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

                                    FORM 10-K
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


        X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   For The Fiscal Year Ended December 31, 2000

                                       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 Number 0-26707

                              NETWORK COMMERCE INC.
             (Exact name of registrant as specified in its charter)

            WASHINGTON                                      91-1628103
   (State or other jurisdiction of                         (IRS Employer
    incorporation or organization)                      Identification Number)

                              411 1st AVENUE SOUTH
                                 SUITE 200 NORTH
                                SEATTLE, WA 98104
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (206) 223-1996

           Securities registered pursuant to Section 12(b) of the Act:

                                                  Name of each exchange
              Title of each class                 of which registered
                   (None)                               (None)

           Securities registered pursuant to Section 12(g) of the Act:
                    COMMON STOCK, $0.001 PAR VALUE PER SHARE:
                                (Title of Class)

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

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

The  aggregate  market  value  of  voting  stock  held by  nonaffiliates  of the
registrant was  $7,355,836 as of April 6, 2001,  based on the closing sale price
of such stock on the Nasdaq National Market on that date.

There were 78,253,578 shares of common stock outstanding as of April 6, 2001.



<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE


The information required by Part III of this Report, to the extent not set forth
herein,  is incorporated  herein by reference from the  registrant's  definitive
proxy  statement  relating to the annual meeting of  shareholders  to be held in
2001,  which  definitive  proxy statement shall be filed with the Securities and
Exchange  Commission  within 120 days after the end of the fiscal  year to which
this Report relates.


<PAGE>



86

                                     Part I
ITEM 1.  BUSINESS

This  annual  report on Form 10-K  contains  forward-looking  statements.  These
statements relate to future events or our future financial performance.  In some
cases, you can identify  forward-looking  statements by terminology such as may,
will, should,  expect, plan, intend,  anticipate,  believe,  estimate,  predict,
potential  or  continue,   the  negative  of  such  terms  or  other  comparable
terminology. These statements are only predictions. Actual events or results may
differ  materially.  In evaluating  these  statements,  you should  specifically
consider various factors, including the risks outlined in the "Factors Affecting
Operating  Results,  Our Business and Our Stock Price" below.  These factors may
cause  our  actual  results  to  differ  materially  from  any   forward-looking
statement.

Although  we believe  that the  expectations  reflected  in the  forward-looking
statements are reasonable at the time they are made, we cannot  guarantee future
results, levels of activity,  performance or achievements.  Moreover, neither we
nor any other person assumes responsibility for the accuracy and completeness of
the  forward-looking  statements.  We are  under  no duty to  update  any of the
forward-looking  statements after the date of this annual report to conform such
statements to actual results or to changes in our expectations.

OVERVIEW AND GENERAL DEVELOPMENT OF BUSINESS

Established in 1994,  Network Commerce Inc. is a technology  infrastructure  and
services  company.  We provide a comprehensive  technology and services platform
including domain  registration  services,  hosting services,  commerce services,
business services and one-to-one marketing services. Our technology and services
platform  operates on the  infrastructure  of four data  centers,  more than 500
servers, and bandwidth in excess of 400 megabits per second. Network Commerce is
headquartered in Seattle, Washington.

In May 2000, we changed our name from  "ShopNow.com  Inc." to "Network  Commerce
Inc." to better  reflect  our  position  as a  leading  provider  of  technology
infrastructure,  services and online marketplaces. In December 2000 we announced
that we will  discontinue  The  HagginGroup and  Professional  Services,  and in
January  2001 we  announced  that  we will  discontinue  our  shopping  channel,
ShopNow.com.  In March 2001 we announced that we will discontinue our gaming and
entertainment site, SpeedyClick.com.  These closures will allow us to focus more
resources on our technology infrastructure and services business. The Company is
exploring  strategic  alternatives,  which may include a merger,  an asset sale,
additional  equity or debt  investment  in the Company by either a strategic  or
financial   investor   or  another   comparable   transaction   or  a  financial
restructuring,  the  results  of  which,  if  any,  may  materially  affect  the
information  to be  provided  in the  10-K.  Absent  any such  transaction  that
provides significant  additional funding to the Company, our ability to continue
business as a going  concern  beyond the first  quarter of 2001 will be severely
challenged.  Please refer to the detailed disclosures contained in our financial
statements,  "Factors Affecting Our Operating Results, Business and Stock Price"
and elsewhere in this annual report for  additional  disclosures on our business
condition.

As used in this annual  report,  the terms "we,"  "Network  Commerce,"  and "the
Company" mean Network Commerce Inc. and its subsidiaries.

During the last fiscal years, we acquired several businesses.  See Note 3 to our
Consolidated Financial Statements included with this report for more information
about these acquisitions.

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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

A summary of net sales to unaffiliated customers, operating earnings (for fiscal
year ended December 31, 2000 only) and identifiable  assets  attributable to our
business  segments  for fiscal  years  1998,  1999 and 2000 is  incorporated  by
reference  herein  by  reference  to  Note  17  of  our  Consolidated  Financial
Statements for the year ended December 31, 2000.

INDUSTRY BACKGROUND

RAPID GROWTH OF THE INTERNET

The Internet has grown in less than a decade from a limited research tool into a
global network consisting of millions of computers and users. International Data
Corporation,  or IDC, estimates that at the end of 2000 there were more than 121
million  Web users in the  United  States  and more than 337  million  Web users
worldwide,  and that by the end of 2003 the number of Web users will increase to
177  million in the United  States and to more than 502 million  worldwide.  The
Internet has also become an  increasingly  important tool for small  businesses.
There are more than 25 million small businesses  (businesses with fewer than 100
employees) in the United States,  comprising 95% of all businesses.  By 2001, of
those 25 million,  more than 4 million  will use the Internet to grow and manage
their businesses online.

The Internet itself, with more than three billion pages, is growing at a rate of
five million  pages per day.  Presently  more than 35 million  domain names have
been registered worldwide, 69% in the US alone. Each week, more than 360,000 new
domain names are  registered.  By 2003, it is expected that 160 million  domains
will be registered worldwide.

CHALLENGES TO CONDUCTING BUSINESS OVER THE INTERNET

Businesses,  merchants,  and individuals are increasingly finding that they need
an online  presence to take  advantage  of the rapid  growth and benefits of the
Internet.  To conduct  business  online  effectively and  efficiently,  however,
businesses and merchants must address a number of challenges:

     ESTABLISHING A PRESENCE ON THE INTERNET. Businesses and individuals must be
     able to easily and  cost-effectively  establish a presence on the Internet.
     Especially for very small businesses, the benefits must outweigh the costs,
     which include domain name registration to hosting to building a Web site.

     BUILDING AND MAINTAINING AN ONLINE PRESENCE.  Businesses and merchants must
     design and  implement  the look and feel of their online  stores and custom
     Web  sites  in a way  that  provides  a  rich,  easy-to-use  and  generally
     satisfying  end-user  experience  that  fosters  buying and repeat  visits.
     Storefront  design  must  promote the  merchants'  brands,  identities  and
     product information  through the use of graphics,  images and text content.
     Technologies  and services  must be easy to use and  affordable to create a
     low-cost entry point to conducting commerce online.

     TARGETING CUSTOMERS EFFICIENTLY.  Businesses must be able to have access to
     potential  customers  with the  appropriate  demographics  to  successfully
     promote their businesses.

     VISIBILITY  AND  CUSTOMER   ACQUISITION.   Merchants  need  to  effectively
     communicate  with their targeted  online audience to maximize the number of
     visits to, and purchases from, their Web sites. Online merchants seeking to
     establish a brand and traditional  merchants with  established  brands both
     need to create visibility  online and to differentiate  themselves from the
     significant  number of  competitors  selling  products  and services on the
     Internet.  Achieving widespread brand recognition and customer loyalty in a

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     crowded  market  where consumers  are  inundated  with   Internet-related
     advertising  requires a  comprehensive  and focused  marketing  strategy to
     reach the desired  audience.  These  efforts  require a broad range of both
     online  and  traditional  marketing  techniques,  ranging  from  banner and
     hyperlink  advertisements or e-mail  communications to traditional methods,
     such as direct  mail.  In order to attract  the  highest  number of desired
     online shoppers, merchants need to employ creative marketing solutions that
     position their products and services more  effectively  than those of their
     many competitors.

     TRANSACTION  PROCESSING.  Businesses and merchants must implement solutions
     that enable them to efficiently  and  effectively  process orders once they
     are placed. Online transaction  processing is complex and involves a number
     of elements  including  secure,  dependable,  automated  real-time  payment
     authorization,  calculation of tax and shipping charges, order tracking and
     customer  service.  Online orders for physical goods must be transmitted to
     fulfillment  centers,  distributors or merchant-owned  distribution centers
     for shipment of goods.

In light of these challenges, businesses and merchants that choose to internally
develop and maintain an Internet  presence must invest a  significant  amount of
capital and technical  resources.  Technology  infrastructure  evolves  rapidly,
necessitating  timely  implementation  and  upgrades.   The  lengthy  and  often
cost-prohibitive  nature of in-house  development  and maintenance has caused an
increasing  number of businesses and merchants to outsource some or all of their
e-commerce capability  development to third-party service providers.  Outsourced
solutions offer convenience and savings,  but most service providers  specialize
in specific,  limited aspects of an Internet merchant's business.  Merchants who
outsource  their  e-commerce   capability   development  typically  must  devote
significant  technical  expertise  and other  resources to  coordinate  multiple
vendors and integrate various components.

As technologies  evolve and online businesses and merchants  proliferate,  small
businesses  and  merchants  have an  increased  need and demand  for  outsourced
e-commerce  solutions  that  seamlessly  integrate  every  aspect  of an  online
business  from  storefront   development  to  marketing  services,   transaction
processing and fulfillment.

THE NETWORK COMMERCE SOLUTION

We provide a comprehensive  technology and services  platform  including  domain
registration services, hosting services, commerce services, one-to-one marketing
services, business services, wireless technology, and online marketplaces.

Key benefits of our solution include:

     A FULL  SUITE  OF  TECHNOLOGY  AND  SERVICES.  We  provide  businesses  and
     individuals  with the  ability to  establish  a presence  on the  Internet;
     build,  manage,  and grow an online store; and market products and services
     via  one-to-one  marketing.  Our extensive  commerce  services and business
     services allow businesses to find the information,  tools and services they
     need to grow their  businesses  - online and  offline.  Our goal is to be a
     one-stop shop for small- to medium-size  businesses  looking to build, grow
     and manage an online business.  Our technologies and services are presented
     in a way that makes  establishing  and managing an online presence easy and
     affordable for businesses and individuals.

     ACCESS TO AN  EXTENSIVE  DATABASE OF  CUSTOMERS.  Through our  Ubarter.com,
     Registrars.com,  Ehost.com and b2bNow.com  Business  Center sites,  we have
     established  an  extensive  database  of  customers  which we can access to
     cross-promote  our own  products  and  services,  or those  of  third-party
     customers.

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     A  DO-IT-YOURSELF  SOLUTION.  With the  growth in the  number of small- and
     medium-sized  businesses online,  and the number of individuals  wishing to
     establish a personal presence online,  our products and services are highly
     automated  and  easy  to  use  for  people  with  little  or no  technology
     background.

     COMPREHENSIVE  TECHNOLOGY  PLATFORM.  We  provide  a  flexible,   scaleable
     technology platform from which we can tailor solutions to meet the changing
     needs of our  customers.  Our  platform  is a  combination  of  third-party
     technologies and technologies that we have developed.  We also have serving
     and hosting  capabilities  that enable our clients to outsource the storage
     and  transmission  functions of their online  operations.  This  technology
     provides merchants with a high level of reliability, 24 hours a day, 7 days
     a week. Using data centers with redundant  servers,  continuous  monitoring
     and high speed  Internet  connections;  we can provide  customers  with the
     performance they require for uninterrupted e-commerce operations.


STRATEGY

Our goal is to be a leading provider of technology infrastructure and services
for businesses. We plan to achieve this goal through the following strategies,
which are dependant upon obtaining additional financing as discuss in the
section of the document entitle "Risks Related to Our Business":

     EXPAND TECHNOLOGY  INFRASTRUCTURE AND SERVICES OFFERINGS FOR BUSINESSES. We
     plan to continue to add new features and functionality to our comprehensive
     technology   and  services   packages,   including   expanding  our  domain
     registration and hosting services,  our one-to-one marketing services,  and
     our commerce and business services.

     DOMAIN  REGISTRATION  AND  HOSTING.  We  plan to  continue  to  expand  our
     capabilities in these areas to include domain auctions,  domain  reselling,
     and the registration of new and multilingual  top-level domains. We plan to
     continue  to adopt new  strategies  to bridge our domain  registration  and
     hosting  capabilities and encourage businesses and individuals who register
     domains to utilize our other technologies and services.

     ONE-TO-ONE  MARKETING.  We  plan  to  continue  to  increase  our  base  of
     registered  users and expand the profiles for each user in order to provide
     more highly  targeted  marketing  services to customers  of our  one-to-one
     marketing solutions.

     COMMERCE  SERVICES AND BUSINESS  SERVICES.  We intend to continue to expand
     our offerings for businesses  interested in building an online  presence to
     conduct commerce over the Internet through our  FreeMerchant.com  platform.
     This currently  includes plans to release  periodic  upgrades as we improve
     technology  and services.  We also intend to continue to expand content and
     services to business  customers of our b2bNow.com  Business  Center,  which
     helps businesses start, manage and promote online or offline businesses, by
     providing access to tools, services and resources.

OUR PRODUCTS AND SERVICES

TECHNOLOGY INFRASTRUCTURE AND SERVICES

We provide a comprehensive technology and services platform, including:

     DOMAIN NAME REGISTRATION SERVICES.  Through  Registrars.com,  a division of
     Network Commerce, we are a leading ICANN-accredited  registrar specializing

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     in the registration of top-level  domain names.  The company  currently has
     more  than  600,000   registered   domains.   We  combine  reliable  domain
     registration with  industry-leading  customer support services to deliver a
     highly   efficient   registration   system  for  business   customers   and
     individuals.  We facilitate the  registration  of top-level  domains (.com,
     .net and .org) in different languages including English,  Chinese, Japanese
     and Korean,  as well as country  domains  such as .tv and .ws. Our services
     include  real-time  domain name  search and  registration,  online  account
     management,  customer support and domain-related resources. We believe this
     service  is a key  point of entry for  businesses  and  individuals  on the
     Internet.  We also offer global  partner,  referral  partner and  affiliate
     partner programs for resellers, which extend our reach in this area.

     HOSTING SERVICES.  Network Commerce offers domain name and hosting packages
     for businesses and individuals  wishing to establish an Internet  presence.
     Standard   features  include  account  control  panel,   email  POP/Webmail
     accounts, email aliases, Web site statistics and Secure Sockets Layer (SSL)
     servers.  As part of our  overall  technology  and  services  package,  our
     hosting  services   provide  small  and  medium-size   businesses  with  an
     affordable way to get started online.

     COMMERCE AND PAYMENT  PROCESSING  SERVICES.  Network  Commerce  operates an
     award-winning  e-commerce  technology  and  application  service  provider,
     FreeMerchant.com,  offering  e-commerce  products  and  services  to  small
     businesses. This includes online store-builder technology,  secure shopping
     cart,  hosting and a variety of services  that  provide  businesses  with a
     low-cost entry point to  e-commerce.  Depending on the size of the business
     and its needs,  we offer four  membership  packages with varying  levels of
     products and services to manage and grow an online business. We believe our
     FreeMerchant.com is one of the most competitive services of its kind on the
     market  today.  For paid  members of  FreeMerchant.com,  we have  developed
     InternetMall.com, a marketplace where consumers can shop among and purchase
     products from our FreeMerchant members.

          We provide services to operate and maintain online stores on behalf of
          our listed  merchants.  We use data  centers with  redundant  servers,
          24-hour monitoring and support and high-speed Internet  connections to
          provide  customers  with  continuous  e-commerce  operations.  We also
          provide  merchants  with  detailed  electronic  and hard copy  reports
          summarizing visits to and transactions made at their online stores.

          Go  Software,  a payment  processing  division  of  Network  Commerce,
          enables businesses to process Credit Cards,  ATM/Debit Cards and Check
          Guarantee Services with it's premier product PCCharge Pro. Go Software
          is an  industry  leader  that  currently  interacts  with  34  payment
          processors and provides payment processing  solutions with over 32,000
          merchants.  Go Software's  latest  product is the RiTA Server  payment
          processing  engine,   which  is  a  highly  scalable,   multi-platform
          application   supporting   high-volume,   multi-threaded   transaction
          processing. Engineered with speed, scalability and throughput in mind,
          RiTA  Server  provides  TCP/IP  connectivity  directly  to  processing
          companies.  For  security,  it use  advanced  encryption  methods.  To
          exchange information with merchants and shoppers on its Web sites, our
          network servers use software that complies with the SSL protocol,  the
          predominant  method for managing the security of transmissions  over a
          network.


     BUSINESS  SERVICES.  Network  Commerce  provides  businesses,  through  the
     Ubarter.com and b2bNow.com  Business Center,  with  information,  tools and
     services to start,  manage and  promote  online and  offline  products  and
     services.  The services and resources  offered by the  b2bNow.com  Business
     Center  include  news  and  information,  access  to tools  such as  domain
     registration,   hosting,   online  store  building,  a  business  directory
     featuring  more than 851,000  businesses  in more than 230  countries,  and
     access to resources  including business travel,  customer care,  eBusiness,
     finance,  IT  solutions,  sales and marketing  and  telecommunications.

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     ONE-TO-ONE  MARKETING  SERVICES.  Utilizing our various customer databases,
     Network  Commerce sends emails for some third parties and to  cross-promote
     our products and services.  The lists are often demographically  segmented,
     such as by: gender,  residential  location,  marital  status,  family size,
     occupation,  income, Internet use habits,  purchasing choices and patterns,
     and leisure  activities and interests.  The emails usually  contain offers,
     alerts,  news, or other  information.  In 2001,  Network  Commerce plans to
     offer a full  suite of  solutions  to  clients  with an a la carte  option:
     develop  email-relevant  content,  design  clients'  creative  email format
     (Flash, HTML, text-only,  etc.), provide targeted mailing lists, send email
     campaigns, and track results (open rates,  click-throughs,  response rates,
     purchase  rates,  etc).  Network  Commerce's  email  lists  were  generated
     primarily  through   SpeedyClick.com  that  was  shutdown  in  April  2001,
     accordingly,  Network  Commerce  will  need to obtain  new email  addresses
     through other channels in the future.

CUSTOMERS

As of December 31, 2000,  Network Commerce had approximately  13,000 Ubarter.com
members,  approximately  213,000  FreeMerchant.com  members,  and  approximately
850,000 businesses on b2bNow.com.  The total number of businesses  utilizing our
technology was approximately 325,000, including members or customers of Ubarter,
FreeMerchant,   syndicate   sites,   business  domain  names   registration  and
transaction processing.


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SALES AND MARKETING

SALES

Our sales  strategy is designed to expand our business  and  consumer  customers
specifically  through the increased  acquisition of paying customers and through
development of additional revenue  opportunities by cross-selling and up-selling
additional products and services to our existing customers. We sell our merchant
services  through  online tools as well as through our direct and indirect sales
force.  Our indirect  sales force  consists of over 2,800 third party global and
affiliate  partners.  Our  direct  sales  organization  targets  businesses  and
merchants  seeking  our  online  products  and  services.  These  employees  are
currently  located at our  headquarters in Seattle,  Washington.  Our success in
these  areas will  depend on our  ability to  cultivate  larger and more  highly
targeted  databases of customers and effectively  leverage our network of global
and affiliate partners.

MARKETING

We currently  employ a variety of  traditional  and online  marketing  programs,
business  development  and  promotional  activities  as  part  of our  marketing
strategy.  We place advertisements on high-profile  third-party Web sites and on
our  own  Web  sites.  We  also  rely  on  relationship   marketing,   including
word-of-mouth  advertising by merchants and shoppers, email marketing,  indirect
promotions  by merchants  with links to our Web sites and  indirect  advertising
arising through use of our services. We believe that relationship marketing will
continue to generate a substantial number of new merchant  customers,  which can
then be utilized by prospective businesses wishing to reach our database through
our one-to-one marketing services.

To augment our online marketing efforts, we rely on public relations activities,
attendance  at  industry  trade  shows and  direct  mail  programs  to  increase
awareness of our products and  services  and to generate  additional  sales.  We
intend  to  continue  to  participate  in  joint  promotions  using  online  and
traditional advertising media.

TECHNOLOGY AND INFRASTRUCTURE

Our products,  services,  and online  marketplaces  require the  development and
deployment of advanced  technologies and  methodologies.  Consequently,  we have
invested heavily in licensing advanced technologies and in developing a core set
of technologies.  Our third-party vendors provide relational databases,  such as
Oracle and  Microsoft  SQL server,  search  technologies,  ad  servers,  catalog
engines  and  various   back-end   automation   technologies.   Our  proprietary
technologies  include  interfaces  to  customer  order  fulfillment  and payment
systems.

Our software runs on system  hardware  that is hosted and leased at  third-party
data centers  located in Seattle,  Washington and Boston,  Massachusetts.  These
data centers are connected to our  headquarters  in Seattle  through  high-speed
networks.  These data  centers,  as well as the system  hardware  located at our
headquarters,  are  connected to back-up  generators  to maintain  uninterrupted
electrical  service  and to  the  Internet  through  multiple  Internet  service

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providers to avoid  connectivity  problems.  Our systems are  redundant,  and we
maintain  multiple  clustered   high-speed  routers,   multiple  clustered  load
balancing hardware,  multiple Web servers and multiple  application and database
servers.  Data for our networks is stored on dedicated  high-speed and redundant
disk  appliances that provide  continuous  access to the data even if individual
disk drives,  computers and power supplies fail. Data is backed up regularly and
is stored off site at the third-party  data centers to provide for data recovery
in the event of a disaster.  We employ extensive automated and manual monitoring
to maintain a high level of network uptime.

Network Commerce  currently  manages more than 225,000 hosted  e-commerce sites,
more than 4,000 hosting  customers,  more than 500 servers,  and bandwidth of 50
megabits per second.  The company has invested more than $100 million to build a
robust infrastructure.

We  believe  that our  future  success  will  depend in part on our  ability  to
license, develop and maintain advanced technologies.

INTELLECTUAL PROPERTY

Intellectual  property  is  critical to our  success,  and we rely upon  patent,
trademark,  copyright  and trade  secret  laws in the  United  States  and other
jurisdictions  to protect  our  proprietary  rights and  intellectual  property.
However,  patent,  trademark,  copyright and trade secret  protection may not be
available in every country in which our products and services are distributed or
made  available.  Our  proprietary  software,  documentation  and other  written
materials are provided  limited  protection by  international  and United States
copyright laws. In addition,  we protect our proprietary  rights through the use
of  confidentiality  and license  agreements  with  employees,  consultants  and
affiliates.

We were issued two United States  patents in 2000 and currently  have six patent
applications pending. Network Commerce currently relies on its own advertisement
serving  technology.  Our ad serving  technology  collects and uses data derived
from user activity on our Web sites and those of our  merchants'  customers that
we  maintain.  This  data is  intended  to be used for  targeted  marketing  and
predicting advertisement performance. Although we believe that we have the right
to use  such  data,  trade  secret,  copyright  or other  protection  may not be
available for such information or others may claim rights to such information.

RESEARCH AND DEVELOPMENT

Our research and development  efforts are directed  toward  improving the design
and functionality of our online marketplaces,  improving our network systems and
enhancing the technology  underlying the features of our e-commerce products and
services.  In 2000, our research and  development  resulted in the creation of a
wireless Internet group, the creation of infrastructure  for our email marketing
business,  the creation of a flexible  registration  system and development of a
data warehouse for analyzing visitor profiles. Research and development expenses
were $4.4 million in 1998,  $8.9 million in 1999 and $24.2  million in 2000.  We
anticipate reducing our research and development investment in 2001.

COMPETITION

The  market for  Internet  technology  infrastructure  and  services  and online
marketplaces is intensely  competitive,  highly fragmented and rapidly changing.
Barriers to entry are not significant and we expect  competition to intensify in
the future.  Although we believe very few companies currently offer the range of
technology and enabling  solutions offered by Network  Commerce,  many companies
offer alternatives to one or more of our products and services.  These companies
include InfoSpace, Inc., Yahoo!, Inc., Network Solutions,  Register.com and many
others.

                                       10
<PAGE>


The number of companies  providing  products and services that compete with ours
is large and increasing at a rapid rate.  Many of our  competitors and potential
competitors have substantially greater financial, technical, marketing and other
resources.  We expect  that  additional  companies  which to date have not had a
substantial  commercial  presence on the Internet or in our markets,  will offer
competing  products and  services.  In addition,  as the use of the Internet and
online   products   and  services   increases,   larger   well-established   and
well-financed entities may continue to acquire, invest in or form joint ventures
with portals and providers of Internet  technology  infrastructure and services,
and existing portals and providers of technology infrastructure and services may
continue to  consolidate.  Providers  of Internet  browsers  and other  Internet
products and services who are affiliated  with providers of Web  directories and
information  services may more tightly integrate these affiliated offerings into
their browsers or other products or services. Any of these trends would increase
the competition we face.

EMPLOYEES

At April 1, 2001, we had approximately 240 employees.  We are not subject to any
collective bargaining agreements.


                                       11
<PAGE>


FACTORS AFFECTING OUR OPERATING RESULTS, BUSINESS AND STOCK PRICE

You  should  carefully   consider  the  risks  described  below  and  the  other
information  in this annual  report.  While we have  attempted  to identify  the
primary known risks that are material to our business,  additional risks that we
have not yet  identified  or that we  currently  think are  immaterial  may also
impair our  business  operations.  The trading  price of our common  stock could
decline due to any of these  risks.  In assessing  these risks,  you should also
refer to the other information in this annual report, including the Consolidated
Financial Statements and related Notes.

RISKS RELATED TO OUR BUSINESS

WE WILL NEED ADDITIONAL FINANCING AND WE HAVE RECEIVED A "GOING CONCERN" OPINION
FROM OUR ACCOUNTANTS

We  believe  that our cash  reserves  and cash  flows  from  operations  will be
adequate to fund our operations through the first quarter of 2001. Consequently,
we will require  substantial  additional  funds to continue our business  beyond
that period. Many companies in the Internet industry have experienced difficulty
raising additional  financing in recent months.  Additional financing may not be
available to us on favorable  terms or at all. Even if  additional  financing is
available,  we may be required to obtain the  consent of our  existing  lenders,
which we may not be able to obtain. If additional  financing is not available to
us we may need to  dramatically  change  our  business  plan,  sell or merge our
business,  or  face  bankruptcy.   In  addition,   our  issuance  of  equity  or
equity-related  securities  will  dilute  the  ownership  interest  of  existing
stockholders  and our  issuance of debt  securities  could  increase the risk or
perceived risk of our Company.

Our  inability  to secure  additional  financing  would have a material  adverse
effect  on  whether  we would be able to  successfully  implement  our  proposed
business plan and our ability to continue as a going  concern.  Our  independent
accountants  have  issued a "going  concern"  opinion  in  their  report  to our
financial  statements  for the year ended  December 31, 2000,  citing  recurring
operating  losses,  reduced  working  capital and  violation of debt  covenants.
Accordingly,  those  conditions  raise  substantial  doubt  about our ability to
continue as a going concern.

FAILURE  TO  RESTRUCTURE  OUR  PAYMENTS  TO OUR  CREDITORS  COULD  RESULT IN OUR
BANKRUPTCY

We are receiving  increasing  pressure for payments from trade creditors and are
seeking to restructure the payment terms; however, there is no assurance that we
will be able to do this. If we are unable to reach  agreement with certain trade
creditors  regarding the  restructuring of payment terms, our creditors may seek
to file a petition in bankruptcy  against us, or we may need to seek  protection
of the bankruptcy court.

IF WE FAIL TO REMAIN IN COMPLIANCE WITH TERMS OF OUR CONVERTIBLE NOTES AND OTHER
DEBT OBLIGATIONS,  OUR ABILITY TO CONTINUE AS A GOING CONCERN WILL BE CHALLENGED

On September 28, 2000, in connection with the closing of a private placement, we
issued convertible  promissory notes in the aggregate  principal amount of $20.0
million (the "Convertible Notes") to Capital Ventures  International ("CVI"). In
connection  with the  private  placement,  we also  issued  to CVI  warrants  to
purchase up to  4,050,633  shares of our common  stock at an  exercise  price of
$10.375 per share.  The warrants have a term of 5 years.  The Convertible  Notes
bear interest of 6%, compounded annually. As of December 31, 2000, the principal
amount of the Convertible Notes was $15.0 million.

                                       12
<PAGE>

On April 3,  2001,  we  received  a notice of  default  from CVI for an  alleged
violation  of certain  covenants  of the  Convertible  Notes and the  Securities
Purchase  Agreement  relating  thereto.  The notice of default  demanded that we
redeem the  Convertible  Notes on or before April 9, 2001 for an amount equal to
$17.25  million.  We  responded  to the  notice of  default on April 4, 2001 and
denied that an event of default  occurred under the Notes. If we are found to be
in default of the  Convertible  Notes and if the default is not cured, or waived
by the  holder of the  Convertible  Notes,  and we are  required  to redeem  the
amounts  outstanding under the Convertible Notes, the holder could seek remedies
against us, which may include penalty rates of interest,  immediate repayment of
the debt and the filing of an involuntary  petition in bankruptcy.  In addition,
we may have no alternative  but to file a petition in  bankruptcy.  If we become
insolvent  or  enter  into  a  liquidation  proceeding,  after  payment  to  our
creditors,  there  is  likely  to  be  insufficient  assets  remaining  for  any
distribution to shareholders.

OUR CONTINUED NASDAQ NATIONAL MARKET LISTING IS NOT ASSURED, WHICH COULD MAKE IT
MORE  DIFFICULT TO RAISE  CAPITAL AND WHICH COULD RESULT IN A DEFAULT  UNDER OUR
CONVERTIBLE NOTES

Our common stock is presently listed on the Nasdaq National Market.  In order to
maintain  such  listing,   we  must   continue  to  satisfy   on-going   listing
requirements,  some of which we currently do not satisfy.  Potential events that
could lead to our delisting from the Nasdaq National Market include:

     failure  to  maintain a minimum  bid price for the  common  stock of either
     $1.00 per share or $5.00 per  share,  depending  on,  among  other  things,
     whether or not tangible net assets for the company are greater than or less
     than $4 million; o failure to maintain an audit committee which comports to
     the independence and other standards of the Nasdaq and the SEC;

     failure to maintain a  sufficient  number of  independent  directors on our
     board of directors; and

     failure to timely hold  annual  meetings  of  stockholders  and comply with
     other corporate governance requirements.

Our common stock has been trading  below the $1 minimum bid  requirement,  which
could  lead  to  Nasdaq's  initiation  of  delisting  procedures  at  any  time.
Furthermore, on April 16, 2001, we received the written resignation of Mr. Brett
Maxwell, an independent director.  As a result of this resignation,  we now have
only two independent directors. Accordingly, we no longer satisfy Nasdaq's audit
committee  requirements  which,  among other  things,  require us to maintain an
audit  committee  of at least  three  members  comprised  solely of  independent
directors.  Our failure to satisfy such audit committee  requirements could lead
to Nasdaq's  initiation  of delisting  procedures  at any time.  There can be no
assurances  that there  will not be  additional  resignations  from the board of
directors or that suitable replacement board members can be found.

If we lose our Nasdaq  National  Market  status,  our common  stock  would trade
either on the Nasdaq Small Cap market or in the over-the-counter market, both of
which are viewed by most investors as less desirable,  less liquid marketplaces.
Among other things,  our common stock would then constitute "penny stock," which
would place increased regulatory burden upon brokers, making them less likely to
make a market in the stock. Loss of our Nasdaq National Market status could make
it more  difficult  for us to raise capital or complete  acquisitions  and would
also complicate compliance with state blue sky laws. Loss of our Nasdaq National
Market  status  would also be deemed an event of default  under our  Convertible
Notes.

                                       13
<PAGE>

WE HAVE A HISTORY OF LOSSES

We incurred  net losses of $24.7  million for the year ended  December 31, 1998,
$75.9  million for the year ended  December 31, 1999 and $262.0  million for the
year ended  December 31,  2000.  At December  31,  2000,  we had an  accumulated
deficit of $367.3 million.  We have  historically  invested heavily in sales and
marketing,  technology infrastructure and research and development. As a result,
we must  generate  significant  revenues to achieve and maintain  profitability.
There can be no  assurance  that we will  ever  become  profitable  on an annual
basis.  We expect that our sales and  marketing  research  and  development  and
general and  administrative  expenses will decrease in absolute  dollars but may
increase as a percentage of revenues.

Many of our  cost-basis  investments in  early-stage  technology  companies have
uncertain  futures  primarily  related to the general  decline in the technology
companies  and many of our  acquisitions  are losing  money.  If our  cost-basis
investments and acquisitions are not successful, we will incur additional losses
from  asset  impairment  charges,  lease  and  employee  terminations  and other
restructuring costs. See subsequent events.

OUR FUTURE  REVENUES ARE  UNPREDICTABLE  AND WE EXPECT OUR OPERATING  RESULTS TO
FLUCTUATE FROM PERIOD TO PERIOD

Our business  model has been applied to the Internet  only since the  mid-1990's
and continues to evolve.  Therefore,  we have limited experience in planning the
financial needs and operating  expenses of our business.  It is difficult for us
to accurately  forecast our revenues in any given period. We do not expect to be
able to sustain our recent  revenue  growth rates and may not obtain  sufficient
revenues to achieve  profitability or become cash flow positive. If our revenues
in a particular period fall short of our expectations,  we will likely be unable
to  quickly  adjust  our  spending  in order  to  compensate  for  that  revenue
shortfall.

