<PAGE>   1
                       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, 2001

                           Commission File No. 0-21527

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

<TABLE>
<S>                                                          <C>
DELAWARE                                                              06-1276882
--------                                                              ----------
(State of Incorporation)                                        (I.R.S. Employer
                                                             Identification No.)

9 West Broad Street;
Stamford, Connecticut                                                      06902
--------------------------------------                                     -----
(Address of principal executive offices)                              (Zip Code)
</TABLE>

                                 (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 3, 2001 was $211,681,563. 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 3, 2001 was
15,430,151.


DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders of
MemberWorks Incorporated are incorporated by reference in Part III of this
report.
<PAGE>   2
                                      INDEX



<TABLE>
<CAPTION>
                                                                                       Page
                                                                                       ----
<S>                                                                                    <C>
Part I   Item 1. Business                                                                 1

         Item 2. Properties                                                               6

         Item 3. Legal Proceedings                                                        6

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

         Executive Officers of the Registrant                                             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             16

         Item 8. Financial Statements and Supplementary Data                             16

         Item 9. Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure                                                        16

Part III Item 10. Directors and Executive Officers of the Registrant                     17

         Item 11. Executive Compensation                                                 17

         Item 12. Security Ownership of Certain Beneficial Owners and Management         17

         Item 13. Certain Relationships and Related Transactions                         17

Part IV  Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K        17

Signatures                                                                               18

Exhibit listing                                                                          19
</TABLE>
<PAGE>   3
                                     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 offered through the
programs. MemberWorks believes, based on 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,
that it is a leading designer and provider of innovative membership service
programs. 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 customer lists, 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 because the vendors agree to
allow discounts on products and services not generally available to non-members.
For 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 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.

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 are expected to reach $1,019 billion in
2001, an increase of 9% over the prior year. The Company believes that
membership service programs are one of the fastest growing areas of direct
marketing. 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 7.9
million members as of June 30, 2001, offer unique and valuable services,
information and savings opportunities. The service programs are marketed under
the name of the program on behalf of the client 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 and averaged
approximately $78 per year during fiscal 2001.

                                       1
<PAGE>   4
DESCRIPTION OF BUSINESS

MemberWorks is a leader in bringing value to consumers by designing innovative
membership programs that offer services and discounts on everyday needs in
healthcare, personal finance, insurance, travel, entertainment, computing,
fashion and personal security. MemberWorks combines marketing innovation,
entrepreneurial energy and consumer insight to create highly flexible membership
programs. These programs create new revenue streams and increase customer
loyalty for clients by creating alliances with highly valued partners. The
Company's money-saving programs fall into the following four key categories:


         Health and insurance

         MemberWorks' Health membership programs offer savings on prescription
         drugs; medical, elder, dental, chiropractic and vision care; eyeglasses
         and contact lenses; and hearing aids and exams.

         MemberWorks' Insurance membership programs offer competitively-priced
         insurance products such as accidental death insurance, accidental
         disability, term life insurance, short-term medical insurance and
         student medical insurance, as well as several supplemental medical
         coverage programs. Insurance membership programs also offer access to a
         comparison service which compares term life products from more than 10
         highly-rated insurance carriers.


         Lifestyle

         MemberWorks' unique Lifestyle membership programs offer members
         opportunities to receive exclusive savings on fashion; fitness;
         grooming; entertainment activities such as amusement parks, restaurants
         and movie theaters; leisure time merchandise, apparel and services;
         gardening; home improvements; decorating; crafts; cooking; travel;
         eyewear; prescriptions; cars; and financial services.

         Lifestyle membership programs also offer members services such as a
         discount shopping service that provides the guaranteed lowest prices on
         the highest quality brand name electronics, appliances and furniture
         and a wide range of home and garden ideas and information.


         Information

         MemberWorks' Information membership programs offer services such as
         technological assistance related to the latest products in consumer
         electronics, personal computers and home entertainment; 24 hour
         protection services; personal information monitoring services; personal
         business consulting services; personal finance, tax, insurance and
         retirement planning services; credit card registration services such as
         one-call urgent stop notices, fraud reimbursement and emergency cash
         services; and access to home sales values and neighborhood statistics.

         Information membership programs also offer savings on everyday
         household expenses including utilities, long distance telephone
         service, home repair, consumer electronics and home entertainment.


         International

         MemberWorks tailors its innovative consumer programs to meet the unique
         needs and interest of its international consumers. Each of the
         MemberWorks international programs feature alliances with popular,
         high-caliber partners that deliver superior service and savings to its
         members. MemberWorks' International membership programs combine many of
         the benefits offered in the Lifestyle, Information and Health and
         Insurance programs to form membership programs that meet the specific
         needs of its international consumers.

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>   5
If the membership is not canceled during the trial period, the consumer is
charged the annual membership fee. In the event that the member does not cancel
the membership after the initial membership term, he or she generally receives a
renewal kit 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.

MemberWorks offers its service programs to consumers through clients, such as
credit card issuers, who have an existing relationship with those consumers. The
client provides 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, such as a customer's name, address
and billing information, that is required to administer its business activities.
MemberWorks pays the client an annual royalty for initial and renewal membership
fees received from consumers provided to MemberWorks by the client. The
royalties paid to clients by MemberWorks average approximately 20% of revenue.

MemberWorks also offers its service programs through clients who have inbound
call centers. This type of marketing method which MemberWorks refers to as
MemberLink(SM), 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. In 2001, revenues from MemberLink(SM) programs increased
approximately 80% from the prior year and represented approximately 35% of the
Company's total revenue. MemberWorks pays the client either an annual royalty
for initial and renewal membership fees or a fee per marketing pitch or per
sale. Generally, MemberLink(SM) arrangements serve as a more efficient and cost
effective way to acquire members than the Company's traditional marketing model.

MemberWorks has developed a consultative product development process by
coordinating 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.
An important factor in the Company's ability to develop innovative programs is
its emphasis on telemarketing which allows it to obtain and analyze market trend
information quickly. 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 materials and fulfillment materials. MemberWorks also maintains
in-house call center facilities in order to answer its member's phone calls.
MemberWorks believes this in-house approach enables the Company to market its
products more efficiently and provide better customer service.

MemberWorks believes that it was the first membership company to introduce
aggregated discount services in the areas of health, sports, fashion and beauty,
financial, personal computer programs and personal protection services.
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 MemberLink(SM), 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 design 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 substantially
reduce the cost for MemberWorks to acquire new members, which results 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>   6
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 maintains four call centers located in Omaha, Nebraska;
Houston, Texas; Chicago, Illinois and Montreal, Canada with a total of 902
membership service representatives. The Company's service centers are available
to members toll-free, 24 hours a day, seven days a week. 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 advanced management information
systems to allow it to operate its business more efficiently and productively.
MemberWorks receives new member information from marketing partners on a daily
basis, and the system routes that data to other Company facilities for member
fulfillment thereby allowing MemberWorks to mail member information kits to new
members very rapidly. The system also 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 system interacts with the Company's advanced call routing system and
displays a member's profile prior to receiving the call in order to prepare the
Company's membership service representatives to better serve 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 both the Company's proprietary systems and 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 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 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 MemberLink(SM) 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>   7
MemberWorks continues to pursue its international expansion through the growth
of its subsidiaries located in Canada, MemberWorks Canada, and England,
MemberWorks Ltd. MemberWorks Canada and MemberWorks Ltd. provide retail
membership programs similar to those offered in the U.S. MemberWorks Canada also
provides credit card enhancement services to Canadian financial institutions
through wholesale arrangements. The Company's revenues from international
operations represented 2% of total revenues for the fiscal year ended June 30,
2001, an increase of 46% over the previous fiscal year.

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.

MemberWorks obtains substantially all of the information necessary for the
Company's marketing efforts from customer lists supplied by its clients. 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 dependent upon first
obtaining client approval.

Most 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
telemarketing, 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.

For the year ended June 30, 2001, no clients accounted for more than 10% of
revenues.


GOVERNMENT REGULATION

One of the substantial means which the Company uses to market its programs is
telemarketing. 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 promulgated thereunder prohibit deceptive, unfair or abusive
practices in telemarketing sales. Both the 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 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

                                       5
<PAGE>   8
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
state and federal 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, 2001, MemberWorks employed 1,329 persons on a full-time basis and
369 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:

<TABLE>
<CAPTION>
         Location                            Square Footage          Year of Lease Expiration
         --------                            --------------          ------------------------
<S>                                          <C>                     <C>
         Omaha, NE                              111,563                  2009 through 2015
         Stamford, CT                            72,626                  2002 through 2006
         Montreal, Canada                        48,373                  2003 through 2011
         Houston, TX                             41,591                        2006
         Orange, CA                              30,344                  2003 through 2004
         Langhorne, PA                           28,784                  2005 through 2006
         Atlanta, GA                             16,122                        2002
         Chicago, IL                             11,676                        2005
         White Plains, NY                        4,193                         2004
         London, England                         3,184                         2001
</TABLE>

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. 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.

