<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, 2000

                           Commission File No. 0-21527

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

DELAWARE                                                            06-1276882
(State of Incorporation)                                      (I.R.S. Employer
                                                           Identification No.)
9 West Broad Street;
Stamford, Connecticut                                                    06902
(Address of principal executive offices)                            (Zip Code)

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant at August 2, 2000 was $304,086,458. 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 2, 2000 was
14,796,458.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2000 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                                                            7

         Item 3. Legal Proceedings                                                     7

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

         Executive Officers of the Registrant                                          8

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

         Item 6. Selected Financial Data                                              10

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

         Item 7A. Quantitative and Qualitative Disclosures About Market Risk          15

         Item 8. Financial Statements and Supplementary Data                          15

         Item 9. Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure                                                     15

Part III Item 10. Directors and Executive Officers of the Registrant                  16

         Item 11. Executive Compensation                                              16

         Item 12. Security Ownership of Certain Beneficial Owners and Management      16

         Item 13. Certain Relationships and Related Transactions                      16

Part IV  Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K     16

Signatures                                                                            17

Exhibit listing                                                                       18
</TABLE>
<PAGE>   3
                                     PART I

Item 1.  Business

BACKGROUND

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
providing 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 such as banks, retailers, major oil companies, mortgage companies,
direct response television companies, catalog companies and e-commerce
companies, 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
including banks, retailers, major oil companies, mortgage companies, direct
response television companies, catalog companies and e-commerce companies.

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, the estimated total consumer
sales as a result of direct marketing in the United States were approximately
$843 billion in 1999, an 11% increase 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 retailers, catalog companies, e-commerce companies,
banks, insurance companies and direct response television 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.


DESCRIPTION OF BUSINESS

The Company's membership service programs, which combined had approximately 6.9
million members as of June 30, 2000, 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, averaged approximately $72 per year during fiscal 2000.

The Company 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:


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   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 businesses
   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.

   Health and insurance
   MemberWorks' Health membership programs offer savings on prescription drugs;
   medical, elder, dental and vision care; eyeglasses and contact lenses;
   chiropractic services 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. Insurance membership programs also offer access to a comparison
   service which compares term life products from more than 10 highly-rated
   insurance carriers.

   International
   MemberWorks tailors its innovative consumer programs to meet the unique needs
   and interest of its international consumers. Each of the Company's
   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, as well
as membership brochure received by mail along with a membership card and
membership identification number. 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. The Company does not record any
revenue with respect to trial memberships.

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.

The Company 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 the Company 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


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activities. The Company pays the client an annual royalty for initial and
renewal membership fees received from consumers provided to the Company by the
client. The royalties paid to clients by the Company average approximately 20%
of initial and renewal membership fees.

The Company also offers its service programs through clients who have inbound
call centers. This type of marketing method, which the Company 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 2000, revenues from MemberLink(SM) programs more than tripled
from prior year and represented approximately 28% of the Company's revenues. The
Company pays the client either an annual royalty for initial and renewal
membership fees or a fee per marketing pitch or per net sale. Generally,
MemberLink(SM) arrangements serve as a more efficient and cost effective way to
acquire members than the Company's traditional marketing model.

The Company 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. The Company believes this method of product
development has allowed it to respond quickly and effectively to market demand
for new programs.

The Company 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. The
Company 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, the Company 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), the Company also delivers its membership service
programs through its wholesale programs. The Company 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 the Company the membership fees for the
customers who receive the service program. Wholesale programs substantially
reduce the cost for the Company to acquire new members, which results in higher
profit margins for the Company. Accordingly, the Company provides membership in
the service program for fees which are less than the Company's standard fees for
the program.

MEMBER SERVICE
The Company 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, the Company maintains three call centers located in Omaha, Nebraska;
Houston, Texas; and Montreal, Canada with a total of 815 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, its systems and its software, the Company seeks to provide members
with friendly, rapid and effective answers to questions. The Company also works
closely with its clients' customer service staffs to ensure that their
representatives are knowledgeable in matters relating to membership service
programs offered by the Company.

TECHNOLOGY
The Company has invested substantially in advanced management information
systems to allow it to operate its business more efficiently and productively.
The Company receives new member information from telemarketers on a daily basis,
and the system routes that data to other Company facilities for member
fulfillment thereby allowing the Company 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 the Company to
update the status of each member, including member profile information.

In providing quality service to its members, the Company's management
information 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


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<PAGE>   6
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. The
Company 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 the Company,
generally quote a discounted price. The Company receives no material payments
from these vendors for rendering services to the Company's members and, in
certain cases, the Company pays its vendors a fee based on the 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 the Company. Vendors may
cancel contracts with the Company, but in most cases, only for cause and subject
to notice provisions to provide the Company time to locate a substitute vendor.
Most vendor contracts are non-exclusive, but have requirements that the vendors
maintain the confidentiality of the terms of the contract.

SALES AND MARKETING
The Company 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. In addition, the Company
uses direct mail mailed either at its own expense or at its client's expense.
Several of the Company's individual memberships are also available on the
Internet.

Under the Company's wholesale programs, the Company does not pay for the
marketing costs to solicit memberships. Instead, the client offering the
memberships is responsible for marketing, usually with the assistance of the
Company. In some cases, the client may provide wholesale memberships to its
customers free of charge and pay the periodic membership fee to the Company for
each customer membership. In other cases, the client may charge a reduced fee to
its customer.

The Company has begun to sell service programs internationally through the
opening of its first international office in London, England. In addition, the
Company continues to pursue its international expansion through the growth of
its Canadian subsidiary, MemberWorks Canada. MemberWorks Canada provides credit
card enhancement services to Canadian financial institutions through wholesale
arrangements. During fiscal 2000, MemberWorks Canada expanded its services to
include retail membership programs similar to those offered in the U.S. The
Company's revenues from international operations represented 2% of total
revenues for the fiscal year ended June 30, 2000.

The Company's sales strategy is to establish and maintain long-term
relationships with its clients. The Company 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 the Company. MemberWorks
seeks to build upon its existing customer relationships by integrating and
cross-selling its different membership service programs.

DISTRIBUTION
The Company 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 the Company 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.

The Company 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.


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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, the Company 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.

The Company 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, the Company distributes its
products through wholesale arrangements where the Company is not responsible for
marketing to the customer.

Membership service programs sponsored by the Company's largest client, Citibank,
accounted for 12.8% of revenues for the fiscal year ended June 30, 2000.

NEW BUSINESS DEVELOPMENT
The Company is continually testing and developing new distribution channels,
such as the Internet. MemberWorks is expanding its Internet distribution channel
through its majority-owned subsidiary, iPlace.com, Inc. ("iPlace"). iPlace was
formed on February 23, 2000 through the merger of ConsumerInfo.com ("CIC") and
eNeighborhoods. The Company's acquisition of CIC, an Internet direct marketing
company and online provider of value-added membership programs, was completed on
July 27, 1999. eNeighborhoods is a leading provider of home resale and
neighborhood data on the Internet. On April 30, 2000, iPlace acquired Qspace,
Inc., a leading online provider of credit and personal finance information. The
Company believes that the Internet is and will continue to be an important
channel for the distribution of its service programs in the future.

iPlace is a leading infrastructure provider of credit, home, neighborhood and
other personally relevant information. iPlace aims to be a leading infomediary,
providing a place for consumers to view, store, understand and permit the use of
their personal information on the Web, while facilitating commerce and
advertising for businesses. iPlace's services and technologies provide
compelling information solutions, relationship building tools and transaction
facilitation engines for online and offline businesses. iPlace's strategic
relationships include Yahoo!, Microsoft, Intuit, Freddie Mac, Wells Fargo,
Homestore.com, NextCard, E-Loan and CBS Marketwatch.

