$74.1 million in 2003 from $79.2 million in 2002 and, as a percent of revenues
were 16% in 2003 and 19% in 2002. The decrease in general and administrative
expenses is primarily due to the sale of iPlace, Inc. and the closing of the
United Kingdom operations in 2002. The improvement in general and administrative
expenses was partially offset by an increase in marketing expenses. Marketing
expenses increased 13% in 2003, and as a percent of revenues were 61% in 2003
and 58% in 2002, primarily due to a higher level of non-refundable royalties and
advertising costs incurred in 2003 due to the Company's shift away from
telemarketing.

PERSONALS
Operating  income  was $0.3  million  in 2004 and  represented  the  results  of
Lavalife,  which was acquired on April 1, 2004.  Operating  income  reported for
2004 reflects $1.3 million of expense for the amortization of intangible assets.

<TABLE>
<CAPTION>


                                                                                                      PERCENT
                                                                                                INCREASE/(DECREASE)
                                                                                               -----------------------
CORPORATE:                                                   2004         2003         2002    '04 VS. `03 '03 VS. `02
                                                          ------------ -----------  ----------- ---------- -----------
<S>                                                       <C>          <C>          <C>                       <C>
Interest (expense) income, net                            $    (6,621) $       570  $      333     NM         71%
Other income (expense), net                                       349         (244)       (734)   243%        67%
Settlement of investment related litigation                         -       19,148           -     NM         NM
(Loss) gain on sale of subsidiary                                   -         (959)     65,608     NM         NM
Net loss on investment                                              -         (206)    (33,628)    NM         NM
Minority interest                                                   -            -         450     0%         NM
Provision for income taxes                                     18,638       16,239           -     15%        NM
NM = Not Meaningful
</TABLE>


Interest  (expense) income,  net. The increase in interest expense,  net in 2004
was due to nine months of interest expense related to the 5.5% Convertible Notes
issued in  September  2003 and three months of interest  expense  related to the
9.25% Senior Notes issued in April 2004.

Settlement of investment related  litigation.  In 2003, the Company,  along with
certain of the other former shareholders of iPlace,  Inc., settled their lawsuit
against  Homestore.com,  Inc.  The  total  settlement  amount  in  favor  of the
plaintiffs was $23.0 million of which the Company received $19.1 million.


                                       13
<PAGE>


(Loss) gain on sale of  subsidiary.  In 2002, the Company sold its investment in
iPlace,  Inc. for $50.1 million in cash and 1.6 million shares of Homestore.com,
Inc.  common stock and reported a gain of $65.6  million.  In 2003,  the Company
settled with  Homestore.com,  Inc. all issues pending related to amounts held in
escrow  in  connection  with the sale and  recorded  a net loss of $1.0  million
related to this settlement in 2003.

Net loss on investment.  In 2002,  the Company  reported a loss of $33.6 million
reflecting the  write-down of the Company's  investment in  Homestore.com,  Inc.
common  stock to its fair market  value.  In 2003,  the Company  sold all of its
Homestore.com, Inc. common stock and recognized a loss of $0.2 million.

Provision for income taxes.  In 2004 and 2003, the Company  recorded a provision
for income taxes of $18.6 million and $16.2 million,  respectively,  based on an
effective  tax rate of 40%.  The  effective  tax rate was  higher  than the U.S.
federal statutory rate due to state tax expense and other non-deductible  items.
In 2002, the Company was not required to record a provision for income taxes due
to its ability to utilize net  operating  loss  carryforwards  against which the
Company had previously carried a full valuation  allowance.  As of June 30, 2004
and 2003, the Company had accumulated  federal net operating loss  carryforwards
of $6.5 million and $41.4 million, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Net cash flow provided by operating  activities is an important  measure used to
understand the Company's  liquidity.  Management believes it is useful to report
the components of net cash provided by operating activities as follows:  Revenue
before deferral,  marketing costs before deferral,  operating expenses,  general
and  administrative  expenses,  and  changes  in  assets  and  liabilities.  For
definitions and  reconciliations  of revenue before deferral and marketing costs
before deferral see  "Reconciliation  of Non-GAAP Measures" located elsewhere in
this Annual Report on Form 10-K.  Net cash provided by operating  activities was
$47.9  million,  $48.5  million  and $17.0  million for the years ended June 30,
2004, 2003 and 2002, respectively.

Revenues before deferral increased 9% to $456.5 million in 2004 and increased 2%
to $417.9 million in 2003.  These increases were primarily due to an increase in
the  weighted  average  program  price point per retail  member.  The new annual
weighted  average program price points per retail member were $107, $104 and $88
during 2004, 2003 and 2002, respectively. Monthly weighted average program price
points per retail  member were $11.37,  $10.11 and $8.97  during 2004,  2003 and
2002,  respectively.  Revenues  before  deferral also included  $17.1 million of
revenues from Lavalife, which was acquired on April 1, 2004.

As described  above, the Company  increased the mix of programs  marketed with a
monthly  payment plan beginning in 2003 and  continuing  through 2004. The table
below  summarizes the components of revenues before deferral for the years ended
June 30:

                                    2004            2003           2002
                                -----------       ----------     ----------
  Monthly payment plans         $   166,365       $   76,859     $   41,273
  Annual payment plans:
     Initial year                    78,190          149,393        157,816
     Renewal year                   194,812          191,626        211,397
  Personals                          17,100                -              -
                                -----------       ----------     ----------
  Total                         $   456,467       $  417,878     $  410,486
                                ===============   ==========     ==========

Marketing costs before  deferral were $230.4 million,  $229.3 million and $233.9
million in 2004, 2003 and 2002,  respectively.  In 2004,  marketing costs before
deferral  increased 0.5%  primarily due to marketing  costs incurred by Lavalife
offset by the  decrease  in the level and mix of members  enrolled  through  the
higher cost outbound  telemarketing  channel.  The decrease in members  enrolled
through the  outbound  telemarketing  channel was not  completely  offset by the
increase in the level of members  enrolled through the Company's more profitable
online  and  Memberlink  channels.  As a percent  of  revenue  before  deferral,
marketing  costs before  deferral were 50% in 2004 versus 55% in 2003 due to the
effect of higher weighted average program price points,  as described above, the
effect of the  maturing  base of  members  enrolled  in a monthly  payment  plan
program and the  reduced  level and mix of higher  cost  outbound  telemarketing
costs. In 2003 marketing costs before deferral decreased 2% and, as a percent of
revenue before deferral,  decreased to 55% in 2003 versus 57% in 2002, primarily
due to the effect of higher  weighted  average  program  price points per retail
member, as described above.



                                       14
<PAGE>

Net cash provided by operating activities in 2004 was impacted by increased
operating expenses, general and administrative expenses and net interest expense
as described above. Net cash provided by operating activities in 2003 benefited
from decreased general and administrative expenses in 2003. In addition, 2002
included a restructuring charge, which is described above. Net cash provided by
operating activities was also impacted by changes in assets and liabilities,
which used $4.1 million of cash in 2004, had no significant impact in 2003 and
used $9.8 million of cash in 2002. The primary driver of the increase in cash
used by changes in assets and liabilities in 2004 is the decrease in the
allowance for membership cancellations and reflects the decrease in the level of
marketing as well as the decrease in the programs marketed with an annual
payment program. The Company expects an increase in cash paid for taxes in 2005
as the remaining federal net operating loss carryforwards have been reduced to
$6.5 million as of June 30, 2004.

Net cash used in investing  activities  was $129.6 million in 2004, and net cash
provided by investing  activities was $12.4 million in 2003 and $40.2 million in
2002.  In 2004,  the Company  completed the  acquisition  of Lavalife for $114.9
million in cash. Also in 2004, the Company  purchased $7.7 million of short-term
investments.  Net cash  provided by investing  activities  in 2003  included the
Company's $19.1 million  settlement of a lawsuit against  Homestore.com Inc. Net
cash  provided by investing  activities  in 2002  reflected the receipt of $46.0
million in net proceeds from the sale of iPlace, Inc. Capital  expenditures were
$7.1  million,   $5.5  million  and  $5.8  million  in  2004,   2003  and  2002,
respectively.

Net cash  provided by financing  activities  was $168.8  million in 2004 and net
cash used in financing activities was $34.2 million in 2003 and $33.5 million in
2002. Net cash provided by financing  activities in 2004  principally  reflected
the issuance of $229.8 million in debt, net of issuance costs, the proceeds from
the exercise of employee  stock  options of $33.6  million and the proceeds from
the issuance of restricted stock of $9.1 million (See Note 8 of the consolidated
financial  statements  contained  in this  Annual  Report on Form  10-K).  These
sources  of cash were  partially  offset by the use of $94.2  million in cash to
repurchase the Company's  stock.  Net cash used in financing  activities in 2003
principally  reflected the  repurchase of the Company's  stock for $37.2 million
partially offset by proceeds from the exercise of employee stock options of $4.1
million. Net cash used in financing activities in 2002 principally reflected the
purchase of Company  stock for $34.3 million  partially  offset by proceeds from
the exercise of employee stock options of $1.5 million.

DEBT ISSUANCES
During 2004 the Company  issued $90.0 million  aggregate  principal  amount 5.5%
convertible senior subordinated notes  ("Convertible  Notes") due September 2010
and $150.0 million of Senior Notes.  The Convertible  Notes bear interest at the
rate of 5.5% per year, which will be payable in cash semi-annually in arrears on
April 1 and October 1 of each year,  and the first  payment was paid on April 1,
2004. The net proceeds were to be used for general corporate purposes, including
mergers and  acquisitions  and additional  repurchases  of the Company's  common
stock  under its  stock  buyback  program.  Upon the  occurrence  of a change in
control,  holders of the Convertible Notes may require the Company to repurchase
all or part of the  Convertible  Notes for cash.  The Senior  Notes were sold at
98.418% of the  principal  amount which  results in an effective  yield of 9.5%.
Interest is payable in cash semi-annually in arrears on April 1 and October 1 of
each year,  with the first  payment  due on  October  1, 2004.  A portion of the
proceeds  from the  offering  of the  Senior  Notes  was  used to repay  amounts
borrowed  under the  senior  secured  credit  facility  to fund a portion of the
Lavalife  acquisition.  The Company  intends to use the  remaining  proceeds for
general corporate purposes,  including working capital,  future acquisitions and
repurchases  of the  Company's  common stock under the  Company's  stock buyback
program to the extent  permitted under the indenture  governing the Senior Notes
and the senior  secured  credit  facility.  The Senior  Notes  offering was made
solely  by  means of a  private  placement  to  qualified  institutional  buyers
pursuant  to Rule 144A under the  Securities  Act of 1933,  as  amended,  and to
certain  persons in offshore  transactions  pursuant to  Regulation  S under the
Securities Act. The Senior Notes have not been  registered  under the Securities
Act and may not be offered or sold in the United  States,  or to a U.S.  person,
absent registration or an applicable exemption from registration requirements.

CREDIT FACILITY
The Company has an amended and restated  senior  secured  credit  facility  that
allows  borrowings of up to $45.0 million.  Borrowings  under the senior secured
credit facility accrue interest at either the Eurodollar  rate, or the higher of
the Prime rate or the Federal Funds rate, plus an applicable  margin. As of June
30, 2004, the availability  under the senior secured credit facility was reduced
by an  outstanding  letter of credit of $5.5  million  and one  year's  worth of
interest on the Senior Notes.  As of June 30, 2004, the  availability  under the
senior secured credit facility is  approximately  $25.7 million.  As of June 30,
2004, the effective interest rate for borrowings under the senior secured credit
facility was 4.0%.  The senior  secured  credit  facility has certain  financial
covenants,  including a maximum debt coverage ratio,  potential  restrictions on
additional   borrowings   and  potential   restrictions   on  additional   stock
repurchases.  As of June 30, 2004,  the Company was in compliance  with all such
debt covenants.

STOCK REPURCHASE PROGRAM
The Company  purchased 3.0 million  shares for $94.2 million at an average price
of $31.56 in 2004 compared to 2.0 million shares for $37.2 million at an average
price of $18.67 in 2003 and 2.2 million  shares for $34.3  million at an average
price of $15.40 in 2002.  The  Company  utilized  cash  from  operations,  stock
issuances  and the  issuance  of the  Convertible  Notes  and  Senior  Notes  to
repurchase shares.  During 2004, the Board of Directors authorized an additional
3.0 million shares to be repurchased  under the buyback program.  As of June 30,
2004,  the Company had 1.0 million  shares  available for  repurchase  under its
buyback program.

                                       15
<PAGE>


As of June 30, 2004, the Company had cash and cash equivalents of $159.5 million
in addition to its senior secured  credit  facility.  The Company  believes that
existing cash balances,  together with funds  available under its senior secured
credit  facility,  will be sufficient to meet its funding  requirements  for the
foreseeable future.

The Company did not have any material commitments for capital expenditures as of
June 30, 2004.  The Company  intends to utilize cash on hand and cash  generated
from operations to fulfill any capital expenditure requirements during 2005.

RECONCILIATION OF NON-GAAP MEASURES

Management  believes that revenues  before  deferral and marketing  costs before
deferral are  important  measures of liquidity  and are  significant  factors in
understanding the Company's operating cash flow trends.  These non-GAAP measures
are used by management  and the Company's  investors to understand the liquidity
trends  of  the  Company's  marketing  margins  related  to the  current  period
operations  which are reflected  within the  operating  cash flow section of the
cash flow statement. GAAP revenues and marketing expenses are important measures
used to understand the marketing  margins earned during the period in the income
statement. However, in order to understand the Company's operating cash flow, it
is important to  understand  the primary,  current  period  drivers of that cash
flow.  Two of the primary  indicators of operating  liquidity for the period are
revenues before deferral and marketing  costs before  deferral.  Revenues before
deferral  are  revenues  before the  application  of SAB 104 and  represent  the
revenues  billed  during the  current  reporting  period less an  allowance  for
membership  cancellations.  That is,  revenues  before  deferral for a reporting
period include  membership  fees received in the current  reporting  period that
will be  recorded  as GAAP  revenues  in future  reporting  periods  and exclude
membership  fees received in prior  reporting  periods that are recorded as GAAP
revenues in the current  reporting  period.  Marketing costs before deferral are
marketing  costs before the  application  of SAB 104 and SOP 93-7 and  represent
marketing  costs paid for or accrued  for during the current  reporting  period.
That is,  marketing costs before  deferral for a reporting  period include costs
paid or accrued in the  current  reporting  period that will be recorded as GAAP
marketing  expenses in future reporting periods and exclude  marketing  expenses
paid or accrued in prior  reporting  periods that are recorded as GAAP marketing
expenses in the current reporting  period.  Neither revenues before deferral nor
marketing costs before deferral exclude charges or liabilities that will require
cash  settlement.  Additionally,  these  measures are not a  substitute  for, or
superior  to,  Revenues  and  Marketing  Expense  prepared  in  accordance  with
generally  accepted  accounting  principles.  In light of the difference between
revenues  before  deferral,  marketing  expenses  before deferral and their most
directly  comparable  GAAP  measures,  the Company solely uses these measures as
liquidity measures and not as performance measures.

Revenues  before  deferral for the years ended June 30, 2004,  2003 and 2002 are
calculated as follows:

<TABLE>
<CAPTION>
                                                                                   2004          2003           2002
                                                                               ------------  ------------    -----------
<S>                                                                            <C>            <C>            <C>
Revenues                                                                       $   488,739    $   456,881    $   427,602
Change in deferred revenues                                                        (32,272)       (39,003)       (17,116)
                                                                                -----------  ------------    -----------
Revenues before deferral                                                       $   456,467    $   417,878    $   410,486
                                                                                ===========  ============    ===========
</TABLE>

Marketing cost before  deferral for the years ended June 30, 2004, 2003 and 2002
is calculated as follows:

<TABLE>
<CAPTION>
                                                                                    2004          2003          2002
                                                                               ------------  ------------    -----------
<S>                                                                            <C>            <C>            <C>
Marketing expenses                                                             $   255,818    $   280,673    $   248,974
Change in membership solicitation and other deferred costs                         (25,455)       (51,411)       (15,038)
                                                                               ------------  ------------    ----------
Marketing costs before deferral                                                $   230,363    $   229,262    $   233,936
                                                                               ============  ============    ===========
</TABLE>

COMMITMENTS

The  Company is not aware of factors  that are  reasonably  likely to  adversely
affect liquidity  trends,  other than the risk factors  presented in the Forward
Looking Statements in this 2004 Annual Report on Form 10-K. The Company does not
have off-balance sheet  arrangements,  non-exchange traded contracts or material
related party transactions.