Our  operating  results  are likely to  fluctuate  substantially  from period to
period as a result of a number of factors,  such as:

     declines in the number of businesses  and merchants to which we provide our
     products and services;

     the amount and  timing of  operating  costs and  expenditures  relating  to
     expansion of our operations; and

     the mix of products and services that we sell.

In addition, factors beyond our control may also cause our operating results to
fluctuate, such as:

     the announcement or introduction of new or enhanced products or services by
     our competitors;

     registration services related to the introduction of new top level domains;

     a decrease in the growth of Internet usage;  and o the pricing  policies of
     our competitors.

Period-to-period  comparisons of our operating  results are not a good indicator
of our  future  performance,  particularly  in light of  recent  changes  in our
business focus. It is likely that our operating results in some quarters may not
meet the  expectations  of stock market  analysts and  investors  and this could
cause our stock price to decline.

                                       14
<PAGE>

OUR RAPID  GROWTH AND  EVOLUTION  MAY MAKE IT DIFFICULT TO EVALUATE OUR BUSINESS
AND PROSPECTS

Network  Commerce was  incorporated in January 1994 and operated  initially as a
computer services company. In 1996, we began to change the focus of our business
to conducting commerce over the Internet.  In August 1998, we launched our first
online  marketplace,  ShopNow.com.  In  January  2001,  we  announced  plans  to
discontinue  the ShopNow.com  marketplace.  In March 2001, we announced plans to
discontinue  our  gaming  and  entertainment  site,  SpeedyClick.com.  In recent
months,  we have  increasingly  focused on developing  and providing  technology
infrastructure and domain registration  services and operating portal sites. Due
to the recent shifts in our business  focus,  our historical  results are likely
not indicative of our future performance and you may have difficulty  evaluating
our business and prospects.

OUR BUSINESS MODEL IS UNPROVEN AND CHANGING

We provide  technology  infrastructure and services and operate portal sites. We
have  limited  experience  as a company,  particularly  with  these  businesses.
Additionally,  the  Internet,  on which  our  business  model  relies,  is still
unproven  as a  business  medium.  Accordingly,  our  business  model may not be
successful,  and we may need to change it. Our  ability to  generate  sufficient
revenues to achieve  profitability or become cash flow positive will depend,  in
large part, on our ability to successfully market our technology  infrastructure
services and portal sites to businesses and consumers.

IF WE FAIL TO EFFECTIVELY MANAGE THE RAPID CHANGE OF OUR OPERATIONS OUR BUSINESS
WILL SUFFER

Our ability to  successfully  offer our products and services and  implement our
business plan in a rapidly  evolving market  requires an effective  planning and
management   process.  We  are  diversifying  and  changing  the  scope  of  our
operations. While our operations have been changing, we have reduced our overall
number of employees from  approximately 600 in October 2000 to approximately 240
in April 2001.  These  changes in our business  plan and  reduction in personnel
have placed,  and will continue to place, a significant strain on our management
systems,  infrastructure  and  resources.  Simultaneously,  the reduction in our
workforce may make it more difficult to execute and implement our business plan.
We will need to continue to improve our  financial and  managerial  controls and
reporting systems and procedures,  and will need to continue to train and manage
our  workforce  worldwide.  Furthermore,  we expect  that we will be required to
manage an increasing  number of relationships  with various  customers and other
third parties.  Any failure to adapt to any of the foregoing  areas  efficiently
and effectively could cause our business to suffer.

ANY FUTURE GROWTH MAY DEPEND ON OUR ABILITY TO MAKE AND  SUCCESSFULLY  INTEGRATE
ADDITIONAL ACQUISITIONS

Our  success  depends  on our  ability  to  continually  enhance  and expand our
e-commerce  enabling  products and services and domain  registration and hosting
services in response to changing technologies,  customer demands and competitive
pressures.   Consequently,   we  have  acquired  complementary  technologies  or
businesses in the past,  and intend to do so in the future.  If we are unable to
identify  suitable  acquisition  targets,  or if we are  unable to  successfully
complete  acquisitions  and  successfully  integrate  the  acquired  businesses,
technologies  and  personnel,  our ability to increase  and enhance  product and
service  offerings  will be  negatively  impacted.  This could  cause us to lose
business to our competitors and our operating results could suffer.


                                       15
<PAGE>


acquisitions involve a number of risks

We have  actively  sought to identify  and  acquire  companies  with  attributes
complementary  to our  products and  services.  Since  January 1, 1999,  we have
acquired twelve companies. Acquisitions that we make may involve numerous risks,
including:

     failure to conduct an adequate investigation of the financial,  business or
     operational condition of companies we acquire;

     diverting management's attention from other business concerns;

     being  unable to  maintain  uniform  standards,  controls,  procedures  and
     policies;

     entering markets in which we have no direct prior experience;

     improperly  evaluating  new services and  technologies  or otherwise  being
     unable to fully exploit the anticipated opportunity; and

     being  unable  to   successfully   integrate   the   acquired   businesses,
     technologies, other assets and personnel.

If we  are  unable  to  accurately  assess  any  newly  acquired  businesses  or
technologies, our business could suffer. For example, in August 2000 we acquired
Ubarter for approximately $61.7 million.  Ubarter had developed a multi-merchant
e-commerce purchasing tool and universal shopping cart technology.  Early in the
fourth  quarter 2000, we launched a new user  interface and back-end  management
system for the Ubarter.com  merchant  exchange,  and executed various  marketing
efforts to promote the new system. These efforts did not stimulate growth in the
Ubarter economy as expected,  which led to a revision of the original  forecasts
and  projections  for Ubarter.  These revised  forecasts  indicated  that future
expected cash flows from this business unit were less than the carrying value of
its intangible assets,  thus triggering an impairment event in December 2000. At
that  time,  the  carrying  value  of  Ubarter's  intangible  assets,  including
goodwill,  was $51.6 million.  Based on recent  comparable sales of other barter
exchange  systems,  management  determined  the fair value of  Ubarter.com to be
approximately  $5.0 million.  As a result,  the Company recognized an impairment
charge  of  $46.6  million  in  2000.  We have  also  had to  write  off in 2000
substantially all the purchase price for our acquisitions of AXC, WebCentric and
Cortix. In June 1998 we acquired e-Warehouse and CyberTrust. These companies had
developed payment processing  technologies that we planned to utilize as part of
our e-commerce  products and services.  However,  we are not currently utilizing
the acquired technologies,  and we have determined that the technologies have no
other use or value to us. Because we are not using the acquired technologies, we
wrote off  substantially  all of the $5.4 million  aggregate  purchase price for
e-Warehouse and CyberTrust in 1998. Additionally,  in the first quarter of 2001,
we incurred  write-offs due to further  restructuring.  Future  acquisitions may
involve  the  assumption  of  obligations  or  large  one-time   write-offs  and
amortization  expenses related to goodwill and other intangible  assets.  Any of
the factors listed above would adversely affect our results of operations.

In addition,  in order to finance any future  acquisition,  we may need to raise
additional funds through public or private  financings.  In this event, we could
be forced to obtain equity or debt  financing on terms that are not favorable to
us and that may result in dilution to our shareholders.


                                       16
<PAGE>

OUR SUCCESS  DEPENDS  UPON  ACHIEVING  ADEQUATE  MARKET  SHARE TO  INCREASE  OUR
REVENUES AND BECOME PROFITABLE

Our success depends upon achieving significant market penetration and acceptance
of our  products  and  services.  We have  only  recently  begun to  expand  our
technology  infrastructure  services.  We may not currently have adequate market
share to  successfully  execute our business plan. If we are unable to reach and
retain substantial numbers of businesses,  merchants and shoppers,  our business
model may not be sustainable.

To successfully market and sell our products and services we must:

     become  recognized as a leading provider of technology  infrastructure  and
     services;

     enhance existing products and services;

     add new products and services and increase  awareness of these products and
     services;

     complete projects on time;

     increase  the  number of  businesses  and  merchants  using our  e-commerce
     products and services and online marketplaces; and

     continue  to  increase  the   attractiveness  of  the   Registrars.com  and
     Freemerchant.com Web sites to businesses and other users.

WE FACE SIGNIFICANT COMPETITION

The market for our products and services is highly competitive, and we expect
competition to intensify in the future. Barriers to entry are not significant.
Our failure to compete effectively could result in the following:

     fewerbusinesses  and merchants relying upon our enabling solutions or using
     our technology infrastructure products and services;

     the obsolescence of the technology underlying our products and services;

     a decrease in traffic on our Web sites; and

     a reduction in the prices of or profits on our products and services.

The number of companies providing  technology  infrastructure  services,  portal
sites and e-commerce enabling products and services is large and increasing at a
rapid rate. We expect that  additional  companies,  which to date have not had a
substantial  commercial  presence on the Internet or in our markets,  will offer
competing products and services.  Companies such as InfoSpace Inc., Yahoo! Inc.,
Register.com  and Network  Solutions  offer  alternatives  to one or more of our
products and services.

Many of our competitors and potential competitors have substantial competitive
advantages as compared to us, including:

     larger customer or user bases;

     the ability to offer a wider array of  technology  infrastructure  products
     and solutions;

     greater name recognition and larger marketing budgets and resources;

     substantially greater financial, technical and other resources;

     the ability to offer additional content and other personalization features;
     and

     larger production and technical staffs.


                                       17
<PAGE>

These  advantages  may  enable  our  competitors  to adapt  more  quickly to new
technologies  and customer needs,  devote greater  resources to the promotion or
sale of their  products and services,  initiate or withstand  substantial  price
competition,  take advantage of acquisition or other opportunities more readily,
or develop and expand their product and service offerings more quickly.

In  addition,  as the use of the  Internet  and  online  products  and  services
increases,  larger  well-established and well-financed  entities may continue to
acquire,  invest in or form joint ventures with providers of e-commerce enabling
solutions,  and existing  providers  may continue to  consolidate.  Providers of
Internet  browsers and other  Internet  products and services who are affiliated
with providers of Web directories and information services that compete with our
products and services may more tightly integrate these affiliated offerings into
their browsers or other products or services. Any of these trends would increase
the competition we face.

WE CANNOT  PREDICT  WITH ANY  CERTAINTY  THE EFFECT  THAT NEW  GOVERNMENTAL  AND
REGULATORY POLICIES,  OR INDUSTRY REACTIONS TO THOSE POLICIES,  WILL HAVE ON OUR
DOMAIN REGISTRATION BUSINESS

Before April 1999, the domain name  registration  system for the .com,  .net and
 .org  domains  was  managed  by  Network  Solutions  pursuant  to a  cooperative
agreement with the U.S. government. In November 1998, the Department of Commerce
recognized the Internet  Corporation  for Assigned  Names and Numbers,  commonly
known as ICANN, to oversee key aspects of the Internet domain name  registration
system. We cannot predict with any certainty that future measures adopted by the
Department of Commerce or ICANN will benefit us or that they will not materially
harm our business,  financial condition and results of operations.  In addition,
we continue to face the  following  risks:

     the U.S. government may, for any reason, reassess its decision to introduce
     competition   into,  or  ICANN's  role  in  overseeing,   the  domain  name
     registration market;

     the Internet  community  may become  dissatisfied  with ICANN and refuse to
     recognize  its  authority  or support  its  policies,  which  could  create
     instability in the domain name registration system; and

     ICANN may revoke or fail to renew our  accreditation,  or attempt to impose
     additional  fees on registrars if it fails to obtain funding  sufficient to
     run its operations.

OUR  BUSINESS  WILL  SUFFER  IF WE  FAIL  TO  MAINTAIN  OUR  STRATEGIC  BUSINESS
RELATIONSHIPS OR ARE UNABLE TO ENTER INTO NEW RELATIONSHIPS

An  important   element  of  our  strategy   involves   entering  into  business
relationships with other companies.  Our success is dependent on maintaining our
current  contractual  relationships and developing new strategic  relationships.
These contractual relationships typically involve joint marketing,  licensing or
promotional  arrangements.  For  example,  we  have  entered  into  a  Registrar
Accreditation  Agreement  with ICANN,  a Registrar  License and  Agreement  with
Network  Solutions,  Inc., a licensing  and  co-marketing  agreement  with Chase
Manhattan Bank, and a marketing  agreement with About.com,  Inc.  Although these
relationships  are an important factor in our strategy because they enable us to
enhance our product and service  offerings,  the parties  with which we contract
may not view their relationships with us as significant to their own businesses.
Most of these  relationships  may be  terminated  by either  party  with  little
notice.  Accordingly,  in order to maintain our strategic business relationships
with some of these partners we will need to meet our partners' specific business
objectives,   which  may  include  incremental  revenue,   brand  awareness  and


                                       18
<PAGE>

implementation of specific  e-commerce  applications.  If our strategic business
relationships  are  discontinued  for any reason,  or if we are  unsuccessful in
entering  into new  relationships  in the future,  our  business  and results of
operations may be harmed.

WE MAY NOT DERIVE SUBSTANTIAL BENEFITS FROM OUR STRATEGIC RELATIONSHIPS

To date, we have not derived material revenue from these relationships, and some
of these relationships  impose substantial  obligations on us. It is not certain
that  the  benefits  to  us  will  outweigh  our  obligations.  Several  of  our
significant   business   arrangements  do  not  establish  minimum   performance
requirements  but instead rely on  contractual  best efforts  obligations of the
parties with which we contract.

WE DEPEND ON OUR KEY PERSONNEL FOR SUCCESSFUL OPERATION OF OUR BUSINESS

Our success  depends on the skills,  experience  and  performance  of our senior
management and other key personnel. Our key personnel include Dwayne Walker, our
Chairman and Chief Executive  Officer,  Randy Cerf, our Executive Vice President
and Chief Financial Officer, Ganapathy Krishnan, Ph.D., Executive Vice President
and Chief  Technology  Officer,  Anne-Marie  Savage,  Executive Vice  President,
One-to-One Marketing,  Jennifer Rogers,  Senior Vice President,  Commerce Group,
Sanjay Arnad,  Chief  Information  Officer,  Stephen D. Smith, Vice President of
Finance  and  Tony  Abruzzio,  General  Manager  of Go  Software,  Inc.  All key
personnel listed above have employment agreements with Network Commerce. Many of
our executive  officers have joined us within the past three years. If we do not
quickly and  efficiently  integrate  these new personnel into our management and
culture,  our business  could  suffer.  If we fail to  successfully  attract and
retain a sufficient number of qualified executive, technical,  managerial, sales
and marketing, business development and administrative personnel, our ability to
manage and expand our business could suffer.

OUR ABILITY TO DEVELOP AND INTEGRATE  INFRASTRUCTURE  TECHNOLOGIES IS SUBJECT TO
UNCERTAINTIES

We have limited experience delivering our technology infrastructure products and
services.  In  order  to  remain  competitive,  we must  regularly  upgrade  our
technology   infrastructure   products  and  services  to  incorporate   current
technology,  which  requires  us to  integrate  complex  computer  hardware  and
software components.  If we do not successfully integrate these components,  the
quality and  performance  of our online  offerings  may be reduced.  While these
technologies are generally commercially  available, we may be required to expend
considerable  time and money in order to  successfully  integrate  them into our
products and  services  and this may cause our business to suffer.  We must also
maintain an adequate testing and technical support  infrastructure to ensure the
successful introduction of products and services.

OUR COMPUTER SYSTEMS MAY BE VULNERABLE TO SYSTEM FAILURES

Our success  depends on the  performance,  reliability  and  availability of the
technology  supporting our products and services.  Our revenues depend, in large
part,  on the number of  businesses  and  consumers  that use our  products  and
services.  This depends, in part, upon our actual and perceived  reliability and
performance.  Any inability to provide our products and services  could cause us
to lose customers and therefore lose revenue.  Substantially all of our computer
and communications  hardware is located at leased and third-party  facilities in
Seattle,  Washington.  Our systems and  operations  are  vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure, break-in,
earthquake and similar events.  In addition,  due to the ongoing power shortages
in California,  the Pacific Northwest may experience power shortages or outages.
These power  shortages or outages  could cause  disruptions  to our  operations,
which in turn may result in a material decrease in our revenues and earnings and
have a material adverse affect on our operating results. Because we presently do
not have fully redundant  systems or a formal disaster  recovery plan, a systems
failure could adversely affect our business.  In addition,  our computer systems
are vulnerable to computer viruses, physical or electronic break-ins and similar


                                       19
<PAGE>

disruptions, which may lead to interruptions,  delays, loss of data or inability
to process  online  transactions  for our clients.  We may be required to expend
considerable  time and money to correct any system failure.  If we are unable to
fix a problem  that  arises,  we may lose  customers or be unable to conduct our
business at all.

OUR BUSINESS MAY BE HARMED BY DEFECTS IN OUR SOFTWARE AND SYSTEMS

We have  developed  custom  software for our network  servers and have  licensed
additional  software from third  parties.  This software may contain  undetected
errors or defects. We may be unable to fix defects in a timely or cost-effective
manner.

WE WILL NEED TO EXPAND AND UPGRADE  OUR  SYSTEMS IN ORDER TO  MAINTAIN  CUSTOMER
SATISFACTION

We must expand and upgrade our technology,  transaction  processing  systems and
network  infrastructure  if the number of  businesses  and  merchants  using our
e-commerce  products  and  services  and online  marketplaces,  or the volume of
traffic on our Web sites or our clients' Web sites, increases substantially.  We
could experience  periodic capacity  constraints,  which may cause unanticipated
system disruptions,  slower response times and lower levels of customer service.
We may be unable to accurately project the rate or timing of increases,  if any,
in the use of our products or services or our Web sites,  or when we must expand
and upgrade our systems and  infrastructure  to accommodate these increases in a
timely manner. Any inability to do so could harm our business.

OUR INTERNATIONAL OPERATIONS INVOLVE RISKS

We are subject to risks specific to Internet-based companies in foreign markets.
These risks include:

     delays  in  the  development  of  the  Internet  as a  commerce  medium  in
     international markets;

     restrictions on the export of encryption technology; and

     increased  risk  of  piracy  and  limits  on our  ability  to  enforce  our
     intellectual property rights.

In addition, we have been developing business  opportunities in Canada and Asia.
We may be unable to develop  sufficient  relationships in Canada or Asia to take
advantage of business  opportunities  there. In recent periods, the Asia Pacific
and Canadian economies have experienced weakness. If these economies continue to
exhibit weakness,  our efforts to develop business  opportunities in these areas
and our  ability to grow these  markets  could be  impaired.  In  addition,  the
failure to succeed in these  markets  could  impair our  ability to enter  other
international markets.

WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS

We regard our  intellectual  property rights as critical to our success,  and we
rely on trademark and copyright law, trade secret protection and confidentiality
and license  agreements with our employees,  customers and others to protect our
proprietary  rights.  Despite our precautions,  unauthorized third parties might
copy portions of or reverse  engineer our software and use  information  that we
regard as  proprietary.  We currently have been granted two patents and have six
patent  applications  pending in the United States  Patent and Trademark  Office
covering different aspects of our product architecture and technology.  However,
there is no  assurance  that any pending  patent  application  will result in an
issued  patent,  or that our existing  patents or any future  patent will not be
challenged,  invalidated or  circumvented,  or that the rights granted under any
patent will provide us with a competitive advantage.  The laws of some countries
do not  protect  proprietary  rights  to the same  extent  as do the laws of the


                                       20
<PAGE>

United States, and our means of protecting our proprietary rights abroad may not
be  adequate.  Any  misappropriation  of our  proprietary  information  by third
parties could adversely affect our business by enabling third parties to compete
more effectively with us.

OUR TECHNOLOGY MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS

We cannot be certain that our  technology  does not infringe  issued  patents or
other  intellectual  property  rights of others.  In  addition,  because  patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which relate to our software. We may be
subject to legal proceedings and claims from time to time in the ordinary course
of our business,  including claims of alleged infringement of the trademarks and
other  intellectual  property  rights of third  parties.  Intellectual  property
litigation is expensive and  time-consuming,  and could divert our  management's
attention away from running our business.

IF THE  SECURITY  PROVIDED BY OUR  E-COMMERCE  SERVICES IS  BREACHED,  WE MAY BE
LIABLE TO OUR CLIENTS AND OUR REPUTATION COULD BE HARMED

A  fundamental   requirement  for  e-commerce  is  the  secure  transmission  of
confidential  information  of  businesses,   merchants  and  shoppers  over  the
Internet.  Among the  e-commerce  services we offer to  merchants  are  security
features such as:

     secure online payment services;

     secure order processing services; and

     fraud prevention and management services.

Third  parties may  attempt to breach the  security  provided by our  e-commerce
products and services or the security of our clients' internal systems.  If they
are successful,  they could obtain confidential information about businesses and
shoppers using our online  marketplaces,  including their  passwords,  financial
account information,  credit card numbers or other personal information.  We may
be liable to our clients or to shoppers for any breach in  security.  Even if we
are not held liable,  a security breach could harm our reputation,  and the mere
perception of security risks,  valid or not, could inhibit market  acceptance of
our products and services.  We may be required to expend significant capital and
other  resources  to license  additional  encryption  or other  technologies  to
protect  against  security  breaches or to  alleviate  problems  caused by these
breaches.  In addition,  our clients  might decide to stop using our  e-commerce
products and services if their customers experience security breaches.

RISKS RELATED TO OUR INDUSTRY

WE ARE VULNERABLE TO DOWNTURNS  EXPERIENCED  BY OTHER INTERNET  COMPANIES OR THE
INTERNET INDUSTRY IN GENERAL

We derive a  significant  portion of our revenue from  strategic  marketing  and
advertising  relationships  with other Internet companies and we own equity in a
number of Internet  companies.  At the current time, some of these companies are
having  difficulty  generating  operating cash flow or raising  capital,  or are
anticipating  such  difficulties,  and are electing to scale back the  resources
they devote to  advertising,  including on our network.  Other  companies in the
Internet  industry  have  depleted  their  available  capital  and  have  ceased
operations  or filed for  bankruptcy  protection  or may be  expected  to do so.
Difficulties  such as these may  affect  our  ability  to  collect  revenues  or
advances  against  revenues from our existing  partners or  advertisers  as such


                                       21
<PAGE>

amounts  become due and may impair the value of the equity we hold in certain of
our  partners.  If the  current  environment  for  Internet  companies  does not
improve, our business and financial results may suffer.

OUR  SUCCESS  DEPENDS ON  CONTINUED  INCREASES  IN THE USE OF THE  INTERNET AS A
COMMERCIAL MEDIUM

We depend on the  growing use and  acceptance  of the  Internet  by  businesses,
merchants  and shoppers as a medium of commerce.  Rapid growth in the use of and
interest  in  the  Internet  and  online  products  and  services  is  a  recent
development.  No one can be certain that  acceptance and use of the Internet and
online  products and services  will  continue to develop or that a  sufficiently
broad base of businesses,  merchants and shoppers will adopt and continue to use
the Internet and online products and services as a medium of commerce.

The  Internet  may fail as a  commercial  marketplace  for a number of  reasons,
including   potentially   inadequate   development  of  the  necessary   network
infrastructure  or  delayed  development  of  enabling  technologies,  including
security technology and performance  improvements.  For example, if technologies
such as software that stops  advertising from appearing on a Web user's computer
screen gain wide acceptance,  the  attractiveness of the Internet to advertisers
would be diminished, which could harm our business.

RAPID TECHNOLOGICAL CHANGE COULD NEGATIVELY AFFECT OUR BUSINESS

Rapidly changing  technology,  evolving  industry  standards,  evolving customer
demands and  frequent  new product and service  introductions  characterize  the
market  for our  products  and  services.  Our  future  success  will  depend in
significant  part  on our  ability  to  improve  the  performance,  content  and
reliability  of our  products  and  services in  response  to both the  evolving
demands of the market and competitive product and service offerings. Our efforts
in these areas may not be successful. If a large number of our clients adopt new
Internet  technologies  or  standards,  we may  incur  substantial  expenditures
modifying or adapting our products and services to remain  compatible with their
systems.

WE RELY ON THE  INTERNET  INFRASTRUCTURE  PROVIDED  BY  OTHERS  TO  OPERATE  OUR
BUSINESS

Our success  depends in large part on other  companies  maintaining the Internet
infrastructure. In particular, we rely on other companies to maintain a reliable
network backbone that provides adequate speed, data capacity and security and to
develop  products  that enable  reliable  Internet  access and  service.  If the
Internet  continues  to  experience  significant  growth in the number of users,
frequency of use and amount of data transmitted,  the Internet infrastructure of
thousands of computers  communicating  via  telephone  lines,  coaxial cable and
other telecommunications  systems may be unable to support the demands placed on
it, and the Internet's performance or reliability may suffer as a result of this
continued  growth.  If the  performance or reliability of the Internet  suffers,
Internet  users  could have  difficulty  obtaining  access to the  Internet.  In
addition, data transmitted over the Internet, including information and graphics
contained on Web pages, could reach Internet users much more slowly.  This could
result in frustration of Internet users, which could decrease online traffic and
cause advertisers to reduce their Internet expenditures.

                                       22
<PAGE>


FUTURE  GOVERNMENTAL  REGULATION AND PRIVACY CONCERNS COULD ADVERSELY AFFECT OUR
BUSINESS

We are not  currently  subject to direct  regulation by any  government  agency,
other  than  regulations  applicable  to  businesses  generally,  and  there are
currently few laws or regulations  directly  applicable to access to or commerce
on the  Internet.  However,  due to the  increasing  popularity  and  use of the
Internet,   a  number  of  legislative   and  regulatory   proposals  are  under
consideration by federal,  state, local and foreign governmental  organizations,
and it is  possible  that a number of laws or  regulations  may be adopted  with
respect to the  Internet  relating  to issues  such as user  privacy,  taxation,
infringement,  pricing,  quality  of  products  and  services  and  intellectual
property ownership. The adoption of any laws or regulations that have the effect
of imposing additional costs, liabilities or restrictions relating to the use of
the Internet by businesses or consumers  could decrease growth in the use of the
Internet,  which could in turn  decrease  demand for our products and  services,
decrease  traffic  on our  online  marketplaces,  increase  our  cost  of  doing
business, or otherwise have a material adverse effect on our business. Moreover,
the  applicability  to the Internet of existing  laws  governing  issues such as
property ownership,  copyright,  trademark,  trade secret, obscenity,  libel and
personal privacy is uncertain and developing. Any new legislation or regulation,
or new  application or  interpretation  of existing laws,  could have a material
adverse effect on our business.

The Federal  Communications  Commission is currently  reviewing  its  regulatory
positions  on  the  privacy   protection  given  to  data   transmissions   over
telecommunications   networks   and   could   seek  to   impose   some  form  of
telecommunications   carrier  regulation  on  telecommunications   functions  of
information  services.  State public utility commissions generally have declined
to regulate  information  services,  although the public service  commissions of
some states  continue to review  potential  regulation of such services.  Future
regulation or regulatory  changes  regarding  data privacy could have an adverse
effect on our business by requiring us to incur substantial  additional expenses
in order to comply with this type of regulation.

A number of proposals have been made at the federal,  state and local level that
would  impose  additional  taxes  on the  sale of goods  and  services  over the
Internet  and  certain  states  have  taken  measures  to  tax  Internet-related
activities.  Foreign countries also may tax Internet transactions.  The taxation
of  Internet-related  activities  could have the effect of  imposing  additional
costs on companies,  such as Network  Commerce,  that conduct  business over the
Internet.  This,  in turn,  could  lead to  increased  prices for  products  and
services, which could result in decreased demand for our solutions.

WE COULD FACE LIABILITY FOR MATERIAL TRANSMITTED OVER THE INTERNET BY OTHERS

Because  material may be downloaded from Web sites hosted by us and subsequently
distributed to others,  there is a potential that claims will be made against us
for negligence,  copyright or trademark  infringement or other theories based on
the nature and content of this material. Negligence and product liability claims
also  potentially  may be made  against us due to our role in  facilitating  the
purchase of some  products,  for  example  firearms.  Although we carry  general
liability  insurance,  our insurance may not cover claims of these types, or may
not be adequate to indemnify us against this type of liability.  Any  imposition
of liability,  and in particular  liability that is not covered by our insurance
or is in excess of our insurance coverage,  could have a material adverse effect
on our reputation and our operating  results,  or could result in the imposition
of criminal penalties on us.

WE DO NOT CURRENTLY COLLECT SALES TAX FROM ALL TRANSACTIONS

We do not currently  collect sales or other similar taxes on products sold by us
and delivered into states other than Washington,  California,  Georgia,  and New
York. However, one or more states or foreign countries may seek to impose sales,
value  added or other tax  collection  obligations  on  out-of-state  or foreign
companies  engaging in  e-commerce.  In  addition,  any new  operation in states
outside  of those  for  which we  currently  collect  sales  tax  could  subject
shipments  into  these  states to state or foreign  sales  taxes.  A  successful
assertion by one or more states or any foreign  country  that we should  collect
sales, value added or other similar taxes on the sale of merchandise or services
could result in liability for penalties as well as substantially higher expenses
incurred by our business.


                                       23
<PAGE>

RISKS RELATED TO AN INVESTMENT IN OUR STOCK

PROVISIONS OF OUR CHARTER  DOCUMENTS AND  WASHINGTON  LAW COULD  DISCOURAGE  OUR
ACQUISITION BY A THIRD PARTY

Specific  provisions of our articles of incorporation  and bylaws and Washington
law could make it more  difficult for a third party to acquire us, even if doing
so would be beneficial to our shareholders.

Our  articles  of  incorporation  and bylaws  establish  a  classified  board of
directors,  eliminate  the ability of  shareholders  to call  special  meetings,
eliminate  cumulative voting for directors and establish  procedures for advance
notification of shareholder  proposals.  The presence of a classified  board and
the elimination of cumulative  voting may make it more difficult for an acquirer
to replace our board of directors. Further, the elimination of cumulative voting
substantially   reduces  the  ability  of   minority   shareholders   to  obtain
representation on the board of directors.

Our board of directors  has the  authority  to issue up to  5,000,000  shares of
preferred stock and to determine the price, rights, preferences,  privileges and
restrictions,  including voting rights, of those shares without any further vote
or action by our  shareholders.  The issuance of preferred  stock could have the
effect of  delaying,  deferring  or  preventing  a change of  control of Network
Commerce Inc. and may adversely  affect the market price of the common stock and
the voting and other rights of the holders of common stock.

Washington law imposes  restrictions on some transactions  between a corporation
and  significant  shareholders.   Chapter  23B.19  of  the  Washington  Business
Corporation  Act  prohibits a target  corporation,  with some  exceptions,  from
engaging in  particular  significant  business  transactions  with an  acquiring
person,  which is defined as a person or group of persons that beneficially owns
10% or more of the voting securities of the target corporation,  for a period of
five years after the  acquisition,  unless the  transaction  or  acquisition  of
shares is  approved  by a majority  of the  members of the target  corporation's
board of directors prior to the acquisition.  Prohibited  transactions  include,
among other things:

     a merger or  consolidation  with,  disposition of assets to, or issuance or
     redemption of stock to or from the acquiring person;

     termination of 5% or more of the employees of the target corporation; or

     allowing the acquiring person to receive any disproportionate  benefit as a
     shareholder.

A  corporation  may not opt out of this  statute.  This  provision  may have the
effect of  delaying,  deterring  or  preventing  a change in  control of Network
Commerce Inc.

The foregoing  provisions of our charter documents and Washington law could have
the effect of making it more  difficult or more  expensive  for a third party to
acquire,  or could discourage a third party from attempting to acquire,  control
of Network  Commerce Inc.  These  provisions  may  therefore  have the effect of
limiting the price that investors  might be willing to pay in the future for our
common stock.

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<PAGE>

OUR STOCK PRICE MAY BE VOLATILE

The stock market in general, and the stock prices of Internet-related  companies
in particular,  have recently  experienced extreme  volatility,  which has often
been  unrelated  to the  operating  performance  of any  particular  company  or
companies.  Our stock price could be subject to wide fluctuations in response to
factors such as the following:

     actual or anticipated variations in quarterly results of operations;

     the addition or loss of merchants and shopper traffic;

     announcements of technological innovations,  new products or services by us
     or our competitors;

     announcement  that our  creditors  and  lenders  seek to file a petition in
     bankruptcy against us, or that we seek protection of the bankruptcy court;

     changes in financial estimates or recommendations by securities analysts;

     conditions or trends in the Internet, e-commerce and marketing industries;

     changes in the market  valuations  of other  Internet or online  service or
     software  companies;

     our  announcements of significant  acquisitions,  strategic  relationships,
     joint ventures or capital commitments;

     additions or departures of key personnel;

     sales of our common stock;

     announcement of a possible delisting from the Nasdaq National Market;

     general market conditions; and

     other events or factors, many of which are beyond our control.

In addition,  stock  markets,  particularly  the Nasdaq  National  Market,  have
experienced extreme price and volume fluctuations,  and in particular the market
prices  of  securities  of  technology  companies,  especially  Internet-related
companies,  have declined significantly in recent months. Some of these declines
have been unrelated to the operating performance of such companies.  The trading
price of our common  stock has likewise  experienced  a  significant  decline in
recent months, and fluctuations or declines such as these may continue to affect
the market  price of our common  stock in the future.  Substantial  sales of our
common stock could also cause the stock price to decline.

