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

                                    FORM 10-K

  X     Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
-----   Act of 1934 for the fiscal year ended June 30, 2005

        or

        Transition report pursuant to Section 13 or 15(d) of the Securities
-----   Exchange Act of 1934 for the transition period from
        ________ to ________.

                           Commission File No. 0-21527

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

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

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

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

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

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

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

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

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[   ] Yes  [ X ] No

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant at December 31, 2004 was $217,443,000. This was computed by reference
to the closing price of the registrant's  Common Stock at December 31, 2004. For
purposes of this calculation, 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  12,  2005 was
9,742,347.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy  Statement for the 2005 Annual Meeting of  Stockholders of
Vertrue  Incorporated  are incorporated by reference in Parts II and III of this
report.


<PAGE>


                                      Index



                                                                            Page
                                                                            ----

Part I   Item 1. Business                                                      1

         Item 2. Properties                                                    6

         Item 3. Legal Proceedings                                             6

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

         Executive Officers of the Registrant                                  7

Part II  Item 5. Market for Registrant's Common Equity, Related
          Stockholder Matters and Issuer Purchases of Equity Securities        8

         Item 6. Selected Financial Data                                      10

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

         Item 7A. Quantitative and Qualitative Disclosures about Market
          Risk                                                                23

         Item 8. Financial Statements and Supplementary Data                  24

         Item 9. Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure                                 24

         Item 9A. Controls and Procedures                                     24

         Item 9B. Other Information                                           25

Part III Item 10. Directors and Executive Officers of the Registrant          25

         Item 11. Executive Compensation                                      25

         Item 12. Security Ownership of Certain Beneficial Owners and
          Management and Related Stockholder Matters                          25

         Item 13. Certain Relationships and Related Transactions              25

         Item 14. Principal Accountant Fees and Services                      26

Part IV  Item 15. Exhibits and Financial Statement Schedules                  26

Signatures                                                                    27

Exhibit Listing                                                               28




<PAGE>

                                     Part I

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

OVERVIEW
Vertrue Incorporated ("Vertrue" or the "Company") is a leading consumer services
marketing  company.  The Company offers both  subscription and transaction based
services  focused on  meeting  consumer  needs in large  spending  categories  -
healthcare,  personal property, discounts, security and insurance and personals.
The  Company's   service   offerings   provide   consumers   everyday   savings,
event-oriented discounts,  benefits that provide the consumer with peace of mind
and access to information and opportunities for self-enrichment.

Vertrue  operates  a group of  businesses  that  have a diverse  mix of  product
offerings that reach consumers through direct marketing efforts. Vertrue markets
its services through inbound call marketing, internet marketing,  television and
newspaper  advertising,  outbound  telemarketing  and direct mail. Over the last
three years,  Vertrue has increased  its use of the internet to market,  deliver
and service its  customers.  During 2005,  revenues  before  deferral  generated
through internet  marketing  efforts were 29% of total revenues before deferral.
Looking ahead to 2006, Vertrue expects the internet channel to continue to grow.

The Company has two reportable business segments:  Marketing Services,  formerly
known as the Membership segment, and Personals.  The Marketing Services business
segment provides discounted products and services to consumers on a subscription
basis.  The Personals  business  segment provides both web-based and phone-based
personals services to its customers.

The  Company was  incorporated  in 1989 in  Delaware  under the name  Cardmember
Publishing  Corporation.  On October 17, 1996, the Company  completed an initial
public  offering of its stock and changed its name to MemberWorks  Incorporated.
On October 13, 2004,  the Company began doing  business as Vertrue  Incorporated
and on November 18, 2004,  shareholders  approved an amendment to the  Company's
charter formally changing its name to Vertrue Incorporated.  The name change was
intended to reflect the ever-broadening base of services that the Company offers
to its customers.

MARKETING SERVICES SEGMENT
The  Marketing  Services  segment  designs  membership   programs  that  provide
consumers  everyday  savings,  event-oriented  discounts,  benefits that provide
consumers with peace of mind and access to information.  The membership programs
provide substantial benefits to members, clients and vendors. Members benefit by
receiving  an array of programs and services in the  categories  of  healthcare,
personal property,  discounts,  security and insurance. Clients benefit from the
increased   revenue  stream  that  partnering  with  Vertrue   generates  or  by
strengthening  the loyalty of their customer base.  Vendors benefit by obtaining
access to a large number of  demographically  attractive  consumers with minimal
incremental marketing costs.

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

If the membership is not canceled during the trial period, the member is charged
the annual or monthly membership fee, depending upon the applicable payment plan
offered.  Annual members who do not cancel their  memberships  after the initial
one year  membership term receive a renewal notice in advance of each membership
year and are charged for the succeeding year's membership fee. During the course
of an initial annual membership term or renewal term, a member may cancel his or
her membership in the program  generally for a pro rata refund of the membership
fee based on the remaining  portion of the membership  period at the time of the
cancellation.  Monthly members are billed each month after the trial period ends
and  continue  to be billed each month until the member  cancels.  During  2005,
approximately  85% of the Marketing  Services  segments' new member  enrollments
were in a monthly  payment  program.  Membership  fees vary  depending  upon the
particular  services offered in the membership  program.  The Marketing Services
segment had approximately 5.7 million members as of June 30, 2005.

Membership service programs are also delivered through loyalty arrangements with
client  partners.  The  Marketing  Services  segment  works with its  clients to
incorporate  elements from one or more of the standard  membership  programs and
designs a custom  program for the client.  The client then either  provides  the


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<PAGE>

customized  membership  program to its  customers  as a  value-added  feature or
resells the customized  membership  program.  In some cases, the client provides
loyalty  memberships  to its  customers  free of  charge  and pays the  periodic
membership  fee for each  customer's  membership.  In other  cases,  the  client
charges a  reduced  fee to its  customer.  Under  these  loyalty  programs,  the
Marketing  Services  segment  does not pay for the  marketing  costs to  solicit
memberships. Instead, the client offering the memberships is responsible for the
marketing.

Products.  The Marketing  Services  segment  partners  with leading,  brand name
merchants  and  service   companies  to  offer  members  valuable   packages  of
members-only benefits. Programs are available in English, French and Spanish and
can  be  customized  for  specific   clients,   customer  segments  or  consumer
communities. Membership programs are packaged around popular spending categories
and offer  potential  savings  greater  than the  program  fee.  The  membership
programs fall into the four consumer spending categories described below.

Healthcare
Health,  wellness and  self-improvement  programs  offer savings on nearly every
healthcare  product and  service,  including  prescription  drugs,  vitamins and
supplements,  eye glasses and contact  lenses,  hearing aides,  durable  medical
equipment and select consumer  products.  These programs also offer discounts on
professional services, including medical, dental, vision, hearing, chiropractic,
alternative  medicine,  elder care,  diet,  exercise and other  personal  health
services.   These   programs   offer  real   solutions  for  the  uninsured  and
underinsured.

Personal Property
Personal  property  programs  offer  consumers  online  access  to  listings  of
discounted homes and autos.  Members also have access to complementary  services
such as a mortgage  center,  roadside  assistance,  lemon  checker and  extended
warranties.

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

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

The Company's  loyalty programs provide clients with a wide range of benefits to
offer or market to their  customers  and include  stand-alone  benefits,  reward
point  accumulation and management,  gift  certificates,  merchandise and travel
reward redemption.  The Marketing  Services  segment's  versatility in designing
loyalty  strategies and providing  turnkey  execution is essential in supporting
and promoting the client's brand.

Vendors.  The  Marketing  Services  segment has  established  a large network of
vendor  relationships  that  deliver the  discounts  and services in each of the
various  membership  programs.  The  Marketing  Services  segment  evaluates and
engages  only  those  vendors  who can  cost-effectively  deliver  high  quality
products and  services.  Participating  vendors  generally  benefit by obtaining
access to a large number of  demographically  attractive  consumers with minimal
incremental  marketing  costs.  Specifically,  vendors gain access and marketing
exposure to the Marketing  Services'  membership  base, and in almost all cases,
pursuant to contractual arrangements, provide members-only discounts on products
or services.  The Marketing Services segment generally does not receive payments
from these vendors for rendering  services to the members and, in certain cases,
it pays the  vendors a fee  based on the  number of  members  in the  membership
program or based on other agreed upon factors.

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


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<PAGE>

Marketing and Distribution.  The Marketing Services segment solicits members for
its programs using direct marketing  methods,  including inbound call marketing,
referred to as MemberLink, online marketing, newspaper and magazine advertising,
television advertising, direct mail and outbound telemarketing.

MemberLink  inbound call marketing occurs when clients' inbound callers who meet
certain  criteria  are  offered  membership  programs  by the  client's  service
representative  or by a Marketing  Services  membership  service  representative
through a call  transfer.  Vertrue pays the client  either a royalty for initial
and renewal membership fees or a fee per marketing offer or per sale.

Online  marketing  is  conducted  through  arrangements  with  internet  service
providers,  online retailers and online marketers. The marketing methods include
banner ads,  pop-up boxes and search engine  marketing.  The Marketing  Services
segment buys advertising or pays a royalty on membership fees generated or a fee
per  impression or per sale.  The Marketing  Services  segment also makes use of
affiliate  marketing.  New members sign up for  membership  programs by clicking
through to the Marketing  Services  segment's  websites  through links posted on
affiliate partner websites.

Clients.  Membership programs are marketed,  in many cases, through arrangements
with clients, which include banks and other financial  institutions,  e-commerce
companies,  direct response television companies,  catalog companies,  retailers
and other  organizations  with large  numbers  of  individual  customers.  These
companies  have  outsourced  the   implementation  of  membership   programs  to
providers,  such as Vertrue, that are able to apply advanced database systems to
capture, process and store consumer and market information, use their experience
to provide  effective  membership  programs and realize  economies of scale.  In
addition,  businesses that outsource their  membership  programs demand that the
program  provider  have the  expertise to continue to introduce  innovative  new
programs  and  have  resources,   such  as  extensive  vendor  networks  and  an
experienced   management  team,  to  launch  membership   programs  quickly  and
successfully.  Clients  receive  royalty  payments in exchange for providing new
members or access to potential members.

The  Marketing   Services   segment's  clients  supply   substantially  all  the
information for marketing  efforts in accordance  with strict  consumer  privacy
safeguards.  As a result,  the  ability to market a new  program to an  existing
customer base or an existing  program to a new customer base may depend on first
obtaining the client's approval.

Contracts with clients typically grant the Marketing  Services segment the right
to indefinitely continue to provide membership services directly to the clients'
account  holders  even  if the  client  terminates  its  contract.  Many  client
contracts  may be  terminated  by the client upon 30 to 90 days  notice  without
cause and without penalty.

Membership programs sponsored by the Company's largest client, West Corporation,
accounted for 14% of total  revenues for the year ended June 30, 2005. A loss of
this client could have a material effect on the Company's results of operations.

Member  Service.  Providing  high  quality  service to  members is an  extremely
important  factor in  retaining  members and  strengthening  the affinity of the
clients' customers.  Currently  membership call centers are located in Montreal,
Canada,  Goleta,  California,  Houston,  Texas,  Omaha,  Nebraska  and  Chicago,
Illinois, with a total of over 1,300 membership service representatives. All new
membership service  representatives are required to attend on-the-job  training.
Through its training  programs,  systems and software,  the  Marketing  Services
segment seeks to provide members with friendly,  rapid and effective  answers to
members'  questions.  Members can access  their  benefits 24 hours a day via the
program's  website or automated  telephone  response  technology.  The Marketing
Services segment also works closely with its clients' customer service personnel
to ensure that their  representatives  are  knowledgeable in matters relating to
the membership programs.

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

In providing quality service to its members, the management  information systems
interact  with the Company's  advanced  call routing  system in order to display
member  profile  information  prior to answering the call,  allowing  membership
service  representatives to have the best possible  information prior to serving
those  members.  The  telecommunications  systems also  monitor the  performance
quality of the membership service  representatives and other aspects of business
through sophisticated reporting capabilities.


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<PAGE>

In addition,  the Marketing  Services  segment has increased its use of the data
warehousing  capabilities  to review,  analyze and model the membership  base to
optimize  service and to market  additional  products most  appropriate for each
member.

Competition.   The  Marketing  Services  segment  believes  that  the  principal
competitive  factors in the membership  services industry include the ability to
identify,  develop  and offer  innovative  programs,  the quality and breadth of
programs  offered,   competitive  prices  and  in-house   marketing   expertise.
Competitors offer programs which provide services similar to or compete directly
with those provided by the Marketing Services segment. Some of these competitors
have  substantially  larger  customer  bases  and  greater  financial  and other
resources. To date, the Marketing Services segment has effectively competed with
such competitors.  However,  there can be no assurance that competitors will not
increase  their  emphasis on programs  similar to those offered by the Marketing
Services segment;  provide programs  comparable or superior to those provided by
the Marketing Services segment at lower membership prices; adapt more quickly to
evolving  industry  trends  or  changing  market   requirements;   or  that  new
competitors  will  not  enter  the  market  or that  other  businesses  will not
introduce  competing  programs.  Such increased  competition may result in price
reductions,  reduced  marketing  margins or loss of market  share,  any of which
could materially  adversely affect the segment'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 Marketing Services
segment to  promote a program  if the  services  are  similar to or overlap  the
services provided by an existing program of a competitor.

PERSONALS SEGMENT
The  Personals  segment  consists  of the  Lavalife  business.  Lavalife  offers
web-based  and  phone-based  personals  services  to its  customers.  Lavalife's
open-minded  approach to dating allows members to choose how they want to "click
with other singles" by offering different dating  communities  including dating,
relationships  and  intimate  encounters.  These  services  allow  customers  to
interact with each other from anywhere in real time by phone,  email,  text chat
or video. To acquire new users and retain existing customers, Lavalife relies on
its  innovative  products,  marketing  relationships  with major  media  groups,
advertising  campaigns in large markets,  a widely  recognized brand name and an
advanced technology  infrastructure.  These interactive services allow customers
who want to enhance their social lives to search for a date, meet new people and
communicate  with other  customers  in a real time,  "Anywhere,"  "Anytime"  and
"Anyhow" environment.

Lavalife  employs  a  transactional  business  model,  in  which  customers  buy
non-refundable  credits up front and spend those  credits only when they want to
interact  with  other  customers.  Lavalife's  competitors  generally  employ  a
subscription  business  model,  in which  customers  pay a fixed  periodic  fee.
Lavalife believes a transactional model is more attractive to new customers, who
will join due to a lower  initial cost and the ability to easily  control  their
spending.  The customer  determines when to use the credits to communicate  with
other  customers.  Furthermore,  once a  customer  has an account  balance,  the
customer  has a  strong  financial  incentive  to  return  to use the  remaining
credits.  To further  develop  brand  loyalty and to  encourage  return  visits,
Lavalife  continues to add features and  functionality  to its existing  service
offerings and introduce new innovative interactive products.  Lavalife continues
to employ new distribution channels,  recently expanding the distribution of its
phone-product by marketing it through mobile carriers.

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

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


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<PAGE>

ACQUISITIONS
On January 1, 2005,  the Company  completed  the  acquisition  of certain of the
assets of My Choice Medical Holdings, Inc. ("MCM"), a privately held advertising
and practice  management company serving cosmetic surgeons throughout the United
States. The Company acquired certain of the assets of MCM in order to expand its
consumer  offerings to include  cosmetic  surgery.  The results of MCM have been
included in the Corporate and Other business unit.

On November 30, 2004,  the Company  completed the  acquisition of certain of the
assets of Bargain  Network,  Inc.  ("Bargain"),  a  privately  held  provider of
premier pricing services for homes and vehicles. The Company acquired certain of
the  assets of  Bargain  in order to expand  its  direct to  consumer  marketing
presence and to expand its  discounted  consumer  offerings to include  personal
property.  The results of Bargain have been included in the  Marketing  Services
segment.

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

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

FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS
See Note 18 to the  consolidated  financial  statements in Item 8 of this Annual
Report on Form 10-K for financial information about geographic areas.

EMPLOYEES
As of June 30, 2005, the Company employed 1,505 persons on a full-time basis and
776 on a part-time basis. The Company's employees are not represented by a labor
union. The Company believes its employee relations are good.

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

The Company makes available,  free of charge through its website,  the Company's
annual reports on Form 10-K,  quarterly reports on Form 10-Q, current reports on
Form 8-K,  Section 16 filings  and all  amendments  to those  reports as soon as
reasonably  practicable  after such  material  is  electronically  filed with or
furnished to the Securities and Exchange  Commission  ("SEC").  You may read and
copy any document filed with the SEC on its website,  http://www.sec.gov,  or at
its public reference  facility at 100 F Street,  N.E.,  Washington,  D.C. 20459.
Please call the SEC at 1-800-SEC-0330  for further  information on the operation
of the public reference facility.


                                       5
<PAGE>

Item 2.  Properties
         ----------

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

                Location                  Square Footage    Year Lease Expires
                --------                  --------------    ------------------
                Omaha, NE                     124,832        2009 through 2015
                Toronto, Canada                73,929              2009
                Goleta, CA                     66,251              2006
                Stamford, CT                   63,559              2006
                Montreal, Canada               48,193              2011
                Houston, TX                    41,591              2006
                Chicago, IL                    15,218              2010
                Atlanta, GA                    13,717              2005
                Stroudsburg, PA                 9,500              2008

The Stamford,  Connecticut office serves as the Company's corporate headquarters
and also includes  non-corporate offices for the Marketing Services segment. The
Toronto,  Canada  office  serves as the  operational  office  for the  Personals
segment.  All other  locations  serve as  operational  offices for the Marketing
Services segment. The Company believes that its properties are generally in good
condition,  are well  maintained  and are  suitable and adequate to carry on its
business.  Vertrue  recently  signed a lease effective March 1, 2006 to relocate
its Stamford, CT offices to Norwalk, CT.

Item 3.  Legal Proceedings
         -----------------

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  except as set forth  below.  The  Company is involved in
other lawsuits and claims  generally  incidental to its business,  including but
not limited to various suits,  including  previously  disclosed  suits,  brought
against the Company by individual  consumers  seeking monetary and/or injunctive
relief relating to the marketing of the Company's  programs.  In addition,  from
time to  time  in the  regular  course  of its  business  the  Company  receives
inquiries from various federal and/or state regulatory authorities.

In March 2001, an action was  instituted  by plaintiff  Teresa  McClain  against
Coverdell & Company  ("Coverdell"),  a wholly owned  subsidiary  of the Company,
Monumental  Life  Insurance  Company and other  defendants  in the United States
District  Court for the Eastern  District of Michigan,  Southern  Division.  The
suit, which sought unspecified monetary damages,  alleged that Coverdell and the
other  defendants  violated  the  Michigan  Consumer  Protection  Act and  other
applicable  Michigan  laws in connection  with the marketing of Monumental  Life
Insurance  Company insurance  products.  The Court certified a class of Michigan
residents. The Court approved the settlement agreement,  which was signed by all
parties, at a Fairness/Approval hearing on November 22, 2004 and the Company was
not required to make any payment.

On January 24, 2003,  the Company filed a motion with the Superior Court for the
Judicial District of Hartford, Connecticut to vacate and oppose the confirmation
of an arbitration award issued in December 2002. The arbitration,  filed against
the Company by MedValUSA  Health  Programs,  Inc.  ("MedVal") in September 2000,
involved claims of breach of contract, breach of the duty of good faith and fair
dealing,  and violation of the Connecticut Unfair Trade Practices Act ("CUTPA").
Even though the arbitrators  found that the Company was not liable to MedVal for
any  compensatory  damages,  they awarded  $5.5 million in punitive  damages and
costs  against the Company  solely under CUTPA.  The Company  believes that this
arbitration award was unjustified and not based on any existing legal precedent.
Specifically, the Company challenged the award on a number of grounds, including
that it violated a well-defined  public policy against excessive punitive damage
awards,  raised constitutional issues and disregarded certain legal requirements
for a valid award under CUTPA.  On June 22, 2003,  the Superior Court denied the
Company's  motion to  vacate  the award  and on May 10,  2005,  the  Connecticut
Supreme Court denied the Company's  appeal of that decision.  As a result of the
Connecticut  Supreme  Court's  decision,  the Company  recorded a one-time  $5.5
million  charge in the June 2005  quarter.  The Company has  requested  the U.S.
Supreme Court to review the Connecticut Supreme Court's decision. However, there
can be no assurance that the Company will be successful in its efforts.


                                       6
<PAGE>

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

No matters were submitted to a vote of security holders during the quarter ended
June 30, 2005.

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

The executive  officers of the  registrant  of the Company and their  respective
ages as of July 31, 2005 are as follows:

Name                   Age       Position
----                   ---       --------
Gary A. Johnson        50        President and Chief Executive Officer, Director
Vincent DiBenedetto    48        Executive Vice President, Health and Insurance
                                  Services
James B. Duffy         51        Executive Vice President and Chief Financial
                                  Officer

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

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

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






                                       7
<PAGE>

                                     Part II

Item 5.  Market for Registrant's Common Equity,  Related Stockholder Matters and
         -----------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------

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

        Fiscal Year Ended June 30, 2005:      High       Low
                                            --------   --------
          First Quarter                     $  29.28   $  24.42
          Second Quarter                       38.33      24.70
          Third Quarter                        40.89      35.34
          Fourth Quarter                       39.47      29.47

        Fiscal Year Ended June 30, 2004:      High       Low
                                            --------   --------
          First Quarter                     $  38.22   $  19.75
          Second Quarter                       34.00      24.16
          Third Quarter                        36.77      26.96
          Fourth Quarter                       35.02      26.89

Holder and Dividend Information
As of August 12, 2005,  there were  40,000,000  shares of the  Company's  Common
Stock   authorized  of  which  9,742,347  shares  were   outstanding,   held  by
approximately 1,700 stockholders of record. The Company has not declared or paid
any cash  dividends  to date and  anticipates  that all of its  earnings  in the
foreseeable  future will be retained for use in its  business and to  repurchase
its common  stock  under the stock  repurchase  program.  The  Company's  future
dividend  policy will depend on the Company's  earnings,  capital  requirements,
financial  condition,  requirements  of the  financing  agreements  to which the
Company  is a party  and  other  factors  considered  relevant  by the  Board of
Directors.