                                       16
<PAGE>





Future minimum  payments of  contractual  obligations as of June 30, 2004 are as
follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                  PAYMENTS DUE BY PERIOD
                                      ----------------------------------------------------------------------------
                                                       LESS THAN                                          AFTER
                                          TOTAL          1 YEAR        1-3 YEARS       3-5 YEARS        5 YEARS
                                      ------------    -----------     ------------    -----------    -------------
<S>                                   <C>             <C>             <C>             <C>             <C>
Operating leases                      $     29,293    $     7,761     $     10,931    $     7,716     $      2,885
Capital leases                               1,190            326              707            157                -
Long-term debt                             240,000              -                -              -          240,000
Purchase obligations                        13,403         13,371               32              -                -
Other obligations                               12             12                -              -                -
                                      ------------    -----------    -------------    -----------     ------------
Total payments due                    $    283,898    $    21,470     $     11,670    $     7,873     $    242,885
                                      ============    ===========    =============    ===========     ============
</TABLE>

The  Company  operates  in leased  facilities.  Management  expects  that leases
currently  in effect will be renewed or  replaced  by other  leases of a similar
nature  and term.  See Notes 6 and 7 of the  consolidated  financial  statements
contained elsewhere in this 2004 Annual Report filed on Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS

In January  2003,  the FASB  issued  Interpretation  No. 46,  "Consolidation  of
Variable Interest  Entities" ("FIN 46"), which was revised in December 2003. FIN
46 clarifies the application of Accounting Research Bulletin No. 51 and provides
guidance on the  identification of and reporting for variable interest entities.
FIN 46 is effective  immediately  for variable  interest  entities  formed after
January 31, 2003 and is  effective  for periods  ending after March 15, 2004 for
any variable  interest  entity formed prior to February 1, 2003. The adoption of
FIN 46 did not have a material impact on the Company's financial statements.

In May  2003,  the FASB  issued  Statement  No.  150,  "Accounting  for  Certain
Financial  Instruments  with  Characteristics  of both  Liabilities  and Equity"
("SFAS 150"). This statement  requires that certain  financial  instruments that
were  accounted  for  as  equity  under  previous   guidance  be  classified  as
liabilities  in  statements  of financial  position.  SFAS 150 is effective  for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period  beginning  after June
15,  2003.  The  adoption  of SFAS 150 did not  have a  material  impact  on the
Company's financial statements.

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K  contains  forward-looking  statements  that are
based on current  expectations,  estimates,  forecasts and projections about the
industry in which the Company  operates and the Company's  management's  beliefs
and assumptions. These forward-looking statements include statements that do not
relate solely to historical or current facts and can be identified by the use of
words  such  as  "believe,"  "expect,"  "estimate,"   "project,"  "continue"  or
"anticipate." These forward-looking  statements are made pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking  statements  are not  guarantees of future  performance  and are
based on a number of assumptions  and estimates  that are inherently  subject to
significant  risks and  uncertainties,  many of which are  beyond  our  control,
cannot be foreseen and reflect  future  business  decisions  that are subject to
change.  Therefore,  actual outcomes and results may differ materially from what
is expressed or forecasted in such  forward-looking  statements.  Among the many
factors  that  could  cause  actual  results  to  differ   materially  from  the
forward-looking statements are:

o    higher  than  expected  membership  cancellations  or lower  than  expected
     membership renewal rates;

o    changes in the marketing techniques of credit card issuers;

o    increases in the level of commission rates and other compensation  required
     by marketing partners to actively market with the Company;

o    potential  reserve  requirements by business partners such as the Company's
     credit card processors;

o    unanticipated termination of marketing agreements;

o    the extent to which the Company can  continue to  successfully  develop and
     market new products and services and introduce them in a timely basis;

o    the Company's ability to integrate  acquired  businesses into the Company's
     management and operations and operate successfully;



                                       17
<PAGE>


o    unanticipated changes in or termination of the Company's ability to process
     revenues  through third parties,  including credit card processors and bank
     card associations;

o    the Company's  ability to develop and implement  operational  and financial
     systems to manage growing operations;

o    the Company's  ability to recover from a complete or partial system failure
     or  impairment,   other  hardware  or  software  related   malfunctions  or
     programming errors;

o    the degree to which the Company is leveraged;

o    the Company's  ability to obtain  financing on acceptable  terms to finance
     the Company's growth strategy and to operate within the limitations imposed
     by financing arrangements;

o    further  changes in the already  competitive  environment for the Company's
     products or competitors' responses to the Company's strategies;

o    changes  in  the  growth  rate  of  the  overall  U.S.   economy,   or  the
     international  economy  where the Company does  business,  such that credit
     availability,  interest rates,  consumer spending and related consumer debt
     are impacted;

o    additional  government  regulations  and  changes  to  existing  government
     regulations of the Company's  industry;

o    the Company's  ability to compete with other  companies that have financial
     or other advantages;

o    adverse movement of foreign exchange rates;

o    the  Company's  ability to attract and retain active  members and users;  o
     adverse results of litigation or regulatory  matters;  and

o    new accounting pronouncements.

Many of these  factors are beyond the Company's  control,  and,  therefore,  its
business,  financial  condition,  results  of  operations  and cash flows may be
adversely affected by these factors.

The  Company  cautions  that  such  factors  are  not  exclusive.   All  of  the
forward-looking statements made in this Annual Report on Form 10-K are qualified
by these  cautionary  statements  and readers are  cautioned  not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this Annual Report on Form 10-K. Except as required by law, the Company does not
have  any  intention  or  obligation  to  publicly  update  any  forward-looking
statements, whether as a result of new information, future events or otherwise.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE
The Company has a senior secured credit facility that allows borrowings of up to
$45.0  million.  Borrowings  under the senior  secured  credit  facility  accrue
interest  at either the  Eurodollar  rate or the higher of the Prime rate or the
Federal  Funds  rate  plus  an  applicable  margin.  There  were  no  borrowings
outstanding under this senior secured credit facility as of June 30, 2004. As of
June 30, 2004, availability under the senior secured credit facility was reduced
by an  outstanding  letter of credit of $5.5  million  and one  year's  worth of
interest on the Senior Notes.  As of June 30, 2004, the  availability  under the
senior  secured  credit  facility is  approximately  $25.7  million.  Management
believes that an increase in the Eurodollar  rate, the Prime rate or the Federal
Funds rate would not be  material  to the  Company's  financial  position or its
results of operations.  If the Company is not able to renew its existing  credit
facility  agreement,  which  matures on March 25, 2005,  it is possible that any
replacement  lending  facility  obtained by the Company may be more sensitive to
interest rate  changes.  In addition,  the Company has $90.0  million  aggregate
principal amount of 5.5% Convertible Notes due 2010 and $150.0 million aggregate
principal  amount of 9.25% Senior Notes due 2014. The Convertible  Notes and the
Senior  Notes pay  interest  in cash  semi-annually  in  arrears  on April 1 and
October 1 of each year.  The fair value of the fixed  interest  instruments  are
affected  by changes in  interest  rates,  and with  respect to the  Convertible
Notes, are also affected by changes in the Company's stock price and volatility.
The  Company  does not  currently  hedge  interest  rates  with  respect  to its
outstanding  debt. As of June 30, 2004,  the carrying  value of the  Convertible
Notes and the Senior Notes was $90.0 million and $147.7  million,  respectively,
and the  fair  value  of the  notes  were  $93.3  million  and  $143.3  million,
respectively.

FOREIGN CURRENCY
The Company conducts  business in certain foreign markets,  primarily in Canada.
The Company's  primary  exposure to foreign currency risk relates to investments
in foreign subsidiaries that transact business in functional currency other than
the U.S.  Dollar,  primarily the Canadian Dollar.  As the Company  increases its
operations  in  international   markets,  it  becomes  increasingly  exposed  to
potentially  volatile  movements in currency exchange rates. The economic impact
of  currency  exchange  rate  movements  on the  Company  are  often  linked  to
variability in real growth, inflation,  interest rates, governmental actions and
other factors. These changes, if material, could cause the Company to adjust its
financing  and  operating   strategies.   As  currency  exchange  rates  change,
translation  of the income  statements of the Company's  international  business
into U.S. dollars affects  year-over-year  comparability  of operating  results.
Historically,  the Company has not hedged  translation  risks because cash flows
from international operations were generally reinvested locally.



                                       18
<PAGE>

In connection with the acquisition of Lavalife,  the Company  employed  policies
and procedures to manage foreign  currency  risks  associated  with the purchase
price,  which was denominated in Canadian  dollars.  The Company's  objective in
managing its exposure to foreign  currency  exchange  rate  fluctuations  was to
reduce the impact of adverse  fluctuations on cash flows associated with foreign
currency  exchange  rate  changes.  Accordingly,  the Company  utilized  foreign
currency option  contracts and forward  contracts to manage its exposure related
to the purchase price for the Lavalife acquisition.  Gains and losses related to
these  derivative  contracts  were  recognized in the statement of operations in
fiscal 2004.

Foreign exchange gains and losses were not material to the Company's earnings in
2004, 2003 and 2002. However,  given the currency  fluctuations in 2004 and 2003
and anticipated increases in the Company's operations in international  markets,
the Company is  reviewing  its  strategy  for  hedging  transaction  risks.  The
Company's  objective  in  managing  its foreign  exchange  risk is to reduce its
potential  exposure  to the  changes  that  exchange  rates  might  have  on its
earnings, cash flows and financial position. The Company will assess the need to
utilize financial  instruments to hedge currency  exposures on an ongoing basis.
However,  there can be no assurance that the Company's  foreign currency hedging
activities  will  substantially  offset the impact of  fluctuations  in currency
exchange rates on its results of operations and financial position.

FAIR VALUE OF INVESTMENTS
The Company  does not have  material  exposure  to market  risk with  respect to
investments,  as the Company's  investments  are short-term in nature  (original
maturities of less than one year). The Company does not use derivative financial
instruments for speculative or trading purposes. However, this does not preclude
the Company's adoption of specific hedging strategies in the future.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  financial  statements  and related notes and report of  independent  public
registered  accounting  firm for the Company  are  included  following  Part IV,
beginning on page F-1, and identified in the index appearing at Item 15(a).

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

None.

ITEM 9A.  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Chief  Executive  Officer and Chief  Financial  Officer have  evaluated  the
effectiveness  of the Company's  disclosure  controls and procedures (as defined
under Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
report and have concluded that the Company's  disclosure controls and procedures
were  effective at the  reasonable  assurance  level.  The Company's  disclosure
controls  and  procedures  are  designed  to ensure  that  material  information
relating to the Company and its consolidated subsidiaries that is required to be
disclosed in its reports under the Exchange Act is accumulated and  communicated
to the Chief Executive Officer and Chief Financial Officer.

Notwithstanding  the  foregoing,  although  there can be no  assurance  that the
Company's disclosure controls and procedures will detect or uncover all failures
of persons  within the Company  and its  consolidated  subsidiaries  to disclose
material  information  otherwise  required  to be set  forth  in  the  Company's
periodic reports,  the Chief Executive  Officer's and Chief Financial  Officer's
evaluation concluded that they are reasonably effective to do so.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
During  2004,  there were no  changes in the  Company's  internal  control  over
financial  reporting  that could have  materially  affected,  or are  reasonably
likely to materially  affect,  the  Company's  internal  control over  financial
reporting.

During the quarter ended June 30, 2004, the Company completed the acquisition of
Lavalife  for $114.9  million  in cash.  As part of the  integration  activities
associated  with  this  acquisition,  the  Company  is in the  process  of fully
incorporating this business into its disclosure controls and procedures.



                                       19
<PAGE>



ITEM 9B.  OTHER INFORMATION

None.
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  contained in the Company's  Proxy Statement under the sections
titled  "Election of Directors" is incorporated  herein by reference in response
to this item.  Information  regarding the  Executive  Officers of the Company is
furnished  in Part I of this  Annual  Report  on form  10-K  under  the  heading
"Executive Officers of the Registrant."

ITEM 11.  EXECUTIVE COMPENSATION

The  information  contained in the Company's  Proxy  Statement under the section
titled "Executive  Compensation" is incorporated herein by reference in response
to this item.

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

The  information  contained in the Company's  Proxy  Statement under the section
titled  "Security  Ownership of Certain  Beneficial  Owners and  Management"  is
incorporated herein by reference in response to this item.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  contained in the Company's  Proxy  Statement under the section
titled "Certain  Relationships and Related  Transactions" is incorporated herein
by reference in response to this item.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The  information  contained in the Company's  Proxy  Statement under the section
titled  "Ratification  of Selection  of  Independent  Auditors" is  incorporated
herein by reference in response to this item.

                                     PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
<S>                                                                                                        <C>

(a)  Index to Financial  Statements and Financial  Statement  Schedules                                    PAGE

    (1)  Report  of   PricewaterhouseCoopers   LLP,  Independent  Registered  Public
         Accounting Firm                                                                                   F-1

         Consolidated   Balance  Sheets  as  of  June  30,  2004  and  2003                                F-2

         Consolidated  Statements  of  Operations  for the years  ended June 30,
         2004,  2003 and  2002                                                                             F-3

         Consolidated  Statements  of  Shareholders' (Deficit) Equity for the
         years ended June 30, 2004, 2003 and 2002                                                          F-4

         Consolidated Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002            F-5

         Notes to Consolidated Financial Statements                                                        F-6

     The following Financial Statement Schedule is included:

     (2) Schedule II - Valuation and Qualifying Accounts - Years ended June 30, 2004, 2003 and 2002       F-29
</TABLE>

     All  other  schedules  for  which  provision  is  made  in  the  applicable
     accounting  regulations of the  Securities and Exchange  Commission are not
     required under the related instructions, or are inapplicable, and therefore
     have been omitted.

(b) Reports on Form 8-K
     On  April  5,  2004,  the  Company  furnished  on  Form  8-K  under  Item 2
     "Acquisition  or Disposition  of Assets" and Item 7 "Financial  Statements,
     Pro Forma Financial Statements and Exhibits" a press release announcing the
     completion of the acquisition of Lavalife Inc.

     On April 8, 2004, the Company filed on Form 8-K under Item 5 "Other Events"
     and Item 7  "Financial  Statements,  Pro  Forma  Financial  Statements  and
     Exhibits"  a  press  release  announcing  the  pricing  of  $150.0  million
     aggregate principal amount of 9.25% Senior Notes due 2014 sold at 98.418%.

                                       20
<PAGE>

     On April 28,  2004,  the Company  filed on Form 8-K under Item 7 "Financial
     Statements, Pro Forma Financial Statements and Exhibits" and furnished Item
     12  "Results  of  Operations  and  Financial  Condition"  a  press  release
     announcing fiscal year 2004 third quarter and nine month results.

(c) Exhibits:
     Exhibits  filed as a part of this Annual  Report on Form 10-K are listed in
     the Index to Exhibits immediately preceding the exhibits located at the end
     of this Annual Report.



                                       21
<PAGE>




                            MEMBERWORKS INCORPORATED

                                   SIGNATURES

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


                                         MEMBERWORKS INCORPORATED
                                              (Registrant)


                                         By:   /s/ GARY A. JOHNSON
                                              Gary A. Johnson, President, Chief
                                              Executive Officer and Director


                                               Date: September 13, 2004

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


<TABLE>
<CAPTION>

SIGNATURE                           TITLE                                               DATE
----------                          ------                                              -----
<S>                                 <C>                                                 <C>
By: /s/ GARY A. JOHNSON             President, Chief Executive Officer and Director     September 13, 2004
-----------------------------
Gary A. Johnson

By: /s/ JAMES B. DUFFY              Executive Vice President, Chief Financial Officer   September 13, 2004
-----------------------------
James B. Duffy

By: /s/ ALEC L. ELLISON             Director                                            September 13, 2004
-----------------------------
Alec L. Ellison

By: /s/ SCOTT N. FLANDERS           Director                                            September 13, 2004
-----------------------------
Scott N. Flanders

By: /s/ ROBERT KAMERSCHEN           Director                                            September 13, 2004
-----------------------------
Robert Kamerschen

By: /s/ MICHAEL T. MCCLOREY         Director                                            September 13, 2004
-----------------------------
Michael T. McClorey

By: /s/ EDWARD M. STERN             Director                                            September 13, 2004
-----------------------------
Edward M. Stern

By: /s/ MARC S. TESLER              Director                                            September 13, 2004
-----------------------------
Marc S. Tesler
</TABLE>


                                       22
<PAGE>


                                    EXHIBITS
NO.        DESCRIPTION

*3.1     Restated  Certificate of  Incorporation  of the  Registrant.  (filed as
         Exhibit  3.3 to the  Company's  Registration  Statement  on  Form  S-1,
         Registration No. 333-10541, filed on October 18, 1996)

*3.2     Restated  By-laws  of the  Registrant.  (filed  as  Exhibit  3.4 to the
         Company's   Registration   Statement  on  Form  S-1,  Registration  No.
         333-10541, filed on October 18, 1996)

*4.1     Amended  and  Restated  Registration  Rights  Agreement,  dated  as  of
         September 9, 1994 between the Registrant and Brown Brothers  Harriman &
         Co.  (filed as Exhibit 4.3 to the Company's  Registration  Statement on
         Form S-1, Registration No. 333-10541, filed on October 18, 1996)

*4.2     Registration  Rights  Agreement,  dated  September  20,  1995 among the
         Registrant and the Stockholders set forth on Schedule I thereto. (filed
         as Exhibit 4.4 to the  Company's  Registration  Statement  on Form S-1,
         Registration No. 333-10541, filed on October 18, 1996)

*4.3     Indenture   dated  as  of  September   30,  2003  between   MemberWorks
         Incorporated  and Deutsche  Bank Trust  Company  Americas,  or Trustee.
         (filed as exhibit 4.1 to the Company's  Quarterly  report on Form 10-Q,
         File No. 000-21527, filed on November 13, 2003)