GOVERNMENT REGULATION
The primary 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 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


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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.

On April 18, 2000, the Company announced that it had reached a settlement with
the Minnesota Attorney General's office regarding a lawsuit filed in the United
States District Court, District of Minnesota in June 1999. In connection with
the settlement, the Company agreed to pay the State of Minnesota $75,000 for its
expenses and to make certain modifications to its marketing and collateral
materials. The settlement did not have a material effect on the Company's
results of operations.

In addition, there are an increasing number of laws and regulations pertaining
to the Internet. A number of legislative and regulatory proposals are under
consideration by federal, state, local and foreign governments and agencies.
Laws or regulations may be adopted with respect to the Internet relating to
liability for information received from or transmitted over the Internet, online
content regulation, user privacy, taxation and quality of products and services.
Moreover, the applicability to the Internet of existing laws governing issues
such as intellectual property ownership and infringement, copyright, trademark,
trade secret, obscenity, libel, employment and personal privacy is uncertain and
developing. Any new legislation or regulation, or the application or
interpretation of existing laws, may decrease growth in the use of the Internet,
which could in turn decrease the demand for the Company's services, increase the
Company's cost of doing business or otherwise have a material adverse effect on
the Company's business, results of operations and financial condition.
Management continues to carefully track developments in the area to make sure
they are aware of potential risks and to allow them to position the Company
accordingly.

COMPETITION
The Company 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, including large retailers,
travel agencies, insurance companies and financial service institutions, some of
which have substantially larger customer bases and greater financial and other
resources than the Company's, offer membership programs which provide services
similar to, or which directly compete with, those provided by the Company. To
date, the Company has effectively competed with its competitors. However, there
can be no assurance that the Company's competitors will not increase their
emphasis on programs similar to those offered by the Company to more directly
compete with the Company, or provide programs comparable or superior to those
provided by the Company at lower membership prices, or adapt more quickly than
the Company to evolving industry trends or changing market requirements, or that
new competitors will not enter the market or that other businesses will not
themselves introduce competing programs. Such increased competition may result
in price reductions, reduced 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 the Company
to promote a program if the services provided by the Company's program are
similar to, or merely overlap with, the services provided by an existing program
of a competitor.


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EMPLOYEES

As of June 30, 2000, the Company employed 1,432 persons on a full-time basis and
166 on a part-time basis. None of the Company's employees are represented by a
labor union. The Company believes that its employee relations are good.

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>
      Orange, CA                13,959             2003 through 2004
      San Francisco, CA         4,500                    2001
      Stamford, CT              72,626             2002 through 2006
      Atlanta, GA               16,122                   2002
      Omaha, NE                127,804             2000 through 2014
      White Plains, NY          4,193                    2000
      Bristol, PA               10,011                   2001
      Houston, TX               41,591                   2006
      Montreal, Canada          48,373             2003 through 2011
      London, England           1,541                    2000
</TABLE>

The Stamford, Connecticut office serves as the Company's headquarters. All other
locations serve as the offices for the subsidiaries of the Company.

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 is subject. The Company is involved in other
lawsuits and claims generally incidental to its business.

On April 18, 2000, the Company announced that it had reached a settlement with
the Minnesota Attorney General's office regarding a lawsuit filed in the United
States District Court, District of Minnesota in June 1999. In connection with
the settlement, the Company agreed to pay the State of Minnesota $75,000 for its
expenses and to make certain modifications to its marketing and collateral
materials. The settlement did not have a material effect on the Company's
results of operations.

On May 5, 2000, Eye Care International, Inc. filed a complaint against the
Company in the United States District Court, Middle District of Florida. The
complaint seeks monetary damages based upon the alleged breach of a vendor
contract. The Company believes that the allegations made in this lawsuit are
unfounded and the Company will vigorously defend its interests against this
suit.

On July 2, 1999, a purported class action was filed by Consumer Cause Inc.
against the Company and other defendants in the California Superior Court, San
Francisco County. The suit alleged that the Company and the other defendants
violated their customers' right of privacy and the Fair Credit Reporting Act and
sought unspecified monetary damages. The Company filed a demurrer and the action
was dismissed.

On July 7, 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 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, 2000.


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Executive Officers of the Registrant

The executive officers of the registrant of the Company and their respective
ages as of July 31, 2000 are as follows:


<TABLE>
<CAPTION>
Name                  Age      Position
----                  ---      --------
<S>                   <C>      <C>
Gary A. Johnson       45       President and Chief Executive Officer, Director
Dennis P. Walker      55       Executive Vice President, Director
James B. Duffy        46       Executive Vice President and Chief Financial
                               Officer
David Schachne        39       Executive Vice President, Business Development
Matthew Donaldson     43       Senior Vice President, Marketing
</TABLE>

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

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

JAMES B. DUFFY joined the Company in 1996 and currently serves as Executive Vice
President and Chief Financial Officer. Prior to joining the Company, Mr. Duffy
served in various senior financial management positions, most recently as Senior
Vice President, Business Planning, at Merck Medco Managed Care, Inc., a
prescription benefit management company, from 1986 to 1996.

DAVID SCHACHNE joined the Company in 1990 and currently serves as Executive Vice
President, Business Development. He has held various senior management positions
in the Company such as Vice President, Marketing and Senior Vice President, New
Business Development.

MATTHEW DONALDSON joined the Company in 1999 and currently serves as Senior Vice
President, Marketing. Prior to joining the Company, Mr. Donaldson served in
several direct marketing and operational positions with Merck Medco Managed Care
L.L.C.


                                       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, 2000:
          First Quarter                                 $42 3/16     $26 1/2
          Second Quarter                                 36 1/4       21 7/8
          Third Quarter                                  80 7/8       25 1/4
          Fourth Quarter                                 41 1/4       25 1/8
</TABLE>


<TABLE>
<CAPTION>
                                                          High         Low
                                                          ----         ---
        Fiscal Year Ended June 30, 1999:
<S>                                                    <C>          <C>
          First Quarter                                 $36 7/8      $13 7/8
          Second Quarter                                 31 1/8       12 1/2
          Third Quarter                                  37 1/4       29 7/8
          Fourth Quarter                                 49 1/2         25
</TABLE>


As of August 2, 2000, there were 40,000,000 shares of Common Stock authorized of
which 14,796,458 shares of Common Stock were outstanding, held by approximately
2,433 stockholders of record. The Company has not declared or paid any cash
dividends to date and anticipates that all of its earnings in the foreseeable
future will be retained for use in its business. The Company's future dividend
policy will depend on the Company's earnings, capital requirements, financial
condition, requirements of the financing agreements to which the Company is a
party and other factors considered relevant by the Board of Directors.