Securities Authorized for Issuance under Equity Compensation Plans
<TABLE>
<CAPTION>

                                            Number of                           Number of securities
                                         securities to be     Weighted-       remaining available for
                                           issued upon         average         future issuance under
                                           exercise of     exercise price       equity compensation
                                           outstanding      of outstanding       plans (excluding
Plan category                                options           options      securities reflected in (a))
-------------                           -----------------  ---------------  ---------------------------
                                               (a)               (b)                   (c)
<S>                                            <C>           <C>                               <C>
Equity compensation plans
 approved by security holders                  1,640,000     $      25.51                      443,000
Equity compensation plans not
 approved by security holders (1)              1,232,000            17.70                      163,000
                                        -----------------  ---------------  ---------------------------
  Total                                        2,872,000     $      22.16                      606,000
                                        =================  ===============  ===========================
</TABLE>

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


                                       8
<PAGE>

Purchases of Equity Securities by the Issuer
The following  table  summarizes the shares of the Company's  equity  securities
purchased by or on behalf of the Company:
<TABLE>
<CAPTION>
                                                                                              Maximum
                                                                       Total Number of       Number of
                                                                           Shares         Shares that May
                                             Total                       Purchased as         Yet be
                                           Number of      Average     Part of Publicly       Purchased
                                            Shares      Price Paid     Announced Plans    Under the Plans
Period                                     Purchased     per Share      or Programs (1)     or Programs
------                                    -----------  ------------  ------------------  -----------------
<S>                                           <C>        <C>                    <C>               <C>
April 1, 2005 to April 30, 2005               42,000     $   36.16              42,000            979,430
May 1, 2005 to May 31, 2005                   90,500         36.60              90,500            888,930
June 1, 2005 to June 30, 2005                 63,700         38.97              63,700            825,230
                                          -----------  ------------  ------------------  -----------------
  Total                                      196,200     $   37.28             196,200            825,230
                                          ===========  ============  ==================  =================
</TABLE>

(1)  In October 2004, the Board of Directors  authorized an additional 1,000,000
     shares,  no  expiration  date, to be purchased  under the  Company's  stock
     repurchase program originally authorized during fiscal 1997.






                                       9
<PAGE>

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

The selected consolidated  operating and common stock data for each of the years
ended  June 30,  2005  through  2001  and the  selected  consolidated  financial
position  data and  liquidity as of June 30, 2005 through 2001 below are derived
from the  Company's  audited  consolidated  financial  statements.  All selected
financial  information in this Item 6 is qualified by reference to and should be
read in conjunction with Item 8, "Financial  Statements and Supplementary Data,"
and Item 7,  "Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations," in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>

                                                                          For the years ended June 30,
                                                             --------------------------------------------------
(In millions except per share data)                             2005(1)   2004(2)   2003      2002      2001
                                                             --------------------------------------------------
<S>                                                            <C>       <C>       <C>       <C>       <C>
Consolidated Operating Data:
Revenues                                                       $ 579.8   $ 488.7   $ 456.9   $ 427.6   $ 475.7
Operating income (loss)                                           57.1      52.9      22.3      11.9     (33.3)
Income (loss) before provision for income taxes                   38.9      46.6      40.6      43.9     (26.8)
Provision for income taxes                                        13.4      18.6      16.2        -         -
Income (loss) before cumulative effect of accounting
 change                                                           25.5      28.0      24.4      43.9     (26.8)
Net income (loss)                                                 25.5      28.0      24.4      38.0     (52.5)

Common Stock Data:
Diluted earnings (loss) before cumulative effect of
 accounting change per share                                   $  2.22   $  2.29   $  1.84   $  2.95   $ (1.75)
Diluted earnings (loss) per share                              $  2.22   $  2.29   $  1.84   $  2.55   $ (3.44)
Diluted weighted average common shares outstanding                13.0      13.2      13.2      14.9      15.2

                                                                                  June 30,
                                                             --------------------------------------------------
                                                                2005      2004      2003      2002      2001
                                                             --------------------------------------------------
Consolidated Financial Position Data and Liquidity:
Cash and cash equivalents (3)                                 $   64.4   $  47.2   $  67.3   $  45.5   $  21.7
Short-term investments (3)                                        16.2     120.0       5.0        -         -
Total assets                                                     447.2     453.2     248.5     280.8     348.5
Long-term liabilities                                            252.8     246.9       8.3       3.6       3.1
Shareholders' (deficit) equity                                   (48.4)    (46.1)    (20.3)    (20.6)    (26.0)
Cash flow provided by operating activities                        32.3      47.9      48.5      17.0      12.0

</TABLE>

(1)  In 2005, the Company acquired certain of the net assets of Bargain Network,
     Inc. and My Choice Medical Holdings, Inc.
(2)  In 2004, the Company completed the acquisition of all of the net assets and
     outstanding capital stock of Lavalife Inc.
(3)  Reclassifications  have been made to prior  year  amounts to conform to the
     current year presentation  including  reclassifying $112.3 million and $5.0
     million  of  auction  rate  securities  from cash and cash  equivalents  to
     short-term investments as of June 30, 2004 and 2003, respectively.

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

OVERVIEW

The Company is a leading consumer services marketing company. The Company offers
both  subscription  and transaction  based services  focused on meeting consumer
needs in large spending categories - healthcare,  personal property,  discounts,
security and insurance and personals.  The Company's  service  offerings provide
consumers everyday savings,  event-oriented discounts, benefits that provide the
consumer  with peace of mind and access to  information  and  opportunities  for
self-enrichment.  The Company's  loyalty  programs  provide  clients with a wide
range of benefits to offer or market to their customers and include  stand-alone
benefits,   reward  point   accumulation  and  management,   gift  certificates,
merchandise and travel reward redemption.


                                       10
<PAGE>

The Company has two reportable business segments:  Marketing Services,  formerly
known  as the  Membership  segment,  and  Personals.  For  additional  financial
information  about  these  reportable  business  segments,  see  Note  18 to the
consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

The  Marketing  Services  segment  offers  consumers a variety of  products  and
services  from  selected  vendors and service  providers on an annual or monthly
subscription basis or a fee for service basis.  Revenues are derived principally
from  recurring  fees  which  are  billed  to the  member on either an annual or
monthly  basis.  In the case of annually  billed  membership  fees,  the Company
receives full payment at or near the  beginning of the  membership  period,  but
recognizes the revenues as the member's  refund  privilege  expires.  Membership
fees that are billed monthly are recognized when earned.  Revenues  derived from
one time fees are recognized when the service is performed.

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

CRITICAL ACCOUNTING POLICIES

Critical  accounting  policies  are those  policies  that are  important  to the
Company's  financial  condition and results of operations and involve subjective
or complex judgments on the part of management, often as a result of the need to
make estimates.  The following areas require the use of judgments and estimates:
revenue recognition,  deferred marketing costs,  valuation of goodwill and other
intangible assets, estimation of remaining useful lives of intangible assets and
valuation of deferred tax assets.  Estimates in each of these areas are based on
historical  experience  and various  assumptions  that  management  believes are
appropriate. Actual results may differ from these estimates. Management believes
the areas listed above represent the critical accounting policies of the Company
as  contemplated  by  Financial  Reporting  Release No. 60,  "Cautionary  Advice
Regarding  Disclosure about Critical Accounting  Policies." For a summary of all
the Company's  significant  accounting policies,  see Note 2 to the consolidated
financial statements in Item 8 of this Annual Report on Form 10-K.

Revenue recognition
Revenues are billed primarily  through credit and debit cards and are recognized
when earned.  Members may cancel their memberships at any time. Members enrolled
in an annual payment plan who cancel their memberships receive a pro rata refund
of the remaining  unused portion of their  membership  fees. In accordance  with
Staff Accounting Bulletin 104, "Revenue Recognition" ("SAB 104"),  revenues, net
of  estimated  cancellations,  are  deferred  and  recognized  as revenues  when
membership  refund  privileges  expire.  Management  establishes  and  regularly
updates the allowance for membership cancellations.  In estimating the allowance
for  membership  cancellations,   management  analyzes  historical  cancellation
experience,  current  economic  trends and  changes in  customer  demand for the
Company's  products and services.  Actual membership refunds are charged against
the  allowance  for  membership  cancellations  on a  current  basis.  If actual
cancellations  differ  from the  estimate,  the results of  operations  would be
impacted.  The Personals segment employs a transactional business model in which
users buy non-refundable credits up front and spend those credits only when they
want to interact with other  customers.  Personals  revenues are recognized when
the services are used.

Marketing expenses
Marketing expenses are comprised of refundable royalty payments,  non-refundable
royalty payments,  advertising costs, telemarketing costs and direct mail costs.
Advertising costs and  non-refundable  royalty  payments,  which include fee per
offer, fee per sale and fee per impression marketing arrangements,  are expensed
when  incurred.  Refundable  royalty  payments are charged to  operations as the
associated  revenues are  recognized in accordance  with SAB 104.  Telemarketing
costs,  including  costs for third  party  vendors  to solicit  members  for the
Company,  and direct mail costs,  including costs of printing and mailing direct
mail pieces,  are deferred direct response  advertising costs and are charged to
marketing  expenses over the expected  future benefit period in accordance  with
American Institute of Certified Public  Accountants  Statement of Position 93-7,
"Reporting on Advertising Costs" ("SOP 93-7").

Deferred  marketing  costs to  enroll a new  member  are less  than the  related
estimated  total net  revenues.  However,  if deferred  marketing  costs were to
exceed the related  estimated  total net revenues,  management  would adjust the
deferred marketing costs for that impairment.

Valuation of goodwill and other intangibles
The Company  reviews the carrying  value of its  goodwill  and other  intangible
assets and  assesses the  estimated  remaining  useful  lives of its  intangible
assets  in  accordance  with  Financial   Accounting  Standards  Board  ("FASB")
Statement  No.  142,  "Goodwill  and  Other  Intangible  Assets"  ("SFAS  142").


                                       11
<PAGE>

Management  reviews  goodwill  and other  intangible  assets for  impairment  by
comparing  their carrying  values to their fair values at least annually or more
frequently if circumstances indicate possible impairment.  When determining fair
value, management utilizes various assumptions,  including projections of future
cash flows. A change in the underlying  assumptions could cause fair value to be
less than  carrying  value and  require  the  Company to record a  corresponding
charge against operations.  Management tested goodwill for impairment at July 1,
2004, 2003 and 2002 during the quarters ended September 30, 2004, 2003 and 2002,
respectively, and concluded that it was not impaired as of July 1, 2004, 2003 or
2002.  Management also  reassessed the estimated  useful lives of its indefinite
lived intangible assets and determined that they were appropriate.

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

RESULTS OF OPERATIONS

Consolidated Overview

                                                      For the years ended June 30,        Percent Increase/(Decrease)
                                                  ------------------------------------   -----------------------------
(Dollars in millions)                                2005         2004         2003       '05 vs. '04     '04 vs. '03
                                                  ----------   ----------   ----------   -------------   -------------
<S>                                               <C>          <C>          <C>               <C>              <C>
Revenues                                          $   579.8    $   488.7    $   456.9         19%              7%

Marketing expenses                                    286.4        255.8        280.7         12%             (9%)
Operating expenses                                    114.4         91.8         78.4         25%             17%
General and administrative expenses                   108.2         85.8         74.1         26%             16%
Charge for arbitration award                            5.5           -            -           NM              NM
Amortization of intangibles                             8.2          2.4          1.4        242%             71%
                                                  ----------   ----------   ----------

Operating income                                       57.1         52.9         22.3          8%            137%
Settlement of investment related litigation              -            -          19.1          NM              NM
Loss on sale of subsidiary                               -            -          (1.0)         NM              NM
Net loss on investment                                   -            -          (0.2)         NM              NM
Interest (expense) income, net                        (18.8)        (6.6)         0.6       (185%)        (1,200%)
Other income (expense), net                             0.6          0.3         (0.2)       100%            250%
                                                  ----------   ----------   ----------

Income before income taxes                             38.9         46.6         40.6        (17%)            15%
Provision for income taxes                             13.4         18.6         16.2        (28%)            15%
                                                  ----------   ----------   ----------

Net income                                        $    25.5    $    28.0    $    24.4         (9%)            15%
                                                  ==========   ==========   ==========

</TABLE>

NM = Not Meaningful

The Company operates in two reportable  business segments:  Marketing  Services,
formerly known as the Membership segment, and Personals.  The Marketing Services
reportable  business  segment  provides  discounted  products  and  services  to
consumers. The Personals reportable business segment provides both web-based and
phone-based  personals  services  to its  customers.  The  Corporate  and  Other
business  unit  includes  the  results  of MCM as  well as  unallocated  general
corporate expenses.

The results of MCM,  Bargain and Lavalife (the "acquired  companies")  have been
included in the  consolidated  results  since their  acquisitions  on January 1,
2005, November 30, 2004 and April 1, 2004, respectively.

Revenues
Revenues  increased  19% in 2005  due to the  inclusion  of  revenues  from  the
acquired companies.  During 2005, Vertrue increased direct to consumer marketing
efforts in order to provide  additional growth  opportunities and a more diverse
business  model.  Vertrue  decreased its level of marketing  with certain client
partners in the outbound  telemarketing  channel.  Vertrue's member and customer
base was 6.3 million at the end of 2005 versus 6.2 million at the end of 2004.


                                       12
<PAGE>

In 2004, revenues increased 7% primarily due to the effect of the acquisition of
Lavalife.  Excluding the impact of the  acquisition of Lavalife,  revenues would
have increased 3% primarily due to an increase in the weighted  average  program
price point per member.

Marketing expenses
Marketing  expenses  increased  12% in 2005  primarily  due to the  inclusion of
marketing  expenses  incurred by the  acquired  companies.  As a  percentage  of
revenues, marketing expenses were 49% in 2005 compared to 52% in 2004. Marketing
expenses  decreased as a percentage of revenues primarily due to the decrease in
the  level  and  mix of  members  enrolled  through  the  higher  cost  outbound
telemarketing  channel and the effect of the lower  marketing  expense ratios of
the acquired companies.

In 2004,  marketing  expenses  decreased  9% and, as a  percentage  of revenues,
decreased to 52% from 61% in 2003.  These  decreases  were  primarily due to the
decrease  in the level and mix of  members  enrolled  through  the  higher  cost
outbound telemarketing channel.

Operating expenses
Operating  expenses  increased  25% in 2005 and, as a  percentage  of  revenues,
operating  expenses  increased to 20% in 2005 from 19% in 2004.  These increases
were primarily due to the effect of the higher  operating  expense ratios of the
acquired companies.

In 2004, operating expenses increased 17% and, as a percentage of revenues, were
19% in 2004  compared to 17% in 2003.  These  increases  were  primarily  due to
increased member service call center related costs incurred to improve the value
and quality of services offered to the membership base.

General and administrative expenses
General and  administrative  expenses increased 26% in 2005 and, as a percentage
of revenues,  were 19% in 2005  compared to 18% in 2004.  These  increases  were
primarily   due  to  the  impact  of  the   acquired   companies.   General  and
administrative  expenses increased 16% in 2004 and, as a percentage of revenues,
were 18% in 2004 compared to 16% in 2003.  These increases were primarily due to
increased  employee  related  expenses  and the  impact  of the  acquisition  of
Lavalife.

Charge for arbitration award
In 2005,  the Company  recorded a $5.5 million  charge related to an arbitration
award  against  the  Company.  For  additional  information,  see  Item 3 "Legal
Proceedings" in this Annual Report on Form 10-K.

Amortization of intangibles
The increase in amortization  of intangible  assets during 2005 and 2004 was due
to the acquisitions that occurred during those years.

Operating income
Operating  income  increased  8% in  2005  due to  the  impact  of the  acquired
companies  and the  decrease in marketing  expense  ratios.  As a percentage  of
revenues, marketing expenses were 49% in 2005 compared to 52% in 2004. Marketing
expenses  decreased as a percentage of revenues primarily due to the decrease in
the  level  and  mix of  members  enrolled  through  the  higher  cost  outbound
telemarketing  channel and the effect of the lower  marketing  expense ratios of
the acquired  companies.  These increases were partially offset by the impact of
the $5.5 million charge for the arbitration award.

In  2004,  operating  income  increased  137%  primarily  due to a  decrease  in
marketing  expense as a  percentage  of revenues.  As a percentage  of revenues,
marketing expenses were 52% in 2004 compared to 61% in 2003 primarily due to the
decrease  in the level and mix of  members  enrolled  through  the  higher  cost
outbound telemarketing channel.

Interest expense, net
Interest expense, net in 2005 included $14.3 million related to the 9.25% Senior
Notes and $5.0 million related to the 5.5%  Convertible  Notes.  The increase in
interest expense, net in 2005 was due to a full year of interest expense related
to the 9.25% Senior Notes  issued in April 2004 and the 5.5%  Convertible  Notes
issued in  September  2003.  In  addition to the  increase in interest  expense,
interest  income  earned in 2005  decreased due to lower  short-term  investment
balances.  The decrease in short-term  investments  was due to  acquisitions  of
businesses and purchases of treasury stock.


                                       13
<PAGE>

The  increase  in  interest  expense,  net in 2004 was due to  interest  expense
related to the 5.5% Convertible Notes and the 9.25% Senior Notes. For additional
information on these debt issuances,  refer to Item 7  "Management's  Discussion
and Analysis of Financial  Condition - Liquidity and Capital  Resources" in this
Annual Report on Form 10-K.

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

Loss on sale of subsidiary
In 2003, the Company settled with Homestore.com, Inc. all issues pending related
to  amounts  held in escrow in  connection  with the 2002 sale of the  Company's
investment  in iPlace,  Inc.  The  Company  recorded a net loss of $1.0  million
related to this settlement in 2003.

Net loss on investment
In 2003,  the  Company  sold all of its  Homestore.com,  Inc.  common  stock and
recognized a loss of $0.2 million.

Provision for income taxes
In 2005,  2004 and 2003,  the Company  recorded  provisions  for income taxes of
$13.4 million, $18.6 million and $16.2 million, respectively, based on effective
tax rates of 34.4%,  40% and 40%,  respectively.  The effective tax rate in 2005
decreased  from the  prior  year as a  result  of the full  year  impact  of the
acquisition of Lavalife. The effective tax rate was higher than the U.S. federal
statutory   rate  in  2004  and  2003  due  to  state  tax   expense  and  other
non-deductible  items. As of June 30, 2005 and 2004, the Company had accumulated
federal net  operating  loss carry  forwards of $1.5  million and $6.5  million,
respectively.

EBITDA Measures
EBITDA  and  Adjusted  EBITDA  are  used  by the  Company's  management  and its
investors  to evaluate  the  performance  of its  business.  A  description  and
reconciliation   of  EBITDA  and  Adjusted   EBITDA  are  disclosed  in  Item  7
"Management's Discussion and Analysis of Financial Condition - Reconciliation of
Non-GAAP Measures" of this Annual Report on Form 10-K.

EBITDA  increased 20% in 2005 to $78.7 million and, as a percentage of revenues,
EBITDA  increased to 14% in 2005 from 13% in 2004.  These  increases were due to
the impact of the  acquired  companies  and  improved  marketing  margins.  As a
percentage of revenues,  marketing expenses decreased to 49% in 2005 from 52% in
2004  primarily  due to the  decrease  in the level and mix of members  enrolled
through the higher  cost  outbound  telemarketing  channel and the effect of the
lower marketing expense ratios of the acquired  companies.  These increases were
partially  offset by the impact of the $5.5 million  charge for the  arbitration
award.

EBITDA  increased 90% in 2004 to $65.4 million and, as a percentage of revenues,
EBITDA  increased to 13% in 2004 from 8% in 2003.  These increases were due to a
decrease in marketing  expenses as a  percentage  of revenue from 61% in 2003 to
52% in 2004  primarily  due to the  decrease  in the  level  and mix of  members
enrolled through the higher cost outbound telemarketing channel.

Adjusted  EBITDA  decreased 2% in 2005 to $57.2  million and, as a percentage of
revenues before  deferral,  adjusted EBITDA decreased to 10% in 2005 from 13% in
2004.  These  decreases  were due to the  increase  in the mix of  revenue  from
monthly  payment  plans  and the  impact  of the  $5.5  million  charge  for the
arbitration award partially offset by the impact of the acquired companies.

Adjusted  EBITDA  increased 25% in 2004 to $58.6 million and, as a percentage of
revenues before  deferral,  adjusted EBITDA increased to 13% in 2005 from 11% in
2004. Theses increases were due to an increase in revenues before deferral of 9%
while  marketing  costs before  deferral  remained flat.  This  improvement  was
primarily due to the decrease in the level and mix of members  enrolled  through
the higher cost outbound telemarketing channel.


                                       14
<PAGE>

<TABLE>
<CAPTION>
Summary of Results by Segment

                                     For the years ended June 30,        Percent Increase/(Decrease)
                                 ------------------------------------   -----------------------------
(Dollars in millions)               2005         2004         2003       '05 vs. '04     '04 vs. '03
                                 ----------   ----------   ----------   -------------   -------------
<S>                              <C>          <C>          <C>                <C>             <C>
Revenues
Marketing Services               $   490.3    $   471.0    $   456.9          4%              3%
Personals                             72.1         17.7           -         307%              NM
Corporate and Other                   17.4           -            -           NM              NM
                                 ----------   ----------   ----------
  Total                          $   579.8    $   488.7    $   456.9         19%              7%
                                 ==========   ==========   ==========

Operating Income
Marketing Services               $    85.5    $    76.6    $    41.8         12%             83%
Personals                             (3.1)         0.3           -           NM              NM
Corporate and Other                  (25.3)       (24.0)       (19.5)         5%             23%
                                 ----------   ----------   ----------
  Total                          $    57.1    $    52.9    $    22.3          8%            137%
                                 ==========   ==========   ==========

EBITDA
Marketing Services               $    96.5    $    86.7    $    53.7         11%             61%
Personals                              6.2          2.7           -         130%              NM
Corporate and Other                  (24.0)       (24.0)       (19.3)         0%             24%
                                 ----------   ----------   ----------
  Total                          $    78.7    $    65.4    $    34.4         20%             90%
                                 ==========   ==========   ==========

Adjusted EBITDA
Marketing Services               $    74.0    $    80.5    $    66.1         (8%)            22%
Personals                              6.3          2.1           -         200%              NM
Corporate and Other                  (23.1)       (24.0)       (19.3)        (4%)            24%
                                 ----------   ----------   ----------
  Total                          $    57.2    $    58.6    $    46.8         (2%)            25%
                                 ==========   ==========   ==========

</TABLE>

NM = Not Meaningful

Marketing Services Segment

Revenues
Revenues increased 4% in 2005 and net active members increased 2% to 5.7 million
as of June 30, 2005 due to the  inclusion of revenues and members from  Bargain.
During  2005,  the  Marketing  Services  segment  increased  direct to  consumer
marketing efforts in order to provide additional growth opportunities and a more
diverse business model. In addition,  the Marketing  Services segment  decreased
its  level  of  marketing   with  certain   client   partners  in  the  outbound
telemarketing channel.