*4.4     Registration  Rights  Agreement  dated as of September 30, 2003 between
         MemberWorks  Incorporated  and  Lehman  Brothers  Inc.  and CIBC  World
         Markets Corp.  (filed as exhibit 4.2 to the Company's  Quarterly report
         on Form 10-Q, File No. 000-21527, filed on November 13, 2003)

*4.5     Indenture dated as of April 13, 2004 between  MemberWorks  Incorporated
         and each of the  Guarantors  party  thereto and LaSalle  Bank  National
         Association,  as Trustee  relating to the 9.25%  Senior Notes due 2014,
         including  the form of notes.  (filed as exhibit  4.1 to the  Company's
         Registration Statement on Form S-4, Registration No. 333-115500,  filed
         on May 14, 2004)

*4.6     Registration  Rights Agreement dated April 13, 2004 between MemberWorks
         Incorporated  and  each of the  Guarantors  party  thereto  and  Lehman
         Brothers Inc., UBS Securities LLC and ABN AMRO Incorporated.  (filed as
         exhibit  4.2 to the  Company's  Registration  Statement  on  Form  S-4,
         Registration No. 333-115500, filed on May 14, 2004)

*10.1    Amended Employee Incentive Stock Option Plan. (filed as Exhibit 10.1 to
         the  Company's  Registration  Statement on Form S-1,  Registration  No.
         333-10541, filed on October 18, 1996)

*10.3    1995 Non-Employee  Directors' Stock Option Plan. (filed as Exhibit 10.3
         to the Company's  Registration  Statement on Form S-1, Registration No.
         333-10541, filed on October 18, 1996)

*10.4    1996  Stock  Option  Plan.  (filed  as  Exhibit  10.4 to the  Company's
         Registration  Statement on Form S-1, Registration No. 333-10541,  filed
         on October 18, 1996)

*10.5    1996  Employee  Stock  Purchase  Plan.  (filed as  Exhibit  10.5 to the
         Company's   Registration   Statement  on  Form  S-1,  Registration  No.
         333-10541, filed on October 18, 1996)

*10.6    Amended and Restated  401(k)  Profit  Sharing  Plan of the  Registrant,
         dated July 1,  2000.  (filed as Exhibit  10.6 to the  Company's  Annual
         Report on Form 10-K, File No. 000-21527, filed on September 6, 2001)

*10.8    Amended  and  Restated  Credit  Agreement  dated  March 25,  2004 among
         MemberWorks  Incorporated,  the Lenders Parties Hereto and LaSalle Bank
         National  Association.  (filed as exhibit 99.3 to the Company's Current
         report on Form 8-K, File No.000-21527, filed on April 5, 2004)

*10.9    Master  Transaction  Agreement  dated March 3, 2004.  (filed as exhibit
         99.2 to the Company's  Current  report on Form 8-K, File  No.000-21527,
         filed on April 5, 2004)

*10.18   Lease Agreement  between  Stamford  Towers Limited  Partnership and the
         Registrant,  dated  January 15,  1996.  (filed as Exhibit  10.22 to the
         Company's   Registration   Statement  on  Form  S-1,  Registration  No.
         333-10541, filed on October 18, 1996)

*10.20   Arena  Tower  II  Lease   Agreement  by  and  between  Arena  Tower  II
         Corporation  and the  Registrant,  dated February 12, 1996, as amended.
         (filed as Exhibit 10.24 to the Company's Registration Statement on Form
         S-1, Registration No. 333-10541, filed on October 18, 1996)

*10.23   Lease Agreement  between  Stamford  Towers Limited  Partnership and the
         Registrant,  dated  May  20,  1997.  (filed  as  Exhibit  10.23  to the
         Company's  Annual  Report on Form 10-K,  File No.  000-21527,  filed on
         September 29, 1997)


                                       23
<PAGE>

*10.24   Second Amendment to Lease Agreement  between Arena Tower II Corporation
         and Registrant  dated January 24, 1997.  (filed as Exhibit 10.24 to the
         Company's  Annual  Report on Form 10-K,  File No.  000-21527,  filed on
         September 29, 1997)

*10.25   Third Amendment to Lease  Agreement  between Arena Tower II Corporation
         and  Registrant  dated July 23,  1997.  (filed as Exhibit  10.25 to the
         Company's  Annual  Report on Form 10-K,  File No.  000-21527,  filed on
         September 29, 1997)

*14.1    Code of Conduct. (filed as exhibit 14 to the Company's Quarterly report
         on Form 10-Q, File No. 000-21527, filed on May 14, 2004)

*18      Letter re: Change in Accounting Principle.  (filed as Exhibit 18 to the
         Company's  Annual  Report on Form 10-K,  File No.  000-21527,  filed on
         October 8, 1998)

21       Subsidiaries of the Registrant.

23       Consent of PricewaterhouseCoopers LLP.

31.1     Rule 13a-14(a)/15d-14(a) CEO Certification.

31.2     Rule 13a-14(a)/15d-14(a) CFO Certification.

32.1     CEO Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.

32.2     CFO Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.

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

*Previously filed.

                                       24
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders
of MemberWorks Incorporated

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 15(a)(1)  present  fairly,  in all material  respects,  the
financial position of MemberWorks  Incorporated and its subsidiaries at June 30,
2004 and 2003, and the results of their operations and their cash flows for each
of the  three  years in the  period  ended  June  30,  2004 in  conformity  with
accounting  principles  generally  accepted in the United States of America.  In
addition,  in our opinion,  the financial statement schedule listed in the index
appearing under Item 15(a)(2)  presents fairly,  in all material  respects,  the
information  set  forth  therein  when  read in  conjunction  with  the  related
consolidated  financial  statements.  These  financial  statements and financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted our audits of these  statements in accordance with the
standards of the Public  Company  Accounting  Oversight  Board (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,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 14 to the consolidated  financial  statements,  the Company
changed its method of accounting for goodwill and other intangible assets in
fiscal 2002.





PricewaterhouseCoopers LLP
New York, New York
September 8, 2004

                                      F-1
<PAGE>



                            MEMBERWORKS INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>


                                                                                                     JUNE 30,
                                                                                            -------------------------
                                                                                                2004          2003
                                                                                            ----------    -----------
                                       ASSETS
Current assets:
<S>                                                                                        <C>            <C>
  Cash and cash equivalents                                                                $   159,496    $    72,260
  Restricted cash                                                                                3,120          2,732
  Short-term investments                                                                         7,650              -
  Accounts receivable (net of allowance for doubtful accounts of $235 and $1,743 at
    June 30, 2004 and 2003, respectively)                                                       10,557          8,713
  Prepaid membership materials                                                                   3,233          2,196
  Prepaid expenses                                                                               4,886          7,571
  Membership solicitation and other deferred costs                                              52,428         77,883
                                                                                           -----------    -----------
             Total current assets                                                              241,370        171,355
Fixed assets, net                                                                               36,540         24,969
Goodwill                                                                                       125,675         42,039
Intangible assets, net                                                                          38,872          6,656
Other assets                                                                                    10,705          3,486
                                                                                           -----------    -----------
             Total assets                                                                  $   453,162    $   248,505
                                                                                           ===========    ===========

                        LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
  Current maturities of long-term obligations                                              $       338    $       244
  Accounts payable                                                                              35,185         32,644
  Accrued liabilities                                                                           66,075         59,105
  Deferred revenues                                                                            138,381        167,643
  Deferred income taxes                                                                         12,323            879
                                                                                           -----------    -----------
             Total current liabilities                                                         252,302        260,515
Deferred income taxes                                                                            4,354          5,145
Other long-term liabilities                                                                      4,930          3,128
Long-term debt                                                                                 237,659              -
                                                                                           -----------    -----------
             Total liabilities                                                                 499,245        268,788
                                                                                           -----------    -----------

Commitments and contingencies (Note 7)                                                               -              -

Shareholders' deficit:
  Preferred stock, $0.01 par value -- 1,000 shares authorized; no shares issued                      -              -
  Common stock, $0.01 par value -- 40,000 shares authorized;
    19,089 shares issued (17,847 shares at June 30, 2003)                                          191            178
  Capital in excess of par value                                                               156,457        122,425
  Accumulated earnings (deficit)                                                                10,131        (17,829)
  Accumulated other comprehensive loss                                                            (373)          (469)
  Treasury stock, 8,852 shares at cost (6,126 shares at June 30, 2003)                        (212,489)      (124,588)
                                                                                           -----------    -----------
             Total shareholders' deficit                                                       (46,083)       (20,283)
                                                                                           -----------    -----------
             Total liabilities and shareholders' deficit                                   $   453,162    $   248,505
                                                                                           ===========    ===========


</TABLE>



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

                                      F-2

<PAGE>



                            MEMBERWORKS INCORPORATED
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>


                                                                                   FOR THE YEAR ENDED JUNE 30,
                                                                           ----------------------------------------
                                                                                2004          2003         2002
                                                                           -------------- ------------ ------------

<S>                                                                        <C>            <C>          <C>
Revenues                                                                   $   488,739    $   456,881  $   427,602

Expenses:
    Marketing                                                                  255,818        280,673      248,974
    Operating                                                                   91,832         78,444       78,694
    General and administrative                                                  85,826         74,085       79,211
    Restructuring charges (Note 5)                                                   -              -        6,893
    Amortization of intangibles                                                  2,393          1,393        1,941
                                                                           -------------- ------------ ------------

Operating income                                                                52,870         22,286       11,889
Settlement of investment related litigation (Note 10)                                -         19,148            -
(Loss) gain on sale of subsidiary (Note 9)                                           -           (959)      65,608
Net loss on investment (Note 9)                                                      -           (206)     (33,628)
Interest (expense) income, net                                                  (6,621)           570          333
Other income (expense), net                                                        349           (244)        (734)
                                                                           -------------- ------------ ------------

Income before minority interest                                                 46,598         40,595       43,468
Minority interest (Note 12)                                                          -              -          450
                                                                           -------------- ------------ ------------

Income before income taxes                                                      46,598         40,595       43,918
Provision for income taxes                                                      18,638         16,239           -
                                                                           -------------- ------------ ------------

Income before cumulative effect of accounting change                            27,960         24,356       43,918
Cumulative effect of accounting change (Note 14)                                     -              -       (5,907)
                                                                           -------------- ------------ ------------
Net income                                                                 $    27,960    $    24,356  $    38,011
                                                                           ============== ============ ============

Basic earnings per share:
     Income before cumulative effect of accounting change                  $      2.60    $      1.93  $      3.03
     Cumulative effect of accounting change                                          -              -        (0.41)
                                                                           -------------- ------------ ------------
     Basic earnings per share                                              $      2.60    $      1.93  $      2.63
                                                                           ============== ============ ============

Diluted earnings per share:
     Income before cumulative effect of accounting change                  $      2.29    $      1.84  $      2.95
     Cumulative effect of accounting change                                          -              -        (0.40)
                                                                           -------------- ------------ ------------
     Diluted earnings per share                                            $      2.29    $      1.84  $      2.55
                                                                           ============== ============ ============

Weighted average common shares used in earnings per share calculations:
     Basic                                                                      10,755         12,596       14,477
                                                                           ============== ============ ============
     Diluted                                                                    13,208         13,233       14,909
                                                                           ============== ============ ============
</TABLE>


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

                                      F-3
<PAGE>



                            MEMBERWORKS INCORPORATED
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                COMMON STOCK     CAPITAL IN   ACCUMULATED    OTHER
                                             ------------------  EXCESS OF      EARNINGS  COMPREHENSIVE   TREASURY
                                               SHARES   AMOUNT   PAR VALUE     (DEFICIT)   (LOSS) GAIN       STOCK       TOTAL
                                             -----------------------------------------------------------------------------------
<S>                                             <C>     <C>      <C>            <C>          <C>           <C>         <C>
Balance - June 30, 2001                         17,308  $    173 $   107,835    $ (80,196)   $     (370)   $ (53,407)  $ (25,965)
Issuance of common stock                           185         2       1,462            -             -           --       1,464
Issuance of treasury stock to fund 401K Plan         -         -         (51)           -             -          207         156
Expense associated with the issuance of
   stock options to a non-employee                   -         -           8            -             -            -           8
Acquisition of treasury stock                        -         -           -            -             -      (34,301)    (34,301)
Comprehensive income:
  Net income                                         -         -           -       38,011             -            -      38,011
  Currency translation adjustment                    -         -           -            -            (3)           -          (3)
                                                                                                                       ---------
  Total comprehensive loss                                                                                                38,008
                                             -----------------------------------------------------------------------------------
Balance - June 30, 2002                         17,493       175     109,254      (42,185)         (373)     (87,501)    (20,630)
Issuance of common stock                           354         3       4,047            -             -            -       4,050
Tax Benefit from employee stock options              -         -       9,100            -             -            -       9,100
Issuance of treasury stock to fund 401K Plan         -         -         (21)           -             -          127         106
Expense associated with the issuance of
   stock options to a non-employee                   -         -          45            -             -            -          45
Acquisition of treasury stock                        -         -           -            -             -      (37,214)    (37,214)
Comprehensive income:
  Net income                                         -         -           -       24,356             -            -      24,356
  Currency translation adjustment                    -         -           -            -           (96)           -         (96)
                                                                                                                       ---------
  Total comprehensive income                                                                                              24,260
                                             -----------------------------------------------------------------------------------
Balance - June 30, 2003                         17,847       178     122,425      (17,829)         (469)    (124,588)    (20,283)
Issuance of common stock                         1,242        13      24,551            -             -            -      24,564
Issuance of restricted stock                         -         -       2,774            -             -        6,306       9,080
Tax Benefit from employee stock options              -         -       6,520            -             -            -       6,520
Expense associated with the issuance of
   stock options to a non-employee                   -         -         187            -             --           -         187
Acquisition of treasury stock                        -         -           -            -             -      (94,207)    (94,207)
Comprehensive income:
  Net income                                         -         -           -       27,960             -            -      27,960
  Currency translation adjustment                    --        -           -            -           105            -         105
  Minimum pension liability adjustment (net
   of tax)                                           -                                               (9)           -          (9)
                                                                                                                     -----------
  Total comprehensive income                                                                                              28,056
                                             -----------------------------------------------------------------------------------
Balance - June 30, 2004                         19,089  $    191  $  156,457  $    10,131   $      (373) $  (212,489)  $ (46,083)
                                             ===================================================================================
</TABLE>




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

                                       F-4

<PAGE>



                            MEMBERWORKS INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                     FOR THE YEAR ENDED JUNE 30,
                                                                              ----------------------------------------
                                                                                 2004           2003           2002
                                                                              -----------    -----------   -----------
  Operating activities
<S>                                                                           <C>            <C>           <C>
    Net income                                                                $    27,960    $    24,356   $    38,011
    Adjustments to reconcile net income to net cash provided
    by operating activities:
       Change in deferred revenues                                                (32,272)       (39,003)      (17,116)
       Change in membership solicitation and other deferred costs                  25,455         51,411        15,038
       Depreciation and amortization                                               13,252         12,120        13,252
       Deferred and other income taxes                                             10,254         14,182             -
       Tax benefit from employee stock plans                                        6,520            942             -
       Gain on settlement of investment related litigation                              -        (19,148)            -
       Loss (gain) on sale of subsidiary                                                -            959       (65,608)
       Net loss on investment                                                           -            206        33,628
       Non-cash restructuring charges                                                   -              -         1,585
       Minority interest                                                                -              -          (450)
       Cumulative effect of accounting change                                           -              -         5,907
       Other                                                                          890          2,485         2,605

    Change in assets and liabilities:
       Restricted cash                                                               (388)         2,951        (4,692)
       Accounts receivable                                                           (112)           758         8,830
       Prepaid membership materials                                                (1,589)          (135)          315
       Prepaid expenses                                                             5,172         (3,246)       (2,217)
       Other assets                                                                  (461)        (1,331)         (251)
       Related party payables                                                           -              -            12
       Accounts payable                                                           (10,323)          (255)      (10,752)
       Accrued and other liabilities                                                3,590          1,281        (1,083)
                                                                              -----------    -----------   -----------
  Net cash provided by operating activities                                        47,948         48,533        17,014
                                                                              -----------    -----------   -----------
  Investing activities
    Acquisition of fixed assets                                                    (7,057)        (5,463)       (5,761)
    Settlement of investment related litigation                                         -         19,148             -
    Proceeds from sale of subsidiary, net of cash sold                                  -              -        45,997
    Other investing activities                                                          -         (1,250)            -
    Purchase of short-term investments                                             (7,650)             -             -
    Business combinations, net of cash acquired                                  (114,916)             -             -
                                                                              -----------    -----------   -----------
  Net cash (used in) provided by investing activities                            (129,623)        12,435        40,236
                                                                              -----------    -----------   -----------
  Financing activities
    Net proceeds from issuance of stock                                            33,644          4,050         1,515
    Treasury stock purchases                                                      (94,207)       (37,214)      (34,301)
    Net proceeds from issuance of debt                                            229,825              -             -
    Payments of long-term obligations                                                (453)        (1,051)         (718)
                                                                              -----------    -----------   -----------
  Net cash provided by (used in) financing activities                             168,809        (34,215)      (33,504)
                                                                              -----------    -----------   -----------
  Effect of exchange rate changes on cash and cash equivalents                        102              5            11
                                                                              -----------    -----------   -----------
  Net increase in cash and cash equivalents                                        87,236         26,758        23,757
  Cash and cash equivalents at beginning of year                                   72,260         45,502        21,745
                                                                              -----------    -----------   -----------
  Cash and cash equivalents at end of year                                    $   159,496    $    72,260   $    45,502
                                                                              ===========    ===========   ===========
</TABLE>

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

                                      F-5
<PAGE>



NOTE 1 - NATURE OF BUSINESS

MemberWorks  Incorporated (the "Company"),  a Delaware Corporation,  began doing
business  as  Cardmember  Publishing  Corporation  in  1986,  was  organized  as
MemberWorks  Incorporated  in 1996 and has been doing  business  as  MemberWorks
Incorporated  since then. The Company is a marketing  services leader,  bringing
value to  consumers  by  designing  innovative  membership  programs  that offer
members easy access to a variety of discounted products and services provided by
the Company's  participating  vendors.  In April 2004, the Company broadened the
scope of its  business by  acquiring  Lavalife  Inc.  ("Lavalife"),  a personals
service.  As a result of this  acquisition,  the Company is now a leading global
provider of web-based and  interactive  voice response  ("IVR") based  personals
services.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - CONSOLIDATION
The  consolidated  financial  statements  have been prepared in accordance  with
accounting  principles  generally  accepted in the United  States of America and
include  the  accounts of the Company  and its  wholly-owned  subsidiaries.  All
significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES
The preparation of these  consolidated  financial  statements in conformity with
accounting  principles  generally  accepted  in the  United  States  of  America
requires management of the Company to make estimates, judgments and assumptions
that  affect  the  reported  amounts of assets and  liabilities,  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. The most significant judgments
and estimates include:  membership cancellation rates, deferred marketing costs,
valuation of goodwill and  intangible  assets,  estimation  of remaining  useful
lives of intangible assets and valuation of deferred tax assets.