                                       9
<PAGE>   12
Item 6.  Selected Financial Data

The selected consolidated statements of operations data for each of the years
ended June 30, 1996 through 2000 and the selected consolidated balance sheet
data as of June 30, 1996 through 2000 set forth below are derived from the
consolidated financial statements of the Company, which have been audited by
PricewaterhouseCoopers LLP. The selected consolidated financial information of
the Company 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,
                                                     ---------------------------------------------------------------------
                                                        1996           1997           1998           1999           2000
                                                     ---------      ---------      ---------      ---------      ---------
                                                                      (In thousands, except per share data)
<S>                                                  <C>            <C>            <C>            <C>            <C>
CONSOLIDATED STATEMENTS OF
    OPERATIONS DATA:
Revenues                                             $  57,012      $  79,174      $ 120,834      $ 218,086      $ 330,107
Total expenses                                          62,259         83,032        117,749        210,138        321,820
                                                     ---------      ---------      ---------      ---------      ---------
Net income (loss) before equity in affiliate and
   minority interest                                    (5,247)        (3,858)         3,085          7,948          8,287
Equity in income (loss) of affiliate                        --             --           (638)        (1,912)            19
Minority interest                                           --             --             --             --          2,027
                                                     ---------      ---------      ---------      ---------      ---------
Net income (loss) before cumulative effect of
   accounting change                                    (5,247)        (3,858)         2,447          6,036         10,333
Cumulative effect of accounting change                      --             --             --         (3,367)            --
                                                     ---------      ---------      ---------      ---------      ---------
Net income (loss)                                    $  (5,247)     $  (3,858)     $   2,447      $   2,669      $  10,333
                                                     =========      =========      =========      =========      =========

Basic earnings (loss) per share:
   Income (loss) before cumulative effect of
     accounting change                               $   (0.49)     $   (0.35)     $    0.16      $    0.39      $    0.68
   Cumulative effect of accounting change                   --             --             --          (0.22)            --
                                                     ---------      ---------      ---------      ---------      ---------
   Basic earnings (loss) per share                   $   (0.49)     $   (0.35)     $    0.16      $    0.17      $    0.68
                                                     =========      =========      =========      =========      =========

Diluted earnings (loss) per share:
   Income (loss) before cumulative effect of
     accounting change                               $   (0.49)     $   (0.35)     $    0.15      $    0.35      $    0.61
   Cumulative effect of accounting change                   --             --             --          (0.20)            --
                                                     ---------      ---------      ---------      ---------      ---------
   Diluted earnings (loss) per share                 $   (0.49)     $   (0.35)     $    0.15      $    0.16      $    0.61
                                                     =========      =========      =========      =========      =========

Weighted average common shares outstanding
Basic                                                   11,956         13,901         14,837         15,361         15,162
                                                     =========      =========      =========      =========      =========
Diluted                                                 11,956         13,901         16,381         17,124         16,993
                                                     =========      =========      =========      =========      =========
</TABLE>


<TABLE>
<CAPTION>
                                                                          June 30,
                                               -------------------------------------------------------------
                                                 1996          1997         1998         1999         2000
                                               --------      --------     --------     --------     --------
                                                                       (In thousands)
<S>                                            <C>           <C>          <C>          <C>          <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents                      $  4,312      $ 40,758     $ 35,933     $ 50,939     $ 30,169
Cash flow provided by operating activities            1         7,835        8,930       50,573       44,910
Total assets                                     41,927        84,423      133,291      209,827      316,772
Long-term obligations                             1,089           438           69            6        1,083
Redeemable preferred stock                       20,487            --           --           --           --
Shareholders' equity (deficit)                  (36,332)       14,030       28,442       30,287       19,021
</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. The Company derives its revenues principally from annually renewable
membership fees. The Company receives full payment of annual fees at or near the
beginning of the membership period, but recognizes revenue ratably over the
membership period. Similarly, the costs associated with soliciting each new
member, as well as the cost of royalties, are amortized ratably over the same
period. 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 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, the Company 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.

GAIN ON SALE OF INVESTMENT, NET. In February 2000, the Company sold its equity
interest in AwardTrack, Inc. in exchange for stock in 24/7 Media, Inc. ("24/7").
In connection with this sale, the Company 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, the Company wrote down its investment in
24/7 by $36.3 million. During the fourth quarter of fiscal 2000, the Company
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


                                       11
<PAGE>   14
repurchase program and business acquisitions. The Company 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. The Company 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, the Company had accumulated federal net operating
loss carry forwards of $93.6 million.

FISCAL 1999 COMPARED TO FISCAL 1998

REVENUES. Revenues increased 80% to $218.1 million in 1999 from $120.8 million
in 1998 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 5.3
million members at June 30, 1999 from 3.5 million members at June 30, 1998. If
revenues from Coverdell and Company, acquired on April 2, 1998, were included in
both periods on a pro forma basis, twelve month revenues would have increased
66%. The increase in the Company's membership base was due to increased demand
for the Company's existing programs, as well as new programs introduced in 1998
and 1999. The increase in the weighted average program fee was due to an
increase in program pricing and new programs with higher fees. Revenues from
renewals increased to $92.2 million in 1999 from $50.6 million in 1998. As a
percentage of individual membership revenues, these amounts represented 45% in
1999 and 44% in 1998.

OPERATING EXPENSES. Operating expenses increased 75% to $43.0 million in 1999
from $24.6 million in 1998. As a percentage of revenues, operating expenses
decreased to 19.7% in 1999 from 20.4% in 1998 primarily due to the increase in
leverage of certain costs which do not increase proportionately with revenue.

MARKETING EXPENSES. Marketing expenses increased 77% to $126.8 million in 1999
from $71.6 million in 1998. The increase was due primarily to increased
telemarketing and royalty expenses associated with the larger membership base.
As a percentage of revenues, marketing expenses decreased to 58.1% in 1999 from
59.2% in 1998 due to the favorable effect of an increase in more efficient
marketing methods and improved retention rates.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 75% to $40.2 million in 1999 from $22.9 million in 1998. This increase
was attributable to the costs incurred for additional personnel in all areas and
related facilities costs. As a percentage of revenues, general and
administrative expenses decreased to 18.4% in 1999 from 19.0% in 1998.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
increased to $2.2 million in 1999 from $0.3 million in 1998 due to the
acquisition of two additional businesses during fiscal 1999. As a percentage of
revenues, amortization of goodwill and other intangibles increased to 1.0% in
1999 from 0.2% in 1998.

OTHER INCOME, NET. Other income, net increased to $2.2 million in 1999 compared
to $1.7 million reported in 1998 due to higher cash balances available for
investment. The Company 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. The Company was not required to record a provision
for income taxes for the years ended June 30, 1999 and 1998 due to tax losses
realized. As of June 30, 1999, the Company had accumulated federal net operating
loss carry forwards of $66.7 million.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of capital has been from internally generated cash
from operations. As of June 30, 2000, the Company had cash and cash equivalents
of $30.2 million and marketable securities of $6.3 million. In addition, the
Company has a $20.0 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, 2000. In addition, the Company's Canadian
subsidiary, MemberWorks Canada, has a $0.7 million bank credit facility which
bears interest at the Royal Bank of Canada prime rate per annum. As of June 30,
2000, the Company had $0.5 million outstanding under this bank credit facility.
Because of ongoing costs in connection with soliciting new members, the Company
expects to continue to utilize any net cash generated from operating activities
to increase the Company's membership base. The Company believes its existing
cash balances, together with


                                       12
<PAGE>   15
its future operating cash flows and its available bank credit facilities, will
be sufficient to meet its operating requirements for at least the next twelve
months.

Net cash provided by operating activities was $44.9 million, $50.6 million and
$8.9 million for the years ended June 30, 2000, 1999 and 1998, respectively. The
decrease in operating cash flow in 2000 was due to increased spending related to
the Company's online initiatives and international businesses. Changes in
working capital items contributed $29.0 million to operating cash flow in 2000
verses $20.9 million in 1999 and $2.5 million in 1998. The increase in changes
in working capital in fiscal 2000 is primarily related to accounts payable which
increased due to higher expenditures over the prior year.