Revenues  increased  3% in 2004  primarily  due to an increase  in the  weighted
average program price point per member. Net active members decreased 11% in 2004
to 5.6  million  primarily  due to a  decrease  in  marketing  efforts  in 2004.
Revenues in 2003  benefited from the completion of the migration of members that
participate  in a  full-money-back  refund  policy  program to a pro rata refund
policy program.




                                       15
<PAGE>

The mix of new members enrolled in a monthly payment plan was approximately 85%,
62% and 27% in 2005, 2004 and 2003, respectively. Revenues from members enrolled
in different payment plans are summarized below (dollars in millions):
<TABLE>
<CAPTION>

                                     For the years ended June 30,        Percent Increase/(Decrease)
                                 ------------------------------------   -----------------------------
                                    2005         2004         2003       '05 vs. '04     '04 vs. '03
                                 ----------   ----------   ----------   -------------   -------------
<S>                              <C>          <C>          <C>                <C>             <C>
Monthly payment plans            $   250.8    $   160.6    $    76.9         56%            109%
Annual payment plans:
  Initial year                        56.5        113.2        163.6        (50%)           (31%)
  Renewal year                       152.6        170.1        189.8        (10%)           (10%)
Other                                 30.4         27.1         26.6         12%              2%
                                 ----------   ----------   ----------
  Total                          $   490.3    $   471.0    $   456.9          4%              3%
                                 ==========   ==========   ==========

</TABLE>

Operating income
Operating  income  increased  12% in  2005  primarily  due to a 4%  increase  in
revenues while marketing  expenses  increased 1%. Marketing expenses were $251.1
million in 2005 versus $248.9  million in 2004 and, as a percentage of revenues,
marketing  expenses  were 51% in 2005  versus  53% in 2004.  This  decrease  was
primarily due to the decrease in the level and mix of members  enrolled  through
the higher cost outbound telemarketing channel.

Operating  income  increased  83% in  2004  primarily  due to a 3%  increase  in
revenues while marketing  expenses decreased 11%. Marketing expenses were $248.9
million in 2004 versus $280.7  million in 2003 and, as a percentage of revenues,
marketing  expenses were 53% in 2004 versus 61% in 2003.  These  decreases  were
primarily due to the decrease in the level and mix of members  enrolled  through
the higher cost outbound telemarketing channel. The decrease in members enrolled
through  the  outbound  telemarketing  channel was not  completely  offset by an
increase in the level of members  enrolled through the Company's more profitable
online and MemberLink  channels.  Operating income was reduced by an increase in
operating  expenses.  Operating  expenses  increased  12%  in  2004  and,  as  a
percentage  of  revenues,  were  19% in 2004  and 17% in 2003  primarily  due to
increased member service call center related costs incurred to improve the value
and quality of services offered to the membership base.

EBITDA
EBITDA  increased 11% in 2005 to $96.5 million and, as a percentage of revenues,
EBITDA increased to 20% in 2005 from 18% in 2004. These increases were primarily
due to a 4% increase in revenues  while  marketing  expenses only  increased 1%.
Marketing  expenses  were 51% in 2005  versus  53% in 2004.  This  decrease  was
primarily due to the decrease in the level and mix of members  enrolled  through
the higher cost outbound telemarketing channel.

In 2004, EBITDA increased 61% to $86.7 million and, as a percentage of revenues,
EBITDA increased to 18% in 2004 from 12% in 2003. These increases were primarily
due to a decrease in marketing  expenses of 11%  combined  with a 3% increase in
revenues offset by an increase in operating  expenses.  Marketing  expenses as a
percentage of revenues  were 53% in 2004 compared to 61% in 2003.  This decrease
was  primarily  due to the  decrease  in the level and mix of  members  enrolled
through  the  higher  cost  outbound  telemarketing  channel.  In  2004,  EBITDA
increased  61%  while  operating  income  increased  83%  due to a $1.8  million
decrease in depreciation expenses.

Adjusted EBITDA
Adjusted  EBITDA  decreased 8% in 2005 to $74.0  million and, as a percentage of
revenues  before  deferral,  adjusted  EBITDA was 16% in 2005 compared to 18% in
2004.  These  decreases  were due to a 6% increase  in  marketing  costs  before
deferral  while revenue  before  deferral  increased only 3%. As a percentage of
revenue before deferral, marketing costs before deferral was 52% in 2005 and 51%
in 2004 due to the increase in the mix of revenue from monthly payment plans.

Adjusted  EBITDA  increased 22% in 2004 to $80.5 million and, as a percentage of
revenues  before  deferral,  adjusted  EBITDA was 18% in 2004 compared to 16% in
2003.  These  increases  were  primarily  due to an increase in revenues  before
deferral  of  5%  while  marketing  costs  before  deferral  decreased  3%.  The
improvement  in the  marketing  margin was  primarily due to the decrease in the
level and mix of members enrolled through the higher cost outbound telemarketing
channel.


                                       16
<PAGE>

Personals Segment

Revenues
Revenues  were $72.1  million in 2005 and  represent  the  revenues of Lavalife,
which was  acquired  by the  Company  on April 1,  2004.  On a pro  forma  basis
assuming the  acquisition of Lavalife  occurred on July 1, 2003,  revenues would
have remained flat from fiscal 2004. There were approximately 0.6 million active
customers as of June 30, 2005, which was also flat from June 30, 2004.

Operating income
The  operating  loss was $3.1  million  in 2005 and  included  $5.2  million  of
intangible amortization expense related to the acquisition. On a pro forma basis
assuming the acquisition of Lavalife occurred on July 1, 2003,  operating income
would  have been  $0.7  million  in 2004.  The  decrease  from  fiscal  2004 was
primarily due to increased employee related expenses.

EBITDA
EBITDA was $6.2 million in 2005 and, as a percentage of revenue was 9%. On a pro
forma basis  assuming  the  acquisition  of  Lavalife  occurred on July 1, 2003,
EBITDA would have been $9.9 million in 2004.  The decrease  from fiscal 2004 was
primarily due to increased employee related expenses.

Adjusted EBITDA
Adjusted EBITDA was $6.3 million in 2005 and, as a percentage of revenue was 9%.
On a pro forma basis assuming the  acquisition  of Lavalife  occurred on July 1,
2003,  adjusted  EBITDA would have been $10.3 million in 2004. The decrease from
fiscal 2004 pro forma  adjusted  EBITDA was primarily due to increased  employee
related expenses.

LIQUIDITY AND CAPITAL RESOURCES

Net cash flow provided by operating  activities is an important  measure used to
understand the Company's liquidity.  Management believes it is useful to analyze
the components of net cash provided by operating activities as follows: Revenues
before deferral,  marketing costs before deferral,  operating expenses,  general
and administrative expenses, interest paid, current taxes payable and changes in
assets and liabilities.  For definitions and  reconciliations of revenues before
deferral and marketing  costs before  deferral see  "Reconciliation  of Non-GAAP
Measures" in Item 7 "Management's Discussion and Analysis of Financial Condition
- Liquidity and Capital Resources" in this Annual Report on Form 10-K.

Net cash provided by operating  activities was $32.3 million,  $47.9 million and
$48.5 million for the years ended June 30, 2005, 2004 and 2003, respectively.

The table below  summarizes the components of revenues  before  deferral for the
years ended June 30 (in millions):

Revenues before deferral            2005         2004         2003
                                 ----------   ----------   ----------
Monthly payment plans            $   255.8    $   166.3    $    76.9
Annual payment plans:
  Initial year                        40.3         78.2        149.4
  Renewal year                       127.7        167.7        165.0
Personals                             72.2         17.1           -
Other                                 48.9         27.1         26.6
                                 ----------   ----------   ----------
  Total                          $   544.9    $   456.4    $   417.9
                                 ==========   ==========   ==========

Revenues before  deferral  increased 19% to $544.9 million in 2005 and increased
9% to $456.5 million in 2004  primarily due to the inclusion of revenues  before
deferral from the acquired  companies.  Excluding  revenues before deferral from
the acquired companies, revenues before deferral would have decreased 1% in 2005
and increased 5% in 2004. The decrease in 2005 is primarily due to the effect of
an increase in the  marketing of monthly  payment  programs.  In 2005,  2004 and
2003,  the mix of new members  enrolled in a monthly  payment  plan  program was
approximately  85%, 62% and 27% of total  members  enrolled,  respectively.  The
increase in revenues before deferral in 2004 was primarily due to an increase in
the weighted  average program price point per member.  Monthly  weighted average
program  price points per member were $12.61,  $11.37 and $10.11 for 2005,  2004
and 2003, respectively. The new annual weighted average program price points per
member for 2005, 2004 and 2003 were $104, $107 and $104, respectively.


                                       17
<PAGE>

Marketing costs before  deferral were $273.0 million,  $230.3 million and $229.3
million in 2005, 2004 and 2003, respectively.  As a percentage of revenue before
deferral,  marketing  costs before  deferral were 50%, 50% and 55% in 2005, 2004
and 2003,  respectively.  Marketing costs before deferral  increased 19% in 2005
primarily  due to the  inclusion  of marketing  costs of $52.2  million from the
acquired companies.  Marketing margin before deferral was $271.9 million, $226.1
million and $188.6 million for 2005, 2004 and 2003, respectively.

The effect of the increase in marketing  margin  before  deferral in 2005 on net
cash provided by operating  activities was more than offset by increased general
and administrative and operating expenses primarily due to the operations of the
acquired  companies and increased interest costs associated with the Convertible
Notes and Senior Notes.  Interest paid on the Convertible Notes was $5.0 million
in 2005 compared to $2.5 million in 2004.  Interest paid on the Senior Notes was
$13.9  million in 2005 while no payments  were made in 2004.  Taxes paid in 2005
and 2004 were $8.0  million and $5.6  million,  respectively.  The effect of the
increase in marketing  margin  before  deferral in 2004 on net cash  provided by
operating  activities  was  partially  offset by increased  operating  expenses,
general and administrative expenses and net interest expense. The net changes in
assets and liabilities excluding the impact of interest and taxes paid discussed
above were neutral for 2006.

Net cash provided by (used in) investing  activities  was $16.4 million in 2005,
($237.0)  million  in 2004  and $7.4  million  in 2003.  Net  cash  provided  by
investing activities in 2005 reflected $104.6 million of net proceeds from sales
of  short-term  investments  offset by $77.2  million of cash used in connection
with the Company's recent acquisitions. Net cash used in investing activities in
2004 reflected $114.9 million of cash used in connection with the acquisition of
Lavalife  and $115.0  million of cash used in the net  purchases  of  short-term
investments.  Net cash provided by investing  activities  in 2003  reflected the
Company's  $19.1 million  settlement of a lawsuit  against  Homestore.com,  Inc.
Capital expenditures were $11.0 million,  $7.1 million and $5.5 million in 2005,
2004 and 2003, respectively.

Net cash (used in) provided by financing activities was ($31.7) million in 2005,
$168.8  million in 2004 and ($34.2)  million in 2003. Net cash used in financing
activities in 2005 principally  reflected the use of $41.1 million to repurchase
the Company's stock, which was partially offset by proceeds from the exercise of
stock  options  of $10.8  million.  In  2004,  net cash  provided  by  financing
activities  principally reflected the issuance of $229.8 million in debt, net of
issuance  costs,  proceeds from the exercise of employee  stock options of $24.5
million and proceeds  from the  issuance of  restricted  stock of $9.1  million.
These  sources of cash were  partially  offset by $94.2  million of cash used to
repurchase the Company's  stock. In 2003, net cash used in financing  activities
principally  reflected  repurchase  of the  Company's  stock for  $37.2  million
partially  offset by proceeds  from  exercise of employee  stock options of $4.1
million.

Debt Issuances
As of June 30,  2005,  the Company had $240.0  million of debt  outstanding.  In
September 2003, the Company issued $90.0 million aggregate principal amount 5.5%
convertible senior subordinated notes ("Convertible  Notes") due September 2010.
The  Convertible  Notes were  registered  in 2004.  The  Convertible  Notes bear
interest at the rate of 5.5% per year, which is payable in cash semi-annually in
arrears  on April 1 and  October  1. Upon a change in  control,  holders  of the
Convertible  Notes may  require  the  Company to  repurchase  all or part of the
Convertible Notes for cash.

In April 2004, the Company issued $150.0 million  aggregate  principal amount of
9.25%  Senior  Notes due 2014.  The Senior Notes were  registered  in 2005.  The
Senior Notes were sold at 98.418% of the principal  amount which  resulted in an
effective  yield of 9.5%.  Interest  on the  Senior  Notes  is  payable  in cash
semi-annually  in  arrears on April 1 and  October 1. A portion of the  proceeds
from the offering of the Senior Notes was used to repay amounts  borrowed  under
the  senior  secured  credit   facility  to  fund  a  portion  of  the  Lavalife
acquisition.  The  Company  intends to use the  remaining  proceeds  for general
corporate   purposes,   including  working  capital,   future  acquisitions  and
repurchases  of the  Company's  common stock under the  Company's  stock buyback
program to the extent  permitted under the indenture  governing the Senior Notes
and the senior secured credit facility.

Credit Facility
The Company has a senior secured credit facility, which was amended and restated
on March 1, 2005 and matures on March 23, 2006, that allows  borrowings of up to
$45.0  million.  Borrowings  under the senior  secured  credit  facility  accrue
interest at either the Eurodollar  rate, or the higher of the Prime rate, or the
Federal Funds rate plus an applicable margin. As of June 30, 2005,  availability
under the senior secured credit facility was reduced by an outstanding letter of
credit of $5.5 million and was $39.5 million. As of June 30, 2005, the effective
interest rate for borrowings under the senior secured credit facility was 6.25%.
The senior secured credit facility has certain financial covenants,  including a
maximum debt coverage ratio, potential restrictions on additional borrowings and
potential restrictions on additional stock repurchases. As of June 30, 2005, the
Company was in compliance with all such debt covenants.


                                       18
<PAGE>

Stock Repurchase Program
The Company  purchased 1.2 million  shares of its common stock for $41.1 million
at an average  price of $34.92 per share  during  2005  compared  to 3.0 million
shares for $94.2 million at an average price of $31.56 per share in 2004 and 2.0
million  shares for $37.2  million  at an  average  price of $18.67 per share in
2003.  The  Company  utilized  cash from  operations,  stock  issuances  and the
issuance of the Convertible Notes and Senior Notes to repurchase shares.

During 2005, the Company's  Board of Directors  authorized the repurchase of 1.0
million shares of its common stock under its ongoing stock  repurchase  program.
On November 8, 2004, the Board of Directors  authorized a modified Dutch Auction
self-tender offer for up to 500,000 shares of its common stock.  Under the terms
of the self-tender  offer as approved by the Board of Directors and as set forth
in the Offer to Purchase filed as an exhibit to the Company's  Schedule TO filed
on November 15, 2004,  as amended,  the  Company's  stockholders  were given the
opportunity  to tender part or all of their  shares to the Company at a price of
not less  than  $33.50  per  share  and not more  than  $38.50  per  share.  The
self-tender  offer  closed on  January  7, 2005 with a total of  605,000  shares
tendered by shareholders.  The Company  exercised its right, as set forth in the
Offer to Purchase,  to purchase the additional  105,000 shares and repurchased a
total of 605,000 shares for $38.50 per share, paying a total of $23.3 million.

As of June 30, 2005, the Company had 0.8 million shares available for repurchase
under its stock repurchase program.

Acquisitions
In January 2005, the Company  completed the acquisition of certain of the assets
of MCM, a privately held  advertising  and practice  management  company serving
cosmetic surgeons  throughout the United States.  The purchase price,  excluding
fees and expenses, amounted to $33.0 million and was paid in cash on the closing
date. In addition, contingent payments of up to $56.0 million may be paid in the
next three years if certain performance targets,  including increasing levels of
revenues and earnings, are achieved over the next three calendar years.

In November 2004, the Company completed the acquisition of certain of the assets
of Bargain,  a privately held provider of premier pricing services for homes and
vehicles. The purchase price, which excludes fees and expenses and is subject to
certain  purchase  price  adjustments,  amounted to $39.1  million.  The Company
expects  to pay  approximately  $14.6  million  of  contingent  payments  in the
December  2005  quarter.  No further  contingent  payments  are  required by the
purchase  agreement.  In  addition,  the  Company  assumed  certain  liabilities
amounting to $4.7 million.

In April 2004,  the Company  completed the  acquisition of all of the net assets
and outstanding  capital stock of Lavalife,  a leading provider of web-based and
phone-based  interactive personals services.  The purchase price, excluding fees
and expenses,  was Cdn$152.5 million, or $116.3 million. In connection with this
acquisition,  the Company  received $9.1 million  related to the issuance of the
Company's restricted common stock to Lavalife's senior management.

Other
As of June 30,  2005,  the Company had cash,  cash  equivalents  and  short-term
investments of $80.6 million in addition to its senior secured credit  facility.
The Company  believes  that  existing  cash and short term  investment  balances
together with funds  available  under its senior secured credit facility will be
sufficient to meet its funding requirements for the foreseeable future.

The Company did not have any material commitments for capital expenditures as of
June 30,  2005.  The  Company  expects to incur  capital  expenditures  of $15.0
million in 2006. The Company  intends to utilize cash on hand and cash generated
from operations to fulfill capital expenditure requirements during 2006.




                                       19
<PAGE>

RECONCILIATION OF NON-GAAP MEASURES

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

Revenues  before  deferral for the years ended June 30, 2005,  2004 and 2003 are
calculated as follows (in millions):

                                          2005         2004         2003
                                       ----------   ----------   ----------
Revenues                               $   579.8    $   488.7    $   456.9
Change in deferred revenues                (34.9)       (32.3)       (39.0)
                                       ----------   ----------   ----------
Revenues before deferral               $   544.9    $   456.4    $   417.9
                                       ==========   ==========   ==========

Marketing costs before deferral for the years ended June 30, 2005, 2004 and 2003
are calculated as follows (in millions):

                                          2005         2004         2003
                                       ----------   ----------   ----------
Marketing expenses                     $   286.4    $   255.8    $   280.7
Change in deferred marketing costs         (13.4)       (25.5)       (51.4)
                                       ----------   ----------   ----------
Marketing costs before deferral        $   273.0    $   230.3    $   229.3
                                       ==========   ==========   ==========

The Company's  management  and investors use EBITDA and adjusted  EBITDA,  among
other measures, to evaluate the year over year performance of its businesses, to
measure  that  performance  compared  with  internal  budgets  and to  determine
compensation under its management incentive plans.

EBITDA  eliminates  the effects of interest  and other  expense,  income  taxes,
noncash  depreciation of tangible assets and noncash  amortization of intangible
assets that were  recognized  in business  combinations.  A  limitation  of this
measure,  however,  is that it does not  reflect  the  periodic  cost of certain
capitalized tangible assets and intangible assets used in generating revenues in
the Company's  businesses  nor does it reflect the effect of interest and taxes.
The Company's management evaluates these costs through other financial measures.

Adjusted EBITDA is calculated using revenues before deferral and marketing costs
before deferral instead of GAAP revenues and GAAP marketing  expenses.  Adjusted
EBITDA is useful to management because it eliminates the amortization related to
the  recognition  of GAAP  revenues and GAAP  marketing  expenses and  therefore
includes  only  membership  fees  received in the current  reporting  period and
marketing costs paid or accrued in the current reporting period.

These non-GAAP measures should be considered in addition to, not as a substitute
for or superior to, operating income, net income,  operating cash flows or other
measures of financial  performance  and liquidity  determined in accordance with
generally accepted accounting principles.


                                       20
<PAGE>

The following  tables reconcile EBITDA and adjusted EBITDA to net income for the
years ended June 30 (in millions):
<TABLE>
<CAPTION>

                                                         For the year ended June 30, 2005
                                         -----------------------------------------------------------------
                                          Consolidated      Marketing                        Corporate and
                                             Total           Services         Personals          Other
                                         --------------   --------------   --------------   --------------
<S>                                      <C>              <C>              <C>              <C>
Net income                               $        25.5
Interest and other expense, net (1)               18.2
Provision for income taxes (1)                    13.4
                                         --------------
Operating income (expense)               $        57.1    $        85.5    $        (3.1)   $       (25.3)
Depreciation and amortization                     21.6             11.0              9.3              1.3
                                         --------------   --------------   --------------   --------------
EBITDA                                            78.7             96.5              6.2            (24.0)
Change in deferred revenues                      (34.9)           (35.9)             0.1              0.9
Change in deferred marketing costs                13.4             13.4              -                -
                                         --------------   --------------   --------------   --------------
Adjusted EBITDA                          $        57.2    $        74.0    $         6.3    $       (23.1)
                                         ==============   ==============   ==============   ==============


                                                         For the year ended June 30, 2004
                                         -----------------------------------------------------------------
                                          Consolidated      Marketing                        Corporate and
                                             Total           Services         Personals          Other
                                         --------------   --------------   --------------   --------------
Net income                               $        28.0
Interest and other expense, net (1)                6.3
Provision for income taxes (1)                    18.6
                                         --------------
Operating income (expense)               $        52.9    $        76.6    $         0.3    $       (24.0)
Depreciation and amortization                     12.5             10.1              2.4              -
                                         --------------   --------------   --------------   --------------
EBITDA                                            65.4             86.7              2.7            (24.0)
Change in deferred revenues                      (32.3)           (31.7)            (0.6)             -
Change in deferred marketing costs                25.5             25.5              -                -
                                         --------------   --------------   --------------   --------------
Adjusted EBITDA                          $        58.6    $        80.5    $         2.1    $       (24.0)
                                         ==============   ==============   ==============   ==============


                                                         For the year ended June 30, 2003
                                         -----------------------------------------------------------------
                                          Consolidated      Marketing                        Corporate and
                                             Total           Services         Personals          Other
                                         --------------   --------------   --------------   --------------
Net income                               $        24.4
Interest and other expense, net (1)              (18.3)
Provision for income taxes (1)                    16.2
                                         --------------
Operating income (expense)               $        22.3    $        41.8    $         -      $       (19.5)
Depreciation and amortization                     12.1             11.9              -                0.2
                                         --------------   --------------   --------------   --------------
EBITDA                                            34.4             53.7              -              (19.3)
Change in deferred revenues                      (39.0)           (39.0)             -                -
Change in deferred marketing costs                51.4             51.4              -                -
                                         --------------   --------------   --------------   --------------
Adjusted EBITDA                          $        46.8    $        66.1    $         -      $       (19.3)
                                         ==============   ==============   ==============   ==============
</TABLE>

(1)  Management  does not allocate  interest and other expense,  net nor does it
     allocate provision for income taxes to the individual segments.