RECLASSIFICATIONS
Certain  prior year  amounts  have been  reclassified  to conform to the current
year's presentation.

FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries, whose assets and liabilities are
denominated  in the local  currency,  are  translated  at the exchange  rates in
effect  as of the  balance  sheet  dates.  Equity  accounts  are  translated  at
historical  exchange rates and revenues,  expenses and cash flows are translated
at the average exchange rates for the periods  presented.  Translation gains and
losses are included as a component of  comprehensive  income in the consolidated
statements of shareholders'  deficit.  Transaction gains and losses are included
in the consolidated statements of operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
All current assets and liabilities are carried at cost, which  approximates fair
value due to the short-term maturity of those instruments.  The recorded amounts
of the Company's  long-term  liabilities  also approximate fair value except for
differences with respect to the Convertible Notes and the Senior Notes (see Note
6) which had carrying values of $90,000,000 and $147,659,000,  respectively, and
fair values of $93,263,000 and $143,250,000 as of June 30, 2004,  respectively.
Financial  instruments which potentially subject the Company to concentration of
credit risk consist primarily of accounts receivable from credit card processors
who facilitate payment from our membership and personals customers.

FIXED ASSETS
Fixed assets, capitalized software costs and capital leases are carried at cost,
less accumulated depreciation and amortization. Depreciation is calculated using
the straight-line  method over the estimated useful lives of the related assets.
Useful  lives  are  generally  3 years  for  computer  software  and  equipment,
estimated remaining useful life or the remaining life of the lease for leasehold
improvements  and 5 to 10 years for  furniture  and  fixtures.  Maintenance  and
repair expenditures are charged to operations as incurred.

REVENUE RECOGNITION
Revenues are billed  primarily  through credit and debit cards.  Members who are
enrolled in a monthly  payment plan may cancel their  membership at any time, at
which time,  the billings will be  discontinued.  Revenue from these  membership
programs  is  recognized  when  earned.  Members  who are  enrolled in an annual
payment  plan may cancel  their  membership  in the program at any time and will
receive a pro rata refund of the fee paid based on the remaining  portion of the
membership  period.  In accordance with Staff Accounting  Bulletin 104, "Revenue
Recognition"  ("SAB  104"),  deferred  revenues are  recorded,  net of estimated
cancellations,  and are amortized as revenues upon the  expiration of membership
refund  privileges.  An allowance for  membership  cancellations  is established
based on  management's  estimates and is updated  regularly.  In determining the
estimate  of  allowance  for  membership   cancellations,   management  analyzes
historical  cancellation  experience,  current  economic  trends and  changes in
customer  demand for the  Company's  products and  services.  Actual  membership
refunds are charged  against the allowance  for  membership  cancellations  on a
current basis.  Accrued  liabilities set forth in the accompanying  consolidated
balance  sheets as of June 30, 2004 and 2003 include an allowance for membership
cancellations of $14,156,000 and $20,934,000, respectively.


                                       F-6
<PAGE>



Revenues generated by the Personals business segment are recognized when earned.

Membership  programs  sponsored  by the  Company's  two largest  clients in 2004
accounted for 18% and 12% of revenues, respectively. For the year ended June 30,
2003,  membership  programs  sponsored  by the  Company's  two  largest  clients
accounted for 21% and 16% of revenues, respectively. For the year ended June 30,
2002,  membership  programs  sponsored by the company's largest client accounted
for 16% of revenues.

MARKETING EXPENSES
The Company's  marketing  expenses are comprised of refundable royalty payments,
non-refundable  royalty payments,  advertising  costs,  telemarketing and direct
mail.  Refundable  royalty  payments are deferred and charged to operations over
the membership  period in order to match the marketing costs with the associated
revenues from membership  fees.  Advertising  costs and  non-refundable  royalty
payments,  which  include  fee per  offer,  fee per sale and fee per  impression
marketing  arrangements,  are  expensed  when  incurred.  Telemarketing,   which
includes  the cost of third party  vendors to solicit  members on the  Company's
behalf,  and direct mail, which includes the cost of printing and mailing direct
mail pieces,  are direct response  advertising  costs which are accounted for in
accordance with American Institute of Certified Public Accountants  Statement of
Position 93-7,  "Reporting on Advertising  Costs" ("SOP 93-7").  Under SOP 93-7,
direct  response  advertising  costs are deferred and charged to operations over
the  membership  period,  which is the period of  expected  future  benefit,  as
revenues from membership fees are recognized.

Total  membership  solicitation  costs  incurred  to  obtain  a new  member  are
generally less than the estimated  total net membership  revenues.  However,  if
total  membership   solicitation  costs  were  to  exceed  total  estimated  net
membership revenue,  an adjustment would be made to the membership  solicitation
and other deferred costs balance to the extent of any impairment.

EARNINGS PER SHARE
Basic and diluted  earnings per share amounts are determined in accordance  with
the provisions of Financial  Accounting  Standards Board Statement  ("SFAS") No.
128,  "Earnings Per Share" ("SFAS  128").  Basic  earnings per share is computed
using the  weighted  average  number of common  shares  outstanding  during  the
reporting  period.  Diluted  earnings  per share is computed  using the weighted
average number of common shares outstanding and the dilutive effect of potential
common shares outstanding, determined using the treasury stock method.

CASH AND CASH EQUIVALENTS
The  Company  considers  highly  liquid  investment  instruments  with  original
maturity of three months or less to be cash equivalents.  The Company's cash and
cash equivalents are carried at cost, which  approximates fair market value, and
primarily consist of money market funds and tax-exempt notes and bonds.

RESTRICTED CASH
The Company  excludes from cash and cash  equivalents  restricted  cash which is
held in an escrow account for the payment of commissions to a client.

SHORT-TERM INVESTMENTS
Short-term  investments  consist of commercial paper and auction rate securities
with  original  maturities  of more than 3 months  but less than or equal to one
year. As of June 30, 2004, these investments are classified as  held-to-maturity
under the  provisions of SFAS No. 115,  "Accounting  for Certain  Investments in
Debt and Equity Securities" and are recorded at cost.

INCOME TAXES
The Company  accounts  for income  taxes under the  provisions  of SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109").  Deferred tax assets and liabilities
are recognized for future tax consequences  attributable to differences  between
the financial  statement carrying amounts of existing assets and liabilities and
their respective tax bases.


                                       F-7
<PAGE>


VALUATION OF GOODWILL AND OTHER INTANGIBLES
The Company  reviews the carrying  value of its  goodwill  and other  intangible
assets and  assesses the  remaining  estimated  useful  lives of its  intangible
assets in  accordance  with SFAS 142,  "Goodwill  and Other  Intangible  Assets"
("SFAS 142").  The Company  reviews the carrying value of its goodwill and other
intangible assets for impairment by comparing such amounts to their fair values.
The Company is required to perform  this  comparison  at least  annually or more
frequently if circumstances indicate possible impairment.  When determining fair
value, the Company utilizes various assumptions, including projections of future
cash flows. A change in these underlying assumptions could cause a change in the
results of the tests and,  as such,  could  cause fair value to be less than the
carrying amounts. In such an event, the Company would then be required to record
a corresponding charge which would negatively impact earnings.  Goodwill at July
1, 2003 and 2002 was tested for impairment  during the quarters ended  September
30, 2003 and 2002, respectively. The Company concluded that none of its goodwill
was  impaired  as of July 1,  2003 and 2002.  As of July 1,  2001,  the  Company
determined  that there was an impairment of goodwill of $5,907,000 at one of its
reporting  units (see Note 14) due to the change in  methodology  of calculating
impairment  under SFAS 142 concurrent  with downward trends in the operations of
the  reporting  unit.  This  amount  was  recorded  as a  cumulative  effect  of
accounting change in the statement of operations in 2002.

Intangible assets  principally  include member and customer  relationships and a
trade  name  that  arose in  connection  with  business  acquisitions.  Acquired
intangibles, except member relationships, are recorded at cost and are amortized
on a straight-line  basis over their estimated useful lives ranging from 3 to 20
years.  The value of member  relationships  is  amortized  using an  accelerated
method based on estimated future cash flows.

IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for the impairment and disposition of long-lived  assets in
accordance  with  SFAS  144,  "Accounting  for the  Impairment  or  Disposal  of
Long-Lived  Assets." The Company  reviews its  intangible  and other  long-lived
assets for impairment whenever events or changes in circumstances  indicate that
the carrying value may not be recoverable,  as determined based on the projected
undiscounted future cash flows. If this review indicates that the carrying value
will not be  recoverable,  the carrying  value is reduced to its estimated  fair
value. As of June 30, 2004, no impairment has been indicated.

TREASURY STOCK
Treasury stock is accounted for under the cost method.

CONTINGENT LIABILITIES
In  accordance  with  SFAS 5,  "Accounting  for  Contingencies,"  and  Financial
Accounting Standards  Interpretation 14, "Reasonable Estimation of the Amount of
a Loss," the Company may have  certain  contingent  liabilities  with respect to
material  existing or  potential  claims,  lawsuits and other  proceedings.  The
Company  accrues  liabilities  when it is  probable  that  future  costs will be
incurred and such costs can be reasonably estimated and measured.


                                      F-8
<PAGE>



STOCK-BASED COMPENSATION
In accordance with Accounting  Principles Board Opinion No. 25,  "Accounting for
Stock Issued to Employees"  ("APB 25"), the Company  applies the intrinsic value
method in  accounting  for  employee  stock  options.  Accordingly,  the Company
generally  does not recognize  compensation  expense with respect to stock-based
awards  to  employees.  If  compensation  cost  for  the  Company's  stock-based
compensation plans had been determined based on the fair value method (estimated
using the Black-Scholes  option-pricing  model) at the grant dates in accordance
with SFAS No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS 123"), and
SFAS  No.  148,   "Accounting  for  Stock-Based   Compensation   Transition  and
Disclosure"  ("SFAS  148"),  the Company's pro forma net income and earnings per
share would have been as follows ($ in thousands, except per share data):



<TABLE>
<CAPTION>

                                                                                             YEAR ENDED JUNE 30,
                                                                                   ----------------------------------------
                                                                                       2004         2003           2002
                                                                                   ------------  -----------   ------------
<S>                                                                               <C>                <C>       <C>
Net income reported                                                               $    27,960        24,356    $     38,011
Add: Stock-based employee compensation expense determined under the intrinsic
   value based method for all awards, net of related tax effects                            -             -               8
Deduct: Stock-based employee compensation expense determined under the fair
   value based method for all awards, net of related tax effects                       (4,762)       (6,055)        (11,406)
                                                                                  ------------  ------------   -----------
Pro forma net income                                                              $    23,198        18,301    $     26,613
                                                                                  ============  ============   ===========

Earnings per share:
   As reported
     Basic                                                                        $      2.60           1.93    $      2.63
     Diluted                                                                             2.29           1.84           2.55
   Pro forma
     Basic                                                                        $      2.16           1.45    $      1.84
     Diluted                                                                             1.90           1.38           1.79

</TABLE>


Under the  Company's  stock  option  plans the fair value of each  option  grant
calculated  under the  provisions  of SFAS 123 is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for the years ended June 30:

<TABLE>
<CAPTION>
                                                               2004              2003            2002
                                                             -------           -------           -------
<S>                                                          <C>                <C>              <C>
             Dividend yield                                       0%                 0%               0%
             Expected volatility                                 74%                69%              50%
             Risk free interest rate                            2.9%               3.5%             4.8%
             Expected lives                                  5 years            5 years          5 years
</TABLE>

The  weighted  average  fair value per share of options  granted at market value
were $14.98,  $7.95 and $9.55 for the years ended June 30, 2004,  2003 and 2002,
respectively.  For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period of
four to five years and the estimated  fair value of the Company's  awards issued
under the Employee Stock Purchase Plan are recognized in the period the stock is
issued.

For purposes of calculating  the pro forma SFAS 123  compensation  expense under
the iPlace Inc.  stock  option  plan,  the fair value of each  option  grant was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following  weighted  average  assumptions  for the year ended June 30, 2002:
dividend  yield of 0%;  volatility of 50%; risk free interest rate of 4.6%;  and
expected life of 5 years.  The weighted average fair value of options granted at
market value during 2002 was $1.34.

NEW ACCOUNTING PRONOUNCEMENTS
In January  2003,  the FASB  issued  Interpretation  No. 46,  "Consolidation  of
Variable Interest  Entities" ("FIN 46"), which was revised in December 2003. FIN
46 clarifies the application of Accounting Research Bulletin No. 51 and provides
guidance on the  identification of and reporting for variable interest entities.
FIN 46 is effective  immediately  for variable  interest  entities  formed after
January 31, 2003 and is  effective  for periods  ending after March 15, 2004 for
any variable  interest  entity formed prior to February 1, 2003. The adoption of
FIN 46 did not have a material impact on the Company's financial statements.





                                       F-9
<PAGE>

In May  2003,  the FASB  issued  Statement  No.  150,  "Accounting  for  Certain
Financial  Instruments  with  Characteristics  of both  Liabilities  and Equity"
("SFAS 150"). This statement  requires that certain  financial  instruments that
were  accounted  for  as  equity  under  previous   guidance  be  classified  as
liabilities  in  statements  of financial  position.  SFAS 150 is effective  for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period  beginning  after June
15,  2003.  The  adoption  of SFAS 150 did not  have a  material  impact  on the
Company's financial statements.

NOTE 3 - FIXED ASSETS

Fixed assets, net are comprised of the following at June 30, (in thousands):



                                                     2004           2003
                                                 -------------  -------------
        Computer software and equipment          $     62,501   $     44,535
        Furniture and fixtures                          8,246          8,161
        Leasehold improvements                          6,622          6,356
                                                 -------------  -------------
                                                       77,369         59,052
        Accumulated depreciation                      (40,829)       (34,083)
                                                 -------------  -------------
                                                 $     36,540   $     24,969
                                                 =============  =============

Depreciation   and  amortization   expense  was  $10,189,000,   $10,818,000  and
$11,311,000 for the years ended June 30, 2004, 2003 and 2002, respectively.

NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS

The gross  carrying  value and  accumulated  amortization  of goodwill and other
intangibles are as follows (in thousands):


<TABLE>
<CAPTION>
                                                    AS OF JUNE 30, 2004                   AS OF JUNE 30, 2003
                                             -----------------------------------   --------------------------------
                                              GROSS CARRYING     ACCUMULATED        GROSS CARRYING      ACCUMULATED
                                                  AMOUNT         AMORTIZATION           AMOUNT         AMORTIZATION
                                             ----------------- -----------------   ------------------ -------------
<S>                                          <C>               <C>                 <C>               <C>

Amortizable intangible assets:
   Membership and client relationships       $      27,999     $      (8,686)      $      13,195      $      (6,730)
   Trade name                                       18,543              (310)                  -                  -
   Other                                             1,162              (886)                950               (759)
                                             -------------     -------------       --------------     -------------
      Total amortizable intangible assets           47,704            (9,882)      $      14,145      $      (7,489)
                                             -------------     --------------      -------------      -------------
      Amortizable intangible assets, net     $      37,822                         $       6,656
                                             =============                         =============
Unamortizable intangible assets:
     Goodwill                                $     125,675                         $      42,039
     Intangible asset related to minimum
     pension liability                       $       1,050                         $           -
</TABLE>


The future intangible  amortization expense for the next five years is estimated
to be as follows (in thousands):

FISCAL YEAR
     2005                                   $       6,104
     2006                                           5,959
     2007                                           5,173
     2008                                           3,171
     2009                                           2,754

The changes in the carrying  amount of goodwill for the year ended June 30, 2004
are as follows (in thousands):

Balance at June 30, 2003                        $      42,039
Arising from completed acquisition                     83,636
                                                -------------
Balance at June 30, 2004                        $     125,675
                                                =============


                                      F-10
<PAGE>


As part of the  purchase of Lavalife  Inc. in April 2004,  the Company  acquired
intangible assets of $116,983,000. Of that amount, $14,804,000 has been assigned
to membership  and client  relationships  and  $18,543,000  has been assigned to
trade name, both of which are subject to periodic amortization over the weighted
average  estimated  useful lives  ranging from 3 years to 15 years.  Goodwill of
$83,636,000, which is not subject to amortization, also arose in connection with
the acquisition.

