SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                     For the fiscal year ended June 30, 2002

                           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. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant at August 5, 2002 was $115,053,670. 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 5, 2002 was 13,351,830.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2002 Annual Meeting of Stockholders of
MemberWorks Incorporated are incorporated by reference in Part III of this
report.


<PAGE>


                                      Index



                                                                           Page
                                                                           ----

Part I   Item 1. Business                                                     1

         Item 2. Properties                                                   6

         Item 3. Legal Proceedings                                            7

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

         Executive Officers of the Registrant                                 8

Part II  Item 5. Market for the Registrant's Common Stock and Related
         Stockholder Matters                                                  9

         Item 6. Selected Financial Data                                     10

         Item 7. Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                           11

         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

Part III Item 10. Directors and Executive Officers of the Registrant         19

         Item 11. Executive Compensation                                     19

         Item 12. Security Ownership of Certain Beneficial Owners and
                  Management                                                 19

         Item 13. Certain Relationships and Related Transactions             19

Part IV  Item 14. Exhibits, Financial Statement Schedules and Reports on
                  Form 8-K                                                   20

Signatures                                                                   21

Exhibit listing                                                              22





<PAGE>

                                     Part I

Item 1.  Business
         --------

OVERVIEW
MemberWorks Incorporated ("MemberWorks" or the "Company"), a Delaware
Corporation organized in 1996 and doing business as CardMember Publishing
Corporation since 1989, designs and manages innovative membership programs that
provide substantial benefits to member consumers, those organizations offering
the programs and vendors whose products and services are accessed through the
programs. Members receive value-added benefits, insightful information and
exclusive savings in the areas of healthcare, personal finance, insurance,
travel, entertainment, fashion and personal security. MemberWorks believes that
it is the leading designer and provider of innovative membership service
programs due to its senior management's extensive knowledge of the industry and
its relationships with leading consumer-driven organizations with large numbers
of individual account holders and customers. The Company addresses the needs of
organizations seeking to leverage the expertise of an outside provider in
offering these programs. In return for providing the Company with members, the
Company's clients receive royalty payments. Clients also benefit because the
programs are designed and managed to strengthen the relationship between clients
and their customers. MemberWorks offers its programs to increasingly
sophisticated consumers seeking economy, efficiency and convenience in their
purchase of products and services. Members save time by purchasing goods and
services and obtaining useful information over the telephone or the Internet.
Members also benefit from participating vendors who agree to provide discounts
on products and services not generally available to non-members. For the
participating vendors, the programs provide the opportunity to reach a large
number of demographically attractive members at minimal incremental marketing
cost. The Company's programs are primarily marketed to customers through
arrangements with its client organizations which include banks and other
financial institutions, retailers, major oil companies, direct response
television companies, catalog companies, e-commerce companies and other
organizations with large numbers of individual customers.

Businesses that sell services and products to consumers have substantially
increased the use of direct marketing techniques to reach their customers.
According to the Direct Marketing Association, total consumer sales as a result
of direct marketing in the United States were $1,085 billion in 2002, an
increase of 8% over the prior year. Membership service programs, if designed,
marketed and managed effectively, can be of substantial value to the consumers
who become members of such programs, the businesses that market to consumers and
the client organizations that offer the programs to their customers.

Historically, a substantial number of the businesses that utilize membership
service programs have been issuers of credit cards. More recently, however,
other businesses, including banks and other financial institutions, retailers,
major oil companies, direct response television companies, catalog companies,
e-commerce companies and insurance companies have also begun to offer service
programs. In many cases, these businesses lack the core competency to
successfully design, market and manage membership programs. As a result, these
businesses seek to outsource to companies 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 programs and are able to
realize economies of scale. In addition, businesses seeking to implement
membership service programs demand that the provider of those programs has the
expertise to continue to introduce innovative new programs and that the provider
has resources such as extensive vendor networks and experienced management teams
in order to market programs quickly and successfully.

The Company's membership service programs, which combined had approximately 6.6
million retail members and over 13 million total members, including wholesale,
as of June 30, 2002, offer unique and valuable services, information and savings
opportunities. The service programs are generally marketed under the name of the
program and are designed and developed to capitalize on the client's existing
relationship with its customers or other constituents. In general, membership
fees, which may be payable monthly or annually, vary depending upon the
particular membership program. Annual membership fees averaged approximately $90
per year during fiscal 2002 and monthly membership fees averaged $9 per month
during fiscal 2002. Most of the membership programs are for one-year renewable
terms and members are generally entitled to unlimited use of the service during
the membership period.


                                       1
<PAGE>



DESCRIPTION OF BUSINESS
MemberWorks is a leader in bringing value to consumers by designing innovative
membership programs that offer easy access to significant savings at national
brand name providers and retailers in healthcare, insurance, travel,
entertainment, shopping, personal security, home improvement and more.
MemberWorks combines marketing innovation, entrepreneurial energy and consumer
insight to create industry leading membership programs. These programs create
new revenue streams and increase customer loyalty for clients. MemberWorks
continues to enhance its existing membership programs to add more member value
while systematically increasing the membership fee. During 2002, MemberWorks
introduced four new premium products. These premium products offer members even
more services and discounts at an increased membership fee. The Company's
money-saving programs fall into the following four key categories:

    Health and Insurance
    The Health membership programs offer significant savings on a comprehensive
    array of products including: prescription drugs, vitamins and supplements,
    eye glasses and contact lenses, hearing aides and durable medical equipment;
    and professional services, including medical, dental, chiropractic,
    alternative medicine and elder care.

    The Insurance membership programs offer competitively priced insurance
    products, including life, accidental death, short-term and catastrophic
    disability, supplemental medical and warranty coverage.

    Travel, Entertainment and Shopping
    These membership programs offer exclusive members only savings with leading
    brand name partners. Members have multiple opportunities to save on: travel,
    including air fare, hotel rates, car rental and cruise packages;
    entertainment, featuring theme parks, amusements parks, restaurants and
    movie theaters; and shopping, offering savings on a wide range of
    merchandise, apparel and personal services.

    Privacy, Protection and Home Improvement
    These membership programs offer discounts on products and services that
    enhance and improve the member's sense of security and well being. Members
    have access to bundles of services that enable them to better manage their:
    privacy, including card registration, credit reporting, scoring and
    monitoring, and personal information monitoring services; protection,
    offering savings on security systems, 24-hour protection services, roadside
    assistance, financial, tax and retirement planning and extended warranty
    protection; home and household expenses, featuring discounts on home
    improvement, consumer electronics and entertainment and family activities.

    Specialty Markets and Custom Programs
    MemberWorks offers a full line of membership programs in Canada, as well as,
    Hispanic versions of certain membership programs. Membership materials and
    customer service are offered in English, Spanish and French.

    MemberWorks also partners with large clients to offer custom, private label
    or co-branded membership programs to meet the specific needs of a defined
    customer base.

In general, members subscribe for renewable one-year memberships in the
Company's programs. 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. A
membership kit, which includes a membership brochure and a membership card with
a membership identification number, is mailed to the consumer during the trial
period. The brochure outlines in detail the benefits offered and contains
toll-free numbers which may be called to access membership benefits and
information. In the event that a consumer elects not to participate in the
service, he or she can call a toll-free number during the trial period to cancel
the service without charge. Trial memberships are generally for a period of 30
days and there are no conditions with respect to the ability of the consumer to
terminate a trial membership. MemberWorks does not record any revenue with
respect to trial memberships.



                                       2
<PAGE>



If the membership is not canceled during the trial period, the consumer is
charged the annual or monthly membership fee, depending upon the billing method
selected. For annual members, in the event that the member does not cancel the
membership after the initial membership term, generally one year, he or she
generally receives a renewal notice in the mail in advance of each membership
year and is 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, either for a complete refund of the membership
fee for that period or a prorata refund based on the remaining portion of the
membership period depending upon the terms of the membership program. Monthly
members are billed each month after a free trial period and continue to be
billed each month until the member cancels.

MemberWorks markets its programs primarily through arrangements with companies
such as banks and other financial institutions, retailers, major oil companies,
direct response television companies, catalog companies, e-commerce companies
and other organizations with large numbers of individual account holders and
customers, who have an existing relationship with its consumers. Participating
marketing partners provide lists of consumers which MemberWorks inputs into its
database management system to model, analyze and identify likely members.
MemberWorks only collects and maintains customer data that is required to
administer its business activities, such as a customer's name, address and
billing information. MemberWorks pays participating marketing partners an annual
royalty for initial and renewal membership fees received from consumers provided
to MemberWorks by the client.

MemberWorks also offers its service programs through clients who have inbound
call centers. This type of marketing method which MemberWorks refers to as
MemberLinkSM, essentially turns the client call center into a profit center.
Under these arrangements, inbound callers to a client meeting certain criteria
are offered the Company's membership service programs by the client's service
representative or by a MemberWorks membership service representative through a
call transfer. MemberWorks pays the client either an annual royalty for initial
and renewal membership fees or a fee per marketing pitch or per sale. Generally,
MemberLinkSM arrangements serve as a more efficient and cost effective way to
acquire members than the Company's traditional marketing model.

MemberWorks coordinates the efforts of its sales and marketing group with those
of its client management group in order to anticipate clients' needs for new
product offerings. The Company's senior management works with both of these
groups to develop and refine new program concepts and then to introduce the new
programs. MemberWorks believes this method of product development has allowed it
to respond quickly and effectively to market demand for new programs.

MemberWorks possesses the in-house operational capabilities and expertise to
perform most aspects of its business with minimal reliance upon third party
outsourcing. For instance, MemberWorks generally creates most of its marketing,
creative and fulfillment materials. MemberWorks also maintains in-house call
center facilities in order to answer its members' phone calls. MemberWorks
believes this in-house approach enables the Company to provide better customer
service and market its products more efficiently.

MemberWorks believes that it was the first membership company to introduce
aggregated discount services in the areas of healthcare, sports, shopping,
financial and personal security. MemberWorks also believes that all of its
programs are innovative with respect to the variety and quality of particular
services, discounts and other features which those programs offer. By bundling
and reconfiguring various features of its standard programs, MemberWorks can
customize a program to the particular needs and demands of its clients.

In addition to marketing its programs directly to consumers either through lists
provided by credit card issuers and other businesses and organizations or
through MemberLinkSM, MemberWorks also delivers its membership service programs
through its wholesale programs. MemberWorks works with a wholesale client to
incorporate elements from one or more of its standard service programs and
designs a custom program for the client. The client will then provide the
membership in the customized format to its customers as a value-added feature or
resell the product. The client pays MemberWorks the membership fees for the
customers who receive the service program. Wholesale programs have substantially
lower acquisition cost, which result in higher profit margins for MemberWorks.
Accordingly, MemberWorks provides membership in the service program for fees
which are less than the Company's standard fees for the program.


                                       3
<PAGE>



MEMBER SERVICE
MemberWorks believes that providing high quality service to its members is
extremely important in order to encourage memberships and to strengthen the
affinity of those members for the client that offered the service program.
Currently, MemberWorks (including through its wholly-owned subsidiaries)
maintains four call centers located in Omaha, Nebraska; Houston, Texas; Chicago,
Illinois and Montreal, Canada with a total of almost 700 membership service
representatives. All new membership service representatives are required to
attend on-the-job training. Through its training programs, systems and software,
MemberWorks seeks to provide members with friendly, rapid and effective answers
to questions. MemberWorks 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 MemberWorks.

TECHNOLOGY
MemberWorks has invested substantially in new technology, including a
state-of-the-art fulfillment center, a sophisticated customer service CRM
platform, data warehousing and mining capabilities and various Internet
applications to allow it to effectively and efficiently service its members.
MemberWorks receives new member information from its marketing partners daily,
and that information is maintained on core infrastructure systems that drive
information consistently to call center, fulfillment, billing and financial
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 call center interactions.
MemberWorks receives confirmation of billing data from the Company's merchant
processors on a regular basis, permitting MemberWorks 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 receiving 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 respond to an offer and retain their membership.

FULFILLMENT
In most cases, the products and services offered to members through the
Company's programs are provided directly to members by independent benefit
providers/vendors. MemberWorks evaluates and engages only those vendors who can
cost-effectively deliver high quality products and services. Vendors generally
benefit by gaining significant volume demand with minimal associated marketing
expense. Accordingly, vendors gain access and marketing exposure to the
Company's membership base and, pursuant to contractual arrangements with
MemberWorks, generally quote a discounted price. MemberWorks generally does not
receive any material payments from these vendors for rendering services to the
Company's members and, in certain cases, MemberWorks pays its vendors a fee
based on the volume of members in the Company's program or based on other agreed
upon factors.

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

SALES AND MARKETING
MemberWorks solicits members for its programs primarily by direct marketing
methods, including telemarketing, which it outsources to third party
contractors, and MemberLinkSM inbound call marketing. MemberWorks also solicits
members through the use of direct mail which is mailed either at MemberWorks'
own expense or at its client's expense. Most of the Company's individual
memberships are also available on the Internet.

Under the Company's wholesale programs, MemberWorks 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
MemberWorks. In some cases, the client may provide wholesale memberships to its
customers free of charge and pay the periodic membership fee to MemberWorks for
each customer membership. In other cases, the client may charge a reduced fee to
its customer.


                                       4
<PAGE>


MemberWorks continues to pursue its international expansion through the growth
of its subsidiary located in Canada, MemberWorks Canada. MemberWorks Canada
provides retail membership programs similar to those offered in the U.S. as well
as credit card enhancement services to Canadian financial institutions through
wholesale arrangements. The Company's revenues from international operations
represented 3% of total revenues for the fiscal year ended June 30, 2002.

The Company's sales strategy is to establish and maintain long-term
relationships with its clients. MemberWorks employs a consultative sales process
to understand and define client needs and to determine how those needs can be
addressed by the membership service programs offered by MemberWorks. MemberWorks
seeks to build upon its existing customer relationships by integrating and
cross-selling its different membership service programs.

DISTRIBUTION
MemberWorks arranges with its client organizations to market membership programs
to such clients' individual account holders and customers. Clients generally
receive royalties on initial and renewal memberships. The Company's contracts
with these clients typically grant MemberWorks the right to continue providing
membership services directly to such clients' individual account holders even if
the client terminates the contract, provided that the client continues to
receive its royalties.

Substantially all of the information necessary for the Company's marketing
efforts are 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 is
generally dependent upon first obtaining client approval.