In the past,  securities  class  action  litigation  has often  been  instituted
against  companies  following  periods of volatility in their stock price.  This
type of  litigation  could  result in  substantial  costs and could  divert  our
management's attention and resources.

ITEM 2. PROPERTIES

Our principal  executive  offices are located in Seattle,  Washington,  where we
lease  approximately  50,000  square  feet under a lease that  expires in August
2004. We lease  additional space in various  geographic  locations for sales and
marketing  personnel and for our servers.  We also lease space in San Francisco,
Glendale, and Irvine, California;  Phoenix, Arizona; Savannah, Georgia; Wichita,
Kansas;   and  Vancouver,   British  Columbia  for  the  operations  of  various
subsidiaries.  We believe that our current  facilities  are adequate to meet our
needs for the foreseeable future.


                                       25
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

On October 6, 2000, Mall.com, Inc. filed suit against us. The suit is based on a
contract between Mall.com and IveBeenGood.com, which we acquired in August 2000.
The suit  alleges  that  IveBeenGood.com  breached  a  contract  with  Mall.com,
breached  a  warranty  given to  Mall.com  and  committed  fraud  and  negligent
misrepresentation.  Mall.com  seeks  return of cash and stock paid by  Mall.com,
attorneys'  fees and  costs,  $1  million  in direct  damages,  $15  million  in
compensatory  damages  and  $32  million  in  punitive  damages.  We  intend  to
vigorously defend our position.

On December 20, 2000,  an action was  initiated  in Los Angeles  Superior  Court
styled Futurist Entertainment,  Inc. v. Network Commerce,  Inc., Jackie Sutphin,
SpeedyClick.com,  Case No. BC242139.  In the complaint plaintiff alleges,  among
other things,  breach of contract and business torts against defendants relating
to  a  Development  and  Website  Agreement  ("Development  Agreement")  between
Futurist  Entertainment,  Inc. and Network Commerce dated February 25, 2000. The
website was to serve as the official  website for the Jackson 5's upcoming album
and world tour.  Plaintiff  alleges damages "in an amount yet to be ascertained,
but in no event less than $4,400,000." We are mounting a vigorous legal defense,
and on April 5, 2001, we filed an answer and  cross-complaint  against S. Jackie
Jackson and Futurist Entertainment,  Inc. In the answer, we contend, among other
things,  that  Futurist and Jackson  thwarted  our ability to perform  under the
Development  Agreement.  In the cross-complaint,  we allege, among other things,
securities  fraud,  fraud,  unfair  competition,  gross negligence and breach of
fiduciary duty by both Futurist and Jackson. Additionally, we allege damages "in
an amount presently  unknown but in excess of $10 million." Jackson and Futurist
have yet to respond to the  Cross-Complaint  or  pending  discovery.  We hold an
investment in the common stock of Futurist Entertainment, Inc.

From  time to time we are  and  expect  to  continue  to be,  subject  to  legal
proceedings  and  claims in the  ordinary  course of  business.  If the  Company
suffers  an  adverse  judgment  in any  such  legal  proceeding  or if we  incur
significant  expenses to defend against such proceedings,  it will likely have a
material  adverse effect on our results of operations  and financial  condition;
and could affect our ability to continue business on as a going concern.

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

No  matters  were  submitted  to a vote of  security  holders  during our fourth
quarter.


                                       26
<PAGE>


                                     PART II

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

MARKET INFORMATION

Since our initial  public  offering on September 28, 1999,  our common stock has
traded on the Nasdaq Stock National  Market  (currently  under the symbol NWKC).
The  following  table shows the range of  quarterly  high and low closing  sales
prices of our common  stock for our fiscal year 2000,  as reported by the Nasdaq
National Market.

                                               High             Low

Fiscal year ended December 31, 1999
        Fourth quarter                     $ 23.4375           $ 10.9375

Fiscal year ended December 31, 2000
        First quarter                      $ 21.9375           $ 12.1250
        Second quarter                     $ 12.4375           $  3.5000
        Third quarter                      $  7.6250           $  4.5000
        Fourth quarter                     $  5.5625           $  0.5312


DIVIDENDS

We have never  declared or paid any  dividends  on our common  stock.  We do not
anticipate paying any cash dividends in the foreseeable future.

HOLDERS

As of April 6, 2001, there were 633 holders of record of our common stock.

Recent Sales Of Unregistered Securities

Between  January 1, 2000 and December 31, 2000, we issued and sold  unregistered
securities as set forth below:

     On January 5, 2000,  pursuant to a Licensing  and  Reseller  Agreement,  we
     issued  warrants  to  purchase  50,000  shares of common  stock to  Inktomi
     Corporation at an exercise price of $17.00 per share.

     On  January  13,  2000,  pursuant  to a Share Sale and  Purchase  Agreement
     between   ShopNow.com  Inc.,  0307952  Nova  Scotia  Company,   and  Pronet
     Enterprise  Ltd.  (Pronet),  we issued  162,508  shares of common  stock at
     $17.60 per share to  shareholders  of Pronet for all equity  securities  in
     Pronet.

                                       27
<PAGE>

     On January 18, 2000,  pursuant to an Agreement  and Plan of Merger  between
     ShopNow.com  Inc.,  SN  Acquisition,  Inc.,  AXC  Corporation  and  certain
     shareholders of AXC, we issued 540,296 shares of common stock at $17.60 per
     share to the shareholders of AXC for all the equity securities in AXC.

     On April 11, 2000,  in  connection  with the  Agreement  and Plan of Merger
     between  Network  Commerce,  Inc. and  FreeMerchant,  we issued warrants to
     purchase 6,749 shares of common stock to  BigVine.com,  Inc. at an exercise
     price of $1.48 per share.

     On April 11, 2000,  in  connection  with the  Agreement  and Plan of Merger
     between  Network  Commerce,  Inc. and  FreeMerchant,  we issued warrants to
     purchase 6,749 shares of common stock to eBay, Inc. at an exercise price of
     $1.48 per share.

     On May 11,  2000,  pursuant  to an  Agreement  and Plan of  Merger  between
     Network  Commerce,  Inc. and  FreeMerchant,  we issued  2,573,732 shares of
     common stock at $8.80 per share to  shareholders  of  FreeMerchant  for all
     equity securities in FreeMerchant.

     On May 19, 2000, in connection with the execution of a credit agreement, we
     issued warrants to purchase 105,820 shares of common stock to Imperial Bank
     at an exercise  price of $5.67 per share.  The  warrants  have a term of 10
     years.

     Effective as of June 2, 2000, in connection  with the  consummation  of our
     acquisition  of  Ubarter.com,  we issued  38,995  shares of common stock to
     Astra Ventures LLC at $17.31 per share.

     On July 4, 2000, in connection with the  consummation of our acquisition of
     Ubarter.com,  we  issued  50,000  shares of  common  stock to  Commonwealth
     Associates L.P. at $5.38 per share.

     On August 24,  2000,  pursuant to an Agreement  and Plan of Merger  between
     Network Commerce Inc. and IveBeenGood.com,  Inc. d/b/a UberWorks, we issued
     2,601,562  shares of common  stock at $6.13  per share to  shareholders  of
     UberWorks for all equity securities in UberWorks.

     On September 28, 2000,  pursuant to a Securities Purchase Agreement between
     Network  Commerce Inc. and Capital  Ventures  International,  we sold $20.0
     million of convertible  notes and warrants.  The notes have a one-year term
     and bear interest at an annual rate of six percent.  We issued  warrants to
     purchase up to  4,050,633  shares of common  stock at an exercise  price of
     $10.375 per share. The warrants have a term of 5 years.

     On September  29, 2000, in connection  with the  consummation  of the $20.0
     million  Securities  Purchase  Agreement  between Network Commerce Inc. and
     Capital  Ventures  International,  we issued  warrants to  purchase  42,500
     shares of common stock to Steven  Brathe at an exercise  price of $8.39 per
     share. The warrants have a term of 5 years.

     On September  29, 2000, in connection  with the  consummation  of the $20.0
     million  Securities  Purchase  Agreement  between Network Commerce Inc. and
     Capital  Ventures  International,  we issued  warrants to  purchase  42,500
     shares of common  stock to Andrew  Baum at an  exercise  price of $8.39 per
     share. The warrants have a term of 5 years.

     On  November  12,  2000,  in  connection  with an  Electronic  Distribution
     Agreement  between Network Commerce Inc. and Corel  Corporation,  dated May
     19,  1999,  we issued  warrants to Corel  Corporation  to purchase  100,000
     shares of common stock at $9.00 per share.  The warrants  have a term of 10
     years.

     On December 8, 2000,  pursuant to an Agreement  and Plan of Merger  between
     Network Commerce,  Inc. and ePackets.Net,  Inc., we issued 1,616,658 shares
     of common  stock at $1.25 per share to  shareholders  of  ePackets  for all
     equity securities in ePackets.

     On December  22,  2000,  pursuant  to a Stock  Purchase  Agreement  between
     Network  Commerce,  Inc. and Internet  Domain  Registrars  Corp., we issued
     11,312,000  shares of common stock at $0.781 per share to  shareholders  of
     IDR for all equity securities in IDR.

                                       28
<PAGE>

No underwriters were engaged in connection with these issuances and sales. These
securities  were  issued in  transactions  exempt  from  registration  under the
Securities  Act of 1933 in reliance upon Section 4(2) of the  Securities Act and
Regulation D promulgated thereunder.


USE OF PROCEEDS

On  September  28, 1999,  our  registration  statement on Form S-1,  file number
333-80981,  became  effective.  The offering date was  September  28, 1999.  All
shares offered in the final  prospectus  (filed with the Securities and Exchange
Commission on September 29, 1999) were sold, thus terminating our offering.  The
managing  underwriters were Dain Rauscher  Wessels,  U.S. Bancorp Piper Jaffray,
SoundView Technology Group and Wit Capital  Corporation.  The offering consisted
of 7,250,000  shares of ShopNow.com  Inc.  common stock issued in September 1999
and an additional  1,087,500 shares of common stock subject to the underwriter's
over-allotment  option,  which was exercised on October 28, 1999.  The aggregate
price of the shares offered and sold was $100.0  million.  Proceeds to us, after
accounting for $7.0 million in  underwriting  discounts and commissions and $1.9
million in other expenses, were $91.1 million.

On February  14,  2000,  our  registration  statement  on Form S-1,  file number
333-95085,  for our second public offering became effective.  All shares offered
in the final  prospectus  (filed with the Securities and Exchange  Commission on
February  16,  2000) were sold,  thus  terminating  our  offering.  The managing
underwriters  were J.P.  Morgan  Securities  Inc.,  CIBC  World  Markets  Corp.,
PaineWebber  Incorporated and U.S. Bancorp Piper Jaffray. The offering consisted
of 7,913,607  shares of common stock at $14.50 per share. The aggregate price of
the shares offered and sold was $114.7 million. Proceeds to us, after accounting
for  approximately  $6.0 million in  underwriting  discounts and commissions and
$700,000 in other expenses, were $108.0 million.

On May 19, 2000, in connection with the consummation of a credit  agreement,  we
issued a term note for $15.0  million or such lesser amount  outstanding  at any
one time.  As of December 31, 2000,  the  principal  amount of the note was $9.8
million.  The term note  bears  interest  at an annual  rate  equal to the prime
lending rate plus one and one-half  percent.  Principal  and interest  under the
term  note  are  required  to be  repaid  under  specific  schedules,  with  all
commitments to be repaid no later than November 18, 2003.

On September 28, 2000, in connection with the closing of a private placement, we
issued convertible  promissory notes in the aggregate  principal amount of $20.0
million  to Capital  Ventures  International  ("CVI").  In  connection  with the
private  placement,  we also issued to CVI  warrants to purchase up to 4,050,633
shares of our  common  stock at an  exercise  price of $10.375  per  share.  The
warrants  have a term of 5 years.  The  promissory  notes bear  interest  of 6%,
compounded  annually.  As of December 31, 2000, the principal amount of the note
was $15.0 million.

We have used  approximately  $17.6 million of the net offering proceeds from our
initial and second public  offering to repay  indebtedness,  $118.2  million for
working capital paid directly or indirectly to third parties,  $28.5 million for
the  purchase  or  installation  of software  and  equipment,  $23.8  million in
connection with business acquisitions,  $14.5 million for the purchase of equity
securities of various e-commerce  companies and approximately  $31.5 million for
the net purchase of temporary  investments  consisting of cash, cash equivalents
and short-term, interest-bearing,  investment-grade securities. We have not used
any of the net  offering  proceeds  from our  initial  public  offering  for the
construction of plant,  building or facilities or purchases of real estate.  The
use of proceeds from our initial  public  offering does not represent a material
change in the use of proceeds  described in the registration  statement relating
to such offering.


                                       29
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

Due to the  acquisitions  effected  in 1998,  1999 and  2000,  we  believe  that
period-to-period comparisons are not meaningful, and you should not rely on them
as indicative of our future performance.  You should read the following selected
consolidated  financial data in conjunction  with  "Management's  Discussion and
Analysis of Financial Condition and Results of Operations," and the Consolidated
Financial  Statements  and  related  Notes  appearing  elsewhere  in this annual
report.

<TABLE>
<CAPTION>
                                                                              Year ended December 31,
                                                      1995         1996        1997         1998         1999         2000
------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>           <C>           <C>        <C>         <C>         <C>
Dollars in thousands, except per share data
Consolidated Statements of Operations Data:
Revenues                                           $      727    $     993     $   604    $   7,154   $   36,955  $   106,121
Cost of revenues                                          323          430         515        5,849       27,329       59,299
                                                   ------------  ------------  ---------  ----------- ----------  -----------
    Gross profit                                          404          563          89        1,305        9,626       46,822
                                                   ------------  ------------  ---------  ----------- ----------  -----------
Operating expenses:
    Sales and marketing                                   163          610       1,201       12,183       55,072       95,518
    Research and development                                -           25       2,436        4,370        8,885       24,187
    General and administrative                            347          656         918        3,549        8,342       13,978
    Amortization of intangible assets                       -           32         136          730        8,805       80,515
    Stock-based compensation                                -            -           -          182        7,216        6,215
    Impairment of certain long-lived assets                 -            -           -            -            -       46,564
    Restructuring and other impairment charges              -            -           -        5,207            -       64,938
                                                   ------------  ------------  ---------  ----------- ----------  -----------
    Total operating expenses                              510        1,323       4,691       26,221       88,320      331,915
                                                   ------------  ------------  ---------  ----------- ----------  -----------
    Loss from operations                                (106)        (760)      (4,602)     (24,916)     (78,694)    (285,093)
                                                   ------------  ------------  ---------  ----------- ----------  -----------
Nonoperating income (expense):
    Gain on sale of marketable equity securities            -            -           -            -        2,878        5,670
    Interest income (expense)                             (7)         (50)        (164)          171        (127)         469
    Impairment of marketable equity securities and
    cost-basis investments                                  -            -           -            -            -      (32,277)
                                                   ------------  ------------  ---------  ----------- ----------  --- --------
    Total nonoperating income (expense), net              (7)         (50)        (164)          171        2,751     (26,138)
                                                   ------------  ------------  ---------  ----------- ----------  -----------
    Net loss before income tax benefit                  (113)        (810)      (4,766)     (24,745)     (75,943)    (311,231)
Income tax benefit.                                         -            -           -            -            -       49,205
                                                   ------------  ------------  ---------  ----------- ----------  -----------
    Net loss                                       $    (113)    $   (810)     $(4,766)   $ (24,745)  $  (75,943) $  (262,026)
                                                   ===========   ===========   =========  ==========  ==========  ===========

Basic and diluted net loss per share (1)           $   (0.06)    $  (0.40)     $ (1.83)   $   (7.01)  $    (5.80) $     (4.61)

                                                   ===========   ===========   =========  ==========  ==========  ===========


Dollars in thousands
Consolidated Balance Sheet Data:
    Cash and cash equivalents                       $    38      $     12      $  376      $  9,849    $  10,660   $   11,715
    Working capital (deficit)                           (99)         (704)     (2,756)        5,678       74,315        7,688
    Total assets                                        213           272       2,330        23,783      274,174      288,437
    Long-term obligations                                39           288         885         1,837        6,797        5,444
    Total liabilities                                   261         1,102       4,354        10,581       44,961       92,731
    Preferred stock                                       -             -       3,403        35,070            -            -
    Total shareholders' equity (deficit)                (48)         (830)     (2,024)       13,202      229,213      195,706


</TABLE>

<TABLE>
<CAPTION>
                                                                                    As of and for the three-months ended
                                                                                March 31,    June 30,    Sept. 30,     Dec. 31,
                                                                                  2000         2000         2000         2000
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>           <C>         <C>          <C>
Other Data:
Number of premier merchants listed on the Network
    Commerce Consumer Network (2)                                                 97          125           118           80
Average quarterly revenue per premier merchant                                47,504       71,736        122,831     145,375
Number of businesses listed on the Network
    Commerce Business Network (3)                                            610,000      899,000      1,025,000   1,077,000
Number of businesses utilizing our technology platforms                       19,700      115,000        232,000     325,000


     (1) See Note 2 to the Consolidated  Financial  Statements for a description
of the method used to compute basic and diluted earnings per share.

     (2) Premier  merchants  include those  merchants  that  contribute  greater
than10,000 of revenue per month to the Network Commerce  Consumer  Network.

     (3)  Represents  the number of  businesses  listed in the Network  Commerce
Business Network directory as of the last day of the applicable quarter.

</TABLE>

                                       30
<PAGE>


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

This annual report on Form 10-K contains forward-looking statements that involve
known and unknown  risks and  uncertainties,  such as  statements  of our plans,
objectives,  expectations and intentions. Words such as "may," "could," "would,"
"expect,"  "anticipate," "intend," "plan," "believe," "estimate," and variations
of  such  words  and  similar   expressions   are  intended  to  identify   such
forward-looking  statements.  You  should  not  place  undue  reliance  on these
forward-looking  statements,  which are based on our  current  expectations  and
projections about future events, are not guarantees of future  performance,  are
subject to risks,  uncertainties  and  assumptions  (including  those  described
below) and apply only as of the date of this report.  Our actual  results  could
differ  materially  from those  anticipated in the  forward-looking  statements.
Factors that could cause or contribute to such differences  include, but are not
limited to, those discussed below in "Factors  Affecting Our Operating  Results,
our Business and Our Stock Price" as well as those discussed in this section and
elsewhere in this report.

OVERVIEW

We  are  a  technology   infrastructure  and  services  company  that  offers  a
comprehensive  technology  and  services  platform  solution,  including  domain
registration,  hosting services, e-commerce servicesand online marketplaces. Our
technology and services platform operates across our core infrastructure,  which
includes four data centers,  more than 500 servers,  and operates at a bandwidth
in excess of 400 megabits per second. Through December 31, 2000, we operated two
commerce  networks  and an eBusiness  Services  division.  The Network  Commerce
Consumer Network aggregated merchants and shoppers over a distributed network of
Web sites,  and the Network  Commerce  Business  Network  enabled  businesses to
engage  in  online  activities  and  transactions  with  other  businesses.  The
eBusiness services division provided consulting,  custom commerce solutions, and
integrated  marketing  services for businesses  conducting  commerce online.  In
January  2001, we  restructured  these groups into the Network  Commerce  Portal
Services and the Network Commerce  Infrastructure  and Technology  ("IT") groups
and we shutdown the  eBusiness  Services  division.  The Portal  Services  group
includes one-to-one  marketing services and various online marketplaces  focused
on gaming and entertainment.  The Network Commerce IT group includes domain name
registration,  technology and licensing and other business services. As a result
of  this   restructuring,   we   recognized   approximately   $64.9  million  in
restructuring  and  impairment  charges for the year ended  December  31,  2000.
During our  continued  restructuring  efforts in  January  2001,  certain of our
business units were shut down,  which resulted in severance and related  payroll
charges  of  approximately  $1.1  million  and  approximately  $1.7  million  of
restructuring charges. Further restructuring efforts in March 2001, included the
shutdown  of  SpeedyClick,  the sale of  Ubarter  Canada  and the lay off of 100
employees,   which  resulted  in  severance  and  related   payroll  charges  of
approximately  $230,000 and  approximately  $50.0 million of  restructuring  and
impairment charges.

Our consolidated  financial statements for the year ended December 31, 2000 have
been prepared on a going concern basis,  which  contemplates  the realization of
assets and the settlement of  liabilities  in the normal course of business.  We
have incurred net losses of $262.0  million for the year ended December 31, 2000
and have  accumulated  deficits of $367.3  million as of December 31, 2000.  The
Company has  continuously  incurred net loss from  operations and as of December
31, 2000 has working  capital of $7.7 million.  These factors raise  substantial
doubt  about our  ability  to  continue  as a going  concern.

                                       31
<PAGE>

We  believe  that our cash  reserves  and cash  flows  from  operations  will be
adequate to fund our operations through the first quarter of 2001. Consequently,
we will require substantial additional funds to continue to operate the business
beyond that period.  Many  companies in the Internet  industry have  experienced
difficulty raising additional  financing in recent months.  Additional financing
may not be  available  to us on favorable  terms or at all.  Even if  additional
financing is available, we may be required to obtain the consent of our existing
lenders,  which we may not be able to obtain.  If  additional  financing  is not
available,  we may need to dramatically  change our business plan, sell or merge
our  business,  or face  bankruptcy.  In  addition,  the  issuance  of equity or
equity-related  securities  will  dilute  the  ownership  interest  of  existing
stockholders  and the  issuance of debt  securities  could  increase the risk or
perceived risk.

Our plans to mitigate the risk of this uncertainty  include, but are not limited
to, one or more of the following:

     engaging a financial advisor to explore strategic  alternatives,  which may
     include a merger, asset sale, or another comparable transaction;

     raising  additional  capital  to  fund  continuing  operations  by  private
     placements of equity and/or debt securities; and

     forming a joint  venture  with a  strategic  partner or partners to provide
     additional capital resources to fund operations.

Additional  cost-cutting  measures could include additional  lay-offs and/or the
closure of certain business units and facilities.

We were  incorporated  in  January  1994 and  initially  operated  as a computer
services  company.  In 1996,  we began to change  the focus of our  business  to
conducting   commerce  over  the   Internet.   In  May  1997,  we  launched  the
BuySoftware.com  Network, a network of online sites that sold computer products.
During 1998, we completed three acquisitions, including the acquisition of Media
Assets,  Inc., a direct marketing company, we launched  ShopNow.com and we began
offering merchants e-commerce enabling products and services.  In April 1999, we
changed our name from TechWave Inc. to ShopNow.com  Inc. In June 1999, we ceased
operation  of  the   BuySoftware.com   Network  because  we  determined  it  was
inconsistent  with our evolving  strategy.  In May 2000,  we changed our name to
Network  Commerce Inc. We consummated  five  acquisitions  during 1999 and seven
additional  acquisitions  during  2000.  During the fourth  quarter of 2000,  we
announced the lay off of 209 employees  through  staff  reductions  and from the
closure of Media Assets,  Inc., AXC  Corporation,  Cortix,  Inc. and WebCentric,
Inc. In addition,  we initiated a restructuring  plan to lower costs and improve
profitability by shutdown of certain other business units, including ShopNow.com
in January 2001, and SpeedyClick.com in March 2001, these restructuring  efforts
included laying off 145 and 100 employees, respectively.

Through  December 31, 2000,  we have derived  substantially  all of our revenues
from the  Network  Commerce  Consumer  Network,  the Network  Commerce  Business
Network and from providing services to businesses.

Revenues  from the Network  Commerce  Consumer  Network,  which was a network of
proprietary  and affiliated  Web sites  including  www.shopnow.com  and licensed
affiliates,   the  BottomDollar  Network  (including   www.bottomdollar.com  and
licensed affiliates) and  www.speedyclick.com  were generated primarily from the
sale  of  online  marketing   services,   leads  and  orders,   advertising  and
merchandising.  Revenues from these  agreements  were recognized as the media or
services were delivered to the merchants over the term of the agreements,  which
typically  ranged from one to twelve  months.  We bore the full credit risk with
respect  to  these   sales.   In  certain   circumstances,   such  as  with  the
www.chaseshop.com  portal,  we offered products  directly to shoppers.  In these
instances where we acted as merchant-of-record,  we recorded as revenue the full
sales price of the product  sold and recorded the full cost of the product to us
as cost of revenues;  upon shipment of the product.  Shipping  charges billed to
the customer were included in revenues, and the costs incurred by us to ship the
product to the customer  were  included in cost of sales.  In January  2001,  to
improve margins and to lower costs, we discontinued  offering  products directly
to online  shoppers.  By March 2001, the Network  Commerce  Consumer Network was
shutdown to further reduce costs.

Revenues  from the  Network  Commerce  Business  Network,  which is a network of
proprietary   and   affiliated   Web   sites,   including    www.registrars.com,
www.b2bnow.com,  www.freemerchant.com,  www.domainzero.com  and www.ubarter.com,
are  derived  primarily  from  providing  domain  registration,   web-enablement
services,  commerce-enablement services, transaction processing, advertising and
technology  licensing to businesses.  Revenues from  registrars.com  are derived
from the sale of domain name registration fees, which are typically paid in full


                                       32
<PAGE>

at the time of the sale and are recognized  over the  registration  term,  which
typically ranges from one to three years. Revenues from b2bNow.com are generated
primarily from the sale of advertising and  merchandising  products and services
similar to those sold on the Network Commerce  Consumer  Network.  Revenues from
Ubarter.com are generated from  transaction  fees earned from member  businesses
that transact over the Ubarter  exchange system as well as from products sold by
Ubarter.com to other member merchants of the Ubarter  exchange system.  Revenues
from  services  are  generated  principally  through  development  fees,  domain
registration fees, hosting fees and sales and marketing services. These services
can be purchased as a complete  end-to-end  suite of services or separately.  We
recognize revenues from the development of custom applications and online stores
and marketing  projects on a percentage  of completion  basis over the period of
development or the period of the marketing  project.  These  projects  generally
range from two to twelve months.  Hosting contracts typically have a term of one
year,  with fees charged and earned on a monthly basis.  We bear the full credit
risk with  respect to these  sales.  Contract  costs  include all direct  labor,
material,  subcontract and other direct project costs and certain indirect costs
related to contract performance.

Revenues are also generated from fees paid to us by businesses and merchants who
license our technology;  transaction  processing,  fraud prevention,  and online
payment gateways,  as well as other e-commerce enabling  technologies.  Revenues
include  licensing  fees,  per-transaction  fees and in  certain  cases  monthly
hosting  and  maintenance  fees,  which are  recognized  in the  period  earned.
Revenues  generated from technology  licensing are recognized in accordance with
Statement of Position  97-2,  "Software  Revenue  Recognition."  Businesses  and
merchants  who  utilize  our  payment   processing   technologies   act  as  the
merchant-of-record  and bear the full  credit  risk on those  sales of goods and
services.

We recognize  revenues from barter  transactions  when earned,  and value barter
transactions based on the value of the consideration  received from the customer
or from the value of the services  provided to the  customer,  whichever is more
readily determinable.  During 2000, we recognized  approximately $4.1 million in
revenues on such transactions.

We recognize revenues from sale of online marketing services,  leads and orders,
advertising  and  merchandising  in which we receive equity in our customer.  We
value the equity  received from these  transactions  as  cost-basis  investments
based on the value of the  consideration  received from the customer or from the
value of the  services  provided  to the  customer,  whichever  is more  readily
determinable.  We monitor these  cost-basis  investments  for  impairment.  When
cost-basis  investments  are deemed to be permanently  impaired,  the difference
between  cost and  market  value  is  charged  to  operations.  There  can be no
assurance that our investments in these early-stage technology companies will be
realized.  During 2000, we recognized approximately $10.3 million in revenues on
such equity transactions.

Cost of revenues  generated from the Network  Commerce  Consumer Network include
the portion of our  Internet  telecommunications  connections  that are directly
attributable to traffic on the Network Commerce  Consumer Network and the direct
labor costs incurred in maintaining and enhancing our network infrastructure. In
order to  fulfill  our  obligations  under  our  registrations,  lead and  order
delivery advertising  programs,  we occasionally  purchase consumer traffic from
third party  networks by placing on their Web sites  advertisements  that,  when
clicked  on by a visitor,  send the  visitor to the  Network  Commerce  Consumer
Network.  Any shopping  traffic that we purchase from a third party that is used
to fulfill these  obligations is included as cost of revenues.  Cost of revenues
on the  products  that we sell as  merchant-of-record  includes  the cost of the
product,  credit card fees and shipping costs.  Cost of revenues  generated from
providing  services  includes all direct labor costs incurred in connection with
the provision of services,  as well as fees charged by third-party  vendors that
have directly  contributed to the design,  development and implementation of our
services.   Cost  of  revenues  generated  from  licensing  e-commerce  enabling
technologies  and  from our  proprietary  business-to-business  portal  consists
primarily  of  telecommunications  costs and  direct  labor  costs  incurred  in
maintaining and enhancing our network infrastructure.

                                       33
<PAGE>

During the first  quarter of 2000,  we paid  Inktomi  Corp.  ("Inktomi")  a $6.1
million  prepaid fee to be a  non-exclusive  distributor of certain of Inktomi's
shopping  engine   technologies   that  provides  a  scalable  and  customizable
end-to-end shopping solution.  This fee allowed us to sell up to 100 occurrences
to Inktomi's  shopping engine during a 12-month  period  subsequent to the first
quarter  2000.  Through  September  30, 2000,  we had  recognized  approximately
$400,000  in  revenues  from this  distribution  agreement.  Based on this sales
history,  we  determined  that we would not recover the  remaining  value of the
prepaid fee before the 12-month  period  expired.  As a result,  we charged $5.3
million to cost of  revenues - unusual  item  during the third  quarter  2000 in
order to write down this prepaid asset to its net  realizable  value,  which was
deemed  to be  approximately  $300,000  at the time  that the  unusual  item was
recorded.

Prior to our calendar year-end 2000, we held marketable equity securities with a
fair market  value of  $431,000  and a cost basis of $24.1  million.  Due to the
substantial  decline in market values of these securities as well as the overall
decline in valuations in the public markets  experienced in the third and fourth
quarters of 2000, we determined that our marketable  securities were permanently
impaired as of December 31,  2000.  As a result,  we  recognized  an  impairment
charge of $23.7  million  to write down  these  investments  to fair value as of
December 31, 2000. For the year ended December 31, 1999, these investments had a
fair value of $30.9  million,  resulting in the  recognition  of $7.5 million in
unrealized  holding gains for the same period. As of December 31, 1999 and 2000,
the majority of our marketable equity securities  consisted of 476,410 shares of
24/7 Media (NASDAQ: TSFM).

ACQUISITIONS

In June 1999,  we acquired GO  Software,  Inc.  ("GO").  GO develops and markets
transaction  processing  software for personal  computers that can function on a
stand-alone basis or can interface with core corporate  accounting  systems.  We
paid GO shareholders $4.7 million in cash, issued a $1.0 million promissory note
bearing interest at 10%, and issued 1,123,751 shares of common stock,  valued at
$8.54 per share,  for a total purchase price of $15.4 million.  The  acquisition
was  accounted  for  using the  purchase  method of  accounting.  Of the  excess
purchase price of  approximately  $14.4 million,  $13.8 million was allocated to
acquired technology and $556,000 was allocated to goodwill, which are both being
amortized  over a three-year  life. The note bore interest at 10% and was repaid
in full upon  completion of our initial public  offering  completed in September
1999.  Also in June 1999,  we acquired  CardSecure,  Inc.  ("CardSecure")  for a
purchase  price of  approximately  $3.5  million.  CardSecure  is a developer of
e-commerce  enabled  Web sites.  The  acquisition  was  accounted  for using the
purchase method of accounting.  The excess purchase price of approximately  $3.5
million was  allocated  to acquired  technology  and is being  amortized  over a
three-year life.

On November 12, 1999, we acquired SpeedyClick, Corp. ("SpeedyClick"),  for $55.6
million of cash, common stock and common stock options.  SpeedyClick  maintained
an  Internet  Web site that  focused  on  entertainment  and  interactivity.  In
connection with this  acquisition,  we issued to the shareholders of SpeedyClick
3,799,237 shares of common stock valued at $13.31 per share. Options to purchase
SpeedyClick  common stock were assumed by us and converted into 157,527  options
to purchase our common stock. We also paid cash consideration of $3.0 million to
the owners of SpeedyClick.  We accounted for this transaction as a purchase.  Of
the $55.6  million  in  consideration  paid,  approximately  $27.9  million  was
allocated to  proprietary  concepts,  $14.7 million to customer  lists and $13.0
million  to  goodwill.  These  intangible  assets  were being  amortized  over a
three-year life.  However, in March 2001, we decided to shut down the operations
and will  write-off  the  remaining  intangible  assets of  approximately  $32.0
million in the first quarter of 2001.

                                       34
<PAGE>

On December 3, 1999, we acquired Cortix,  Inc.  ("Cortix"),  a corporation doing
business  as  20-20Consumer.com,  for $14.4  million of cash and  common  stock.
Cortix  provided  comparison  shopping  services  including  online  reviews and
ratings for commerce-oriented businesses,  merchants and products. In connection
with this acquisition, we issued to the shareholders of Cortix 711,435 shares of
common stock valued at $18.81 per share together with cash consideration of $1.0
million.  We accounted for this transaction as a purchase.  Of the $14.4 million
in  consideration  paid,  approximately  $11.3 million was allocated to acquired
technology,  $1.6 million to customer lists and $1.3 million to goodwill.  These
intangible  assets were being  amortized  over a three-year  life.  However,  in
December  2000,  we  decided  to shut  down the  operations  and  wrote-off  the
remaining intangible assets of $9.1 million.