Goodwill was tested for impairment  during the quarters ended September 30, 2003
and 2002 as  required  by SFAS  142.  The  Company  concluded  that  none of its
goodwill was  impaired.  Fair value was  estimated  using  discounted  cash flow
methodologies.  Goodwill  was tested at July 1, 2002 for  impairment  during the
quarter ended  September  30, 2002 in  connection  with the adoption of SFAS 142
(see Note 14). In addition, the Company reassessed the estimated useful lives of
its  indefinite  lived  intangible  assets  and  determined  that the lives were
appropriate.  The  Company  will  continue  to test the  goodwill of each of its
reporting units annually or more frequently if impairment indicators exist.

NOTE 5 - RESTRUCTURING CHARGES

During 2002,  the Company  announced the  implementation  of several cost saving
initiatives due to a slowdown in consumer response rates and increased  economic
uncertainty in both the U.S. and abroad.  This restructuring  program included a
workforce reduction,  the closing of the Company's United Kingdom operations and
the downsizing of the operational  infrastructure  throughout the Company.  As a
result of the restructuring  program, the Company recorded restructuring charges
of $6,893,000 during 2002.

The following is a  rollforward  of the major  components  of the  restructuring
reserve which is recorded in accrued liabilities and other long-term liabilities
(in thousands):

<TABLE>
<CAPTION>

                                                 WORKFORCE          LEASE
                                                 REDUCTION       OBLIGATIONS           TOTAL
                                               --------------  -----------------   --------------
<S>                                            <C>             <C>                 <C>
Reserve balance at June 30, 2002               $       391     $      2,546        $     2,937
Additions to the reserve                                 -                -                  -
Cash charges to the reserve                            300              836              1,136
                                               --------------  -----------------   --------------
Reserve balance at June 30, 2003                        91            1,710              1,801
Additions to the reserve                                 -                -                  -
Cash charges to the reserve                             91               66                157
                                               --------------  -----------------   --------------
Reserve balance at June 30, 2004               $         -     $      1,644        $     1,644
                                               ==============  =================   ==============
</TABLE>

Workforce Reduction
As  part of the  restructuring  plan,  the  Company  reduced  its  workforce  by
approximately   190  regular   employees,   consisting  of  membership   service
representatives  and other professional  personnel.  All 190 employees have been
terminated.

Lease Obligations and Asset Disposals
In connection  with the closing of the United Kingdom offices and the downsizing
of  the  Company's  infrastructure,  the  Company  recorded  $73,000  for  lease
terminations, $3,021,000 for non-cancelable lease obligations and $1,585,000 for
asset  disposals.  The  reserve  for  lease  obligations  has  been  reduced  by
anticipated  sublease  income.  Charges  against  the  reserve  are  expected to
continue for the remaining life of the lease.

NOTE 6 - LONG-TERM LIABILITIES

Long-term liabilities are summarized as follows at June 30, (in thousands):

                                                 2004           2003
                                             -----------    -----------
         Senior Notes                        $   147,659    $         -
         Convertible Notes                        90,000              -
         Other long-term obligations               5,268          3,372
                                             -----------    -----------
                                                 242,927          3,372
         Less: current maturities                    338            244
                                             -----------
                                                            -----------
         Long-term liabilities               $   242,589    $     3,128
                                             ===========    ===========



                                      F-11
<PAGE>


In April 2004, the Company issued  $150,000,000  aggregate  principal  amount of
unsecured 9.25% senior notes due 2014 ("Senior Notes").  These Senior Notes were
sold at 98.418% of the principal  amount which results in an effective  yield of
9.5%.  Interest  is  payable  in cash  semi-annually  in  arrears on April 1 and
October 1 of each year, with the first payment due on October 1, 2004. A portion
of the  proceeds  from the  offering  of these  Senior  Notes  was used to repay
amounts  borrowed under the senior secured credit  facility to fund a portion of
the Lavalife  acquisition.  At any time prior to April 1, 2007,  the Company may
redeem up to 35% of the Senior  Notes with net cash  proceeds of certain  equity
offerings,  as long as at least  65% of the  aggregate  principal  amount of the
Senior Notes issued remains  outstanding  after the redemption.  The Company may
redeem  all or part of the  Senior  Notes  prior to April  1,  2009 by  paying a
make-whole  premium.  At any time on or after  April 1, 2009,  the  Company  may
redeem some or all of the Senior Notes at certain redemption prices plus accrued
and unpaid interest and liquidation  damages, if any, to the date of redemption.
The  offering of Senior  Notes was made solely by means of private  placement to
qualified institutional buyers pursuant to Rule 144A under the Securities Act of
1933, as amended,  and to certain persons in offshore  transactions  pursuant to
Regulation S under the Securities Act. In connection with the private  placement
of the Senior Notes,  the Company entered into a registration  rights  agreement
pursuant  to  which  the  Company  will  use its  reasonable  efforts  to have a
registration statement declared effective within 210 days from the issue date of
the Senior Notes.  Debt issuance  costs and debt discount  associated  with this
issuance were $5,256,000  during 2004. Debt issuance costs and debt discount are
capitalized and amortized as interest  expense,  net over the term of the Senior
Notes using the effective interest method.

In September 2003, the Company issued $90,000,000  aggregate principal amount of
5.5% convertible senior  subordinated notes due 2010 ("Convertible  Notes") in a
private  offering  pursuant  to Rule  144A of the  Securities  Act of  1933,  as
amended. The Convertible Notes bear interest at the rate of 5.5% per year, which
is payable  in cash  semi-annually  in arrears on April 1 and  October 1 of each
year.  The first payment was paid on April 1, 2004.  Holders of the  Convertible
Notes may convert their notes into shares of the  Company's  common stock at any
time prior to maturity at an initial  conversion price of  approximately  $40.37
per share,  which is equivalent to an initial  conversion rate of  approximately
24.7739 shares per $1,000 principal amount of the Convertible  Notes.  There are
no  beneficial  conversion  features  related  to these  Convertible  Notes.  In
accordance  with  Accounting  Principles  Board Opinion No. 14,  "Accounting for
Convertible  Notes  and  Debt  Issued  with  Stock  Purchase   Warrants,"  these
Convertible  Notes have been  classified  as a liability.  Debt  issuance  costs
associated with this issuance were  $3,432,000  during 2004. Debt issuance costs
are  capitalized  and  amortized  as  interest  expense  over  the  term  of the
Convertible Notes using the effective interest method.

Other  long-term  obligations  are  comprised  of the  long-term  portion of the
restructuring  reserve (see Note 5),  minimum  pension  liability (see Note 17),
lease incentives  related to certain operating leases and consulting  agreements
which expire during 2005.  The lease  incentives are amortized as a reduction to
rent expense over the terms of the leases.

In March,  2004, the Company entered into an amended and restated senior secured
credit facility that allows  borrowings of up to $45,000,000.  Borrowings  under
the senior  secured  credit  facility  accrue  interest at either the Eurodollar
rate,  or the  higher of the  Prime  rate or the  Federal  Funds  rate,  plus an
applicable  margin. The availability under the senior secured credit facility is
reduced by an outstanding letter of credit of $5,459,000 and by one years' worth
of interest on the Senior Notes. There were no borrowings outstanding under this
bank  credit  facility  as of June 30, 2004 or 2003.  As of June 30,  2004,  the
availability under the senior secured credit facility is $25,666,000. The senior
secured credit  facility has certain  financial  covenants,  including a maximum
debt  coverage  ratio,  potential  restrictions  on  additional  borrowings  and
potential  restrictions on additional stock  repurchases.  For the periods ended
June 30, 2004 and 2003,  the Company was in  compliance  with all  financial and
restrictive loan covenants. The senior secured credit facility is secured by all
of the Company's assets, including the stock of its subsidiaries.  Debt issuance
costs  associated  with this  amendment and  restatement  of the senior  secured
credit  facility were $494,000 during 2004. Debt issuance costs are deferred and
amortized  over  the  term of the  senior  secured  credit  facility  using  the
effective interest method.

Interest  (expense) income, net as shown in the statements of operations for the
years  ended  June 30,  2004,  2003  and  2002,  includes  interest  expense  of
$7,715,000,   $238,000  and  $435,000,   respectively  and  interest  income  of
$1,094,000, $808,000 and $768,000,  respectively.  Interest expense, net in 2004
includes  $742,000  of  amortization  of debt  issuance  costs  and  $32,000  of
amortization of debt discount.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

The  Company  operates  in leased  facilities.  Management  expects  that leases
currently  in effect will be renewed or  replaced  by other  leases of a similar
nature and term. Rent expense under operating leases was $6,779,000,  $7,671,000
and $6,508,000 for the years ended June 30, 2004, 2003 and 2002, respectively.


                                      F-12
<PAGE>


The Company has certain capital leases for equipment. Lease amortization for the
years ended June 30,  2004,  2003 and 2002 was  $193,000,  $55,000 and  $62,000,
respectively,  and is included in depreciation  and  amortization  expense.  The
incremental borrowing rate on the capital lease is 5.5%.

The future minimum lease  payments under  operating and capital lease as of June
30, 2004 are as follows (in thousands):

<TABLE>
<CAPTION>

                                                                 OPERATING      CAPITAL
FISCAL YEAR                                                        LEASES        LEASE
------------                                                  ------------   -----------
<C>                                                           <C>            <C>
2005                                                          $      7,761   $       383
2006                                                                 6,808           383
2007                                                                 4,123           383
2008                                                                 3,970           159
2009                                                                 3,746             -
Thereafter                                                           2,885             -
                                                              ------------    ----------
Total minimum lease payments                                  $     29,293         1,308
                                                              ============
ess amount representing interest                                                     118
                                                                             -----------
Present value of net minimum obligations                                           1,190
Less current portion                                                                 326
                                                                             -----------
Long-term capital lease obligation                                           $       864
                                                                             ===========
</TABLE>

As of June 30,  2004,  the  Company  had  outstanding  purchase  obligations  of
$13,403,000  which  primarily  relate to marketing  agreements  and  maintenance
contracts on Company's software, equipment and other assets.

LEGAL PROCEEDINGS
Except as set forth below,  in  management's  opinion,  there are no significant
legal  proceedings to which the Company or any of its subsidiaries is a party or
to which any of their  properties are subject.  The Company is involved in other
lawsuits and claims  generally  incidental  to its business  including,  but not
limited to, various suits, including previously disclosed suits, brought against
the Company by individual  consumers  seeking monetary and/or  injunctive relief
relating to the marketing of the Company's programs.  In addition,  from time to
time, and in the regular course of its business,  the Company receives inquiries
from various federal and/or state regulatory authorities.

In March 2001, an action was  instituted  by plaintiff  Teresa  McClain  against
Coverdell & Company  ("Coverdell"),  a  wholly-owned  subsidiary of the Company,
Monumental  Life  Insurance  Company and other  defendants  in the United States
District  Court for the Eastern  District of Michigan,  Southern  Division.  The
suit, which seeks unspecified  monetary damages,  alleges that Coverdell and the
other  defendants  violated  the  Michigan  Consumer  Protection  Act and  other
applicable  Michigan  laws in connection  with the marketing of Monumental  Life
Insurance  Company insurance  products.  The Court certified a class of Michigan
residents.  The Court has now signed an Order granting preliminary approval of a
settlement  agreement  that has been signed by all parties.  The Court will hold
the  Fairness/Approval  hearing on November 22, 2004. The  settlement  agreement
will have no financial or other material impact on Coverdell's business.

On January 24, 2003,  the Company filed a motion with the Superior Court for the
Judicial District of Hartford, Connecticut to vacate and oppose the confirmation
of an arbitration award issued in December 2002. The arbitration,  filed against
the Company by MedValUSA  Health  Programs,  Inc.  ("MedVal") in September 2000,
involved claims of breach of contract, breach of the duty of good faith and fair
dealing,  and violation of the Connecticut Unfair Trade Practices Act ("CUTPA").
Even though the arbitrators  found that the Company was not liable to MedVal for
any compensatory  damages, they awarded $5,495,000 in punitive damages and costs
against  the  Company  solely  under  CUTPA.  The  Company  believes  that  this
arbitration  award is unjustified and not based on any existing legal precedent.
Specifically,  the  Company  is  challenging  the award on a number of  grounds,
including  that it  violates a well  defined  public  policy  against  excessive
punitive  damage awards,  raises  constitutional  issues and disregards  certain
legal  requirements  for a valid award under CUTPA. The hearing on the Company's
motion was held on February 10,  2003.  On June 22,  2003,  the  Superior  Court
denied the Company's motion to vacate the award, and the Company filed an appeal
of that  decision.  While the  Company  intends to take  action to  prevent  the
enforcement of the award by, among other things,  vigorously pursuing an appeal,
there can be no assurance  that the Company will be  successful  in its efforts.
The  Company  has  made  no  provision  in its  financial  statements  for  this
contingency because it believes that a loss is not probable.  If the Company was
ultimately  unsuccessful  in  this  or  other  available  appeals,  and a  final
non-appealable  court order  confirming the arbitration  award is rendered,  the
payment  of the award  could  have a material  adverse  effect on the  Company's
results of operations in the period in which the final order is entered.


                                      F-13
<PAGE>


On October  21,  2003,  the  Florida  Attorney  General's  Office  filed a civil
complaint  against  the  Company  based  upon  concerns  that  some of its  past
marketing  practices may have violated  various consumer laws. On June 28, 2004,
the  Company  announced  that it had  reached a  voluntary  settlement  with the
Florida Attorney  General's  office to alleviate  concerns that some of its past
marketing  practices may have confused some  consumers.  In connection  with the
settlement, the Company agreed to formalize its existing national Best Marketing
Practices  in the  state of  Florida  and to pay the state of  Florida  costs of
investigation  of $950,000.  The Company  expects that the  agreement  will have
little  new  effect  on its  business  in  Florida  as the  agreement  serves to
formalize the Company's  already existing  national  marketing best practices in
the state.

NOTE 8 - BUSINESS COMBINATIONS

On April 1, 2004, the Company completed the acquisition of all of the assets and
outstanding  capital  stock of Lavalife  Inc., a leading  provider of online and
IVR-based interactive personals services. The Company acquired Lavalife in order
to broaden  the scope of services  offered to include  personals  services.  The
acquisition of Lavalife  benefits the Company by providing  access to one of the
largest and fastest growing consumer  categories on the internet while expanding
its target market.  In addition,  it is the Company's  intention to cross-market
the products and services of the Company and  Lavalife.  Lavalife  operates as a
wholly-owned  subsidiary of the Company. The purchase price,  excluding fees and
expenses,  was  Cdn$152,500,000,  or  $116,300,000,  and is  subject  to certain
purchase price  adjustments.  In connection with this  acquisition,  the Company
received  $9,080,000 related to the issuance of the Company's  restricted common
stock to Lavalife's senior  management.  The acquisition was funded with cash on
hand and  borrowings  under the  Company's  $45,000,000  senior  secured  credit
facility.  The  acquisition  was  accounted  for  under the  purchase  method of
accounting.  The Company  obtained an independent  valuation of the identifiable
intangible assets acquired in conjunction with the acquisition of Lavalife which
identified $33,347,000 of intangible assets other than goodwill. The $83,636,000
of  unallocated  excess merger  consideration  over the net assets  acquired was
allocated to goodwill.  The amount of tax deductible  goodwill was  $77,436,000.
See Note 4 for a detailed  description of the identified  intangible  assets and
goodwill  identified in  connection  with this  business  combination.  The fair
values of the acquired assets and liabilities  assumed at the date of
acquisition are as follows (in thousands):

                Current assets                        $          6,160
                Fixed assets                                    14,730
                Goodwill arising in the acquisition             83,636
                Intangible assets                               33,347
                Current liabilities                            (19,990)
                Other long-term obligations                     (2,498)
                                                         --------------
                Net assets acquired                   $        115,385
                                                         ==============

PRO FORMA RESULTS
The following unaudited pro forma results of operations for the years ended June
30, 2004 and 2003 have been  prepared  assuming  the  Lavalife  acquisition  had
occurred  on July 1, 2003 for the year ended  June 30,  2004 and on July 1, 2002
for the year ended June 30, 2003.  These pro forma  results are not  necessarily
indicative  of the  results  of future  operations  or  results  that would have
occurred had the  acquisition  been  consummated  as of that date (in thousands,
except per share data).