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, MemberWorks generally has the right to continue its
relationship with the client's customers that have become program members for a
specified period to substantially the same extent as prior to the termination,
but may not resolicit those members upon such member's cancellation or
non-renewal of the member's membership.

MemberWorks distributes its programs through direct marketing efforts. The
direct marketing techniques utilized include outbound telemarketing, inbound
marketing, direct mail and internet marketing. All telemarketing is outsourced
to third party contractors. In addition, MemberWorks distributes its products
through wholesale arrangements where MemberWorks is not responsible for
marketing to the customer.

Membership programs sponsored by the Company's largest client, Citibank,
accounted for 16% of revenue for the fiscal year ended June 30, 2002.

RESTRUCTURING
In October 2001, 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 was designed
to improve organizational effectiveness and profitability and included a
workforce reduction, the closing of the Company's United Kingdom operations and
the downsizing of the operational infrastructure throughout the Company.

GOVERNMENT  REGULATION
MemberWorks markets its membership programs through various distribution
channels, including outbound telemarketing, inbound marketing, direct mail and
internet marketing. These channels are regulated on both the state and federal
levels and the Company believes that these marketing methods will increasingly
be subject to such regulation, particularly in the area of consumer privacy.
Such regulation may limit our 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 as well
as general public scrutiny in the past several years. 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,
promulgated thereunder prohibit deceptive, unfair or abusive practices in
telemarketing sales. Both the


                                       5
<PAGE>



FTC  and  state  attorneys  general  have  authority  to  prevent  telemarketing
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  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 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.  The risk of  noncompliance by the Company 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  materially  adversely  affect  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,  and the
membership  programs industry is susceptible to peremptory  charges by the media
of regulatory noncompliance and unfair dealing.

The Company currently maintains rigorous security and quality controls 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 required to administer its business activities,
such as a customer's name, address and 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
customer information that is obtained or derived in its marketing efforts nor
purchases consumer information from financial institutions.

COMPETITION
MemberWorks believes that the principal competitive factors in the membership
services industry include the ability to identify, develop and offer innovative
service programs, the quality and breadth of service programs offered, price and
marketing expertise. The Company's competitors offer membership programs which
provide services similar to, or which directly compete with, those provided by
MemberWorks. Some of these competitors have substantially larger customer bases
and greater financial and other resources than the Company's. To date,
MemberWorks 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 MemberWorks to more directly compete
with MemberWorks; provide programs comparable or superior to those provided by
MemberWorks at lower membership prices; adapt more quickly than MemberWorks 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 gross margins and 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 MemberWorks
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.

EMPLOYEES
As of June 30, 2002, MemberWorks employed 1,075 persons on a full-time basis and
141 on a part-time basis. None of the Company's employees are represented by a
labor union. MemberWorks believes that its employee relations are good.

Item 2.  Properties

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

Location                    Square Footage          Year of Lease Expiration
--------                    --------------          ------------------------
Omaha, NE                       93,123                  2009 through 2015
Stamford, CT                    98,947                  2002 through 2006
Montreal, Canada                48,193                  2003 through 2011
Houston, TX                     41,591                        2006
Atlanta, GA                     16,122                        2005
Chicago, IL                     11,676                        2005
White Plains, NY                 4,193                        2004


                                       6
<PAGE>


The Stamford, Connecticut office serves as the Company's corporate headquarters.
All other locations serve as the operational offices for MemberWorks.


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/enforcement 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 complaint includes a claim that the
suit should be certified as a class action and the plaintiff has filed a motion
for class certification to which all of the defendants have filed opposing
papers regarding the same. The Court has announced that it will deny the motion
for national class certification, but it has certified a class of Michigan
residents. No order has been issued. The Company believes that the claims made
against Coverdell are unfounded and Coverdell and the Company will vigorously
defend their interests against this suit.

In March 2002, the Company and other plaintiffs filed suit against
Homestore.com, Inc. in United States District Court for the District of
Connecticut. The action has been transferred to the United States District Court
for the Central District of California. The suit, seeking injunctive and other
relief, alleges securities fraud, negligent misrepresentation, breach of
contract and other grounds in connection with the Company's sale of its interest
in iPlace, Inc. In response to plaintiffs' preliminary motions, the court
ordered Homestore.com, Inc. to place $58.0 million in a constructive trust
pending resolution of the lawsuit or further order of the court. In August 2002,
the Company announced that it, along with certain of the other former
shareholders of iPlace, Inc., had settled their lawsuit against Homestore.com,
Inc. The total settlement amount in favor of the plaintiffs is $23.0 million of
which the Company will receive approximately $19.2 million.


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, 2002.



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<PAGE>


Executive Officers of the Registrant
------------------------------------

The executive officers of the registrant of MemberWorks and their respective
ages as of July 31, 2002 are as follows:

Name                      Age    Position
----                      ---    --------

Gary A. Johnson           47     President and Chief Executive Officer, Director
Vincent DiBenedetto       45     Executive Vice President, Sales and Client
                                 Services
James B. Duffy            48     Executive Vice President and Chief Financial
                                 Officer
Walter Kazmierczak        47     Executive Vice President, Marketing Services
William Olson             44     Executive Vice President, Sales and Client
                                 Services
David Schachne            41     Executive Vice President, Business Development
Dennis P. Walker          57     Executive Vice President and Director

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

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

JAMES B. DUFFY joined MemberWorks in 1996 and currently serves as Executive
Vice President and Chief Financial Officer.

WALTER KAZMIERCZAK joined MemberWorks in May 2001 and currently serves as
Executive Vice President, Marketing Services. Prior to joining MemberWorks, Mr.
Kazmierczak was Senior Vice President and General Manager of Columbia House,
Chief Internet Officer of Crown Book Corporation and Vice President and General
Manager of Macmillan Publishing.

WILLIAM OLSON joined MemberWorks in March 2001 and currently serves as Executive
Vice President, Sales and Client Services. Prior to joining MemberWorks, Mr.
Olson served in various senior positions such as President & Chief Executive
Officer of Dunlop/Maxfli Sports Corporation, President & Chief Executive Officer
of Gold Coast Beverage Distributors and President & Chief Executive Officer of
Guinness Brewing North America Corporation.

DAVID SCHACHNE joined MemberWorks in 1990 and currently serves as Executive Vice
President, Business Development. He has held various senior management positions
at MemberWorks in Marketing and Business Development.

DENNIS P. WALKER, a co-founder of MemberWorks, has served as Executive Vice
President and a director of MemberWorks since its inception.

                                       8
<PAGE>


                                     Part II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
        ------------------------------------------------------------------------



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.


                                                        High          Low
        Fiscal Year Ended June 30, 2002:                ----          ---
         First Quarter                                 $25.00       $17.90
         Second Quarter                                 21.00         7.98
         Third Quarter                                  18.93        14.26
         Fourth Quarter                                 18.53        16.27



                                                         High         Low
                                                         ----         ---
        Fiscal Year Ended June 30, 2001:
          First Quarter                                 $37.06       $25.56
          Second Quarter                                 36.19        19.38
          Third Quarter                                  27.94        18.69
          Fourth Quarter                                 26.00        20.31


As of August 5, 2002, there were 40,000,000 shares of the Company's Common Stock
authorized of which 13,351,830 shares were outstanding, held by approximately
1,959 stockholders of record. MemberWorks 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 MemberWorks is a
party and other factors considered relevant by the Board of Directors.



                                        9

<PAGE>


Item 6.  Selected Financial Data
         -----------------------

The selected consolidated statements of operations data for each of the years
ended June 30, 2002 through 1998 and the selected consolidated balance sheet
data as of June 30, 2002 through 1998 set forth below are derived from the
consolidated financial statements of MemberWorks which have been audited by
PricewaterhouseCoopers LLP. The selected consolidated financial information of
MemberWorks is qualified by reference to and should be read in conjunction with
Item 8, "Consolidated 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,
                                                            -------------------------------------------------------------
                                                                2002        2001         2000        1999       1998
                                                                ----        ----         ----        ----       ----
                                                                       (In thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS       DATA:
<S>                                                          <C>         <C>          <C>        <C>         <C>
Revenues                                                     $  427,602  $  475,726   $  330,107 $  218,086  $  120,834
Total expenses                                                  415,713     509,050      331,547    212,292     119,449
                                                              ----------- ------------ ----------------------------------
Operating income (loss)                                          11,889     (33,324)      (1,440)     5,794       1,385
Gain on sale of subsidiary                                       65,608           -            -          -           -
Net (loss) gain on investment                                   (33,628)     (2,172)       8,854          -           -
Other (expense) income, net                                        (401)       (450)         873      2,154       1,700
                                                              ----------- ------------ ----------------------------------
Income (loss) before equity in affiliate and minority            43,468     (35,946)       8,287      7,948       3,085
interest
Equity in income (loss) of affiliate                                  -          83           19     (1,912)       (638)
Minority interest                                                   450       9,106        2,027          -           -
                                                              ----------- ------------ ----------------------------------
Net income (loss) before cumulative effect of accounting
   change                                                        43,918     (26,757)      10,333      6,036       2,447
Cumulative effect of accounting change                           (5,907)    (25,730)           -     (3,367)          -
                                                              ----------- ------------ ----------------------------------
Net income (loss)                                            $   38,011  $  (52,487)  $   10,333 $    2,669  $    2,447
                                                              =========== ============ ==================================

Basic earnings (loss) per share:
   Income (loss) before cumulative effect of accounting
     change                                                  $     3.03  $    (1.75)  $     0.68 $     0.39  $     0.16
   Cumulative effect of accounting change                         (0.41)      (1.69)           -      (0.22)          -
                                                              ----------- ------------ ----------------------------------
   Basic earnings (loss) per share                           $     2.63  $    (3.44)  $     0.68 $     0.17  $     0.16
                                                              =========== ============ ==================================

Diluted earnings (loss) per share:
   Income (loss) before cumulative effect of accounting
     change                                                  $     2.95  $    (1.75)  $     0.61 $     0.35  $     0.15
   Cumulative effect of accounting change                         (0.40)      (1.69)           -      (0.20)          -
                                                              ----------- ------------ ----------------------------------
   Diluted earnings (loss) per share                         $     2.55  $    (3.44)  $     0.61 $     0.16  $     0.15
                                                              =========== ============ ==================================

Weighted average common shares outstanding
Basic                                                            14,477      15,248       15,162     15,361      14,837
                                                              =========== ============ ==================================
Diluted                                                          14,909      15,248       16,993     17,124      16,381
                                                              =========== ============ ==================================

                                                                                      June 30,
                                                            -------------------------------------------------------------
                                                                2002        2001         2000        1999       1998
                                                                ----        ----         ----        ----       ----
                                                                                   (In thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents                                    $   51,185  $   22,736   $   30,169 $   50,939  $   35,933
Total assets                                                    280,817     348,461      316,772    209,827     133,291
Long-term liabilities                                             3,627       3,057        1,083          6          69
Shareholders' (deficit) equity                                  (20,630)    (25,965)      19,021     30,287      28,442
Cash flow provided by operating activities                       21,706      13,013       44,910     50,573       8,930


</TABLE>


                                       10
<PAGE>



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

OVERVIEW

MemberWorks addresses the needs of organizations seeking to leverage the
expertise of an outside provider in offering membership service programs.
Membership service programs offer selected products and services from a variety
of vendors for a monthly or annual fee. Membership service programs intend to
enhance existing relationships between businesses and consumers. MemberWorks
derives its revenues principally from annually renewable membership fees. The
Company generally receives full payment of annual fees at or near the beginning
of the membership period, but recognizes revenue as the member's refund
privilege expires. Similarly, the costs associated with soliciting each new
member, as well as the cost of royalties, are recognized as the related revenue
is recognized. 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.

CRITICAL ACCOUNTING POLICIES

On December 12, 2001, the Securities and Exchange Commission issued Financial
Reporting Release ("FRR") No. 60, "Cautionary Advice Regarding Disclosure About
Critical Accounting Policies" ("FRR 60"), suggesting that companies provide
additional disclosure on those accounting policies considered most critical to
their organization. Critical accounting policies are those policies that are
important to the Company's financial condition and results and involve
subjective or complex judgments on the part of management, often as a result of
the need to make estimates. The following areas all require the use of judgments
and estimates: membership cancellation rates, deferred marketing costs,
intangible assets and income taxes. Estimates in each of these areas are based
on historical experience and various assumptions that MemberWorks believes are
appropriate. Actual results may differ from these estimates. MemberWorks
believes the following represent the critical accounting policies of the Company
as contemplated by FRR 60. For a summary of all of the Company's significant
accounting policies, see Note 2 of the Notes to the consolidated financial
statements located in this 2002 Annual Report on Form 10-K.

Revenue recognition
Membership fees are billed through clients of the Company primarily through
credit cards. During an initial annual membership term or renewal term, a member
may cancel his or her membership in the program, either for a complete refund of
the membership fee for that period or a prorata refund based on the remaining
portion of the membership period depending upon the terms of the membership
program. Deferred membership fees are recorded, net of estimated cancellations,
after the trial period has expired, and are amortized as revenues from
membership fees upon the expiration of membership refund privileges. An
allowance for cancellations is established based on management's estimates and
is updated regularly. In determining the estimate of allowance for
cancellations, management analyzes historical cancellation experience, current
economic trends and changes in customer demand for the Company's products.
Actual membership cancellations are charged against the allowance for
cancellations on a current basis. If actual cancellations differ from the
estimate, the results of operations would be impacted. Accrued liabilities set
forth in the accompanying consolidated balance sheets as of June 30, 2002 and
2001 include an allowance for membership cancellations of $23.8 million and
$30.0 million, respectively.

Membership solicitation and other deferred costs
Membership solicitation costs include marketing and direct mail costs related
directly to membership solicitation (i.e., direct response advertising costs).
In accordance with the American Institute of Certified Public Accountants
Statement of Position 93-7, "Reporting on Advertising Costs," direct response
advertising costs are deferred and charged to operations as revenues from
membership fees are recognized. Other deferred costs consist of royalties paid
to clients, which relate to the same revenue streams as the direct response
advertising costs and are also charged to income over the membership period.
Membership solicitation costs incurred to obtain a new member generally are less
than the estimated total membership fees. However, if membership solicitation
costs were to exceed total estimated membership fees, an adjustment would be
made to the extent of any impairment.