                                       6
<PAGE>   9
In July 1999, a purported class action was instituted by plaintiffs Kathryn
Rosebear and Anne Bergman against the Company and other defendants in the United
States District Court, District of Minnesota. The suit, which seeks unspecified
monetary damages, alleges that the Company and the other defendants violated
their privacy policies and Minnesota consumer law. The complaint has been
dismissed.

In January 2001, a purported class action was instituted by plaintiff Brandy L.
Ritt against the Company and other defendants in the Court of Common Pleas in
Cuyahoga County, Ohio. The suit, which seeks unspecified monetary damages,
alleges that the Company and the other defendants violated various provisions of
Ohio's consumer protection laws in connection with the marketing of certain
membership programs offered by the Company. The Company believes that the claims
asserted against it are unfounded and the Company will vigorously defend its
interests against this suit.

In March 2001, a purported class action was instituted by plaintiff Teresa
McClain against Coverdell & Company ("Coverdell"), a wholly-owned subsidiary of
the 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 insurance products. The Company believes
that the claims asserted against Coverdell are unfounded and the Company and
Coverdell will vigorously defend their interests against this suit.

In June 2001, purported class actions were instituted by plaintiffs Judith
Jeselskis and Marcia Walters against the Company and other defendants in Circuit
Court of the Tenth Judicial District, Highlands County Civil Division, Florida,
and Circuit Court of the Sixth Judicial Circuit, Pinellas County Civil Division,
Florida, respectively. The suits, which seek unspecified monetary damages,
allege that the Company and the other defendants violated the Florida Deceptive
and Unfair Trade Practices Act, in connection with the marketing of certain
membership programs offered by the Company. The Company believes that the
allegations made in this lawsuit are unfounded and the Company will vigorously
defend its interests against the suits.

In July 2001, a purported class action was instituted by Alan Stone against the
Company and other defendants in Superior Court of the State of California,
County of Orange. The suit, which seeks unspecified monetary damages, alleges
that the Company and the other defendants violated California business practices
law. The Company believes that the allegations made in this lawsuit are
unfounded and the Company will vigorously defend its interests against this
suit.


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, 2001.

                                       7
<PAGE>   10
Executive Officers of the Registrant

The executive officers of the registrant of MemberWorks and their respective
ages as of July 31, 2001 are as follows:


<TABLE>
<CAPTION>
Name                      Age           Position
----                      ---           --------
<S>                       <C>           <C>
Gary A. Johnson           46            President and Chief Executive Officer, Director
James B. Duffy            47            Executive Vice President and Chief Financial Officer
Walter Kazmierczak        46            Executive Vice President, Marketing Services
William Olson             43            Executive Vice President, Client Services
David Schachne            40            Executive Vice President, Business Development
Dennis P. Walker          56            Executive Vice President, Director
</TABLE>

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

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

WALTER KAZMIERCZAK joined MemberWorks in May of 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 of 2001 and currently serves as
Executive Vice President, Client Services. Prior to joining MemberWorks, Mr.
Olson served in various senior positions such as President & CEO of
Dunlop/Maxfli Sports Corporation, President & CEO of Gold Coast Beverage
Distributors and President & CEO 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
in 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>   11
                                     PART II

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

The 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.

<TABLE>
<CAPTION>
                                                          High         Low
                                                          ----         ---
<S>                                                     <C>          <C>
        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
</TABLE>


<TABLE>
<CAPTION>
                                                          High         Low
                                                          ----         ---
<S>                                                     <C>          <C>
        Fiscal Year Ended June 30, 2000:
          First Quarter                                 $42.19       $26.50
          Second Quarter                                 36.25        21.88
          Third Quarter                                  80.88        25.25
          Fourth Quarter                                 41.25        25.13
</TABLE>

As of August 3, 2001, there were 40,000,000 shares of Common Stock authorized of
which 15,430,151 shares of Common Stock were outstanding, held by approximately
2,410 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. 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>   12
Item 6.  Selected Financial Data

The selected Consolidated Statements of Operations data for each of the years
ended June 30, 2001 through 1997 and the selected Consolidated Balance Sheet
data as of June 30, 2001 through 1997 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,
                                                                                  -------------------
                                                         2001            2000            1999             1998            1997
                                                         ----            ----            ----             ----            ----
                                                                        (In thousands, except per share data)
<S>                                                   <C>             <C>             <C>             <C>             <C>
CONSOLIDATED STATEMENTS OF
  OPERATIONS DATA:
Revenues                                              $ 475,726       $ 330,107       $ 218,086       $ 120,834       $  79,174
Total expenses                                          509,050         331,547         212,292         119,449          83,962
                                                      ---------       ---------       ---------       ---------       ---------
Operating (loss) income                                 (33,324)         (1,440)          5,794           1,385          (4,788)
Net (loss) gain on sale of investment                    (2,172)          8,854              --              --              --
Other (expense) income, net principally interest           (450)            873           2,154           1,700             930
                                                      ---------       ---------       ---------       ---------       ---------
(Loss) income before equity in affiliate and
   minority interest                                    (35,946)          8,287           7,948           3,085          (3,858)
Equity in income (loss) of affiliate                         83              19          (1,912)           (638)             --
Minority interest                                         9,106           2,027              --              --              --
                                                      ---------       ---------       ---------       ---------       ---------
Net (loss) income before cumulative effect of
   accounting change                                    (26,757)         10,333           6,036           2,447          (3,858)
Cumulative effect of accounting change                  (25,730)             --          (3,367)             --              --
                                                      ---------       ---------       ---------       ---------       ---------
Net (loss) income                                     $ (52,487)      $  10,333       $   2,669       $   2,447       $  (3,858)
                                                      =========       =========       =========       =========       =========

Basic (loss) earnings per share:
   (Loss) income before cumulative effect of
     accounting change                                $   (1.75)      $    0.68       $    0.39       $    0.16       $   (0.35)
   Cumulative effect of accounting change                 (1.69)             --           (0.22)             --              --
                                                      ---------       ---------       ---------       ---------       ---------
   Basic (loss) earnings per share                    $   (3.44)      $    0.68       $    0.17       $    0.16       $   (0.35)
                                                      =========       =========       =========       =========       =========

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

Weighted average common shares outstanding
Basic                                                    15,248          15,162          15,361          14,837          13,901
                                                      =========       =========       =========       =========       =========
Diluted                                                  15,248          16,993          17,124          16,381          13,901
                                                      =========       =========       =========       =========       =========
</TABLE>


<TABLE>
<CAPTION>
                                                                                 June 30,
                                                    ----------------------------------------------------------------
                                                    2001           2000          1999           1998            1997
                                                    ----           ----          ----           ----            ----
                                                                              (In thousands)
<S>                                             <C>             <C>            <C>            <C>            <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents                       $  22,736       $  30,169      $  50,939      $  35,933      $  40,758
Cash flow provided by operating activities         13,013          44,910         50,573          8,930          7,835
Total assets                                      348,461         316,772        209,827        133,291         84,423
Long-term obligations                               3,057           1,083              6             69            438
Shareholders' (deficit) equity                    (25,965)         19,021         30,287         28,442         14,030
</TABLE>

                                       10
<PAGE>   13
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 intended to enhance the existing relationships between businesses and
consumers. MemberWorks derives its revenues principally from annually renewable
membership fees. MemberWorks 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.


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 Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"),
revenues would have increased 40% to $462.3 million in 2001. 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. Revenues from renewals increased to $170.7 million in 2001 from $122.5
million in 2000. As a percentage of individual membership revenues, these
amounts represented 40% in 2001 and 41% 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, operating expenses increased to
19.0% in 2001 from 18.8% in 2000. Excluding the effects of SAB 101, operating
expenses would have been 19.5% of revenues in 2001. Operating expenses, as a
percentage of revenues, increased 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.

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, general and administrative expenses
increased to 21.0% in 2001 from 20.5% in 2000. Excluding the effect of SAB 101,
general and administrative expenses would have been 21.6% of revenues in 2001.
General and administrative expenses as a percentage of revenues increased
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.

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., ("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.

                                       11
<PAGE>   14
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 has taken a non-recurring charge of $3.0 million.

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.