On December 17, 1999, we acquired  WebCentric Inc.  ("WebCentric") a corporation
doing business as bottomdollar.com, for $41.6 million of cash, common stock, and
common stock options. WebCentric developed e-commerce integration technology and
applications,  including a comparison  shopping engine that allowed consumers to
search and  compare  the  products  and  services  of several  leading  Internet
merchants. In connection with this acquisition, we issued to the shareholders of
WebCentric  2,161,904 shares of common stock valued at $16.89 per share together
with  approximately  $1.4 million of cash.  In addition,  we issued  replacement
stock options to purchase an aggregate of 121,544  shares of our common stock to
certain employees and owners of WebCentric. We accounted for this transaction as
a purchase.  Of the $40.2 million in  consideration  paid,  approximately  $31.8
million was allocated to acquired technology, $3.3 million to customer lists and
$4.6 million to goodwill.  These  intangible  assets were being amortized over a
three-year  life.  However,  in  December  2000,  we  decided  to shut  down the
operations and wrote-off the remaining intangible assets of $24.3 million.

On January 13,  2000,  through a wholly owned Nova Scotia  company,  we acquired
Pronet Enterprises Ltd. ("Pronet"),  a Canadian company, for approximately $12.8
million,  consisting of $3.2 million in cash, $2.2 million in non-cash  deferred
tax  liabilities  assumed  and $7.4  million in common  stock and  common  stock
options issued to Pronet  shareholders.  Pronet operates a  business-to-business
portal and marketplace that aggregates businesses that seek to transact with one
another.  In connection with this acquisition,  we issued to the shareholders of
Pronet 162,508 shares of common stock,  valued at $17.60 per share. In addition,
we  issued  options  to  purchase  351,666  shares  of  common  stock to the two
principal  shareholders  of  Pronet.  We  accounted  for this  transaction  as a
purchase. Of the $12.8 million in consideration paid, approximately $6.3 million
was allocated to acquired  technology,  $2.7 million to customer  lists and $3.8
million  to  goodwill.  These  intangible  assets  are  being  amortized  over a
three-year life. In January 2001, we revised our estimated useful life for these
assets  and  will  be  amortizing   the  remaining   carrying  value  of  Pronet
(approximately  $9.1  million as of December 31, 2000) over the first six months
of 2001.

On January 18, 2000,  we acquired AXC  Corporation  ("AXC"),  for  approximately
$17.9  million,  consisting  of $2.2  million in cash,  $4.1 million in non-cash
deferred tax  liabilities  assumed and $11.6  million in common stock and common
stock options issued to AXC  shareholders.  AXC provided  e-commerce  consulting
services to businesses.  In connection with this  acquisition,  we issued to the
shareholders  of AXC  540,296  shares of common  stock  valued at $17.60 per. In
addition, we issued replacement stock options to purchase an aggregate of 72,089
shares of our common stock to certain  employees and owners of AXC. We accounted
for this transaction as a purchase.  Of the $17.9 million in consideration paid,
approximately $7.2 million was allocated to assembled workforce, $4.9 million to
customer lists, $5.0 million to goodwill and $800,000 to working capital.  These
intangible  assets were being  amortized  over a three-year  life.  However,  in
December  2000,  we  decided  to shut  down the  operations  and  wrote-off  the
remaining intangible assets of $14.2 million.

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<PAGE>

On April 11, 2000,  we acquired  FreeMerchant.com,  Inc.  ("FreeMerchant"),  for
approximately  $38.1 million,  consisting of $2.0 million in cash, $10.0 million
in non-cash deferred tax liabilities assumed, $500,000 of debt assumed and $25.6
million  in common  stock  and  common  stock  options  issued  to  FreeMerchant
stockholders.  FreeMerchant developed online store-builder technology for small-
to  medium-sized  merchants who seek a low-cost entry point to  e-commerce,  and
provides  hosting   services  to  those  merchants.   In  connection  with  this
acquisition,  we issued to the shareholders of FreeMerchant  2,573,723 shares of
common  stock,  valued at $8.80 per share.  In  addition,  we issued  options to
purchase 293,596 shares of common stock to certain FreeMerchant stockholders and
employees. We accounted for this transaction as a purchase. Of the $38.1 million
in  consideration  paid,  approximately  $23.0 million was allocated to acquired
technology,  $4.1 million to assembled  workforce and $11.0 million to goodwill.
These intangible assets are being amortized over a three-year life.

On June 2, 2000, we acquired Ubarter.com Inc ("Ubarter") for approximately $61.7
million,  consisting of $875,000 in cash, $11.4 million in non-cash deferred tax
liabilities assumed,  $978,000 of net liabilities  assumed,  $7.6 million in the
cancellation  of debt between  Ubarter and us, and $40.8 million in common stock
and common stock warrants issued to Ubarter stockholders and creditors. Ubarter,
which  was a  publicly  traded  company,  is a  business-to-business  e-commerce
enterprise,  which  utilizes  the  Ubarter  Dollar as payment for  products  and
services by its member  businesses over its proprietary  barter exchange system.
In connection with this acquisition, we issued to the stockholders and creditors
of Ubarter a total of 2,682,871  shares of common stock valued at  approximately
$15.10 per share.  In addition,  we issued warrants to purchase 51,842 shares of
common  stock to certain  Ubarter  stockholders,  employees  and  creditors.  We
accounted  for  this  transaction  as  a  purchase.  Of  the  $61.7  million  in
consideration  paid,  approximately  $7.5  million  was  allocated  to  acquired
technology,  $2.5 million to assembled  workforce,  $25.1 million to proprietary
concept,  $2.5 million to customer lists,  and $24.0 million to goodwill.  These
intangible  assets were being  amortized  over a three-year  life.  Early in the
fourth  quarter 2000, we launched a new user  interface and back-end  management
system for the Ubarter.com  merchant  exchange,  and executed various  marketing
efforts to promote the new system. These efforts did not stimulate growth in the
Ubarter economy as expected,  which led to a revision in our original  forecasts
and  projections  for Ubarter.  These revised  forecasts  indicated  that future
expected cash flows from this business unit were less than the carrying value of
its intangible assets,  thus triggering an impairment event in December 2000. At
that time, the carrying value of Ubarter's  intangible assets including goodwill
was $51.6 million.  Based on recent  comparable  sales of other barter  exchange
systems,  we determined  the fair value of Ubarter.com  to be  approximately  $5
million.  As a result,  we recognized  an impairment  charge of $46.6 million in
December 2000.

On August 24, 2000, we acquired Ivebeengood.com, d.b.a. UberWorks ("UberWorks"),
a wholly owned subsidiary of Trilogy, Inc. ("Trilogy"),  for approximately $22.8
million,  consisting of $2.4 million accrued as non-cash deferred  compensation,
$5.9 million in non-cash  deferred tax liabilities  assumed and $14.5 million in
common stock and common stock options issued to Trilogy and UberWorks employees.
UberWorks  is a developer  of  multi-merchant  e-commerce  purchasing  tools and
universal  shopping cart  technology.  In connection with this  acquisition,  we
issued to the  shareholders  of UberWorks a total of 2,601,562  shares of common
stock valued at approximately $6.13 per share. Of the total,  913,459 shares are
being held back by us to be  subsequently  released based on time vesting and on
certain  performance  criteria  yet to be  achieved.  In  addition,  we issued a
warrant to Trilogy,  with a strike  price of  $0.000001  per share,  to purchase
additional shares of our common stock if on the one-year anniversary date of the
acquisition;  the shares issued to Trilogy are not worth at least $13.1 million.
The maximum  number of  additional  shares that Trilogy can  purchase  under the
terms of the warrant is 2.6  million.  To the extent that the shares have a fair
market value that exceeds $13.1 million on the one-year  anniversary  date,  the
warrant is cancelled and Trilogy must forfeit the number of shares that would be
required to bring their fair value down to $13.1 million, limited to a maximum


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<PAGE>

of 1.3 million  shares.  We also issued  options to purchase  248,162  shares of
common stock to certain UberWorks  employees.  We accounted for this transaction
as a purchase.  Of the $22.8 million of consideration paid,  approximately $12.3
million  was  allocated  to  acquired  technology,   $2.4  million  to  deferred
compensation,  $726,000 to  assembled  workforce  and $7.3  million to goodwill.
These intangible  assets were being amortized over a three-year  life.  Deferred
compensation   will  be  amortized  over  the  three-year  term  of  the  option
agreements,  subject to certain accelerated vesting criteria.  However, in March
2001,  we decided to abandon the  technology;  and will  write-off the remaining
intangible asset of approximately $16.0 million in the first quarter of 2001.

On  December  8,  2000,  we  acquired   ePackets.Net,   Inc.   ("ePackets")  for
approximately $270,000,  consisting of $150,000 in cash, $37,000 in common stock
and common  stock  options  and  $83,000 in net  liabilities  assumed.  ePackets
provides  permission-based  one-to-one email solutions.  In connection with this
acquisition,  we issued to the shareholders of ePackets a total of 33,324 shares
of common stock. The consideration paid was allocated to acquired technology and
will be amortized over a three-year life.

On  December  22,  2000,  we acquired  Internet  Domain  Registrars  Corporation
("IDR"),  for approximately $23.6 million,  consisting of $750,000 in cash, $6.1
million in non-cash  deferred tax  liabilities  assumed,  $5.7 million in common
stock  and  $11.1  million  in net  liabilities  assumed.  IDR is a domain  name
infrastructure company, which owns and operates the www.registrars.com Web site.
In connection  with this  acquisition,  we issued to the  shareholders  of IDR a
total of 7,650,000  shares of common stock,  of which  1,000,000  were placed in
escrow for indemnification  purposes. In addition,  3,281,000 shares were issued
and placed in escrow to be  released  to the  former  shareholders  and  certain
employees of IDR upon the achievement of established future revenue targets over
an eighteen month period, and 219,000 shares were issued to employees of IDR who
continued to be employed by IDR after the acquisition.  Finally,  600,000 shares
of our common  stock were  issued at the  closing  to certain  other  persons in
connection  with  the  settlement  of  potential   claims  against  IDR  and  as
consideration  of services  rendered to IDR in connection with the  acquisition.
The closing  price of our common stock on December 22, 2000 was $0.69 per share.
We  accounted  for this  transaction  as a  purchase.  Of the $23.6  million  of
consideration  paid,  approximately  $10.5 million was allocated to  proprietary
concept,  $874,000 to domain name, $3.5 million to customer  lists,  $874,000 to
assembled  workforce and $7.8 million to goodwill.  These intangible  assets are
being amortized over a three-year life.



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<PAGE>

RESULTS OF OPERATIONS

COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999

REVENUES

Consumer and Business Networks. Revenues from our consumer and business networks
for the year ended  December  31,  2000 were  $88.2  million  compared  to $25.8
million for the year ended  December 1999. The increase was due primarily to the
expansion of our networks and increased demand for our services. We continued to
experience  growth in our business and merchant  listings,  consumer traffic and
affiliate and syndication  shopping sites, which resulted in increased fees from
licensing,  transaction processing,  business services,  online direct marketing
and  advertising.  The  BuySoftware.com  portion of revenues  for the year ended
December 31, 1999 was $9.9 million.

Going forward,  we anticipate lower Consumer and Business Network revenues,  due
to the shutdown of ShopNow.com and SpeedyClick, the elimination of direct retail
sales  to  consumers,   and  the  sale  of  Ubarter  Canada,  which  represented
approximately 60% of Ubarter  revenues.  On a pro forma basis, if the operations
had been  closed  at the  beginning  of 2000,  revenues  from our  Consumer  and
Business  Networks would have been $11.8 million for the year ended December 31,
2000.

Services.  Revenues for services for the year ended December 31, 2000 were $18.0
million  compared to $11.1  million for the year ended  December 31,  1999.  The
increase was due  primarily to the  contribution  of service  revenues from AXC,
which we acquired in January 2000. In 2001, we anticipate services revenue to be
eliminated due to the shutdown of both The HagginGroup and AXC.

We expect that revenues in both of these segments will be materially  negatively
impacted by a continued  downturn in the Internet sector. See "Factors Affecting
Operating  Results,  Our  Business  and Our Stock  Price - Risks  Related to Our
Industry"  for a  description  of this  trend  and its  potential  impact on our
operating results.

COST OF REVENUES AND GROSS PROFIT

CONSUMER  AND  BUSINESS  NETWORKS.  The cost of revenues  for the  consumer  and
business  networks  for the year  ended  December  31,  2000 was  $43.7  million
compared to $20.2 million for the year ended  December 31, 1999. The increase in
our cost of  revenues  was  directly  attributable  to the  increase in revenues
during the same period from the networks. The BuySoftware.com portion of cost of
revenues for the year ended December 31, 1999 was $11.2 million.

We  anticipate   improved  margins  due  to  the  shutdown  of  ShopNow.com  and
SpeedyClick,  the elimination of direct retail sales to consumers,  and the sale
of Ubarter Canada,  which were all low profit margin operations.  On a pro forma
basis,  cost of revenue from our Consumer and Business  Networks would have been
$2.9 million for the year ended December 31, 2000.

SERVICES. The cost of revenues for services for the year ended December 31, 2000
was $10.3 million compared to $7.2 million for the year ended December 31, 1999.
The  increase  in  our  cost  of  revenues  was  attributable  primarily  to the
operations  of AXC,  which we acquired in January  2000.  In 2001, we anticipate
services cost of revenue to be zero due to the shutdown of both The  HagginGroup
and AXC.

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<PAGE>

UNUSUAL ITEM.  The unusual item in cost of revenues for the year ended  December
31,  2000  consisted  of a $5.3  million  write  down of a prepaid  distribution
agreement with Inktomi.  Through  September 30, 2000, the Company had recognized
approximately  $400,000 in revenues from this distribution  agreement.  Based on
this sales history, management determined that the Company would not recover the
remaining  value of the prepaid fee before the 12-month  period  expired.  There
were no such items recognized in prior periods.

GROSS  PROFIT.  Gross  profit  for the year  ended  December  31,  2000,  before
recognition  of the unusual item was $52.1 million  compared to $9.6 million for
the year ended  December  31, 1999.  As a percent of revenues,  our gross profit
before the unusual item was 49.1%  compared to 26.0% for the year ended December
31, 1999.  This  increase in gross profit  percentage  was due  primarily to the
increase  in   higher-margin   revenues  during  2000,   while   decreasing  our
concentration of revenues from product sales to shoppers, which historically has
contributed only flat or negative gross profits. Gross profit for the year ended
December 31, 2000 inclusive of the $5.3 million unusual item described above was
44.1%.  In 2001,  we expect to increase  our gross  profits as a  percentage  of
revenues,  primarily  due to the  shutdown  of low  margin  business  units  and
offerings.  On a pro forma basis,  gross profit for the year ended  December 31,
2000,  would  have been $8.9  million  or 75.0% of  revenues  compared  to $46.8
million or 44.1% of revenues.


OPERATING EXPENSES

SALES AND MARKETING.  Sales and marketing  expenses  consist  primarily of costs
associated with marketing programs such as advertising and public relations,  as
well as salaries  and  commissions.  Sales and  marketing  expenses for the year
ended  December 31, 2000 were $95.5  million  compared to $55.1  million for the
year ended  December  31,  1999.  The  increase  was due  primarily to increased
spending as a result of our expansion of the Network  Commerce  Consumer Network
and our launch and expansion of the Network Commerce Business  Network,  both of
which resulted in additional personnel and nationwide  television,  print, radio
and online  advertisements.  Beginning in the forth  quarter 2000 through  April
2001, the Company  implemented a  restructuring  plan to lower costs and improve
profitability  that  included the  elimination  of the Consumer  Network and the
Services  Group.  As a result,  staffing  was reduced  from 118  employees to 35
employees and direct marketing  expense was  significantly  curtailed,  as we no
longer purchased traffic for our Consumer Network.

RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
salaries and related costs  associated  with the development of new products and
services, the enhancement of existing products and services, and the performance
of quality  assurance and  documentation  activities.  Research and  development
expenses  for the year ended  December 31, 2000 were $24.2  million  compared to
$8.9  million  for the year  ended  December  31,  1999.  The  increase  was due
primarily to the development and enhancement of our technology platform, as well
as to an increase in technology  personnel.  These employees focus on developing
our  technology  platform as well as building  the overall  infrastructure  that
supports the Network Commerce Consumer Network and the Network Commerce Business
Network.  Beginning in the forth  quarter 2000 through  April 2001,  the Company
implemented a restructuring plan to lower costs and improve  profitability which
resulted in a staff reduction of 58%, from 268 employees to 113 employees.

GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses  consist
primarily  of  salaries  and  other   personnel-related   costs  for  executive,
financial,  human  resources,  information  services  and  other  administrative
personnel,  as well as  legal,  accounting  and  insurance  costs.  General  and
administrative  expenses for the year ended December 31, 2000 were $14.0 million
compared to $8.3 million for the year ended  December 31, 1999. The increase was
due primarily to an increase in personnel from internal growth and acquisitions.

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<PAGE>

Beginning in the forth quarter 2000 through April 2001, the Company  implemented
a restructuring plan to lower costs and improve  profitability which resulted in
a staff reduction of 63%, from 279 employees to 102 employees.

AMORTIZATION OF INTANGIBLE  ASSETS.  Amortization of intangible assets resulting
from  acquisitions is primarily  related to the  amortization of customer lists,
domain names, acquired technology, proprietary concepts, assembled workforce and
goodwill.  Amortization of intangible assets expense for the year ended December
31, 2000 was $80.5 million  compared to $8.8 million for the year ended December
31, 1999.  This increase was due primarily to the increase in intangible  assets
and related amortization  expenses from business  acquisitions  completed during
1999  and  2000  described  above.   Intangible   assets  acquired  in  business
combinations are amortized over a three-year period. The Company's restructuring
plans in 2000 and 2001 resulted in the shutdown of operations  and the write-off
of   remaining    intangible    assets   of   HagginGroup,    AXC,    WebCentrix
(Bottomdollar.com),   Cortix,   Ivebeengood.com  (d.b.a.   UberWorks),   ProNet,
SpeedyClick,  and the  sale of  Ubarter  Canada.  Accordingly,  amortization  of
intangible  assets  expense will be reduced to  approximately  $34.0 million for
2001.

STOCK-BASED  COMPENSATION.  Stock-based  compensation  expense is related to the
amortization  of deferred  compensation  resulting  from stock option  grants to
employees with an option exercise price below the estimated fair market value of
our common stock as of the date of grant.  Stock-based  compensation expense for
the year ended  December 31, 2000 was $6.2 million  compared to $7.2 million for
the year ended December 31, 1999. The amount of deferred compensation  resulting
from these  grants is  generally  amortized  over a one- to  three-year  vesting
period.  As of December 31, 2000,  we have  recognized  $7.8 million of deferred
compensation to be amortized over future periods at  approximately  $650,000 per
quarter for the next twelve  quarters.  In December  2000,  the Company  granted
options to purchase  4,530,792  shares to Company  executives and employees at a
price of $0.78 vesting over 4 years.  In April 2001, the Company  repriced these
options to a price of $0.09 per share.  Also,  the  Company  offered a voluntary
stock option exchange program to its employees.  The plan allows  employees,  if
they so choose, to exchange any three options for one option priced at $0.09 per
share and  vesting  quarterly  over the next  four  quarters.  The stock  option
repricing and voluntary  stock option  exchange  program will result in variable
accounting treatment for these stock options. Variable accounting treatment will
result in unpredictable  stock-based  compensation  dependent on fluctuations in
quoted prices for the Company's common stock. These  unpredictable  fluctuations
in stock-based  compensation may result in material non-cash fluctuations in our
results of operations.  For example, in periods of general decline in the quoted
price  of our  common  stock,  if any,  variable  accounting  will  cause  us to
recognize less stock-based  compensation than in periods of general appreciation
in the quoted price of our common stock.  Furthermore,  in  circumstances  where
increases  in the quoted  price of our common  stock are followed by declines in
the quoted price of our common stock, variable accounting may result in negative
expense recognition as we adjust the cumulative  compensation of our stock-based
awards.  Stock-based  compensation is non-cash and will therefore have no impact
on our cash flows or liquidity.

IMPAIRMENT OF CERTAIN LONG-LIVED  ASSETS.  During the fourth quarter of 2000, we
launched a new user interface and back-end management system for the Ubarter.com
merchant  exchange,  and executed various  marketing  efforts to promote the new
system.  These  efforts  did not  stimulate  growth in the  Ubarter  economy  as
expected,  which led to a revision in our original forecasts and projections for
Ubarter.  These revised forecasts indicated that future expected cash flows from
this business unit were less than the carrying value of its  intangible  assets,
thus triggering an impairment event in December 2000. At that time, the carrying
value of Ubarter's intangible assets including goodwill was $51.6 million. Based
on recent comparable sales of other barter exchange  systems,  we determined the
fair value of  Ubarter.com to be  approximately  $5.0 million.  As a result,  we
recognized an impairment charge of $46.6 million in December 2000. There were no
such  charges   during  1999.  In  March  2001,  we  sold  Ubarter   Canada  for
approximately  $750,000  resulting in a loss on disposal of  approximately  $2.3
million.

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<PAGE>


We believe we will incur additional impairment and restructuring charges in the
future.

Restructuring and Other Impairment  Charges.  During the fourth quarter of 2000,
we recognized  restructuring  and  impairment  charges of $64.9  million,  which
included  $48.3  million of impaired  intangible  assets and goodwill as well as
$16.6  million of tenant  improvements,  fixed assets,  software and  supporting
technologies and infrastructure  related to previously  acquired businesses that
were shut down.  We  restructured  the  business to focus more  resources on our
technology   infrastructure  and  services   business.   As  a  result  of  this
restructuring,  we closed offices in San Francisco, Phoenix and Wichita. Charges
relating to employee  severance  and  benefits  for  terminated  employees  were
$235,000,  of which  $170,000  had been  paid as of  December  31,  2000 and the
remainder was paid early in the first quarter of 2001.

In the first  quarter of 2001,  we continued  our  restructuring  efforts by the
shutdown of our Consumer Network group  (ShopNow.com and SpeedyClick) and laying
off an  additional  245  employees.  This  will  result  in our  recognition  of
restructuring  and impairment  charges of  approximately  $54.1  million,  which
include $50.0 million of  restructuring  and  impairment  intangible  assets and
goodwill,  $2.8  million of tenant  improvements,  fixed  assets,  software  and
supporting  technologies,  and $1.3  million of  severance  and related  payroll
charges.

There were no such  charges  earlier in 2000 or for the year ended  December 31,
1999. There can be no assurance that we will not incur additional  restructuring
and impairment charges in the future.

NONOPERATING ITEMS AND NET LOSS

GAIN ON SALE OF  INVESTMENTS.  Gain on sale of  investments  occurs when we sell
certain of our investments in marketable equity securities and/or our cost-basis
investments  for cash proceeds in excess of our cost-basis in these  investments
at the time of sale.  Gains recognized for the year ended December 31, 2000 were
$5.7  million  compared to $2.9  million for the year ended  December  31, 1999.
There can be no assurance that we will  recognize  gains on sales of investments
in the future.

INTEREST INCOME. Interest income consists of interest income earned on our cash,
restricted  cash, cash equivalents and short-term  investments.  Interest income
for the year ended  December 31, 2000 was $5.2 million  compared to $1.4 million
for the year ended  December 31, 1999.  Interest  income  increased for the year
ended  December  31,  2000  due to the  increase  in our  cash  equivalents  and
short-term  investments realized from completion of our initial and supplemental
public  offerings of common stock.  We expect interest income to decline in 2001
due to a reduction in our cash position.

INTEREST  EXPENSE.  Interest  expense consists of interest costs incurred on our
outstanding debt  obligations.  Interest expense for the year ended December 31,
2000 was $4.7 million  compared to $1.5 million for the year ended  December 31,
1999.  Interest  expense  increased  for the year ended  December  31,  2000 due
primarily to the increase in our line of credit  during 2000,  which at year end
had an  outstanding  balance of $10.1 million  compared to $0 as of December 31,
2000 and 1999, respectively.

IMPAIRMENT OF MARKETABLE  EQUITY SECURITIES AND COST-BASIS  INVESTMENTS.  During
the second half of 2000, we  determined  that certain of our  marketable  equity
securities and cost-basis  investments  were  permanently  impaired  relative to
their  historical  values.  As a result,  we recognized an impairment  charge of
$32.3 million.  There were no such charges in 1999.  During the first quarter of
2001, we will incur  additional  write-down  of our  cost-basis  investments  of

                                       41
<PAGE>

approximately  $20.0  million  primarily  related to the general  decline in the
technology  industry.  There can be no assurance  that we will not incur further
downs of our cost-basis investments.

INCOME TAX BENEFIT.  The income tax benefit resulted principally from reductions
of deferred tax liabilities created as a result of business combinations. Income
tax benefit for the year ended December 31, 2000 was $49.2  million.  We did not
realize any income tax benefits  during the year ended  December 31, 1999. If we
continue  to  consummate  additional  business  combinations  that result in the
recognition  of  deferred  taxes,  we may  incur  additional  tax  deferred  tax
benefits. We have not paid nor have we received refunds for federal income taxes
and we do not expect to pay income  taxes or receive  income tax  refunds in the
foreseeable future.

NET LOSS.  Net loss for the year ended  December  31,  2000 was  $262.0  million
compared to $75.9  million for the year ended  December 31, 1999.  This increase
was  due  primarily  to an  increase  in our  operating  expenses,  increase  in
amortization  of  intangible  assets  relating to  acquisitions,  impairment  of
certain  long-lived  assets,  restructuring  and other  impairment  charges  and
impairment of marketable equity securities and cost-basis investments, partially
offset by our  increase in gross  profit and income tax benefit  during the year
ended December 31, 2000.

COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998

REVENUES

CONSUMER AND BUSINESS NETWORKS.  Revenues for consumer and business networks for
the year ended December 31, 1999 were $25.8 million compared to $4.2 million for
the year ended December 1998.  During 1999, we continued to experience growth in
our  business  and  merchant  listings,   consumer  traffic  and  affiliate  and
syndication  shopping  sites,  which resulted in increased fees from  licensing,
transaction   processing,   business  services,   online  direct  marketing  and
advertising,  exclusive  of  BuySoftware.com.  The  BuySoftware.com  portion  of
revenues for the year ended December 31, 1999 was $9.9 million  compared to $4.5
million for the year ended December 31, 1998.

SERVICES.  Revenues for services for the year ended December 31, 1999 were $11.1
million  compared to $2.9  million for the year ended  December  31,  1998.  The
increase was due primarily to increased demand for merchant services,  including
those services  provided by Media Assets Inc., which we acquired in September of
1998.

COST OF REVENUES AND GROSS PROFIT

CONSUMER  AND  BUSINESS  NETWORKS.  The cost of revenues  for the  consumer  and
business  networks  for the year  ended  December  31,  1999 was  $20.2  million
compared to $4.5 million for the year ended  December 31, 1998.  The increase in
these cost of  revenues,  exclusive  of  BuySoftware.com,  was due  primarily to
increased   merchandising  revenues  and  product  sales  from  the  ShopNow.com
marketplace.  The BuySoftware.com portion of cost of revenues for the year ended
December 31, 1999 was $11.2 million  compared to $4.5 million for the year ended
December 31, 1998.

SERVICES. The cost of revenues for services for the year ended December 31, 2000
was $7.2 million  compared to $1.4 million for the year ended December 31, 1999.
The  increase in our services  cost of revenues  was due  primarily to increased
demand for merchant services, including those services provided by Media Assets,
Inc.

                                       42
<PAGE>

GROSS  PROFIT.  Gross  profit  for the year  ended  December  31,  1999 was $9.6
million,  compared to a gross profit of $1.3 million for the year ended December
31, 1998.  This  increase in gross  profit was due  primarily to the increase in
revenues  from  advertising  and  merchandising  over the  Consumer and Business
Networks and from services, which contribute greater gross profits than revenues
generated  on  the  sales  of  products   from  the   ShopNow.com   marketplace.
Discontinuing  the  BuySoftware.com  business  in June 1999 also had a  positive
effect  on  our  overall  gross  profit.   The   BuySoftware.com   business  had
historically operated with minimal or negative gross profits.

OPERATING EXPENSES

SALES AND MARKETING.  Sales and marketing  expenses  consist  primarily of costs
associated with marketing programs such as advertising and public relations,  as
well as salaries  and  commissions.  Sales and  marketing  expenses for the year
ended  December 31, 1999 were $55.1  million  compared to $12.2  million for the
year ended  December 31,  1998.  This  increase  was due  primarily to increased
spending  as a result  of the  expansion  of our  merchant  services  and of the
ShopNow marketplace,  including additional personnel and nationwide print, radio
and television advertisements.

RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
salaries and related costs  associated  with the development of new products and
services, the enhancement of existing products and services, and the performance
of quality  assurance and  documentation  activities.  Research and  development
expenses  for the year ended  December 31, 1999 were $8.9  million,  compared to
$4.4  million  for the year ended  December  31,  1998.  This  increase  was due
primarily to the development  and enhancement of our technology  platform and to
an increase in technology  personnel.  These  employees  focus on developing our
technology platform as well as building the overall infrastructure that supports
our merchant services and the ShopNow marketplace.

GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses  consist
primarily  of  salaries  and  other   personnel-related   costs  for  executive,
financial,  human  resources,  information  services  and  other  administrative
personnel,  as well as  legal,  accounting  and  insurance  costs.  General  and
administrative  expenses for the year ended December 31, 1999 were $8.3 million,
compared to $3.5 million for the year ended December 31, 1998. This increase was
due primarily to an increase in personnel from internal growth and acquisitions.
In  September  1999,  we  settled a lawsuit  brought by a party with whom we had
entered  into a contract.  As a result of the terms of this  settlement,  in the
quarter  ended  September  30,  1999,  we  recognized   additional  general  and
administrative expenses in the amount of $1.5 million.

AMORTIZATION OF INTANGIBLE  ASSETS.  Amortization of intangible assets resulting
from  acquisitions is primarily  related to the  amortization of customer lists,
domain  names,   acquired   technology,   proprietary   concepts  and  goodwill.
Amortization  of intangible  assets expense for the year ended December 31, 1999
was $8.8  million,  compared to $730,000  for the year ended  December 31, 1998.
This increase was due primarily to the increase in intangible assets and related
amortization expenses from business acquisitions completed during 1999.

STOCK-BASED  COMPENSATION.  Stock-based  compensation  expense is related to the
amortization  of deferred  compensation  resulting  from stock option  grants to
employees with an option exercise price below the estimated fair market value of
our common stock as of the date of grant.  Stock-based  compensation expense for
the year ended December 31, 1999 was $7.2 million,  compared to $182,000 for the
year ended December 31, 1998. The amount of deferred compensation resulting from
these grants is generally amortized over a three-year vesting period. During the
fourth quarter of 1999, the contingent  performance criteria relating to a stock
option grant of 310,000  shares of the  Company's  common stock with an exercise

                                       43
<PAGE>

price of $4.00 were satisfied. Accordingly, a stock-based compensation charge of
approximately $3.3 million was recognized in the fourth quarter of 1999.

RESTRUCTURING  AND  OTHER  IMPAIRMENT   CHARGES.   In  June  1998,  we  acquired
e-Warehouse   and  CyberTrust  with  the  intent  of  integrating  the  acquired
technologies with our own e-commerce product and service  offerings.  The amount
we paid for these acquisitions was $5.4 million. We did not utilize the acquired
technologies and determined that they had no alternative  future use or value to
us, as our technology platform provided superior functionality.  As a result, we
wrote off $5.2 million of the purchase  price during the fourth quarter of 1998.
There were no such charges recognized during 1999.

NONOPERATING ITEMS AND NET LOSS

GAIN ON SALE OF  INVESTMENTS.  Gain on sale of  investments  occurs when we sell
certain of our investments in marketable equity securities and/or our cost-basis
investments  for cash proceeds in excess of our cost-basis in these  investments
at the time of sale. The gains recognized  during 1999 were primarily the result
of the sale of our investment in 110,000 shares of common stock of  FreeShop.com
in the fourth quarter of 1999. There were no gains on sales of marketable equity
securities in 1998.

INTEREST INCOME.  Interest income consists primarily of interest income on cash,
restricted  cash, cash equivalents and short-term  investments.  Interest income
for the year ended December 31, 1999 was $1.4 million,  compared to $382,000 for
the year ended December 31, 1998.  Interest  income in 1999 increased due to the
increase in our cash  equivalents and short-term  investments  realized from our
initial public offering, which was completed in September 1999.

INTEREST EXPENSE. Interest expense consists primarily of interest expense on our
outstanding debt  obligations.  Interest expense for the year ended December 31,
1999 was $1.5  million,  compared to $211,000  for the year ended  December  31,
1998.  The  increase in  interest  expense  was due to the  additional  interest
charges from our notes and leases payable,  as well as the  amortization of debt
financing costs incurred during 1999.

NET LOSS.  Net loss for the year  ended  December  31,  1999 was $75.9  million,
compared to a net loss of $24.7  million for the year ended  December  31, 1998.
This increase was due primarily to an increase in our operating  expenses,  most
significantly sales and marketing expenses,  partially offset by our increase in
gross profit during the same period.