Goodwill and other intangibles
In connection with the  implementation of Financial  Accounting  Standards Board
("FASB") Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
MemberWorks  reviewed  the carrying  value of its goodwill and other  intangible
assets by comparing  such amounts to their fair values.  The Company  determined
that at July 1, 2001, there was an impairment of goodwill of $5.9 million at one


                                       11
<PAGE>


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 that  reporting  unit (see Note 3 to the  consolidated  financial
statements  contained in this 2002 Annual Report on Form 10-K).  This amount was
recorded  as a  cumulative  effect  of  accounting  change in the  statement  of
operations  in the fiscal  quarter  ended  September  30, 2001.  MemberWorks  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  will  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, MemberWorks would then be required to record
a corresponding charge, which would impact earnings.

Income Taxes
Income taxes are determined in accordance with FASB Statement No. 109,
"Accounting for Income Taxes" ("SFAS 109"), which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred liabilities and assets are determined
based on the difference between the financial statement basis and the tax basis
of liabilities and assets using enacted tax rates in effect for the year in
which the differences are expected to reverse. SFAS 109 also provides for the
recognition of deferred tax assets if it is more likely than not that the assets
will be realized in future years. A valuation allowance has been established for
deferred tax assets for which realization may not be likely. As of June 30, 2002
and 2001, the deferred tax asset of $6.6 million and $22.7 million,
respectively, has been fully reserved. In assessing the valuation allowance,
MemberWorks has considered future taxable income and ongoing tax planning
strategies.


FISCAL 2002 COMPARED TO FISCAL 2001

REVENUES. Revenues decreased 10% to $427.6 million in 2002 from $475.7 million
in 2001 primarily due to the effect of the sale of iPlace, Inc. and the
controlled slow down in new member marketing implemented in the beginning of the
fiscal year. This controlled slow down was a reaction to decreased consumer
response rates. Excluding iPlace, Inc. revenues of $9.4 million and $42.4
million in 2002 and 2001, respectively, revenues would have decreased 3%.
Revenues before deferral, which are revenues before the application of Staff
Accounting Bulletin 101, "Revenue Recognition in the Financial Statements" ("SAB
101"), decreased 15% to $410.5 million in 2002 from $485.0 million in 2001 due
to the sale of iPlace, Inc., the controlled slow down in new member marketing
implemented in the beginning of the fiscal year, and the closing of the United
Kingdom operations. Excluding iPlace, Inc. revenues before deferral of $11.0
million and $53.7 million in 2002 and 2001, respectively, revenues before
deferral would have decreased 7%. The Company's membership base decreased to
approximately 6.6 million members at June 30, 2002 from 7.9 million members at
June 30, 2001 due to the controlled slow down in new member marketing
implemented in the beginning of the fiscal year, the sale of iPlace, Inc. and
the closing of the United Kingdom operations. As a percentage of total revenues,
annual renewal revenues were 48% in 2002 and 41% in 2001. As a percentage of
total revenues before deferral, annual renewal revenues were 51% in 2002 and 44%
in 2001. The increase in renewal revenues as a percentage of total revenues is
due to the controlled slow down in new member marketing implemented in the
beginning of the fiscal year. Revenue from members who are charged on a monthly
payment program increased to $41.3 million in 2002 from $27.6 million in 2001.

OPERATING EXPENSES. Operating expenses consist of member service call center
costs, membership benefit costs and membership kit costs. Operating expenses
decreased 13% to $78.7 million in 2002 from $90.4 million in 2001 primarily due
to the sale of iPlace, Inc., the closing of the United Kingdom operations and
lower revenues during the year. As a percentage of revenues before deferral,
operating expenses increased to 19.2% in 2002 from 18.6% in 2001 primarily due
to the effect of lower revenues reported in 2002.

MARKETING  EXPENSES.  Marketing  expenses consist of direct  solicitation  costs
incurred  to  obtain  new  members  and  royalties  paid to  clients,  which are
generally  amortized  in the  same  manner  as the  related  revenue.  Marketing
expenses  decreased  18% to $249.0  million in 2002 from $305.0  million in 2001
primarily due to the effect of the controlled slow down in new member  marketing
implemented  in the  beginning  of the fiscal year and the effect of the sale of
iPlace,  Inc. As a percent of revenue,  marketing expenses decreased to 58.2% in
2002 from  64.1% in 2001  primarily  due to the  increase  in the mix of renewal
revenue as a percent of total revenue.  The lower level of new member  marketing
resulted in an increase in the ratio of renewal member revenues to total
revenues. Marketing expenses related to renewal revenues are typically


                                       12
<PAGE>


significantly  lower than  expenses  related to new  member  revenues.  Expenses
related to new member marketing, as a percent of new member revenues,  increased
in 2002 compared to 2001 primarily due to a decrease in consumer response rates.
Marketing  expenses  before  deferral,  which are marketing  expenses before the
application  of SAB 101,  decreased  19% to $233.9  million in 2002 from  $287.9
million in 2001 and,  as a percent of revenues  before  deferral,  decreased  to
57.0% in 2002 from 59.4% in 2001.  The  decrease in  marketing  expenses  before
deferral was due to a controlled slow down in new member  marketing  implemented
in the beginning of fiscal 2002, the effect of the sale of iPlace,  Inc. and the
closing of the United  Kingdom  operations.  The decrease in marketing  expenses
before  deferral as a percent of revenue before  deferral was due to an increase
in the mix of renewal revenues.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
primarily include personnel-related costs, occupancy costs and other overhead
costs. General and administrative expenses decreased 21% to $79.2 million in
2002 from $99.7 million in 2001, and as a percentage of revenues before
deferral, decreased to 19.3% in 2002 from 20.6% in 2001. These decreases were
primarily due to the sale of iPlace, Inc. and the effect of cost saving
initiatives related to the restructuring, as described below.

RESTRUCTURING CHARGES. In October 2001, the Company implemented certain 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 of approximately 190 employees, the closing of
the Company's United Kingdom operations and the downsizing of the operational
infrastructure throughout the Company. As a result of this restructuring
program, the Company recorded restructuring charges of $6.9 million during the
second quarter ended December 31, 2001.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
decreased to $1.9 million in 2002 from $10.9 million in 2001 due to the adoption
of SFAS 142, which no longer requires the amortization of indefinite lived
intangible assets, and the sale of iPlace, Inc. Excluding the amortization of
indefinite lived intangible assets in 2001, amortization of goodwill and other
intangibles would have been $3.1 million.

GAIN ON SALE OF SUBSIDIARY. In August 2001, the Company sold its investment
in and advances to iPlace, Inc. in exchange for $50.1 million in cash, including
$3.7  million  held in escrow,  and 1.6 million  shares of  Homestore.com,  Inc.
common stock, including 0.5 million shares held in escrow. The fair value of the
Homestore.com,  Inc. common stock as of the date of sale was $34.5 million.  The
Homestore.com,   Inc.   common  stock   received  is   unregistered.   Once  the
Homestore.com, Inc. stock is registered, MemberWorks may only sell 1/12th of the
shares in any calendar  month  pursuant to the merger agreement.  In connection
with this sale, the Company  recognized a gain of $65.6 million before the write
down of Homestore.com, Inc. stock described below.

LOSS ON SALE OF INVESTMENT, NET. The Company's investment in Homestore.com,
Inc.  declined in value during fiscal 2002 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 market value and recognized a loss
of $33.6  million  during  fiscal  2002.  As of June  30,  2002,  the  Company's
investment in Homestore.com, Inc. is valued at $0.9 million.

OTHER EXPENSE, NET. Other expense, net is primarily composed of interest income
from cash and cash equivalents and interest expense on the Company's borrowings
under its line of credit and notes payable. Other expense decreased to $0.4
million in 2002 from $0.5 million in 2001. The Company had no borrowings
outstanding under its line of credit as of June 30, 2002.

PROVISION FOR INCOME TAXES. MemberWorks was not required to record a provision
for income taxes for the year ended June 30, 2002 due to the ability to utilize
net operating losses to offset taxable income. MemberWorks was not required to
record a provision for income taxes for the year ended June 30, 2001 due to tax
losses realized. As of June 30, 2002, MemberWorks had accumulated federal net
operating loss carry forwards of $68.7 million.

FISCAL 2001 COMPARED TO FISCAL 2000

REVENUES. Revenues increased 44% to $475.7 million in 2001 from $330.1 million
in 2000 due to an increase in the Company's membership base and an increase in
the weighted average program fee. Excluding the effects of SAB 101, revenues
would have increased 40% to $462.3 million in 2001. Revenues before deferral
increased 26% to $485.0 million in 2001 from $383.6 million in 2000 due to an
increase in the Company's membership base and an increase in the weighted


                                       13
<PAGE>



average program fee. The Company's membership base increased to 7.9 million
members at June 30, 2001 from 6.9 million members at June 30, 2000. The increase
in the Company's membership base was due to increased demand for the Company's
existing programs, as well as the introduction of new programs in 2001 and the
Company's expansion into international markets. The increase in the weighted
average program fee was due to an increase in program pricing and introduction
of new programs with higher fees. As a percentage of total revenues, annual
renewal revenues were 41% in 2001 and 38% in 2000. As a percentage of total
revenues before deferral, annual renewal revenues were 44% in 2001 and 38% in
2000.

OPERATING EXPENSES. Operating expenses increased 46% to $90.4 million in 2001
from $62.0 million in 2000 due to the servicing requirements of a larger
membership base. As a percentage of revenues before deferral, operating expenses
increased to 18.6% in 2001 from 16.2% in 2000 primarily due to an increase in
the mix of revenue generated from our online business, which has a higher
operating expense ratio than our other businesses.

MARKETING EXPENSES. Marketing expenses increased 56% to $305.0 million in 2001
from $195.3 million in 2000 due to increased expenses required to grow the
membership base. As a percentage of revenues, marketing expenses increased to
64.1% in 2001 from 59.1% in 2000. Excluding the effect of SAB 101, marketing
expenses would have been 62.3% of revenues in 2001. Marketing expenses, as a
percentage of revenues, increased primarily due to a shift in the marketing mix
and higher cancellation rates. Marketing expenses before deferral increased 17%
to $287.9 million in 2001 from $245.7 million in 2000. As a percent of revenues
before deferral, marketing expenses decreased to 59.4% in 2001 from 64.1% in
2000.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 48% to $99.7 million in 2001 from $67.6 million in 2000 due to higher
staff related expenses and occupancy costs required to support the Company's
growth. As a percentage of revenues before deferral, general and administrative
expenses increased to 20.6% in 2001 from 17.6% in 2000 primarily due to an
increase in the mix of revenue generated from our online business, which has a
higher general and administrative expense ratio than our other businesses.

NON-RECURRING CHARGE. In April 2001, the Company entered into a voluntary
agreement with the State of California and Ventura and Orange Counties to
implement certain marketing practices in the State of California. Pursuant to
the agreement, the Company paid costs of investigation and certain penalties to
be split between the state and the counties and established a reserve to cover
specific future costs related to the agreement. As a result of the agreement,
the Company recorded a non-recurring charge of $3.0 million.

AMORTIZATION  OF GOODWILL AND OTHER  INTANGIBLES.  Intangible  amortization
increased  to  $10.9  million  in 2001  from  $6.7  million  in 2000  due to the
acquisition  of  Discount  Development  Services,  L.L.C.  and  its  subsidiary,
Uni-Care,  Inc.,  (together  "DDS")  during fiscal 2001 and the effect of a full
year of amortization related to the Company's  acquisition of eNeighborhoods and
Qspace, Inc. in February and April of 2000, respectively.

GAIN ON SALE OF INVESTMENT, NET. During fiscal 2001, the Company wrote down its
investment in 24/7 Media, Inc. ("24/7') by $1.8 million due to a decline in
value which was determined to be other than temporary. In addition, during
fiscal 2001, MemberWorks sold its remaining shares of 24/7 stock, received
proceeds of $4.1 million and recognized a loss of $0.4 million. The financial
impact of these transactions on fiscal 2001 is a net loss of $2.2 million.

OTHER EXPENSE/INCOME, NET. Other expense/income, net is primarily composed of
interest income from cash and cash equivalents and interest expense on the
Company's borrowings under its line of credit. Other expense in 2001 was $0.5
million compared to other income of $0.9 million in 2000. Other expense in 2001
increased due to the Company's borrowings under its line of credit during the
period.

PROVISION FOR INCOME TAXES. MemberWorks was not required to record a provision
for income taxes for the years ended June 30, 2001 and 2000 due to tax losses
realized. As of June 30, 2001, MemberWorks had accumulated federal net operating
loss carry forwards of $102.4 million.


LIQUIDITY AND CAPITAL RESOURCES
Operating cash flow before changes in assets and liabilities was $26.9 million,
$16.0 million and $16.0 million for the years ended June 30, 2002, 2001 and
2000, respectively. The increase in operating cash flow before changes in assets

                                       14
<PAGE>


and liabilities in 2002 was primarily due to decreased losses incurred related
to iPlace, Inc. and the United Kingdom operations, as well as the cost saving
initiatives related to the restructuring plan.

Revenues before deferral were $410.5 million, $485.0 million and $383.6 million
for the years ended June 30, 2002, 2001 and 2000, respectively. The Company's
membership base was 6.6 million, 7.9 million and 6.9 million members at June 30,
2002, 2001 and 2000, respectively. The decrease in the membership base in 2002
was due to a controlled slow down in new member marketing implemented in the
beginning of the 2002 fiscal year, the sale of iPlace, Inc. and the closing of
the United Kingdom operations.

Marketing expenses before deferral were $233.9 million, $287.9 million and
$245.7 million in 2002, 2001 and 2000, respectively. As a percent of revenues
before deferral, marketing expenses before deferral were 57.0% in 2002, 59.4% in
2001 and 64.1% in 2000. The decrease in marketing expenses before deferral was
due to a controlled slow down in new member marketing implemented in the
beginning of fiscal 2002, the effect of the sale of iPlace, Inc. and the closing
of the United Kingdom operations. The decrease in marketing expenses before
deferral as a percent of revenue before deferral was due to an increase in the
mix of renewal revenues. Marketing expenses related to renewal revenues are
typically significantly lower than expenses related to new member revenues.
Expenses related to new member marketing, as a percent of new member revenues,
increased in 2002 compared to 2001 primarily due to a decrease in consumer
response rates.

Changes in assets and liabilities decreased cash from operating activities by
$5.1 million in 2002, $3.0 million in 2001 and increased cash by $29.0 million
in 2000. The negative effect of changes in assets and liabilities in 2002 was
primarily due to the controlled slow down in new member marketing implemented in
the beginning of fiscal 2002, as well as the effect of an increase in the
members enrolled in a monthly versus annual payment plan. In total, cash
provided by operations was $21.7 million, $13.0 million and $44.9 million in
2002, 2001 and 2000, respectively.