                                       21
<PAGE>

COMMITMENTS

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

Future minimum  payments of  contractual  obligations as of June 30, 2005 are as
follows (in millions):
<TABLE>
<CAPTION>

                                                       Payments Due by Period
                                  --------------------------------------------------------------
                                                Less than      1 - 3        3 - 5       After 5
                                     Total       1 year        years        years        years
                                  ----------   ----------   ----------   ----------   ----------
<S>                               <C>          <C>          <C>          <C>          <C>
Operating leases                  $    27.3    $     8.7    $    10.7    $     6.9    $     1.0
Capital leases                          1.9          0.7          1.1          0.1          -
Long-term debt                        240.0          -            -            -          240.0
Purchase obligations (1)               86.5         24.8         61.5          0.2          -
Pension obligation                      4.6          -            -            0.3          4.3
                                  ----------   ----------   ----------   ----------   ----------
Total payments due                $   360.3    $    34.2    $    73.3    $     7.5    $   245.3
                                  ==========   ==========   ==========   ==========   ==========

</TABLE>

(1)  Includes  $70.6  million  of  contingent   payments   related  to  business
     combinations.

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 terms.  The Company plans to relocate certain of its offices in 2006.
The new  leases  were  signed  during  the  first  quarter  of  fiscal  2006 and
therefore,  are not  reflected  in the  table  above.  See  Notes 7 and 8 to the
consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued Statement No. 123 (Revised 2004), "Share-Based
Payment," ("SFAS 123R"). This statement is a revision of SFAS 123 and supersedes
APB 25. SFAS 123R will require the Company to measure all  employee  stock-based
compensation  awards  using a fair value  method and record that  expense in its
consolidated  financial statements over the requisite service periods.  Adoption
of SFAS 123R will also  require  additional  accounting  related  to income  tax
effects and additional  disclosure  regarding  cash flow effects  resulting from
share-based  payment  arrangements.  SFAS  123R is  effective  beginning  in the
Company's  first  quarter  of  fiscal  2006.  Adoption  of SFAS 123R will have a
material impact on the Company's  consolidated  financial  position,  results of
operations, cash flow presentation and related disclosures.  The Company expects
additional  expense related to the adoption of SFAS 123R of  approximately  $5.0
million in fiscal 2006.

In May 2005, the FASB issued  Statement No. 154,  "Accounting  Changes and Error
Corrections  - A  replacement  of APB Opinion No. 20 and FASB  Statement  No. 3"
("SFAS  154").  This  statement  requires  retrospective  application  to  prior
periods' financial  statements of changes in accounting  principles unless it is
impracticable to determine either the period-specific  effects or the cumulative
effect of the  change.  This  statement  applies  to all  voluntary  changes  in
accounting  principles and changes required by an accounting  pronouncement that
does not include specific transition provisions. SFAS 154 is effective beginning
in the  Company's  first  quarter of fiscal  2007.  The Company  does not expect
adoption  of SFAS 154 to have a material  effect on its  consolidated  financial
position, results of operations or cash flows.

FORWARD-LOOKING STATEMENTS

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


                                       22
<PAGE>

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

     o    higher than expected  membership  cancellations or lower than expected
          membership renewal rates;
     o    changes in the marketing techniques of credit card issuers;
     o    increases  in the level of  commission  rates  and other  compensation
          required by marketing partners to actively market with the Company;
     o    potential  reserve  requirements  by  business  partners,  such as the
          Company's credit card processors;
     o    unanticipated termination of marketing agreements;
     o    the extent to which the Company can continue to  successfully  develop
          and market new products and  services and  introduce  them in a timely
          manner;
     o    the  Company's  ability  to  integrate  acquired  businesses  into the
          Company's management and operations and operate successfully;
     o    unanticipated  changes in or termination  of the Company's  ability to
          process  revenues   through  third  parties,   including  credit  card
          processors and bank card associations;
     o    the  Company's  ability  to  develop  and  implement  operational  and
          financial systems to manage growing operations;
     o    the  Company's  ability to recover  from a complete or partial  system
          failure or impairment, other hardware or software related malfunctions
          or programming errors;
     o    the degree to which the Company is leveraged;
     o    the  Company's  ability to obtain  financing  on  acceptable  terms to
          finance  the  Company's  growth  strategy  and to  operate  within the
          limitations imposed by financing arrangements;
     o    further  changes  in  the  already  competitive  environment  for  the
          Company's   products  or  competitors'   responses  to  the  Company's
          strategies;
     o    changes  in  the  growth  rate  of the  overall  U.S.  economy  or the
          international economy where the Company does business such that credit
          availability,  interest rates,  consumer  spending,  related  consumer
          financing and related consumer debt are affected;
     o    additional  government  regulations and changes to existing government
          regulations of the Company's industry;
     o    the  Company's  ability to  compete  with  other  companies  that have
          financial or other advantages;
     o    adverse movements of foreign exchange rates;
     o    the Company's  ability to attract and retain active members and users;
     o    adverse results of litigation or regulatory matters; and
     o    new accounting pronouncements.

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

The Company  cautions that these factors are not exclusive.  All forward looking
statements  made in this  Annual  Report  on Form  10-K are  qualified  by these
cautionary  statements  and readers are cautioned not to place undue reliance on
these forward looking statements, which speak only as of the date of this Annual
Report on Form 10-K.  Except as required by law,  the Company has no  obligation
and does not intend to publicly update any forward looking  statements,  whether
as a result of new information, future events or otherwise.

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

Interest Rate
The Company has a senior secured credit facility, which was amended and restated
on March 1, 2005 and matures on March 23, 2006, that allows  borrowings of up to
$45.0  million.  Borrowings  under this senior secured  credit  facility  accrue
interest at either the  Eurodollar  rate or the higher of the Prime rate, or the
Federal  Funds  rate  plus  an  applicable  margin.  There  were  no  borrowings
outstanding under this senior secured credit facility as of June 30, 2005. As of
June 30, 2005, availability under the senior secured credit facility was reduced
by an outstanding letter of credit of $5.5 million and was $39.5 million.  As of
June 30, 2005,  the  effective  interest  rate for  borrowings  under the senior
secured credit facility was 6.25%.  Management  believes that an increase in the
Eurodollar  rate, the Prime rate or the Federal Funds rate would not be material
to the Company's financial position or its results of operations.


                                       23
<PAGE>

In addition,  the Company has $90.0 million  aggregate  principal amount of 5.5%
Convertible  Notes due 2010 and $150.0  million  aggregate  principal  amount of
9.25%  Senior  Notes due 2014.  The  Convertible  Notes and the Senior Notes pay
interest  in cash  semi-annually  in arrears on April 1 and  October 1. The fair
value of the fixed interest instruments is affected by changes in interest rates
and, with respect to the  Convertible  Notes,  by changes in the Company's stock
price and  volatility.  The Company does not currently hedge interest rates with
respect to its outstanding  debt. As of June 30, 2005, the carrying value of the
Convertible  Notes and the Senior  Notes was $90.0  million and $147.8  million,
respectively,  and the fair  value of the notes was  $103.1  million  and $151.5
million, respectively.  Cash paid in connection with interest on the Convertible
Notes and the  Senior  Notes in each of the next five  years is  expected  to be
$18.8 million assuming none of the notes is converted into equity.

Foreign Currency
The Company conducts  business in certain foreign markets,  primarily in Canada.
The Company's  primary  exposure to foreign currency risk relates to investments
in foreign  subsidiaries that transact  business in functional  currencies other
than the U.S.  dollar,  primarily  the Canadian  dollar.  The  Company's  recent
acquisitions   have  reduced  the  proportion  of  its  operations   exposed  to
potentially  volatile  movements in currency exchange rates. The economic impact
of  currency  exchange  rate  movements  on  the  Company  is  often  linked  to
variability in real growth, inflation,  interest rates, governmental actions and
other factors. These changes, if material, could cause the Company to adjust its
financing  and  operating   strategies.   As  currency  exchange  rates  change,
translation of the income statements of the Company's  international  businesses
into U.S. dollars affects year-to-year comparisons of operating results.

The Company uses purchase option contracts and forward contracts to minimize its
exposure to changes in future cash flows caused by movements in foreign currency
exchange rates between the U.S. dollar and the Canadian dollar.  However,  there
can be no assurance that the Company's foreign currency hedging  activities will
substantially  offset the impact of fluctuations  in currency  exchange rates on
its results of  operations  and  financial  position.  The Company  does not use
derivatives  for  speculative  purposes.  Derivatives  used to hedge  forecasted
transactions and specific cash flows associated with Canadian dollar denominated
financial assets and liabilities that meet the criteria for hedge accounting are
designated  as cash flow hedges.  The  effective  portion of gains and losses is
deferred  as a  component  of  accumulated  other  comprehensive  income  and is
recognized  in earnings in the same line item as the  underlying  hedged item at
the time the hedged item affects earnings.

Fair Value of Investments
The Company  does not have  material  exposure  to market  risk with  respect to
investments  since the Company's  investments are short-term in nature (original
maturities of less than one year).

Item 8.  Financial Statements and Supplementary Data
         -------------------------------------------

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

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

None.

Item 9A. Controls and Procedures
         -----------------------

Evaluation of disclosure controls and procedures.
The  Chief  Executive   Officer  and  Chief  Financial   Officer  evaluated  the
effectiveness of the design and operation of the Company's  disclosure  controls
and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities
and Exchange Act of 1934) as of the end of the period covered by this report and
have  concluded  that the  Company's  disclosure  controls and  procedures  were
effective at the reasonable  assurance level. The Company's  disclosure controls
and procedures are designed to ensure that material  information relating to the
Company and its  consolidated  subsidiaries  that is required to be disclosed in
its reports  under the Exchange Act is  accumulated,  communicated  to the Chief
Executive Officer and Chief Financial Officer and disclosed appropriately in its
timely reports under the Exchange Act.

Because a  cost-effective  control  system,  no matter  how well  conceived  and
operated,  can  provide  only  reasonable,  not  absolute,  assurance  that  the
objectives of the control  system are met,  misstatements  due to error or fraud
may occur and not be detected.  In addition,  projections  of any  evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions  or that the degree of  compliance
with the policies or procedures may deteriorate.


                                       24
<PAGE>

Management's Report on Internal Control over Financial Reporting.
The  Company's  management  is  responsible  for  establishing  and  maintaining
adequate internal control over financial  reporting,  as defined in Exchange Act
Rule 13a-15(f).  Under the supervision and with the  participation  of the Chief
Executive  Officer  and  Chief  Financial  Officer,   management  evaluated  the
effectiveness of the Company's  internal control over financial  reporting as of
June 30, 2005.

On January 1, 2005 and November 30, 2004,  respectively,  the Company  completed
the  acquisitions  of  certain  of the  assets  of MCM and  Bargain.  Management
excluded certain  elements of the internal  control over financial  reporting of
MCM and Bargain from its assessment of internal control over financial reporting
as of June 30,  2005  because the assets  were  acquired  in  purchase  business
combinations  during 2005.  Subsequent to the acquisitions,  certain elements of
each of the MCM and  Bargain  internal  control  over  financial  reporting  and
related  processes  were  integrated  into the  Company's  existing  systems and
internal  control  over  financial  reporting.  Those  controls  that  were  not
integrated have been excluded from management's assessments of the effectiveness
of internal  control over financial  reporting as of June 30, 2005. The excluded
elements of MCM and Bargain represent  controls over accounts  representing 3.8%
of the  Company's  consolidated  assets and 6.6% of the  Company's  consolidated
revenues as of and for the year ended June 30, 2005.

Management  used the  criteria  set  forth in  "Internal  Control  -  Integrated
Framework"  of  the  Committee  of  Sponsoring  Organizations  of  the  Treadway
Commission  in  making  its  assessment.  Based  on those  criteria,  management
concluded  that the  Company's  internal  control over  financial  reporting was
effective.

PricewaterhouseCoopers  LLP, the independent  registered  public accounting firm
that  audited  the  Company's  financial  statements  included in Item 8 of this
Annual  Report on Form 10-K,  has also audited  management's  assessment  of the
Company's internal control over financial  reporting as of June 30, 2005 and the
effectiveness of the Company's  internal control over financial  reporting as of
June 30, 2005. Their report is included in Item 8.

Changes in internal control over financial reporting.
During the  fourth  quarter  of 2005,  there  were no  changes in the  Company's
internal control over financial reporting that have materially affected,  or are
reasonably  likely to materially  affect,  the Company's  internal  control over
financial reporting.

Item 9B. Other Information
         -----------------

None.

                                    Part III

Item 10. Directors and Executive Officers of the Registrant
         --------------------------------------------------

The  information  in the  Company's  Proxy  Statement  under the section  titled
"Election  of  Directors"  is  incorporated  herein  by  reference.  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  in the  Company's  Proxy  Statement  under the section  titled
"Executive Compensation" is incorporated herein by reference.

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

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

Item 13. Certain Relationships and Related Transactions
         ----------------------------------------------

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


                                       25
<PAGE>


Item 14. Principal Accountant Fees and Services
         --------------------------------------

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

                                     Part IV

Item 15. Exhibits and Financial Statement Schedules
         ------------------------------------------

(a) Index to Financial Statements and Financial Statement Schedules         Page
                                                                            ----
     (1) Report of PricewaterhouseCoopers LLP, Independent Registered
          Public Accounting Firm                                             F-1
         Consolidated Balance Sheets as of June 30, 2005 and 2004            F-3
         Consolidated Statements of Operations for the years ended
          June 30, 2005, 2004 and 2003                                       F-4
         Consolidated Statements of Shareholders' Equity (Deficit) for
          the years ended June 30, 2005, 2004 and 2003                       F-5
         Consolidated Statements of Cash Flows for the years ended
          June 30, 2005, 2004 and 2003                                       F-6
         Notes to Consolidated Financial Statements                          F-7

     (2) The following Financial Statement Schedule is included:
         Schedule II - Valuation and Qualifying Accounts - Years ended
          June 30, 2005, 2004 and 2003                                      F-30

     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.

     (3) Exhibits:
         Exhibits  filed as part of this Annual  Report  on Form 10-K are listed
         in the Exhibit  Index  immediately  following  the  signatures  in this
         Annual Report on Form 10-K.






                                       26
<PAGE>

                              VERTRUE INCORPORATED

                                   SIGNATURES

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


                                     VERTRUE INCORPORATED
                                     --------------------
                                          (Registrant)


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


                                          Date: September 13, 2005

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     September 13, 2005
    -----------------------------     Officer and Director
Gary A. Johnson


By: /s/ James B. Duffy               Executive Vice President and Chief     September 13, 2005
    ---------------------------       Financial Officer
James B. Duffy


By: /s/ Alec L. Ellison              Director                               September 13, 2005
    ---------------------------
Alec L. Ellison


By: /s/ Joseph E. Heid               Director                               September 13, 2005
    ---------------------------
Joseph E. Heid


By: /s/ Robert Kamerschen            Director                               September 13, 2005
    ---------------------------
Robert Kamerschen


By: /s/ Michael T. McClorey          Director                               September 13, 2005
    ---------------------------
Michael T. McClorey


By: /s/ Edward M. Stern              Director                               September 13, 2005
    ---------------------------
Edward M. Stern


By: /s/ Marc S. Tesler               Director                               September 13, 2005
    ---------------------------
Marc S. Tesler

</TABLE>

                                       27
<PAGE>

                                    Exhibits
                                    --------

No.       Description
---       -----------

  *3.1    Restated  Certificate of  Incorporation  of the  Registrant  (filed as
          Exhibit  3.3 to the  Company's  Registration  Statement  on Form  S-1,
          Registration No. 333-10541, filed on September 6, 1996; Certificate of
          Amendment of Restated  Certificate of  Incorporation of the Registrant
          (filed as Exhibit 3.1 to the Company's  Quarterly Report on Form 10-Q,
          File No. 000-21527, filed on February 9, 2005).

  *3.2    Restated By-laws of the Registrant as amended (filed as Exhibit 3.3 to
          the Company's  Registration  Statement on Form S-1,  Registration  No.
          333-10541, filed on August 21, 1996).

  *4.1    Indenture  dated as of September 30, 2003 between the  Registrant  and
          Deutsche Bank Trust  Company  Americas,  Trustee  relating to the 5.5%
          Convertible  Senior  Subordinated Notes due 2010 (filed as exhibit 4.1
          to the Company's  Quarterly  report on Form 10-Q, File No.  000-21527,
          filed on November 13, 2003).

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

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

 *10.1^   Amended  Employee  Incentive  Stock  Option  Plan  of  the  Registrant
          (filed as Exhibit 10.1 to the Company's Registration Statement on Form
          S-1, Registration No. 333-10541, filed on September 6, 1996).

 *10.2^   1995  Non-Employee  Directors'  Stock Option Plan  of  the  Registrant
          (filed as Exhibit 10.3 to the Company's Registration Statement on Form
          S-1, Registration No. 333-10541, filed on August 21, 1996).

 *10.3^   1996 Stock Option Plan of the Registrant (filed as Exhibit 10.4 to the
          Company's   Registration  Statement  on  Form  S-1,  Registration  No.
          333-10541, filed on September 27, 1996).

 *10.4^   1996  Employee  Stock  Purchase  Plan  of  the  Registrant  (filed  as
          Exhibit  10.5 to the  Company's  Registration  Statement  on Form S-1,
          Registration No. 333-10541, filed on September 27, 1996).

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

 *10.6    Amended and Restated Credit  Agreement dated  March 25, 2004,  amended
          March 1, 2005,  among the  Registrant,  the Lenders Parties Hereto and
          LaSalle  Bank  National  Association  (filed  as  exhibit  99.3 to the
          Company's  Current  report on Form 8-K, File No.  000-21527,  filed on
          April 5, 2004).

 *10.7    Master   Transaction   Agreement   dated   March  3,  2004  among  the
          Registrant,  Lavalife Inc., Lavalife's Investors and Lavalife's Senior
          Management  (filed as exhibit 99.2 to the Company's  Current report on
          Form 8-K, File No. 000-21527, filed on April 5, 2004).

 *10.8^   Long-term Incentive Plan of the Registrant (filed as  Exhibit 10.1  to
          the Company's Quarterly Report on Form 10-Q, File No. 000-21527, filed
          on February 9, 2005).

 *10.9    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 September 6, 1996).

 *10.10   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 September 6, 1996).

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

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


                                       28
<PAGE>

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

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

  21.1    Subsidiaries of the Registrant.

  23.1    Consent of PricewaterhouseCoopers LLP.

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

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

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

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

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

*    Previously filed and incorporated herein by reference.
^    Management contract or compensatory plan.




                                       29
<PAGE>


             Report of Independent Registered Public Accounting Firm


To the Shareholders and Board of Directors of Vertrue Incorporated:

We  have  completed  an  integrated  audit  of  the  Vertrue  Incorporated  2005
consolidated  financial  statements  and of its internal  control over financial
reporting  as of June 30,  2005  and  audits  of its 2004 and 2003  consolidated
financial  statements  in accordance  with the  standards of the Public  Company
Accounting Oversight Board (United States).  Our opinions,  based on our audits,
are presented below.

Consolidated financial statements and financial statement schedule
------------------------------------------------------------------

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 15(a)(1)  present  fairly,  in all material  respects,  the
financial position of Vertrue Incorporated and its subsidiaries at June 30, 2005
and 2004,  and the results of their  operations and their cash flows for each of
the three years in the period ended June 30, 2005 in conformity  with accounting
principles  generally accepted in the United States of America. In addition,  in
our opinion,  the financial  statement  schedule  listed in the index  appearing
under Item 15(a)(2) presents fairly, in all material  respects,  the information
set  forth  therein  when  read in  conjunction  with the  related  consolidated
financial  statements.   These  financial  statements  and  financial  statement
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these financial  statements and financial  statement
schedule  based on our audits.  We conducted  our audits of these  statements in
accordance with the standards of the Public Company  Accounting  Oversight Board
(United States).  Those standards  require that we plan and perform the audit to
obtain reasonable  assurance about whether the financial  statements are free of
material misstatement. An audit of financial statements includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting
-----------------------------------------

Also, in our opinion,  management's assessment,  included in Management's Report
on Internal Control over Financial  Reporting  appearing under Item 9A, that the
Company  maintained  effective  internal control over financial  reporting as of
June 30, 2005 based on criteria  established  in Internal  Control -  Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission  (COSO), is fairly stated, in all material  respects,  based on those
criteria.  Furthermore,  in our opinion, the Company maintained, in all material
respects,  effective  internal  control over financial  reporting as of June 30,
2005, based on criteria  established in Internal Control - Integrated  Framework
issued by the COSO.  The Company's  management is  responsible  for  maintaining
effective  internal  control over financial  reporting and for its assessment of
the   effectiveness   of  internal   control  over  financial   reporting.   Our
responsibility  is to express  opinions on  management's  assessment  and on the
effectiveness of the Company's  internal control over financial  reporting based
on our  audit.  We  conducted  our  audit of  internal  control  over  financial
reporting in  accordance  with the  standards of the Public  Company  Accounting
Oversight  Board  (United  States).  Those  standards  require  that we plan and
perform  the  audit to  obtain  reasonable  assurance  about  whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects.  An  audit of  internal  control  over  financial  reporting  includes
obtaining  an  understanding  of  internal  control  over  financial  reporting,
evaluating  management's  assessment,  testing  and  evaluating  the  design and
operating   effectiveness  of  internal  control,   and  performing  such  other
procedures as we consider  necessary in the  circumstances.  We believe that our
audit provides a reasonable basis for our opinions.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (i) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions of the assets of the company;  (ii)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company;  and (iii) provide  reasonable  assurance  regarding  prevention or
timely  detection  of  unauthorized  acquisition,  use,  or  disposition  of the
company's assets that could have a material effect on the financial statements.