Net cash used by investing activities increased to $34.2 million in 2000 from
$32.4 million in 1999 and $10.0 million in 1998. In fiscal 2000, the Company
acquired CIC for $15.9 million in cash. In fiscal 1999, the Company acquired
Quota-Phone for $9.25 million, of which $7.75 million was paid in cash, and CUC
Canada for $9.2 million in cash. In fiscal 1998, the Company acquired Coverdell
and Company for $3.9 million in cash plus common stock and options worth $14.5
million. In addition, the Company's capital expenditures were $20.3 million in
2000 compared to $12.1 million in 1999 and $4.6 million in 1998. The increased
capital expenditures in 2000 are primarily due to the costs related to opening a
new operations facility in Omaha, NE and a new call center in Montreal, Canada.

The Company's net cash used in financing activities was $31.5 million in 2000
compared to $3.2 million in 1999 and $3.7 million in 1998. Under the Company's
stock repurchase program, the Company repurchased 1,098,000 shares for $36.3
million in fiscal 2000, compared to the repurchase of 111,000 shares for $3.8
million in fiscal 1999 and 156,000 shares for $3.5 million in fiscal 1998. As of
June 30, 2000, approximately 1,038,000 shares were remaining for repurchase.

BUSINESS COMBINATIONS

On July 27, 1999, the Company increased its ownership percentage in
Consumerinfo.com ("CIC"), a California Corporation, from 19% to 100%, for cash
consideration of $15.9 million. On February 23, 2000, CIC merged with
eNeighborhoods, a leading provider of home resale and neighborhood data on the
Internet. The new entity was renamed iPlace, Inc. The net purchase price totaled
approximately $15.9 million. On April 30, 2000, iPlace, Inc. acquired all of the
issued and outstanding common stock of Qspace, Inc. in exchange for iPlace stock
valued at approximately $11.9 million. Qspace is a leading online provider of
credit and personal finance information. These three acquisitions were accounted
for as purchases, with the purchase prices allocated to the assets acquired and
liabilities assumed based upon their respective estimated fair values at the
dates of acquisition.

As of June 30, 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.

NEW ACCOUNTING PRONOUNCEMENTS

The Securities and Exchange Commission staff (the "Staff") issued "Staff
Accounting Bulletin No. 101-Revenue Recognition in Financial Statements" ("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 current method of accounting) in limited circumstances where all
of certain criteria set forth in SAB 101 have been met.

The Company plans to voluntarily adopt the full deferral method of accounting
for membership fee revenue for all of the Company's membership programs having
full refund privileges effective July 1, 2000. Consequently, membership fees
having full refund privileges, and the related direct costs associated with
acquiring the underlying memberships, will no longer be recognized on a prorata
basis over the corresponding membership periods, but instead will be recognized
in earnings upon the expiration of membership refund privileges.

If SAB 101 had been adopted effective July 1, 1999, the cumulative effect of the
accounting change would have been a one-time non cash charge of $38.4 million.
The impact of the change for the fiscal year ended June 30, 2000 would


                                       13
<PAGE>   16
have been to increase revenues by $13.4 million and increase net income before
the cumulative effect of the accounting change by $12.2 million, or $0.72 per
diluted share. The amounts for the fiscal year ended June 30, 2000 include a
portion of the membership fees and associated direct costs previously recognized
in fiscal 1999 earnings.

While management has not yet completed its analysis of the impact, the amount of
the one-time non cash charge to be recorded as of July 1, 2000 is estimated to
be between $27 million and $30 million. The cumulative effect of the change at
July 1, 2000 represents the deferral of previously recognized membership fees
net of estimated refunds and associated direct costs. The membership fees, net
of estimated refunds and associated direct costs, which will be deferred as part
of the cumulative effect adjustment at July 1, 2000, will be recognized in
earnings during fiscal year 2001 as the underlying refund privileges expire. As
a result of this change in accounting, fiscal 2001 results will be adversely
affected. The Company expects this change to result in a reduction of earnings
of $10 million to $13 million, or $0.67 per share to $0.87 per share. The
estimated adverse impact of the accounting change on net income is due to a
delay in the revenue, net of direct costs, without a corresponding delay in
increasing operating and general and administrative costs necessary for the
continued growth of the Company's membership base.

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

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains various forward-looking statements and
includes assumptions about future market conditions, operations and results.
These statements are based on current expectations and are subject to
significant risks and uncertainties. They are made pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Among the
many factors that could cause actual results to differ materially from the
forward-looking statements are:

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

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

      -     Economic conditions in areas outside the United States;

      -     Continued growth within the United States;

      -     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;

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

      -     New accounting pronouncements

The Company undertakes no obligation to publicly update or revise any
forward-looking statement as a result of new information, future events or
otherwise.


                                       14
<PAGE>   17
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Interest Rate

The Company has a $20.0 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, 2000. In addition, the Company's Canadian
subsidiary, MemberWorks Canada, has a $0.7 million bank credit facility which
bears interest at the Royal Bank of Canada prime rate per annum. As of June 30,
2000, the Company had $0.5 million outstanding under this bank credit facility.
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 agreements, which mature on August 31, 2001 and October 31,
2000, 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 and is, therefore, subject to
foreign currency rate exposure. Historically, its international sales have been
denominated in British pounds sterling. However, with the recent acquisition of
a Canadian subsidiary, certain sales are denominated in 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 at 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. In February 2000, the Company sold its equity interest in
AwardTrack, Inc. in exchange for stock in 24/7 Media, Inc. ("24/7"). The
carrying value of this investment is affected by changes in the quoted market
prices of 24/7 common stock. The Company determines, on a quarterly basis, the
fair market value of the 24/7 shares and records an unrealized gain or loss
resulting from the change in the fair market value from the previous quarter to
the measurement date. If the Company sells all or a portion of this stock, any
unrealized gain or loss on the date of the sale will be recorded as a realized
gain or loss in the Company's results of operations. Any future significant
decline in market value could materially impact the Company's consolidated
financial statements.

Item 8.  Financial Statements and Supplementary Data

The financial statements and related notes and report of independent accountants
for the Company 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.


                                       15
<PAGE>   18
                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

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

Item 11.  Executive Compensation

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

Item 12.  Security Ownership of Certain Beneficial Owners and Management

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, 2000 and 1999                                            F-2
      Consolidated Statements of Operations for the years ended June 30, 2000, 1999 and 1998              F-3
      Consolidated Statements of Shareholders' Equity for the years ended June 30,2000, 1999 and 1998     F-4
      Consolidated Statements of Cash Flows for the years ended June 30, 2000, 1999 and 1998              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,
      2000, 1999 and 1998                                                                                 F-17
</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
      None

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


                                       16
<PAGE>   19
                            MEMBERWORKS INCORPORATED

                                   SIGNATURES

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


                                          MEMBERWORKS INCORPORATED
                                          ------------------------
                                                (Registrant)


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


                                          Date: August 30, 2000

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

<TABLE>
<CAPTION>
Signature                                   Title                                                Date
---------                                   -----                                                ----
<S>                                         <C>                                                  <C>
By: /s/ Gary A. Johnson                     President, Chief Executive Officer and Director      August 30, 2000
    ---------------------------------
Gary A. Johnson

By: /s/ Dennis P. Walker                    Executive Vice President and Director                August 30, 2000
    ---------------------------------
Dennis P. Walker

By: /s/ James B. Duffy                      Executive Vice President, Chief Financial Officer    August 30, 2000
    ---------------------------------
James B. Duffy

By: /s/ Stephen J. Clearman                 Director                                             August 30, 2000
    ---------------------------------
Stephen J. Clearman

By: /s/ Alec L. Ellison                     Director                                             August 30, 2000
    ---------------------------------
Alec L. Ellison

By: /s/ Michael R. O'Brien                  Director                                             August 30, 2000
    ---------------------------------
Michael R. O'Brien

By: /s/ Marc S. Tesler                      Director                                             August 30, 2000
    ---------------------------------
Marc S. Tesler
</TABLE>


                                       17
<PAGE>   20
<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)

 *10.2  1995 Executive Officers' Stock Option Plan. (filed as Exhibit 10.2 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  401(k) Profit Sharing Plan of the Registrant, dated April 1, 1996.
        (filed as Exhibit 10.6 to the Company's Registration Statement on
        Form S-1, Registration No. 333-10541, filed on October 18, 1996)

  10.8  Credit Agreement dated September 15, 1999 among MemberWorks
        Incorporated, the lenders parties hereto and Brown Brothers Harriman &
        Co.