Net cash provided by investing activities was $40.2 million in 2002, while net
cash used in investing activities was $18.2 million in 2001 and $34.2 million in
2000. Net cash provided by investing activities in 2002 reflected the receipt of
$46.0 million in net proceeds from the sale of iPlace, Inc. In fiscal 2001,
MemberWorks paid $8.2 million in cash to acquire the remaining 81% of DDS. In
fiscal 2000, MemberWorks acquired ConsumerInfo.com for $15.9 million in cash. In
addition, during fiscal 2001 and 2000, MemberWorks received $4.1 million and
$5.2 million, respectively, in proceeds from the sale of its investment in 24/7.
Capital expenditures were $5.8 million, $15.1 million and $20.3 million in 2002,
2001 and 2000, respectively.

Net cash used in financing activities was $33.5 million, $2.1 million and $31.5
million in 2002, 2001 and 2000, respectively. The increase in cash used in
financing activities was due to an increase in the number of treasury shares
acquired under the Company's stock repurchase program. The Company purchased 2.2
million shares for $34.3 million during the year ended June 30, 2002 compared to
0.3 million shares for $8.9 million during the year ended June 30, 2001 and 1.1
million shares purchased for $36.3 million during the year ended June 30, 2000.
The Company utilizes cash from operations to repurchase shares, as the Company
believes this enhances shareholder value. As of June 30, 2002, the Company had
0.5 million shares authorized for repurchase under its buyback program. In July
and August of 2002, the Board of Directors authorized an additional 1 million
and 1.5 million shares, respectively, to be purchased under the buyback program.
Subsequent to these additional authorizations, the Company had 3.0 million
shares available for repurchase under its buyback program.

As of June 30, 2002, the Company had cash and cash equivalents of $51.2 million.
In addition, the Company has an $18.0 million bank credit facility which bears
interest at the higher of the base commercial lending rate for the bank or the
Federal Funds Rate plus 0.5% per annum. As of June 30, 2002, the effective
interest rate for borrowings was 5.25%. There were no borrowings outstanding
under this bank credit facility as of June 30, 2002. The bank credit facility
has certain financial covenants, including a maximum debt coverage ratio, a
minimum fixed charge ratio, potential restrictions on additional borrowings and
potential restrictions on additional stock repurchases. The Company believes
that existing cash balances, together with its available bank credit facility,
will be sufficient to meet its funding requirements for at least the next twelve
months.

In August 2001, the Company received 1.6 million shares of Homestore.com, Inc.
common stock at a market value of $34.5 million, of which 0.4 million shares are
currently held in escrow to secure the Company's indemnification obligations
under the iPlace, Inc. merger agreement. The Homestore.com, Inc. common stock

                                       15
<PAGE>

received  is  unregistered  and  it is  unknown  when  the  stock  will  be
registered. MemberWorks may only sell 1/12th of the shares in any calendar month
pursuant  to the merger  agreement.  During the year  ended June 30,  2002,  the
Company  wrote down its  investment  in  Homestore.com,  Inc. to its fair market
value and  recognized a loss of $33.6  million.  The  financial  impact of these
transactions was a net gain of $32.0 million.

The Company did not have any material commitments for capital expenditures as of
June 30, 2002. The Company intends to utilize cash generated from operations to
fulfill any capital expenditure requirements during 2003.

COMMITMENTS

On January 22, 2002, the Securities and Exchange Commission issued FRR No. 61,
"Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations", suggesting that companies provide
additional disclosures related to liquidity and capital resources, including
off-balance sheet arrangements, certain trading activities that include
non-exchange traded contracts accounted for at fair value and the effect of
transactions with related and certain other parties. 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 2002
Annual Report on Form 10-K. The Company does not have off-balance sheet
arrangements, non-exchange traded contracts or material related party
transactions.

Future minimum payments of contractual obligations as of June 30, 2002 are as
follows (amounts in thousands):
<TABLE>
<CAPTION>

                                                                  Payments Due by Period
                                      -------------------------------------------------------------------------------
                                    Less than
                                          Total          1 year         1-3 years       4-5 years     After 5 years
                                      --------------  -------------   --------------  --------------  ---------------
<S>                                         <C>             <C>             <C>              <C>             <C>
Operating leases                            30,882          6,893           11,607           6,532           5,850
Capital leases                                  68             60                8               -               -
Notes payable                                  760            760                -               -               -
Other obligations                              927            416              511               -               -
                                      --------------  -------------   --------------  --------------  ---------------
Total payments due                          32,637          8,129           12,126           6,532           5,850
                                      ==============  =============   ==============  ==============  ===============
</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 8 and 9 of the condensed consolidated financial
statements contained in this 2002 Annual Report filed on Form 10-K.

DIVESTITURES

In August 2001,  the Company sold its investment in and advances to iPlace,
Inc. to  Homestore.com,  Inc. in exchange for $50.1  million in cash,  including
$3.7  million  held in escrow,  and 1.6 million  shares of  Homestore.com,  Inc.
common stock, including 0.5 million shares held in escrow. The fair value of the
Homestore.com,  Inc. common stock as of the date of sale was $34.5 million.  The
Homestore.com,   Inc.   common  stock   received  is   unregistered.   Once  the
Homestore.com, Inc. stock is registered, MemberWorks may only sell 1/12th of the
shares in any  calendar  month.  In  connection  with  this  sale,  the  Company
recognized a gain of $65.6  million.  During the year ended June 30,  2002,  the
Company  wrote down its  investment  in  Homestore.com,  Inc. to its fair market
value and  recognized a loss of $33.6  million.  The  financial  impact of these
transactions was a net gain of $32.0 million.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001,  the FASB issued SFAS 142,  which was  effective  for fiscal years
beginning  after  December 15, 2001.  Early  adoption was permitted for entities
with fiscal  years  beginning  after  March 15,  2002,  provided  that the first
interim  financial  statements  have not been  previously  issued.  The  Company
adopted SFAS 142  effective  July 1, 2001.  SFAS 142  addresses  how  intangible
assets that are acquired  individually or with a group of other assets should be
accounted for in the financial  statements upon their acquisition and after they
have been initially  recognized in the financial  statements.  SFAS 142 requires
that goodwill and  intangible  assets that have  indefinite  useful lives not be
amortized but rather be tested at least annually for impairment,  and intangible
assets that have finite useful lives be amortized over their useful lives.


                                       16
<PAGE>



With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
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 $5.9
million 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 the fiscal
quarter ended September 30, 2001.

In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which is effective for fiscal years
beginning after June 15, 2002. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. MemberWorks does not believe
that the adoption of SFAS 143 will have a material impact on the Company's
financial statements.

In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which is effective
for fiscal years beginning after December 15, 2001. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of." MemberWorks does not believe that the adoption of
SFAS 144 will have a material impact on the Company's financial statements.

In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"), which is effective for fiscal years beginning after
May 15, 2002. SFAS 145 addresses the financial accounting and reporting for a
number of areas, including gains and losses derived from the extinguishment of
debt and the treatment of sale-leaseback transactions. MemberWorks does not
believe that the adoption of SFAS 145 will have a material impact on the
Company's financial statements.

In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which is effective
for exit or disposal activities that are initiated after December 31, 2002. SFAS
146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs in a Restructuring)." MemberWorks
does not believe that the adoption of SFAS 146 will have a material impact on
the Company's financial statements.

FORWARD-LOOKING STATEMENTS

This 2002 Annual Report filed on Form 10-K contains forward-looking statements
that are based on current expectations, estimates, forecasts and projections
about the industry in which MemberWorks operates and the Company's management's
beliefs and assumptions. Forward-looking statements include all 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:



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

-    Changes in the marketing techniques of credit card issuers;

-    Increases is the level of commission rates and other compensation  required
     by marketing partners to actively market with MemberWorks;

-    Unanticipated  cancellation or termination of marketing  agreements and the
     extent  to  which  MemberWorks  can  continue  successful  development  and
     marketing of new products and services;


                                       17
<PAGE>


-    Higher than expected membership cancellations;

-    Potential requirements by business partners such as the Company's payment
     processors;

-    Lower than expected membership renewal rates;

-    Unanticipated changes in or termination of the Company's ability to process
     membership fees through third parties, including clients, payment
     processors and bank card associations;

-    The Company's ability to introduce new programs on a timely basis;

-    The Company's  ability to develop and implement  operational  and financial
     systems to manage rapidly growing operations;

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

-    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;

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

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

-    Additional government regulation of the Company's industry; and

-    New accounting pronouncements

Many of these factors are beyond MemberWorks' control, and, therefore, its
ability to generate predictable revenue and income growth may be adversely
affected by these factors.

MemberWorks 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 under the Federal Exchange
Commission, MemberWorks 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 an $18.0 million bank credit facility which bears interest at
the higher of the base commercial lending rate for the bank or the Federal Funds
Rate plus 0.5% per annum. There were no borrowings outstanding under this bank
credit facility as of June 30, 2002. Management believes that an increase in the
commercial lending 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 April 1,
2003, it is possible that any replacement lending facility obtained by the
Company may be more sensitive to interest rate changes. The Company does not
currently hedge interest rates with respect to its outstanding debt.

Foreign Currency
The Company has international sales and facilities in Canada and therefore, is
subject to foreign currency rate exposure. Canadian sales have been denominated
in the Canadian dollar and its functional currency is the local currency. Assets
and liabilities of the Canadian subsidiary are translated into U.S. dollars at
the exchange rate in effect as of the balance sheet date. Income and expense
items are translated at the average exchange rate for the period. Accumulated
net translation adjustments are recorded in shareholders' equity. Foreign
exchange transaction gains and losses are included in the results of operations,
and were not material for all periods presented. As a result, the Company's
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic condition. To the
extent the Company  incurs  expenses that are based on locally  denominated
sales volume paid in local  currency,  the exposure to foreign  exchange risk is
reduced.  The  Company  has  determined  that  the  impact  of a  near-term  10%
appreciation  or  depreciation  of the U.S.  dollar would have an  insignificant
effect on its  financial  position,  results of operations  and cash flows.  The
Company does not maintain any derivative instruments to mitigate the exposure to
translation and transaction risk. However,  this does not preclude the Company's
adoption of specific hedging  strategies in the future.  MemberWorks will assess
the need to utilize  financial  instruments  to hedge  currency  exposures on an
ongoing basis.



                                       18
<PAGE>

Fair Value
In August 2001, MemberWorks acquired stock in Homestore.com, Inc. valued at
$34.5 million in exchange for its interest in iPlace, Inc. The carrying value of
this investment is affected by changes in the quoted market prices of
Homestore.com, Inc. common stock. 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 market value and recognized a loss of $33.6 million during the year ended
June 30, 2002. MemberWorks 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 accountants
for MemberWorks are included following Part IV, beginning on page F-1, and
identified in the index appearing at Item 14(a).

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

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 MemberWorks 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
          --------------------------------------------------------------

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.


                                       19
<PAGE>



                                     Part IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
          ---------------------------------------------------------------

(a)  Index to Financial Statements and Financial Statement Schedules
                                                                            Page
                                                                            ----
     Report of PricewaterhouseCoopers LLP, Independent Accountants           F-1
     Consolidated Balance Sheets as of June 30, 2002 and 2001                F-2
     Consolidated Statements of Operations for the years ended June 30,
     2002, 2001 and 2000                                                     F-3
     Consolidated Statements of Shareholders' (Deficit) Equity for
     the years ended June 30, 2002, 2001 and 2000                            F-4
     Consolidated Statements of Cash Flows for the years ended June 30,
     2002, 2001 and 2000                                                     F-5
     Notes to Consolidated Financial Statements                              F-6

     The following Financial Statement Schedule is included:

     Schedule II - Valuation and Qualifying Accounts - Years ended June 30,
     2002, 2001 and 2000                                                    F-22

     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
         None

 (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.


                                       20
<PAGE>



                            MEMBERWORKS INCORPORATED

                                   SIGNATURES

Pursuant to the requirements of the 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: August 23, 2002

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     August 23, 2002
    --------------------
Gary A. Johnson

By: /s/ James B. Duffy          Executive Vice President, Chief Financial Officer   August 23, 2002
   ---------------------------
James B. Duffy

By: /s/ Dennis P. Walker        Executive Vice President and Director               August 23, 2002
    --------------------------
Dennis P. Walker

By: /s/ Alec L. Ellison         Director                                            August 23, 2002
   ---------------------------
Alec L. Ellison

By: /s/ Scott N. Flanders       Director                                            August 23, 2002
   ---------------------------
Scott N. Flanders

By: /s/ Michael T. McClorey     Director                                            August 23, 2002
   ---------------------------
Michael T. McClorey

By: /s/ Edward M. Stern         Director                                            August 23, 2002
   ---------------------------
Edward M. Stern

By: /s/ Marc S. Tesler          Director                                            August 23, 2002
   ---------------------------
Marc S. Tesler
</TABLE>

                                       21
<PAGE>



Exhibit
-------
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)

*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, Registration No. 333-10541, filed on September 6,
          2001)

*10.8     Credit   Agreement   dated   September  15,  1999  among   MemberWorks
          Incorporated, the lenders parties hereto and Brown Brothers Harriman &
          Co.  (filed as Exhibit  10.8 to the  Company's  Annual  Report on Form
          10-K, Registration No. 333-10541, filed on August 30, 2000)

*10.9     Amendment  No. 1 to Credit  Agreement  dated  February  25, 2000 among
          MemberWorks  Incorporated,   the  lenders  parties  hereto  and  Brown
          Brothers Harriman & Co. (filed as Exhibit 10.9 to the Company's Annual
          Report on Form 10-K,  Registration No. 333-10541,  filed on August 30,
          2000)

*10.10    Amendment  No. 2 to  Credit  Agreement  dated  March  13,  2001  among
          MemberWorks  Incorporated,   the  lenders  parties  hereto  and  Brown
          Brothers  Harriman  & Co.  (filed as  Exhibit  10.10 to the  Company's
          Annual  Report on Form  10-K,  Registration  No.  333-10541,  filed on
          September 6, 2001)

10.11     Amendment  No. 3 to Credit  Agreement  dated  November  14, 2001 among
          MemberWorks  Incorporated,   the  lenders  parties  hereto  and  Brown
          Brothers Harriman & Co.

10.12     Amendment  No. 4 to Credit  Agreement  dated  February  1, 2002  among
          MemberWorks  Incorporated,   the  lenders  parties  hereto  and  Brown
          Brothers Harriman & Co.