                                       F-1
<PAGE>

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

As  described  in  Management's   Report  on  Internal  Control  over  Financial
Reporting, management has excluded certain elements of the internal control over
financial  reporting of MCM and Bargain from its assessment of internal  control
over  financial  reporting  as of June 30, 2005  because  they were  acquired in
purchase   business   combinations   during  fiscal  2005.   Subsequent  to  the
acquisitions,  certain  elements of each of the MCM and Bargain internal control
over  financial  reporting  and  related  processes  were  integrated  into  the
Company's existing systems and internal control over financial reporting.  Those
controls  that  were  not  integrated  have  been  excluded  from   management's
assessment of the effectiveness of internal control over financial  reporting as
of June 30, 2005. We have also excluded those  elements of the internal  control
over financial  reporting of MCM and Bargain from our audit of internal  control
over financial  reporting.  The excluded  elements of MCM and Bargain  represent
controls over accounts  representing 3.8% of the consolidated assets and 6.6% of
the consolidated revenues as of and for the year ended June 30, 2005.


/s/ PricewaterhouseCoopers LLP
New York, New York
September 12, 2005






                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                              VERTRUE INCORPORATED
                          CONSOLIDATED BALANCE SHEETS
                    (in thousands, except per share amounts)

                                                                                    June 30,
                                                                             -------------------
                                                                               2005      2004
                                                                             --------- ---------
                              Assets
Current assets:
<S>                                                                          <C>       <C>
  Cash and cash equivalents                                                  $ 64,356  $ 47,166
  Restricted cash                                                               3,411     3,120
  Short-term investments                                                       16,223   119,980
  Accounts receivable (net of allowance for doubtful accounts of
      $63 and $235 at June 30, 2005 and 2004, respectfully                     12,559    10,557
  Prepaid membership materials                                                  2,557     3,233
  Prepaid expenses and other current assets                                     8,695     4,886
  Deferred marketing costs                                                     39,226    52,428
                                                                             --------- ---------
     Total current assets                                                     147,027   241,370
  Fixed assets, net                                                            39,062    36,540
  Goodwill                                                                    201,499   125,675
  Intangible assets, net                                                       46,476    38,872
  Other assets                                                                 13,098    10,705
                                                                             --------- ---------
     Total assets                                                            $447,162  $453,162
                                                                             ========= =========

              Liabilities and Shareholders' Deficit
Current liabilities:
  Current maturities of long-term obligations                                $    686  $    338
  Accounts payable                                                             42,077    35,185
  Accrued liabilities                                                          82,157    66,075
  Deferred revenues                                                           108,117   138,381
  Deferred income taxes                                                         9,780    12,323
                                                                             --------- ---------
     Total current liabilities                                                242,817   252,302
  Deferred income taxes                                                         9,702     4,354
  Other long-term liabilities                                                   5,257     4,930
  Long-term debt                                                              237,814   237,659
                                                                             --------- ---------
     Total liabilities                                                        495,590   499,245
                                                                             --------- ---------

Commitments and contingencies                                                       -         -

Shareholders' deficit:
  Preferred stock, $0.01 par value -- 1,000 shares authorized;
     no shares issued                                                               -         -
  Common stock, $0.01 par value -- 40,000 shares authorized;
     19,703 shares issued (19,089 shares at June 30, 2004)                        197       191
  Capital in excess of par value                                              169,463   156,457
  Accumulated earnings                                                         35,680    10,131
  Accumulated other comprehensive loss                                           (148)     (373)
  Treasury stock, 10,020 shares at cost (8,852 shares at June
     30, 2004)                                                               (253,620) (212,489)
                                                                             --------- ---------
     Total shareholders' deficit                                              (48,428)  (46,083)
                                                                             --------- ---------
     Total liabilities and shareholders' deficit                             $447,162  $453,162
                                                                             ========= =========



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

</TABLE>


                                       F-3
<PAGE>

<TABLE>
<CAPTION>
                              VERTRUE INCORPORATED
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)

                                                          For the years ended June 30,
                                                       -------------------------------------
                                                          2005          2004        2003
                                                       ----------- ------------- -----------

<S>                                                    <C>         <C>           <C>
Revenues                                               $  579,839  $    488,739  $  456,881

Expenses:
  Marketing                                               286,437       255,818     280,673
  Operating                                               114,418        91,832      78,444
  General and administrative                              108,231        85,826      74,085
  Charge for arbitration award                              5,458             -           -
  Amortization of intangibles                               8,201         2,393       1,393
                                                       ----------- ------------- -----------

Operating income                                           57,094        52,870      22,286
Settlement of investment related litigation                     -             -      19,148
Loss on sale of subsidiary                                      -             -        (959)
Net loss on investment                                          -             -        (206)
Interest (expense) income, net                            (18,805)       (6,621)        570
Other income (expense), net                                   652           349        (244)
                                                       ----------- ------------- -----------

Income before income taxes                                 38,941        46,598      40,595
Provision for income taxes                                 13,392        18,638      16,239
                                                       ----------- ------------- -----------

Net income                                             $   25,549  $     27,960  $   24,356
                                                       =========== ============= ===========

Earnings per share:
  Basic                                                $     2.56  $       2.60  $     1.93
                                                       =========== ============= ===========
  Diluted                                              $     2.22  $       2.29  $     1.84
                                                       =========== ============= ===========

Weighted average common shares used in earnings per
 share calculations:
  Basic                                                     9,995        10,755      12,596
                                                       =========== ============= ===========
  Diluted                                                  12,973        13,208      13,233
                                                       =========== ============= ===========

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

</TABLE>


                                       F-4
<PAGE>

<TABLE>
<CAPTION>
                              VERTRUE INCORPORATED
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                 (in thousands)



                                                                                               Accumulated
                                                     Common Stock    Capital in  Accumulated      Other
                                                   ----------------- Excess of    Earnings     Comprehensive    Treasury
                                                    Shares  Amount   Par Value   (Deficit)      (Loss) Gain      Stock     Total
                                                    ------  ------   ---------   ---------      -----------      -----     -----
<S>            <C> <C>                              <C>     <C>      <C>         <C>            <C>             <C>       <C>
Balance - June 30, 2002                             17,493  $   175  $ 109,254   $   (42,185)   $        (373)  $(87,501) $(20,630)
Issuance of common stock                               354        3      4,047             -                -          -     4,050
Tax benefit from employee stock options                  -        -      9,100             -                -          -     9,100
Issuance of treasury stock to fund 401K Plan             -        -        (21)            -                -        127       106
Expense associated with issuing stock options to a
 non-employee                                            -        -         45             -                -          -        45
Acquisition of treasury stock                            -        -          -             -                -    (37,214)  (37,214)
Comprehensive income:
 Net income                                              -        -          -        24,356                -          -    24,356
 Currency translation adjustment                         -        -          -             -              (96)         -       (96)
                                                                                                                         ----------
 Total comprehensive income                                                                                                 24,260
                                                   --------------------------------------------------------------------------------
Balance - June 30, 2003                             17,847      178    122,425       (17,829)            (469)  (124,588)  (20,283)
Issuance of common stock                             1,242       13     24,551             -                -          -    24,564
Issuance of restricted stock                             -        -      2,774             -                -      6,306     9,080
Tax benefit from employee stock options                  -        -      6,520             -                -          -     6,520
Expense associated with issuing stock options to a
 non-employee                                            -        -        187             -                -          -       187
Acquisition of treasury stock                            -        -          -             -                -    (94,207)  (94,207)
Comprehensive income:
 Net income                                              -        -          -        27,960                -          -    27,960
 Currency translation adjustment                         -        -          -             -              105          -       105
 Minimum pension liability adjustment (net of tax)       -        -          -             -               (9)         -        (9)
                                                                                                                         ----------
 Total comprehensive income                                                                                                 28,056
                                                   --------------------------------------------------------------------------------
Balance - June 30, 2004                             19,089      191    156,457        10,131             (373)  (212,489)  (46,083)
Issuance of common stock                               614        6     10,786             -                -          -    10,792
Tax benefit from employee stock options                  -        -      2,220             -                -          -     2,220
Acquisition of treasury stock                            -        -          -             -                -    (41,131)  (41,131)
Comprehensive income:
 Net income                                              -        -          -        25,549                -          -    25,549
 Currency translation adjustment                         -        -          -                             79          -        79
 Unrealized hedging gain                                 -        -          -                            239          -       239
 Minimum pension liability adjustment (net of tax)       -        -          -                            (93)         -       (93)
                                                                                                                         ----------
 Total comprehensive income                                                                                                 25,774
                                                   --------------------------------------------------------------------------------
Balance - June 30, 2005                             19,703  $   197  $ 169,463   $    35,680     $       (148) $(253,620) $(48,428)
                                                   ================================================================================

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


</TABLE>



                                       F-5
<PAGE>

<TABLE>
<CAPTION>
                              VERTRUE INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)



                                                                     For the years ended June 30,
                                                                    -------------------------------
                                                                       2005       2004      2003
                                                                    ---------- ---------- ---------
 Operating activities
<S>                                                                 <C>        <C>        <C>
   Net income                                                       $  25,549  $  27,960  $ 24,356
   Adjustments to reconcile net income to net cash provided
   by operating activities:
    Change in deferred revenues                                       (34,911)   (32,272)  (39,003)
    Change in deferred marketing costs                                 13,443     25,455    51,411
    Depreciation and amortization                                      23,105     13,252    12,120
    Deferred and other income taxes                                       453     10,254    14,182
    Tax benefit from employee stock plans                               2,220      6,520       942
    Gain on settlement of investment related litigation                     -          -   (19,148)
    Loss on sale of subsidiary                                              -          -       959
    Net loss on investment                                                  -          -       206
    Other                                                                (423)       890     2,485

   Change in assets and liabilities:
    Restricted cash                                                      (291)      (388)    2,951
    Accounts receivable                                                (1,789)      (112)      758
    Prepaid membership materials                                          676     (1,589)     (135)
    Prepaid expenses                                                   (2,114)     5,172    (3,246)
    Other assets                                                       (2,584)      (461)   (1,331)
    Accounts payable                                                    8,758    (10,323)     (255)
    Accrued and other liabilities                                         219      3,590     1,281
                                                                    ---------- ---------- ---------
 Net cash provided by operating activities                             32,311     47,948    48,533
                                                                    ---------- ---------- ---------

 Investing activities
   Acquisition of fixed assets                                        (11,006)    (7,057)   (5,463)
   Settlement of investment related litigation                              -          -    19,148
   Purchases of short-term investments                               (402,630)  (650,750)   (5,000)
   Sales of short-term investments                                    507,260    535,770         -
   Acquisitions of businesses, net of cash acquired, and other
    investing activities                                              (77,237)  (114,916)   (1,250)
                                                                    ---------- ---------- ---------
 Net cash provided by (used in) investing activities                   16,387   (236,953)    7,435
                                                                    ---------- ---------- ---------

 Financing activities
   Net proceeds from issuance of stock                                 10,792     33,644     4,050
   Treasury stock purchases                                           (41,131)   (94,207)  (37,214)
   (Debt issuance costs)/net proceeds from issuance of debt              (844)   229,825         -
   Payments of long-term obligations                                     (549)      (453)   (1,051)
                                                                    ---------- ---------- ---------
 Net cash (used in) provided by financing activities                  (31,732)   168,809   (34,215)
                                                                    ---------- ---------- ---------
 Effect of exchange rate changes on cash and cash equivalents             224        102         5
                                                                    ---------- ---------- ---------
 Net increase (decrease) in cash and cash equivalents                  17,190    (20,094)   21,758
 Cash and cash equivalents at beginning of year                        47,166     67,260    45,502
                                                                    ---------- ---------- ---------
 Cash and cash equivalents at end of year                           $  64,356  $  47,166  $ 67,260
                                                                    ========== ========== =========

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

</TABLE>


                                      F-6
<PAGE>

NOTE 1 - NATURE OF BUSINESS

Vertrue Incorporated ("Vertrue" or the "Company") is a leading consumer services
marketing  company.  The Company offers both  subscription and transaction based
services  focused on  meeting  consumer  needs in large  spending  categories  -
healthcare,  personal property, discounts, security and insurance and personals.
The  Company's   service   offerings   provide   consumers   everyday   savings,
event-oriented discounts,  benefits that provide the consumer with peace of mind
and access to information and opportunities for self-enrichment.

The  Company was  incorporated  in 1989 in  Delaware  under the name  Cardmember
Publishing  Corporation.  On October 17, 1996, the Company  completed an initial
public  offering of its stock and changed its name to MemberWorks  Incorporated.
On October 13, 2004,  the Company began doing  business as Vertrue  Incorporated
and on November 18, 2004,  shareholders  approved an amendment to the  Company's
charter formally changing its name to Vertrue Incorporated.  The name change was
intended to reflect the ever-broadening base of services that the Company offers
to its customers.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation - consolidation
The  consolidated  financial  statements  have been prepared in accordance  with
accounting  principles  generally  accepted in the United  States of America and
include the accounts of the Company,  its wholly owned subsidiaries and variable
interest  entities  required to be  consolidated.  All significant  intercompany
accounts and transactions have been eliminated.

The  Company  acquired  Lavalife  Inc.  ("Lavalife")  on April 1, 2004,  Bargain
Network,  Inc.  ("Bargain")  on November  30, 2004 and My Choice  Medical,  Inc.
("MCM") on January 1, 2005.  Therefore,  their results of  operations  have been
included in the  consolidated  results of  operations  since  their  acquisition
dates.  The  results of  Bargain,  Lavalife  and MCM have been  included  in the
Marketing Services, Personals and Corporate and Other segments, respectively.

Use of estimates
The  preparation  of  consolidated   financial  statements  in  conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities,  disclosure of contingent assets and
liabilities at the date of the financial  statements and the amounts reported in
the financial  statements and  accompanying  notes.  Actual results could differ
from those  estimates.  The most  significant  judgments and estimates  include:
membership  cancellation  rates,  deferred  marketing costs,  goodwill and other
intangible  asset  valuations,  intangible  assets'  remaining  useful lives and
deferred tax asset valuations.

Reclassifications
Certain  prior year  amounts  have been  reclassified  to conform to the current
year's  presentation  to reclassify  auction rate  securities from cash and cash
equivalents to short-term investments.  Corresponding adjustments have been made
in the consolidated  statements of cash flows for prior periods to reflect gross
purchases and sales of auction rate  securities as investing  activities  rather
than as a  component  of cash and cash  equivalents.  The  Company  reclassified
$112,330,000  and  $5,000,000  from  cash and  cash  equivalents  to  short-term
investments at June 30, 2004 and 2003, respectively.  These reclassifications do
not affect previously reported cash flows from operating or financing activities
in the consolidated  statements of cash flows. For the years ended June 30, 2004
and  2003,  net cash  used in  investing  activities  related  to  auction  rate
securities was $107,330,000 and $5,000,000, respectively.

Foreign currency translation
Assets and liabilities of foreign subsidiaries, whose assets and liabilities are
denominated in their local  currencies,  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 average  exchange  rates for the  periods  presented.  Translation  gains and
losses are included as a component of  comprehensive  income in the consolidated
statements of shareholders'  deficit.  Transaction gains and losses are included
in the consolidated statements of operations.

Fair value of financial instruments and concentration of credit risk
All current assets and liabilities are carried at cost, which  approximates fair
value due to their short-term maturities.  The recorded amounts of the Company's
long-term  liabilities  also  approximate fair value except for differences with
respect to the  Convertible  Notes and the  Senior  Notes (see Note 7) which had
carrying values of $90,000,000 and $147,814,000,  respectively,  and fair values
of  $103,050,000  and  $151,500,000,  respectively,  as of June  30,  2005.  The
Convertible  Notes and the Senior Notes had carrying  values of $90,000,000  and
$147,659,000,  respectively,  and fair values of $93,263,000  and  $143,250,000,
respectively,  as of June 30,  2004.  The fair  value  information  was based on
publicly available  information.  Financial instruments that potentially subject
the  Company to  concentration  of credit  risk  consist  primarily  of accounts
receivable from credit card  processors who facilitate  payments from membership
and personals customers.


                                       F-7
<PAGE>

Fixed assets
Fixed assets, capitalized software costs and capital leases are carried at cost,
less accumulated depreciation and amortization. Depreciation is calculated using
the straight-line  method over the estimated useful lives of the related assets.
Useful  lives are  generally  between 3 and 7 years for  computer  software  and
equipment,  the shorter of the estimated  remaining useful life or the remaining
life of the lease,  for leasehold  improvements  and 5 to 10 years for furniture
and fixtures.  Maintenance and repair  expenditures are charged to operations as
incurred.

Revenue recognition
Revenues are billed  primarily  through  credit and debit cards.  Revenues  from
membership  programs  are  recognized  when  earned.  Members  may cancel  their
memberships at any time.  Members  enrolled in an annual payment plan who cancel
their  memberships  receive a pro rata refund of the remaining unused portion of
their  membership  fees.  In  accordance  with Staff  Accounting  Bulletin  104,
"Revenue Recognition" ("SAB 104"), revenues, net of estimated cancellations, are
deferred and recognized as revenues when membership  refund  privileges  expire.
Management  establishes  and  regularly  updates the  allowance  for  membership
cancellations.   In  estimating  the  allowance  for  membership  cancellations,
management analyzes historical cancellation experience,  current economic trends
and changes in customer demand for the Company's  products and services.  Actual
membership   refunds  are  charged   against  the   allowance   for   membership
cancellations  on  a  current  basis.  Accrued  liabilities  set  forth  in  the
accompanying consolidated balance sheets as of June 30, 2005 and 2004 include an
allowance  for  membership   cancellations   of  $11,232,000  and   $14,156,000,
respectively.

Revenues generated by the Personals  reportable  business segment are recognized
when the services are used.

Membership  programs sponsored by the Company's largest client accounted for 14%
of revenues in 2005.  Membership programs sponsored by the Company's two largest
clients in each year  accounted  for 18% and 12% of revenues in 2004 and 21% and
16% of revenues in 2003, respectively.

Marketing expenses
The Company's  marketing  expenses are comprised of refundable royalty payments,
non-refundable  royalty payments,  advertising  costs,  telemarketing  costs and
direct mail costs.  Advertising costs and non-refundable royalty payments, which
include  fee  per  offer,  fee  per  sale  and  fee  per  impression   marketing
arrangements,  are  expensed  when  incurred.  Refundable  royalty  payments are
charged to operations as the  associated  revenues are  recognized in accordance
with SAB 104.  Telemarketing  costs,  including costs for third party vendors to
solicit  members for the  Company,  and direct mail  costs,  including  costs of
printing  and  mailing  direct  mail  pieces,   are  deferred   direct  response
advertising costs and are charged to marketing expenses over the expected future
benefit  period in  accordance  with  American  Institute  of  Certified  Public
Accountants  Statement of Position 93-7,  "Reporting on Advertising Costs" ("SOP
93-7").

Deferred  marketing  costs to  enroll a new  member  are less  than the  related
estimated  total net  revenues.  However,  if deferred  marketing  costs were to
exceed the related  estimated  total net revenues,  management  would adjust the
deferred marketing costs for that impairment.

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

Cash and cash equivalents
The  Company  considers  highly  liquid  investment  instruments  with  original
maturities of three months or less to be cash  equivalents.  The Company's  cash
and cash equivalents are carried at cost, which  approximates fair market value,
and primarily consist of money market funds.

Restricted cash
The Company excludes from cash and cash equivalents restricted cash that is held
in an escrow account for payment of commissions to a client.


                                       F-8
<PAGE>

Short-term investments
Short-term  investments  consist of commercial paper with original maturities of
more  than 3 months  but  less  than or  equal  to one  year  and  auction  rate
securities  with  interest  rates  that  reset  every 49 days or less but stated
contractual  maturities  greater  than  one  year.  As of June 30,  2005,  these
investments  are classified as  available-for-sale  and recorded at cost,  which
approximates fair value due to their short-term reset dates.  Historically,  the
Company has been able to liquidate  auction rate securities at any reset date to
provide funds for  investing or financing  activities or to invest in securities
that would generate higher yields.

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

Valuation of goodwill and other intangibles
The Company  reviews the carrying  value of its  goodwill  and other  intangible
assets and  assesses the  estimated  remaining  useful  lives of its  intangible
assets in accordance with SFAS No. 142,  "Goodwill and Other Intangible  Assets"
("SFAS  142").  Management  reviews  goodwill  and other  intangible  assets for
impairment  by  comparing  their  carrying  values to their fair values at least
annually or more frequently if circumstances indicate possible impairment.  When
determining  fair value,  management  utilizes  various  assumptions,  including
projections of future cash flows. A change in the underlying  assumptions  could
cause fair  value to be less than  carrying  value and  require  the  Company to
record a corresponding charge against operations. Management tested goodwill for
impairment at July 1, 2004 and 2003 during the quarters ended September 30, 2004
and 2003,  respectively,  and  concluded  that it was not impaired as of July 1,
2004 or 2003.  Management  also  reassessed  the  estimated  useful lives of its
indefinite lived intangible assets and determined that they were appropriate.

Intangible  assets  principally  include member and customer  relationships  and
trade  names that  arose in  connection  with  business  acquisitions.  Acquired
intangibles, except member relationships, are recorded at cost and are amortized
on a straight-line  basis over their estimated useful lives. The value of member
relationships is amortized using an accelerated method based on estimated future
cash flows. The weighted average  amortization periods for membership and client
relationships,  trade  names,  other  amortizable  intangible  assets  and total
amortizable  intangible  assets held at June 30, 2005 were 9 years,  15 years, 3
years and 11 years, respectively.

Impairment of long-lived assets
The Company  accounts for  impairment and  disposition  of long-lived  assets in
accordance  with  SFAS  144,  "Accounting  for the  Impairment  or  Disposal  of
Long-Lived  Assets." The Company  reviews its  intangible  and other  long-lived
assets for impairment whenever events or changes in circumstances  indicate that
the  carrying  value  may not be  recoverable,  as  determined  based  on  their
projected  undiscounted  future cash flows.  If this review  indicates  that the
carrying  value will not be  recoverable,  the carrying  value is reduced to its
estimated fair value. As of June 30, 2005, no impairment had been indicated.