FISCAL 2000 COMPARED TO FISCAL 1999

REVENUES. Revenues increased 51% to $330.1 million in 2000 from $218.1 million
in 1999 due to an increase in the Company's membership base and an increase in
the weighted average program fee. The Company's membership base increased to 6.9
million members at June 30, 2000 from 5.3 million members at June 30, 1999. The
increase in the Company's membership base was due to increased demand for the
Company's existing programs, new programs introduced in fiscal 1999 and 2000 and
members acquired through the Company's business acquisitions. The increase in
the weighted average program fee is due to an increase in program pricing and
introduction of new programs with higher fees. Revenues from renewals increased
to $122.5 million in 2000 from $92.2 million in 1999. As a percentage of
individual membership revenues, these amounts represented 41% in 2000 and 45% in
1999. The decreased ratio was due to the rapid growth in new members added.

OPERATING EXPENSES. Operating expenses increased 44% to $62.0 million in 2000
from $43.0 million in 1999 due to the servicing requirements of a larger
membership base. As a percentage of revenues, operating expenses decreased to
18.8% in 2000 from 19.7% in 1999. The ratio improved due to utilization of the
Company's call centers to full capacity during the majority of fiscal 2000.
During the fourth quarter of fiscal 2000, MemberWorks opened a third call center
to provide capacity for the Company's future growth plans.

MARKETING EXPENSES. Marketing expenses increased 54% to $195.3 million in 2000
from $126.8 million in 1999 primarily due to increased expenses required to grow
the membership base. As a percentage of revenues, marketing expenses increased
to 59.1% in 2000 from 58.1% in 1999 due to increased costs incurred during the
fourth quarter of fiscal 1999 and the first quarter of 2000 related to
addressing privacy issues in conjunction with the Gramm Leach Act which was
passed in November 1999.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 68% to $67.6 million in 2000 from $40.2 million in 1999. As a
percentage of revenues, general and administrative expenses increased to 20.5%
in 2000 from 18.4% in 1999 due to the Company's efforts to build the
infrastructure necessary to pursue its online and international initiatives.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
increased to $6.7 million in 2000 from $2.2 million in 1999 due to the
acquisition of three additional businesses during fiscal 2000. As a percentage
of revenues, amortization of goodwill and other intangibles increased to 2.0% in
2000 from 1.0% in 1999.

                                       12
<PAGE>   15
GAIN ON SALE OF INVESTMENT, NET. In February 2000, MemberWorks sold its equity
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 $47.5 million
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 $36.3 million. During the fourth quarter of fiscal 2000, MemberWorks
sold a portion of the 24/7 shares. Proceeds from the sales were $5.2 million and
related realized losses included in income were $2.3 million. The financial
impact of the above transactions is a net gain of $8.9 million.

OTHER INCOME, NET. Other income, net decreased to $0.9 million in 2000 compared
to $2.2 million reported in 1999 due to a decrease in the Company's cash
position. The Company's cash position decreased to $30.2 million in June 2000
from $50.9 million in June 1999 primarily due to increased spending related to
the Company's share repurchase program and business acquisitions. MemberWorks
invests in short-term, investment-grade, interest-bearing securities, and the
amount of interest income fluctuates based upon the amount of funds available
for investment and prevailing interest rates.

PROVISION FOR INCOME TAXES. MemberWorks was not required to record a provision
for income taxes for the years ended June 30, 2000 and 1999 due to tax losses
realized. As of June 30, 2000, MemberWorks had accumulated federal net operating
loss carry forwards of $93.6 million.


LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of capital has been from internally generated cash
from operations. As of June 30, 2001, MemberWorks had cash and cash equivalents
of $22.7 million. In addition, MemberWorks has a $28.0 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, 2001. The
bank credit facility requires MemberWorks to maintain a compensating balance of
$10.0 million in addition to certain financial covenants. The Company believes
that existing cash balances, together with its available bank credit facility
and future cash flows from operations, will be sufficient to meet its funding
requirements for at least the next twelve months.

Net cash provided by operating activities was $13.0 million, $44.9 million and
$50.6 million for the years ended June 30, 2001, 2000 and 1999, respectively.
The decrease in operating cash flow in 2001 was due to increased spending
related to the expansion of the Company's online and international initiatives.
Changes in working capital items decreased cash by $3.0 million in 2001 and
increased cash by $29.0 million in 2000 and $20.9 million in 1999. The decrease
in changes in working capital in fiscal 2001 is primarily due to the Company's
slowdown in membership growth in the second half of fiscal 2001.

Net cash used by investing activities decreased to $18.2 million in 2001 from
$34.2 million in 2000 and $32.4 million in 1999. 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 fiscal 1999,
MemberWorks paid $7.8 million in cash to acquire Quota-Phone, Inc. and $9.2
million in cash to acquire CUC Canada. 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. In addition, the Company's capital expenditures were
$15.1 million in 2001 compared to $20.3 million in 2000 and $12.1 million in
1999.

The Company's net cash used in financing activities was $2.1 million in 2001
compared to $31.5 million in 2000 and $3.2 million in 1999. Under the Company's
stock repurchase program, MemberWorks repurchased 340,000 shares for $8.9
million in fiscal 2001, compared to the repurchase of 1,097,000 shares for $36.3
million in fiscal 2000 and 111,000 shares for $3.8 million in fiscal 1999. As of
June 30, 2001, approximately 699,000 shares were authorized for repurchase.

The Company did not have any material commitments for capital expenditures as of
June 30, 2001. However, the Company anticipates to incur spending for capital
expenditures consistent with its anticipated growth of operations. The Company
intends to utilize cash generated from operations and its funds available under
its credit facility to fulfill any capital expenditure requirements for fiscal
2002.

                                       13
<PAGE>   16
BUSINESS COMBINATIONS

In October 2000, the Company increased its ownership in DDS from 19% to 100%.
The Company paid $8.2 million in cash and 425,232 shares of MemberWorks Common
Stock with an approximate fair market value of $13.6 million 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 of
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.

MemberWorks announced on August 10, 2001, that a definitive agreement had been
signed under which Homestore.com, Inc. will acquire iPlace in a cash and stock
transaction. The Company expects to receive approximately $52 million in cash
and an additional $36 million in Homestore.com stock for its 58% ownership in
iPlace. The transaction closed on August 24, 2001.


NEW ACCOUNTING PRONOUNCEMENTS

The Securities and Exchange Commission staff (the "Staff") issued SAB 101 in
December 1999. SAB 101 establishes the Staff's preference that membership fees
should not be recognized in earnings prior to the expiration of refund
privileges. Notwithstanding the Staff's preference described above, it is also
stated in SAB 101 that the Staff will not object to the recognition of
refundable membership fees, net of estimated refunds, as earned revenue over the
membership period (the Company's historical method) in limited circumstances
where all of certain criteria set forth in SAB 101 have been met.

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 pro-rata
basis over the corresponding membership period, but instead will be 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 $25.7
million 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 $68.2 million 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 accounting
change for the fiscal year ended June 30, 2001, is an increase of $13.5 million,
$3.8 million and $0.25, respectively.

This change in accounting for the recognition of membership fees in income has
no impact on the Company's cash flows or on the value of the underlying
memberships.

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations" ("SFAS 141"), which is effective for business
combinations initiated after June 30, 2001. SFAS 141 eliminates the pooling of
interest method of accounting for business combinations and requires that all
business combinations occurring on or after July 1, 2001 are accounted for under
the purchase method.

In July 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), which is effective for fiscal years beginning after
December 15, 2001. Early adoption is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not been previously issued. 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 tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives. SFAS
142 provides specific guidance for testing goodwill and intangible assets that
will not be amortized for impairment. In addition, SFAS 142 expands the
disclosure requirements about goodwill and other intangible assets in the years
subsequent to their acquisition. Impairment losses for goodwill and
indefinite-life intangible assets that arise due to the initial application of
SFAS 142 are to be reported as resulting from a change in

                                       14
<PAGE>   17
accounting principle. However, goodwill and intangible assets acquired after
June 30, 2001 will be subject immediately to the provisions of SFAS 142. The
Company is currently assessing but has not yet determined the impact of SFAS 142
on its financial statements.

In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs and is effective for
fiscal years beginning after June 15, 2002. The Company does not expect SFAS 143
to have a material impact on its financial statements.


FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that are
based on current expectations, estimates, forecasts and projections about the
industry in which MemberWorks operates and the Company's management's beliefs
and assumptions. 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 into the Company's management and
         operations and operate successfully acquired businesses;

    -    Changes in the marketing techniques of credit card issuers;

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

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

    -    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 economies where MemberWorks does business, such that
         consumer spending and related consumer debt are impacted;

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

    -    New accounting pronouncements

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.