10.13     Amendment  No. 5 to Credit  Agreement  dated  February  28, 2002 among
          MemberWorks  Incorporated,   the  lenders  parties  hereto  and  Brown
          Brothers Harriman & Co.


10.14     Amendment  No.  6 to  Credit  Agreement  dated  April  1,  2002  among
          MemberWorks  Incorporated,   the  lenders  parties  hereto  and  Brown
          Brothers Harriman & Co.

*10.15    Warrant  Agreement  dated  as  of  September  9,  1994,   between  the
          Registrant and Brown  Brothers  Harriman & Co. (filed as Exhibit 10.12
          to the Company's  Registration Statement on Form S-1, Registration No.
          333-10541, filed on October 18, 1996)

*10.16    Form of Stock Subscription Warrant with Voting Rights, dated August 3,
          1995. (filed as Exhibit 10.15 to the Company's  Registration Statement
          on Form S-1, Registration No. 333-10541, filed on October 18, 1996)

*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)


                                       22
<PAGE>


*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,  Registration  No.  333-10541,
          filed on September 29, 1997)

*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,  Registration  No.  333-10541,
          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,  Registration  No.  333-10541,
          filed on September 29, 1997)

*18  Letter  re:  Change in  Accounting  Principle.  (filed as Exhibit 18 to the
     Company's Annual Report on Form 10-K, Registration No. 333-10541,  filed on
     October 8, 1998)

21   Subsidiaries of the Registrant.

23   Consent of PricewaterhouseCoopers LLP.

---------------------------------------------------
*Previously filed.



                                       23
<PAGE>


                            MEMBERWORKS INCORPORATED

                        Report of Independent Accountants
                        ---------------------------------

To the Board of Directors and Shareholders
of MemberWorks Incorporated

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) on page 20 present fairly, in all material respects,
the financial position of MemberWorks Incorporated and its subsidiaries at June
30, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 2002 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
aforementioned index 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 and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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 3 to the consolidated financial statements, the Company
changed its method of accounting for membership fee revenue in fiscal 2001 and
goodwill and other intangible assets in fiscal 2002.


PricewaterhouseCoopers LLP
New York, New York
July 29, 2002, except for Note 21, which is as of August 12, 2002

                                      F-1
<PAGE>
<TABLE>
<CAPTION>




                            MEMBERWORKS INCORPORATED

                           CONSOLIDATED BALANCE SHEETS
                    (In thousands, except per share amounts)
                                                                                                    June 30,
                                                                                           ---------------------------
                                                                                               2002          2001
                                                                                           ------------  -------------
                                Assets
Current assets:
<S>                                                                                        <C>           <C>
    Cash and cash equivalents                                                              $    51,185   $    22,736
    Marketable securities                                                                          912             -
    Accounts receivable                                                                          9,831        20,446
    Prepaid membership materials                                                                 2,061         3,903
    Prepaid expenses                                                                             4,325         5,857
    Membership solicitation and other deferred costs                                           129,085       154,059
                                                                                           ------------  -------------
             Total current assets                                                              197,399       207,001
Fixed assets, net                                                                               31,420        39,687
Goodwill                                                                                        42,039        84,814
Intangible assets, net                                                                           8,049        14,283
Other assets                                                                                     1,910         2,676
                                                                                           ------------  -------------
             Total assets                                                                  $   280,817   $   348,461
                                                                                           ============  =============

                 Liabilities and Shareholders' Deficit
Current liabilities:
    Current maturities of long-term obligations                                            $     1,070   $       516
    Accounts payable                                                                            32,769        49,505
    Accrued liabilities                                                                         57,709        64,634
    Due to related parties                                                                           -         2,028
    Deferred membership fees                                                                   206,272       243,024
                                                                                           ------------  -------------
             Total current liabilities                                                         297,820       359,707
Long-term liabilities                                                                            3,627         3,057
                                                                                           ------------  -------------
             Total liabilities                                                                 301,447       362,764
                                                                                           ------------  -------------

Commitments and Contingencies (Note 9)

Minority interest                                                                                    -         6,505
Mandatorily redeemable convertible preferred securities of subsidiary                                -         5,157

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; 17,493 shares issued
       (17,308 shares at June 30, 2001)                                                            175           173
    Capital in excess of par value                                                             109,254       107,835
    Accumulated deficit                                                                        (42,185)      (80,196)
    Accumulated other comprehensive loss                                                          (373)         (370)
                                                                                           ------------  -------------
             Total shareholders' equity before treasury stock                                   66,871        27,442
    Treasury stock, 4,139 shares at cost (1,920 shares at June 30, 2001)                       (87,501)      (53,407)
                                                                                           ------------  -------------
             Total shareholders' deficit                                                       (20,630)      (25,965)
                                                                                           ------------  -------------
             Total liabilities and shareholders' deficit                                   $   280,817   $   348,461
                                                                                           ============  =============

</TABLE>


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


                                      F-2
<PAGE>


<PAGE>
<TABLE>
<CAPTION>



                            MEMBERWORKS INCORPORATED

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

                                                                                 For the year ended June 30,
                                                                           ----------------------------------------
                                                                               2002          2001          2000
                                                                           ------------   -----------  ------------

Revenues                                                                   $   427,602    $  475,726   $  330,107

Expenses:
<S>                                                                             <C>           <C>          <C>
    Operating                                                                   78,694        90,368       62,040
    Marketing                                                                  248,974       305,032      195,253
    General and administrative                                                  79,211        99,732       67,600
    Restructuring charges (Note 10)                                              6,893             -            -
    Non-recurring charge (Note 9)                                                    -         3,000            -
    Amortization of goodwill and other intangibles                               1,941        10,918        6,654
                                                                           ------------   -----------  ------------

Operating income (loss)                                                         11,889       (33,324)      (1,440)
Gain on sale of subsidiary (Note 5)                                             65,608             -            -
Net (loss) gain on investment (Note 5)                                         (33,628)       (2,172)       8,854
Other (expense) income, net                                                       (401)         (450)         873
                                                                           ------------   -----------  ------------

Income (loss) before equity in affiliate and minority interest                  43,468       (35,946)       8,287
Equity in income of affiliate                                                        -            83           19
Minority interest (Notes 13 and 14)                                                450         9,106        2,027
                                                                           ------------   -----------  ------------

Income (loss) before income taxes                                               43,918       (26,757)      10,333
Provision for income taxes                                                          -              -            -
                                                                           ------------   -----------  ------------

Income (loss) before cumulative effect of accounting change                     43,918       (26,757)      10,333
Cumulative effect of accounting change (Note 3)                                 (5,907)      (25,730)           -
                                                                           ------------   -----------  ------------
Net income (loss)                                                          $    38,011    $  (52,487)  $   10,333
                                                                           ============   ===========  ============

Basic earnings (loss) per share:
     Income (loss) before cumulative effect of accounting change           $      3.03    $    (1.75)  $     0.68
     Cumulative effect of accounting change                                      (0.41)        (1.69)          -
                                                                           ------------   -----------  ------------
     Basic earnings (loss) per share                                       $      2.63    $    (3.44)  $     0.68
                                                                           ============   ===========  ============

Diluted earnings (loss) per share:
     Income (loss) before cumulative effect of accounting change           $      2.95    $    (1.75)  $     0.61
     Cumulative effect of accounting change                                      (0.40)        (1.69)          -
                                                                           ------------   -----------  ------------
     Diluted earnings (loss) per share                                     $      2.55    $    (3.44)  $     0.61
                                                                           ============   ===========  ============

Pro forma assuming accounting changes are retroactively applied:
     Net income (loss)                                                     $    43,918    $  (18,978)  $   27,009
     Basic earnings (loss) per share                                              3.03         (1.24)        1.78
     Diluted earnings (loss) per share                                            2.95         (1.24)        1.59

Weighted average common shares used in earnings (loss) per share calculations:
     Basic                                                                      14,477        15,248       15,162
                                                                           ============   ===========  ============
     Diluted                                                                    14,909        15,248       16,993
                                                                           ============   ===========  ============
</TABLE>

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


                                      F-3
<PAGE>



<PAGE>
<TABLE>
<CAPTION>

                            MEMBERWORKS INCORPORATED

            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
                                 (In thousands)


                                                                                                 Accumulated
                                          Common Stock     Capital in                               Other
                                       -----------------    Excess of    Deferred   Accumulated Comprehensive Treasury
                                        Shares   Amount    Par Value   Compensation   Deficit        Loss      Stock    Total
                                       -------------------------------------------------------------------- ---------- -------

<S>                                    <C>     <C>       <C>         <C>         <C>          <C>            <C>      <C>
Balance - June 30, 1999                 15,909  $   159   $  76,999   $    (511)  $   (38,042) $     (14)  $(8,304) $  30,287
Issuance of common stock                   598        6       4,395                                                     4,401
Acquisition of treasury stock                                                                              (36,340)   (36,340)
Deferred compensation                                                       467                                           467
Issuance of subsidiary stock for
  acquisitions (Note 4)                                      10,004                                                    10,004
Comprehensive income:
  Net income                                                                           10,333
  Currency translation adjustment                                                                   (131)
  Total comprehensive income                                                                                           10,202
                                       -------------------------------------------------------------------- ---------- -------
Balance - June 30, 2000                 16,507      165      91,398         (44)      (27,709)      (145)   (44,644)   19,021
Issuance of common stock                   376        4       3,234                                                     3,238
Issuance of common stock for
  an acquisition (Note 4)                  425        4      12,880                                                    12,884
Issuance of treasury stock to fund
  401K Plan                                                     (28)                                            154       126
Acquisition of treasury stock                                                                                (8,917)   (8,917)
Deferred compensation                                           351          44                                           395
Comprehensive loss:
  Net loss                                                                            (52,487)
  Currency translation adjustment                                                                   (225)
  Total comprehensive loss                                                                                            (52,712)
                                       -------------------------------------------------------------------- ---------- -------
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
  Currency translation adjustment                                                                     (3)
  Total comprehensive income                                                                                           38,008
                                       ------------------------------------------------------------------- ---------- -------
Balance - June 30, 2002                 17,493  $   175   $ 109,254   $       -   $   (42,185) $    (373)   $(87,501)$(20,630)
                                       =================================================================== ========== =======

</TABLE>

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

                                      F-4
<PAGE>

<TABLE>
<CAPTION>



                            MEMBERWORKS INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                                                                   For the year ended June 30,
                                                                            ------------------------------------------
                                                                                2002           2001           2000
                                                                            ------------   -------------  ------------
Operating activities
<S>                                                                         <C>            <C>            <C>
  Net income (loss)                                                         $    38,011    $   (52,487)   $    10,333
  Adjustments to reconcile net income (loss) to net cash provided
  by operating activities:
     Revenues before deferral                                                   410,486        484,992        383,558
     Marketing costs before deferral                                           (233,936)      (287,855)      (245,684)
     Revenues recognized                                                       (427,602)      (475,726)      (330,107)
     Marketing costs expensed                                                   248,974        305,032        195,253
     Depreciation and amortization                                               13,252         20,498         13,002
     Non-cash restructuring charges                                               1,585              -              -
     Gain on sale of subsidiary                                                 (65,608)             -              -
     Net loss (gain) on investment                                               33,628          2,172         (8,854)
     Equity in income of affiliate                                                    -            (83)           (19)
     Minority interest                                                             (450)        (9,106)        (2,027)
     Cumulative effect of accounting change                                       5,907         25,730              -
     Other                                                                        2,605          2,863            505
                                                                            ------------   -------------  ------------
                                                                                 26,852         16,030         15,960
  Change in assets and liabilities:
     Accounts receivable                                                          8,830         (2,299)        (5,237)
     Prepaid membership materials                                                   315            202           (699)
     Prepaid expenses                                                            (2,217)        (2,938)        (1,141)
     Other assets                                                                  (251)           773           (874)
     Related party payables                                                          12            176             63
     Accounts payable                                                           (10,752)          (827)        16,361
     Accrued liabilities                                                         (1,083)         1,896         20,477
                                                                            ------------   -------------  ------------
Net cash provided by operating activities                                        21,706         13,013         44,910
                                                                            ------------   -------------  ------------
Investing activities
  Acquisition of fixed assets                                                    (5,761)       (15,133)       (20,326)
  Proceeds from sale of subsidiary, net of cash sold                             45,997              -              -
  Other investments                                                                   -          4,144          3,466
  Business combinations, net of cash acquired                                         -         (7,185)       (17,326)
                                                                            -------------  -------------  ------------
Net cash provided by (used in) investing activities                              40,236        (18,174)       (34,186)
                                                                            ------------   -------------  ------------
Financing activities
  Net proceeds from issuance of stock and warrants                                1,515          8,059          4,401
  Net (repayments of) borrowings from credit facility                                 -           (526)           529
  Treasury stock purchases                                                      (34,301)        (8,917)       (36,340)
  Payments of long-term obligations                                                (718)          (755)           (74)
                                                                            ------------   -------------  ------------
Net cash used in financing activities                                           (33,504)        (2,139)       (31,484)
                                                                            ------------   -------------  ------------
Effect of exchange rate changes on cash and cash equivalents                         11           (133)           (10)
                                                                            ------------   -------------  ------------
Net increase (decrease) in cash and cash equivalents                             28,449         (7,433)       (20,770)
Cash and cash equivalents at beginning of year                                   22,736         30,169         50,939
                                                                            ------------   -------------  ------------
Cash and cash equivalents at end of year                                    $    51,185    $    22,736    $    30,169
                                                                            ============   =============  ============
</TABLE>


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


                                      F-5
<PAGE>



NOTE 1 - NATURE OF BUSINESS

MemberWorks Incorporated ("MemberWorks" or the "Company") designs innovative
membership programs that offer services and discounts on everyday needs in
healthcare, personal finance, insurance, travel, entertainment, fashion and
personal security. As of June 30, 2002, 6.6 million retail members and over 13
million total members, including wholesale, are enrolled in MemberWorks
programs, gaining convenient access to thousands of service providers and
vendors. MemberWorks is the trusted marketing partner of leading consumer-driven
organizations and offers them effective tools to enhance their market presence,
strengthen customer affinity and generate additional revenue.

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 subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to prior period financial statements to conform
to the current year presentation.

Use of estimates
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America require
management of the Company to make estimates, judgements 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.