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

Contingent Liabilities
In  accordance  with  SFAS 5,  "Accounting  for  Contingencies,"  and  Financial
Accounting Standards  Interpretation 14, "Reasonable Estimation of the Amount of
a Loss," the Company accrues for contingent liabilities when it is probable that
future costs will be incurred and those costs can be  reasonably  estimated  and
measured.




                                       F-9
<PAGE>

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


                                                             For the years ended June 30,
                                                         2005           2004         2003
                                                     ------------ -------------- ------------
<S>                                                  <C>          <C>            <C>
Net income reported                                  $    25,549  $      27,960  $    24,356
Add: Stock-based employee compensation expense
under the intrinsic value method, net of related tax
 effects                                                       -              -            -
Deduct: Stock-based employee compensation expense
under the fair value method, net of related tax
 effects                                                  (4,013)        (4,762)      (6,055)
                                                     ------------ -------------- ------------
Pro forma net income                                 $    21,536  $      23,198  $    18,301
                                                     ============ ============== ============

Earnings per share:
 As reported
  Basic                                              $      2.56  $        2.60  $      1.93
  Diluted                                            $      2.22  $        2.29  $      1.84
Pro forma
  Basic                                              $      2.15  $        2.16  $      1.45
  Diluted                                            $      1.89  $        1.90  $      1.38
</TABLE>



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

                                    2005          2004          2003
                                    ----          ----          ----
Dividend yield                        0%            0%            0%
Expected volatility                  64%           74%           69%
Risk free interest rate             3.7%          2.9%          3.5%
Expected lives                   5 years       5 years       5 years

The weighted average fair value per share of options granted at market value was
$18.23,  $14.98  and $7.95 for the years  ended  June 30,  2005,  2004 and 2003,
respectively.  For pro forma purposes, the estimated fair value of the Company's
stock-based  awards to employees is amortized over the options'  vesting periods
of four to five  years and the  estimated  fair  value of the  Company's  awards
issued under the Employee  Stock  Purchase  Plan is recognized in the period the
stock is issued.

New accounting pronouncements
In December 2004, the FASB issued Statement No. 123 (Revised 2004), "Share-Based
Payment," ("SFAS 123R"). This statement is a revision of SFAS 123 and supersedes
APB 25. SFAS 123R will require the Company to measure all  employee  stock-based
compensation  awards  using a fair value  method and record that  expense in its
consolidated  financial statements over the requisite service periods.  Adoption
of SFAS 123R will also  require  additional  accounting  related  to income  tax
effects and additional  disclosure  regarding  cash flow effects  resulting from
share-based  payment  arrangements.  SFAS  123R is  effective  beginning  in the
Company's  first  quarter  of  fiscal  2006.  Adoption  of SFAS 123R will have a
material impact on the Company's  consolidated  financial  position,  results of
operations, cash flow presentation and related disclosures.  The Company expects
additional  expense  related  to the  adoption  of SFAS  123R  of  approximately
$5,000,000 in fiscal 2006.

In May 2005, the FASB issued  Statement No. 154,  "Accounting  Changes and Error
Corrections  - A  replacement  of APB Opinion No. 20 and FASB  Statement  No. 3"
("SFAS  154").  This  statement  requires  retrospective  application  to  prior
periods' financial  statements of changes in accounting  principles unless it is
impracticable to determine either the period-specific  effects or the cumulative
effect of the  change.  This  statement  applies  to all  voluntary  changes  in
accounting  principles and changes required by an accounting  pronouncement that
does not include specific transition provisions. SFAS 154 is effective beginning
in the Company's  first quarter of fiscal 2007.  The Company does not expect the
adoption  of SFAS 154 to have a material  effect on its  consolidated  financial
position, results of operations or cash flows.


                                      F-10
<PAGE>

NOTE 3 - FIXED ASSETS
<TABLE>
<CAPTION>

                                                                           June 30,
                                                                ----------------------------
                                                                    2005           2004
                                                                -------------  -------------
<S>                                                             <C>            <C>
Computer software and equipment                                 $     68,273   $     62,501
Furniture and fixtures                                                 8,269          8,246
Leasehold improvements                                                 7,906          6,622
                                                                -------------  -------------
                                                                      84,448         77,369
Accumulated depreciation                                             (45,386)       (40,829)
                                                                -------------  -------------
Fixed assets, net                                               $     39,062   $     36,540
                                                                =============  =============
</TABLE>

Depreciation   and  amortization   expense  was  $13,485,000,   $10,189,000  and
$10,818,000 for the years ended June 30, 2005, 2004 and 2003, respectively.

NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS

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

<TABLE>
<CAPTION>

                                                 June 30, 2005                June 30, 2004
                                             -----------------------  ---------------------------
                                               Gross                    Gross
                                              Carrying  Accumulated    Carrying    Accumulated
                                               Amount   Amortization    Amount     Amortization
                                             ---------- ------------  ---------- ----------------
Amortizable intangible assets:
<S>                                          <C>         <C>          <C>          <C>
 Membership and client relationships         $   40,215  $    15,184  $   27,999  $        8,686
 Trade names                                     21,859        1,662      18,543             310
 Other                                            1,518        1,237       1,162             886
                                             ---------- ------------  ---------- ----------------
  Total amortizable intangible assets        $   63,592  $    18,083  $   47,704  $        9,882
                                             ---------- ------------  ---------- ----------------
  Amortizable intangible assets, net         $   45,509               $   37,822
                                             ==========               ==========

Indefinite-lived intangible assets:
 Goodwill                                    $  201,499               $  125,675
 Intangible asset related to minimum pension
  liability                                  $      967               $    1,050
</TABLE>

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

Fiscal Year
  2006                                       $     8,483
  2007                                             6,825
  2008                                             4,743
  2009                                             4,322
  2010                                             3,191


Changes in the carrying amount of goodwill by segment were as
follows (in thousands):
<TABLE>
<CAPTION>

                                                            2005                                     2004
                                                 ---------------------------------------- ------------------------------
                                                  Marketing           Corporate            Marketing
                                                  Services  Personals and Other   Total    Services  Personals   Total
                                                 ---------- --------- --------- --------- ---------- --------- ---------
<S>                                              <C>        <C>       <C>       <C>       <C>        <C>       <C>
Balance at beginning of year                     $  42,039  $ 83,636  $      -  $125,675  $  42,039  $      -  $ 42,039
Acquisitions                                        53,664         -    23,367    77,031          -    83,636    83,636
Purchase adjustments and other                         214    (1,421)        -    (1,207)         -         -         -
                                                 ---------- --------- --------- --------- ---------- --------- ---------
Balance at end of year                           $  95,917  $ 82,215  $ 23,367  $201,499  $  42,039  $ 83,636  $125,675
                                                 ========== ========= ========= ========= ========== ========= =========
</TABLE>


                                      F-11
<PAGE>

As part of the  acquisitions  of  certain  of the  assets of MCM and  Bargain in
fiscal 2005, the Company  acquired  intangible  assets of $92,491,000.  Of those
amounts,  $12,220,000  was assigned to membership and client  relationships  and
$3,240,000 was assigned to trade names.  These identified  intangible assets are
subject to periodic  amortization over the estimated useful lives ranging from 1
to 15 years. Goodwill of $77,031,000, which is not subject to amortization, also
arose in connection with these acquisitions.

As part of the  purchase  of  Lavalife  in fiscal  2004,  the  Company  acquired
intangible assets of $115,632,000. Of that amount, $14,799,000 has been assigned
to membership  and client  relationships  and  $18,619,000  has been assigned to
trade  name,  both of  which  are  subject  to  periodic  amortization  over the
estimated  useful  lives  ranging from 3 to 15 years.  Goodwill of  $82,214,000,
which  is not  subject  to  amortization,  also  arose  in  connection  with the
acquisition.

Goodwill was tested for impairment during the quarters ended September 30, 2004,
2003 and 2002 as required by SFAS 142.  The Company  concluded  that none of its
goodwill was  impaired.  Fair value was  estimated  using  discounted  cash flow
methodologies. In addition, the Company reassessed the estimated useful lives of
its  indefinite  lived  intangible  assets  and  determined  that the lives were
appropriate.  The  Company  will  continue  to test the  goodwill of each of its
reporting units annually or more frequently if impairment indicators exist.

NOTE 5 - FOREIGN CURRENCY INSTRUMENTS

The Company uses purchase option contracts and forward contracts to minimize its
exposure to changes in future cash flows caused by movements in foreign currency
exchange rates between the U.S. dollar and the Canadian dollar.  Derivatives are
held only for the purpose of hedging such risks and are not used for speculative
purposes.  Derivatives  used to hedge  forecasted  cash  flows  associated  with
Canadian dollar denominated  forecasted  transactions that meet the criteria for
hedge  accounting are designated as cash flow hedges.  The effective  portion of
derivative  gains and losses is  deferred as a component  of  accumulated  other
comprehensive  income  and is  recognized  when the  underlying  hedged  item is
recognized in earnings.

The fair value of these  contracts  is  included  in prepaid  and other  current
assets.  As of June 30, 2005, the fair value of these  instruments  was $559,000
(asset).  Derivative  gains  recognized  in earnings  were recorded in operating
expenses and general and administrative  expenses and amounted to $1,382,000 for
2005.  All forecast  transactions  currently  being hedged are expected to occur
over the next year.

During 2004, the Company used purchase option contracts and forward contracts to
protect  against the foreign  currency  exchange  risk  inherent in the purchase
price for its acquisition of Lavalife, which was denominated in Canadian dollars
(see Note 9). The risk of loss  associated  with purchase  option  contracts was
limited to  premium  amounts  paid for them.  The risk of loss  associated  with
forward  contracts was equal to the exchange rate differential from the time the
contract was entered into until it was settled. These contracts expired on April
1, 2004  concurrently with the closing of the Lavalife  acquisition.  Derivative
gains  recognized in earnings were recorded as a component of other income,  net
and amounted to $353,000 in 2004. As of June 30, 2004,  the Company did not hold
any foreign currency instruments.

NOTE 6 - RESTRUCTURING CHARGES

The restructuring reserve balance,  which is recorded in accrued liabilities and
other long-term  liabilities,  was $1,499,000 and $1,644,000 as of June 30, 2005
and 2004, respectively. Cash payments related to lease obligations for the years
ended June 30,  2005 and 2004 were  $145,000  and  $66,000,  respectively.  Cash
payments  related to workforce  reductions for the years ended June 30, 2005 and
2004 were $0 and $91,000, respectively.




                                      F-12
<PAGE>

NOTE 7 - LONG-TERM LIABILITIES

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

<TABLE>
<CAPTION>
                                                                     2005             2004
                                                                --------------   --------------
<S>                                                             <C>              <C>
Senior Notes                                                    $     147,814    $     147,659
Convertible Notes                                                      90,000           90,000
Other long-term obligations                                             5,943            5,268
                                                                --------------   --------------
                                                                      243,757          242,927
Less current maturities                                                   686              338
                                                                --------------   --------------
Long-term liabilities                                           $     243,071    $     242,589
                                                                ==============   ==============
</TABLE>


In April 2004, the Company issued  $150,000,000  aggregate  principal  amount of
unsecured  9.25% senior notes due 2014 ("Senior  Notes").  The Senior Notes were
registered  in 2005.  These Senior  Notes were sold at 98.418% of the  principal
amount which resulted in an effective yield of 9.5%. Interest is payable in cash
semi-annually in arrears on April 1 and October 1. The first payment was made on
October 1, 2004.  A portion of the  proceeds  from the  offering of these Senior
Notes  was used to repay  amounts  borrowed  under  the  senior  secured  credit
facility  to fund a portion of the  Lavalife  acquisition.  At any time prior to
April 1, 2007,  the  Company  may redeem up to 35% of the Senior  Notes with net
cash  proceeds  of  certain  equity  offerings,  as long as at least  65% of the
aggregate  principal amount of the Senior Notes issued remains outstanding after
the redemption.  The Company may redeem all or part of the Senior Notes prior to
April 1, 2009 by paying a make-whole  premium.  At any time on or after April 1,
2009,  the  Company  may  redeem  some or all of the  Senior  Notes  at  certain
redemption prices plus accrued and unpaid interest and liquidation  damages,  if
any, to the date of redemption. Debt issuance costs and debt discount associated
with this issuance of $5,889,000  were  capitalized  and are being  amortized as
interest expense over the term of the Senior Notes using the effective  interest
method.

In September 2003, the Company issued $90,000,000  aggregate principal amount of
5.5% convertible senior subordinated notes due 2010 ("Convertible  Notes").  The
Convertible  Notes were registered in 2004. The Convertible  Notes bear interest
at the rate of 5.5% per year, which is payable in cash  semi-annually in arrears
on April 1 and October 1. The first  payment was made on April 1, 2004.  Holders
of the  Convertible  Notes may convert  their notes into shares of the Company's
common  stock at any time prior to  maturity at an initial  conversion  price of
approximately  $40.37 per share,  which is equivalent  to an initial  conversion
rate  of  approximately  24.7739  shares  per  $1,000  principal  amount  of the
Convertible Notes. There are no beneficial  conversion features related to these
Convertible  Notes. In accordance with Accounting  Principles  Board Opinion No.
14,  "Accounting  for  Convertible  Notes and Debt  Issued  with Stock  Purchase
Warrants,"  these  Convertible  Notes have been classified as a liability.  Debt
issuance costs  associated with this issuance of $3,491,000 were capitalized and
are being amortized as interest  expense over the term of the Convertible  Notes
using the effective interest method.

Other  long-term  obligations  are  comprised  of the  long-term  portion of the
restructuring  reserve (see Note 6), minimum pension liability (see Note 15) and
lease incentives  related to certain operating leases.  The lease incentives are
amortized as a reduction to rent expense over the terms of the leases.

The Company has an amended and restated  senior secured credit  facility,  which
was amended and  restated on March 1, 2005 and matures on March 23,  2006,  that
allows  borrowings of up to  $45,000,000.  Borrowings  under the senior  secured
credit facility accrue interest at either the Eurodollar  rate, or the higher of
the Prime rate, or the Federal Funds rate plus an applicable  margin. As of June
30, 2005, the availability  under the senior secured credit facility was reduced
by an outstanding letter of credit of $5,458,000 and was $39,542,000. There were
no borrowings outstanding under this bank credit facility as of June 30, 2005 or
2004.  The senior  secured  credit  facility  has certain  financial  covenants,
including a maximum debt coverage  ratio,  potential  restrictions on additional
borrowings and potential  restrictions on additional stock repurchases.  At June
30,  2005 and  2004,  the  Company  was in  compliance  with all  financial  and
restrictive loan covenants.  All of the Company's assets, including the stock of
its  subsidiaries,  are  pledged as  collateral  for the senior  secured  credit
facility.  Debt  issuance  costs  associated  with the  amendment of this credit
facility were $56,000.  Debt issuance costs  associated  with this amendment and
restatement of the senior secured credit facility were capitalized and are being
amortized  over  the  term of the  senior  secured  credit  facility  using  the
effective interest method.

Interest  (expense) income, net as shown in the statements of operations for the
years  ended  June 30,  2005,  2004  and  2003,  includes  interest  expense  of
$20,741,000,  $7,715,000  and  $238,000,  respectively,  and interest  income of
$1,936,000,  $1,094,000,  and $808,000,  respectively.  Interest expense, net in
2005 and 2004 includes  $1,373,000  and $742,000  amortization  of debt issuance
costs,  respectively,  and $155,000 and $32,000  amortization  of debt discount,
respectively.


                                      F-13
<PAGE>

NOTE 8 - COMMITMENTS AND CONTINGENCIES

The  Company  operates  in leased  facilities.  Management  expects  that leases
currently  in effect  will be renewed or  replaced  by other  leases  similar in
nature and terms. Rent expense under operating leases was $8,643,000, $6,779,000
and $7,671,000 for the years ended June 30, 2005, 2004 and 2003, respectively.

The Company has certain capital leases for equipment. Lease amortization for the
years ended June 30,  2005,  2004 and 2003 was  $536,000,  $193,000 and $55,000,
respectively,  and is included in depreciation and amortization expense. At June
30, 2005, the weighted average interest rate on the Company's capital leases was
8.0% with individual lease rates generally ranging from 5.5% to 19.0%.

Future minimum lease payments under  operating and capital leases as of June 30,
2005 are as follows (in thousands):

<TABLE>
<CAPTION>

                                                                  Operating         Capital
Fiscal Year                                                         Leases           Leases
                                                                --------------   --------------
<S>                                                             <C>              <C>
 2006                                                           $       8,677    $         803
 2007                                                                   5,755              723
 2008                                                                   4,975              427
 2009                                                                   4,433               92
 2010                                                                   2,499                -
Thereafter                                                              1,009                -
                                                                --------------   --------------
Total minimum lease payments                                    $      27,348            2,045
                                                                ==============
 Less amount representing interest                                                        (209)
                                                                                 --------------
Present value of net minimum capital lease obligations                                   1,836
 Less current portion                                                                     (686)
                                                                                 --------------
Long-term capital lease obligations                                              $       1,150
                                                                                 ==============
</TABLE>


As of June 30,  2005,  the  Company  had  outstanding  purchase  obligations  of
$86,544,000  which relate to marketing  agreements and maintenance  contracts on
the Company's  software,  equipment and other assets as well as  $70,624,000  of
contingent payments related to the Bargain and MCM acquisitions.

Legal proceedings
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  except as set forth  below.  The  Company is involved in
other lawsuits and claims  generally  incidental to its business,  including but
not limited to various suits,  including  previously  disclosed  suits,  brought
against the Company by individual  consumers  seeking monetary and/or injunctive
relief relating to the marketing of the Company's  programs.  In addition,  from
time to  time  in the  regular  course  of its  business  the  Company  receives
inquiries from various federal and/or state regulatory authorities.

In March 2001, an action was  instituted  by plaintiff  Teresa  McClain  against
Coverdell & Company  ("Coverdell"),  a wholly owned  subsidiary  of the Company,
Monumental  Life  Insurance  Company and other  defendants  in the United States
District  Court for the Eastern  District of Michigan,  Southern  Division.  The
suit, which sought unspecified monetary damages,  alleged that Coverdell and the
other  defendants  violated  the  Michigan  Consumer  Protection  Act and  other
applicable  Michigan  laws in connection  with the marketing of Monumental  Life
Insurance  Company insurance  products.  The Court certified a class of Michigan
residents. The Court approved the settlement agreement,  which was signed by all
parties, at a Fairness/Approval hearing on November 22, 2004 and the Company was
not required to make any payment.

On January 24, 2003,  the Company filed a motion with the Superior Court for the
Judicial District of Hartford, Connecticut to vacate and oppose the confirmation
of an arbitration award issued in December 2002. The arbitration,  filed against
the Company by MedValUSA  Health  Programs,  Inc.  ("MedVal") in September 2000,
involved claims of breach of contract, breach of the duty of good faith and fair
dealing,  and violation of the Connecticut Unfair Trade Practices Act ("CUTPA").
Even though the arbitrators  found that the Company was not liable to MedVal for
any compensatory  damages, they awarded $5,458,000 in punitive damages and costs
against  the  Company  solely  under  CUTPA.  The  Company  believes  that  this
arbitration award was unjustified and not based on any existing legal precedent.
Specifically, the Company challenged the award on a number of grounds, including
that it violated a well-defined  public policy against excessive punitive damage
awards,  raised constitutional issues and disregarded certain legal requirements
for a valid award under CUTPA.  On June 22, 2003,  the Superior Court denied the
Company's  motion to  vacate  the award  and on May 10,  2005,  the  Connecticut
Supreme Court denied the Company's  appeal of that decision.  As a result of the
Connecticut Supreme Court's decision, the Company recorded a one-time $5,458,000
charge in the June 2005  quarter.  The Company has  requested  the U.S.  Supreme
Court to review the Connecticut Supreme Court's decision.  However, there can be
no assurance that the Company will be successful in its efforts.


                                      F-14
<PAGE>

NOTE 9 - BUSINESS COMBINATIONS

On January 1, 2005,  the Company  completed  the  acquisition  of certain of the
assets of MCM, a privately  held  advertising  and practice  management  company
serving  cosmetic  surgeons  throughout the United States.  The Company acquired
certain  of the  assets  of MCM in order to expand  its  consumer  offerings  to
include  cosmetic  surgery.  The purchase  price,  excluding  fees and expenses,
amounted to  $33,000,000  and was paid in cash on the closing date. In addition,
contingent  payments of up to $56,000,000 may be paid in the next three years if
certain  performance  targets,  including  increasing  levels  of  revenues  and
earnings,  are  achieved  over the next three  calendar  years.  Any  additional
payments  under  the  contingency  arrangement  will  be  considered  additional
purchase price and allocated to the net assets acquired.  The Company identified
$12,060,000 of intangible assets other than goodwill,  including  membership and
client  relationships and trade name, in conjunction with this acquisition.  The
$23,367,000  of excess  merger  consideration  over the net assets  acquired was
allocated  to  goodwill,  substantially  all of  which  is  deductible  for  tax
purposes.

On November 30, 2004,  the Company  completed the  acquisition of certain of the
assets of Bargain,  a privately  held provider of premier  pricing  services for
homes and  vehicles.  The Company  acquired  certain of the assets of Bargain in
order to expand  its direct to  consumer  marketing  presence  and to expand its
discounted consumer offerings to include personal property.  The purchase price,
which excludes fees and expenses,  was paid in cash and amounted to $39,118,000.
The Company  expects to pay  $14,624,000 of contingent  payments in the December
2005 quarter. In addition,  the Company assumed certain liabilities amounting to
$4,729,000.  The Company  identified  $3,400,000 of intangible assets other than
goodwill,  including  membership  and client  relationships  and trade name,  in
conjunction   with  this   acquisition.   The   $53,664,000   of  excess  merger
consideration   over  the  net  assets   acquired  was  allocated  to  goodwill,
substantially all of which is deductible for tax purposes.