                                       15
<PAGE>   18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk


Interest Rate

The Company has a $28.0 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, 2001. 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 March 1,
2002, 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 the United Kingdom and
Canada and therefore, is subject to foreign currency rate exposure.
Historically, international sales have been denominated in British pounds
sterling and the Canadian dollar. The functional currencies of the Company's
foreign operations are the local currencies. Assets and liabilities of these
subsidiaries are translated into U.S. dollars at exchange rates in effect as of
the Balance Sheet date. Income and expense items are translated at average
exchange rates 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.


Fair Value

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.

                                       16
<PAGE>   19
                                    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.

                                     PART IV

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

(a)  Index to Financial Statements and Financial Statement Schedules

<TABLE>
<CAPTION>
                                                                                                       Page
                                                                                                       ----
<S>                                                                                                    <C>
     Report of PricewaterhouseCoopers LLP, Independent Accountants                                      F-1
     Consolidated Balance Sheets as of June 30, 2001 and 2000                                           F-2
     Consolidated Statements of Operations for the years ended June 30, 2001, 2000 and 1999             F-3
     Consolidated Statements of Shareholders' (Deficit) Equity for the years
     ended June 30, 2001, 2000 and 1999                                                                 F-4
     Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000 and 1999             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, 2001, 2000 and 1999        F-20
</TABLE>

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


(b)      Reports on Form 8-K

         On May 8, 2001, the Company filed on Form 8-K under Item 5, "Other
         Events" information about the Injunction and Final Judgement pursuant
         to a Stipulation voluntarily entered into among Sears Roebuck and Co.,
         MemberWorks and the Attorney General of the State of California and the
         District Attorneys of Orange and Ventura Counties.


 (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.

                                       17
<PAGE>   20
                            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: September 6, 2001

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


<TABLE>
<CAPTION>
Signature                                   Title                                                Date
---------                                   -----                                                ----
<S>                                         <C>                                                  <C>
By: /s/ Gary A. Johnson                     President, Chief Executive Officer and Director      September 6, 2001
    ---------------------------------
Gary A. Johnson

By: /s/ Dennis P. Walker                    Executive Vice President and Director                September 6, 2001
    ---------------------------------
Dennis P. Walker

By: /s/ James B. Duffy                      Executive Vice President, Chief Financial Officer    September 6, 2001
    ---------------------------------
James B. Duffy

By: /s/ Stephen J. Clearman                 Director                                             September 6, 2001
    ---------------------------------
Stephen J. Clearman

By: /s/ Alec L. Ellison                     Director                                             September 6, 2001
    ---------------------------------
Alec L. Ellison

By: /s/ Michael McClorey                    Director                                             September 6, 2001
    ---------------------------------
Michael McClorey

By: /s/ Michael R. O'Brien                  Director                                             September 6, 2001
    ---------------------------------
Michael R. O'Brien

By: /s/ Marc S. Tesler                      Director                                             September 6, 2001
    ---------------------------------
Marc S. Tesler
</TABLE>

                                       18
<PAGE>   21
<TABLE>
<CAPTION>
Exhibit
No.                         Description
-------                     -----------
<S>           <C>
    *2.1      Agreement and Plan of Merger among MemberWorks Incorporated, CIC
              Merger, Inc., and ConsumerInfo.Com, Inc. dated as of April 27,
              1998. (filed as Exhibit 2.1 to the Company's Current Report on
              Form 8-K, Registration No. 333-10541, filed on August 11, 1999)

    *2.2      First Amendment to Agreement and Plan of Merger among MemberWorks
              Incorporated, CIC Merger, Inc., and ConsumerInfo.Com, Inc. dated
              as of June 30, 1999. (filed as Exhibit 2.2 to the Company's
              Current Report on Form 8-K, Registration No. 333-10541, filed on
              August 11, 1999)

    *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.

    *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.

    *10.11    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)

    *10.13    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)
</TABLE>

                                       19
<PAGE>   22
<TABLE>
<S>           <C>
    *10.18    Lease Agreement between Stamford Towers Limited Partnership and
              the Registrant, dated January 15, 1996. (filed as Exhibit 10.22 to
              the Company's Registration Statement on Form S-1, Registration No.
              333-10541, filed on October 18, 1996)

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

    *10.23    Lease Agreement between Stamford Towers Limited Partnership and
              the Registrant, dated May 20, 1997. (filed as Exhibit 10.23 to the
              Company's Annual Report on Form 10-K, 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.
</TABLE>


* Previously filed.

                                       20
<PAGE>   23
                            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 accompanying
index present fairly, in all material respects, the financial position of
MemberWorks Incorporated and its subsidiaries at June 30, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2001 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 accompanying 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.





PricewaterhouseCoopers LLP
New York, New York
July 27, 2001, except for Note 19 as to which the date is August 24, 2001

                                      F-1
<PAGE>   24
                            MEMBERWORKS INCORPORATED

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

<TABLE>
<CAPTION>
                                                                                       June 30,
                                                                                       --------
                                                                                 2001            2000
                                                                                 ----            ----
<S>                                                                           <C>             <C>
                                     ASSETS
Current assets:
    Cash and cash equivalents                                                 $  22,736       $  30,169
    Marketable securities                                                            --           6,326
    Accounts receivable                                                          20,446          17,836
    Prepaid membership materials                                                  3,903           4,891
    Prepaid expenses                                                              5,857           3,837
    Membership solicitation and other deferred costs                            154,059         128,767
                                                                              ---------       ---------
             Total current assets                                               207,001         191,826
Fixed assets, net                                                                39,687          34,615
Goodwill, net                                                                    84,395          71,497
Intangible and other assets, net                                                 17,378          18,834
                                                                              ---------       ---------
             Total assets                                                     $ 348,461       $ 316,772
                                                                              =========       =========

                 LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
    Current maturities of long-term obligations                               $     516       $     665
    Accounts payable                                                             49,505          49,693
    Accrued liabilities                                                          64,634          62,642
    Due to related parties                                                        2,028           1,852
    Deferred membership fees                                                    243,024         165,437
                                                                              ---------       ---------
             Total current liabilities                                          359,707         280,289
Long-term liabilities                                                             3,057           1,083
                                                                              ---------       ---------
             Total liabilities                                                  362,764         281,372
                                                                              ---------       ---------

Commitments and Contingencies (Note 8)

Minority interest                                                                 6,505          16,379
Mandatorily redeemable convertible preferred securities of subsidiary             5,157              --

Shareholders' (deficit) equity:
    Preferred stock, $0.01 par value --
       1,000 shares authorized; no shares issued                                     --              --
    Common stock, $0.01 par value --
       40,000 shares authorized; 17,308 shares issued
       (16,507 shares at June 30, 2000)                                             173             165
    Capital in excess of par value                                              107,835          91,398
    Deferred compensation                                                            --             (44)
    Accumulated deficit                                                         (80,196)        (27,709)
    Accumulated other comprehensive loss                                           (370)           (145)
    Treasury stock, 1,920 shares at cost (1,585 shares at June 30, 2000)        (53,407)        (44,644)
                                                                              ---------       ---------
             Total shareholders' (deficit) equity                               (25,965)         19,021
                                                                              ---------       ---------
             Total liabilities and shareholders' (deficit) equity             $ 348,461       $ 316,772
                                                                              =========       =========
</TABLE>


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

                                      F-2
<PAGE>   25
                            MEMBERWORKS INCORPORATED

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

<TABLE>
<CAPTION>
                                                                                           For the year ended June 30,
                                                                                           ---------------------------
                                                                                       2001            2000            1999
                                                                                       ----            ----            ----
<S>                                                                                 <C>             <C>             <C>
Revenues                                                                            $ 475,726       $ 330,107       $ 218,086

Expenses:
    Operating                                                                          90,368          62,040          43,002
    Marketing                                                                         305,032         195,253         126,814
    General and administrative                                                         99,732          67,600          40,233
    Amortization of goodwill and other intangibles                                     10,918           6,654           2,243
    Non-recurring charge (Note 8)                                                       3,000              --              --
                                                                                    ---------       ---------       ---------

Operating (loss) income                                                               (33,324)         (1,440)          5,794
Net (loss) gain on sale of investment (Note 5)                                         (2,172)          8,854              --
Other (expense) income, net principally interest                                         (450)            873           2,154
                                                                                    ---------       ---------       ---------

(Loss) income before equity in affiliate and minority interest                        (35,946)          8,287           7,948
Equity in income (loss) of affiliate                                                       83              19          (1,912)
Minority interest (Notes 11 and 12)                                                     9,106           2,027              --
                                                                                    ---------       ---------       ---------

(Loss) income before income taxes                                                     (26,757)         10,333           6,036
Provision for income taxes                                                                 --              --              --
                                                                                    ---------       ---------       ---------