  10.9  Amendment No. 1 to Credit Agreement dated February 25, 2000 among
        MemberWorks Incorporated, the lenders parties hereto and Brown Brothers
        Harriman & Co.

*10.10  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>


                                       18
<PAGE>   21
<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.

 27     Financial Data Schedule (included in Edgar copy only).
</TABLE>



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

* Previously filed.


                                       19
<PAGE>   22
                            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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000 in conformity with accounting principles
generally accepted in the United States. 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, 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 the opinion expressed
above.

As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for printing and mailing of membership
materials.





PricewaterhouseCoopers LLP
New York, New York
July 28, 2000


                                      F-1
<PAGE>   23
                            MEMBERWORKS INCORPORATED

                           CONSOLIDATED BALANCE SHEETS
                    (In thousands, except per share amounts)




<TABLE>
<CAPTION>
                                                                                         June 30,
                                                                               ---------------------------
                                                                                 2000              1999
                                                                               ---------         ---------
<S>                                                                            <C>               <C>
                         Assets
Current assets:
     Cash and cash equivalents                                                 $  30,169         $  50,939
     Marketable securities                                                         6,326                --
     Accounts receivable                                                          17,836            11,717
     Prepaid membership materials                                                  4,891             4,177
     Prepaid expenses                                                              3,837             2,313
     Membership solicitation and other deferred costs                            128,767            78,010
                                                                               ---------         ---------
             Total current assets                                                191,826           147,156
Fixed assets, net                                                                 34,615            18,858
Intangible and other assets                                                       90,331            43,813
                                                                               ---------         ---------
             Total assets                                                      $ 316,772         $ 209,827
                                                                               =========         =========

          Liabilities and Shareholders' Equity
Current liabilities:
     Current maturities of long-term obligations                               $     665         $      72
     Accounts payable                                                             49,693            29,729
     Accrued liabilities                                                          62,642            40,702
     Due to related parties                                                        1,852                --
     Deferred membership fees                                                    165,437           109,031
                                                                               ---------         ---------
             Total current liabilities                                           280,289           179,534
Long-term obligations                                                              1,083                 6
                                                                               ---------         ---------
             Total liabilities                                                   281,372           179,540
                                                                               ---------         ---------

Commitments and contingencies (Note 6)

Minority interest                                                                 16,379                --

Shareholders' equity:
      Preferred stock, $0.01 par value --
          1,000 shares authorized; no shares issued                                   --                --
      Common stock, $0.01 par value --
          40,000 shares authorized; 16,507 shares issued
          (15,909 shares at June 30, 1999)                                           165               159
     Capital in excess of par value                                               91,398            76,999
     Deferred compensation                                                           (44)             (511)
     Accumulated deficit                                                         (27,709)          (38,042)
     Accumulated other comprehensive loss                                           (145)              (14)
     Treasury stock, 1,585 shares at cost (488 shares at June 30, 1999)          (44,644)           (8,304)
                                                                               ---------         ---------
             Total shareholders' equity                                           19,021            30,287
                                                                               ---------         ---------
             Total liabilities and shareholders' equity                        $ 316,772         $ 209,827
                                                                               =========         =========
</TABLE>


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


                                      F-2
<PAGE>   24
                            MEMBERWORKS INCORPORATED

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

<TABLE>
<CAPTION>
                                                                                           For the year ended June 30,
                                                                                ---------------------------------------------
                                                                                  2000              1999              1998
                                                                                ---------         ---------         ---------
<S>                                                                             <C>               <C>               <C>
Revenues                                                                        $ 330,107         $ 218,086         $ 120,834

Expenses:
     Operating                                                                     62,040            43,002            24,610
     Marketing                                                                    195,253           126,814            71,594
     General and administrative                                                    67,600            40,233            22,928
     Amortization of goodwill and other intangibles                                 6,654             2,243               317
     Gain on sale of investment  (Note 4)                                         (47,475)               --                --
     Loss on investment (Note 4)                                                   38,621                --                --
     Other income, net principally interest                                          (873)           (2,154)           (1,700)
                                                                                ---------         ---------         ---------
Total expenses                                                                    321,820           210,138           117,749
                                                                                ---------         ---------         ---------

Income before equity in income (loss) of affiliate and minority interest            8,287             7,948             3,085
Equity in income (loss) of affiliate                                                   19            (1,912)             (638)
Minority interest                                                                   2,027                --                --
                                                                                ---------         ---------         ---------

Income before income taxes and cumulative effect of accounting change              10,333             6,036             2,447
Provision for income taxes                                                             --                --                --
                                                                                ---------         ---------         ---------

Net income before cumulative effect of accounting change                           10,333             6,036             2,447
Cumulative effect of accounting change                                                 --            (3,367)               --
                                                                                ---------         ---------         ---------
Net income                                                                      $  10,333         $   2,669         $   2,447
                                                                                =========         =========         =========



Basic earnings per share:
     Income before cumulative effect of accounting change                       $    0.68         $    0.39         $    0.16
     Cumulative effect of accounting change                                            --             (0.22)               --
                                                                                ---------         ---------         ---------
     Basic earnings per share                                                   $    0.68         $    0.17         $    0.16
                                                                                =========         =========         =========

Diluted earnings per share:
     Income before cumulative effect of accounting change                       $    0.61         $    0.35         $    0.15
     Cumulative effect of accounting change                                            --             (0.20)               --
                                                                                ---------         ---------         ---------
     Diluted earnings per share                                                 $    0.61         $    0.16         $    0.15
                                                                                =========         =========         =========


Pro forma assuming accounting change is retroactively applied:
     Net income                                                                 $  10,333         $   6,036         $   2,572
     Basic earnings per share                                                        0.68              0.39              0.17
     Diluted earnings per share                                                      0.61              0.35              0.16


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


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


                                      F-3
<PAGE>   25
                            MEMBERWORKS INCORPORATED

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)


<TABLE>
<CAPTION>
                                                        Capital                               Accumulated
                                         Common Stock      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, 1997                14,942   $  149   $ 59,472    $ (1,445)    $ (43,158)   $      --    $      (988) $   14,030
For the year ended June 30, 1998:
  Issuance of common stock                711        7     15,006                                                            15,013
  Acquisition of treasury stock                                                                                  (3,515)     (3,515)
  Deferred compensation                                                   467                                                   467
  Comprehensive income:
     Net income                                                                       2,447
  Total comprehensive income                                                                                                  2,447
                                       ------   ------   --------    --------    ----------    ---------    -----------  ----------
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 iPlace stock for
    acquisitions (Note 3)                                  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
                                       ======   ======   ========    ========    ==========    =========    ===========   =========
</TABLE>