On April 1, 2004, the Company completed the acquisition of all of the net assets
and outstanding  capital stock of Lavalife Inc., a leading provider of web-based
and phone-based interactive personals services. The Company acquired Lavalife in
order to broaden the scope of services  offered to include  personals  services.
The acquisition of Lavalife  benefited the Company by providing access to one of
the  largest and fastest  growing  consumer  categories  on the  internet  while
expanding its target market.  The purchase  price,  excluding fees and expenses,
was Cdn$152,500,000,  or $116,300,000.  In connection with this acquisition, the
Company received $9,080,000 related to the issuance of the Company's  restricted
common stock to Lavalife's  senior  management.  The acquisition was funded with
cash on hand and  borrowings  under the  Company's  $45,000,000  senior  secured
credit facility.  The Company identified  $33,418,000 of intangible assets other
than goodwill.  The $82,214,000 of unallocated excess merger  consideration over
the net assets acquired was allocated to goodwill.  The amount of tax deductible
goodwill was $77,436,000.

See Note 4 for  detailed  descriptions  of the  intangible  assets and  goodwill
identified in connection with these business combinations.

The  fair  values  of  the  assets  acquired  and  liabilities  assumed  at  the
acquisition dates were as follows (in thousands):

<TABLE>
<CAPTION>
                                                         MCM        Bargain      Lavalife
                                                     ------------ ------------ ------------
<S>                                                  <C>          <C>          <C>
Current assets                                       $       258  $     2,163  $     6,160
Fixed assets                                                 600        4,428       14,730
Other assets                                                   -          871            -
Goodwill arising in the acquisition                       23,367       53,664       82,214
Intangible assets                                         12,060        3,400       33,418
Current liabilities                                       (3,060)      (4,066)     (19,990)
Other long-term obligations                                    -         (769)      (2,498)
                                                     ------------ ------------ ------------
Net assets acquired                                  $    33,225  $    59,691  $   114,034
                                                     ============ ============ ============
</TABLE>


                                      F-15
<PAGE>

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

                                               For the years ended June 30,
                                             ---------------------------------
                                                  2004               2003
                                             --------------     --------------
         Revenues                              $  542,766         $  527,736
         Net income                                28,979             25,879

         Basic earnings per share              $     2.58         $     1.98
         Diluted earnings per share                  2.28               1.89

The  results of  operations  and  balance  sheets of Bargain and MCM for periods
prior to the acquisitions were not material to the Company and accordingly,  pro
forma results of operations have not been presented.

NOTE 10 - SETTLEMENT OF INVESTMENT RELATED LITIGATION

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

NOTE 11 - INCOME TAXES

The provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                              For the years ended June 30,
                                                                                              ---------------------------
                                                                                                2005     2004     2003
                                                                                              -------- -------- --------
Current
<S>                                                                                           <C>      <C>      <C>
 Federal                                                                                      $ 9,922  $ 7,219  $ 1,635
 State                                                                                          2,249    2,245      422
 Foreign                                                                                          802    1,028        -
                                                                                              -------- -------- --------
Total                                                                                         $12,973  $10,492  $ 2,057
                                                                                              ======== ======== ========

Deferred
 Federal                                                                                      $ 3,047  $ 8,673  $11,642
 State                                                                                           (595)     140    2,540
 Foreign                                                                                       (2,033)    (667)       -
                                                                                              -------- -------- --------
Total                                                                                         $   419  $ 8,146  $14,182
                                                                                              ======== ======== ========

</TABLE>

The following is a  reconciliation  of the  Company's  effective tax rate to the
U.S. statutory rate:
<TABLE>
<CAPTION>

                                                        For the years ended June 30,
                                                      --------------------------------
                                                         2005       2004       2003
                                                      ---------- ---------- ----------
<S>                                                        <C>        <C>        <C>
Statutory rate                                             35.0%      35.0%      35.0%
State and local                                             2.8%       3.3%       3.4%
Foreign                                                   (3.7%)     (0.5%)       0.0%
Other                                                       0.3%       2.2%       1.6%
                                                      ---------- ---------- ----------
Effective rate                                             34.4%      40.0%      40.0%
                                                      ========== ========== ==========
</TABLE>


The foreign reconciling item includes the net U.S. tax benefit of the net losses
from foreign branch operations. The net U.S. tax benefit is primarily due to the
full year impact of the Lavalife acquisition.


                                      F-16
<PAGE>

Consolidated   U.S.  income  before  taxes  was  $43,458,000,   $44,861,000  and
$37,236,000 in 2005, 2004 and 2003, respectively.  The corresponding amounts for
non-U.S.-based  operations  were (loss) income of  $(4,518,000),  $1,737,000 and
$3,359,000, respectively.

Undistributed  earnings  of  the  Company's  foreign  subsidiaries  amounted  to
$500,000  at June 30,  2005.  U.S.  income  taxes were not  provided  on certain
unremitted  earnings  from  foreign  subsidiaries  since the Company  intends to
permanently  reinvest  substantially  all of  such  earnings  outside  the  U.S.
However, if some portion of these earnings is remitted,  the Company expects the
effect of any  remittance  after  considering  available tax credits and amounts
previously  accrued  not  to be  significant  to  the  consolidated  results  of
operations. A calculation of the amount of unrecognized deferred U.S. income tax
liability  is not  practicable  due  to the  complexities  associated  with  the
calculation.

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



                                                         2005       2004
                                                      ---------- ----------
Deferred Tax Assets
 Benefit of federal and state net operating loss carry
  forwards                                            $    1,672 $    3,093
 Alternative minimum tax credits                               -      1,380
 Allowance for membership cancellations                    4,459      5,728
 Charge for arbitration award                              2,088          -
 Other deferred tax assets                                 5,194      5,252
                                                      ---------- ----------
 Deferred tax assets                                      13,413     15,453
                                                      ---------- ----------

Deferred Tax Liabilities
 Deferred marketing costs                                (14,854)   (20,503)
 Deferred revenues                                        (5,497)    (1,468)
 Goodwill and other intangibles                           (6,221)    (6,721)
 Depreciation                                             (5,678)    (3,438)
 Other deferred tax liabilities                             (645)         -
                                                      ---------- ----------
 Gross deferred tax liabilities                          (32,895)   (32,130)
                                                      ---------- ----------
 Net deferred tax liability                           $  (19,482)$  (16,677)
                                                      ========== ==========


As of June 30, 2005,  the Company had federal net operating  loss carry forwards
of $1,523,000  expiring June 30, 2024. The Company's ability to use these losses
to offset  future  taxable  income  would be  subject to  limitations  under the
Internal  Revenue Code if certain changes in the Company's  ownership occur. The
Company also has state net  operating  loss carry  forwards  available to reduce
future state taxable  income which expire  beginning  June 30, 2006 through June
30,  2011.  In  addition,  the  Company  has  foreign  net  operating  losses of
$5,468,000 expiring beginning June 30, 2012 through June 30, 2013.

As of June 30,  2004,  the  Company  had  alternative  minimum  tax  credits  of
approximately $1,380,000. Credits of $664,000 and $716,000 were generated in the
years ended June 30, 2004 and 2003,  respectively.  These  credits  were carried
forward and fully utilized during the year ended June 30, 2005.

Tax benefits  resulting from the exercise of nonqualified  stock options and the
disqualifying  dispositions  of shares  issued under the  Company's  stock-based
compensation  plans reduced taxes payable by $2,220,000  and  $6,520,000 in 2005
and 2004,  respectively.  Such  benefits  were  credited to  additional  paid-in
capital.




                                      F-17
<PAGE>

NOTE 12 - EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                For the years ended June 30,
                                                              ---------------------------------
                                                                 2005      2004        2003
                                                              --------- --------- -------------
<S>                                                            <C>      <C>            <C>
Numerator:
Income available to common shareholders used in basic earnings
 per share                                                     $25,549  $ 27,960  $     24,356
Add back interest expense on convertible securities, net of
 tax                                                             3,247     2,236             -
                                                              --------- --------- -------------
Income available to common shareholders after assumed
 conversion of dilutive securities                             $28,796  $ 30,196  $     24,356
                                                              ========= ========= =============

Denominator:
Weighted average number of common shares outstanding - basic     9,995    10,755        12,596
Effect of dilutive securities:
 Convertible securities                                          2,230     1,678             -
 Stock options                                                     748       775           637
                                                              --------- --------- -------------
Weighted average number of common shares outstanding - diluted  12,973    13,208        13,233
                                                              ========= ========= =============

Basic earnings per share                                       $  2.56  $   2.60  $       1.93
                                                              ========= ========= =============
Diluted earnings per share                                     $  2.22  $   2.29  $       1.84
                                                              ========= ========= =============

</TABLE>


The  diluted  earnings  per  common  share  calculation  excludes  the effect of
potentially dilutive shares when their effect is antidilutive. Excluded from the
diluted share calculation above for the years ended June 30, 2005, 2004 and 2003
are incremental weighted average stock options of approximately  67,000,  26,000
and 2,838,000, respectively.

NOTE 13 - SHAREHOLDERS' EQUITY

The Company has a stock repurchase  program.  During 2005 and 2004, the Board of
Directors  authorized  the Company to repurchase  up to an aggregate  additional
4,000,000   shares  of  the  Company's  Common  Stock.  As  of  June  30,  2005,
approximately  825,000 shares were  authorized  for  repurchase  under the stock
repurchase program. The Company repurchased 1,168,000 shares for $41,131,000, an
average price of $34.92 per share, in 2005, 2,985,000 shares for $94,207,000, an
average price of $31.56 per share, in 2004 and 1,993,000 shares for $37,214,000,
an average price of $18.67 per share, in 2003.

In fiscal 2005,  the Board of  Directors  authorized  a modified  Dutch  Auction
self-tender offer for up to 500,000 shares of its common stock.  Under the terms
of the self-tender offer as approved by the Board of Directors, and as set forth
in the Offer to Purchase filed as an exhibit to the Company's  Schedule TO filed
on November  15,  2004,  as amended  (the "Offer to  Purchase"),  the  Company's
stockholders were given the opportunity to tender part or all of their shares to
the  Company  at a price of not less  than  $33.50  per  share and not more than
$38.50 per share.  The self-tender  offer closed on January 7, 2005 with a total
of 605,000 shares tendered by shareholders.  The Company exercised its right, as
set forth in the Offer to Purchase,  to purchase the  additional  105,000 shares
and  repurchased a total of 605,000 shares for $38.50 per share,  paying a total
of $23,293,000.

NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of comprehensive income are as follows (in thousands):


                                                 June 30,
                                          --------------------
                                             2005       2004
                                          --------- ----------
Unrealized hedging gain                        239          -
Currency translation adjustment               (285)      (364)
Minimum pension liability adjustment, net
 of tax                                       (102)        (9)
                                          --------- ----------
Total                                         (148)      (373)
                                          ========= ==========


                                      F-18
<PAGE>

NOTE 15 - EMPLOYEE BENEFIT PLANS

The Company has a defined contribution 401(k) profit sharing plan. Employees may
contribute  up to 20% of their  compensation  subject  to  certain  limitations.
Effective   July  1,  2000,   the  Company  began  making   quarterly   matching
contributions  in  Common  Stock  based  on  qualified  employee  contributions.
Treasury stock,  calculated  under the cost method,  was used to match qualified
employee  contributions.  Effective  January 1, 2003,  the Company  began making
matching contributions in cash. Matching  contributions were $266,000,  $168,000
and $153,000 for 2005, 2004 and 2003, respectively.

Effective  January 1, 2004,  the Company has an unfunded,  nonqualified  defined
benefit  pension  plan  that  benefits  certain   executives   selected  by  the
Compensation  Committee of the Board of Directors.  This plan provides for fixed
annual payments for 10 years upon  retirement  after attaining the age of 55 and
10 years of service. Pension expense was $306,000 and $212,000 in 2005 and 2004,
respectively.

The Company used  weighted-average  discount  rates of 5% and 6% in its 2005 and
2004 assumptions,  respectively.  The following tables present information about
this pension plan (in thousands):
<TABLE>
<CAPTION>


                                                                             June 30,
                                                                 ------------------------------
                                                                      2005             2004
                                                                 -------------   --------------
Pension benefit obligation
<S>                                                              <C>             <C>
 Balance at beginning of year                                    $      1,276    $          -
 Interest cost                                                             77               35
 Service cost                                                             146               71
 Prior service cost                                                         -            1,156
 Actuarial loss                                                           146               14
                                                                 -------------   --------------
 Balance at end of year                                          $      1,645    $       1,276
                                                                 =============   ==============

Funded status of the plan
 Cumulative pension expense recognized                           $        518    $         212
 Unrecognized net actuarial loss                                          160               14
 Unrecognized prior service cost                                          967            1,050
                                                                 -------------   --------------
 Excess of the benefit obligation over the value of plan assets  $      1,645    $       1,276
                                                                 =============   ==============

Net recognized amounts as classified in the balance sheet
 Intangible asset                                                $       (967)   $      (1,050)
 Other long-term liabilities                                            1,645            1,276
 Accumulated other comprehensive loss                                    (160)             (14)
                                                                 -------------   --------------
 Cumulative pension expense recognized                           $        518    $         212
                                                                 =============   ==============

                                                                  For the years ended June 30,
                                                                 ------------------------------
                                                                     2005             2004
                                                                 -------------   --------------
Pension expense by component
 Interest cost                                                   $         77    $          35
 Service cost                                                             146               71
 Prior service cost                                                        83              106
                                                                 -------------   --------------
 Pension expense                                                 $        306    $         212
                                                                 =============   ==============
</TABLE>


No benefits are expected to be paid by the plan during the next three years. The
Company  expects to pay  benefits  of  $60,000  and  $225,000  in 2009 and 2010,
respectively, and $4,265,000 thereafter.


                                      F-19
<PAGE>

NOTE 16 - STOCK-BASED COMPENSATION

Stock Compensation Plans
As of June 30,  2005,  the Company had the  following  stock-based  compensation
plans which are described below.

Under the 1996 Stock Option Plan,  the Board of Directors can determine the date
on which options vest and become  exercisable as well as the term of the options
granted.  The 1996 Stock Option Plan is authorized to grant 5,600,000 options to
acquire  shares of Common Stock.  Of these  options,  2,000,000  must be granted
using treasury stock.

Under the 1995 Executive  Officers' Stock Option Plan and the 1995  Non-Employee
Directors'  Stock  Option  Plan 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 grant date.  Under the
Executive Officers' Stock Option Plan, the Board can determine the date on which
options vest and become exercisable.

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

At June 30, 2005,  3,477,000  shares of common stock were  reserved for issuance
under these stock option  plans,  of which  606,000  shares were  available  for
future grant.

Information  with respect to options to purchase  shares  issued under the above
plans is as follows (shares in thousands):
<TABLE>
<CAPTION>

                                       2005                  2004                  2003
                               --------------------- --------------------- ---------------------
                                           Weighted              Weighted              Weighted
                                           Average               Average               Average
                                           Exercise              Exercise              Exercise
                                 Shares     Price      Shares     Price      Shares     Price
                               ---------- ---------- ---------- ---------- ---------- ----------
<S>                                <C>       <C>         <C>       <C>         <C>       <C>
Outstanding at beginning of
 year                              3,305     $20.10      4,532     $19.88      4,341     $20.82
Granted at market value              366      32.35        240      24.92        850      13.42
Exercised                           (607)     17.49     (1,227)     19.78       (338)     11.30
Forfeited                           (192)     20.87       (240)     22.48       (321)     24.53
                               ----------            ----------            ----------
Outstanding at end of year         2,872      22.16      3,305      20.10      4,532      19.88
                               ==========            ==========            ==========

</TABLE>
<TABLE>
<CAPTION>
                                Options Outstanding
                               --------------------------------          Options Exercisable
                                          Weighted                        ----------------------
                                 Shares    Average    Weighted               Shares    Weighted
                              Outstanding Remaining   Average              Outstanding Average
                                   at        Life     Exercise                 at      Exercise
                                 6/30/05   (Years)     Price                 6/30/05    Price
                               ---------- ---------- ----------            ---------- ----------
<C>      <C>                         <C>       <C>      <C>                      <C>     <C>
$4.00 to $13.99                      608       6.01     $11.63                   312     $10.55
$14.00 to $19.99                     402       4.55      16.43                   344      16.39
$20.00 to $26.99                     706       6.36      20.71                   442      20.81
$27.00 to $29.99                     947       5.60      29.47                   728      29.42
$30.00 to $40.99                     209       9.36      35.71                    18      33.24
                               ----------                                  ----------
                                   2,872       6.00      22.16                 1,844      21.77
                               ==========                                  ==========
</TABLE>

Options  exercisable  as of June 30, 2004 and 2003 were 1,835,000 and 2,305,000,
respectively.

Employee Stock Purchase Plan
During 1997,  the Company  adopted the 1996 Employee  Stock  Purchase Plan which
provides  for the  issuance of up to 360,000  shares of common  stock.  The plan
permits eligible employees to purchase Common Stock through payroll  deductions,
which may not exceed 10% of an employee's compensation,  at a price equal to 85%
of the  closing  price  of the  Common  Stock  on the  day the  purchase  period
commences or terminates, whichever is lower. During 2005, 2004 and 2003, 11,000,
14,000 and 16,000 shares were purchased under the plan, respectively.


                                      F-20
<PAGE>

NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was (in thousands):

<TABLE>
<CAPTION>
                                                                For the years ended June 30,
                                                              ---------------------------------
                                                                2005      2004          2003
                                                              --------- --------- -------------

<S>                                                           <C>       <C>       <C>
Cash paid for interest                                        $ 18,754  $  3,417  $        241
Cash paid for income taxes                                       8,036     5,568           411
</TABLE>

NOTE 18 - BUSINESS SEGMENTS

The operating  business  segments  reported  below are the  reportable  business
segments of the Company for which  separate  financial  information is available
and for which operating results are evaluated regularly by executive  management
in assessing performance and deciding how to allocate resources. The Company has
two reportable  business  segments:  Marketing  Services,  formerly known as the
Membership  segment,  and Personals.  The Marketing  Services  business  segment
primarily provides discounted products and services to consumers.  The Personals
business segment provides both web-based and phone-based  personals  services to
its customers. The Corporate and Other business unit includes the results of MCM
as well as unallocated general corporate expenses.

Management  evaluates the operating results of each reportable  business segment
based on revenue and adjusted EBITDA.  In the past, each reportable  segment was
evaluated based on operating income.  Management  decided to use adjusted EBITDA
as the  measure of  profitability  beginning  in fiscal  2005 in order to better
align the results of the  acquired  companies  and to enhance the clarity of the
operating  performance of the reportable  business segments.  The following is a
summary of revenues,  adjusted EBITDA,  capital  expenditures,  depreciation and
amortization and assets by business segment (in thousands):

<TABLE>
<CAPTION>
                                                               For the years ended June 30,
                                                           -------------------------------------
Revenues                                                       2005        2004          2003
                                                           ----------- -----------   -----------
<S>                                                        <C>         <C>           <C>
 Marketing Services                                        $  490,289  $  471,049    $  456,881
 Personals                                                     72,336      17,690             -
 Corporate and Other                                           17,513           -             -
 Intersegment                                                    (299)          -             -
                                                           ----------- -----------   -----------
   Total                                                   $  579,839  $  488,739    $  456,881
                                                           =========== ===========   ===========

Adjusted EBITDA (1)
 Marketing Services                                        $   74,060  $   80,434       $66,127
 Personals                                                      6,267       2,073             -
 Corporate and Other                                          (23,124)    (23,947)      (19,313)
                                                           ----------- -----------   -----------
   Total                                                   $   57,203  $   58,560    $   46,814
                                                           =========== ===========   ===========

Capital Expenditures (2)
 Marketing Services                                        $    8,512  $    6,486    $    5,463
 Personals                                                      2,447         571             -
 Corporate and Other                                               47           -             -
                                                           ----------- -----------   -----------
  Total                                                    $   11,006  $    7,057    $    5,463
                                                           =========== ===========   ===========

Depreciation and Amortization
 Marketing Services                                        $   10,978  $   10,085    $   11,921
 Personals                                                      9,323       2,327             -
 Corporate and Other                                            2,804         840           199
                                                           ----------- -----------   -----------
  Total                                                    $   23,105  $   13,252    $   12,120
                                                           =========== ===========   ===========
</TABLE>

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

                                                                 June 30,
                                                           -----------------------
Assets                                                        2005        2004
                                                           ----------- -----------
<S>                                                        <C>         <C>
 Marketing Services                                        $  245,635  $  178,723
 Personals                                                    132,992     136,874
 Corporate and Other (3)                                       68,535     137,565
                                                           ----------- -----------
  Total                                                    $  447,162  $  453,162
                                                           =========== ===========

</TABLE>


(1)  Defined as net income plus interest and other expense,  net,  provision for
     income taxes,  depreciation  and  amortization  and the changes in deferred
     revenue and deferred marketing costs. See reconciliation below.
(2)  Management does not allocate certain capital  expenditures to the Corporate
     and Other segment.  However,  the associated  depreciation expense has been
     allocated for purposes of evaluating performance.
(3)  Includes  assets  of MCM and  unallocated  non-operating  assets  including
     short-term investments, debt issuance costs and other.

The following tables reconcile Adjusted EBITDA to income before income taxes (in
thousands):

<TABLE>
<CAPTION>

                                                 For the year ended June 30, 2005
                                     --------------------------------------------------------
                                       Consolidated      Marketing                 Corporate
                                           Total         Services   Personals      and Other
                                           -----         --------   ---------      ---------
<S>                                  <C>              <C>           <C>          <C>
Income before income taxes           $       38,941
Interest and other expense, net (1)          18,153
                                     ---------------
Operating income (expense)           $       57,094   $    85,498   $    (3,129) $   (25,275)
Depreciation and amortization                21,577        10,978         9,323        1,276
Change in deferred revenues                 (34,911)      (35,859)           73          875
Change in deferred marketing costs           13,443        13,443             -            -
                                     ---------------  ------------  ------------ ------------
Adjusted EBITDA                      $       57,203   $    74,060   $     6,267  $   (23,124)
                                     ===============  ============  ============ ============

                                                  For the year ended June 30, 2004
                                     --------------------------------------------------------
                                       Consolidated      Marketing                 Corporate
                                           Total         Services   Personals      and Other
                                           -----         --------   ---------      ---------
Income before income taxes           $       46,598
Interest and other expense, net (1)           6,272
                                     ---------------
Operating income (expense)           $       52,870   $    76,576   $       336  $   (24,042)
Depreciation and amortization                12,507        10,085         2,327           95
Change in deferred revenues                 (32,272)      (31,682)         (590)           -
Change in deferred marketing costs           25,455        25,455             -            -
                                     ---------------  ------------  ------------ ------------
Adjusted EBITDA                      $       58,560   $    80,434   $     2,073  $   (23,947)
                                     ===============  ============  ============ ============

                                                For the year ended June 30, 2003
                                     --------------------------------------------------------
                                       Consolidated      Marketing                 Corporate
                                           Total         Services   Personals      and Other
                                           -----         --------   ---------      ---------
Income before income taxes           $       40,595
Interest and other income, net (1)          (18,309)
                                     ---------------
Operating income (expense)           $       22,286   $    41,798   $         -  $   (19,512)
Depreciation and amortization                12,120        11,921             -          199
Change in deferred revenues                 (39,003)      (39,003)            -            -
Change in deferred marketing costs           51,411        51,411             -            -
                                     ---------------  ------------  ------------ ------------
Adjusted EBITDA                      $       46,814   $    66,127   $         -  $   (19,313)
                                     ===============  ============  ============ ============

</TABLE>



(1)  Management  does  not  allocate  interest  and  other  expense,  net to the
     individual segments.