<TABLE>
<CAPTION>
                                                         YEAR ENDED JUNE 30,
                                                      -------------------------
                                                         2004           2003
                                                      ----------     ----------
<S>                                                   <C>            <C>
 Revenues                                             $ 542,766      $ 527,736
 Net income                                              28,979         25,879

 Basic earnings per share                             $    2.58      $    1.98
 Diluted earnings per share                                2.28           1.89
</TABLE>


NOTE 9 - (LOSS) GAIN ON SALE OF SUBSIDIARY/LOSS ON INVESTMENT

During 2002, the Company sold its investment in and advances to iPlace,  Inc. in
exchange for  $50,111,000  in cash,  including  $3,703,000  held in escrow,  and
1,601,000 shares of Homestore.com,  Inc. common stock,  including 451,000 shares
held in  escrow.  The  Company  reported  a gain  of  $65,608,000  on the  sale.
Subsequent to the date of sale, the investment in  Homestore.com,  Inc. declined
in value and management determined that the decline was other than temporary. As
a result,  the Company wrote down its investment in  Homestore.com,  Inc. to its
fair value and  recognized a loss of  $33,628,000  during  2002.  As of June 30,
2002, the Company's  investment in  Homestore.com,  Inc. was valued at $912,000.
During 2002, 84,000 shares of Homestore.com, Inc. were released from the escrow.
During 2003,  the Company  settled with  Homestore.com,  Inc. all pending issues
related to  amounts  held in escrow in  connection  with the sale.  The  Company
returned cash and stock to Homestore.com,  Inc., which resulted in a net loss of
$959,000.  During 2003, the Company sold all of its  Homestore.com,  Inc. common
stock and recognized a loss of $206,000 in connection with this sale.


                                      F-14
<PAGE>


NOTE 10 - SETTLEMENT OF INVESTMENT RELATED LITIGATION

During 2003, the Company, along with certain of the other former shareholders of
iPlace,  Inc.,  settled  their  lawsuit  against  Homestore.com,  Inc. The total
settlement  amount  in favor of the  plaintiffs  was  $23,000,000  of which  the
Company received $19,148,000 (see Note 9).

NOTE 11 - FOREIGN CURRENCY INSTRUMENTS

The Company used  purchased  option  contracts and forward  contracts to protect
against the foreign  currency  exchange risk inherent in the purchase  price for
its acquisition of Lavalife, which was denominated in Canadian dollars (see Note
8). The risk of loss  associated  with purchased  options was limited to premium
amounts paid for the option contracts.  The risk of loss associated with forward
contracts is equal to the exchange rate  differential from the time the contract
is entered into until the time it is settled.  These contracts  expired on April
1, 2004 concurrent with the closing of the Lavalife acquisition.

The change in the fair value of these  derivative  contracts  was  recognized in
earnings as a component of other  income,  net and amounted to $353,000 in 2004.
As of June 30, 2004, the Company did not hold any foreign currency instruments.

NOTE 12 - MINORITY INTEREST

Prior to the sale of iPlace,  Inc. in August 2001,  the Company was the majority
shareholder of iPlace,  Inc. with an approximate 58% ownership  share.  Minority
interest  in the  statement  of  operations  for the year  ended  June 30,  2002
represents approximately 42% of iPlace's losses incurred through the date of the
sale of iPlace, Inc. in August 2001.

NOTE 13- INCOME TAXES

The provision for income taxes is as follows as of June 30, (in thousands):


<TABLE>
<CAPTION>
                                                  2004         2003         2002
                                             -------------  -----------  -----------
CURRENT
<S>                                           <C>           <C>          <C>
Federal                                       $      7,219  $     1,635  $         -
State                                                2,245          422            -
Foreign                                              1,028            -            -
                                              ------------  -----------  -----------
Total                                         $     10,492  $     2,057  $         -
                                              ============  ===========  ===========
DEFERRED
Federal                                       $      8,673  $    11,642  $         -
State                                                  140        2,540            -
Foreign                                               (667)           -            -
                                              ------------  -----------  -----------
Total                                         $      8,146  $    14,182  $         -
                                              ============  ===========  ===========
</TABLE>

There was no current or deferred  provision for income taxes for the years ended
June 30, 2002 due to the  utilization  of the Company's net operating loss carry
forwards against which the Company had carried a full valuation allowance.

The following is a  reconciliation  of the Company's  effective tax rate and the
U.S. statutory rate for the years ended June 30:

                                             2004            2003
                                          ----------      -----------
 Statutory rate                                35.0%           35.0%
 State and local                                3.3%            3.4%
 Foreign                                       (0.5)%           0.0%
 Other                                          2.2%            1.6%
                                          ----------      ----------
 Effective rate                                40.0%           40.0%
                                          ==========      ==========


                                      F-15
<PAGE>


Consolidated  U.S.  income before taxes and the cumulative  effect of accounting
change was  $44,861,000,  $37,236,000  and  $45,956,000 in 2004,  2003 and 2002,
respectively.  The  corresponding  amounts for  non-U.S.-based  operations  were
income of $1,737,000, $3,359,000 and a loss of $2,038,000, respectively.

U.S. income taxes were not provided on certain unremitted earnings from foreign
subsidiaries since the Company intends to permanently reinvest substantially all
of such earnings outside the U.S. However, if some portion of these earnings is
remitted, the Company expects the effect of any remittance after considering
available tax credits and amounts previously accrued not to be significant to
the consolidated results of operations. A calculation has not been performed to
determine the amount of unremitted earnings.

The following is a summary of the Company's  deferred tax assets and liabilities
as of June 30, 2004 and 2003 (in thousands):

<TABLE>
<CAPTION>
                                                                            2004             2003
                                                                        -------------   --------------
DEFERRED TAX ASSETS:
<S>                                                                    <C>              <C>
Benefit of federal and state net operating loss carry forwards         $        3,093   $       16,163
Alternative minimum tax credits                                                 1,380              716
Deferred revenues                                                                   -            2,965
Allowance for membership cancellations                                          5,728            8,361
Other deferred tax assets                                                       5,252            1,281
                                                                        -------------   -------------
Gross deferred tax assets                                                      15,453           29,486
Less: Valuation allowance                                                           -                -
                                                                        -------------   -------------
Deferred tax assets after valuation allowance                                  15,453           29,486
                                                                        -------------   -------------

DEFERRED TAX LIABILITIES:
Membership solicitation and other deferred costs                              (20,503)         (30,266)
Deferred revenues                                                              (1,468)               -
Goodwill and other intangibles                                                 (6,721)          (3,204)
Depreciation                                                                   (3,438)          (2,040)
                                                                        -------------   -------------
Gross deferred tax liabilities                                                (32,130)         (35,510)
                                                                        -------------   -------------
Net deferred tax liability                                             $      (16,677)  $       (6,024)
                                                                        =============   =============
</TABLE>

As of June 30, 2004,  the Company had federal net operating  loss carry forwards
of $6,512,000 expiring at various dates from June 30, 2020 to June 30, 2021. The
Company's  ability to use these losses to offset future  taxable income would be
subject to limitations under the Internal Revenue Code if certain changes in the
Company's  ownership  occur. The Company also has state net operating loss carry
forwards  available to reduce future state taxable income which expire beginning
June 30, 2005 through June 30, 2006.

As of June 30,  2004,  the  Company  had  alternative  minimum  tax  credits  of
approximately $1,380,000. Credits of $664,000 and $716,000 were generated in the
years ended June 30,  2004 and 2003,  respectively,  and can be carried  forward
indefinitely. The Company expects to fully utilize these credits during the year
ended June 30, 2005.

Tax benefits  resulting from the exercise of nonqualified  stock options and the
disqualifying  dispositions  of shares  issued under the  Company's  stock-based
compensation  plans reduced taxes payable by $6,520,000 and $942,000 in 2004 and
2003,  respectively.  Such benefits were credited to additional paid-in capital.
There was no tax benefit  recognized  in income  during 2003 for the reversal of
the valuation  allowance of  $8,158,000  that was  attributable  to prior period
disqualifying  dispositions.  These amounts were credited to additional  paid-in
capital.

The valuation  allowance  recognized in prior periods was fully reversed in 2003
based upon the  Company's  belief  that it was more likely than not that it will
realize its deferred tax assets.

NOTE 14 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE

ADOPTION OF SFAS 142
The Company  adopted SFAS 142 effective July 1, 2001.  With the adoption of SFAS
142, the Company reassessed the useful lives and residual values of all acquired
intangible  assets  to make  any  necessary  valuation  or  amortization  period
adjustments.  Based on that assessment,  only goodwill was determined to have an
indefinite  useful life and no adjustments were made to the amortization  period
or residual values of other intangible  assets.  The Company  determined that at
July 1, 2001,  there was an  impairment  of goodwill of $5,907,000 at one of its
reporting units due to the change in methodology of calculating impairment under
SFAS 142  concurrent  with  recent  downward  trends  in the  operations  of the
reporting  unit.  This amount was recorded as a cumulative  effect of accounting
change in the statement of operations during 2002.


                                      F-16
<PAGE>

NOTE 15 - EARNINGS PER SHARE

Basic and diluted  earnings per share amounts are determined in accordance  with
the provisions  SFAS 128. The following table sets forth the  reconciliation  of
the numerators and denominators in the computation of basic and diluted earnings
per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                              2004         2003       2002
                                                                                           ----------- ----------- ----------
Numerator:
<S>                                                                                       <C>          <C>        <C>
Income available to common shareholders used in basic earnings per share                  $    27,960  $   24,356  $   43,918
Add Back:  Interest expense on convertible securities                                           2,236            -          -
Cumulative effect of accounting change                                                              -            -     (5,907)
                                                                                          -----------  ----------- ----------
Income available to common shareholders after assumed conversion of dilutive securities
  and cumulative effect of accounting change for diluted earning per share                $    30,196  $    24,356 $   38,011
                                                                                           =========== ==========  ==========
Denominator :
Weighted average number of common shares outstanding- basic                                    10,755       12,596     14,477
Effect of dilutive securities:
   Convertible securities                                                                       1,678            -          -
   Stock options                                                                                  775          637        432
                                                                                           -----------  ---------  ---------
Weighted average number of common shares outstanding- diluted                                  13,208       13,233     14,909
                                                                                          ===========  =========== ==========
Basic earnings per share                                                                  $      2.60  $      1.93 $     2.63
                                                                                          ===========  =========== ==========
Diluted earnings per share                                                                $      2.29  $      1.84 $     2.55
                                                                                          ===========  =========== ==========
</TABLE>


The  diluted  earnings  per  common  share  calculation  excludes  the effect of
potentially dilutive shares when their effect is antidilutive. Excluded from the
diluted share calculation above for the years ended June 30, 2004, 2003 and 2002
are incremental  weighted average stock option shares of  approximately  26,000,
2,838,000, and 3,383,000, respectively.

NOTE 16 - SHAREHOLDERS' EQUITY

The Company has a stock repurchase program.  During 2004, the Board of Directors
authorized the Company to repurchase up to an additional 3,000,000 shares of the
Company's Common Stock. As of June 30, 2004,  approximately  994,000 shares were
authorized  for  repurchase  under the stock  repurchase  program.  The  Company
repurchased  2,985,000  shares for  $94,207,000,  an average price of $31.56 per
share, in 2004, 1,993,000 shares for $37,214,000, an average price of $18.67 per
share, in 2003 and 2,227,000 shares for $34,301,000,  an average price of $15.40
per share, in 2002.

NOTE 17 - EMPLOYEE BENEFIT PLANS

All  employees  over  the age of 18 may  participate  in the  Company's  defined
contribution  401(k) profit sharing plan.  Employees may contribute up to 20% of
their compensation subject to certain  limitations.  Effective July 1, 2000, the
Company began making quarterly  matching  contributions in Common Stock based on
qualified  employee  contributions.  Treasury stock,  calculated  under the cost
method, was used to match qualified employee contributions. Effective January 1,
2004,  the  Company  began  making  matching  contributions  in  cash.  Matching
contributions  were  $168,000,  $153,000 and  $156,000 for 2004,  2003 and 2002,
respectively.

Effective January 1, 2004, the Company has an unfunded, nonqualified defined
benefit pension plan that benefits certain executives selected by the
Compensation Committee of the Board of Directors. This plan provides for fixed
annual payments for 10 years upon retirement after attaining the age of 55 and
10 years of service. Pension expense was $212,000 during 2004.

                                      F-17

<PAGE>



The following are  reconciliations  of the pension  benefit  obligation  and the
value of plan assets for 2004. The Company used a weighted-average discount rate
of 6% in its 2004 assumptions.


<TABLE>
<CAPTION>
<S>                                                                             <C>

                                                                                      JUNE 30, 2004
                                                                                      ---------------
            PENSION BENEFIT OBLIGATION                                                 (in thousands)
            Balance, beginning of year                                                $          -
            Interest cost                                                                       35
            Service cost                                                                        71
            Amendment                                                                        1,156
            Actuarial loss                                                                      14
                                                                                      ------------
            Balance, end of year                                                      $      1,276
                                                                                      ------------

At June 30, 2004 the funded status of the plan was as follows (in thousands):

            Excess of the benefit obligation over the value of plan assets            $      1,276
            Unrecognized net actuarial loss                                                    (14)
            Unrecognized prior service cost                                                 (1,050)
                                                                                      ------------
            Accrued benefit costs                                                     $        212
                                                                                      ------------

Pension expense for 2004 was comprised of the following (in thousands):

            Interest cost                                                             $         35
            Service cost                                                                        71
            Amortization of prior service cost                                                 106
                                                                                      ------------
            Pension expense                                                           $        212
                                                                                      ------------

The net amount  recognized  in the  balance  sheet for 2004 were  classified  as
follows (in thousands):

            Intangible asset                                                          $     (1,050)
            Other long-term liabilities                                                      1,276
            Accumulated other comprehensive loss                                               (14)
                                                                                      ------------
            Net amount recognized                                                     $        212
                                                                                      ------------

</TABLE>

No benefits are expected to be paid by the plan during the next four years.  The
Company expects to pay $60,000 of benefits in 2009.  Subsequent to fiscal 2009,
the Company expects to pay benefits of $4,490,000.

NOTE 18 - STOCK-BASED COMPENSATION

STOCK COMPENSATION PLANS
As of June 30, 2004, the company had five stock-based  compensation  plans which
are described below.

During 1997,  the Board of Directors  approved the  Company's  1996 Stock Option
Plan (the "1996 Stock Option Plan"),  which became effective upon the closing of
the Company's  initial  public  offering.  Under the 1996 Stock Option Plan, the
Board can determine the date on which options can vest and become exercisable as
well as the term of the options granted. During 1999, the Board of Directors and
shareholders  approved  an  increase  in the  number of  shares of Common  Stock
reserved  for  issuance  under the 1996  Stock  Option  Plan from  1,800,000  to
3,600,000. During 2002, the Company added an additional 2,000,000 options, which
may be granted using treasury stock.

During 1996, the Board of Directors and shareholders of the Company approved the
adoption  of the  1995  Executive  Officers'  Stock  Option  Plan  and the  1995
Non-Employee Directors' Stock Option Plan under which the Board is authorized to
grant 360,000 and 180,000  options,  respectively,  to acquire  shares of Common
Stock at a price per share  equal to or greater  than fair  market  value at the
date of grant.  Under the Executive  Officers'  Stock Option Plan, the Board can
determine the date on which options vest and become exercisable.

Under  the  stock  option  plans  described  above,   options  generally  become
exercisable  over a four to five  year  period  and  expire  at the  earlier  of
termination of employment or ten years from the date of grant.



                                      F-18
<PAGE>

At June 30, 2004,  4,206,000  shares of common stock were  reserved for issuance
under the stock option plans,  of which 900,000 shares were available for future
grant.

Information  with respect to options to purchase shares issued under these plans
is as follows:


<TABLE>
<CAPTION>
                                                 2004                      2003                      2002
                                                 ----                      ----                      ----
                                                     AVERAGE                     AVERAGE                   AVERAGE
                                                     EXERCISE                    EXERCISE                  EXERCISE
(Shares in thousands)                    SHARE       PRICE         SHARES        PRICE        SHARES       PRICE
                                       --------     --------       ------       --------      -------      --------
<S>                                       <C>       <C>              <C>          <C>           <C>         <C>
Outstanding at beginning of year          4,532     $  19.88         4,341        $ 20.82      3,815       $  21.45
Granted at market value                     240        24.92           850          13.42      1,128          19.36
Exercised                                (1,227)       19.78          (338)         11.30       (127)         21.29
Forfeited                                  (240)       22.48          (321)         24.53       (475)         25.31
                                       --------                      -----                    ------
Outstanding at end of year                3,305     $  20.10         4,532        $ 19.88      4,341       $  20.82
                                       ========                      =====                    ======
</TABLE>


<TABLE>
<CAPTION>
                                                OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                                      -----------------------------------------           ---------------------------
                                         SHARES        AVERAGE       AVERAGE                  SHARES       AVERAGE
                                       OUTSTANDING    REMAINING     EXERCISE               OUTSTANDING    EXERCISE
(Shares in thousands)                  AT 6/30/04    LIFE (YEARS)     PRICE                 AT 6/30/04      PRICE
                                       ----------    ------------   ---------             -------------  -----------
<C>                                           <C>          <C>       <C>                         <C>       <C>
$2.78 to $8.00                                246          2.96      $   4.55                    210       $   3.96
$13.00 to $15.00                              850          7.03         13.50                    311          14.19
$16.00 to $20.86                            1,156          6.90         19.67                    523          19.07
$21.88 to $30.97                              986          5.67         29.25                    791          29.16
$31.25 to $36.75                               67          9.68         33.78                      -             -
                                       ----------                                       ------------
                                            3,305          6.33      $  20.10                  1,835       $  20.87
                                       ==========                                       ============
</TABLE>

Options  exercisable  as of June 30, 2003 and 2002 were  2,305,000 and 1,876,000
respectively.