Gain on issuance of subsidiary stock

Gains realized as a result of stock sales by the Company's subsidiaries are
recorded in the statement of operations, except for any transactions which must
be credited directly to equity in accordance with the provisions of Staff
Accounting Bulletin No. 51, "Accounting for Sales of Stock of a Subsidiary".

Foreign currency translation
Assets and liabilities of foreign subsidiaries 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) equity. Transaction gains and losses, if
any, 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. Financial
instruments which potentially subject the Company to concentration of credit
risk consist primarily of accounts receivable from financial and other
cardholder-based institutions (clients of the Company) whose cardholders
constitute the Company's membership base. These entities include major banks,
financial institutions, large oil companies and retailers located primarily in
the United States.

Fixed assets
Fixed assets, capitalized software costs and capital leases are carried at cost,
less accumulated depreciation and amortization. Depreciation and amortization
are calculated using the straight-line method over the estimated useful lives of
the related assets. Useful lives are 3 years for computer software and
equipment, 5 years or the 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
Membership  fees are billed  through  clients of the Company  primarily  through
credit cards. During an initial annual membership term or renewal term, a member
may cancel his or her membership in the program, either for a complete refund of
the  membership  fee for that period or a prorata  refund based on the remaining


                                      F-6
<PAGE>

portion of the  membership  period  depending  upon the terms of the  membership
program.  Deferred membership fees are recorded, net of estimated cancellations,
after  the  trial  period  has  expired,  and are  amortized  as  revenues  from
membership  fees  upon  the  expiration  of  membership  refund  privileges.  An
allowance for cancellations is established  based on management's  estimates and
is  updated   regularly.   In   determining   the  estimate  of  allowance   for
cancellations,  management analyzes historical cancellation experience,  current
economic  trends and  changes in  customer  demand for the  Company's  products.
Actual   membership   cancellations   are  charged  against  the  allowance  for
cancellations  on  a  current  basis.  Accrued  liabilities  set  forth  in  the
accompanying consolidated balance sheets as of June 30, 2002 and 2001 include an
allowance  for  membership   cancellations   of  $23,753,000  and   $30,004,000,
respectively.

Membership programs sponsored by the Company's largest client accounted for 16%,
13% and 13% of revenue for the fiscal years ended June 30, 2002, 2001 and 2000,
respectively.

Membership solicitation and other deferred costs
Membership solicitation costs include marketing and direct mail costs related
directly to membership solicitation (i.e., direct response advertising costs).
In accordance with American Institute of Certified Public Accountants Statement
of Position 93-7, "Reporting on Advertising Costs," direct response advertising
costs are deferred and charged to operations as revenues from membership fees
are recognized. Other deferred costs consist of royalties paid to clients, which
relate to the same revenue streams as the direct response advertising costs and
are also charged to income over the membership period. Membership solicitation
costs incurred to obtain a new member generally are less than the estimated
total membership fees. However, if membership solicitation costs were to exceed
total estimated membership fees, an adjustment would be made 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 terms of three
months or less at the time of acquisition to be cash equivalents.

The Company retains restricted cash in an escrow account for the payment of
commissions to a client and the related refunds to customers in addition to cash
which is held in an escrow account pursuant to the iPlace, Inc. merger agreement
(see Note 5). As of June 30, 2002 and 2001, restricted cash included in cash and
cash equivalents on the balance sheet was $5,683,000 and $991,000, respectively.

Marketable securities
Marketable securities are classified as available-for-sale. Unrealized gains and
losses are excluded from earnings and are reported as a separate component of
other comprehensive income in shareholders' equity. Losses incurred that are
deemed to be other than temporary are charged to earnings. Realized gains and
losses are included in income and are determined based on the specific
identification method.

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.

Goodwill and intangible assets
MemberWorks  adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"),  as of July 1, 2001.  In  connection  with the  adoption of SFAS 142, the
Company reviewed the carrying value of its goodwill and other intangible  assets
by comparing such amounts to their fair values.  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 that



                                      F-7
<PAGE>

reporting unit (see Note 3). This amount was recorded as a cumulative  effect of
accounting  change in the statement of  operations  in the fiscal  quarter ended
September 30, 2001.  MemberWorks 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.

Intangible assets principally include member and customer relationships and
employment agreements 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 three to twenty 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 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" ("SFAS 121"). The Company reviews its
intangible and other long-lived assets for impairment whenever events or changes
in circumstances indicate that their carrying value may not be recoverable. As
of June 30, 2002, no impairment has been indicated.

Stock-based compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and its related interpretations.

New accounting pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"),
which is effective for fiscal years beginning after June 15, 2002. SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. MemberWorks does not believe that the adoption of SFAS 143 will have a
material impact on the Company's financial statements.

In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which is effective
for fiscal years beginning after December 15, 2001. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of." MemberWorks does not believe that the adoption of
SFAS 144 will have a material impact on the Company's financial statements.

In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"), which is effective for fiscal years beginning after
May 15, 2002. SFAS 145 addresses the financial accounting and reporting for a
number of areas, including gains and losses derived from the extinguishment of
debt and the treatment of sale-leaseback transactions. MemberWorks does not
believe that the adoption of SFAS 145 will have a material impact on the
Company's financial statements.

In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which is effective
for exit or disposal activities that are initiated after December 31, 2002. SFAS
146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs in a Restructuring)." MemberWorks
does not believe that the adoption of SFAS 146 will have a material impact on
the Company's financial statements.

NOTE 3 - 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


                                      F-8
<PAGE>

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 in the fiscal quarter ended September 30,
2001.

The following pro forma net income and earnings per share have been prepared
assuming SFAS 142 was adopted as of July 1, 1999. Pro forma balances have been
adjusted to exclude goodwill amortization expense which is no longer recorded
under the provisions of SFAS 142 (in thousands, except per share data).
<TABLE>
<CAPTION>

                                                                                      2002       2001       2000
                                                                                   ---------------------------------
Net income (loss) before cumulative effect of accounting change:
<S>                                                                                <C>        <C>        <C>
   Reported income (loss) before cumulative effect of accounting change            $  43,918  $ (26,757) $  10,333
   Indefinite lived intangible asset amortization                                          -      7,779      4,523
                                                                                   ---------------------------------
   Adjusted net income (loss) before cumulative effect of accounting change        $  43,918  $ (18,978) $  14,856
                                                                                   =================================

Basic earnings (loss) before cumulative effect of accounting change per share :
   Reported earnings (loss) before cumulative effect of accounting change per share$    3.03  $   (1.75) $    0.68
   Indefinite lived intangible asset amortization per share                               -        0.51       0.30
                                                                                   ---------------------------------
   Adjusted earnings (loss) before cumulative effect of accounting change per share$    3.03  $   (1.24) $    0.98
                                                                                   =================================

Diluted earnings (loss) before cumulative effect of accounting change per share:
   Reported earnings (loss) before cumulative effect of accounting change per share$    2.95  $   (1.75) $    0.61
   Indefinite lived intangible asset amortization per share                               -        0.51       0.27
                                                                                   ---------------------------------
   Adjusted earnings (loss) before cumulative effect of accounting change per share$    2.95  $   (1.24) $    0.87
                                                                                   =================================

Net income (loss):
   Reported income (loss)                                                          $  38,011  $ (52,487) $  10,333
   Indefinite lived intangible asset amortization                                         -       7,779      4,523
                                                                                   ---------------------------------
   Adjusted net income (loss)                                                      $  38,011  $ (44,708) $  14,856
                                                                                   =================================

Basic earnings (loss) per share:
   Reported earnings (loss) per share                                              $    2.63  $   (3.44) $    0.68
   Indefinite lived intangible asset amortization per share                               -        0.51       0.30
                                                                                   ---------------------------------
   Adjusted earnings (loss) per share                                              $    2.63  $   (2.93) $    0.98
                                                                                   =================================

Diluted earnings (loss) per share:
   Reported earnings (loss) per share                                              $    2.55  $   (3.44) $    0.61
   Indefinite lived intangible asset amortization per share                               -        0.51       0.27
                                                                                   ---------------------------------
   Adjusted earnings (loss) per share                                              $    2.55  $   (2.93) $    0.87
                                                                                   =================================

</TABLE>

Adoption of SAB 101
The Company  adopted Staff  Accounting  Bulletin 101,  "Revenue  Recognition  in
Financial  Statements"  ("SAB 101"), as of July 1, 2000. SAB 101 establishes the
Security and Exchange Commission's (the "Staff") preference that membership fees
should  not be  recognized  in  earnings  prior  to  the  expiration  of  refund
privileges. Effective July 1, 2000, the Company changed its method of accounting
for  membership  fee  revenue to comply  with the  Staff's  preferred  method as
outlined in SAB 101.  Membership  fees, and the related direct costs  associated
with acquiring the underlying memberships, are no longer recognized on a prorata
basis over the corresponding  membership  period,  but instead are recognized in
earnings upon the  expiration of membership  refund  privileges.  The cumulative
effect of this change in accounting  principle as of July 1, 2000 of $25,730,000
was recorded in the fiscal  quarter  ended  September 30, 2000.  The  membership
fees, net of estimated refunds and associated direct costs,  which were deferred
as part of the cumulative  effect  adjustment at July 1, 2000 were recognized in
earnings during fiscal year 2001 as the underlying  refund  privileges  expired.
During the fiscal year ended June 30, 2001, the Company  recognized  $68,195,000
of  revenue  which was  included  as a  component  of the  cumulative  effect of
accounting  change booked July 1, 2000. The effect of the adoption of SAB 101 on
reported  revenue,  loss before the cumulative  effect of accounting  change and
loss per share before the cumulative effect of


                                      F-9
<PAGE>

accounting  change for the fiscal  year ended June 30,  2001,  is an increase of
$13,470,000, $3,758,000 and $0.25, respectively.

NOTE 4 - BUSINESS COMBINATIONS

In October 2000, the Company increased its ownership in Discount Development
Services, L.L.C. and its subsidiary, Uni-Care, Inc., (together "DDS") from 19%
to 100%. The Company paid $8,150,000 in cash and 425,232 shares of MemberWorks
Common Stock with an approximate fair market value of $13,641,000 as of the date
the Company entered into the purchase agreement. The acquisition was accounted
for as a purchase, with the purchase price allocated to the assets acquired and
liabilities assumed based upon their respective estimated fair value at the date
of acquisition. DDS is in the business of marketing and administering healthcare
network membership programs that provide its members access to various
healthcare networks including hearing, vision, prescription and chiropractic.
The results of DDS's operations are included in the consolidated financial
statements from the date of acquisition. Due to the immateriality of the
acquisition, pro forma results were not required to be presented.

In July 1999, the Company increased its ownership percentage in ConsumerInfo.com
("CIC"), a California Corporation, from 19% to 100%, for cash consideration of
$15,885,000. The transaction was accounted for as a purchase, with the purchase
price allocated to the assets acquired and liabilities assumed based upon their
respective estimated fair values at the date of acquisition. The results of
operations of CIC are included in the consolidated financial statements from the
date of acquisition.

Pro Forma Results
The following unaudited pro forma results of operations for the year ended June
30, 2000 have been prepared assuming the CIC acquisition had occurred as of July
1, 1999. These pro forma results are not necessarily indicative of the results
of future operations or of results that would have occurred had the acquisition
been consummated as of that date (in thousands, except per share data):

                                                                   2000
                                                               -------------
Revenues                                                      $   330,648
Net income                                                          9,798
Basic earnings per share                                      $      0.65
Diluted earnings per share                                           0.58

In February 2000, CIC merged with eNeighborhoods, a leading provider of home
resale and neighborhood data on the Internet. The new entity was renamed iPlace,
Inc. ("iPlace"). The net purchase price totaled approximately $15,487,000. The
transaction was accounted for as a purchase of eNeighborhoods by CIC with the
purchase price allocated to the assets acquired and liabilities assumed based
upon their respective estimated fair values at the date of acquisition. The
results of eNeighborhoods' operations are included in the consolidated financial
statements from the date of acquisition. Due to the immateriality of the
acquisition, pro forma results were not required to be presented.

In April 2000, iPlace acquired all of the issued and outstanding common stock of
Qspace, Inc. ("Qspace"), a leading online provider of credit and personal
finance information, in exchange for iPlace stock valued at approximately
$10,459,000. The acquisition was accounted for as a purchase, with the purchase
price allocated to the assets acquired and liabilities assumed based upon their
respective estimated fair values at the date of acquisition. The results of
Qspace's operations are included in the consolidated financial statements from
the date of acquisition. Due to the immateriality of the acquisition, pro forma
results were not required to be presented.

As of June 30, 2001 and 2000, MemberWorks was the majority shareholder of iPlace
with an approximate 58% ownership share. Therefore, the results of operations of
CIC,  eNeighborhoods  and Qspace  were  included in the  consolidated  financial
statements from the respective  dates of acquisition,  net of minority  interest
after  February  23,  2000.  Minority  interest in the  Company's  statement  of
operations represents the minority shareholders' interest in iPlace's losses for
the  periods  presented.  See Note 5 for a  discussion  of the sale of iPlace in
August 2001.


                                      F-10
<PAGE>





NOTE 5 - GAIN ON SALE OF SUBSIDIARY/LOSS ON INVESTMENT

In August 2001,  the Company sold its  investment in and advances to iPlace
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. During fiscal 2002, 84,000 shares were released from the escrow.
The fair value of the  Homestore.com,  Inc.  common stock as of the date of sale
was $34,540,000. The Homestore.com,  Inc. common stock received is unregistered.
Once the  Homestore.com,  Inc.  stock is registered,  MemberWorks  may only sell
1/12th of the shares in any calendar month pursuant to the merger agreement.  In
connection with this sale, the Company recognized a gain of $65,608,000.

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 fiscal 2002.
As of June 30, 2002, the Company's  investment in Homestore.com,  Inc. is valued
at $912,000.

See Notes 9 and 21, for recent developments related to Homestore.com, Inc.

In February 2000, MemberWorks sold its interest in AwardTrack, Inc. in exchange
for stock in 24/7 Media, Inc. ("24/7"). In connection with this sale,
MemberWorks recognized a gain of $47,475,000 based upon the market value of 24/7
common stock at that time. Subsequently, the investment in 24/7 declined in
value and management determined that the decline was other than temporary. As a
result, MemberWorks wrote down its investment in 24/7 by $36,280,000. During the
fourth quarter of fiscal 2000, MemberWorks sold a portion of the 24/7 shares.
Proceeds from the sales were $5,244,000 and related realized losses included in
income were $2,341,000. The financial impact of the above transactions on fiscal
2000 was a net gain of $8,854,000.