(Loss) income before cumulative effect of accounting change                           (26,757)         10,333           6,036
Cumulative effect of accounting change (Note 3)                                       (25,730)             --          (3,367)
                                                                                    ---------       ---------       ---------
Net (loss) income                                                                   $ (52,487)      $  10,333       $   2,669
                                                                                    =========       =========       =========

Basic (loss) earnings per share:
     (Loss) income before cumulative effect of accounting change                    $   (1.75)      $    0.68       $    0.39
     Cumulative effect of accounting change                                             (1.69)             --           (0.22)
                                                                                    ---------       ---------       ---------
     Basic (loss) earnings per share                                                $   (3.44)      $    0.68       $    0.17
                                                                                    =========       =========       =========

Diluted (loss) earnings per share:
     (Loss) income before cumulative effect of accounting change                    $   (1.75)      $    0.61       $    0.35
     Cumulative effect of accounting change                                             (1.69)             --           (0.20)
                                                                                    ---------       ---------       ---------
     Diluted (loss) earnings per share                                              $   (3.44)      $    0.61       $    0.16
                                                                                    =========       =========       =========

Pro forma assuming accounting changes are retroactively applied:
     Net (loss) income                                                              $ (26,757)      $  22,486       $  (3,063)
     Basic (loss) earnings per share                                                    (1.75)           1.48           (0.20)
     Diluted (loss) earnings per share                                                  (1.75)           1.32           (0.18)


Weighted average common shares used in (loss) earnings per share calculations:
     Basic                                                                             15,248          15,162          15,361
                                                                                    =========       =========       =========
     Diluted                                                                           15,248          16,993          17,124
                                                                                    =========       =========       =========
</TABLE>

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

                                      F-3
<PAGE>   26
                            MEMBERWORKS INCORPORATED

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

<TABLE>
<CAPTION>

                                                                                                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, 1998              15,653   $  156   $  74,478    $   (978)     $ (40,711)    $       --    $  (4,503)  $   28,442
For the year ended June 30, 1999:
  Issuance of common stock              256        3       2,521                                                               2,524
  Acquisition of treasury stock                                                                                  (3,801)     (3,801)
  Deferred compensation                                                   467                                                    467
  Comprehensive income:
    Net income                                                                         2,669
    Currency translation adjustment                                                                    (14)
  Total comprehensive income                                                                                                   2,655
                                     ------   ------   ---------    --------      ---------     ----------    ---------   ----------
Balance - June 30, 1999              15,909      159      76,999        (511)       (38,042)           (14)      (8,304)      30,287
For the year ended June 30, 2000:
  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
For the year ended June 30, 2001:
  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 common 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)
                                     ======   ======   =========    ========      =========     ==========    =========   ==========
</TABLE>

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

                                      F-4
<PAGE>   27
                            MEMBERWORKS INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                  For the year ended June 30,
                                                                                  ---------------------------
                                                                              2001           2000            1999
                                                                              ----           ----            ----
<S>                                                                        <C>             <C>             <C>
OPERATING ACTIVITIES
  Net (loss) income                                                        $ (52,487)      $  10,333       $   2,669
  Adjustments to reconcile net (loss) income to net cash provided
  by operating activities:
     Cumulative effect of accounting change                                   25,730              --           3,367
     Net loss (gain) on investment                                             2,172          (8,854)             --
     Minority interest                                                        (9,106)         (2,027)             --
     Equity in (income) loss of affiliate                                        (83)            (19)          1,912
     Membership solicitation and other deferred costs                       (252,361)       (234,826)       (146,519)
     Amortization of membership solicitation and other deferred costs        269,538         184,395         116,913
     Deferred membership fees                                                  9,266          53,451          45,069
     Depreciation and amortization                                            20,498          13,002           5,517
     Other                                                                     2,863             505             730

  Change in assets and liabilities:
     Accounts receivable                                                      (2,299)         (5,237)         (1,549)
     Prepaid membership materials                                                202            (699)         (1,026)
     Prepaid expenses                                                         (2,938)         (1,141)         (1,161)
     Other assets                                                                773            (874)         (1,212)
     Related party payables                                                      176              63              --
     Accounts payable                                                           (827)         16,361           5,941
     Accrued liabilities                                                       1,896          20,477          19,922
                                                                           ---------       ---------       ---------
Net cash provided by operating activities                                     13,013          44,910          50,573
                                                                           ---------       ---------       ---------

INVESTING ACTIVITIES
  Acquisition of fixed assets                                                (15,133)        (20,326)        (12,101)
  Other investments                                                            4,144           3,466              --
  Business combinations, net of cash acquired                                 (7,185)        (17,326)        (20,316)
                                                                           ---------       ---------       ---------
Net cash used in investing activities                                        (18,174)        (34,186)        (32,417)
                                                                           ---------       ---------       ---------

FINANCING ACTIVITIES
  Net proceeds from issuance of stock and warrants                             8,059           4,401           1,022
  Net (repayments of) borrowings from credit facility                           (526)            529              --
  Treasury stock purchases                                                    (8,917)        (36,340)         (3,801)
  Payments of long-term obligations                                             (755)            (74)           (371)
                                                                           ---------       ---------       ---------
Net cash used in financing activities                                         (2,139)        (31,484)         (3,150)
                                                                           ---------       ---------       ---------
Effect of exchange rate changes on cash and cash equivalents                    (133)            (10)             --
                                                                           ---------       ---------       ---------
Net (decrease) increase in cash and cash equivalents                          (7,433)        (20,770)         15,006
Cash and cash equivalents at beginning of year                                30,169          50,939          35,933
                                                                           ---------       ---------       ---------
Cash and cash equivalents at end of year                                   $  22,736       $  30,169       $  50,939
                                                                           =========       =========       =========
</TABLE>

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

                                      F-5
<PAGE>   28
NOTE 1 - NATURE OF BUSINESS

MemberWorks Incorporated (the "Company") is a leader in bringing value to
consumers by designing innovative membership programs that offer services and
discounts on everyday needs in healthcare, personal finance, insurance, travel,
entertainment, computing, fashion and personal security. As of June 30, 2001,
7.9 million members 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, to strengthen customer
affinity and to 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 presentation of the financial statements.


Use of estimates

The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management of the Company to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. 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".


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 obligations 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 lesser of the estimated
productive lives of the assets or the terms of the related leases, and range
from two to eleven years. 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. An allowance for cancellations is established based on the
Company's most recent actual cancellation experience and is updated regularly.
Deferred membership fees are recorded, net of estimated cancellations, when the
trial period has elapsed, and are amortized as revenues from membership fees
upon the expiration of membership refund privileges. Membership cancellations
are charged to the allowance for cancellations on a current basis. 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. Accrued
liabilities set forth in the accompanying Consolidated Balance Sheets as of June
30, 2001 and 2000 include an allowance for membership cancellations of
$30,004,000 and $33,477,000, respectively.

                                      F-6
<PAGE>   29
For the year ended June 30, 2001, no clients accounted for more than 10% of
revenues. Membership service programs sponsored by the Company's largest client
accounted for 12.8% of revenues for the fiscal year ended June 30, 2000.
Membership service programs sponsored by the Company's three largest clients
accounted for 15.7%, 11.1% and 10.7% of revenues, respectively, for the fiscal
year ended June 30, 1999.


Membership solicitation and other deferred costs

Membership solicitation costs include telemarketing and direct mail costs
related directly to membership solicitation (i.e., direct response advertising
costs). In accordance with 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 and transaction processing fees, 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 initial membership
fee. However, if membership solicitation costs were to exceed 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. Earnings per share assuming dilution 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. As of June 30,
2001, restricted cash included in cash and cash equivalents on the Balance Sheet
is $991,000.


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. 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

Goodwill represents the excess of acquisition costs over the fair value of net
assets acquired and is amortized on a straight-line basis over the estimated
useful lives ranging from seven to twenty years. Goodwill set forth in the
accompanying Consolidated Balance Sheets as of June 30, 2001 and 2000 is
$84,395,000 and $71,497,000, respectively, net of accumulated amortization of
$13,040,000 and $5,504,000, respectively. If it became probable that the
projected future undiscounted cash flows of acquired assets were less than the
carrying value of the goodwill, the Company would recognize an impairment loss
in accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of"
("SFAS 121"). As of June 30, 2001, no impairment has been indicated. See also
New accounting pronouncements.