IPLACE STOCK OPTION PLANS
The iPlace  options were issued at the  estimated  fair value of the  underlying
common stock and generally  vested 25% per year beginning one year from the date
of grant. During 2002, 470,000 options were granted at an average exercise price
of $2.74 and 205,000  options  were  forfeited at an average  exercise  price of
$2.40.  In August 2001, the Company sold iPlace (see Note 9).  Therefore,  there
were no stock options  outstanding  under this plan as of June 30, 2004, 2003 or
2002.

EMPLOYEE STOCK PURCHASE PLAN
During 1997,  the Company  adopted the 1996 Employee  Stock  Purchase Plan which
provides  for the  issuance of up to 360,000  shares of common  stock.  The plan
permits eligible employees to purchase Common Stock through payroll  deductions,
which may not exceed 10% of an employee's compensation,  at a price equal to the
lower  of (a)  85% of the  closing  price  of the  Common  Stock  on the day the
purchase period commences or (b) 85% of the closing price of the Common Stock on
the day the purchase  period  terminates.  During 2004,  2003,  and 2002 14,000,
16,000 and 18,000 shares were purchased under the plan, respectively.

NOTE 19 - STATEMENT OF CASH FLOWS

Supplemental disclosure of cash flow information (in thousands):


<TABLE>
<CAPTION>
                                                                           YEAR ENDED JUNE 30,
                                                                 -----------------------------------
                                                                    2004        2003          2002
                                                                 --------     --------      --------
<S>                                                              <C>          <C>           <C>
Cash paid during the period for interest                         $  3,417     $    241      $    377
Cash paid during the period for income taxes                        5,568          411            43
</TABLE>


NOTE 20 - BUSINESS SEGMENTS

The operating  business segments reported below are the business segments of the
Company for which  separate  financial  information  is available  and for which
operating  results are evaluated  regularly by executive  management in deciding
how to allocate resources and in assessing performance. Prior to the acquisition
of Lavalife  in April 2004,  the  Company  operated as one  reportable  business
segment.  Subsequent to the acquisition of Lavalife, the Company operates as two
reportable business segments:  Membership and Personals. The Membership business
segment is  primarily  involved  in the  marketing  of  membership  programs  to
consumers.  The Personals  business  segment is primarily  involved in providing
both web-based and IVR-based personals services to its customers.

                                      F-19


<PAGE>

Management  evaluates the operating  results of each of its reportable  business
segments based upon revenue and operating income.  The following is a summary of
revenues, operating income, capital expenditures,  depreciation and amortization
and assets by business  segment for the years ended June 2004, 2003 and 2002 (in
thousands):

<TABLE>
<CAPTION>


                                                 YEARS ENDED JUNE 30,
                                     ---------------------------------------------
                                        2004             2003              2002
                                      ---------        ---------        ----------
        Revenues:
<S>                                  <C>               <C>              <C>
   Membership                         $ 471,049        $ 456,881        $ 427,602
   Personals                             17,690             --               --
                                      ---------        ---------        ---------
      Total                           $ 488,739        $ 456,881          427,602
                                      =========        =========        =========
Operating Income:
   Membership                         $  52,533        $  22,286        $  18,782
   Personals                                337             --               --
   Corporate and other (1)                 --               --             (6,893)
                                      ---------        ---------        ---------
      Total                           $  52,870        $  22,286        $  11,889
                                      =========        =========        =========
Capital expenditures:
   Membership                         $   6,486        $   5,463        $   5,761
   Personals                                571             --               --
                                      ---------        ---------        ---------
      Total                           $   7,057        $   5,463        $   5,761
                                      =========        =========        =========

Depreciation and amortization:
   Membership                         $  10,149        $  12,120        $  13,252
   Personals                              2,327             --               --
   Corporate and other (2)                  776             --               --
                                      ---------        ---------        ---------
      Total                           $  13,252        $  12,120        $  13,252
                                      =========        =========        =========

</TABLE>

<TABLE>
<CAPTION>

                                                                    JUNE 30,
                                                            -------------------------
                                                                2004         2003
                                                            ------------   ----------
        Assets:
<S>                                                         <C>            <C>
           Membership                                       $    178,723   $ 205,331
           Personals                                             136,874           -
           Corporate and other (3)                               137,565      43,174
                                                            ------------   ---------
              Total                                         $    453,162   $ 248,505
                                                            ============   =========
</TABLE>

(1)      Represents the restructuring charge incurred in 2002.

(2)      Represents unallocated amortization of unallocated non-operating assets
         and liabilities.

(3)      Represents  unallocated  non-operating  assets including  non-operating
         cash, short-term investments, debt issuance costs and other.

During 2004, 2003 and 2002, the Company maintained offices in the United States,
Canada, Australia and the United Kingdom.  Geographic information by country for
the years ended June 30, 2004, 2003 and 2002 is presented below (in thousands).

<TABLE>
<CAPTION>
                                                           YEARS ENDED JUNE 30,
                                              --------------------------------------------
                                                  2004            2003            2002
                                              -----------    ------------      -----------
        Revenues:
<S>                                           <C>             <C>              <C>
           United States                      $   460,606     $   443,909      $   413,025
           Canada                                  27,450          11,859           11,028
           Other foreign countries                    683           1,113            3,549
                                              -----------    ------------      -----------
              Total                           $   488,739     $   456,881      $   427,602
                                              ===========    ============      ===========
</TABLE>


                                      F-20

<PAGE>

<TABLE>
<CAPTION>



                                                                          JUNE 30,
                                                                ----------------------------
                                                                    2004            2003
                                                                ------------     -----------
        Long lived assets:
<S>                                                             <C>             <C>
           United States                                        $    119,764     $    68,190
           Canada                                                     89,543           8,960
           Other foreign countries                                     2,485               -
                                                                ------------     -----------
              Total                                             $    211,792     $    77,150
                                                                ============     ===========
</TABLE>

NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>

(In thousands, except per share amounts):
                                                                          YEAR ENDED JUNE 30, 2004
                                                              --------------------------------------------------
                                                                  FIRST      SECOND       THIRD       FOURTH
                                                                 QUARTER     QUARTER     QUARTER     QUARTER
                                                               -------------------------------------------------
<S>                                                            <C>         <C>         <C>         <C>
Revenues                                                      $  113,824   $  123,164  $  118,519  $  133,232
Operating income                                                   6,620       13,911      14,558      17,781
Net income                                                         3,895        7,665       8,379       8,021
Diluted earnings per share                                          0.30         0.60        0.68        0.66


                                                                          YEAR ENDED JUNE 30, 2003
                                                              --------------------------------------------------
                                                                FIRST        SECOND       THIRD       FOURTH
                                                              QUARTER (1)    QUARTER      QUARTER     QUARTER
                                                              --------------------------------------------------
Revenues                                                      $  105,004   $  114,045  $  118,647  $  119,185
Operating income                                                   2,125        5,858       5,516       8,787
Net income                                                        12,136        3,647       3,332       5,241
Diluted earnings per share                                          0.89         0.27        0.25        0.41

</TABLE>


(1)      Results  of  operations  for this  period  include a  $19,148,000  gain
         related to the settlement of investment  related  litigation  (see Note
         10), a $959,000  loss related to the sale of iPlace,  Inc. (see Note 9)
         and a $206,000 loss on investment (see Note 9).

NOTE 22 - GUARANTOR AND NONGUARANTOR FINANCIAL INFORMATION

In April 2004, the Company issued  $150,000,000  aggregate  principal  amount of
9.25%  Senior Notes in a private  placement  pursuant to Rule 144A (see Note 6).
The Senior Notes are unsecured  obligations and will rank pari passu in right of
payment  to  all  of  the  Company's   existing  and  future  senior   unsecured
indebtedness and senior in right of payment to all of the Company's existing and
future  subordinated  indebtedness that expressly provides for its subordination
to the Notes. The Senior Notes are fully and  unconditionally  guaranteed by all
of the Company's  existing and future domestic  subsidiaries  and certain of the
Company's existing and future foreign subsidiaries.

The following  consolidating  financial  information  presents the consolidating
balance  sheets  as of June  30,  2004  and  2003,  the  related  statements  of
operations for each of the three year periods ended June 30, 2004, 2003 and 2002
and the related statements of cash flows for the years ended June 30, 2004, 2003
and  2002.  The  information  includes  the  elimination  entries  necessary  to
consolidate the Company ("Parent") with the guarantor and nonguarantor entities.

Investments  in  subsidiaries  are  accounted for by the Parent using the equity
method of accounting.  The guarantor and nonguarantor subsidiaries are presented
on a combined basis. The principal  elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.

                                      F-21

<PAGE>



                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                   AS OF JUNE 30, 2004
                                                        ----------------------------------------------------------------------
                                                                     GUARANTOR      NONGUARANTOR                  CONSOLIDATED
                                                          PARENT     SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS      TOTAL
                                                        ----------   -----------    -------------  ------------    -----------
                         ASSETS                                                       (in thousands)
Current assets:
<S>                                                    <C>          <C>          <C>          <C>          <C>
    Cash and cash equivalents                            $ 130,581      $  26,657      $  2,258      $    --        $ 159,496
    Restricted cash                                           --            3,120          --             --            3,120
    Short-term investments                                   7,650           --            --             --            7,650
    Accounts receivable                                      2,418          5,413         2,726           --           10,557
    Intercompany receivable                                  4,655            632         1,285         (6,572)          --
    Prepaid membership materials                             1,775            269         1,189           --            3,233
    Prepaid expenses and other current assets                3,240          1,157           489           --            4,886
    Membership solicitation and other deferred costs        43,908          5,707         2,813           --           52,428
                                                         ---------      ---------      --------      ---------      ---------
        Total current assets                               194,227         42,955        10,760         (6,572)       241,370
Fixed assets, net                                           19,675         14,823         2,042           --           36,540
Goodwill                                                      --          118,956         6,719           --          125,675
Intangible assets, net                                       1,050         37,822          --             --           38,872
Other assets                                                10,666             39          --             --           10,705
Intercompany notes receivable                               95,543           --            --          (95,543)          --
Investment in subsidiaries                                  78,633           --            --          (78,633)          --
                                                         ---------      ---------      --------      ---------      ---------
        Total assets                                     $ 399,794      $ 214,595      $ 19,521      $(180,748)     $ 453,162
                                                         =========      =========      ========      =========      =========
     LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
    Current maturities of long-term obligations          $     325      $     13       $   --        $    --        $     338
    Accounts payable                                        10,407         22,685         2,093           --           35,185
    Accrued liabilities                                     54,630          6,841         4,604           --           66,075
    Intercompany payable                                      --            6,572          --           (6,572)          --
    Deferred revenues                                      129,675          3,993         4,713           --          138,381
    Deferred income taxes                                   11,878            445          --             --           12,323
                                                         ---------      ---------      --------      ---------      ---------
        Total current liabilities                          206,915         40,549        11,410         (6,572)       252,302
Deferred income taxes                                       (2,402)         6,647           109           --            4,354
Other long-term liabilities                                  3,705           --           1,225           --            4,930
Intercompany notes payable                                    --           95,543          --          (95,543)          --
Long-term debt                                             237,659           --            --             --          237,659
                                                         ---------      ---------      --------      ---------      ---------
        Total liabilities                                  445,877        142,739        12,744       (102,115)       499,245
                                                         ---------      ---------      --------      ---------      ---------
Shareholders' (deficit) equity:
    Preferred stock                                           --             --            --             --             --
    Common stock                                               191              6             3             (9)           191
    Capital in excess of par value                         156,457         71,744         9,564        (81,308)       156,457
    Accumulated (deficit) earnings                          10,131            (15)       (2,305)         2,320         10,131
    Accumulated other comprehensive loss                      (373)           121          (485)           364           (373)
    Treasury stock                                        (212,489)          --            --             --         (212,489)
                                                         ---------      ---------      --------      ---------      ---------
      Total shareholders' (deficit) equity                 (46,083)        71,856         6,777        (78,633)       (46,083)
                                                         ---------      ---------      --------      ---------      ---------
      Total liabilities and shareholders' (deficit)
         equity                                          $ 399,794      $ 214,595      $ 19,521      $(180,748)     $ 453,162
                                                         =========      =========      ========      =========      =========
</TABLE>


                                      F-22
<PAGE>



                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                   AS OF JUNE 30, 2003
                                                        ---------------------------------------------------------------------
                                                                       GUARANTOR     NONGUARANTOR                CONSOLIDATED
                                                            PARENT     SUBSIDIARIES  SUBSIDIARIES  ELIMINATIONS     TOTAL
                                                        ------------   -----------   ------------  ------------  ------------
                         ASSETS                                                       (in thousands)
Current assets:
<S>                                                       <C>            <C>           <C>           <C>           <C>
    Cash and cash equivalents                             $  51,895      $ 18,716      $  1,649      $   --        $  72,260
    Restricted cash                                            --           2,732          --            --            2,732
    Accounts receivable                                       2,811         3,907         1,995          --            8,713
    Intercompany receivable                                     686           298          --            (984)          --
    Prepaid membership materials                              1,762           170           264          --            2,196
    Prepaid expenses and other current assets                 6,032         1,031           508          --            7,571
    Membership solicitation and other deferred costs         73,856         1,853         2,174          --           77,883
                                                          ----------     ---------     --------      --------      ---------
        Total current assets                                137,042        28,707         6,590          (984)       171,355
Fixed assets, net                                            22,193           535         2,241          --           24,969
Goodwill                                                       --          35,320         6,719          --           42,039
Intangible assets, net                                         --           6,656          --            --            6,656
Other assets                                                  3,426            60          --            --            3,486
Investment in subsidiaries                                   56,419          --            --         (56,419)          --
                                                          ----------     ---------     --------      --------      ---------
        Total assets                                      $ 219,080      $ 71,278      $ 15,550      $(57,403)     $ 248,505
                                                          ==========     =========     ========      ========      =========

     LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
    Current maturities of long-term obligations           $    --        $    244      $   --        $   --        $     244
    Accounts payable                                         17,678        13,018         1,948          --           32,644
    Accrued liabilities                                      53,692         3,333         2,080          --           59,105
    Intercompany payable                                       --             804           180          (984)          --
    Deferred revenues                                       163,276         1,007         3,360          --          167,643
    Deferred income taxes                                       662        (1,701)        1,918          --              879
                                                          ----------     ---------     --------      --------      ---------
        Total current liabilities                           235,308        16,705         9,486          (984)       260,515
Deferred income taxes                                         2,456         3,260          (571)         --            5,145
Other long-term liabilities                                   1,599            63         1,466          --            3,128
                                                          ----------     ---------     --------      --------      ---------
        Total liabilities                                   239,363        20,028        10,381          (984)       268,788
                                                          ----------     ---------     --------      --------      ---------
Shareholders' (deficit) equity
    Preferred stock                                            --            --            --            --             --
    Common stock                                                178             6             3            (9)           178
    Capital in excess of par value                          122,425        52,296         9,564       (61,860)       122,425
    Accumulated (deficit) earnings                          (17,829)       (1,052)       (3,929)        4,981        (17,829)
    Accumulated other comprehensive loss                       (469)         --            (469)          469           (469)
    Treasury stock                                         (124,588)         --            --            --         (124,588)
                                                          ----------     ---------     --------      --------      ---------
        Total shareholders' (deficit) equity                (20,283)       51,250         5,169       (56,419)       (20,283)
                                                          ----------     ---------     --------      --------      ---------
        Total liabilities and shareholders' (deficit)
          equity                                          $ 219,080      $ 71,278      $ 15,550      $(57,403)     $ 248,505
                                                          ==========     ========      ========      =========     =========
</TABLE>

                                      F-23
<PAGE>



                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>


                                                                         FOR YEAR ENDED JUNE 30, 2004
                                                  ----------------------------------------------------------------------------
                                                                  GUARANTOR     NONGUARANTOR                      CONSOLIDATED
                                                   PARENT        SUBSIDIARIES   SUBSIDIARIES    ELIMINATIONS          TOTAL
                                                  -------        -----------    ------------    ------------      ------------
                                                                                 (in thousands)
<S>                                              <C>              <C>              <C>              <C>              <C>
Revenues                                         $ 395,074        $  75,985        $  19,220        $  (1,540)       $ 488,739
Expenses:
    Marketing                                      213,884           36,969            4,965             --            255,818
    Operating                                       69,222           16,358            7,792           (1,540)          91,832
    General and administrative                      65,640           16,346            3,840             --             85,826
    Amortization of intangible assets                 --              2,393             --               --              2,393
                                                 ---------        ---------        --------         ---------        ---------
Operating income                                    46,328            3,919            2,623             --             52,870
Equity in income of subsidiary                       2,661             --               --             (2,661)            --
Interest (expense) income, net                      (4,613)          (2,113)             105             --             (6,621)
Other income (expense), net                            447              (77)             (21)            --                349
                                                 ---------        ---------        ---------        ---------        ---------
Income before income taxes                          44,823            1,729            2,707           (2,661)          46,598
Provision for income taxes                          16,863              692            1,083             --             18,638
                                                 ---------        ---------        --------         ---------        ---------
Net income                                       $  27,960        $   1,037        $   1,624        $  (2,661)       $  27,960
                                                 =========        =========        =========        =========        =========
</TABLE>