During the second quarter of fiscal 2001, the investment in 24/7 declined in
value and management determined that the decline was other than temporary. As a
result, MemberWorks wrote down its investment in 24/7 by $1,790,000. In
addition, during fiscal 2001, MemberWorks sold its remaining shares of 24/7
stock. Proceeds from the sales were $4,144,000 and related realized losses were
$382,000. The financial impact of the transactions on fiscal 2001 is a net loss
of $2,172,000.

NOTE 6 - 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, 2002                   As of June 30, 2001
                                             -----------------------------------   -----------------------------------
                                              Gross Carrying     Accumulated        Gross Carrying      Accumulated
                                                  Amount         Amortization           Amount         Amortization
                                             ----------------- -----------------   ------------------ ----------------
Amortized intangible assets:
<S>                                          <C>               <C>                 <C>                <C>
   Membership and client relationships       $      13,195     $      (5,466)      $      17,465      $      (5,642)
   Non-compete agreements                              238              (238)              3,009               (999)
   Other                                               950              (630)                950               (500)
                                             ----------------- -----------------   ------------------ ----------------
      Total amortized intangible assets      $      14,383     $      (6,334)      $      21,424      $      (7,141)
                                             ================= =================   ================== ================

Unamortized intangible assets:
     Goodwill                                $      42,039                         $      84,814
                                             =================                     ==================

</TABLE>

The gross carrying amount and accumulated amortization of amortized intangible
assets at June 30, 2002 decreased from June 30, 2001 due to the sale of iPlace.


                                      F-11
<PAGE>



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

Fiscal Year:
     2003                                                             1,393
     2004                                                             1,045
     2005                                                               840
     2006                                                               695
     2007                                                               554

The changes in the carrying amount of goodwill for the year ended June 30, 2002
are as follows (in thousands):

     Balance as of June 30, 2001                                 $      84,814
     Goodwill disposed during the first quarter due to sale of         (36,868)
subsidiary
     Cumulative effect of accounting change                             (5,907)
                                                                ----------------
     Balance as of June 30, 2002                                 $      42,039
                                                                ================

Goodwill was tested at July 1, 2001, for impairment during the quarter ended
September 30, 2001 in connection with the adoption of SFAS 142 (see Note 3).

NOTE 7 - FIXED ASSETS

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

                                                                             2002           2001
                                                                             ----           ----
<S>                                                                    <C>            <C>
        Computer software and equipment                                $     44,935   $     43,135
        Furniture and fixtures                                                8,103          8,386
        Leasehold improvements                                                6,895          6,707
                                                                          -----------    -----------
                                                                             59,933         58,228
        Accumulated depreciation and amortization                           (28,513)       (18,541)
                                                                          -----------    -----------
                                                                       $     31,420   $     39,687
                                                                          ===========    ===========

</TABLE>

Depreciation and amortization expense was $11,311,000, $10,545,000 and
$6,261,000 for the years ended June 30, 2002, 2001 and 2000, respectively.

NOTE 8 - LONG-TERM LIABILITIES

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

                                                                             2002           2001
                                                                             ----           ----
<S>                                                                    <C>            <C>
         Notes payable                                                 $       760    $     1,194
         Lease incentives                                                    1,519          1,490
         Other long-term obligations                                         2,355            767
                                                                          -----------    -----------
                                                                             4,634          3,451
         Less current maturities                                             1,015            465
                                                                          -----------    -----------
         Long-term liabilities                                         $     3,619    $     2,986
                                                                          ===========    ===========

</TABLE>

The Company has a bank credit facility that allows borrowings up to $18,000,000.
Borrowings under the facility accrue interest at the higher of the base
commercial lending rate for the bank or the Federal Funds Rate plus 0.5% per
annum. A commitment fee is charged based on the total facility at the rate of
0.50% per annum on the average daily unused portion of the facility. This bank
credit facility matures on April 1, 2003. There were no borrowings outstanding
under this bank credit facility as of June 30, 2002 or 2001. The bank credit
facility has certain financial covenants, including a maximum debt coverage
ratio, a minimum fixed charge ratio, potential restrictions on additional
borrowings and potential restrictions on additional stock repurchases. The
credit agreement is secured by all of the Company's assets, including the stock
of its subsidiaries.

                                      F-12
<PAGE>


As of June 30, 2002 and 2001, the Company's subsidiary, DDS, had $760,000 and
$1,186,000, respectively, outstanding under a note payable that bears an
interest rate of 5.0% per annum and is due on April 30, 2003.

As of June 30, 2002 and 2001, MemberWorks Canada had $1,519,000 and $1,490,000,
respectively, outstanding for lease incentives related to certain operating
leases. These lease incentives are amortized as a reduction to rent expense over
the terms of the leases.

Other long-term obligations are comprised of the long-term portion of the
restructuring reserve (see note 10) and two consulting agreements entered into
by DDS which expire during October and November 2004.

Other  (expense)  income in the fiscal years ended June 30, 2002, 2001 and 2000,
as shown in the statements of operations, includes interest expense of $435,000,
$1,263,000 and $133,000, respectively. Other (expense) income in the fiscal
years ended June 30, 2002, 2001 & 2000, as shown in the statement of operations,
includes interest income of $768,000, $900,000 and $1,587,000, respectively.

NOTE 9 - 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 $6,508,000, $7,552,000
and $3,925,000 for the fiscal years ended June 30, 2002, 2001 and 2000,
respectively.

The Company entered into certain capital leases for certain equipment. Lease
amortization for the years ended June 30, 2002, 2001 and 2000 was $62,000,
$47,000 and $67,000, respectively, and is included in depreciation and
amortization expense.

The future minimum lease payments under capital leases (including present value
of net minimum lease payments) and operating leases as of June 30, 2002 are as
follows (in thousands):
<TABLE>
<CAPTION>

                                                                                          Capital       Operating
Fiscal Year                                                                               Leases          Leases
-----------                                                                               ------          ------
<S>                                                                                   <C>             <C>
2003                                                                                   $      60       $    6,893
2004                                                                                           8            6,176
2005                                                                                           -            5,431
2006                                                                                           -            4,410
2007                                                                                           -            2,122
Thereafter                                                                                     -            5,850
                                                                                       --------------  -------------
Total minimum lease payments                                                                  68       $   30,882
                                                                                                       =============
Less--Amount representing interest                                                             5
                                                                                       --------------
Present value of net minimum lease payments including current maturities of $60
   with interest rates ranging from 9.9% to 21.47%                                    $       63
                                                                                       ==============

</TABLE>

In April 2001, the Company entered into a voluntary agreement with the State of
California and Ventura and Orange Counties to implement certain marketing
practices in the State of California. Pursuant to the agreement, the Company
paid costs of investigation and civil penalties of $2,000,000, which were split
between the state and the counties. The Company also established a reserve of
$1,000,000 to cover specific costs related to the agreement. As a result of the
agreement, the Company recorded a non-recurring charge of $3,000,000 during the
quarter ended March 31, 2001.

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.

                                      F-13
<PAGE>


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 complaint includes a claim that the
suit should be certified as a class action and the plaintiff has filed a motion
for class certification to which all of the defendants have filed opposing
papers regarding the same. The Court has announced that it will deny the motion
for national class certification, but it has certified a class of Michigan
residents. No order has been issued. The Company believes that the claims made
against Coverdell are unfounded and Coverdell and the Company will vigorously
defend their interests against this suit.

In March 2002, the Company and other plaintiffs filed suit against
Homestore.com, Inc. in United States District Court for the District of
Connecticut. The action has been transferred to the United States District Court
for the Central District of California. The suit, seeking injunctive and other
relief, alleges securities fraud, negligent misrepresentation, breach of
contract and other grounds in connection with the Company's sale of its interest
in iPlace, Inc. In response to plaintiffs' preliminary motions, the court
ordered Homestore.com, Inc. to place $58,000,000 in a constructive trust pending
resolution of the lawsuit or further order of the court. See Note 21 for recent
developments related to this litigation.

NOTE 10 - RESTRUCTURING CHARGES

On October 11, 2001, 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 the quarter ended December 31, 2001.

The major components of the restructuring charges and the remaining accrual
balances as of June 30, 2002 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                   Total           Non-cash         Cash Charges        Liability
                                                  Charges      Charges to date        to date            Balance
                                               --------------  -----------------   ---------------    --------------
<S>                                            <C>             <C>                 <C>                <C>
Workforce reduction                            $     2,214     $          -        $      1,823       $       391
Lease obligations                                    3,094                -                 548             2,546
Asset disposals                                      1,585            1,585                   -                 -
                                               --------------  -----------------   ---------------    --------------
  Total                                        $     6,893     $      1,585        $      2,371       $     2,937
                                               ==============  =================   ===============    ==============

</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.


                                      F-14
<PAGE>



NOTE 11- INCOME TAXES

There was no current or deferred  provision  for income taxes for the years
ended June 30, 2002,  2001 and 2000.  No current  provision was required in 2002
due to the  utilization of the Company's net operating loss carry  forwards.  No
current provision was required in 2001 and 2000 because tax losses were incurred
in those years.  Deferred tax assets and liabilities  result from differences in
the basis of assets and  liabilities for tax and financial  statement  purposes.
The tax effects of the basis  differences  and net operating loss carry forwards
and the  valuation  allowance  established  in  accordance  with SFAS  109,  are
summarized below as of June 30, 2002 and 2001 (in thousands):
<TABLE>
<CAPTION>

                                                                               2002             2001
                                                                               ----             ----
<S>                                                                     <C>              <C>
Benefit of federal and state net operating loss carry forwards          $       28,859   $        45,211
Deferred membership fees                                                        18,944            22,897
Allowance for membership cancellations                                           9,453            10,226
Other deferred tax assets (liabilities)                                          3,500              (704)
Membership solicitation and other deferred costs                               (54,175)          (54,940)
                                                                           -------------     ------------
Total deferred tax assets                                                        6,581            22,690
Less: Valuation allowance                                                       (6,581)          (22,690)
                                                                           -------------     ------------
Net deferred tax asset                                                  $           -    $            -
                                                                           =============     ============
</TABLE>

As of June 30, 2002, the Company had federal net operating loss carry forwards
of $68,713,000 expiring at various dates from June 30, 2013 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, 2006 through June 30, 2021. The valuation allowance for
deferred tax assets as of July 1, 2000 was $10,175,000.

NOTE 12 - RELATED PARTY OBLIGATIONS

As of June 30, 2001, the Company's majority-owned subsidiary, iPlace, had a note
payable to the president of iPlace for $1,973,000. The note bore interest at the
Citibank, N.A. publicly announced interest rate plus 1% per annum and was due on
demand. The interest payable related to this note was $55,000 as of June 30,
2001. Other income, net for fiscal 2002, 2001 and 2000 included related party
interest expense of $12,000, $176,000 and $63,000, respectively.

NOTE 13 - MINORITY INTEREST

Prior to the sale of iPlace in August 2001, the Company was the majority
shareholder of iPlace 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 from July 1, 2001 through the date
of the sale.

NOTE 14 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES

During October 2000, iPlace authorized the sale and issuance of 184,000 shares
of Series A Preferred Stock at a purchase price of $5,000,000 to outside
investors. The Series A Preferred Stock had a par value per share of $0.01 and
paid cumulative dividends at an annual rate of 8.0%. Such dividends were accrued
from the original issuance date. As of June 30, 2001, the amount of accrued and
unpaid dividends totaled $289,000.

The Series A Preferred Stock was convertible at the option of the holder, in
whole or part, at any time into iPlace's common stock at an initial conversion
rate of one for one. Upon the demand of at least a majority of holders on or
after October 10, 2004, all shares of Series A Preferred Stock could be redeemed
at a value of the initial purchase price plus any declared and unpaid dividends.

Series A Preferred Stock holders were entitled to vote upon all matters brought
before the iPlace stockholders and were entitled to one vote per share. When
iPlace was sold in August of 2001, the preferred shareholders received $27.23
per share plus all declared and unpaid dividends.


                                      F-15
<PAGE>


NOTE 15 - SHAREHOLDERS' EQUITY

Stock Repurchases
The Company has a stock repurchase program. As of June 30, 2001, approximately
699,000 shares were remaining for repurchase under the stock repurchase program.
During fiscal 2002, the Board of Directors authorized the Company to repurchase
up to an additional 2,000,000 shares of the Company's Common Stock. As of June
30, 2002, approximately 472,000 shares were authorized for repurchase under the
stock repurchase program. During fiscal 2002, the Company repurchased 2,227,000
shares for $34,301,000, compared to the repurchase of 340,000 shares for
$8,917,000 in fiscal 2001 and 1,097,000 shares for $36,340,000 in fiscal 2000.

NOTE 16 - STOCK OPTIONS AND WARRANTS

Stock Compensation Plans
As of June 30, 2002, the Company has five stock-based compensation plans which
are described below. The Company applies APB 25 and related interpretations in
accounting for its plans. Option compensation expense of $8,000, $395,000 and
$467,000 has been recognized during fiscal 2002, 2001 and 2000, respectively,
related to these stock option plans. Had compensation cost for the Company's
stock based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No.
123, "Accounting for Stock-Based Compensation", the Company's pro forma net
income (loss) and earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>

                                                                      Year ended June 30,
                                                           ------------------------------------------
                                                              2002           2001           2000
                                                           ------------   ------------   ------------
                                                          ($ in thousands, except per share data)
             Net income (loss):
<S>                                                    <C>             <C>            <C>
                  As reported                          $      38,011   $    (52,487)  $     10,333
                  Pro forma                                   26,613        (63,402)         3,875

             Earnings (loss) per share:
                  As reported
                      Basic                            $        2.63   $      (3.44)  $       0.68
                      Diluted                                   2.55          (3.44)          0.61
                  Pro forma
                      Basic                            $        1.84   $      (4.16)  $       0.26
                      Diluted                                   1.79          (4.16)          0.23

</TABLE>

Under the stock option plans and the agreement with an executive officer
described below, the fair value of each option grant calculated under the
provisions of SFAS No. 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, 2002, 2001 and 2000:
<TABLE>
<CAPTION>

                                                               2002               2001              2000
                                                               ----               ----              ----
<S>                                                               <C>                <C>              <C>
             Dividend yield                                       0%                 0%               0%
             Expected volatility                                 50%                50%              50%
             Risk free interest rate                            4.8%               5.9%             5.9%
             Expected lives                                  5 years            5 years          5 years

</TABLE>

The weighted average fair value per share of options granted at market value
were $9.55, $14.03 and $14.04 for the years ended June 30, 2002, 2001 and 2000,
respectively.