NET OPERATING LOSS CARRYFORWARDS

As  of  December  31,  2000,  we  had  net  operating  loss   carryforwards   of
approximately  $181.7 million. If not used, the net operating loss carryforwards
will  expire at  various  dates  beginning  in 2012.  The Tax Reform Act of 1986
imposes  restrictions on the use of net operating  losses and tax credits in the
event that there has been an  ownership  change,  as defined,  of a  corporation
since the periods in which the net operating  losses were incurred.  Our ability
to use  net  operating  losses  incurred  prior  to  July  1999  is  limited  to
approximately  $14.3  million  per year due to  sales of  Series D and  Series E
convertible  preferred  stock to  third  parties  in April  1998 and the sale of
Series I convertible preferred stock to Chase Manhattan Bank in July 1999, which
resulted in ownership changes.  Our deferred tax assets are recognizable only to
the extent that they are offset by deferred tax liabilities.  To the extent that
our deferred  tax assets  exceed our  deferred  tax  liabilities  in the future,
valuation  allowances  may be recorded  against  our  deferred  tax  assets.  In
concluding that valuation allowances may be required,  management considers such
factors as our history of  operating  losses,  potential  future  losses and the
nature of our deferred tax assets.

                                       44
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Since  inception,  we have  experienced  net losses and negative cash flows from
operations.  As of December 31, 2000,  we had an  accumulated  deficit of $367.3
million.  We have financed our activities  largely  through  issuances of common
stock and preferred stock, from the issuance of short- and long-term obligations
and from capital leasing  transactions for certain of our fixed asset purchases.
Through  December 31, 2000,  our aggregate net proceeds have been $272.1 million
from issuing equity  securities and $52.3 million from issuing debt  securities.
As of December 31, 2000,  we had $49.9  million in cash,  cash  equivalents  and
short-term investments,  of which $16.6 million of such amounts is characterized
as restricted cash to secure our obligations under certain letters of credit and
other security arrangements.

Net cash used in operating activities was $139.1 million for year ended December
31, 2000,  compared to $50.9 million for the year ended  December 31, 1999.  The
increase  was due  primarily  to the increase in our net loss for the year ended
December 31, 2000 of $262.0 million compared to $75.9 million for the year ended
December  31,  1999.  In 2000,  the cash  used by our  $262.0  million  loss was
partially  offset by depreciation and amortization of $94.6 million for the year
ended  December 31, 2000 compared to $13.2  million for the year ended  December
31, 1999, by the  impairment and  restructuring  charges of $64.9 million in the
year ended  December  31, 2000  compared to none in the year ended  December 31,
1999, by the impairment of marketable equity securities and investments of $32.3
million for the year ended  December 31, 2000 compared to none in the year ended
December 31, 1999,  and by the deferred  income tax benefit of $49.2 million for
the year ended December 31, 2000 compared to none in the year ended December 31,
1999.

Net cash used in  investing  activities  was $37.0  million  for the year  ended
December 31,  2000,  compared to $79.1  million for the year ended  December 31,
1999. The decrease was due primarily to the net sales of short-term  investments
of $13.9 million for the year ended December 31, 2000, compared to net purchases
of short-term investments of $52.0 million for the year ended December 31, 1999,
and was offset by purchases of property and  equipment of $24.6  million for the
year ended  December  31,  2000  compared  to $13.5  million  for the year ended
December 31, 1999, by investments in equity and debt securities and other assets
of $18.0  million for the year ended  December 31, 2000 compared to $7.3 million
for the year ended  December 31, 1999,  and by the  acquisition of businesses of
$18.3 million for the year ended  December 31, 2000 compared to $9.4 million for
the year ended December 31, 1999.

Net cash provided by financing  activities was $130.5 million for the year ended
December 31, 2000,  compared to $130.8  million for the year ended  December 31,
1999. We incurred  similar  financing  transactions  during 2000 and 1999, which
were focused  primarily on the sale of our common stock to the public as well as
from certain long-term debt financings discussed below.

In March 1999,  we entered into a loan and security  agreement  with a financial
institution  for a term loan and line of credit.  In May 1999, the agreement was
amended and  restated to allow us to borrow up to $8.5  million at any one time,
consisting of a $3.5 million term loan (the "term loan"),  a $4.0 million bridge
loan (the "bridge  loan") and a line of credit of up to $2.5  million.  The term
loan bears  interest  at 12%,  is  secured by a letter of credit and  matures in
March  2002.  The term loan  balance  was $1.8  million  and $3.1  million as of
December 31, 2000 and 1999, respectively. The outstanding credit line and bridge
loan balances were both $0 as of December 31, 2000.

On May 19, 2000 we entered into a credit  agreement with a commercial bank, with
a  maximum  commitment  amount of $15.0  million  to  finance  the  purchase  of
equipment, software and tenant improvements.  The credit agreement is secured by

                                       45
<PAGE>

substantially all of our assets and had an outstanding  balance of $10.1 million
at December 31, 2000.  The  outstanding  commitments  bear interest at an annual
rate equal to the prime lending rate plus one and one-half percent.  Outstanding
commitments  under  the  agreement  are  required  to be repaid  under  specific
schedules,  with all  commitments  to be repaid no later than November 18, 2003.
The credit agreement requires us to maintain certain financial ratios and places
limitations on certain financing and investing activities.  The credit agreement
also  contains  other  customary  conditions  and events of default that, in the
event of  noncompliance  by us, would prevent any further  borrowings  and would
generally require the repayment of any outstanding  commitments under the credit
agreement.  We were  out of  compliance  with  respect  to the  working  capital
covenant as of December 31, 2000. We received a waiver from the lender to comply
with this financial covenant for the period ended December 31, 2000. On April 2,
2001, we repaid the outstanding commitment under the credit agreement.

On September 29, 2000, we sold $20.0 million of  convertible  notes and warrants
to CVI, a private institution.  The notes have a one-year term and bear interest
at an annual rate of six percent.  The original  conversion  price for the notes
was 95% of the  average  closing bid price of our common  stock  during a 20-day
trading period prior to the conversion date (which automatically occurs upon the
effectiveness of a registration statement filed with the Securities and Exchange
Commission),  subject to a maximum  conversion  price of the lower of our common
stock's  closing  bid price  the day prior to  closing  or $7.50 per  share.  On
October  26,  2000,  we  filed a  registration  statement  on Form  S-3 with the
Securities and Exchange Commission,  which was declared effective on December 4,
2000. Also at closing,  we issued warrants to purchase  4,050,633  shares of our
common  stock to the  private  institution  at an  exercise  price of $10.37 per
share.  The  warrants  are  immediately  exercisable  and expire five years from
closing.  Immediately  after the effective  date, $5.0 million of the notes were
converted into common stock.  The terms of the notes were also amended such that
the  conversion  price was set at $1.68 per share.  The  delisting of our common
stock from the Nasdaq  National Market is an event of default under the terms of
the notes. Upon default, we are obligated to repay part of the purchase price of
the notes and to make penalty payments to CVI.

On April 3,  2001,  we  received  a notice of  default  from CVI for an  alleged
violation of certain  provisions of Article VI of the Convertible Notes relating
to the breach of certain negative financial covenants contained in the Company's
Credit  Agreement  with  Imperial  Bank and the breach by the Company of certain
material terms of the Securities  Purchase  Agreement  dated as of September 28,
2000.  The notice of default  demanded that the Company  redeem the  Convertible
Notes on or before  April 9, 2001 for an amount equal to $17.25  million,  which
amount  represents  115% of the  aggregate  principal  amount  of the  remaining
Convertible  Notes.  Management  responded  to the notice of default on April 4,
2001 and  denied  that an event of  default  occurred  under the  Notes.  If the
Company were to be in default of the Convertible Notes and if the default is not
cured,  or waived by the holder of the  Convertible  Notes,  and the  Company is
required to redeem the amounts  outstanding  under the  Convertible  Notes,  the
holder  could seek  remedies  against  us,  which may include  penalty  rates of
interest,  immediate  repayment  of the debt and the  filing  of an  involuntary
petition in bankruptcy.  In addition, the Company may have no alternative but to
file  a  petition  in  bankruptcy.  If we  become  insolvent  or  enter  into  a
liquidation  proceeding,  after payment to our  creditors  there is likely to be
insufficient assets remaining for any distribution to shareholders.

                                       46
<PAGE>

Our future capital requirements depend on numerous factors,  including,  but not
limited to:

     the magnitude of our future losses;

     asset sales, if any; o any future restructuring; and;

     the  resources we devote to expansion of our sales,  marketing,  technology
     development and branding efforts.

We have also entered into  agreements to purchase  $10.3 million in  advertising
and  marketing  with  certain  Internet  advertisers  that  require  us to  make
aggregate advertising and marketing  expenditures of approximately $10.1 million
in 2001, of which $8.9 million is related to barter transactions,  decreasing to
$250,000 in 2002. During Q1 2001,  approximately $8.8 million of advertising and
marketing  related to barter  transactions  were  cancelled due primarily to the
vendors inability to deliver the advertising traffic in a timely manner.

We  believe  that our cash  reserves  and cash  flows  from  operations  will be
adequate to fund our operations through the first quarter of 2001. Consequently,
we will require substantial additional funds to continue to operate our business
beyond that period.  Many  companies in the Internet  industry have  experienced
difficulty raising additional  financing in recent months.  Additional financing
may not be  available  to us on favorable  terms or at all.  Even if  additional
financing is available, we may be required to obtain the consent of our existing
lenders,  which we may not be able to obtain.  If  additional  financing  is not
available to us we may need to  dramatically  change our business plan,  sell or
merge our business, or face bankruptcy.  In addition,  our issuance of equity or
equity-related  securities  will  dilute  the  ownership  interest  of  existing
stockholders  and our  issuance of debt  securities  could  increase the risk or
perceived risk of our Company.  Our future capital requirements depend upon many
factors, including, but not limited to:

     the level of revenues in 2001, which we expect to decline from 2000 levels;

     the rate at which we are able to reduce expense levels;

     the extent to which we develop and upgrade our  technology and data network
     infrastructure;

     the occurrence, timing, size and success of any asset dispositions in which
     we may engage; and

     the scope and success of our restructuring efforts, including reductions in
     our workforce.

Our plans for financing may include, but are not limited to, the following:

     engaging a financial advisor to explore strategic  alternatives,  which may
     include a merger, asset sale, or another comparable transaction;

     raising  additional  capital  to  fund  continuing  operations  by  private
     placements of equity and/or debt securities; and

     forming a joint  venture  with a  strategic  partner or partners to provide
     additional capital resources to fund operations.


                                       47
<PAGE>


SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following  table sets forth our unaudited  selected  consolidated  quarterly
financial data for the years ended December 31, 2000 and 1999.

<TABLE>
<CAPTION>
                                              Three Months Ended 1999                         Three Months Ended 2000
                                        March 31    June 30    Sept. 30     Dec. 31     March 31    June 30     Sept. 30    Dec. 31
------------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>         <C>        <C>         <C>          <C>         <C>         <C>         <C>
Dollars in thousands,
   except per share data
Revenues                             $    7,568  $    8,414 $     7,555 $    13,418  $   18,682  $   26,921  $   33,443  $   27,075
Cost of revenues                          7,140       7,543       4,811       7,835      10,393      12,839      20,511      15,555
                                     ----------- ---------- ----------- ------------ ----------- ----------- ----------- -----------
   Gross profit                             428         871       2,744       5,583       8,289      14,082      12,932      11,520
                                     ----------- ---------- ----------- ------------ ----------- ----------- ----------- -----------
Operating expenses:
   Sales and marketing                    5,472      12,808      15,265      21,527      22,100      24,032      24,114      25,272
   Research and development               1,600       1,334       2,433       3,518       4,215       5,195       6,660       8,117
   General and administrative               960       1,521       3,012       2,849       3,234       3,361       3,489       3,894
   Amortization of intangible assets        558       1,080       2,096       5,071      13,492      18,300      23,842      24,882
   Stock-based compensation                 133       1,822         592       4,669       1,856       1,286       1,484       1,590
   Impairment of certain
      long-lived assets                       -           -           -           -           -           -           -      46,564
   Restructuring and other impairmen          -           -           -           -           -           -           -      64,938
   charges
                                     ----------- ---------- ----------- ------------ ----------- ----------- ----------- -----------
   Total operating expenses               8,723      18,565      23,398      37,634      44,897      52,174      59,589     175,257
                                     ----------- ---------- ----------- ------------ ----------- ----------- ----------- -----------
   Loss from operations                  (8,295)    (17,694)    (20,654)    (32,051)    (36,608)    (38,092)    (46,657)   (163,737)
                                     ----------- ---------- ----------- ------------ ----------- ----------- ----------- -----------
Nonoperating income (expense):
   Gain on sale of marketable equity          -           -           -           -       1,086         293       4,163         128
   securities
   Interest income (expense)                 15       (260)       (360)       3,356         834       1,082         666      (2,113)
   Impairment of marketable equity
    securities and cost-basis
     investments                              -           -           -           -           -           -      (2,486)    (29,791)
                                     ----------- ---------- ----------- ------------ ----------- ----------- ----------- -----------
   Total nonoperating
     income (expense), net                   15       (260)       (360)       3,356       1,920       1,375       2,343     (31,776)
                                     ----------- ---------- ----------- ------------ ----------- ----------- ----------- -----------
   Net loss before income tax benefit    (8,280)    (17,954)    (21,014)    (28,695)    (34,688)    (36,717)    (44,314)   (195,513)
                                     ----------- ---------- ----------- ------------ ----------- ----------- ----------- -----------
Income tax benefit                            -           -           -           -      11,916      11,634      15,680       9,975
                                     ----------- ---------- ----------- ------------ ----------- ----------- ----------- -----------
   Net loss                          $   (8,280) $  (17,954)$   (21,014)$   (28,695) $  (22,772) $  (25,083) $  (28,634) $ (185,538)
                                     =========== ========== =========== ============ =========== =========== =========== ===========
Pro forma basic and diluted
   net loss per share (1)            $    (0.48) $    (0.80)$     (0.82)$     (0.77) $    (0.48) $    (0.45) $    (0.48) $    (2.92)
                                     =========== ========== =========== ============ =========== =========== =========== ===========

Weighted average shares used
   to calculate pro forma basic
   and diluted net loss per          17,168,592  22,538,696  25,776,927   37,313,691  47,581,471  56,221,302  60,063,876  63,468,376
                                     =========== ========== =========== ============ =========== =========== =========== ===========

     (1) Pro forma basic and diluted net loss per share is computed based on the
weighted average number of shares  outstanding,  giving effect to the conversion
of convertible  preferred  stock on an as-if  converted  basis from the original
issuance date.

</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

In  December  1999,  the  Securities  and  Exchange  Commission  released  Staff
Accounting   Bulletin   (SAB)  No.  101,   "Revenue   Recognition  in  Financial
Statements," to provide guidance on the recognition, presentation and disclosure
of  revenues  in  financial  statements.  We  believe  our  revenue  recognition
practices are in conformity with the guidelines prescribed in SAB No. 101.

In March 2000,  the  Financial  Accounting  Standards  Board (FASB)  issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain  Transactions  Involving
Stock Compensation." FIN 44 clarifies certain issues relating to the application
of Accounting Principles Board Opinion No. 25 and related interpretations, which
are the  authoritative  pronouncements  we use to  account  for our  stock-based
compensation  transactions.  FIN 44 is effective July 1, 2000; however,  certain
conclusions reached in FIN 44 are applicable for transactions  consummated after
either  December  15, 1998 or January 12,  2000.  The adoption of FIN 44 did not
have a material effect on our financial position or results of operations.

In  September  2000,  the  Emerging  Issues  Task  Force of the FASB  reached  a
consensus on Issue No.  00-10,  "Accounting  for Shipping and Handling  Fees and
Costs" to provide guidance on the  classification  of shipping and handling fees
and  costs in  financial  statements.  This  consensus  is  consistent  with our
historical  accounting  policies and has no impact on our financial  position or
results of operations.


                                       48
<PAGE>

In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities." SFAS
No. 133 establishes  accounting and reporting  standards that require derivative
instruments   (including  certain  derivative   instruments  embedded  in  other
contracts) be recorded at fair value. The statement requires that changes in the
derivative's  fair value be recognized  currently in operations  unless specific
hedge  accounting  criteria are met.  Special  accounting for qualifying  hedges
allows a derivative's  gains and losses to offset related  results on the hedged
item in the statements of operations,  and requires that a company must formally
document,  designate,  and assess the  effectiveness  of  transactions  that are
subject  to  hedge  accounting.  Pursuant  to  SFAS  No.  137,  "Accounting  for
Derivative  Instruments and Hedging  Activities - Deferral of the Effective Date
of FASB No. 133 - an Amendment to FASB Statement No. 133," the effective date of
SFAS No. 133 has been deferred  until fiscal years  beginning  after January 15,
2000. SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied
to (a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued,  acquired,  or  substantively  modified after
December  31,  1998 (and,  at a  company's  election,  before  January 1, 1999).
Adopting  SFAS No.  133 will not  materially  impact our  financial  statements.
However, adoption of the statement could increase volatility in our consolidated
statements of operations and other comprehensive income.

SEASONALITY

We believe  that our  advertising  and  merchandising  revenues  on the  Network
Commerce  Consumer Network and the Network Commerce Business Network are subject
to seasonal changes as retail  transactions and advertising sales in traditional
media, such as television and radio,  generally are lower in the first and third
calendar quarters of each year. In addition,  Internet usage typically  declines
during  the  summer  and  certain  holiday  periods.  If our  market  makes  the
transition  from an emerging to a more developed  market,  seasonal and cyclical
patterns may develop in our industry and in the usage of, and  transactions  on,
our Web sites and those of our  merchants.  Seasonal  and  cyclical  patterns in
online  transactions and advertising  would affect our revenues.  Those patterns
may also develop on our Web sites.  Given the early stage of the  development of
the Internet and our company,  however,  we cannot predict to what extent, if at
all, our operations will prove to be seasonal.

IMPACT OF THE YEAR 2000 COMPUTER PROBLEM

Prior to January 1, 2000,  we devoted  substantial  resources to ensure that our
proprietary  software,  the  third-party  software  on which  we  rely,  and the
underlying  systems and protocols did not contain  errors  associated  with Year
2000  date  functions.  Since  January  1,  2000,  we have not  experienced  any
disruption as a result of Year 2000 problems.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We currently have  instruments  sensitive to market risk relating to exposure to
changing  interest  rates and  market  prices.  We do not enter  into  financial
instruments  for trading or  speculative  purposes and do not currently  utilize
derivative financial instruments.  Our operations are conducted primarily in the
United States and as such are not subject to material foreign currency  exchange
rate risk.

The fair  value of our  investment  portfolio  or  related  income  would not be
significantly  impacted  by either a 100 basis  point  increase  or  decrease in
interest rates due mainly to the  short-term  nature of the major portion of our
investment  portfolio.  All of the  potential  changes  noted above are based on
sensitivity  analyses  performed  on our  investment  portfolio  balances  as of
December 31, 2000.

                                       49
<PAGE>



<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                                                                         Page
Network Commerce Inc.
      <S>                                                                                               <C>
      Report of Independent Public Accountants..........................................................
      Consolidated Balance Sheets.......................................................................
      Consolidated Statements of Operations.............................................................
      Consolidated Statements of Shareholders' Equity and Comprehensive Loss............................
      Consolidated Statements of Cash Flows.............................................................
      Notes to Consolidated Financial Statements........................................................
      Schedule II - Valuation and Qualifying Accounts...................................................

</TABLE>


                                       50
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Network Commerce Inc.:

We have audited the accompanying consolidated balance sheets of Network Commerce
Inc. (a Washington  corporation)  and  subsidiaries  as of December 31, 2000 and
1999,  and the related  consolidated  statements  of  operations,  shareholders'
equity and comprehensive  loss and cash flows for each of the years in the three
year  period  ended  December  31,  2000.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether these financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation. We believe our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of Network  Commerce  Inc. and
subsidiaries  as of  December  31,  2000  and  1999,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting  principles  generally accepted
in the United States.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial  statements,  the Company has  suffered  recurring  operating  losses,
negative cash flows from operations, and has been out of compliance with certain
debt covenants.  These  conditions raise  substantial  doubt about the Company's
ability to continue as a going  concern.  Management's  plans in regard to these
matters are also described in Note 1. The consolidated  financial  statements do
not  include  any  adjustments  to reflect the  possible  future  effects on the
recoverability and classification of assets or the amounts and classification of
liabilities  that may result should the Company be unable to continue as a going
concern.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements  taken as a whole.  The  schedule  listed  in the index to
consolidated financial statements and Financial Statement Schedules is presented
for the purpose of complying with the Securities and Exchange  Commission  rules
and is not a required part of the basic financial statements.  This schedule has
been  subjected  to the auditing  procedures  applied in our audits of the basic
financial  statements  and, in our  opinion,  is fairly  stated in all  material
respects in relation to the basic financial statements taken as a whole.

                                         /s/ Arthur Andersen LLP

Seattle, Washington,
January 26, 2001 except as to Note 19
which is dated April 12, 2001


                                       51
<PAGE>


<PAGE>


                              Network Commerce Inc.
                           Consolidated Balance Sheets
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                         2000           1999
                                                                                  --------------  -------------
                                      ASSETS
   <S>                                                                            <C>              <C>
    Current assets:
       Cash and cash equivalents                                                  $      11,715    $    10,660
       Restricted cash                                                                   16,599          2,600
       Short-term investments                                                            21,592         49,572
       Investments in marketable equity securities                                          431         30,884
       Accounts receivable, less allowance for bad debts of $1,195 and $291              18,111          6,591
       Notes receivable from employees                                                    2,900              -
       Unbilled services                                                                 10,717          2,102
       Prepaid expenses and other                                                        12,910          5,559
                                                                                  --------------  -------------
       Total current assets                                                              94,975        107,968
    Property and equipment, net                                                          22,580         19,385
    Goodwill, net                                                                        40,889         23,860
    Other intangible assets, net                                                         94,739        104,713
    Cost-basis investments                                                               29,481         12,187
    Other assets, net                                                                     5,773          6,061
                                                                                  --------------  -------------
       Total assets                                                               $     288,437   $    274,174
                                                                                  ==============  =============

                       LIABILITIES AND SHAREHOLDERS' EQUITY
    Current liabilities:
       Accounts payable                                                           $      18,933   $      8,330
       Accrued liabilities                                                               18,146          8,778
       Current portion of notes and leases payable                                       24,797          8,565
       Customer deposits                                                                  3,356          2,194
       Deferred revenue                                                                  22,055          5,786
                                                                                  --------------  -------------
       Total current liabilities                                                         87,287         33,653
    Notes and leases payable and line of credit, less current portion      .              1,741          5,409
    Put warrant liability                                                                     -          1,388
    Deferred revenues                                                                     3,703              -
    Deferred tax liabilities                                                                  -          4,511
                                                                                  --------------  -------------
       Total liabilities                                                                 92,731         44,961
                                                                                  --------------  -------------
    Commitments
    Shareholders' equity:
       Convertible preferred stock,0.001 par value:authorized shares - 5,000,000;
        none issued and outstanding                                                           -              -
       Common stock,0.001 par value:authorized shares - 200,000,000; issued
       and outstanding shares - 78,222,569 at December 31, 2000 and 42,923,035
       at December 31, 1999                                                             555,175        325,892
       Subscriptions receivable                                                          (2,421)          (390)
       Common stock warrants                                                             18,172          8,260
       Deferred compensation                                                            (7,758)        (6,713)
       Accumulated other comprehensive (loss) income                                      (130)          7,470
       Accumulated deficit                                                            (367,332)      (105,306)
                                                                                  --------------  -------------
       Total shareholders' equity                                                       195,706        229,213
                                                                                  --------------  -------------
       Total liabilities and shareholders' equity                                 $     288,437   $    274,174
                                                                                  ==============  =============
</TABLE>
The  accompanying  notes  are an  integral  part of these  consolidated  balance
sheets.


                                       52
<PAGE>


                              Network Commerce Inc.
                      Consolidated Statements of Operations
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                 For the Year Ended
                                                                                     December 31,
                                                                       2000              1999              1998
<S>                                                                    <C>            <C>                 <C>
 Revenues:
     Consumer and business networks (see Note 2)                  $      88,158     $      25,841     $       4,211
     Services                                                            17,963            11,114             2,943
                                                                  --------------    --------------    --------------
     Total revenues                                                     106,121            36,955             7,154
                                                                  --------------    --------------    --------------
 Cost of revenues:
     Consumer and business networks                                      43,650            20,169             4,493
     Services                                                            10,329             7,160             1,356
                        Unusual item                                      5,320                 -                 -
                                                                  --------------    --------------    --------------
     Total cost of revenues                                              59,299            27,329             5,849
                                                                  --------------    --------------    --------------
     Gross profit                                                        46,822             9,626             1,305
                                                                  --------------    --------------    --------------
Operating expenses:
     Sales and marketing                                                 95,518            55,072            12,183
     Research and development                                            24,187             8,885             4,370
     General and administrative                                          13,978             8,342             3,549
     Amortization of intangible assets                                   80,515             8,805               730
     Stock-based compensation                                             6,215             7,216               182
     Impairment of certain long-lived assets                             46,564                 -                 -
     Restructuring and other impairment charges                          64,938                 -             5,207
                                                                  --------------    --------------    --------------
     Total operating expenses                                           331,915            88,320            26,221
                                                                  --------------    --------------    --------------
     Loss from operations                                             (285,093)          (78,694)          (24,916)
                                                                  --------------    --------------    --------------
Nonoperating income (expense):
     Gain on sale of investments                                          5,670             2,878                 -
     Interest income                                                      5,158             1,398               382
     Interest expense                                                   (4,689)           (1,525)             (211)
     Impairment of marketable equity securites and
     cost-basis investments                                            (32,277)                 -                 -
                                                                  --------------    --------------    --------------
     Total nonoperating income (expense), net                          (26,138)             2,751               171
                                                                  --------------    --------------    --------------
     Net loss before income tax benefit                               (311,231)          (75,943)          (24,745)
Income tax benefit                                                       49,205                 -                 -
                                                                  --------------    --------------    --------------
     Net loss                                                     $   (262,026)     $    (75,943)     $    (24,745)
                                                                  ==============    ==============    ==============
Basic and diluted net loss per share                              $      (4.61)     $      (5.80)     $      (7.01)
                                                                  ==============    ==============    ==============
Weighted average shares outstanding used to
     compute basic and diluted net loss per share                    56,860,709        13,095,893         3,532,054
                                                                  ==============    ==============    ==============
</TABLE>

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



                                       53
<PAGE>

                              Network Commerce Inc.
     Consolidated Statements of Shareholders' Equity and Comprehensive Loss
                                 (in thousands)
<TABLE>
<CAPTION>
                                           Convertible
                                         Preferred Stock           Common Stock     Common Stock   Subscription
                                      Shares       Amount      Shares        Amount    Warrants    Receivable
--------------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>         <C>           <C>      <C>         <C>
Balances, December 31, 1997......... 3,868,896      $3,403       2,763,055   $(808)          -    $         -

   Issuance of preferred stock
     and warrants to acquire
     common stock................... 8,431,000      31,667               -        -      1,866              -
   Common stock, options and
     warrants issued for
     businesses acquired............         -           -       1,744,692        -      6,105              -
   Exercise of common
    stock options...................         -           -          32,499       25         -               -
   Issuance of common stock in
     consideration for
     professional services..........         -           -          62,327      125         -               -
   Issuance of compensatory
     stock options..................         -           -               -     1,112        -               -
   Compensation from stock
    option vesting..................         -           -               -         -        -               -
   Net loss.........................         -           -               -         -        -               -
                                     ----------    --------      ---------   --------  -------       --------
   Total comprehensive loss.........         -           -               -         -        -               -
Balances, December 31, 1998......... 12,299,896     35,070       4,602,573     6,559     1,866              -
   Issuance of preferred stock
     and warrants to acquire
     common stock...................  7,889,165     54,281               -         -     4,248              -
   Preferred stock converted
     to common stock upon
     closing of initial public
     offering.......................(20,189,061)   (89,351)      20,189,061   89,351         -              -
   Common stock issued upon
     closing of initial
     public offering, net of
     issuance costs.................          -         -         8,337,500   91,084         -              -
   Common stock issued for
   businesses acquired..............          -         -         8,039,363  116,345         -              -
   Issuance of warrants for loan
    Origination fees................          -         -                 -        -       588              -
   Issuance of options and warrants
   to marketing partners............          -         -                 -       46      2,041             -
   Exercise of common stock
   options..........................          -         -           800,347    1,541          -          (390)
   Exercise of common stock
   warrants.........................          -         -           576,156      994       (483)            -
   Issuance of common stock in
     consideration for professional
     services.......................          -         -             7,000        4          -             -
   Issuance of common stock in
     consideration for
     investing activities...........          -         -           500,263    7,669          -             -
   Repurchase of common stock.......          -         -          (129,228)     (46)         -             -
   Issuance of compensatory stock
   options..........................          -         -                 -   12,345          -             -
   Compensation attributable to
   stock option vesting.............          -         -                 -        -          -             -
   Unrealized gain on marketable
   equity securities................          -         -                 -        -          -             -
   Net loss.........................          -         -                 -        -          -             -
                                      ----------    --------      ---------   --------  -------       --------
   Total comprehensive loss.........          -         -                 -        -          -             -
Balances, December 31, 1999.........          -         -        42,923,035    325,892    8,260          (390)
   Common stock issued upon
    closing of public offering,
    net of issuance costs...........          -         -         7,913,607    107,130        -             -
   Common stock issued for
    businesses acquired.............          -         -        21,544,190    107,597      407             -
   Issuance of warrants for loan
    origination fees................          -         -                 -          -      360             -
   Issuance of options and warrants
    to marketing partners...........          -         -                 -          -    9,957             -
   Exercise of common stock
    options.........................          -         -             2,102,751   4,308       -         (2,094)
   Exercise of common stock
    warrants........................          -         -               449,952   1,359    (812)            -
   Issuance of common stock from
     conversion of debt.............          -         -             3,081,649   3,265       -             -
   Issuance of common stock under
     employee stock purchase plan
     and other......................          -         -               207,385     885       -             -
   Repayment of subscription
     receivables....................          -         -                     -       -       -            63
   Issuance of compensatory stock
     options........................          -         -                     -   4,739       -             -
   Compensation attributable to
     stock option vesting...........          -         -                     -       -       -             -
   Unrealized loss on marketable
     equity securities..............          -         -                     -       -       -             -
   Impairment of marketable equity
     securities.....................          -         -                     -       -       -             -
   Net loss.........................          -         -                     -       -       -             -
                                     ----------    --------         ----------- --------  -------     --------
   Total comprehensive loss.........          -         -                     -       -       -             -
Balances, December 31, 2000.........          -    $    -            78,222,569 $555,175  $18,172       (2,421)
                                     ==========    ========         =========== ========  =======     =========

</TABLE>

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

                                       54
<PAGE>

CONTINUED...
Consolidated Statements of Shareholders' Equity and Comprehensive Loss

<TABLE>
<CAPTION>
                                                        Accumulated                     Total
                                                           Other                        Shareholder
                                        Deferred       Comprehensive  Accumulated       Equity
                                        Compensation   (Loss)Income   Deficit          (Deficit)
----------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>            <C>                 <C>
Balances, December 31, 1997.........    $        -     $        -     $   (4,618)         $(2,023)
   Issuance of preferred stock
     and warrants to acquire
     common stock...................             -              -              -           33,533)
   Common stock, options and
     warrants issued for
     businesses acquired............             -              -              -            6,105
   Exercise of common
    stock options...................             -              -              -               25
   Issuance of common stock in
     consideration for
     professional services..........             -              -              -              125
   Issuance of compensatory
     stock options..................             -              -              -                -
   Compensation from stock
    option vesting..................           182              -              -              182
   Net loss.........................             -              -        (24,745)         (24,745)
                                        ----------     ----------     ----------          -------
   Total comprehensive loss.........             -              -              -          (24,745)
Balances, December 31, 1998.........          (930)             -        (29,363)          13,202)
   Issuance of preferred stock
     and warrants to acquire
     common stock...................             -              -              -           58,529
   Preferred stock converted
     to common stock upon
     closing of initial public
     offering.......................             -              -              -                -
   Common stock issued upon
     closing of initial
     public offering, net of
     issuance costs.................             -              -              -           58,529
   Common stock issued for
   businesses acquired..............             -              -              -          116,345
   Issuance of warrants for loan
    Origination fees................             -              -              -              588
   Issuance of options and warrants
   to marketing partners............             -              -              -            2,087
   Exercise of common stock
   options..........................             -              -              -            1,151
   Exercise of common stock
   warrants.........................             -              -              -              511
   Issuance of common stock in
     consideration for professional
     services.......................             -              -              -                4
   Issuance of common stock in
     consideration for
     investing activities...........             -              -              -            7,669
   Repurchase of common stock.......             -              -              -              (46)
   Issuance of compensatory stock
   options..........................       (12,183)             -              -              162
   Compensation attributable to
   stock option vesting.............         6,400              -              -            6,400
   Unrealized gain on marketable
   equity securities................             -          7,470              -            7,470
   Net loss.........................             -              -        (75,943)         (75,943)
                                        ----------     ----------     ----------          -------
   Total comprehensive loss.........             -              -              -          (68,473)
Balances, December 31, 1999.........        (6,713)         7,470       (105,306)         229,213
   Common stock issued upon
    closing of public offering,
    net of issuance costs...........             -              -              -          107,130
   Common stock issued for
    businesses acquired.............        (2,400)             -              -          105,604
   Issuance of warrants for loan
    origination fees................             -              -              -              360
   Issuance of options and warrants
    to marketing partners...........             -              -              -            9,957
   Exercise of common stock
    options.........................             -              -              -            2,214
   Exercise of common stock
    warrants........................             -              -              -              547
   Issuance of common stock from
     conversion of debt.............             -              -              -            3,265
   Issuance of common stock under
     employee stock purchase plan
     and other......................             -              -              -              885
   Repayment of subscription
     receivables....................             -              -              -               63
   Issuance of compensatory stock
     options........................        (4,739)             -              -                -
   Compensation attributable to
     stock option vesting...........         6,094              -              -            6,094
   Unrealized loss on marketable
     equity securities..............             -        (30,971)             -          (30,971)
   Impairment of marketable equity

   Net loss.........................             -              -       (262,026)        (262,026)
                                        ----------     ----------     ----------         --------
   Total comprehensive loss.........             -              -              -         (269,626)
Balances, December 31, 2000.........    $   (7,758)    $     (130)    $ (367,332)        $195,706
                                        ==========     ==========     ==========         ========

</TABLE>
  The accompanying notes are an integral part of these consolidated statements.