Intangible assets principally include member and customer relationships and
employment agreements that arose in connection with business acquisitions. Other
acquired intangibles, except member relationships, are recorded at cost and are
amortized on a straight-line basis over their estimated useful lives ranging
from two to twenty years. The value of member relationships is amortized using
an accelerated method based on estimated future cash flows. Intangible and other
assets set forth in the accompanying Consolidated Balance Sheets as of June 30,
2001 and 2000

                                      F-7
<PAGE>   30
include acquired member and customer relationships and employment agreements of
$14,407,000 and $14,309,000, respectively, net of accumulated amortization of
$6,819,000 and $3,546,000, respectively, and trademarks of $33,000 and $43,000,
respectively, net of accumulated amortization of $17,000 and $7,000,
respectively. The Consolidated Balance Sheets as of June 30, 2001 and 2000
include total accumulated amortization of intangible and other assets of
$7,591,000 and $4,207,000, respectively.


Impairment of long-lived assets

The Company accounts for the impairment and disposition of long-lived assets in
accordance with SFAS 121. The Company reviews its intangible and other
long-lived assets for events or changes in circumstances which indicate that
their carrying value may not be recoverable. As of June 30, 2001, no impairment
has been indicated.


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.


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

MemberWorks adopted Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101") as of July 1, 2000. SAB 101 establishes the
Securities and Exchange Commission staff's (the "Staff") preference that
membership fees should not be recognized in earnings prior to the expiration of
refund privileges. See Note 3 for further information on the effects of the
adoption of SAB 101.

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations" ("SFAS 141"), which is effective for business
combinations initiated after June 30, 2001. SFAS 141 eliminates the pooling of
interest method of accounting for business combinations and requires that all
business combinations occurring on or after July 1, 2001 are accounted for under
the purchase method.

In July 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), which is effective for fiscal years beginning after
December 15, 2001. Early adoption is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not been previously issued. 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. SFAS
142 provides specific guidance for testing goodwill and intangible assets that
will not be amortized for impairment. In addition, SFAS 142 expands the
disclosure requirements about goodwill and other intangible assets in the years
subsequent to their acquisition. Impairment losses for goodwill and
indefinite-life intangible assets that arise due to the initial application of
SFAS 142 are to be reported as resulting from a change in accounting principle.
However, goodwill and intangible assets acquired after June 30, 2001 will be
subject immediately to the provisions of SFAS 142. The Company is currently
assessing but has not yet determined the impact of SFAS 142 on its financial
statements.

In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs and is effective for
fiscal years beginning after June 15, 2002. The Company does not expect SFAS 143
to have a material impact on its financial statements.

                                      F-8
<PAGE>   31
NOTE 3 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE

The Staff issued SAB 101 in December 1999. SAB 101 establishes the Staff's
preference that membership fees should not be recognized in earnings prior to
the expiration of refund privileges. Notwithstanding the Staff's preference
described above, it is also stated in SAB 101 that the Staff will not object to
the recognition of refundable membership fees, net of estimated refunds, as
earned revenue over the membership period (the Company's historical method) in
limited circumstances where all of certain criteria set forth in SAB 101 have
been met.

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 pro-rata
basis over the corresponding membership period, but instead will be 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 accounting change for the fiscal
year ended June 30, 2001, is an increase of $13,470,000, $3,758,000 and $0.25,
respectively.

Effective July 1, 1998, the Company changed its method of accounting for
printing and mailing membership materials. Historically, the Company had
accounted for the costs of printing and mailing of membership materials by
amortizing these costs ratably over the membership period as revenue was
recognized. Effective July 1, 1998, the Company started expensing these costs
upon the mailing of membership materials. The cumulative effect of this change
in accounting principle as of July 1, 1998 of $3,367,000 was recorded in the
first fiscal quarter ended September 30, 1998 as a reduction of membership
solicitation and other deferred costs and net income.

These changes in accounting for the recognition of membership fees and the
printing and mailing of membership materials has no impact on the Company's cash
flows or on the value of the underlying memberships.

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., ("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. Prior to that date, the Company had properly accounted for
its 19% investment under the cost method of accounting. In accordance with
generally accepted accounting principles, the Company has adjusted its prior
period financial results to record its 19% investment in CIC as if it had been
accounted for under the equity method of accounting. For the fiscal years ended
June 30, 1999 and 1998, the effect of the restatement was to decrease net income
by $1,912,000, or $0.11 per diluted share, and $638,000, or $0.04 per diluted
share, respectively. The effect of the restatement on the June 30, 1999 Balance
Sheet was to reduce intangible and other assets by $2,550,000.

                                      F-9
<PAGE>   32
Pro Forma Results

The following unaudited pro forma results of operations for the year ended June
30, 2000 and 1999 have been prepared assuming the CIC acquisition had occurred
as of July 1, 1999 for the year ended June 30, 2000 and as of July 1, 1998 for
the year ended June 30, 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):

<TABLE>
<CAPTION>
                                                                                   JUNE 30,
                                                                                   --------
                                                                               2000          1999
                                                                            ---------     ---------
<S>                                                                         <C>           <C>
Revenues                                                                    $ 330,648     $ 222,689
Net income before cumulative effect of accounting change                        9,798         1,776
Basic earnings before cumulative effect of accounting change per share      $    0.65     $    0.12
Diluted earnings before cumulative effect of accounting change per share         0.58          0.10
</TABLE>

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 is the majority shareholder of iPlace
with an approximate 58% ownership share. Therefore, the results of operations of
CIC, eNeighborhoods and Qspace are 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.

In May 1999, the Company acquired Comp-U-Card Canada Group ("MemberWorks
Canada") for $9,247,000. MemberWorks Canada is a leading provider of credit card
enhancement services in Canada. 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 MemberWorks Canada'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 April 1999, the Company acquired Quota-Phone, Inc. ("Quota-Phone") for
$7,750,000 in cash and 41,666 shares of MemberWorks Common Stock with an
approximate fair market value of $1,500,000 as of the closing date. Quota-Phone
is a wholesale provider of discount shopping services and "no-expiration"
coupons. 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
Quota-Phone'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.

                                      F-10
<PAGE>   33
NOTE 5 - (LOSS) GAIN ON SALE OF INVESTMENT

In February 2000, MemberWorks sold its equity 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 - FIXED ASSETS

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

<TABLE>
<CAPTION>
                                                 2001           2000
                                               --------       --------
<S>                                            <C>            <C>
Computer software and equipment                $ 43,135       $ 33,925
Furniture and fixtures                            8,386          8,349
Leasehold improvements                            6,707          6,910
Construction in progress                             --             13
                                               --------       --------
                                                 58,228         49,197
Accumulated depreciation and amortization       (18,541)       (14,582)
                                               --------       --------
                                               $ 39,687       $ 34,615
                                               ========       ========
</TABLE>

Depreciation and amortization expense was $10,545,000, $6,261,000 and $3,278,000
for the years ended June 30, 2001, 2000 and 1999, respectively.

NOTE 7 - LONG-TERM LIABILITIES

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

<TABLE>
<CAPTION>
                                  2001        2000
                                 ------      ------
<S>                              <C>         <C>
Bank credit facility             $   --      $  529
Notes payable                     1,194         100
Lease incentives                  1,490       1,080
Other long term obligations         767           2
                                 ------      ------
                                  3,451       1,711
Less current maturities             465         631
                                 ------      ------
Long-term liabilities            $2,986      $1,080
                                 ======      ======
</TABLE>

The Company has a bank credit facility that allows borrowings up to $28,000,000.
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
0.25% per annum on the average daily unused portion of the facility. There were
no borrowings outstanding under this bank credit facility as of June 30, 2001 or
2000. The bank credit facility requires that MemberWorks maintain a compensating
balance of $10,000,000 in addition to certain financial covenants. The credit
agreement is secured by all of the Company's assets, including the stock of its
subsidiaries. As of June 30, 2000, the Company's Canadian subsidiary,
MemberWorks Canada, had a $700,000 bank credit facility, which bore interest at
the Royal Bank of Canada prime rate per annum. The Company had $529,000
outstanding under this bank credit facility as of June 30, 2000. This credit
facility expired during fiscal 2001.

                                      F-11
<PAGE>   34
As of June 30, 2001, the Company's subsidiary, DDS, has $1,186,000 outstanding
under various notes payable which bear interest ranging from 5.30% to 8.79% per
annum and are due from July 2001 to November 2004. As of June 30, 2001, a
subsidiary of the Company, iPlace, has $8,000 outstanding under a note payable
which bears interest at 13.6% per annum. As of June 30, 2000, a subsidiary of
the Company, iPlace, had $100,000 outstanding under a note payable which bore
interest at 5.8% per annum. This note payable was paid down during fiscal 2001.

As of June 30, 2001 and 2000, MemberWorks Canada has $1,490,000 and $1,080,000,
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 two consulting agreements entered
into by DDS which expire during October and November 2004.