The Company's 1990 Employee Incentive Stock Option Plan ("Amended 1990 Stock
Option Plan") provided for the grant of "incentive stock options" to employees
and officers of the Company and non-qualified stock options to employees,
consultants, directors and officers of the Company. On August 13, 1996, the
Board of Directors voted that no further options may be granted under the
Amended 1990 Stock Option Plan effective upon the closing of the initial public
offering.


                                      F-16
<PAGE>


During fiscal 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 fiscal 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 fiscal 2002, the Company added an additional
2,000,000 options which may be granted using treasury stock.

During fiscal 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. Options
become exercisable over a four-year period under the Non-Employee Directors'
Stock Option Plan.

Under the stock option plans described above, options generally become
exercisable over a four-year period and expire at the earlier of termination of
employment or ten years from date of grant (eight years for grants prior to
December 31, 1995).

The Company had an agreement with an executive officer, whereby the Company was
required to grant options to purchase up to 144,000 shares of Common Stock to
the executive for achievement of certain performance goals. These options have a
stated exercise price of $2.78 per share and vest ratably over a four-year
period from the date of grant. The Company recognized compensation expense
related to those options of $0, $44,000 and $122,000 for each of the years ended
June 30, 2002, 2001 and 2000, respectively.

In connection with a grant of options in June 1996 to purchase 360,000 shares of
Common Stock, the Company recognized compensation expense of $345,000 during the
year ended June 30, 2000. Compensation expense was recognized over the four-year
vesting period and was measured based on the excess of the fair market value of
the Company's stock over the grant price of the options.

At June 30, 2002, 5,846,000 shares of common stock were reserved for issuance
under the stock option plans, of which 1,505,000 shares were available for
future grant.


                                      F-17
<PAGE>



Information with respect to options to purchase shares issued under these plans
is as follows:
<TABLE>
<CAPTION>

                                                  2002                      2001                     2000
                                                  ----                      ----                     ----
                                                       Average                   Average                   Average
                                                       Exercise                 Exercise                  Exercise
(Shares in thousands)                     Shares        Price        Shares       Price       Shares        Price
                                          ------        -----        ------       -----       ------        -----
<S>                                       <C>            <C>         <C>            <C>        <C>         <C>
Outstanding at beginning of year          3,815          $21.45      2,980          $17.14     2,842       $  12.46
Granted at market value                   1,128           19.36      1,766           27.61     1,068          27.67
Exercised                                  (127)          21.29       (366)           7.78      (451)          8.06
Forfeited                                  (475)          25.31       (565)          26.32      (479)         21.39
                                       -------------               ------------            --------------
Outstanding at end of year                4,341          $20.82      3,815          $21.45     2,980       $  17.14
                                       =============               ============            ==============


                                                Options Outstanding                           Options Exercisable
                                      -----------------------------------------            --------------------------
                                         Shares        Average       Average                  Shares       Average
                                       Outstanding    Remaining     Exercise                Outstanding   Exercise
(Shares in thousands)                  at 6/30/02    Life (Years)     Price                 at 6/30/02      Price
                                       ----------    ------------     -----                 ----------      -----
$2.78 to $13.00                               592          4.5        $ 5.71                      517        $ 5.36
$14.26 to $16.91                              536          6.2         15.37                      361         15.23
$17.75 to $20.31                              554          7.6         18.81                      259         18.32
$20.35 to $20.81                              976          9.1         20.39                       93         20.81
$21.88 to $29.00                              693          7.1         27.66                      365         27.52
$29.56 to $29.88                              990          7.9         29.58                      281         29.62
                                      --------------                                       --------------
                                            4,341          7.3        $20.82                    1,876       $ 17.75
                                      ==============                                       ==============
</TABLE>


Options exercisable as of June 30, 2001 and 2000 were 1,345,000 and 1,138,000,
respectively.

iPlace Stock Option Plan
In April 2001, the Board of Directors of iPlace approved a five-for-one stock
split of iPlace's outstanding stock and options. The stock option split did not
impact the value of outstanding options and all option share information has
been adjusted to reflect the five-for-one stock split.

On February 11, 2000, the Board of Directors of iPlace established and approved
the iPlace 2000 Stock Option Plan. In connection with the acquisition of
eNeighborhoods in February 2000 and Qspace in April 2000 (see Note 4), iPlace
issued 1,165,000 options at an average exercise price of $0.96 and 175,000
options at an average exercise price of $2.74. The fair value of these options
has been accounted for as a part of the respective purchase prices. The iPlace
options are issued at the estimated fair value of the underlying common stock
and generally vest 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, MemberWorks sold iPlace (see Note 5). Therefore, there were no
stock options outstanding under this plan as of June 30, 2002. During 2001,
2,941,000 options were granted at an average exercise price of $4.20 and 482,000
options were forfeited at an average exercise price of $2.80. At June 30, 2001,
options to purchase approximately 5,585,000 shares of iPlace stock remained
outstanding at an average exercise price of $3.18 with 1,548,000 of those
options exercisable at an average exercise price of $2.54. During 2000,
2,175,000 options were granted at an average exercise price of $2.77 and 375,000
options were forfeited at an average exercise price of $2.27. At June 30, 2000,
options to purchase approximately 3,140,000 shares of iPlace stock remained
outstanding at an average exercise price of $2.16 with 360,000 of those options
exercisable at an average exercise price of $0.28.

For purposes of calculating the pro forma SFAS No. 123 compensation expense
under the iPlace stock option plan, the fair value of each option grant is
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 5.0 years. The weighted average fair value of options granted
at market value during fiscal 2002 was $1.34. The following weighted average
assumptions were used for the year ended June 30, 2001: dividend yield of 0%;
volatility of 50%; risk free interest rate of 4.9%; and expected life of 5.0
years. The weighted average fair value of options granted at market value during


                                      F-18
<PAGE>

fiscal 2001 was $2.07. The following weighted average  assumptions were used for
the year ended June 30, 2000:  dividend yield of 0%; volatility of 0%; risk free
interest rate of 6.0%; and expected life of 5.0 years. The weighted average fair
value of options granted at market value during fiscal 2000 was $0.57.

Employee Stock Purchase Plan
During fiscal 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 fiscal 2002, 2001, and
2000, 18,000, 20,000 and 18,000 shares were purchased under the plan,
respectively.

Warrants
During fiscal 2001, warrants to acquire 3,000 shares of Common Stock were
exercised (3,000 at $0.0014 per share). During fiscal 2000, warrants to acquire
158,000 shares of Common Stock were exercised (131,000 at $2.05 per share and
27,000 at $0.0014 per share). In addition, during fiscal 2001, warrants to
acquire 4,000 shares of Common Stock at $0.0014 expired.

Warrants were issued to outside investors prior to fiscal 1997. As of June 30,
2002 and 2001, no warrants are outstanding to purchase Common Stock.

NOTE 17 - EMPLOYEE BENEFIT PLAN

All employees over the age of 18 may participate in the Company's 401(k) profit
sharing plan. Employees may contribute up to 20% of their compensation subject
to certain limitations. Effective July 1, 2000, MemberWorks began making
quarterly matching contributions in Common Stock based on qualified employee
contributions. Treasury stock, calculated under the cost method, is used to
match qualified employee contributions. Matching contributions were $156,000 and
$126,000 for fiscal 2002 and 2001, respectively.

NOTE 18 - STATEMENT OF CASH FLOWS

Supplemental disclosure of cash flow information (in thousands):
<TABLE>
<CAPTION>

                                                                           Year ended June 30,
                                                                   -------------------------------------
                                                                     2002        2001          2000
                                                                     ----        ----          ----
<S>                                                              <C>          <C>           <C>
Cash paid during the period for interest                         $    377     $  1,246      $    90
Cash paid during the period for income taxes                           43          595          205
</TABLE>


                                      F-19
<PAGE>



NOTE 19 - EARNINGS (LOSS) PER SHARE

Basic and diluted earnings (loss) 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 (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>

                                                                         2002        2001         2000
                                                                       ----------  ----------  -----------
<S>                                                                 <C>         <C>         <C>
Numerator for basic and diluted earnings (loss) per share:
Net income (loss) before cumulative effect of accounting change      $   43,918  $  (26,757) $    10,333
Cumulative effect of accounting change                                   (5,907)    (25,730)           -
                                                                       ----------  ----------  -----------
Net income (loss)                                                    $   38,011  $  (52,487) $    10,333
                                                                       ==========  ==========  ===========

Denominator for basic earnings (loss) per share:
Weighted average number of common shares outstanding- basic              14,477      15,248       15,162
Effect of dilutive securities:
   Options and warrants                                                     432           -        1,831
                                                                       ----------  ----------  -----------
Weighted average number of common shares outstanding- diluted            14,909      15,248       16,993
                                                                       ==========  ==========  ===========

Basic earnings (loss) per share                                      $     2.63  $    (3.44) $      0.68
                                                                       ==========  ==========  ===========
Diluted earnings (loss) per share                                    $     2.55  $    (3.44) $      0.61
                                                                       ==========  ==========  ===========
</TABLE>


The diluted earnings (loss) 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 year ended June 30, 2002 and 2001 are
incremental weighted average stock option shares of approximately 3,383,000 and
2,870,000, respectively.

NOTE 20 - QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>

(In thousands, except per share amounts):

                                                                           Year ended June 30, 2002
                                                              ---------------------------------------------------
                                                                  First       Second       Third       Fourth
                                                                 Quarter      Quarter     Quarter      Quarter
<S>                                                            <C>          <C>         <C>          <C>
Revenues                                                       $  118,964   $  102,684  $  100,800   $ 105,154
Operating (loss) income                                            (2,578)        (171)     10,816       3,822
Income (loss) before cumulative effect of accounting change        40,351       (9,160)     10,495       2,232
Net income (loss)                                                  34,444       (9,160)     10,495       2,232
Diluted earnings (loss) before cumulative effect of
  accounting change per share                                        2.14        (0.62)       0.72        0.16

                                                                           Year ended June 30, 2001
                                                              ---------------------------------------------------
                                                                  First       Second       Third       Fourth
                                                                 Quarter      Quarter     Quarter      Quarter
Revenues                                                       $   97,799   $  117,616     133,877   $ 126,434
Operating loss                                                     (9,580)      (7,556)     (8,641)     (7,547)
Loss before cumulative effect of accounting change                 (7,158)      (7,267)     (6,416)     (5,916)
Net loss                                                          (32,888)      (7,267)     (6,416)     (5,916)
Diluted loss before cumulative effect of accounting change
  per share                                                         (0.48)       (0.48)      (0.42)      (0.38)

Pro Forma assuming SFAS 142 is retroactively applied:
Operating loss                                                 $   (7,937)  $   (5,550) $   (6,574)  $  (5,484)
Loss before cumulative effect of accounting change                 (5,515)      (5,261)     (4,349)     (3,853)
Net loss                                                          (31,245)      (5,261)     (4,349)     (3,853)
Diluted loss before cumulative effect of accounting change
  per share                                                         (0.37)       (0.34)      (0.28)      (0.25)

</TABLE>

                                      F-20
<PAGE>

NOTE 21 - SUBSEQUENT EVENTS

In July and August of 2002, the Board of Directors authorized an additional
1,000,000 and 1,500,000 shares, respectively, to be purchased under the buyback
program. Subsequent to these additional authorizations, the Company had
2,972,000 shares authorized for repurchase under its buyback program.

In August 2002, MemberWorks announced that it, along with certain of the other
former shareholders of iPlace, had settled their lawsuit against Homestore.com,
Inc. The total settlement amount in favor of the plaintiffs is $23,000,000 of
which MemberWorks will receive approximately $19,200,000. MemberWorks still
owns 1,601,000 shares of Homestore.com, Inc. common stock, including 367,000
shares held in escrow. These shares are currently unregistered.



                                      F-21
<PAGE>
<TABLE>
<CAPTION>

                            MemberWorks Incorporated
                 Schedule II - Valuation and Qualifying Accounts



                                               Balance at      Charged to    Charged to Other
                                              Beginning of     Costs and   Accounts -- Describe  Deductions --   Balance at End
Description                                      Period         Expense                            Describe        of Period
-----------                                   -------------   -----------  -------------------  -------------    ---------------
Year Ended June 30, 2002
<S>                                           <C>              <C>          <C>                 <C>                <C>
Allowance for cancellations                   $  30,004,000    $         -  $   277,412,000 A   $ 283,663,000 B    $  23,753,000
Valuation allowance for deferred tax assets      22,690,000              -      (16,109,000)D               -          6,581,000

Year Ended June 30, 2001
Allowance for cancellations                   $  33,477,000    $         -  $   362,623,000 A   $ 366,096,000 B    $  30,004,000
Valuation allowance for deferred tax assets      10,175,000              -       12,515,000 C               -         22,690,000

Year Ended June 30, 2000
Allowance for cancellations                   $  24,811,000    $         -  $   282,301,000 A   $ 273,635,000 B    $  33,477,000
Valuation allowance for deferred tax assets      14,284,000              -       (4,109,000)D               -         10,175,000

(A) Charged to balance sheet account "Deferred membership fees."
(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
fiscal year 2002.
(C) Increase in the valuation allowance for deferred tax assets is due to an
increase in deferred tax assets.
(D) Decrease in the valuation allowance for deferred tax assets is due to a
decrease in deferred tax assets.

</TABLE>
                                      F-22
<PAGE>




EXHIBIT 21


                            MEMBERWORKS INCORPORATED
                            SIGNIFICANT SUBSIDIARIES



                                                          STATE OF INCORPORATION
SUBSIDIARY                                                    OR ORGANIZATION
----------                                                    ---------------

Coverdell & Company, Inc.                                           Georgia
Discount Development Services, L.L.C.                               Illinois
MemberWorks Canada Corporation                                      Canada
Quota-Phone, Inc.                                                   New York



<PAGE>



EXHIBIT 23

                       CONSENT OF INDEPENDENT ACCOUNTANTS


We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-20235, 333-20237, 333-20241, 333-23161 and
333-86698) and on Form S-3 (Nos. 333-48762, 333-77077 and 333-47619) of
MemberWorks Incorporated of our report dated July 29, 2002, except for Note 21,
which is as of August 12, 2002, relating to the consolidated financial
statements and financial statement schedule, which appears in this Form 10-K.



PricewaterhouseCoopers LLP
New York, New York
August 20, 2002


<PAGE>