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


                                      F-4
<PAGE>   26
                            MEMBERWORKS INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                             For the year ended June 30,
                                                                    ---------------------------------------------
                                                                       2000              1999              1998
                                                                    ---------         ---------         ---------
<S>                                                                 <C>               <C>               <C>
Operating activities
    Net income                                                      $  10,333         $   2,669         $   2,447
    Adjustments to reconcile net income to net cash provided
     by operating activities:
        Cumulative effect of accounting change                             --             3,367                --
        Equity in (income) loss of affiliate                              (19)            1,912               638
        Minority interest                                              (2,027)               --                --
        Membership solicitation and other deferred costs             (234,826)         (146,519)          (94,835)
        Amortization of membership solicitation and other
           deferred costs                                             184,395           116,913            74,837
        Deferred membership fees                                       53,451            45,069            20,280
        Depreciation and amortization                                  13,002             5,517             2,525
        Net gain on investment                                         (8,854)               --                --
        Other                                                             505               730               514

    Change in assets and liabilities:
        Accounts receivable                                            (5,237)           (1,549)           (3,319)
        Prepaid membership materials                                     (699)           (1,026)           (1,253)
        Prepaid expenses                                               (1,141)           (1,161)             (631)
        Other assets                                                     (874)           (1,212)              (56)
        Accounts payable                                               16,361             5,941             3,556
        Accrued liabilities                                            20,477            19,922             4,227
        Related party payables                                             63                --                --
                                                                    ---------         ---------         ---------
Net cash provided by operating activities                              44,910            50,573             8,930
                                                                    ---------         ---------         ---------

Investing activities
    Acquisition of fixed assets                                       (20,326)          (12,101)           (4,586)
    Business combinations, net of cash acquired and other
       investments                                                    (13,860)          (20,316)           (5,446)
                                                                    ---------         ---------         ---------
Net cash used in investing activities                                 (34,186)          (32,417)          (10,032)
                                                                    ---------         ---------         ---------

Financing activities
    Net proceeds from issuance of stock and warrants                    4,401             1,022               505
    Treasury stock purchases                                          (36,340)           (3,801)           (3,515)
    Payments of long-term obligations                                     (74)             (371)             (713)
    Borrowings from credit facility                                    16,498                --                --
    Repayments of credit facility                                     (15,969)               --                --
                                                                    ---------         ---------         ---------
Net cash used in financing activities                                 (31,484)           (3,150)           (3,723)
                                                                    ---------         ---------         ---------
Effect of exchange rate changes on cash and cash equivalents              (10)               --                --
                                                                    ---------         ---------         ---------
Net (decrease) increase in cash and cash equivalents                  (20,770)           15,006            (4,825)
Cash and cash equivalents at beginning of year                         50,939            35,933            40,758
                                                                    ---------         ---------         ---------
Cash and cash equivalents at end of year                            $  30,169         $  50,939         $  35,933
                                                                    =========         =========         =========
</TABLE>


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


                                      F-5
<PAGE>   27
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, 2000,
6.9 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 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 three 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 on
a straight-line basis, over the remainder of the membership period. 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. Accrued liabilities set forth in the
accompanying consolidated balance sheets as of June 30, 2000 and 1999 include an
allowance for membership cancellations of $33,477,000 and $24,811,000,
respectively.


                                      F-6
<PAGE>   28
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 service programs sponsored by the Company's three largest
clients accounted for 21.9%, 13.9% and 13.7% of revenues, respectively, for the
fiscal year ended June 30, 1998.

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 marketing 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.

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.

Earnings per share
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. For the year ended June 30, 2000,
1999 and 1998, the diluted weighted average common shares outstanding include
1,831,000, 1,763,000 and 1,544,000, respectively, of dilutive stock options and
warrants.

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.

Marketable securities
Marketable securities are classified as available-for-sale and consist of 24/7
Media, Inc. equity securities (see Note 4). 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" ("FAS 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.

Intangible assets
Intangible assets principally include member and customer relationships,
employment agreements and goodwill that arose in connection with business
acquisitions. 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. 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,
2000 and 1999 include acquired member and customer relationships and employment
agreements of $14,309,000 and $8,757,000, respectively, net of accumulated
amortization of $3,546,000 and $1,467,000, respectively, goodwill of $71,497,000
and $31,057,000, respectively, net of accumulated amortization of $5,504,000 and
$1,049,000, respectively, and trademarks of $43,000 and $0, respectively, net of
accumulated amortization of $7,000 and $0, respectively. The


                                      F-7
<PAGE>   29
consolidated balance sheets as of June 30, 2000 and 1999 include total
accumulated amortization of intangible and other assets of $9,711,000 and
$3,057,000, respectively.

Impairment of long-lived assets
The Company accounts for the impairment and disposition of long-lived assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." 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,
2000, no impairment has been indicated.

Long-term obligations
Long-term obligations are comprised mostly of lease incentives related to
certain operating leases. These lease incentives are amortized on a
straight-line basis as a reduction to rent expense over the term of the lease.

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' equity. Translation gains and losses that arise from
exchange rate fluctuations on transactions 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
The Securities and Exchange Commission staff (the "Staff") issued "Staff
Accounting Bulletin No. 101-Revenue Recognition in Financial Statements" ("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.

The Company plans to voluntarily adopt the full deferral method of accounting
for membership fee revenue for all of the Company's membership programs having
full refund privileges effective July 1, 2000. Consequently, membership fees
having full refund privileges, and the related direct costs associated with
acquiring the underlying memberships, will no longer be recognized on a prorata
basis over the corresponding membership periods, but instead will be recognized
in earnings upon the expiration of membership refund privileges.

If SAB 101 had been adopted effective July 1, 1999, the cumulative effect of the
accounting change would have been a one-time non-cash charge of $38,400,000. The
impact of the change for the fiscal year ended June 30, 2000 would have been to
increase revenues by $13,404,000 and increase net income before the cumulative
effect of the accounting change by $12,153,000, or $0.72 per diluted share. The
amounts for the fiscal year ended June 30, 2000 include a portion of the
membership fees and associated direct costs previously recognized in fiscal 1999
earnings.

While management has not yet completed its analysis of the impact, the amount of
the one-time non-cash charge to be recorded as of July 1, 2000 is estimated to
be between $27,000,000 and $30,000,000. The cumulative effect of the change at
July 1, 2000 represents the deferral of previously recognized membership fees
net of estimated refunds and associated direct costs. The membership fees, net
of estimated refunds and associated direct costs, which will be deferred as part
of the cumulative effect adjustment at July 1, 2000, will be recognized in
earnings during fiscal year 2001 as the underlying refund privileges expire.

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


                                      F-8
<PAGE>   30
NOTE 3 - BUSINESS COMBINATIONS

Acquisitions

On July 27, 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.

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>

On February 23, 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
$15,930,000. 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.

On April 30, 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 $11,857,000. 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.

As of June 30, 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 period
from February 23, 2000 to June 30, 2000.

On May 18, 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.

On April 9, 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


                                      F-9
<PAGE>   31
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.

On April 2, 1998, the Company acquired all of the outstanding common stock of
Coverdell & Company, Inc. ("Coverdell"), a marketer of insurance and investment
products. The purchase price totaled approximately $18,400,000, including
$3,900,000 in cash, 448,000 shares of the Company's common stock, with a fair
value of $13,600,000 and options to acquire 93,000 shares of the Company's
common stock with a fair value of $900,000. 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 Coverdell's operations are included in the
consolidated financial statements from the date of acquisition.