Other (expense) income in the fiscal years ended June 30, 2001, 2000 and 1999,
as shown in the Statements of Operations, includes interest expense of
$1,263,000, $133,000 and $55,000, respectively.

NOTE 8 - 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 $7,552,000, $3,925,000
and $2,974,000 for the fiscal years ended June 30, 2001, 2000 and 1999,
respectively.

During fiscal 1996, the Company entered into capital leases for certain computer
equipment totaling $406,000 of capitalized cost. Lease amortization for the
years ended June 30, 2001, 2000 and 1999 was $47,000, $67,000 and $77,000,
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, 2001 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                                    CAPITAL      OPERATING
FISCAL YEAR                                                                         LEASES         LEASES
-----------                                                                         ------         ------
<S>                                                                                 <C>          <C>
2002                                                                                $    51      $   7,652
2003                                                                                     85          6,345
2004                                                                                      8          5,407
2005                                                                                      -          4,653
2006                                                                                      -          3,508
Thereafter                                                                                -          7,901
                                                                                    -------      ---------
Total minimum lease payments                                                            144      $  35,466
                                                                                                 ---------
Less--Amount representing interest                                                       22
                                                                                    -------
Present value of net minimum lease payments including current maturities of $51
   with interest rates ranging from 9.9% to 13.57%                                  $   122
                                                                                    -------
</TABLE>

The Company has an agreement with one of its vendors under which it has a
contingent liability related to services provided in Fiscal 2001. The Company
estimates that this liability could range from $0 to $754,000 as of June 30,
2001. No reserve has been established in the June 30, 2001 Consolidated Balance
Sheet, as the liability is not deemed to be probable or reasonably estimable.

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 is subject. The Company is involved in other
lawsuits and claims generally incidental to its business. The Company may be
involved in other litigation or proceedings regarding claims arising in the
normal course of business, the adverse outcome of which, could

                                      F-12
<PAGE>   35
potentially require substantial payments by the Company. In addition, from time
to time, and in the regular course of its business, the Company receives
inquiries from various federal and/or state regulatory authorities.

In January 2001, a purported class action was instituted by plaintiff Brandy L.
Ritt against the Company and other defendants in the Court of Common Pleas in
Cuyahoga County, Ohio. The suit, which seeks unspecified monetary damages,
alleges that the Company and the other defendants violated various provisions of
Ohio's consumer protection laws in connection with the marketing of certain
membership programs offered by the Company. The Company believes that the claims
asserted against it are unfounded and the Company will vigorously defend its
interests against this suit.

In March 2001, a purported class action was instituted by plaintiff Teresa
McClain against Coverdell & Company ("Coverdell"), a wholly-owned subsidiary of
the 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 insurance products. The Company believes
that the claims asserted against Coverdell are unfounded and the Company and
Coverdell will vigorously defend their interests against this suit.

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
will pay costs of investigation and civil penalties of $2,000,000 to be split
between the state and the counties. The Company has also established a reserve
of $1,000,000 to cover specific costs related to the agreement. As a result of
the agreement, the Company has taken a non-recurring charge of $3,000,000 during
the quarter ended March 31, 2001.

In June 2001, purported class actions were instituted by plaintiffs Judith
Jeselskis and Marcia Walters against the Company and other defendants in Circuit
Court of the Tenth Judicial District, Highlands County Civil Division, Florida,
and Circuit Court of the Sixth Judicial Circuit, Pinellas County Civil Division,
Florida, respectively. The suits, which seek unspecified monetary damages,
allege that the Company and the other defendants violated Florida trade
practices law. The Company believes that the allegations made in this lawsuit
are unfounded and the Company will vigorously defend its interests against the
suits.

In July 2001, a purported class action was instituted by Alan Stone against the
Company and other defendants in Superior Court of the State of California,
County of Orange. The suit, which seeks unspecified monetary damages, alleges
that the Company and the other defendants violated California business practices
law. The Company believes that the allegations made in this lawsuit are
unfounded and the Company will vigorously defend its interests against this
suit.

NOTE 9 - INCOME TAXES

There was no current or deferred provision for income taxes for the years ended
June 30, 2001, 2000 and 1999. No current provision was required 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, 2001 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                                      2001           2000
                                                                    --------       --------
<S>                                                                 <C>            <C>
Benefit of federal and state net operating loss carry forwards      $ 45,211       $ 41,504
Deferred membership fees                                              22,897          3,784
Allowance for membership cancellations                                10,226         12,336
Marketable securities                                                                (1,752)
Other deferred tax (liabilities) assets                                 (704)         1,584
Membership solicitation and other deferred costs                     (54,940)       (47,281)
                                                                    --------       --------
Total deferred tax assets                                             22,690         10,175
Less: Valuation allowance                                            (22,690)       (10,175)
                                                                    --------       --------
Net deferred tax asset                                              $     --       $     --
                                                                    ========       ========
</TABLE>

                                      F-13
<PAGE>   36
As of June 30, 2001, the Company had federal net operating loss carry forwards
of $102,414,000 expiring at various dates from June 30, 2004 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. In addition, there are $9,449,000 of net
operating loss carry forwards related to iPlace which were not included in the
consolidated tax return of the Company. The Company also has state net operating
loss carry forwards available to reduce future state taxable income which expire
beginning June 30, 2005 through June 30, 2021. The valuation allowance for
deferred tax assets as of July 1, 1999 was $14,284,000.

NOTE 10 - RELATED PARTY OBLIGATIONS

As of June 30, 2001 and 2000, the Company's majority-owned subsidiary, iPlace,
has a note payable to the President of iPlace for $1,973,000 and $1,789,000,
respectively. The note bears interest at the Citibank, N.A. publicly announced
interest rate plus 1% per annum and is due on demand. The interest payable
related to this note is $55,000 and $63,000 as of June 30, 2001 and 2000,
respectively. Other income, net for fiscal 2001 and 2000 includes related party
interest expense of $176,000 and $63,000, respectively.

NOTE 11 - MINORITY INTEREST

MemberWorks is the majority shareholder of iPlace, Inc. with an approximate 58%
ownership share. Minority interest in the Statement of Operations represents the
minority shareholders' interest in iPlace's losses for the years ended June 30,
2001 and 2000 net of accumulated dividends on the iPlace Series A Preferred
Stock (Note 12) in fiscal 2001.

NOTE 12 - 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 has a par value per share of $0.01 and
pays cumulative dividends at an annual rate of 8.0%. Such dividends are accrued
from the original issuance date.

The Series A Preferred Stock is 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 are entitled to vote upon all matters brought
before the iPlace stockholders and are entitled to one vote per share. In the
event of the liquidation of iPlace, the preferred shareholders will receive
$27.23 per share plus all declared and unpaid dividends. As of June 30, 2001,
the amount of accrued and unpaid dividends totaled $289,000.

NOTE 13 - SHAREHOLDERS' EQUITY


Stock Repurchases

The Company has a stock repurchase program. In April 1999, the Board of
Directors authorized the Company to repurchase up to 150,000 shares of the
Company's Common Stock. The Company completed repurchases under this
authorization in November 1999. In November 1999 and April 2000, the Board of
Directors authorized the Company to repurchase up to 1,000,000 shares of the
Company's Common Stock, respectively. As of June 30, 2001, approximately 699,000
shares were remaining for repurchase under the November 1999 and April 2000
authorizations. During fiscal 2001, the Company repurchased 340,000 shares for
$8,917,000, compared to the repurchase of 1,097,000 shares for $36,340,000 in
fiscal 2000 and 111,000 shares for $3,801,000 in fiscal 1999.

                                      F-14
<PAGE>   37
NOTE 14 - STOCK OPTIONS AND WARRANTS


Stock Compensation Plans

As of June 30, 2001, 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. Compensation expense of $395,000, $467,000 and
$467,000 has been recognized during fiscal 2001, 2000 and 1999, respectively,
related to its 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 (loss)
income and (loss) earnings per share would have been as follows:

<TABLE>
<CAPTION>
                                             YEAR ENDED JUNE 30,
                                             -------------------
                                    2001            2000            1999
                                    ----            ----            ----
                                  ($ in thousands, except per share data)
<S>                             <C>              <C>             <C>
Net (loss) income:
     As reported                $  (52,487)      $   10,333      $    2,669
     Pro forma                     (63,402)           3,875            (732)

(Loss) earnings per share:
     As reported
         Basic                  $    (3.44)      $     0.68      $     0.17
         Diluted                     (3.44)            0.61            0.16
     Pro forma
         Basic                  $    (4.16)      $     0.26      $    (0.05)
         Diluted                     (4.16)            0.23           (0.04)
</TABLE>

The pro forma effect of SFAS No. 123 on fiscal 1999 results is not
representative of the pro forma effect on net (loss) income in future years
because SFAS No. 123 does not take into consideration pro forma compensation
expense related to grants made prior to July 1, 1995.