                                      F-22
<PAGE>

During 2005, the Company's  assets and  operations  were primarily in the United
States and Canada. Geographic information is presented below (in thousands):
<TABLE>
<CAPTION>

                                                               For the years ended June 30,
                                                           -------------------------------------
Revenues                                                      2005        2004          2003
                                                           ----------- -----------   -----------
<S>                                                        <C>         <C>           <C>
 United States                                             $  520,167  $  460,606    $  443,909
 Canada                                                        57,076      27,450        11,859
 Other countries                                                2,596         683         1,113
                                                           ----------- -----------   -----------
  Total                                                    $  579,839  $  488,739    $  456,881
                                                           =========== ===========   ===========
</TABLE>

                                                                 June 30,
                                                          ----------------------
Long-lived assets                                             2005        2004
                                                          ----------- ----------
 United States                                             $   35,188  $  24,554
 Canada                                                         7,366     14,692
 Other countries                                                2,434        344
                                                          ----------- ----------
 Total                                                     $   44,988  $  39,590
                                                          =========== ==========



NOTE 19 - QUARTERLY FINANCIAL DATA (unaudited)

<TABLE>
<CAPTION>

(in thousands, except per share data)
                                                        For the year ended June 30, 2005
                                                 ---------------------------------------------
                                                    First     Second      Third      Fourth
                                                   Quarter    Quarter    Quarter     Quarter
                                                   -------    -------    -------     -------
<S>                                                <C>        <C>         <C>        <C>
Revenues                                           $135,623   $136,479    $148,995   $158,742
Operating income                                     16,732     13,783      11,539     15,040
Net income                                            7,596      5,883       4,353      7,717
Basic earnings per share                               0.75       0.58        0.44       0.79
Diluted earnings per share                             0.65       0.51        0.40       0.67

                                                       For the year ended June 30, 2004
                                                 ---------------------------------------------
                                                    First     Second      Third      Fourth
                                                   Quarter    Quarter    Quarter     Quarter
                                                   -------    -------    -------     -------
Revenues                                           $113,824   $123,164    $118,519   $133,232
Operating income                                      6,620     13,911      14,558     17,781
Net income                                            3,895      7,665       8,379      8,021
Basic earnings per share                               0.33       0.71        0.81       0.78
Diluted earnings per share                             0.30       0.60        0.68       0.66
</TABLE>



NOTE 20 - GUARANTOR AND NONGUARANTOR FINANCIAL INFORMATION

In April 2004, the Company issued  $150,000,000  aggregate  principal  amount of
9.25% Senior Notes due 2014. The Senior Notes are unsecured obligations and rank
pari  passu in right of  payment  to all of the  Company's  existing  and future
senior  unsecured  indebtedness  and  senior in right of  payment  to all of the
Company's existing and future subordinated  indebtedness that expressly provides
for its  subordination  to the  Senior  Notes.  The  Senior  Notes are fully and
unconditionally  guaranteed by all of the Company's existing and future domestic
subsidiaries  that  guarantee the Company's  Credit  Facility (as defined in the
Indenture  governing the Senior Notes) and certain of the Company's existing and
future foreign subsidiaries.

The  following   consolidating  condensed  financial  information  presents  the
consolidating  balance  sheets  as of  June  30,  2005  and  2004,  the  related
statements of operations and cash flows for the years ended June 30, 2005,  2004
and  2003.  The  information  includes  the  elimination  entries  necessary  to
consolidate the Company ("Parent") with the guarantor and nonguarantor entities.

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


                                      F-23
<PAGE>

<TABLE>
<CAPTION>

                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
                                                                                   June 30, 2005
                                                             -----------------------------------------------------------
                                                                        Guarantor  Nonguarantor             Consolidated
                                                              Parent  Subsidiaries Subsidiaries Eliminations   Total
                                                              ------  ------------ ------------ ------------   -----
                            Assets
<S>                                                          <C>      <C>          <C>          <C>          <C>
Current assets                                               $ 80,036 $    60,684   $   23,509  $  (17,202)  $  147,027
Fixed assets, net                                              18,797      13,098        7,167           -       39,062
Goodwill                                                            -     117,749       83,750           -      201,499
Intangible assets, net                                          1,097      31,789       13,590           -       46,476
Other assets                                                   10,991          64        2,043           -       13,098
Investment in subsidiaries                                    275,213           -            -    (275,213)           -
                                                             --------- ----------- ------------ ----------- ------------
     Total assets                                            $386,134 $   223,384  $   130,059  $ (292,415)  $  447,162
                                                             ========= =========== ============ =========== ============

       Liabilities and Shareholders' (Deficit) Equity
Current liabilities                                          $190,595 $    46,890  $    22,534  $  (17,202)  $  242,817
Deferred income taxes                                           2,588       7,265         (151)          -        9,702
Other long-term liabilities                                     3,565           -        1,692           -        5,257
Long-term debt                                                237,814           -            -           -      237,814
                                                             --------- ----------- ------------ ----------- ------------
     Total liabilities                                        434,562      54,155       24,075     (17,202)     495,590
                                                             --------- ----------- ------------ ----------- ------------

Shareholders' (deficit) equity:
   Preferred stock                                                  -           -            -           -            -
   Common stock                                                   197           6            3          (9)         197
   Capital in excess of par value                             169,463     165,285      102,484    (267,769)     169,463
   Accumulated earnings (deficit)                              35,680       3,884        3,667      (7,551)      35,680
   Accumulated other comprehensive loss                          (148)         54         (170)        116         (148)
   Treasury stock                                            (253,620)          -            -           -     (253,620)
                                                             --------- ----------- ------------ ----------- ------------
     Total shareholders' (deficit) equity                     (48,428)    169,229      105,984    (275,213)     (48,428)
                                                             --------- ----------- ------------ ----------- ------------
     Total liabilities and shareholders' (deficit) equity    $386,134  $  223,384  $   130,059   $(292,415)  $  447,162
                                                             ========= =========== ============ =========== ============

</TABLE>




                                      F-24
<PAGE>
<TABLE>
<CAPTION>

                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
                                                                                    June 30, 2004
                                                           -------------------------------------------------------------
                                                                      Guarantor   Nonguarantor              Consolidated
                                                            Parent   Subsidiaries Subsidiaries Eliminations    Total
                                                           --------- ------------ ------------ ------------ ------------
                           Assets
<S>                                                        <C>       <C>          <C>          <C>          <C>
Current assets                                             $194,227  $    42,955  $    10,760  $    (6,572) $   241,370
Fixed assets, net                                            19,675       14,823        2,042            -       36,540
Goodwill                                                          -      118,956        6,719            -      125,675
Intangible assets, net                                        1,050       37,822            -            -       38,872
Other assets                                                 10,666           39            -            -       10,705
Intercompany notes receivable                                95,543            -            -      (95,543)           -
Investment in subsidiaries                                   78,633            -            -      (78,633)           -
                                                           --------- ------------ ------------ ------------ ------------
   Total assets                                            $399,794  $   214,595  $    19,521  $  (180,748) $   453,162
                                                           ========= ============ ============ ============ ============

      Liabilities and Shareholders' (Deficit) Equity
Current liabilities                                        $206,915  $    40,549  $    11,410  $    (6,572) $   252,302
Deferred income taxes                                        (2,402)       6,647          109            -        4,354
Other long-term liabilities                                   3,705            -        1,225            -        4,930
Intercompany notes payable                                        -       95,543            -      (95,543)           -
Long-term debt                                              237,659            -            -            -      237,659
                                                           --------- ------------ ------------ ------------ ------------
   Total liabilities                                        445,877      142,739       12,744     (102,115)     499,245
                                                           --------- ------------ ------------ ------------ ------------

Shareholders' (deficit) equity:
  Preferred stock                                                 -            -            -            -            -
  Common stock                                                  191            6            3           (9)         191
  Capital in excess of par value                            156,457       71,744        9,564      (81,308)     156,457
  Accumulated earnings (deficit)                             10,131          (15)      (2,305)       2,320       10,131
  Accumulated other comprehensive loss                         (373)         121         (485)         364         (373)
  Treasury stock                                           (212,489)           -            -            -     (212,489)
                                                           --------- ------------ ------------ ------------ ------------
   Total shareholders' (deficit) equity                     (46,083)      71,856        6,777      (78,633)     (46,083)
                                                           --------- ------------ ------------ ------------ ------------
   Total liabilities and shareholders' (deficit) equity    $399,794  $   214,595  $    19,521  $  (180,748) $   453,162
                                                           ========= ============ ============ ============ ============

</TABLE>

                                      F-25
<PAGE>

<TABLE>
<CAPTION>

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)

                                                                          For the year ended June 30, 2005
                                                             -----------------------------------------------------------
                                                                       Guarantor   Nonguarantor              Consolidated
                                                             Parent   Subsidiaries Subsidiaries Eliminations    Total
                                                            --------- ------------ ------------ ------------ ------------

<S>                                                         <C>       <C>          <C>          <C>          <C>
Revenues                                                    $ 376,112 $   145,007  $    71,815  $  (13,095)  $  579,839
Expenses:
 Marketing                                                    202,429      68,233       26,208     (10,433)     286,437
 Operating                                                     62,911      29,579       24,590      (2,662)     114,418
 General and administrative                                    62,839      33,997       11,395           -      108,231
 Charge for arbitration award                                   5,458           -            -           -        5,458
 Amortization of intangibles                                      228       6,103        1,870           -        8,201
                                                             --------- ----------- ------------ ----------- ------------
Operating income                                               42,247       7,095        7,752           -       57,094
Equity in income of subsidiaries                               11,167           -            -     (11,167)           -
Interest (expense) income, net                                (19,068)        199           64           -      (18,805)
Other income (expense), net                                       (55)        278          429           -          652
                                                             --------- ----------- ------------ ----------- ------------
Income before income taxes                                     34,291       7,572        8,245     (11,167)      38,941
Provision for income taxes                                      8,742       1,004        3,646           -       13,392
                                                             --------- ----------- ------------ ----------- ------------

Net income                                                   $ 25,549  $    6,568  $     4,599  $  (11,167) $    25,549
                                                             ========= =========== ============ =========== ============

</TABLE>
<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)

                                                                            For the year ended June 30, 2004
                                                           -------------------------------------------------------------
                                                                      Guarantor   Nonguarantor              Consolidated
                                                            Parent   Subsidiaries Subsidiaries Eliminations    Total
                                                           --------- ------------ ------------ ------------ ------------

<S>                                                        <C>       <C>          <C>          <C>          <C>
Revenues                                                   $395,074  $    75,985  $    19,220  $    (1,540) $   488,739
Expenses:
 Marketing                                                  213,884       36,969        4,965            -      255,818
 Operating                                                   69,222       16,358        7,792       (1,540)      91,832
 General and administrative                                  65,640       16,346        3,840            -       85,826
 Amortization of intangibles                                      -        2,393            -            -        2,393
                                                           --------- ------------ ------------ ------------ ------------
Operating income                                             46,328        3,919        2,623            -       52,870
Equity in income of subsidiaries                              2,661            -            -       (2,661)           -
Interest (expense) income, net                               (4,613)      (2,113)         105            -       (6,621)
Other income (expense), net                                     447          (77)         (21)           -          349
                                                           --------- ------------ ------------ ------------ ------------
Income before income taxes                                   44,823        1,729        2,707       (2,661)      46,598
Provision for income taxes                                   16,863          692        1,083            -       18,638
                                                           --------- ------------ ------------ ------------ ------------

Net income                                                 $ 27,960  $     1,037  $     1,624  $    (2,661) $    27,960
                                                           ========= ============ ============ ============ ============
</TABLE>

                                      F-26
<PAGE>

<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)

                                                                         For the year ended June 30, 2003
                                                           -------------------------------------------------------------
                                                                      Guarantor   Nonguarantor              Consolidated
                                                            Parent   Subsidiaries Subsidiaries Eliminations    Total
                                                           --------- ------------ ------------ ------------ ------------

<S>                                                        <C>       <C>          <C>          <C>          <C>
Revenues                                                   $393,958  $    50,787  $    12,972  $      (836) $   456,881
Expenses:
 Marketing                                                  253,389       23,198        4,086            -      280,673
 Operating                                                   64,539       11,639        3,102         (836)      78,444
 General and administrative                                  60,553       10,381        3,151            -       74,085
 Amortization of intangibles                                      -        1,393            -            -        1,393
                                                           --------- ------------ ------------ ------------ ------------
Operating income                                             15,477        4,176        2,633            -       22,286
Settlement of investment related litigation                  19,148            -            -            -       19,148
Loss on sale of subsidiary                                     (959)           -            -            -         (959)
Net loss on investment                                         (206)           -            -            -         (206)
Equity in income of subsidiaries                              4,600            -            -       (4,600)           -
Interest income, net                                            421          126           23            -          570
Other expense income, net                                      (953)          (2)         711            -         (244)
                                                           --------- ------------ ------------ ------------ ------------
Income before income taxes                                   37,528        4,300        3,367       (4,600)      40,595
Provision for income taxes                                   13,172        1,720        1,347            -       16,239
                                                           --------- ------------ ------------ ------------ ------------

Net income                                                 $ 24,356  $     2,580  $     2,020  $    (4,600) $    24,356
                                                           ========= ============ ============ ============ ============
</TABLE>



                                      F-27
<PAGE>
<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                                      For the year ended June 30, 2005
                                                           -------------------------------------------------------------
                                                                      Guarantor   Nonguarantor              Consolidated
                                                            Parent   Subsidiaries Subsidiaries Eliminations    Total
                                                           --------- ------------ ------------ ------------ ------------
<S>                                                        <C>       <C>          <C>          <C>          <C>
 Net cash provided by (used in) operating activities       $124,196  $   (88,680) $     7,962  $   (11,167) $    32,311

 Investing activities
    Acquisition of fixed assets                              (6,418)      (2,925)      (1,663)           -      (11,006)
    Purchases of short-term investments                    (402,970)         340            -            -     (402,630)
    Sales of short-term investments                         506,960          300            -            -      507,260
    Acquisitions of businesses, net of cash acquired,
      and other investing activities                       (172,977)      94,375        1,365            -      (77,237)
    Other investments                                       (11,167)           -            -       11,167            -
                                                           --------- ------------ ------------ ------------ ------------
 Net cash (used in) provided by investing activities        (86,572)      92,090         (298)      11,167       16,387
                                                           --------- ------------ ------------ ------------ ------------

 Financing activities
    Net proceeds from issuance of stock                      10,792            -            -            -       10,792
    Treasury stock purchases                                (41,131)           -            -            -      (41,131)
    Debt issuance costs                                        (844)           -            -            -         (844)
    Payments of long-term obligations                          (326)         (13)        (210)           -         (549)
                                                           --------- ------------ ------------ ------------ ------------
 Net cash used in financing activities                      (31,509)         (13)        (210)           -      (31,732)
                                                           --------- ------------ ------------ ------------ ------------
 Effect of exchange rate changes on cash and cash
  equivalents                                                     -         (233)         457            -          224
                                                           --------- ------------ ------------ ------------ ------------
 Net increase in cash and cash equivalents                    6,115        3,164        7,911            -       17,190
 Cash and cash equivalents at beginning of year              18,251       26,657        2,258            -       47,166
                                                           --------- ------------ ------------ ------------ ------------
 Cash and cash equivalents at end of year                  $ 24,366  $    29,821  $    10,169  $         -  $    64,356
                                                           ========= ============ ============ ============ ============
</TABLE>

<TABLE>
<CAPTION>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                                      For the year ended June 30, 2004
                                                             -------------------------------------------------------------
                                                                        Guarantor   Nonguarantor              Consolidated
                                                              Parent   Subsidiaries Subsidiaries Eliminations    Total
                                                             --------- ------------ ------------ ------------ ------------
<S>                                                          <C>        <C>         <C>          <C>          <C>
 Net cash (used in) provided by operating activities         $ (55,030) $  104,436 $     1,203  $   (2,661) $    47,948

 Investing activities
   Acquisition of fixed assets                                  (5,599)       (883)       (575)          -       (7,057)
   Purchases of short-term investments                        (650,750)          -           -           -     (650,750)
   Sales of short-term investments                             535,770           -           -           -      535,770
   Acquisitions of businesses, net of cash acquired,
     and other investing activities                                  -    (114,916)          -           -     (114,916)
   Investment in subsidiaries                                  (22,109)     19,448           -       2,661            -
                                                              --------- ----------- ----------- ----------- ------------
 Net cash (used in) provided by investing activities          (142,688)    (96,351)       (575)      2,661     (236,953)
                                                              --------- ----------- ----------- ----------- ------------

 Financing activities
   Net proceeds from issuance of stock                          33,644           -           -           -       33,644
   Treasury stock purchases                                    (94,207)          -           -           -      (94,207)
   Net proceeds from issuance of debt                          229,825           -           -           -      229,825
   Payments of long-term obligations                              (188)       (265)          -           -         (453)
                                                              --------- ----------- ----------- ----------- ------------
 Net cash provided by (used in) financing activities           169,074        (265)          -           -      168,809
                                                              --------- ----------- ----------- ----------- ------------
 Effect of exchange rate changes on cash and cash equivalents        -         121         (19)          -          102
                                                              --------- ----------- ----------- ----------- ------------
 Net (decrease) increase in cash and cash equivalents          (28,644)      7,941         609           -      (20,094)
 Cash and cash equivalents at beginning of year                 46,895      18,716       1,649           -       67,260
                                                              --------- ----------- ----------- ----------- ------------
 Cash and cash equivalents at end of year                     $ 18,251  $   26,657  $    2,258  $        -  $    47,166
                                                              ========= =========== =========== =========== ============
</TABLE>

                                      F-28
<PAGE>
<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                                          For the year ended June 30, 2003
                                                            ------------------------------------------------------------
                                                                      Guarantor   Nonguarantor              Consolidated
                                                             Parent  Subsidiaries Subsidiaries Eliminations    Total
                                                            -------- ------------ ------------ ------------ ------------
<S>                                                         <C>      <C>          <C>          <C>          <C>
 Net cash provided by (used in) operating activities        $42,216  $    11,492  $      (575) $    (4,600) $    48,533

 Investing activities
   Acquisition of fixed assets                               (4,931)        (188)        (344)           -       (5,463)
   Settlement of investment related litigation               19,148            -            -            -       19,148
   Purchases of short-term investments                       (5,000)           -            -            -       (5,000)
   Acquisitions of businesses, net of cash acquired,
     and other investing activities                          (4,600)           -            -        4,600            -
   Other investments                                         (1,250)           -            -            -       (1,250)
                                                            -------- ------------ ------------ ------------ ------------
 Net cash provided by (used in) investing activities          3,367         (188)        (344)       4,600        7,435
                                                            -------- ------------ ------------ ------------ ------------

 Financing activities
   Net proceeds from issuance of stock                        4,050            -            -            -        4,050
   Treasury stock purchases                                 (37,214)           -            -            -      (37,214)
   Payments of long-term obligations                              -       (1,051)           -            -       (1,051)
                                                            -------- ------------ ------------ ------------ ------------
 Net cash used in financing activities                      (33,164)      (1,051)           -            -      (34,215)
                                                            -------- ------------ ------------ ------------ ------------
 Effect of exchange rate changes on cash and cash
  equivalents                                                     -            -            5            -            5
                                                            -------- ------------ ------------ ------------ ------------
 Net increase (decrease) in cash and cash equivalents        12,419       10,253         (914)           -       21,758
 Cash and cash equivalents at beginning of year              34,476        8,463        2,563            -       45,502
                                                            -------- ------------ ------------ ------------ ------------
 Cash and cash equivalents at end of year                   $46,895  $    18,716  $     1,649  $         -  $    67,260
                                                            ======== ============ ============ ============ ============
</TABLE>




                                      F-29
<PAGE>

<TABLE>
<CAPTION>

                              Vertrue Incorporated
                 Schedule II - Valuation and Qualifying Accounts
                                 (in thousands)




                                           Balance at     Charged to      Charged to                        Balance at
                                          Beginning of    Costs and     Other Accounts -   Deductions -        End
Description                                  Period        Expense         Describe        Describe         of Period
-----------                                  ------        -------        ----------       --------         ---------
<S>                                       <C>             <C>             <C>               <C>             <C>
For the year ended June 30, 2005
Allowance for membership cancellations    $   14,156      $     -         $  122,886 A      $  125,810 B    $   11,232

For the year ended June 30, 2004
Allowance for membership cancellations    $   20,934      $     -         $  183,086 A      $  189,864 B    $   14,156

For the year ended June 30, 2003
Allowance for membership cancellations    $   23,753      $     -         $  281,250 A      $  284,069 B    $   20,934
Valuation allowance for deferred tax
 assets                                        6,581            -             (6,581)C             -               -
</TABLE>

(A)  Charged to deferred revenues account. Includes $240,000 added in connection
     with acquisitions in fiscal 2005.
(B)  Charges for refunds upon membership cancellations.
(C)  Decrease  in the  valuation  allowance  was due to current  utilization  of
     deferred  tax assets as well as  management's  belief that the Company will
     more likely than not realize its deferred tax assets in the future.




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