                                       55
<PAGE>


                              Network Commerce Inc.
                      Consolidated Statements of Cash Flows
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                                For the Year Ended
                                                                                                   December 31,
                                                                                       2000          1999          1998
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>           <C>           <C>
Operating activities:
     Net loss                                                                       $(262,026)    $(75,943)     $ (24,745)
     Adjustments to reconcile net loss to net cash used in operating activities-
        Depreciation and amortization.                                                  94,619       13,180          1,602
        Amortization of deferred compensation                                            6,215        6,562            182
        Provision for bad debts                                                          6,188          678            591
        Restructuring and impairment charges                                            64,938            -          5,207
        Impairment of certain ling-lived assets                                         46,564            -              -
        Impairment of marketable equity securites and investments                       32,277            -              -
        Non-cash consideration received                                               (10,234)            -              -
        Realized gain from sale of marketable equity securities                        (5,670)      (2,878)              -
        Operating expenses paid in stock and warrants                                       99        2,041            125
        Deferred income tax benefit                                                   (49,205)            -              -
        Changes in operating assets and liabilities,
          excluding effects of acquired businesses-
        Accounts receivable                                                           (20,583)      (4,067)          1,516
        Prepaid expenses and other current assets                                      (1,652)      (4,640)           (77)
        Other assets                                                                   (1,241)      (1,559)              -
        Unbilled services and customer deposits                                        (7,703)        (615)        (3,713)
        Accounts payable and accrued liabilities                                         8,101       11,675          2,824
        Deferred revenue                                                                 6,782        4,676            535
                                                                                   ------------   ----------   ------------
        Net cash used in operating activities                                         (92,531)     (50,890)       (15,953)
                                                                                   ------------   ----------   ------------
Investing activities:
     Purchases of short-term investments                                             (133,315)    (101,734)          (150)
     Sales of short-term investments                                                   147,230       49,712              -
     Proceeds from sale of investments                                                   9,976        2,990
     Purchases of property and equipment                                              (24,553)     (13,457)        (2,189)
     Investments in equity and debt securities and other assets                       (17,956)      (7,251)          (147)
     Acquisition of businesses, net of cash acquired of $463 in 2000, $711
        in 1999 and $2,850 in 1998                                                    (18,344)      (9,387)        (2,851)
                                                                                   ------------   ----------   ------------
        Net cash used in investing activities                                         (36,962)     (79,127)        (5,337)
                                                                                   ------------   ----------   ------------
Financing activities:
     Borrowings on line of credit, net of loan fees paid                                10,357        1,000             38
     Payments on line of credit                                                          (848)      (1,238)              -
     Proceeds from debt financing                                                       20,152       12,410          3,700
     Payments on long-term debt                                                        (9,858)      (7,544)        (6,034)
     Proceeds from sales of preferred stock                                                  -       33,429         33,034
     Proceeds from sale of common stock                                                110,745       92,817             25
     Repurchases of common stock                                                             -         (46)              -
                                                                                   ------------   ----------   ------------
        Net cash provided by financing activities                                      130,548      130,828         30,763
                                                                                   ------------   ----------   ------------
Net increase (decrease) in cash and cash equivalents                                     1,055          811          9,473
Cash and cash equivalents at beginning of period                                        10,660        9,849            376
                                                                                   ------------   ----------   ------------
Cash and cash equivalents at end of period                                         $    11,715    $  10,660    $     9,849
                                                                                   ============   ==========   ============
Supplementary disclosure of cash flow information:
Cash paid during the period for interest                                           $     1,764    $     962    $       232
                                                                                   ============   ==========   ============
Cash paid during the period for income taxes                                       $         -    $       -    $         -
                                                                                   ============   ==========   ============
     Non-cash investing and financing activities:
        Common stock, options and warrants issued and liabilities assumed
        as part of business and technology acquisitions                            $   144,314    $ 129,825    $     6,105
                                                                                   ============   ==========   ============
        Preferred stock isued as part of investment in marketable equity
        securities                                                                 $         -    $  25,100    $         -
                                                                                   ============   ==========   ============
        Conversion of convertible note payable to common stock                     $     3,265    $       -    $         -
                                                                                   ============   ==========   ============
        Assets acquired under capital leases                                       $              $   4,607    $     2,092
                                                                                   ============   ==========   ============

</TABLE>
 The accompanying notes are an integral part of these consolidated statements.


                                       56
<PAGE>

                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                                December 31, 2000

NOTE 1. ORGANIZATION AND BACKGROUND:

THE COMPANY

Network Commerce Inc. (the Company), a Washington  corporation,  is a technology
infrastructure  and services  company.  The Company  provides a  technology  and
services platform solution that includes domain registration,  hosting services,
commerce services,  business services,  one-to-one marketing services,  wireless
technology and online  marketplaces.  The Company's  headquarters are located in
Seattle,  Washington.  Through  December  31,  2000,  the Company  operated  two
commerce  networks,  known  as the  Network  Commerce  Consumer  Network,  which
aggregated  merchants and shoppers over a distributed  network of Web sites, and
the Network Commerce Business  Network,  which was designed to enable businesses
to engage in online  activities  and  transactions  with  other  businesses.  In
January 2001, the Company  restructured  these groups into the Network  Commerce
Portal  Services and the Network  Commerce  Infrastructure  and Technology  (IT)
groups.  The Portal Services group includes  one-to-one  marketing  services and
various online  marketplaces  focused on gaming and  entertainment.  The Network
Commerce IT group includes  domain name  registration,  technology and licensing
and other business services.  As a result of this restructuring,  certain of the
Company's  previous  business  units and offerings  were shut down (see Note 4).
Further  restructuring  efforts  in March  2001,  resulted  in the  shutdown  of
SpeedyClick.com  and the sale of  Ubarter  Canada,  components  of the  Consumer
Network.

The  Company  is  subject  to the risks and  challenges  associated  with  other
companies  at a  similar  stage  of  development,  including  dependence  on key
management  personnel,  on successful  development and marketing of its products
and services,  on the continued  acceptance  of the Internet.  Additional  risks
include  competition  from substitute  products and services from companies with
greater  financial,  technical,  management  and  marketing  resources and risks
associated  with recent  acquisitions.  Further,  during the period  required to
develop  commercially  viable  products,  services and sources of revenues,  the
Company may require additional funds that may or may not be readily available.

GOING CONCERN

The Company's  consolidated financial statements for the year ended December 31,
2000 have  been  prepared  on a going  concern  basis,  which  contemplates  the
realization  of assets and the settlement of liabilities in the normal course of
business.  The Company has  incurred  net losses of $262.0  million for the year
ended  December 31, 2000 and has  accumulated  deficits of $367.3  million as of
December  31,  2000.  The  Company  has  continuously  incurred  net losses from
operations and as of December 31, 2000 has working capital of $7.7 million.  The
Company is out of compliance  with certain debt  covenants.  These factors raise
substantial  doubt about the Company's  ability to continue as a going  concern.
The consolidated  financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



                                       57
<PAGE>

                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

The Company  believes that its cash reserves and cash flows from operations will
be  adequate  to  fund  its  operations  through  the  first  quarter  of  2001.
Consequently,  the Company will require substantial additional funds to continue
to operate their  business  beyond that period.  Many  companies in the Internet
industry have  experienced  difficulty  raising  additional  financing in recent
months.  Additional  financing  may not be available to the Company on favorable
terms or at all. Even if additional  financing is available,  the Company may be
required to obtain the consent of its  existing  lenders,  which the Company may
not be able to obtain. If additional financing is not available, the Company may
need to dramatically  change its business plan,  sell or merge its business,  or
face  bankruptcy.   In  addition,  the  issuance  of  equity  or  equity-related
securities will dilute the ownership  interest of existing  stockholders and the
issuance of debt  securities  could  increase the risk or perceived  risk of the
Company.

The Company's plans to mitigate the risk of this  uncertainty  include,  but are
not limited to, one or more of the following:

     engaging a financial advisor to explore strategic  alternatives,  which may
     include a merger, asset sale, or another comparable transaction;

     raising  additional  capital  to  fund  continuing  operations  by  private
     placements of equity and/or debt securities; and

     forming a joint  venture  with a  strategic  partner or partners to provide
     additional capital resources to fund operations.

Additional  cost-cutting  measures could include additional  lay-offs and/or the
closure of certain business units and facilities.

PUBLIC OFFERINGS

On October 4, 1999,  the Company  closed its initial  public  offering  (IPO) of
7,250,000  shares of common  stock at $12.00  per  share,  for  proceeds  net of
underwriters'  fees and  commissions  of $80.9 million.  At closing,  all of the
Company's  issued and  outstanding  shares of convertible  preferred  stock were
converted  into shares of common stock on a  one-for-one  basis.  On November 2,
1999, the underwriters of the IPO exercised their over-allotment option and sold
an  additional  1,087,500  shares at  $12.00  per  share,  for  proceeds  net of
underwriters'  fees and commissions of $12.1 million.  The combined net proceeds
to the Company,  less additional  offering costs of approximately  $1.9 million,
were $91.1 million.  In addition,  a $1.0 million  promissory note in connection
with the  Company's  acquisition  of GO Software,  Inc.  (GO) and a $4.0 million
bridge loan with a financial institution plus accrued interest were repaid.

On February 18, 2000, the Company closed a supplemental public offering (SPO) of
7,913,607  shares of common  stock at $14.50  per  share,  for  proceeds  net of
underwriters' fees and commissions of $108.7 million. Offering costs incurred by
the Company relating to the SPO were approximately $700,000.


                                       58
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The  Company's  consolidated  financial  statements  include 100% of the assets,
liabilities  and results of operations of all  subsidiaries in which the Company
has a controlling  ownership interest of greater than 50%. Equity investments in
which the Company holds less than a 20% ownership interest and does not exercise
significant  influence  are  recorded  at cost and are  included  in  cost-basis
investments in the  accompanying  consolidated  balance sheets.  All significant
intercompany transactions and balances have been eliminated.

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the  reported  amounts  of assets  and  liabilities,  the  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

REVENUE RECOGNITION

Through December 31, 2000, the Company derived substantially all of its revenues
from the  Network  Commerce  Consumer  Network,  the Network  Commerce  Business
Network and from providing services to businesses.

Revenues  from the Network  Commerce  Consumer  Network,  which was a network of
proprietary  and affiliated  Web sites  including  www.shopnow.com  and licensed
affiliates,   the  BottomDollar  Network  (including   www.bottomdollar.com  and
licensed affiliates) and  www.speedyclick.com  were generated primarily from the
sale  of  online  marketing   services,   leads  and  orders,   advertising  and
merchandising.  Revenues from these  agreements  were recognized as the media or
services were delivered to the merchants over the term of the agreements,  which
typically  ranged from one to twelve  months.  Where  billings  exceed  revenues
earned  on these  agreements,  the  amounts  are  included  in the  accompanying
consolidated  balance  sheets as deferred  revenue.  The Company  bears the full
credit risk with respect to these sales. In certain circumstances,  such as with
the www.chaseshop.com portal, the Company offered products directly to shoppers.
In these  instances where the Company acted as  merchant-of-record,  the Company
records as revenue the full sales price of the product sold and records the full
cost of the product to the  Company as cost of  revenues,  upon  shipment of the
product.  Shipping charges billed to the customer are included in revenues,  and
the costs  incurred  by the  Company  to ship the  product to the  customer  are
included in cost of sales.

Revenues  from the  Network  Commerce  Business  Network,  which is a network of
proprietary   and   affiliated   Web   sites,   including    www.registrars.com,
www.b2bnow.com,  www.freemerchant.com and www.ubarter.com, are derived primarily
from providing domain registration, web-enablement services, commerce-enablement
services,  transaction  processing,  advertising  and  technology  licensing  to
businesses.  Revenues  from  registrars.com  are derived from the sale of domain
name registration fees, which are typically paid in full at the time of the sale
and are recognized over the registration term, which typically range from one to
three years.  Unearned  revenues are  classified as either  current or long-term
deferred  revenues  depending  on the  future  recognition  of  those  revenues.

                                       59
<PAGE>

                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

Revenues from  b2bNow.com  are generated  primarily from the sale of advertising
and  merchandising  products and  services  similar to those sold on the Network
Commerce  Consumer  Network.   Revenues  from  Ubarter.com  are  generated  from
transaction  fees earned from member  businesses  that transact over the Ubarter
exchange  system as well as from  products sold by  Ubarter.com  to other member
merchants of the Ubarter exchange  system.  Revenues from services are generated
principally through development fees, domain registration fees, hosting fees and
sales and  marketing  services.  These  services  can be purchased as a complete
end-to-end suite of services or separately. The Company recognizes revenues from
the development of custom  applications and online stores and marketing projects
on a percentage of completion basis over the period of development or the period
of the marketing  project.  These  projects  generally  range from two to twelve
months.  Hosting contracts  typically have a term of one year, with fees charged
and earned on a monthly  basis.  The Company bears full credit risk with respect
to  these  sales.  Anticipated  losses  on these  contracts  are  recorded  when
identified.  To date, losses have not been  significant.  Contract costs include
all direct  labor,  material,  subcontract  and other direct  project  costs and
certain  indirect  costs  related  to  contract  performance.   Changes  in  job
performance, job conditions and estimated profitability, including those arising
from contract penalty provisions and final contract  settlements that may result
in  revision  to costs and  income,  are  recognized  in the period in which the
revisions are determined.  Unbilled services typically  represent amounts earned
under the Company's  contracts not billed due to timing or contract terms, which
usually  consider  passage  of  time,   achievement  of  certain  milestones  or
completion of the project.  Where billings  exceed revenues earned on contracts,
the amounts are  included in the  accompanying  consolidated  balance  sheets as
customer  deposits,  as the  amounts  typically  relate to  ancillary  services,
whereby the Company is acting in an agency capacity.  Fee revenue from ancillary
services  provided by the services division is recognized upon completion of the
related job by the applicable third party vendor.

Revenues  are also  generated  from fees paid to the Company by  businesses  and
merchants who license the Company's technology;  transaction  processing,  fraud
prevention,  and online payment gateways,  as well as other e-commerce  enabling
technologies.  Revenues  include  licensing  fees,  per-transaction  fees and in
certain cases monthly hosting and maintenance  fees, which are recognized in the
period earned.  Revenues  generated from technology  licensing are recognized in
accordance  with Statement of Position  97-2,  "Software  Revenue  Recognition."
Where  billings  exceed  revenues  earned on these  contracts,  the  amounts are
included in the accompanying  consolidated  balance sheets as deferred  revenue.
Businesses   and  merchants  who  utilize  the  Company's   payment   processing
technologies  act as the  merchant-of-record  and bear the full  credit  risk on
those sales of goods and services.

The Company  recognizes  revenues  from barter  transactions  when  earned.  The
Company values the barter  transactions  based on the value of the consideration
received  from the  customer or from the value of the  services  provided to the
customer, whichever is more readily determinable.

The Company recognizes  revenues from sale of online marketing  services,  leads
and orders,  advertising and  merchandising and receives equity in the customer.
The Company  values the equity  received from these  transactions  as cost-basis
investments based on the value of the  consideration  received from the customer
or from the value of the services  provided to the  customer,  whichever is more
readily  determinable.  The Company  monitors these  cost-basis  investments for
impairment.  When cost-basis  investments are deemed to be permanently impaired,
the difference between cost and market value is charged to operations. There can
be no assurance that our investments in these early-stage  technology  companies
will be realized.

                                       60
<PAGE>

                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

Revenues for the years ending December 31, 1998 and 1999 include revenues
generated from the Company's BuySoftware.com business, which ceased operations
in June 1999.

UNUSUAL ITEM

During the first  quarter of 2000,  the Company paid Inktomi  Corp.  (Inktomi) a
$6.1 million prepaid fee to be a non-exclusive distributor of Inktomi's shopping
engine technologies.  This fee allowed the Company to sell up to 100 occurrences
to Inktomi's  shopping engine during a 12-month  period  subsequent to the first
quarter  2000.   Through   September  30,  2000,   the  Company  had  recognized
approximately  $400,000 in revenues from this distribution  agreement.  Based on
this sales history, management determined that the Company would not recover the
remaining  value of the prepaid fee before the  12-month  period  expires.  As a
result,  the Company  charged  $5.3  million to cost of revenues - unusual  item
during the third  quarter 2000 in order to write down this prepaid  asset to its
net realizable value, which was deemed to be approximately  $300,000 at the time
that the unusual item was recorded.

CASH, RESTRICTED CASH AND CASH EQUIVALENTS

For the purposes of consolidated statements of cash flows, the Company considers
investment  instruments with an original  maturity of three months or less to be
cash equivalents.  Cash equivalents are comprised of investments in money market
funds, government  mortgage-backed bonds, and highly rated corporate securities.
Approximately $16.6 million and $2.6 million of cash as of December 31, 2000 and
1999,  respectively,  is  characterized as restricted in order to secure certain
facilities  leasing  and debt  obligations  under  letters of credit and another
security  arrangement.  The Company's  restricted cash and cash  equivalents are
stated at cost, which approximates fair market value.

SHORT-TERM INVESTMENTS AND MARKETABLE EQUITY SECURITIES

The Company  classifies  these  securities  as  available-for-sale  and they are
stated at fair  value in  accordance  with  Statement  of  Financial  Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."  This statement  specifies that  available-for-sale  securities are
reported  at fair value with  changes in  unrealized  gains and losses  recorded
directly to shareholders'  equity, which are also reflected in accumulated other
comprehensive  loss in the  accompanying  consolidated  statement  of changes in
shareholders'  equity  and  comprehensive  loss.  Fair  value is based on quoted
market prices. The Company's  short-term  investments consist of corporate notes
and bonds,  commercial paper,  municipal notes and bonds, auction preferreds and
US  government  securities  and are stated at fair value as of December 31, 2000
and at cost, which approximates market value as of December 31, 2000. Marketable
equity securities  consist solely of investments in the common stock of publicly
traded companies and are recorded at fair value.  Realized gains and losses from
the  sale  of  available-for-sale   securities  are  determined  on  a  specific
identification basis. Dividend and interest income are recognized as earned. Any
changes in market values that are  considered  other than temporary are recorded
as realized gains or losses in current operations (see Note 4).


                                       61
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Assets purchased under capital leases
are  recorded  at cost  (based  on the  present  value of future  minimum  lease
payments discounted at the contractual interest rates). Depreciation is computed
using the straight-line  method over the useful lives of the assets estimated at
three to ten years, or in the case of leasehold  improvements,  ten years or the
life of the lease,  whichever is shorter.  Betterments are capitalized.  Repairs
and maintenance expenditures are expensed as incurred.

GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets consist primarily of acquired technology, assembled workforce,
proprietary  concepts,  customer  lists,  domain names and  goodwill  related to
acquisitions accounted for under the purchase method of accounting. Amortization
of these purchased  intangibles is provided on the straight-line  basis over the
respective  useful  lives of the  assets,  primarily  three  years.  The Company
identifies  and records  impairment  losses on intangible  and other assets when
events and  circumstances  indicate  that such  assets  might be  impaired.  The
Company  considers  factors such as  significant  changes in the  regulatory  or
business  climate and  projected  future cash flows from the  respective  asset.
Impairment losses are measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset (see Note 4 and Note 18).

COST-BASIS INVESTMENTS

The Company's cost-basis investments,  which consist primarily of investments in
the equity securities of certain early-stage  technology  companies,  were $29.5
million and $12.2  million at  December  31,  2000 and 1999,  respectively.  The
Company  monitors its cost-basis  investments for impairment (see Note 10). When
cost-basis  investments  are deemed to be permanently  impaired,  the difference
between  cost and  market  value  is  charged  to  operations.  There  can be no
assurance  that  the  Company's  investments  in  these  early-stage  technology
companies will be realized.

ADVERTISING COSTS

The cost of  advertising  is expensed as incurred.  For the years ended December
31, 2000, 1999 and 1998, the Company  incurred  advertising and direct marketing
expenses of approximately $43.0 million (of which $3.8 million was incurred from
barter arrangements), $29.1 million and $5.7 million, respectively.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred and consist primarily of
salaries, supplies and contract services.

The Company's  accounting  policy is to capitalize  eligible  computer  software
development costs upon the establishment of technological feasibility, which the
Company  has  defined as  completion  of a working  model.  For the years  ended
December 31, 2000, 1999 and 1998, the amount of eligible costs to be capitalized
has not been significant,  and accordingly, the Company has charged all software
development  costs to research and development in the accompanying  consolidated
statements of operations.

                                       62
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

STOCK COMPENSATION

The  Company has adopted  the  disclosure-only  provisions  of the SFAS No. 123,
"Accounting  for  Stock-Based  Compensation",  and  instead  applies  Accounting
Principles  Board  (APB)  Opinion  No.  25,  "Accounting  for  Stock  Issued  to
Employees" and related  interpretations  (see Recent  Accounting  Pronouncements
below).  Accordingly,  compensation  cost for stock  options is  measured as the
excess, if any, of the market price of the Company's common stock over the stock
option  exercise  price at the date of grant.  Options  and  warrants  issued to
non-employees  are  accounted  for using the fair value method of  accounting as
prescribed by SFAS No. 123.

INCOME TAXES

Income taxes are accounted for under the asset and  liability  method.  Deferred
tax assets  and  liabilities  are  recognized  for the  future tax  consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and  liabilities  and their  respective tax bases and operating
loss and tax credit  carryforwards.  Deferred  tax assets  and  liabilities  are
measured  using  enacted tax rates  expected  to apply to taxable  income in the
years in which those  temporary  differences  are  expected to be  recovered  or
settled.  The effect on deferred tax assets and  liabilities  of a change in tax
rates is recognized  as income in the period that  includes the enactment  date.
The Company's  income tax benefits of $49.2 million for the year-ended  December
31, 2000 are the result of changes in the Company's deferred tax accounts, which
have  principally  been  created as a result of the  Company's  recent  business
acquisitions  and from the Company's  generation of net  operating  losses.  The
Company did not recognize income tax benefits for any previous period.

NET LOSS PER SHARE

In  accordance  with SFAS No. 128,  "Computation  of Earnings Per Share,"  basic
earnings  per share is  computed by dividing  net loss by the  weighted  average
number of shares of common stock outstanding during the period. Diluted earnings
per share is computed by dividing  net loss by the  weighted  average  number of
common and dilutive  common  equivalent  shares  outstanding  during the period.
Common equivalent shares consist of the shares of common stock issuable upon the
conversion of the convertible  preferred stock (using the  if-converted  method)
and shares  issuable  upon the  exercise of common  stock  options and  warrants
(using the treasury stock method);  common  equivalent  shares are excluded from
the calculation if their effect is antidilutive. The Company did not include the
effects of convertible  preferred  stock or shares issuable upon the exercise of
stock options and warrants as the effect of their inclusion is antidilutive  for
all periods.

SEGMENT INFORMATION

In accordance  with SFAS No. 131,  "Disclosures  about Segments of an Enterprise
and Related  Information," the Company has defined its operating  segments based
upon available financial information, by how they are regularly evaluated by the
Company's chief operating  decision makers, or a  decision-making  group, by how
resources  are  allocated  and by how  performance  is evaluated by segment.  As
allowed under SFAS No. 131, certain  divisions within the Company are aggregated
in determining  the Company's  operating  segments The Company's chief operating
decision-making  group is comprised of the chief  executive  officer and various
executive vice presidents and general  managers of the Company.  The Company has
identified five distinct  reportable  segments:  the Network  Commerce  Consumer

                                       63
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

Network,  the Network Commerce Business Network,  Services,  BuySoftware.com and
corporate/other,  which includes certain executive and overhead divisions of the
Company.  While the  decision  making  group  evaluates  results  in a number of
different ways, the line of business  management  structure is the primary basis
by  which  it  assesses  financial  performance  and  allocates  resources.  The
accounting  policies of the line of business  operating segments are the same as
those described elsewhere in the notes to the consolidated financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the  Securities and Exchange  Commission  (SEC) released Staff
Accounting   Bulletin   (SAB)  No.  101,   "Revenue   Recognition  in  Financial
Statements," to provide guidance on the recognition, presentation and disclosure
of  revenues  in  financial   statements.   The  Company  believes  its  revenue
recognition  practices are in conformity  with the guidelines  prescribed in SAB
No. 101.

In March 2000,  the  Financial  Accounting  Standards  Board (FASB)  issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain  Transactions  Involving
Stock Compensation." FIN 44 clarifies certain issues relating to the application
of APB Opinion No. 25 and related  interpretations,  which are the authoritative
pronouncements  the  Company  uses to account for its  stock-based  compensation
transactions.  The  adoption  of FIN 44 did not have a  material  effect  on the
Company's financial position or results of operations.

In September  2000, the Emerging  Issues Task Force (EITF) of the FASB reached a
consensus on Issue No.  00-10,  "Accounting  for Shipping and Handling  Fees and
Costs" to provide guidance on the  classification  of shipping and handling fees
and  costs in  financial  statements.  This  consensus  is  consistent  with the
Company's  historical  accounting  policies described above and has no impact on
the Company's financial position or results of operations.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging  Activities."  SFAS No. 133  establishes  accounting and
reporting  standards  that require  derivative  instruments  (including  certain
derivative  instruments  embedded  in other  contracts)  to be  recorded at fair
value.  The statement  requires that changes in the  derivative's  fair value be
recognized currently in operations unless specific hedge accounting criteria are
met. Special  accounting for qualifying  hedges allows a derivative's  gains and
losses to  offset  related  results  on the  hedged  item in the  statements  of
operations,  and requires that a company must formally document,  designate, and
assess the  effectiveness of transactions  that are subject to hedge accounting.
Pursuant to SFAS No. 137,  "Accounting  for Derivative  Instruments  and Hedging
Activities  - Deferral of the  Effective  Date of FASB No. 133 - an Amendment to
FASB  Statement No. 133," the  effective  date of SFAS No. 133 has been deferred
until  fiscal years  beginning  after  January 15, 2000.  SFAS No. 133 cannot be
applied  retroactively.   SFAS  No.  133  must  be  applied  to  (a)  derivative
instruments and (b) certain derivative  instruments embedded in hybrid contracts
that were issued,  acquired,  or substantively  modified after December 31, 1998
(and, at a company's  election,  before January 1, 1999).  The Company impact of
adopting SFAS No. 133 is not material on the financial statements.  However, the
statement could increase volatility in the consolidated statements of operations
and in other comprehensive loss.

                                       64
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

RECLASSIFICATIONS

Certain  information  reported in  previous  periods  has been  reclassified  to
conform to the current period presentation.

NOTE 3. ACQUISITIONS:

In June 1999,  the Company  acquired GO  Software,  Inc.  (GO).  GO develops and
markets transaction processing software for personal computers that can function
on a stand-alone basis or can interface with core corporate  accounting systems.
The Company paid GO $4.7 million in cash, issued a $1.0 million  promissory note
bearing interest at 10%, and issued 1,123,751 shares of common stock,  valued at
$8.54 per share,  for a total purchase price of $15.4 million.  The  acquisition
was  accounted  for  using the  purchase  method of  accounting.  Of the  excess
purchase price of  approximately  $14.4 million,  $13.8 million was allocated to
acquired technology and $556,000 was allocated to goodwill, which are both being
amortized  over a three-year  life. The note bore interest at 10% and was repaid
in full upon completion of the Company's IPO.

Also in June 1999, the Company  acquired  CardSecure,  Inc.  (CardSecure)  for a
purchase  price of  approximately  $3.5  million.  CardSecure  is a developer of
e-commerce  enabled  Web sites.  The  acquisition  was  accounted  for using the
purchase method of accounting.  The excess purchase price of approximately  $3.5
million was  allocated  to acquired  technology  and is being  amortized  over a
three-year life.

On November 12, 1999, the Company acquired SpeedyClick,  Corp. (SpeedyClick),  a
California corporation, for $55.6 million of cash, common stock and common stock
options.  SpeedyClick,  a privately held company, maintains an Internet Web site
that focuses on  entertainment  and  interactivity.  Upon  effectiveness  of the
acquisition,  a total of  3,799,237  shares of common stock valued at $13.31 per
share were issued to the owners of SpeedyClick.  Options to purchase SpeedyClick
common stock were assumed by the Company and converted  into 157,527  options to
purchase the Company's common stock. The Company also paid cash consideration of
$3.0  million to the  owners of  SpeedyClick.  The  Company  accounted  for this
transaction  as  a  purchase.  Of  the  $55.6  million  in  consideration  paid,
approximately $27.9 million was allocated to proprietary concepts, $14.7 million
to customer  lists and $13.0 million to goodwill.  These  intangible  assets are
being  amortized  over a three-year  life.  However,  in March 2001, the Company
decided to shut down the  operations  and  wrote-off  the  remaining  intangible
assets. (see Note 19)

On December 3, 1999, the Company  acquired  Cortix,  Inc.  (Cortix),  an Arizona
corporation doing business as  20-20Consumer.com,  for $14.4 million of cash and
common stock.  Cortix,  a privately  held company,  is an operator of comparison
shopping  services  including  online reviews and ratings for  commerce-oriented
businesses,  merchants  and products.  Upon  effectiveness  of the  acquisition,
711,435  shares of common  stock  valued at $18.81 per share were  issued to the
owners of Cortix.  The Company also paid cash  consideration  of $1.0 million to
the owners of Cortix.  The Company accounted for this transaction as a purchase.
Of the $14.4  million in  consideration  paid,  approximately  $11.3 million was
allocated  to  acquired  technology,  $1.6  million to  customer  lists and $1.3
million  to  goodwill.  These  intangible  assets  were being  amortized  over a
three-year life. However, in December 2000, the Company decided to shut down the
operations and wrote-off the remaining  intangible assets of $9.1 million.  (see
Note 4)

                                       65
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

On December 17, 1999,  the Company  acquired  WebCentric  Inc.,  (WebCentric)  a
Kansas  corporation  doing  business as  bottomdollar.com,  for $40.2 million of
common  stock,  common  stock  options and  approximately  $1.4 million of cash.
WebCentric, a privately held company, develops e-commerce integration technology
and applications,  including a comparison  shopping engine that allows consumers
to search and compare the  products  and  services of several  leading  Internet
merchants. Upon effectiveness of the acquisition, a total of 2,161,904 shares of
common stock valued at $16.89 per share were issued to the owners of WebCentric.
In  addition,  the  Company  issued  replacement  stock  options to  purchase an
aggregate of 121,544 shares of the Company's  common stock to certain  employees
and owners of  WebCentric.  The  Company  accounted  for this  transaction  as a
purchase.  Of the $40.2  million  in  consideration  paid,  approximately  $31.8
million was allocated to acquired technology, $3.3 million to customer lists and
$4.6 million to goodwill.  These  intangible  assets were being amortized over a
three-year life. However, in December 2000, the Company decided to shut down the
operations and wrote-off the remaining intangible assets of $24.3 million.  (see
Note 4).

On January 13, 2000, the Company,  through its wholly owned  subsidiary  3037952
Nova Scotia Company,  a Nova Scotia Company,  acquired Pronet  Enterprises  Ltd.
(Pronet),  a Canadian company,  for approximately  $12.8 million,  of which $3.2
million was paid in cash,  $2.2  million in non-cash  deferred  tax  liabilities
assumed and $7.4  million in common  stock and common  stock  options  issued to
Pronet   shareholders.   Pronet,   a   privately   held   company,   operates  a
business-to-business portal and marketplace that aggregates businesses that seek
to transact with one another. Upon effectiveness of the acquisition,  a total of
162,508 shares of common stock,  valued at $17.60 per share,  were issued to the
shareholders  of Pronet.  In addition,  the Company  issued  options to purchase
351,666  shares of common  stock to the two  principals  of Pronet.  The Company
accounted  for  this  transaction  as  a  purchase.  Of  the  $12.8  million  in
consideration  paid,  approximately  $6.3  million  was  allocated  to  acquired
technology,  $2.7 million to customer lists and $3.8 million to goodwill.  These
intangible  assets are being amortized over a three-year  life. In January 2001,
management  revised  its  estimated  useful  life for these  assets  and will be
amortizing the remaining carrying value of Pronet (approximately $9.1 million as
of December 31, 2000) over the first six months of 2001.