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, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                 2001         2000         1999
                                 ----         ----         ----
<S>                            <C>          <C>         <C>
Dividend yield                      0%           0%          0%
Expected volatility                50%          50%         50%
Risk free interest rate           5.9%         5.9%        4.8%
Expected lives                 5 years      5 years     5 years
</TABLE>

The weighted average fair value per share of options granted at market value
were $14.03, $14.04 and $8.52 for the years ended June 30, 2001, 2000 and 1999,
respectively.

The Company's 1990 Employee Incentive Stock Option Plan ("Amended 1990 Stock
Option Plan") provides 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.

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. 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. 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.

                                      F-15
<PAGE>   38
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 date of grant. The executive was granted 43,200 and 14,400 options
to purchase Common Stock in 1997 and 1996, respectively. The Company recognized
compensation expense of $44,000, $122,000 and $122,000 for each of the years
ended June 30, 2001, 2000 and 1999, 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
each of the years ended June 30, 2000 and 1999. 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.

During October 1998, the Compensation Committee of the Company's Board of
Directors approved a stock option exchange program. Pursuant to this exchange
program, options granted on April 2, 1998 with an exercise price of $30.375 and
a vesting period of four years were cancelled in exchange for new options
granted on October 28, 1998 with an exercise price of $15.00 and a vesting
period of four years. A total of 100,000 shares were exchanged. No compensation
expense has been recognized in the financial statements as the exercise price
was equal to the market value of the stock at the date of grant, October 28,
1998.

                                      F-16
<PAGE>   39
Information with respect to options to purchase shares issued under these plans
is as follows:

<TABLE>
<CAPTION>
                                                2001                        2000                           1999
                                                ----                        ----                           ----
                                                      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         2,980       $  17.14          2,842       $  12.46          1,754       $   8.25
Granted at market value                  1,766          27.61          1,068          27.67          1,343          17.96
Replaced/exchanged                          --             --             --             --            100          15.00
Exercised                                 (366)         (7.78)          (451)         (8.06)          (182)          4.01
Cancelled                                   --             --             --             --           (100)         30.38
Forfeited                                 (565)        (26.32)          (479)        (21.39)           (73)         13.78
                                         -----                         -----                         -----
Outstanding at end of year               3,815       $  21.45          2,980       $  17.14          2,842       $  12.46
                                         =====                         =====                         =====
</TABLE>

<TABLE>
<CAPTION>
                                                OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                                                -------------------                    -------------------
                                         SHARES        AVERAGE        AVERAGE           SHARES       AVERAGE
                                       OUTSTANDING    REMAINING      EXERCISE         OUTSTANDING   EXERCISE
(Shares in thousands)                  AT 6/30/01    LIFE (YEARS)      PRICE          AT 6/30/01      PRICE
                                       ----------    ------------      -----          ----------      -----
<S>                                    <C>           <C>             <C>              <C>           <C>
$1.84 to $2.99                                224            4.0      $ 2.70                224      $ 2.70
$3.00 to $4.99                                215            5.0        4.17                215        4.17
$5.00 to $13.99                               170            5.4       10.54                165       10.48
$14.00 to $15.99                              391            6.9       14.99                183       14.99
$16.00 to $20.99                              779            8.5       18.66                282       18.34
$21.00 to $28.99                              357            8.4       24.55                112       24.49
$29.00 and over                             1,679            8.7       29.41                164       29.19
                                            -----                                         -----
                                            3,815            7.8      $21.45              1,345      $13.88
                                            =====                                         =====
</TABLE>

Options exercisable as of June 30, 2000 and 1999 were 1,138,000 and 956,000,
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 does 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 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, 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 fiscal 2001 was $2.07. The following weighted average
assumptions were used for

                                      F-17
<PAGE>   40
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 2001, 2000, and
1999, 20,000, 18,000 and 16,000 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). During fiscal 1999, warrants to acquire 16,000
shares of Common Stock were exercised (9,000 at $0.0014 per share and 7,000 at
$3.56 per share). In addition, during fiscal 2001, warrants to acquire 4,000
shares of Common Stock at $0.0014 expired and during fiscal 1999, warrants to
acquire 20,000 shares of Common Stock at $3.56 expired.

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

NOTE 15 - 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. Matching contributions were $126,000 for fiscal 2001.

NOTE 16 - STATEMENT OF CASH FLOWS

Supplemental disclosure of cash flow information (in thousands):

<TABLE>
<CAPTION>
                                                       YEAR ENDED JUNE 30,
                                                   2001        2000        1999
                                                  ------      ------      ------
<S>                                               <C>         <C>         <C>
Cash paid during the period for interest          $1,246      $   90      $   55
Cash paid during the period for income taxes         595         205          76
</TABLE>

                                      F-18
<PAGE>   41
NOTE 17 - (LOSS) EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                       2001           2000          1999
                                                                       ----           ----          ----
<S>                                                                  <C>            <C>           <C>
Numerator for basic and diluted (loss) earnings per share:
Net (loss) income before cumulative effect of accounting change      $(26,757)      $ 10,333      $  6,036
Cumulative effect of accounting change                                (25,730)            --        (3,367)
                                                                     --------       --------      --------
Net (loss) income                                                    $(52,487)      $ 10,333      $  2,669
                                                                     ========       ========      ========

Denominator for basic (loss) earnings per share:
Weighted average number of common shares outstanding - basic           15,248         15,162        15,361
Effect of dilutive securities:
   Options and warrants                                                    --          1,831         1,763
                                                                     --------       --------      --------
Weighted average number of common shares outstanding - diluted         15,248         16,993        17,124
                                                                     ========       ========      ========

Basic (loss) earnings per share                                      $  (3.44)      $   0.68      $   0.17
                                                                     ========       ========      ========
Diluted (loss) earnings per share                                    $  (3.44)      $   0.61      $   0.16
                                                                     ========       ========      ========
</TABLE>

The diluted net (loss) income 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, 2001 is
incremental weighted average stock option shares of approximately 2,870,000.

NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)

(In thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED JUNE 30, 2001
                                                                                 ------------------------
                                                                  FIRST          SECOND            THIRD         FOURTH
                                                                 QUARTER         QUARTER          QUARTER        QUARTER
                                                                 -------         -------          -------        -------
<S>                                                             <C>             <C>               <C>           <C>
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)
</TABLE>

<TABLE>
<CAPTION>
                                                                               YEAR ENDED JUNE 30, 2000
                                                                               ------------------------
                                                                  FIRST          SECOND        THIRD         FOURTH
                                                                 QUARTER        QUARTER       QUARTER        QUARTER
                                                                 -------        -------       -------        -------
<S>                                                              <C>           <C>           <C>            <C>
Revenues                                                         $ 71,658      $ 78,908      $ 85,129       $ 94,412
Operating income (loss)                                             2,087         2,708           230         (6,465)
Income (loss) before cumulative effect of accounting change
                                                                    2,334         3,008        18,829        (13,838)
Net income (loss)                                                   2,334         3,008        18,829        (13,838)
Diluted income (loss) before cumulative effect of
accounting change per share                                          0.13          0.18          1.10          (0.84)
</TABLE>

NOTE 19 - SUBSEQUENT EVENT

MemberWorks announced on August 10, 2001, that a definitive agreement had been
signed under which Homestore.com, Inc. will acquire iPlace in a cash and stock
transaction. The Company expects to receive approximately $52,000,000 in cash
and an additional $36,000,000 in Homestore.com stock for its 58% ownership in
iPlace. The transaction closed on August 24, 2001.

                                      F-19
<PAGE>   42
                            MEMBERWORKS INCORPORATED
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS



<TABLE>
<CAPTION>
                                               Balance at      Charged to    Charged to Other
                                              Beginning of     Costs and        Accounts --         Deductions --   Balance at End
Description                                      Period         Expense          Describe             Describe        of Period
-----------                                      ------         -------          --------             --------        ---------
<S>                                           <C>            <C>             <C>                  <C>               <C>
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                   -         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

YEAR ENDED JUNE 30, 1999
Allowance for cancellations                   $ 16,362,000   $         --      $192,019,000 A     $ 183,570,000 B    $  24,811,000
Valuation allowance for deferred tax assets     13,739,000             --           545,000 C                 -         14,284,000
</TABLE>

(A)  Charged to Balance Sheet account "Deferred membership fees."

(B)  Charges for refunds upon membership cancellations.

(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.

                                      F-20