                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                             FOR THE YEAR ENDED JUNE 30, 2003
                                                         ----------------------------------------------------------------------
                                                                       GUARANTOR     NONGUARANTOR                  CONSOLIDATED
                                                           PARENT    SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS     TOTAL
                                                         ----------  ------------   --------------- -------------  -----------
                                                                                      (in thousands)
<S>                                                      <C>         <C>            <C>             <C>            <C>
Revenues                                                 $  393,958  $    50,787    $       12,972  $       (836)  $   456,881
Expenses:
    Marketing                                               253,389       23,198             4,086             -       280,673
    Operating                                                64,539       11,639             3,102          (836)       78,444
    General and administrative                               60,553       10,381             3,151             -        74,085
    Amortization of intangible assets                             -        1,393                 -             -         1,393
                                                         ----------  -----------    --------------  ------------   -----------
Operating income                                             15,477        4,176             2,633             -        22,286
Settlement of investment related litigation                  19,148            -                 -             -        19,148
Loss on sale of subsidiary                                     (959)           -                 -             -          (959)
Loss on investment                                             (206)           -                 -             -          (206)
Equity in income of subsidiaries                              4,600            -                 -        (4,600)            -
Interest income, net                                            421          126                23             -           570
Other (expense) income, net                                    (953)          (2)              711             -          (244)
                                                         ----------  -----------    --------------  ------------   -----------
Income before income taxes                                   37,528        4,300             3,367        (4,600)       40,595
Provision for income taxes                                   13,172        1,720             1,347             -        16,239
                                                         ----------  -----------    --------------  ------------   -----------
Net income                                               $   24,356  $     2,580    $        2,020  $     (4,600)  $    24,356
                                                         ==========  ===========    ==============  ============   ===========
</TABLE>


                                      F-24

<PAGE>



                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>


                                                                              FOR THE YEAR ENDED JUNE 30, 2002
                                                         -----------------------------------------------------------------------
                                                                       GUARANTOR     NONGUARANTOR                   CONSOLIDATED
                                                           PARENT    SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS      TOTAL
                                                         ----------  ------------   --------------  -------------- -------------
                                                                                      (in thousands)
<S>                                                      <C>         <C>            <C>             <C>           <C>
Revenues                                                 $  358,283  $    55,380    $       14,576  $       (637) $    427,602
Expenses:
    Marketing                                               220,224       22,867             5,883              -      248,974
    Operating                                                59,286       13,650             6,395          (637)       78,694
    General and administrative                               60,815       13,600             4,796             -        79,211
    Restructuring charge                                      4,720            -             2,173             -         6,893
    Amortization of intangible assets                             -        1,941                 -             -         1,941
                                                         ----------  -----------    --------------   -----------   -----------
Operating income (loss)                                      13,238        3,322            (4,671)            -        11,889
Gain (loss) on sale of subsidiary                            69,379       (3,771)                -             -        65,608
Loss on investment                                          (33,628)           -                 -             -       (33,628)
Equity in income of subsidiaries                              3,769            -                 -        (3,769)            -
Interest income, net                                            209           96                28             -           333
Other (expense) income, net                                 (14,956)        (232)           14,454             -          (734)
                                                         ----------  -----------    --------------   -----------   -----------
Income (loss) before minority interest                       38,011         (585)            9,811        (3,769)       43,468
Minority interest                                                 -          450                 -             -           450
                                                         ----------  -----------    --------------   -----------   -----------
Income (loss) before income taxes                            38,011         (135)            9,811        (3,769)       43,918
Provision for income taxes                                        -            -                 -             -             -
                                                         ----------  -----------    --------------  -----------    -----------
Income (loss) before cumulative effect of accounting
  change                                                     38,011         (135)            9,811        (3,769)       43,918
Cumulative effect of accounting change                            -       (5,907)                -             -        (5,907)
                                                         ----------  -----------    --------------  -----------    -----------
Net income (loss)                                        $   38,011  $    (6,042)   $        9,811  $     (3,769)  $    38,011
                                                         ==========  ===========    ==============  ============   ===========
</TABLE>
                                      F-25

<PAGE>



                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>


                                                                          FOR THE YEAR ENDED JUNE 30, 2004
                                                         ------------------------------------------------------------------------
                                                                       GUARANTOR      NONGUARANTOR                   CONSOLIDATED
                                                           PARENT     SUBSIDIARIES    SUBSIDIARIES   ELIMINATIONS       TOTAL
                                                         ---------    -------------  -------------  ----------------  -----------
                                                                                   (in thousands)
Operating activities
<S>                                                       <C>             <C>             <C>             <C>           <C>
 Net income                                               $  27,960       $   1,037       $   1,624       $  (2,661)    $  27,960
 Adjustments to reconcile net income to net cash
  provided by operating activities:
    Change in deferred revenues                             (33,601)            (32)          1,361            --         (32,272)
    Change in membership solicitation and other
      deferred costs                                         29,948          (3,854)           (639)           --          25,455
    Depreciation and amortization                             8,865           3,714             673            --          13,252
    Deferred income and other taxes                           6,363           3,514             377            --          10,254
    Tax benefit from employee stock plans                     6,520            --              --              --           6,520
    Other                                                     1,137            (247)           --              --             890

 Change in assets and liabilities:
    Restricted cash                                            --              (388)           --              --            (388)
    Accounts receivable                                         393             226            (731)           --            (112)
    Intercompany receivable & payable                       (99,512)        100,977          (1,465)           --            --
    Prepaid membership materials                               (565)            (99)           (925)           --          (1,589)
    Prepaid expenses and other current assets                 4,107           1,046              19            --           5,172
    Other assets                                               (487)             26            --              --            (461)
    Accounts payable                                         (7,271)         (3,193)            141            --         (10,323)
    Accrued and other liabilities                             1,113           1,709             768            --           3,590
                                                         ----------       ---------       ---------       ---------    ----------
Net cash provided by operating activities                   (55,030)        104,436           1,203          (2,661)       47,948
                                                         ----------       ---------       ---------       ---------     ---------

Investing activities
 Acquisition of fixed assets                                 (5,599)           (883)           (575)           --          (7,057)
 Purchase of short-term investments                          (7,650)           --              --              --          (7,650)
 Business combinations, net of cash acquired                   --          (114,916)           --              --        (114,916)
 Investment in subsidiaries                                 (22,109)         19,448            --             2,661          --
                                                         ----------       ---------       ---------       ---------     ---------
Net cash used in by investing activities                    (35,358)        (96,351)           (575)          2,661      (129,623)
                                                         ----------       ---------       ---------       ---------     ---------
Financing activities
 Net proceeds from issuance of stock                         33,644            --              --              --          33,644
 Treasury stock purchases                                   (94,207)           --              --              --         (94,207)
 Net proceeds from issuance of debt                         229,825            --              --              --         229,825
 Payments of long-term obligations                             (188)           (265)           --              --            (453)
                                                         ----------       ---------       ---------       ---------     ---------
Net cash provided by (used in) financing activities         169,074            (265)           --              --         168,809
                                                         ----------       ---------       ---------       ---------     ---------
Effect of exchange rate changes on cash and cash
equivalents                                                    --               121             (19)           --             102
                                                         ----------       ---------       ---------       ---------     ---------
Net increase (decrease) in cash and cash equivalents         78,686           7,941             609            --          87,236
Cash and cash equivalents at beginning of period             51,895          18,716           1,649            --          72,260
                                                         ----------       ---------       ---------       ---------     ---------
Cash and cash equivalents at end of period                $ 130,581       $  26,657       $   2,258       $    --       $ 159,496
                                                         ==========       =========       =========       =========     =========

</TABLE>

                                      F-26
<PAGE>



                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>


                                                                              FOR THE YEAR ENDED JUNE 30, 2003
                                                          -----------------------------------------------------------------------
                                                                        GUARANTOR     NONGUARANTOR                   CONSOLIDATED
                                                            PARENT     SUBSIDIARIES   SUBSIDIARIES    ELIMINATIONS      TOTAL
                                                          ----------   ------------  --------------  -------------- -------------
                                                                                       (in thousands)
 Operating activities
<S>                                                       <C>         <C>            <C>             <C>            <C>
  Net income                                              $   24,356  $       2,580  $        2,020  $    (4,600)   $      24,356
  Adjustments to reconcile net income to net cash
   provided by operating activities:
     Change in deferred revenues                             (37,705)          (741)           (557)           -          (39,003)
     Change in membership solicitation and other deferred
       costs                                                  50,675            304             432            -           51,411
     Depreciation and amortization                             9,390          1,750             980            -           12,120
     Deferred income and other taxes                          11,276          1,559           1,347            -           14,182
     Tax benefit from employee stock plans                       942              -               -            -              942
     Gain on settlement of investment related litigation     (19,148)             -               -            -          (19,148)
     Loss on sale of subsidiary                                  959              -               -            -              959
     Net loss on investment                                      206              -               -            -              206
     Other                                                     2,635              -            (150)           -            2,485

  Change in assets and liabilities:
     Restricted cash                                               -          2,951               -            -            2,951
     Accounts receivable                                         504            220              34            -              758
     Intercompany receivable & payable                         2,852          1,364          (4,216)           -                -
     Prepaid membership materials                                (86)            10             (59)           -             (135)
     Prepaid expenses and other current assets                (2,799)          (311)           (136)           -           (3,246)
     Other assets                                             (1,387)            56               -            -           (1,331)
     Accounts payable                                         (2,457)         2,082             120            -             (255)
     Accrued and other liabilities                             2,003           (332)           (390)           -            1,281
                                                          ----------   ------------  --------------  -----------    -------------
 Net cash provided by (used in) operating activities          42,216         11,492            (575)      (4,600)          48,533
                                                          ----------   ------------  --------------  -----------    -------------

 Investing activities
  Acquisition of fixed assets                                 (4,931)          (188)           (344)           -           (5,463)
  Settlement of investment related litigation                 19,148              -               -            -           19,148
  Investment in subsidiaries                                  (4,600)             -               -        4,600                -
  Other investments                                           (1,250)             -               -            -           (1,250)
                                                          ----------  -------------  --------------  -----------    -------------
 Net cash provided by (used in) investing activities           8,367           (188)           (344)       4,600           12,435
                                                          ----------  -------------  --------------  -----------    -------------

 Financing activities
  Net proceeds from issuance of stock                          4,050              -               -            -            4,050
  Treasury stock purchases                                   (37,214)             -               -            -          (37,214)
  Payments of long-term obligations                                -         (1,051)              -            -           (1,051)
                                                          ----------  -------------  --------------  -----------    -------------
 Net cash used in financing activities                       (33,164)        (1,051)              -            -          (34,215)
                                                          ----------  -------------  --------------  -----------    -------------
 Effect of exchange rate changes on cash and cash
 equivalents                                                       -              -               5            -                5
                                                          ----------  -------------  --------------  -----------    -------------
 Net increase (decrease) in cash and cash equivalents         17,419         10,253            (914)           -           26,758
 Cash and cash equivalents at beginning of period             34,476          8,463           2,563            -           45,502
                                                          ----------  -------------  --------------  -----------    -------------
 Cash and cash equivalents at end of period               $   51,895  $      18,716  $        1,649  $         -    $      72,260
                                                          ==========  =============  ==============  ===========    =============
</TABLE>


                                      F-27

<PAGE>



                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>


                                                                            FOR THE YEAR ENDED JUNE 30, 2002
                                                          -----------------------------------------------------------------------
                                                                        GUARANTOR     NONGUARANTOR                   CONSOLIDATED
                                                            PARENT     SUBSIDIARIES   SUBSIDIARIES    ELIMINATIONS      TOTAL
                                                          ---------   -------------  --------------  -------------  -------------
                                                                                       (in thousands)
 Operating activities
<S>                                                       <C>         <C>            <C>             <C>            <C>
  Net income (loss)                                       $   38,011  $      (6,042) $        9,811  $    (3,769)   $      38,011
  Adjustments to reconcile net income to net cash
   provided by operating activities:
     Change in deferred revenues                             (18,701)         1,721            (136)           -          (17,116)
     Change in membership solicitation and other deferred
       costs                                                  16,485         (2,641)          1,194            -           15,038
     Depreciation and amortization                             9,452          2,544           1,256            -           13,252
     Gain (loss) on sale of subsidiary                       (69,378)         3,770               -            -          (65,608)
     Loss on investment                                       33,628              -               -            -           33,628
     Non-cash restructuring charges                                -              -           1,585            -            1,585
     Minority interest                                             -           (450)              -            -             (450)
     Cumulative effect of accounting change                        -          5,907               -            -            5,907
     Other                                                     2,435             54             116            -            2,605

  Change in assets and liabilities:
     Restricted cash                                               -         (4,692)              -            -           (4,692)
     Accounts receivable                                       2,837          4,573           1,420            -            8,830
     Intercompany receivable & payable                        24,764        (13,280)        (11,484)           -                -
     Prepaid membership materials                                560             11            (256)           -              315
     Prepaid expenses and other current assets                (1,832)          (613)            228            -           (2,217)
     Other assets                                               (337)            86               -            -             (251)
     Related party payables                                        -             12               -            -               12
     Accounts payable                                        (10,783)         2,524          (2,493)           -          (10,752)
     Accrued and other liabilities                              (199)          (807)            (77)           -           (1,083)
                                                          ----------  -------------  --------------  -----------    -------------
 Net cash provided by (used in) operating activities          26,942         (7,323)          1,164       (3,769)          17,014
                                                          ----------  -------------  --------------  -----------    -------------

 Investing activities
  Acquisition of fixed assets                                 (5,074)          (262)           (425)           -           (5,761)
  Investment in subsidiaries                                  (3,769)             -               -        3,769                -
  Proceeds from sale of subsidiary, net of cash sold          35,582  `      10,415               -            -           45,997
  Other investing activities                                   1,499         (1,499)              -            -                -
                                                          ----------  -------------  --------------  -----------    -------------
 Net cash provided by (used in) investing activities          28,238          8,654            (425)       3,769           40,236
                                                          ----------  -------------  --------------  -----------    -------------
 Financing activities
  Net proceeds from exercise of stock options                  1,461             54               -            -            1,515
  Treasury stock purchases                                   (34,301)             -               -            -          (34,301)
  Payments of long-term obligations                                -           (718)              -            -             (718)
                                                          ----------  -------------  --------------  -----------    -------------

 Net cash used in financing activities                       (32,840)          (664)              -            -          (33,504)
                                                          ----------  -------------  --------------  -----------    -------------
 Effect of exchange rate changes on cash and cash
 equivalents                                                       -              -              11            -               11
                                                          ----------  -------------  --------------  -----------    -------------
 Net increase in cash and cash equivalents                    22,340            667             750            -           23,757
 Cash and cash equivalents at beginning of period             12,136          7,796           1,813            -           21,745
                                                          ----------  -------------  --------------  -----------    -------------
 Cash and cash equivalents at end of period               $   34,476  $       8,463  $        2,563  $         -    $      45,502
                                                          ==========  =============  ==============  ===========    =============

</TABLE>

                                                                F-28

<PAGE>

<TABLE>
<CAPTION>


                                                       MEMBERWORKS INCORPORATED
                                            SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS


                                           BALANCE AT    CHARGED TO COSTS  CHARGED TO OTHER                  BALANCE AT END
                                          BEGINNING OF         AND          ACCOUNTS --      DEDUCTIONS --         OF
DESCRIPTION                                  PERIOD          EXPENSE        DESCRIBE          DESCRIBE           PERIOD
------------                              -------------- --------------- -----------------  ---------------  -------------
YEAR ENDED JUNE 30, 2004
<S>                                       <C>                <C>          <C>               <C>               <C>
Allowance for membership cancellations    $   20,934,000     $     -      $  183,086,000A   $ 189,864,000 B   $ 14,156,000

YEAR ENDED JUNE 30, 2003
Allowance for membership cancellations    $   23,753,000     $     -      $  281,250,000A   $ 284,069,000 B   $ 20,934,000
Valuation allowance for deferred tax
assets                                         6,581,000           -          (6,581,000)C              -                -

YEAR ENDED JUNE 30, 2002
Allowance for membership cancellations    $   30,004,000     $     -      $  277,412,000A   $ 283,663,000 B   $ 23,753,000
Valuation allowance for deferred tax
assets                                        22,690,000           -         (16,109,000)C              -        6,581,000

</TABLE>

(A)  Charged to balance sheet account "Deferred revenues."

(B)  Charges for refunds upon membership cancellations. In addition, the
     allowance was reduced by $2,082,000 in connection with the sale of iPlace
     in 2002.

(C)  Decrease in the valuation allowance was due to current utilization of
     deferred tax assets as well as management's belief that the Company will
     more likely than not realize its deferred tax assets in the future.

                                      F-29