On January 18, 2000, the Company  acquired AXC  Corporation  (AXC), a Washington
corporation,  for approximately $17.9 million, of which $2.2 million was paid in
cash,  $4.1  million in  non-cash  deferred  tax  liabilities  assumed and $11.6
million in common stock and common  stock  options  issued to AXC  shareholders.
AXC, a  privately  held  company,  provided  e-commerce  consulting  services to
businesses.  Upon effectiveness of the acquisition, a total of 540,296 shares of
common  stock  valued at $17.60 per share were  issued to the owners of AXC.  In
addition,  the Company issued replacement stock options to purchase an aggregate
of 72,089 shares of the Company's  common stock to certain  employees and owners
of AXC. The Company  accounted for this transaction as a purchase.  Of the $17.9
million in  consideration  paid,  approximately  $7.2  million was  allocated to
assembled  workforce,  $4.9 million to customer lists,  $5.0 million to goodwill
and $800,000 to working capital.  These  intangible  assets were being amortized
over a three-year life.  However,  in December 2000, the Company decided to shut
down the  operations  and  wrote-off the  remaining  intangible  assets of $14.2
million. (see Note 4).

On April 11, 2000, the Company acquired FreeMerchant.com, Inc. (FreeMerchant), a
Delaware corporation, for approximately $38.1 million, of which $2.0 million was
paid in cash,  $10.0  million in  non-cash  deferred  tax  liabilities  assumed,
$500,000 of debt  assumed  and $25.6  million in common  stock and common  stock
options  issued to  FreeMerchant  shareholders.  FreeMerchant,  a privately held

                                       66
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

company,   has  developed   online   store-builder   technology  for  small-  to
medium-sized  merchants  that seek a  low-cost  point of entry to  e-commerceand
provides  hosting  services  to  those  merchants.  Upon  effectiveness  of  the
acquisition,  a total of 2,573,723  shares of common stock,  valued at $8.80 per
share, were issued to the shareholders of FreeMerchant. In addition, the Company
issued   options  to  purchase   293,596  shares  of  common  stock  to  certain
FreeMerchant   shareholders  and  employees.  The  Company  accounted  for  this
transaction  as  a  purchase.  Of  the  $38.1  million  in  consideration  paid,
approximately $23.0 million was allocated to acquired  technology,  $4.1 million
to assembled  workforce and $11.0 million to goodwill.  These intangible  assets
are being amortized over a three-year life.

On June 2, 2000,  the  Company  effected  its  acquisition  of  Ubarter.com  Inc
(Ubarter),  a Nevada  corporation,  pursuant to an agreement  and plan of merger
dated January 20, 2000, for approximately  $61.7 million,  of which $875,000 was
paid in cash,  $11.4  million in  non-cash  deferred  tax  liabilities  assumed,
$978,000 in net liabilities  assumed,  $7.6 million in the  cancellation of debt
between  Ubarter and the Company,  and $40.8  million in common stock and common
stock warrants issued to Ubarter shareholders and creditors. Ubarter, a publicly
traded company, is a business-to-business  e-commerce enterprise, which utilizes
the Ubarter Dollar as payment for products and services by its member businesses
over  its  proprietary  barter  exchange  system.   Upon  effectiveness  of  the
acquisition, a total of 2,682,871 shares of common stock valued at approximately
$15.10 per share were issued to the  shareholders  and creditors of Ubarter.  In
addition,  the Company issued warrants to purchase 51,842 shares of common stock
to certain Ubarter shareholders,  employees and creditors. The Company accounted
for this transaction as a purchase.  Of the $61.7 million in consideration paid,
approximately $7.5 million was allocated to acquired technology, $2.5 million to
assembled  workforce,  $25.1  million to  proprietary  concept,  $2.5 million to
customer  lists,  and $24.0 million to goodwill.  These  intangible  assets were
being amortized over a three-year life. However, in December 2000, we recognized
an impairment charge of $46.6 million. (see Note 4 and Note 18).

On August 24,  2000,  the Company  acquired  Ivebeengood.com,  d.b.a.  UberWorks
(UberWorks),   a  wholly  owned  subsidiary  of  Trilogy,  Inc.  (Trilogy),  for
approximately  $22.8  million,  of which $2.4  million  was  accrued as non-cash
deferred compensation, $5.9 million in non-cash deferred tax liabilities assumed
and $14.5 million in common stock and common stock  options  issued to UberWorks
shareholders  and  employees.   UberWorks  is  a  developer  of   multi-merchant
e-commerce  purchasing  tools  and  universal  shopping  cart  technology.  Upon
effectiveness  of the  acquisition,  a total of 2,601,562 shares of common stock
valued  at  approximately  $6.13  per  share  were  issued  to  shareholders  of
UberWorks,  of  which  423,253  are  being  held  back  by  the  Company  to  be
subsequently  released based on time vesting and on certain performance criteria
yet to be  achieved  (these  shares  have been  excluded  from  determining  the
Company's  weighted  average  shares  outstanding  used to  calculate  basic and
diluted  earnings per share).  The maximum term of the  retention is three years
from the effective date of the  acquisition.  In addition,  the Company issued a
warrant to Trilogy,  with a strike  price of  $0.000001  per share,  to purchase
additional  shares of the Company's common stock if on the one-year  anniversary
date of the  acquisition,  the shares  currently  held by Trilogy  (the  Trilogy
Shares) are not worth at least $13.1  million.  The maximum number of additional
shares that Trilogy can purchase  under the terms of the warrant is 2.6 million.
To the extent that the Trilogy  Shares  have a fair  market  value that  exceeds
$13.1  million on the one-year  anniversary  date,  the warrant is cancelled and
Trilogy  must  forfeit  the number of Trilogy  Shares  that would be required to
bring  their  fair  value  down to $13.1  million,  limited  to a maximum of 1.3
million  shares to be  forfeited  under this  scenario.  The Company also issued
options  to  purchase  248,162  shares  of  common  stock to  certain  UberWorks
employees.  The Company  accounted for this  transaction  as a purchase.  Of the
$22.8 million of consideration  paid,  approximately $12.3 million was allocated

                                       67
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

to  acquired  technology,  $2.4  million to deferred  compensation,  $726,000 to
assembled  workforce and $7.3 million to goodwill.  These intangible  assets are
being amortized over a three-year life. Deferred  compensation will be amortized
over  the  three-year  term  of  the  option  agreements,   subject  to  certain
accelerated  vesting  criteria.  However,  in March 2001, the Company decided to
abandon the technology and wrote-off the remaining  intangible assets. (see Note
19)

On December 8, 2000,  the Company  acquired  ePackets.Net,  Inc.  (ePackets) for
approximately  $270,000  consisting of $150,000 in cash, $37,000 in common stock
and common  stock  options  and  $83,000 in net  liabilities  assumed.  ePackets
provides  permission-based  one-to-one email solutions.  In connection with this
acquisition,  the  Company  issued to the  shareholders  of  ePackets a total of
33,324 shares of common stock.  The Company  accounted for this transaction as a
purchase.  The  consideration  paid was allocated to acquired  technology and is
being amortized over a three-year life.

n December 22, 2000, the Company acquired Internet Domain Registrars Corporation
(IDR),  for  approximately  $23.6 million,  consisting of $750,000 in cash, $6.1
million in non-cash  deferred tax  liabilities  assumed,  $5.7 million in common
stock  and  $11.1  million  in net  liabilities  assumed.  IDR is a domain  name
infrastructure company, which owns and operates the www.registrars.com Web site.
In connection with this  acquisition,  the Company issued to the shareholders of
IDR a total of 7,650,000  shares of common stock, of which 1,000,000 were placed
in escrow for  indemnification  purposes.  In  addition,  3,281,000  shares were
issued  and  placed in escrow to be  released  to the  former  shareholders  and
certain  employees of IDR upon the  achievement  of  established  future revenue
targets  over an  eighteen-month  period,  and  219,000  shares  were  issued to
employees  of IDR who  continued  to be employed  by IDR after the  acquisition.
Finally,  600,000  shares of our  common  stock  were  issued at the  closing to
certain  other  persons in connection  with the  settlement of potential  claims
against IDR and as consideration of services  rendered to IDR in connection with
the  acquisition.  The Company's common stock on December 22, 2000 was $0.69 per
share. The Company  accounted for this  transaction as a purchase.  Of the $23.6
million of  consideration  paid,  approximately  $10.5  million was allocated to
proprietary  concept,  $874,000 to domain name,  $3.5 million to customer lists,
$874,000 to assembled  workforce and $7.8 million to goodwill.  These intangible
assets are being amortized over a three-year life.

UNAUDITED PRO FORMA COMBINED RESULTS

The  following  summarizes  the  unaudited  pro forma  results of the  Company's
operations  for the years  ended  December  31, 2000 and 1999  assuming  the GO,
CardSecure,  SpeedyClick,  Cortix and WebCentric acquisitions had occurred as of
January 1, 1999 and assuming the AXC, Pronet,  FreeMerchant,  Ubarter, UberWorks
and IDR  acquisitions  had occurred as of January 1, 2000. The pro forma results
are presented for the purposes of additional analysis only and do not purport to
present  the  results of  operations  that would have  occurred  for the periods
presented or that may occur in the future.

                                         Year Ended December 31,
                                          2000            1999
                                       ----------      ----------
                                          (in thousands, except
                                              share amounts)

Revenues                                $ 107,917       $  48,976
Net loss before taxes                    (337,382)       (184,927)
Net loss per share before taxes             (4.95)          (4.92)

                                       68
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)


NOTE 4. RESTRUCTURING AND IMPAIRMENT CHARGES:

IMPAIRMENT OF CERTAIN LONG-LIVED ASSETS

Early in the fourth quarter 2000, the Company  launched a new user interface and
back-end management system for the Ubarter.com  merchant exchange,  and executed
various  marketing  efforts to promote  the new  system.  These  efforts did not
stimulate growth in the Ubarter economy as expected,  which led to a revision in
management's  original  forecasts  and  projections  for Ubarter.  These revised
forecasts indicated that future expected cash flows from this business unit were
less than the  carrying  value of its  intangible  assets,  thus  triggering  an
impairment event in December 2000. At that time, the carrying value of Ubarter's
intangible  assets  including  goodwill  was  $51.6  million.  Based  on  recent
comparable  sales of other barter exchange  systems,  management  determined the
fair value of Ubarter.com to be  approximately  $5.0 million.  As a result,  the
Company recognized an impairment charge of $46.6 million in December 2000, which
is reflected in the  accompanying  December 31, 2000  consolidated  statement of
operations.  In March 2001, the Company recognized additional losses on the sale
of certain Ubarter assets. (see Note 19)

RESTRUCTURINGS AND RELATED IMPAIRMENTS

In December  2000,  the Company  initiated  a  restructuring  plan to focus more
resources on the technology  infrastructure  and services business that resulted
in the closing of certain  business units including Media Assets,  Inc.  (d.b.a.
The  HagginGroup),   ShopNow.com,   AXC,  Cortix  and  WebCentric,  as  well  as
termination of approximately 141 employees. The Company recognized restructuring
and  impairment  charges  of $64.9  million,  which  included  $48.1  million of
impaired  intangible  assets  and  goodwill  as well as $16.6  million of tenant
improvements,   fixed  assets,   software  and   supporting   technologies   and
infrastructure  related  to  these  acquired  businesses.  Charges  relating  to
employee severance and benefits for terminated employees were $235,000, of which
$170,000 had been paid as of December 31, 2000 and the  remainder was paid early
in the first quarter of 2001.  Of the $64.9 million in recognized  restructuring
and  impairment  charges,  approximately  $3.2 million is related to future cash
outlays  that are  expected  to be  incurred  during  2001  from  exiting  lease
agreements for office space that is no longer in use. This amount is included in
accrued liabilities in the accompanying  December 31, 2000 consolidated  balance
sheet.

NOTE 5. SHORT-TERM INVESTMENTS:

Short-term investments are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                     December 31                       December 31
                                                        2000                              1999
                                                  Cost       Market Value          Cost        Market Value
   <S>                                     <C>             <C>                <C>             <C>
    Auction preferreds                     $          -    $           -      $   14,647       $    14,647
    Municipal notes and bonds                     3,503            3,500          13,453            13,453
    Commercial paper                                  -                -          11,452            11,452
    Corporate notes and bonds                     6,867            6,744           6,298             6,298
    U.S. government securities                    1,499            1,495           3,572             3,572
    Certificate of deposit                        9,853            9,853             150               150
                                           ------------    -------------      ----------       -----------
    Total short-term investments           $     21,722    $      21,592      $   49,572       $    49,572
                                           ============    ==============     ==========       ============

</TABLE>

                                       69
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

NOTE 6. MARKETABLE EQUITY SECURITIES:

At December 31, 2000, the Company's  investments in marketable equity securities
were  comprised  primarily of 476,410  shares of 24/7 Media,  a publicly  traded
company  subject to the  reporting  requirements  of the SEC.  During the fourth
quarter of 2000,  management  determined  that its  investment in 24/7 Media and
certain  of  its  other   investments  in  marketable   equity  securities  were
permanently  impaired. As a result, the Company recorded an impairment charge of
$23.7 million, which is included as a component of nonoperating income (expense)
in the accompanying December 31, 2000 consolidated statement of operations. Fair
values used to determine the magnitude of the impairment charge were based on an
average  closing  market  price  as of  December  31,  2000  of  the  individual
securities as quoted in the public markets.  There were no such charges in prior
periods. After recording this charge, the Company's cost basis in its marketable
equity securities was $431,000  (equivalent to their fair values) as of December
31, 2000,  compared to $23.4 million as of December 31, 1999. For the year-ended
December 31, 1999, the Company had recognized  unrealized  holding gains of $7.5
million.

During the fourth  quarter of 1999,  the Company  sold  110,000 of its  original
195,122 shares of FreeShop.com,  Inc. for a recognized gain of $2.4 million. The
Company's remaining 85,122 shares were sold during 2000 for a recognized gain of
$1.3 million.  There were no sales of the Company's marketable equity securities
in 2000 or prior to 1999.

NOTE 7. UNBILLED SERVICES:

Unbilled  services is comprised of marketing and professional  services of $10.8
million and $2.1  million,  at December 31, 2000 and 1999,  respectively.  These
amounts were primarily billed in the following month.

NOTE 8. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following (in thousands):

                                                              December 31,
                                                         2000            1999
                                                     -----------      ----------
  Equipment                                          $     4,506      $   11,065
  Software                                                20,377          10,645
  Furniture and fixtures                                   9,166           1,618
  Leasehold improvements                                   1,128             817
                                                          35,177          24,145
                                                     -----------      ----------
  Less - Accumulated depreciation and amortization      (12,597)         (4,760)
                                                     -----------      ----------
   Property and equipment, net                       $    22,580      $   19,385
                                                     ============     ==========

Depreciation  expense for the years ended  December 31, 2000,  1999 and 1998 was
approximately $11.1 million, $3.6 million and $816,000, respectively.

                                       70
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)


Property and equipment shown above include assets under capital leases of
approximately $8.3 million and $6.9 million at December 31, 2000 and 1999, with
corresponding accumulated amortization of approximately $2.5 million and $1.0
million at December 31, 2000 and 1999, respectively.







                                       71
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

NOTE 9. OTHER INTANGIBLE ASSETS:

Other intangible assets consists of the following (in thousands):

                                                              December 31,
                                                         2000            1999
                                                    ------------     -----------

    Acquired technology                             $    60,875      $   61,297
    Proprietary concept                                  40,841          27,910
    Customer lists                                       20,581          22,297
    Domain names                                          4,268           1,175
    Assembled workforce                                   6,060               -
    Other                                                   420             402
                                                    -----------      ----------
                                                        133,045         113,681
    Less - Accumulated amortization                     (38,306)         (8,968)
                                                    -----------      ----------
    Total other intangible assets, net              $    94,739      $  104,713
                                                    ============     ==========

NOTE 10. COST-BASIS INVESTMENTS:

Cost-basis  investments in the equity securities of certain technology companies
consist of the following (in thousands):
                                                              December 31,
                                                         2000            1999
                                                     ----------       --------

    Futurist Records, Inc                            $    8,200       $      -
    Privaseek, Inc                                        4,728          4,728
    Bidbay, Inc                                           3,108              -
    Planet of Music, Inc.                                 2,754              -
    Escrow.com, Inc                                       2,700          5,387
    The Munder Fund                                       1,499              -
    Skyway Communications, Inc.
        (promissory note receivable)                      1,481              -
    Insuresuite.com, Inc.                                   900              -
    Other                                                 4,111          2,072
                                                     ----------       --------
    Total cost-basis investments                     $   29,481       $ 12,187
                                                     ==========       ========

During  the  second  half of 2000,  management  determined  that  certain of its
cost-basis  investments were permanently  impaired  relative to their historical
values.  As a  result,  the  Company  recognized  an  impairment  charge of $8.6
million,  which is included as a component of nonoperating  income  (expense) in
the  accompanying  December  31,  2000  consolidated  statement  of  operations.
Permanent impairments in the Company's cost-basis investments were determined by
examining the operations of each company,  and when possible by reviewing recent
private-placement   valuations  for   comparable   companies  and  by  obtaining
professional business valuations. There were no such charges prior to 2000. Also
during 2000,  the Company sold 1.4 million of its original 2 million shares held
in Escrow.com,  Inc., for a recognized gain of $3.9 million. There were no other
sales of

                                       72
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

the  Company's  cost-basis  investments  in 2000 or  prior to  1999.  The  above
companies are predominantly early stage technology companies, which will in most
instances  be seeking to raise  additional  capital in the  future.  There is no
assurance  that  additional  capital  will be  raised  by  these  entities,  and
management's  evaluation of permanent  impairment may change in the near term as
facts and circumstances  change. The amounts the Company will ultimately realize
could differ materially in the near term from the amounts assumed in determining
whether permanent impairment had occurred as of December 31, 2000.

NOTE 11. ACCRUED LIABILITIES:

Accrued liabilities consists of the following (in thousands):
                                                              December 31,
                                                         2000            1999
                                                     ----------       ---------

    Accrued compensation and benefits                $    4,730       $   4,422
    Accrued marketing expenses                            3,047           2,145
    Other accrued liabilities                            10,369           2,211
                                                     ----------       ---------
    Total accrued liabilities                        $   18,146       $   8,778
                                                     ==========       =========

NOTE 12. DEFERRED REVENUES:

Deferred revenues consists of the following (in thousands):

                                                              December 31,
                                                         2000            1999
                                                      ---------        -------
    Domain registrations                              $  11,982        $     -
    Marketing services                                    8,898            816
    Licensing fee                                         2,259          4,970
    Professional services                                 2,619              -
                                                      ---------        -------
                                                         25,758          5,786
    Less - Current portion of deferred revenues         (22,055)        (5,786)
                                                      ---------        -------
    Deferred Revenues                                 $   3,703        $     -
                                                      =========        =======

Unearned revenues related to domain  registrations  represent the unexpired term
of  registration  fees, net of the referral  commissions  paid to affiliates and
referral partners, and are recognized ratably over the term of the registration.
Revenues from marketing and  professional  fees are recognized when services are
delivered, and licensing fees are recognized over the term of agreement.

                                       73
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

NOTE 13. DEBT OBLIGATIONS:

Notes and leases payable consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                           2000           1999
                                                                                        ----------    ---------
    <S>                                                                                 <C>           <C>
    Convertible note payable to shareholder, bearing interest at applicable federal
       rate, quarterly principal and interest payments totaling $113,000; final
       payment due in October 2000. The note is convertible to common stock
       at $8.00 per share...........................................................    $       -     $     437
    Term note payable bearing interest at 12% per year, principal and interest
       payments payable monthly, final payment due in March 2002....................         1,750        3,086
    Credit agreement bearing interest at prime lending rate plus 1-1/2% (11% at
       December 31, 2000); principal and interest payments payable monthly, final
       payment due in November 2003, net of discount of $300,000....................         9,847            -
              Convertible notes payable, net of discount of $5,235,000..............         9,765            -
    Capital lease obligations and other notes payable, interest, and principal
       payable monthly, interest at rates from 5% to 29% with maturity dates
       between 2001 and 2010........................................................         5,176       10,451
                                                                                        ----------    ---------
                                                                                            26,538       13,974
                               Less current portion.................................       (24,797)      (8,565)
                                                                                        ----------    ---------
                                                                                        $    1,741     $  5,409
                                                                                        ==========    =========
</TABLE>

In March 1999,  the Company  entered into a loan and security  agreement  with a
financial  institution  for a term loan and line of  credit.  In May  1999,  the
agreement  was  amended  and  restated to allow the Company to borrow up to $8.5
million at any one time,  consisting of a $3.5 million term loan (term loan),  a
$4.0  million  bridge  loan  (bridge  loan)  and a line of  credit of up to $2.5
million.  The term loan bears  interest at 12%, is secured by a letter of credit
and matures in March 2002. In conjunction with the agreement, the Company issued
warrants to acquire  72,000 shares of common stock at an exercise price of $6.25
per share. The warrants are exercisable immediately and expire in March 2006. In
May 1999, the Company issued to the financial institution additional warrants to
acquire  70,000 shares of common stock at an exercise  price of $7.00 per share.
The warrants are exercisable immediately and expire in June 2006.

On May 19, 2000, the Company  entered into a credit  agreement with a commercial
bank, with a maximum  commitment amount of $15.0 million to finance the purchase
of equipment, software and tenant improvements.  The credit agreement is secured
by substantially  all of the Company's assets and had an outstanding  balance of
$10.1 million at December 31, 2000. The outstanding commitments bear interest at
an annual rate equal to the prime  lending rate plus one and  one-half  percent.
Outstanding  commitments  under the  agreement  are  required to be repaid under
specific schedules, with all commitments to be repaid no later than November 18,
2003. The credit agreement  requires the Company to maintain  certain  financial
ratios and places limitations on certain financing and investing activities. The
credit agreement also contains other customary  conditions and events of default
that, in the event of  noncompliance  by the Company,  would prevent any further
borrowings and would

                                       74
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

generally require the repayment of any outstanding  commitments under the credit
agreement.  As of December 31, 2000,  the Company had an adjusted quick ratio of
1.14 to 1.00  that was not in  compliance  with  the  financial  ratio  covenant
required of 1.75 to 1.00. (see Note 19)

On September 29, 2000, the Company sold $20.0 million of  convertible  notes and
warrants  to a private  institution.  The notes  have a  one-year  term and bear
interest at an annual rate of six  percent.  On October  26,  2000,  the Company
filed a  registration  statement  on Form S-3 with the SEC,  which was  declared
effective on December 4, 2000.  Also,  the Company  issued  warrants to purchase
4,050,633 shares of common stock to the private institution at an exercise price
of $10.37 per share. The warrants are immediately exercisable and expire in five
years.  These  warrants  were valued at $9.4 million and were recorded as common
stock warrants in the accompanying December 31, 2000 consolidated balance sheet.
The notes were valued at $10.6 million.  Immediately  after the effective  date,
$5.0 million of the notes were  converted  into common  stock.  The terms of the
notes provide for conversion to common stock at a conversion  price of $1.68 per
share.  Under the terms of the agreement,  the notes can be called by the holder
if the Company were to be delisted from the NASDAQ stock exchange.

Notes and leases payable  mature as follows for the periods ending  December 31,
(in thousands):
    2001.............................................. $24,874
    2002..............................................   5,779
    2003..............................................     944
    2004..............................................      36
    2005..............................................      21
    Thereafter........................................     199
                                                       -------
    Total notes and leases payable.................... $31,773
                                                       =======

NOTE 14. COMMITMENTS AND CONTINGENCIES:

COMMITMENTS

The  Company is  obligated  under  capital  and  operating  leases  for  various
equipment  leases and its office  facilities.  The leases  expire  through 2011.
Future  minimum lease payments under these leases are as follows for the periods
ending December 31, (in thousands):

                                                       Capital      Operating
                                                        leases       leases
                                                       -------      -------
    2001.............................................. $ 3,972      $ 8,284
    2002..............................................   1,065        8,742
    2003..............................................     148        8,621
    2004..............................................      20        8,305
    2005..............................................       2        7,076
    Thereafter........................................       -       26,537
                                                       -------      -------

                                                         5,207      $67,565
                                                                    =======
    Less amounts representing interest................    (532)
                                                       -------
    Net present value of minimum lease payment........ $ 4,675
                                                       =======

                                       75
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

In 1999,  the Company issued 62,400  warrants to purchase  common stock at $6.25
per share to two  financial  institutions  in  conjunction  with certain  leases
included above. The warrants are exercisable immediately and expire between June
2004 and April 2006.

Rental  expense  for the  years  ended  December  31,  2000,  1999  and 1998 was
approximately $4.1 million, $1.3 million and $225,000, respectively.

The  Company has  commitments  under  various  business  agreements  to purchase
advertising totaling  approximately $10.1 million in 2001, of which $8.9 million
is related to barter transactions, decreasing to $250, 000 in 2002.

CONTINGENCIES

On October 6, 2000,  Mall.com,  Inc. filed suit against the Company. The suit is
based on a contract  between  Mall.com  and  IveBeenGood.com,  which the Company
acquired  in August  2000.  The suit  alleges  that  IveBeenGood.com  breached a
contract  with  Mall.com,  breached a warranty  given to Mall.com and  committed
fraud and negligent  misrepresentation.  Mall.com seeks return of cash and stock
paid by Mall.com,  attorneys' fees and costs, $1 million in direct damages,  $15
million in compensatory damages and $32 million in punitive damages.  Management
intends to vigorously defend the Company's position.

From time to time the  Company  has been  named in other  claims  arising in the
ordinary  course  of  business.  In the  opinion  of  management,  the  ultimate
disposition  of these  matters  will not have a material  adverse  effect on the
Company's consolidated financial position, results of operations or liquidity.

NOTE 15. INCOME TAXES:

Prior to 2000,  the Company had not provided for any current or deferred  United
States federal,  state or foreign income tax provision or benefit because it had
incurred net operating  losses since inception,  and had  historically  provided
full valuation  allowances on those  deferred tax assets due to the  uncertainty
regarding  their  realizability.  In  December  1999,  the  Company's  valuation
allowance  was reduced to zero due to the increase in deferred  tax  liabilities
recognized from business acquisitions, which as of December 31, 1999, exceed the
amount of deferred tax assets recognized by the Company.  As additional deferred
tax assets were generated during 2000,  deferred tax benefits were recognized by
the  Company  totaling  $49.2  million  for the year ended  December  31,  2000.
Deferred tax assets  consist  primarily  of net  operating  loss  carryforwards,
stock-compensation  expense not recognized for tax purposes and deferred revenue
recognized  immediately  for tax  purposes.  Deferred  tax  liabilities  consist
primarily of intangible  assets not recognized for tax purposes and  accelerated
tax depreciation  deductions  exceeding the amounts recognized by the Company in
its consolidated financial statements. Deferred income taxes reflect the net tax
effects


                                       76
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

of temporary  differences between the carrying amounts of assets and liabilities
for financial  reporting  purposes and the amounts used for income tax purposes.
Significant  components  of the  Company's  deferred  taxes were as follows  (in
thousands):

                                                              December 31,
                                                         2000            1999
                                                      ---------       ---------
Deferred tax assets:
    Net operating loss carryforwards                  $  69,033       $  29,021
    Stock-based compensation                                  -           2,730
    Restructuring and impairment charges                 15,107               -
    Deferred revenue                                      2,473           1,889
    Other                                                   945             311
    Valuation allowance for deferred tax assets        (51,505)               -
                                                      ---------      ----------
    Total deferred tax assets                            36,053          33,951
                                                      ---------      ----------
Deferred tax liabilities:
    Ingangible assets                                  (36,001)        (38,398)
    Property and equipment                                 (52)            (64)
                                                      --------       ---------
    Total deferred tax liabilities                     (36,053)        (38,462)
                                                      ---------      ---------
Net deferred taxes                                    $       -      $  (4,511)
                                                      =========      =========

Income tax benefit differed from the amounts computed by applying the income tax
rate of 38%  (federal  statutory  rate of 34% plus a blend of state  income  tax
rates,  net of the federal  benefit) to loss before  income taxes as a result of
the following (in thousands):

<TABLE>
<CAPTION>
                                                                       December 31,
                                                         2000              1999             1998
                                                        --------       ---------          -------
<S>                                                     <C>             <C>               <C>
Expected income tax benefit                            $(118,268)      $ (28,858)         $(9,403)
Increase (decrease) in income taxes resulting from:
    Change in valuation allowance                         51,505          28,858            9,403
    Nondeductible goodwill                                18,095               -                -
    Other                                                   (537)              -                -
                                                       ---------       ---------          -------
Actual income tax benefit                              $ (49,205)      $       -          $     -
                                                       =========       =========          =======

</TABLE>

At December  31,  2000,  the Company had net  operating  loss  carryforwards  of
approximately  $181.7  million  related  to  U.S.  federal,  foreign  and  state
jurisdictions.  Utilization of net operating loss  carryforwards  are subject to
certain  limitations  under Section 382 of the Internal Revenue Code of 1986, as
amended.  The Company's  ability to use net operating  losses  incurred prior to
July 1999 is limited to an aggregate of approximately $14.3 million per year due
to sales of Series D and Series E convertible  preferred  stock to third parties
in April  1998 and the sale of  Series I  convertible  preferred  stock to Chase
Manhattan  Bank in  July  1999,  which  resulted  in  ownership  changes.  These
carryforwards will begin to expire at various times commencing in 2012.

                                       77
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

NOTE 16. SHAREHOLDERS' EQUITY:

CONVERTIBLE PREFERRED AND COMMON STOCK

At December 31, 2000,  the Company had authorized  200,000,000  shares of common
stock and 5,000,000 shares of convertible preferred stock. Through September 30,
1999, the Company had issued  20,189,061  shares of convertible  preferred stock
for  total  consideration  of  $89.4  million.   All  series  of  the  Company's
outstanding  preferred  stock were  converted into common stock on a one-for-one
basis upon completion of the Company's IPO during the fourth quarter of 1999.

STOCK OPTION PLANS

The Company adopted a combined incentive and nonqualified stock option plan (the
Plan) to provide  incentive to employees,  directors,  consultants and advisors.
The Company  originally  reserved  5,000,000 shares of common stock for issuance
under the Plan. During 1999 and 2000, the Company amended the Plan and increased
the shares reserved for issuance under the Plan to 10,500,000 as of December 31,
2000. The Company has granted  options to purchase  2,683,249  shares to Company
executives   outside  the  Plan.  In  December  1999,  the  Company   adopted  a
non-executive  officer stock option plan (the NOE Plan) to provide  incentive to
certain employees and consultants.  The Company  originally  reserved  1,000,000
shares of common  stock for issuance  under the NOE Plan,  which also allows for
automatic increases in the number of shares issuable based on certain events, up
to a maximum number of 4,000,000 shares.  During 2000, the Company increased the
maximum number of shares issuable under the NOE Plan to 10,500,000.  In December
1999, in connection  with the  acquisition of  SpeedyClick,  Corp.,  the Company
assumed the SpeedyClick  1999 Stock Incentive Plan (the  SpeedyClick  Plan). The
SpeedyClick  Plan was  designed to provide  incentive to  employees,  directors,
consultants and advisors. The Company has granted 157,537 shares of common stock
for issuance  under the  SpeedyClick  Plan.  There are 375,000  shares of common
stock reserved for issuance under the  SpeedyClick  Plan;  however,  the Company
does not intend to make further grants of options under this Plan.

Options under the Plan, the NOE Plan, the  SpeedyClick  Plan and options granted
outside  of the Plan (the  Plans)  generally  expire  10 years  from the date of
grant.  The Board of Directors  determines  the terms and  conditions of options
granted  under the Plans,  including the exercise  price.  Options are generally
granted at fair market  value on the date of grant and  generally  vest  ratably
over a three-year period from the date of grant.

Under APB No. 25, the  Company  records  compensation  expense  over the vesting
period for the difference  between the exercise price and the deemed fair market
value for financial  reporting  purposes of stock options granted.  Prior to the
Company's  IPO,  the fair  value of  common  stock  had  been  based on  factors
including, but not limited to, preferred stock sales, milestones achieved in the
development  of the Company,  comparisons to  competitive  public  companies and
general market conditions. Subsequent to the IPO, fair value has been determined
using the  Company's  closing  stock  price as quoted in the public  market.  In
conjunction  with grants made in 2000, 1999 and 1998, the Company  recorded $6.2
million,  $6.6  million  and  $182,000  as  stock  compensation  expense  in the
accompanying  December  31,  2000,  1999 and  1998  consolidated  statements  of
operations, respectively.

                                       78
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation expense been recognized on stock options issued based on the fair
value of the options at the date of grant and recognized over the vesting
period, the Company's net loss would have been increased to the pro forma
amounts indicated below (in thousands, except per share amounts):
                                                    December 31,
                                          2000          1999         1998
                                        --------     --------     --------
                                              (dollars in thousands)
Net loss:
    As reported                        $(262,026)    $(75,943)    $(24,745)
    Pro forma                           (271,002)     (83,443)     (25,067)
Basic and diluted net loss per share:
    As reported                        $   (4.61)    $  (5.80)    $  (7.01)
    Pro forma                              (4.77)       (6.37)       (7.10)


The fair  value of each  option  is  estimated  using the  Black-Scholes  option
pricing  model that takes into  account:  (1) the fair value  stock price at the
grant date,  (2) the exercise  price,  (3)  estimated  lives ranging from two to
three years, (4) no dividends, (5) risk-free interest rates ranging from 5.3% to
6.5% and (6) volatility  ranging from 0% through June 18, 1999, 72.0% subsequent
to June 18, 1999 through  September 30, 1999, and 88.3%  subsequent to September
30,  1999  through  December  31,  2000.  Annual  volatility  for the year ended
December 31, 2000 was 134.70%.  The initial impact on pro forma net loss may not
be representative of compensation expense in future years when the effect of the
amortization of multiple awards would be reflected in results from operations.