Pro Forma Results
The following unaudited pro forma results of operations for 1998 have been
prepared assuming the Coverdell acquisition had occurred as of July 1, 1996.
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>
                                                    1998
                                                  --------
<S>                                               <C>
      Revenues                                    $131,200
      Net income                                       500
      Basic and diluted earnings per share        $   0.03
</TABLE>

NOTE 4 - GAIN ON SALE OF INVESTMENT

In February 2000, the Company sold its equity interest in AwardTrack, Inc. in
exchange for stock in 24/7 Media, Inc. ("24/7"). In connection with this sale,
the Company recognized a gain of $47,475,000 based upon the market value of 24/7
common stock at that date. Subsequently, the investment in 24/7 declined in
value and management determined that the decline was other than temporary. As a
result, the Company wrote down its investment in 24/7 by $36,280,000. During the
fourth quarter of fiscal 2000, the Company 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 is a net
gain of $8,854,000.

NOTE 5 - FIXED ASSETS

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

<TABLE>
<CAPTION>
                                                         2000             1999
                                                       --------         --------
<S>                                                    <C>              <C>
      Computer software and equipment                  $ 33,925         $ 18,866
      Furniture and fixtures                              8,349            3,218
      Leasehold improvements                              6,910            2,376
      Construction in progress                               13            2,719
                                                       --------         --------
                                                         49,197           27,179
      Accumulated depreciation and amortization         (14,582)          (8,321)
                                                       --------         --------
                                                       $ 34,615         $ 18,858
                                                       ========         ========
</TABLE>

Depreciation and amortization expense was $6,261,000, $3,278,000 and $1,770,000
for the years ended June 30, 2000, 1999 and 1998, respectively.


                                      F-10
<PAGE>   32
NOTE 6 - LONG-TERM OBLIGATIONS

Notes payable

Notes payable are summarized as follows at June 30, (in thousands):

<TABLE>
<CAPTION>
                                     2000        1999
                                     ----        ----
<S>                                  <C>         <C>
      Bank credit agreement          $529        $ 10
      Note payable                    100          --
      Equipment term loans              2           7
                                     ----        ----
                                      631          17
      Less current maturities         631          16
                                     ----        ----
      Long-term notes payable        $ --        $  1
                                     ====        ====
</TABLE>

The Company has a Bank Credit Agreement that allows borrowings up to
$20,000,000. 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,
2000. The credit agreement is secured by all of the Company's assets, including
the stock of its subsidiaries. In addition, the Company's Canadian subsidiary,
MemberWorks Canada, has a $700,000 bank credit facility which bears interest at
the Royal Bank of Canada prime rate per annum. As of June 30, 2000, the Company
had $529,000 outstanding under this bank credit facility. A subsidiary of the
Company, iPlace, has $100,000 outstanding under a note payable which bears
interest at 5.8% per annum and is due in January 2001.

The equipment term loan expires in fiscal 2001 and is secured by certain
computer equipment. Interest is at a rate of 10.8%, and principal is repayable
monthly.

Other income in the fiscal years ended June 30, 2000, 1999 and 1998, as shown in
the Statements of Operations, includes interest expense of $133,000, $55,000 and
$146,000, respectively.

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 $3,925,000, $2,974,000
and $1,640,000 for the fiscal years ended June 30, 2000, 1999 and 1998,
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, 2000, 1999 and 1998 was $67,000, $77,000 and $137,000,
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, 2000 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                                      CAPITAL        OPERATING
FISCAL YEAR                                                                            LEASES          LEASES
-----------                                                                            ------          ------
<S>                                                                                    <C>            <C>
2001                                                                                        34          6,979
2002                                                                                         4          6,363
2003                                                                                        --          5,205
2004                                                                                        --          4,315
2005                                                                                        --          3,801
Thereafter                                                                                  --         17,691
                                                                                       -------        -------
Total minimum lease payments                                                                38        $44,354
                                                                                                      =======
Less--Amount representing interest                                                           1
                                                                                       -------
Present value of net minimum lease payments including current maturities of $34
   with interest rates ranging from 10.1% to 10.4%                                     $    37
                                                                                       =======
</TABLE>


                                      F-11
<PAGE>   33
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 potentially
require substantial payments by the Company.

On April 18, 2000, the Company announced that it had reached a settlement with
the Minnesota Attorney General's office regarding a lawsuit filed in the United
States District Court, District of Minnesota in June 1999. In connection with
the settlement, the Company agreed to pay the State of Minnesota $75,000 for its
expenses and to make certain modifications to its marketing and collateral
materials. The settlement did not have a material effect on the Company's
results of operations.

On May 5, 2000, Eye Care International, Inc. filed a complaint against the
Company in the United States District Court, Middle District of Florida. The
complaint seeks monetary damages based upon the alleged breach of a vendor
contract. The Company believes that the allegations made in this lawsuit are
unfounded and the Company will vigorously defend its interests against this
suit.

On July 2, 1999, a purported class action was filed by Consumer Cause Inc.
against the Company and other defendants in the California Superior Court, San
Francisco County. The suit alleged that the Company and the other defendants
violated their customers' right of privacy and the Fair Credit Reporting Act and
sought unspecified monetary damages. The Company filed a demurrer and the action
was dismissed.

On July 7, 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 Company believes that the
allegations made in this lawsuit are unfounded and the Company will vigorously
defend its interests against this suit.

NOTE 7 - INCOME TAXES

There was no current or deferred provision for income taxes for the years ended
June 30, 2000, 1999 and 1998. 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
FAS 109, are summarized below as of June 30, 2000 and 1999 (in thousands):

<TABLE>
<CAPTION>
                                                          2000             1999
                                                        --------         --------
<S>                                                     <C>              <C>
Benefit of net operating loss carry forwards            $ 41,504         $ 30,236
Deferred membership fees                                   3,784            5,893
Allowance for membership cancellations                    12,336            8,186
Marketable securities                                     (1,752)              --
Other deferred tax assets                                  1,584            1,165
Membership solicitation and other deferred costs         (47,281)         (31,196)
                                                        --------         --------
Total deferred tax assets                                 10,175           14,284
Less: Valuation allowance                                (10,175)         (14,284)
                                                        --------         --------
Net deferred tax asset                                  $     --         $     --
                                                        ========         ========
</TABLE>

The valuation allowance for deferred tax assets as of July 1, 1998 was
$13,739,000. At June 30, 2000, the Company had federal net operating loss carry
forwards of $93,604,000 expiring at various dates from June 30, 2004 to June 30,
2020. Approximately $4,776,000 of the net operating loss carry forwards is
limited in their use to the future taxable income of Coverdell. The Company's
ability to use these losses to offset future taxable income would be subject to
limitations under the Internal Revenue Code if certain changes in the Company's
ownership occur. The Company also has state net operating loss carry forwards
expiring at various dates through June 30, 2005 available to reduce future state
taxable income.


                                      F-12
<PAGE>   34
NOTE 8 - RELATED PARTY OBLIGATIONS

As of June 30, 2000, the Company's majority-owned subsidiary, iPlace, has a note
payable to the President of iPlace for $1,789,000. The note bears interest at
the Citibank, N.A. publicly announced interest rate plus 1% per annum and is due
on or before February 28, 2001. The interest payable related to this note is
$63,000 as of June 30, 2000. Other income, net for fiscal 2000 includes related
party interest expense of $63,000.