A summary of activity relating to stock option grants under the Plans follows:
<TABLE>
<CAPTION>
                                                                        December 31,
                                             -------------------------------------------------------------------
                                                       2000               1999                    1998
                                             ----------------------  ---------------------  --------------------
                                                           Weighted               Weighted              Weighted
                                                           Average                Average                Average
                                                           Exercise               Exercise              Exercise
                                                Options     Price      Options     Price      Options     Price
                                             ------------  -------  ---------     -------  ----------   --------
<S>                                           <C>           <C>     <C>            <C>     <C>             <C>
Outstanding at beginning of year               10,312,983  $ 5.28   4,333,566     $ 1.91   1,793,515     $ 0.54
    Granted                                    22,868,066    4.89   7,409,430       6.83   3,087,379       2.60
    Exercised                                 (2,102,751)    2.05   (672,004)       2.09    (27,499)       0.77
    Cancelled                                                8.10   (758,009)       4.06   (519,829)       2.28
                                              (5,959,999)
                                              -----------          ----------              ---------
Outstanding at end of year                     25,118,299  $ 4.86  10,312,983     $ 5.28   4,333,566     $ 1.91
                                              ===========          ==========              =========
Exercisable at end of year                      6,813,223  $ 5.70   3,231,952     $ 2.17   1,681,026     $ 1.06
                                              ===========          ==========              =========
 Weighted average grant date fair value of
    options granted during year               $      1.04          $     3.91              $       -
                                              ===========          ==========              =========

</TABLE>

                                       79
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

The  following  information  is provided for all stock options  outstanding  and
exercisable at December 31, 2000:
<TABLE>
<CAPTION>
                                               Outstanding                            Exercisable
                                          -----------------------------------   ----------------------
                                                                    Weighted
                                                       Weighted      Average                   Weighted
                                                        Average     Remaining                  Average
                                          Number of    Exercise    Contractual     Number of   Exercise
                                           Options       Price      Life (Years)   Options      Price
Exercise Price Range                     -----------   ---------    -----------   ----------   --------
<S>                                      <C>            <C>         <C>           <C>          <C>
$0.00 -2.24                                7,154,443   $    0.56          8.4     1,829,066  $    1.11
$2.25 -4.48                                9,802,876        3.53          8.3     2,460,314       3.78
$4.49 -6.72                                2,183,267        5.78          8.6       150,695       5.62
$6.73 - 8.96                               1,203,506        6.92          8.3       540,720       6.99
$8.97 -11.21                               1,624,442        9.68          7.8       910,157       9.63
$11.22 -13.45                              1,536,006       12.66          8.8       353,050      12.08
$13.46 - 22.42                             1,613,759       16.92          7.1       569,221      17.27
                                        ------------ -----------   -----------   ----------  ---------
                                          25,118,299   $    4.86          8.3     6,813,223  $    5.70
                                        ============ ===========   ===========   ==========  =========
</TABLE>

During the fourth quarter of 1999, the contingent  performance criteria relating
to a stock  option  grant  made  outside of the Plan for  310,000  shares of the
Company's  common  stock  with  an  exercise  price  of  $4.00  were  satisfied.
Accordingly, a stock-based compensation charge of approximately $3.3 million was
recognized  in the  accompanying  December  31, 1999  consolidated  statement of
operations.  There were no such  charges  relating to  contingent  stock  option
grants in 2000 or prior to 1999.

In December 2000, the Company  granted options to purchase  4,530,792  shares to
Company  executives  and employees at a price of $0.78 vesting over 3 years.  In
April 2001, the Company  repriced  certain options and offered a voluntary stock
option exchange program. (see Note 19)

At December 31, 2000, 6,058,946 shares of common stock were available for future
grants under the Plans. Also,  31,177,245 shares of common stock were authorized
but unissued relating to outstanding and available stock option grants under the
Plans.

WARRANTS AND OPTIONS ISSUED TO NON-EMPLOYEES AND BUSINESS PARTNERS

On April 29, 1999,  pursuant to a  distribution  and marketing  agreement with a
telecommunications  company,  the Company  issued  warrants to purchase  100,000
shares  of the  Company's  common  stock  at $10 per  share.  The  warrants  are
exercisable  immediately and expire in April 2002.  Simultaneously,  the Company
entered into a put agreement, which allows the telecommunications company to put
the shares back to the Company for $25.00 per share  during the period from June
2001 to August 2001.  The number of shares  subject to the put warrant  declines
over time as the Company  generates revenue under the marketing and distribution
agreement. In accordance with EITF 96-13, the Company recorded the fair value of
the put warrant in the  accompanying  consolidated  balance sheet as of December
31, 1999.


                                       80
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

On May 19,  1999,  the Company  entered  into a  distribution  agreement  with a
software manufacturer. As part of this agreement, the Company issued warrants to
purchase 100,000 shares of common stock at $9.00 per share,  options to purchase
300,000  shares of common stock at $4.80 per share and 200,000  shares of common
stock valued at $9.00 per share.

During the third and fourth  quarters of 1999, the Company  granted  warrants to
purchase  183,782  shares of the  Company's  common  stock to certain  marketing
partners at exercise  prices  ranging from $9.50 to $18.94.  These warrants were
immediately  exercisable  when granted and expire between 1 and 5 years from the
date of grant.

During the second  quarter of 2000,  the  Company  issued  warrants  to purchase
400,000  shares of common stock to a third party in connection  with the sale of
certain of the Company's cost-basis  investments.  The warrants have an exercise
price of $2.00 per share and are immediately exercisable at the time of grant.

During the third quarter of 2000, the Company issued options to purchase 200,000
shares of common stock under the Plans to certain advisory board members.  These
options have an exercise price of $6.00 and vest ratably over a two-year period.
The options were valued at $3.31 per share using a Black-Scholes  option pricing
model and were recorded as deferred compensation to be amortized over a two-year
period. There were no other non-employee stock option grants made during 2000.

EMPLOYEE STOCK PURCHASE PLAN

During 1999,  the  Company's  Board of Directors and  shareholders  approved and
adopted an employee stock purchase plan (the ESPP). A total of 2,000,000  shares
of common stock have been reserved for issuance under the ESPP, which allows for
future  increases.  During two six-month  purchase  periods each year,  eligible
employees may withhold up to 10% of their salary, plus commissions,  to purchase
common  stock at a price equal to 85% of the lesser of the fair market  value of
the Company's  common stock on the first or the last day of the  applicable  six
month  purchase  period.  The ESPP will continue for a term of 10 years,  unless
terminated earlier by the Company's Board of Directors. As of December 31, 1999,
no shares had been sold to employees under the ESPP. The first sale of shares to
employees  occurred on April 30,  2000.  For the  year-ended  December 31, 2000,
195,387  shares of common stock had been  purchased by the  Company's  employees
under the ESPP.

The following shares of common stock were reserved at December 31, 2000:

    Convertible preferred stock                 -
    Common stock options               31,177,245
    Common stock warrants               7,487,059
    Employee stock purchase plan        1,804,613
                                       ----------
                                       40,468,917
                                       ==========

                                       81
<PAGE>

                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

NOTE 17. SEGMENT INFORMATION:

The Company's segment information for each of the three years ended December 31,
2000, 1999 and 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                      2000            1999            1998
                                                                    ---------       --------         -------
<S>                                                                 <C>            <C>              <C>
 Revenues from unaffiliated customers:
     Consumer Network                                               $  74,580      $  16,094        $    280
     Business Network                                                  13,578              -               -
     Services                                                          17,963         10,938           2,416
     BuySoftware.com                                                        -          9,923           4,458
     Corporate/other                                                        -              -               -
                                                                    ---------      ---------       ---------
                                                                      106,121         36,955           7,154
                                                                    ---------      ---------       ---------
 Cost of revenues:
     Consumer Network (including unusual item in 2000
         of $5,320)                                                    44,322          9,016             142
     Business Network                                                   4,648              -               -
     Services                                                          10,329          7,123           1,255
     BuySoftware.com                                                        -         11,190           4,452
     Corporate/other                                                        -              -               -
                                                                    ---------      ---------       ---------
                                                                       59,299         27,329           5,849
                                                                    ---------      ---------       ---------
 Gross Profit:
     Consumer Network                                                  30,258          7,078             138
     Business Network                                                   8,930              -               -
     Services                                                           7,634          3,815           1,161
     BuySoftware.com                                                        -        (1,267)               6
     Corporate/other                                                        -              -               -
                                                                    ---------      ---------       ---------
                                                                       46,822          9,626           1,305
                                                                    ---------      ---------       ---------
 Operating Expenses By Segment:
     Consumer Network                                                  52,079
     Business Network                                                  23,744
     Services                                                          11,641
     BuySoftware.com                                                        -
     Corporate/other                                                  244,451
                                                                    ---------       --------        --------
                                                                      331,915         88,320          26,221
                                                                    ---------       --------        --------
 Loss From Operations By Segment:
     Consumer Network                                                (21,821)
     Business Network                                                (14,814)
     Services                                                         (4,007)
     BuySoftware.com                                                        -
     Corporate/other                                                (244,451)
                                                                   ---------       --------        --------
     Loss from operations                                          $(285,093)      $(78,694)       $(24,916)
                                                                   =========       ========        ========

</TABLE>

During  2000,  management  began  tracking  profitability  by business  segment.
Management  did not track  business unit  profitability  in prior  periods.  The
Company  does not track assets by operating  segments;  consequently,  it is not
practicable to show assets by operating segments.

                                       82
<PAGE>

                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

NOTE 18. RELATED PARTY TRANSACTIONS:

The Company has notes  receivable  from five senior  executives of $2.9 million,
including interest.  The notes bear interest at 7% and are due between June 2001
and November 2001. (see Note 19)

The  Company  has  subscriptions  receivable  of $2.4  million  from four senior
executives, including interest. The notes bear interest between 6.25% and 7% and
are due between May 2001 and September 2001. (see Note 19)

The Company recognized  revenues and expenses from entities in which the Company
has an equity interest as follows (in thousands):

 <TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                   --------------------------------------------------------------------------
                                                     2000                                   1999
                                   ----------------------------------------     -----------------------------
                                   Merchandising    Service       Marketing     Merchandising     Marketing
                                     Revenues       Revenues      Expenses        Revenues         Expenses
                                   -------------    ---------     ---------     -------------     ---------
    <S>                           <C>             <C>          <C>            <C>              <C>
    Bidbay, Inc                  $         5,409  $         -  $       370    $             -   $        -
    Planet of Music, Inc                   5,163            -        1,525                  -            -
    Privaseek, Inc.                        2,629            -            -                  -            -
    HobbyRat, Inc                          2,358            -          365                  -            -
    Escrow.com, Inc                            -        1,787            -                  -            -
    Futurist Records,                          -        1,694            -                  -            -
    Inc
    24/7 Media, Inc                        1,171            -        2,847                  -        3,564
    Other                                  4,131        2,538          217                539            -
                                 ---------------  ------------ ------------   ----------------  -----------
                                 $        20,861  $     6,019  $     5,324    $           539   $    3,564
                                 ================ ============ ============   ================  ===========

</TABLE>

The Company did not recognize  revenues or expenses from related parties for the
year-ended December 31, 1998.

The  Company  does not own more than 20% of any of these  entities  nor does the
Company exercise influence over these entities.

NOTE 19. SUBSEQUENT EVENTS

RESTRUCTURING AND IMPAIRMENT

In the first quarter of 2001, the Company continued our restructuring efforts by
the shutdown of our Consumer  Network group  (ShopNow.com  and  SpeedyClick) and
laying  off an  additional  245  employees.  This  will  result  in the  Company
recognizing restructuring and impairment charges of approximately $54.1 million,
which includes $50.0 million of restructuring  and impairment  intangible assets
and goodwill,  $2.8 million of tenant improvements,  fixed assets,  software and
supporting  technologies,  and $1.3  million of  severance  and related  payroll
charges.  Also,  the Company  will incur  additional  write-down  of  cost-basis
investments  of  approximately  $20.0 million  primarily  related to the general
decline in technology companies.


                                       83
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

OPTION REPRICING AND EXCHANGE PROGRAM

In April 2001, the Company repriced options to purchase  4,530,792 shares issued
in December 2000 from a price of $0.78 to a price of $0.09.  This repricing will
result in  variable  accounting  treatment  for these  stock  options.  Variable
accounting  treatment  will  result in  unpredictable  stock-based  compensation
dependent on fluctuations in quoted prices for the Company's common stock.

In April 2001, the Company offered a voluntary stock option exchange  program to
its employees.  The plan allows employees,  if they so choose, to exchange three
options  priced  greater than $0.09 per share for one option priced at $0.09 per
share.  The vesting period will be quarterly  over the next four quarters.  This
exercise  price change will result in variable  accounting  treatment  for these
stock  options.  Variable  accounting  treatment  will  result in  unpredictable
stock-based  compensation  dependent on  fluctuations  in quoted  prices for the
Company's common stock.

DEBT OBLIGATIONS

In April 2001, the Company repaid its obligation under the credit agreement with
a commercial  bank, which had a balance of $9.8 million as of December 31, 2000.
The obligation was repaid with the cash that was restricted for this purpose.

On April 3, 2001,  the Company  received a notice of default from the holders of
the $20  million  of  convertible  notes for an  alleged  violation  of  certain
provisions of the convertible  notes relating to the breach of certain  negative
financial covenants contained in the the credit agreement for $15.0 million with
a commercial bank and the breach by the Company of certain material terms of the
Securities  Purchase  Agreement  dated as of September  28, 2000.  The notice of
default  demanded  that the Company  redeem the  convertible  notes on or before
April 9, 2001 for an amount equal to $17.25  million,  which  amount  represents
115% of the aggregate  principal amount of the remaining  convertible notes. The
Company  responded  to the notice of default on April 4, 2001 and denied that an
event  of  default  occurred.  If  the  Company  were  to be in  default  of the
convertible  notes and if the  default is not cured,  or waived by the holder of
the  convertible  notes,  and the  Company is  required  to redeem  the  amounts
outstanding under the convertible  notes, the holder could seek remedies against
the Company, which may include penalty rates of interest, immediate repayment of
the debt and the filing of an involuntary  petition in bankruptcy.  In addition,
the Company may have no alternative but to file a petition in bankruptcy.

RELATED PARTY TRANSACTIONS

In April 2001, the Company settled  potential  claims held by Mr. Dwayne Walker,
the Company's Chairman and Chief Executive Officer,  against the Company arising
from the withdrawal of Mr.  Walker's  shares of the Company's  common stock from
the Company's secondary public offering completed in February 2000. The terms of
the  settlement  are set forth in a letter  agreement  dated as of April 5, 2001
between the Company and Mr. Walker.

The  settlement  provides that the Company will purchase  262,000  shares of its
common  stock from Mr.  Walker in exchange for the tender of a $3.8 million note
payable from the Company (Company Note). In connection with the settlement,  the
Company agreed to consolidate all of Mr. Walker's  outstanding  promissory notes
to the Company,  executed by him since  September  28, 1999,  which totaled $4.5
million as of December  31, 2000 and were  recorded  in Notes  Receivables  from
employees and Subscriptions receivable. Principal and interest, at 7% per year,


                                       84
<PAGE>

                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

are due on March 31,  2011.  Following  the  Company's  purchase  of the 262,000
shares,  Mr.  Walker may  endorse  the  Company  Note to the  Company in partial
satisfaction  of the new loan. In addition,  Mr. Walker agreed to transfer up to
1,171,158  shares of Company stock to the Company as  additional  payment of the
loan.  The  Company  agreed to reduce the balance of the loan by the fair market
value of the  1,171,158  shares on the date of the  transfer.  To the extent Mr.
Walker's outstanding promissory note has not been completely repaid by the above
actions,  the Company will immediately  extinguish any remaining  obligation Mr.
Walker may owe under the  promissory  note. As a result of the  settlement,  the
Company will  recognize  approximately  $4.5 million dollar expense in the first
quarter of 2001.

LITIGATION

On December 20, 2000,  an action was  initiated  in Los Angeles  Superior  Court
styled Futurist Entertainment,  Inc. v. Network Commerce,  Inc., Jackie Sutphin,
SpeedyClick.com,  Case No. BC242139.  In the complaint plaintiff alleges,  among
other things,  breach of contract and business torts against defendants relating
to  a  Development  and  Website  Agreement  ("Development  Agreement")  between
Futurist  Entertainment,  Inc. and Network Commerce dated February 25, 2000. The
website was to serve as the official  website for the Jackson 5's upcoming album
and world tour.  Plaintiff  alleges damages "in an amount yet to be ascertained,
but in no event less than  $4,400,000." The Company is mounting a vigorous legal
defense,  and on April 5, 2001, the Company filed an answer and  cross-complaint
against S. Jackie Jackson and Futurist  Entertainment,  Inc. In the answer,  the
Company  contends,  among other things,  that Futurist and Jackson  thwarted the
Company's   ability  to  perform  under  the  Development   Agreement.   In  the
cross-complaint,  the Company  alleges,  among other things,  securities  fraud,
fraud, unfair competition, gross negligence and breach of fiduciary duty by both
Futurist and Jackson.  Additionally,  the Company  alleges damages "in an amount
presently  unknown but in excess of $10 million."  Jackson and Futurist have yet
to respond to the  Cross-Complaint  or pending  discovery.  The Company holds an
investment in the common stock of Futurist Entertainment, Inc.


                                       85
<PAGE>
                              Network Commerce Inc.
                   Notes To Consolidated Financial Statements
                          December 31, 2000 (Continued)

NOTE 20. UNAUDITED PROFORMA FINANCIAL INFORMATION

The  following  information  reflects the  revenues,  cost of revenues and gross
margins of continuing businesses and business closures in 2000 and 2001.

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                     ---------------------------------------------
                                          2000            1999           1998
                                     --------------   -------------  -------------
<S>                                   <C>                <C>           <C>
 Revenues:
       Continuing operations:
          Business Network                $ 11,806         $     -        $     -
       Business closures:
          Business Network                   1,772               -              -
          Consumer Network                  74,580          16,094            280
          Services                          17,963          10,938          2,416
          BuySoftware.com                        -           9,923          4,458
                                     --------------   -------------  -------------
                                            94,315          36,955          7,154
                                     --------------   -------------  -------------
                                           106,121          36,955          7,154
                                     --------------   -------------  -------------
 Cost of revenues:
       Continuing operations:
          Business Network                   2,924               -              -
       Business closures:
          Business Network                   1,724               -              -
          Consumer Network                  44,322           9,016            142
          Services                          10,329           7,123          1,255
          BuySoftware.com                        -          11,190          4,452
                                     --------------   -------------  -------------
                                            56,375          27,329          5,849
                                     --------------   -------------  -------------
                                            59,299          27,329          5,849
                                     --------------   -------------  -------------
 Gross Profit:
       Continuing operations:
          Business Network                   8,882               -              -
       Business closures:
          Business Network                      48               -              -
          Consumer Network                  30,258           7,078            138
          Services                           7,634           3,815          1,161
          BuySoftware.com                        -         (1,267)              6
                                     --------------   -------------  -------------
                                            37,940           9,626          1,305
                                     --------------   -------------  -------------
                                         $  46,822        $  9,626       $  1,305
                                     --------------   -------------  -------------
</TABLE>
                                       86
<PAGE>


ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

                                    PART III

Due to the late June date for the annual shareholders' meeting and the fact that
Washington  law  requires a notice  period that is no more than 60 days prior to
the meeting,  you should consider copying and pasting the information called for
below from the proxy statement rather than incorporating by reference.

ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

Information  called for by Part III, Item 10, is included in our Proxy Statement
relating to our annual meeting of  shareholders  to be held May 21, 2001, and is
incorporated herein by reference. The information appears in the Proxy Statement
under the captions  "Election of Directors" and "Executive  Officers." The Proxy
Statement  will be filed within 120 days of December  31, 2000,  our fiscal year
end.

ITEM 11. EXECUTIVE COMPENSATION

Information  called for by Part III, Item 11, is included in our Proxy Statement
relating to our annual meeting of  shareholders  to be held on May 21, 2001, and
is  incorporated  herein by  reference.  The  information  appears  in the Proxy
Statement under the caption  "Executive  Compensation." The Proxy Statement will
be filed within 120 days of December 31, 2000, our fiscal year end.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information  called for by Part III, Item 12, is included in our Proxy Statement
relating to our annual meeting of  shareholders  to be held on May 21, 2001, and
is  incorporated  herein by  reference.  The  information  appears  in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management."  The Proxy  Statement will be filed within 120 days of December 31,
2000, our fiscal year end.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information  called for by Part III, Item 13, is included in our Proxy Statement
relating to our annual meeting of shareholders to be held on May 21, 2001 and is
herein incorporated by reference. The information appears in the Proxy Statement
under the caption "Certain  Relationships and Related  Transactions."  The Proxy
Statement  will be filed within 120 days of December  31, 2000,  our fiscal year
end.


                                       87
<PAGE>


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

<TABLE>
<CAPTION>
                                                                                                           Page
<S>                                                                                                        <C>
Network Commerce Inc.
      Report of Independent Public Accountants..........................................................   50
      Consolidated Balance Sheets.......................................................................   51
      Consolidated Statements of Operations.............................................................   52
      Consolidated Statements of Shareholders' Equity and Comprehensive Loss............................   53
      Consolidated Statements of Cash Flows.............................................................   54
      Notes to Consolidated Financial Statements........................................................   55 - 81
      Schedule II - Valuation and Qualifying Accounts...................................................   89
</TABLE>

REPORTS ON FORM 8-K

On  October  4,  2000,  we filed a Form 8-K under  Item 5,  reporting  a private
placement of  convertible  notes and warrants to purchase  shares of our capital
stock to Capital Ventures International.

On December 6, 2000, we filed a Form 8-K under Item 5 reporting a  clarification
and  modification  of certain of our  obligations in connection with the private
placement of  convertible  notes and warrants to purchase  shares of our capital
stock to Capital Ventures International.

On December 11, 2000,  we filed a Form 8-K under Item 5 reporting  reductions in
our operating costs and work force and providing  guidance on certain  financial
matters for fiscal 2001.


                                       88
<PAGE>

EXHIBITS

<TABLE>
<CAPTION>
Number         Description
<S>            <C>
3.1++          Amended and Restated Articles of Incorporation of the registrant.
3.2++          Amended and Restated Bylaws of the registrant.
4.1++          Second Amended and Restated Registration Rights Agreement dated as of November 30, 1998
4.2++          Amendment No. 1 to Second Amended and Restated Registration Rights Agreement dated as of June 15, 1999.
4.3++          Amendment No. 2 to Second Amended and Restated Registration Rights Agreement dated as of June 16, 1999.
10.1++         Amended and Restated 1999 Employee Stock Purchase Plan and form of agreement thereunder.
10.2++         Amended and Restated 1996 Combined Incentive and Nonqualified Stock Option Plan and form of agreements thereunder.
10.3#####      1999 Nonofficer Employee Stock Option Plan and form of agreements thereunder.
10.4++         Electronic Distributor Agreement dated as of May 19, 1999, between Corel Corporation and the registrant.
10.5++         Addendum No. 1 Project Agreement to Strategic Alliance Agreement between HNC Software and the registrant, dated
                        May 4, 1999.
10.6++         Distributor/Marketing Agreement dated as of April 29, 1999, between Quest Communications Corporation and the
                        registrant.
10.7++         Strategic Alliance Agreement dated as of May 4, 1999, between HNC Software Inc. and the registrant.
10.8++         Consortium Membership Agreement dated as of May 4, 1999, between HNC Software and the registrant.
10.9++         Cross Promotion Agreement dated April 5, 1999, between 24/7 Media, Inc. and the registrant.
10.10++        Loan and Security Agreement dated as of March 4, 1999, between Transamerica Business Credit Corporation and the
                        registrant.
10.11++        Letter of Intent Agreement dated March 24, 1999, between the ZERON Group and the registrant.
10.12++        Employment Agreement effective as of July 1, 1999, between Dwayne M. Walker and the registrant.
10.13++        Corporate Master Agreement effective as of February 10, 1999, between Vignette Corporation and the registrant.
10.14++        Agreement dated July 7, 1999, between About.com, Inc. and the registrant.
10.15++        Agreement effective as of July 12, 1999, between Chase Manhattan Capital, L.P. and the registrant.
10.16#         Agreement and Plan of Merger dated as of November 10, 1999, among Racer Acquisition, Inc., SpeedyClick, Corp.,
                        the Principal Shareholders of SpeedyClick, Corp. and the registrant.
10.17#         Employment Agreement, dated as of November 12, 1999, between Farid Tabibzadeh and the registrant.
10.18#         Employment Agreement, dated as of November 12, 1999, between Shahab Emrani and the registrant.
10.20##        Agreement and Plan of Merger dated as of December 16, 1999, among Chiefs Acquisition, Inc., WebCentric, Inc.,
                        the Stockholders of WebCentric, Inc.and the registrant.
10.21###       Letter of Intent, dated December 20, 1999, between Ubarter.com Inc., Steven White, New Horizons L.P. and
                        the registrant.
10.22####      Office Building Lease, dated September 21, 1999, between CEP Investors XII LLC and the registrant.
10.23***       Office Lease, dated December 13, 1999, between Benaroya Capital Company, LLC and the registrant.
10.24***       Promissory Note, dated September 28, 1999, from Alan Koslow to the registrant
10.25**        Agreement and Plan of Merger dated January 20, 2000 between Ubarter.com Inc., Shamu Acquisition, Inc.
                        and the registrant.
10.26*         Promissory Note, dated May 26, 2000 from Dwayne Walker to registrant.
10.27*         Promissory Note, dated June 1, 2000 from Dwayne Walker to registrant.
10.28*         Promissory Note, dated September 19, 2000 from Dwayne Walker to registrant.
10.29*         Promissory Note, dated October 25, 2000 from Dwayne Walker to registrant.
10.30*         Promissory Note, dated November 16, 2000 from Dwayne Walker to registrant.
21.1*          List of Subsidiaries
23.1*          Consent of Arthur Andersen LLP, Independent Accountants.

----------
   *     Filed herewith
   **    Incorporated by referenced to the registration statement on Form S-4 (File No. 333-32452).
   +     Portions of these exhibits have been omitted based upon a request for
         confidential treatment. The omitted portions of the exhibits have been
         filed separately with the Securities and Exchange Commission.
   ++    Incorporated by reference to the Registration Statement on Form S-1
         (No. 333-80981) filed by the registrant on September 28, 1999, as
         amended.
   #     Incorporated by reference to the Current Report on Form 8-K (File No.
         000-26707) filed by the registrant on November 24, 1999, as amended.
   ##    Incorporated by reference to the Current Report on Form 8-K (File No.
         000-26707) filed by the registrant on December 29, 1999, as amended.
   ###   Incorporated by reference to the Current Report on Form 8-K (File No.
         000-26707) filed by the registrant on December 30, 1999.
   ####  Incorporated by reference to Quarterly Report on Form 10-Q (File No.
          000-26707) filed by the registrant on November 9, 1999.
   ##### Incorporated by reference to Registration Statement on Form S-8
          (File No. 333-92533) filed by the registrant on December 10, 1999.
</TABLE>

                                       89
<PAGE>

                                   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.



                           NETWORK COMMERCE INC.
                           (REGISTRANT)



                            By: /s/ DWAYNE M. WALKER
                                    Dwayne M. Walker
                                    Chief Executive Officer

Dated: April 16, 2001

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

<TABLE>
<CAPTION>
                Signature                                              Title                                 Date
         <S>                                     <C>                                                 <C>

         /s/ Dwayne M. Walker                    Chief Executive Officer and Chairman of the          April 16, 2001
                                                 Board (Principal Executive Officer)

                                                 Executive Vice President, and Chief Financial
         /s/    Randy Cerf                       Officer, and Secretary (Principal Financial and      April 16, 2001
                                                 Accounting Officer)



        /s/ David M. Lonsdale                    Director                                             April 16, 2001



       /s/   Mark H. Terbeek                     Director                                             April 16, 2001


</TABLE>

                                       90
<PAGE>
                                INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number         Description
<S>            <C>
3.1++          Amended and Restated Articles of Incorporation of the registrant.
3.2++          Amended and Restated Bylaws of the registrant.
4.1++          Second Amended and Restated Registration Rights Agreement dated as of November 30, 1998
4.2++          Amendment No. 1 to Second Amended and Restated Registration Rights Agreement dated as of June 15, 1999.
4.3++          Amendment No. 2 to Second Amended and Restated Registration Rights Agreement dated as of June 16, 1999.
10.1++         Amended and Restated 1999 Employee Stock Purchase Plan and form of agreement thereunder.
10.2++         Amended and Restated 1996 Combined Incentive and Nonqualified Stock Option Plan and form of agreements thereunder.
10.3#####      1999 Nonofficer Employee Stock Option Plan and form of agreements thereunder.
10.4++         Electronic Distributor Agreement dated as of May 19, 1999, between Corel Corporation and the registrant.
10.5++         Addendum No. 1 Project Agreement to Strategic Alliance Agreement between HNC Software and the registrant, dated
                        May 4, 1999.
10.6++         Distributor/Marketing Agreement dated as of April 29, 1999, between Quest Communications Corporation and the
                        registrant.
10.7++         Strategic Alliance Agreement dated as of May 4, 1999, between HNC Software Inc. and the registrant.
10.8++         Consortium Membership Agreement dated as of May 4, 1999, between HNC Software and the registrant.
10.9++         Cross Promotion Agreement dated April 5, 1999, between 24/7 Media, Inc. and the registrant.
10.10++        Loan and Security Agreement dated as of March 4, 1999, between Transamerica Business Credit Corporation and the
                        registrant.
10.11++        Letter of Intent Agreement dated March 24, 1999, between the ZERON Group and the registrant.
10.12++        Employment Agreement effective as of July 1, 1999, between Dwayne M. Walker and the registrant.
10.13++        Corporate Master Agreement effective as of February 10, 1999, between Vignette Corporation and the registrant.
10.14++        Agreement dated July 7, 1999, between About.com, Inc. and the registrant.
10.15++        Agreement effective as of July 12, 1999, between Chase Manhattan Capital, L.P. and the registrant.
10.16#         Agreement and Plan of Merger dated as of November 10, 1999, among Racer Acquisition, Inc., SpeedyClick, Corp.,
                        the Principal Shareholders of SpeedyClick, Corp. and the registrant.
10.17#         Employment Agreement, dated as of November 12, 1999, between Farid Tabibzadeh and the registrant.
10.18#         Employment Agreement, dated as of November 12, 1999, between Shahab Emrani and the registrant.
10.20##        Agreement and Plan of Merger dated as of December 16, 1999, among Chiefs Acquisition, Inc., WebCentric, Inc.,
                        the Stockholders of WebCentric, Inc.and the registrant.
10.21###       Letter of Intent, dated December 20, 1999, between Ubarter.com Inc., Steven White, New Horizons L.P. and
                        the registrant.
10.22####      Office Building Lease, dated September 21, 1999, between CEP Investors XII LLC and the registrant.
10.25**        Agreement and Plan of Merger dated January 20, 2000 between Ubarter.com Inc., Shamu Acquisition, Inc.
                        and the registrant.
10.26*         Promissory Note, dated May 26, 2000 from Dwayne Walker to registrant.
10.27*         Promissory Note, dated June 1, 2000 from Dwayne Walker to registrant.
10.28*         Promissory Note, dated September 19, 2000 from Dwayne Walker to registrant.
10.29*         Promissory Note, dated October 25, 2000 from Dwayne Walker to registrant.
10.30*         Promissory Note, dated November 16, 2000 from Dwayne Walker to registrant.
21.1*          List of Subsidiaries
23.1*          Consent of Arthur Andersen LLP, Independent Accountants.

----------
   *     Filed herewith
   **    Incorporated by referenced to the registration statement on Form S-4 (File No. 333-32452).
   +     Portions of these exhibits have been omitted based upon a request for
         confidential treatment. The omitted portions of the exhibits have been
         filed separately with the Securities and Exchange Commission.
   ++    Incorporated by reference to the Registration Statement on Form S-1
         (No. 333-80981) filed by the registrant on September 28, 1999, as
         amended.
   #     Incorporated by reference to the Current Report on Form 8-K (File No.
         000-26707) filed by the registrant on November 24, 1999, as amended.
   ##    Incorporated by reference to the Current Report on Form 8-K (File No.
         000-26707) filed by the registrant on December 29, 1999, as amended.
   ###   Incorporated by reference to the Current Report on Form 8-K (File No.
         000-26707) filed by the registrant on December 30, 1999.
   ####  Incorporated by reference to Quarterly Report on Form 10-Q (File No.
          000-26707) filed by the registrant on November 9, 1999.
   ##### Incorporated by reference to Registration Statement on Form S-8
          (File No. 333-92533) filed by the registrant on December 10, 1999.
</TABLE>

                                       91
<PAGE>

                              NETWORK COMMERCE INC.

                 SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
               ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                       Charged /
                                                       Balance at    (Credited) to
                                                      Beginning of     Costs and       Amounts       Balance at
Year Ended                                               Period        Expenses      Written Off   End of Period
--------------------                                 ------------------------------------------------------------
<S>                                                   <C>             <C>           <C>             <C>
December 31, 2000                                       $   291        $  6,188     $  (5,284)       $  1,195

December 31, 1999                                       $   230        $   678      $   (617)        $   291

December 31, 1998                                       $    23        $   591      $   (384)        $   230


(1) Write-offs, net of bad debt recovery.

</TABLE>



                                       92