NOTE 9 - SHAREHOLDERS' EQUITY

Stock Repurchases

The Company has a stock repurchase program. In January 1998, 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 April 1999. 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, the Board of Directors authorized the Company to repurchase up to
1,000,000 shares of the Company's Common Stock. In April 2000, the Board of
Directors authorized the Company to repurchase an additional 1,000,000 shares of
the Company's Common Stock. As of June 30, 2000, approximately 1,038,000 shares
were remaining for repurchase under the November 1999 and April 2000
authorizations. During fiscal 2000, the Company repurchased 1,097,000 shares for
$36,340,000, compared to the repurchase of 111,000 shares for $3,801,000 in
fiscal 1999 and 156,000 shares for $3,515,000 in fiscal 1998.

NOTE 10 - STOCK OPTIONS AND WARRANTS

Stock Compensation Plans
At June 30, 2000, 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 $467,000 has been recognized
during fiscal 2000, 1999 and 1998 related to its stock option plans under APB
25. Had compensation cost for the Company's stock based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123 "Accounting for Stock-Based
Compensation", the Company's pro forma net income (loss) and earnings (loss) per
share would have been as follows:



<TABLE>
<CAPTION>
                                                      Year ended June 30,
                                        ----------------------------------------------
                                           2000              1999              1998
                                        ----------        ----------        ----------
                                            ($ in thousands, except per share data)
<S>                                     <C>               <C>               <C>
      Net income (loss):
         As reported                    $   10,333        $    2,669        $    2,447
         Pro forma                           3,875              (732)            1,233

      Earnings (loss) per share:
         As reported
            Basic                       $     0.68        $     0.17        $     0.16
            Diluted                           0.61              0.16              0.15
         Pro forma
            Basic                       $     0.26        $    (0.05)       $     0.08
            Diluted                           0.23             (0.04)             0.08
</TABLE>

The pro forma effect of SFAS No. 123 on fiscal 2000, 1999 and 1998 results is
not representative of the pro forma effect on net income (loss) 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.


                                      F-13
<PAGE>   35
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, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                    2000       1999       1998
                                    ----       ----       ----
<S>                                 <C>        <C>        <C>
      Dividend yield                  0%         0%         0%
      Expected volatility            50%        50%        42%
      Risk free interest rate        5.9%       4.8%       5.8%
      Expected lives                 5 years    5 years    4.5 years
</TABLE>

The weighted average fair value per share of options granted at market value
were $14.04, $8.52 and $9.04 for the years ended June 30, 2000, 1999 and 1998,
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.

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 $122,000 for each of the years ended June 30, 2000, 1999
and 1998.

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, 1999 and 1998. Compensation expense is
being recognized over the four-year vesting period and is measured based on the
excess of the fair market value of the Company's stock over the grant price of
the options.

In connection with the acquisition of Coverdell on April 2, 1998 (see Note 3),
the Company substituted 93,000 options to acquire Common Stock for options to
acquire Coverdell common stock with the same terms and conditions at an exercise
price of $20.81 per share. The fair value of these options, approximately
$900,000, has been accounted for as a part of the Coverdell purchase price.

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


                                      F-14
<PAGE>   36
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.

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

<TABLE>
<CAPTION>
                                                   2000                     1999                     1998
                                                   ----                     ----                     ----
                                                          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            2,842         $ 12.46    1,754        $   8.25       1,649       $ 4.78
Granted at market value                     1,068           27.67    1,343           17.96         257        21.84
Replaced/Exchanged                              -              -       100           15.00          93        20.81
Exercised                                    (451)          (8.06)    (182)           4.01        (202)        2.30
Cancelled                                       -              -      (100)          30.38           -          -
Forfeited                                    (479)         (21.39)     (73)          13.78         (43)       11.45
                                            -----                    -----                       -----
Outstanding at end of year                  2,980         $ 17.14    2,842         $ 12.46       1,754       $ 8.25
                                            =====                    =====                       =====
</TABLE>

<TABLE>
<CAPTION>
                                                 Options Outstanding                         Options Exercisable
                                       ----------------------------------------            -----------------------
                                          Shares        Average      Average                  Shares       Average
                                        Outstanding    Remaining     Exercise               Outstanding   Exercise
(Shares in thousands)                   at 6/30/00    Life (Years)    Price                 at 6/30/00      Price
                                        ----------    ------------    -----                 ----------      -----
<S>                                     <C>           <C>            <C>                    <C>           <C>
$1.57 to $2.99                                333          3.8        $  2.46                    322      $  2.45
$3.00 to $4.99                                279          5.6           4.17                    279         4.17
$5.00 to $13.99                               280          6.2           9.87                    171         9.92
$14.00 to $15.99                              504          8.1          14.99                    112        14.99
$16.00 to $20.99                              511          8.6          17.93                    209        18.75
$21.00 to $28.99                              355          9.4          24.42                     15        25.00
$29.00 and over                               718          8.9          29.16                     30        29.88
                                            -----                                              -----
                                            2,980          7.6        $ 17.14                  1,138      $  9.24
                                            =====                                              =====
</TABLE>

Options exercisable as of June 30, 1999 and 1998 were 956,000 and 781,000,
respectively.

iPlace Stock Option Plan
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 on February 23, 2000 and Qspace on April 30, 2000 (see Note 3),
iPlace issued 233,000 options at an average exercise price of $4.82 and 35,000
options at an average exercise price of $13.70. 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 2000, 435,000 options were granted at an average exercise price of $13.84
and 75,000 options were forfeited at an average exercise price of $11.37. At
June 30, 2000, options to purchase approximately 628,000 shares of iPlace stock
remained outstanding at an average exercise price of $10.78 with 72,000 of those
options exercisable at an average exercise price of $1.41.

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, 2000:
dividend yield and 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 $2.89.

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)


                                      F-15
<PAGE>   37
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 2000, 18,380 shares were purchased
under the plan. Purchases under the plan during fiscal 1999 totaled 16,087
shares. Purchases under the plan during 1998 were not significant.

Warrants
During fiscal 2000, warrants to acquire 158,281 shares of Common Stock were
exercised (131,000 at $2.05 per share and 27,281 at $0.0014 per share). During
fiscal 1999, warrants to acquire 16,344 shares of Common Stock were exercised
(9,324 at $0.0014 per share and 7,020 at $3.56 per share). In addition, during
fiscal 1999, warrants to acquire 19,757 shares of Common Stock at $3.56 expired.
During fiscal 1998, warrants to acquire 57,509 shares of Common Stock were
exercised (28,121 at $0.0014 per share and 29,388 at $3.56 per share).

As of June 30, 2000, the Company had outstanding warrants to purchase an
aggregate of 7,272 shares of Common Stock with an exercise price of $0.0014.
These warrants expire in August 2000.

NOTE 11 - 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. The Company may elect to make matching contributions or
profit sharing contributions to the plan. There were no Company contributions
made for the years ended June 30, 2000, 1999 and 1998.

NOTE 12 - STATEMENT OF CASH FLOWS

Supplemental disclosure of cash flow information (in thousands):

<TABLE>
<CAPTION>
                                                          YEAR ENDED JUNE 30,
                                                    ----------------------------
                                                    2000        1999        1998
                                                    ----        ----        ----
<S>                                                 <C>         <C>         <C>
Cash paid during the period for interest            $ 90        $ 55        $114
Cash paid during the period for income taxes        $205        $ 76        $ --
</TABLE>


                                      F-16
<PAGE>   38
                            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, 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

Year Ended June 30, 1998
Allowance for cancellations                     $11,401,000     $  --      $101,381,000 A     $ 96,420,000 B     $16,362,000
Valuation allowance for deferred tax assets      12,977,000        --           762,000 C                 --      13,739,000
</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 in due to a
decrease in deferred tax assets.


                                      F-17