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

(Mark One)

|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

|_|   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: 0-27253

                                NETCENTIVES INC.
             (Exact Name of Registrant as Specified in Its Charter)

                     Delaware                               93-1213291
          (State or Other Jurisdiction                     (I.R.S. Employer
       of Incorporation or Organization)                   Identification No.)

                    475 Brannan Street
                    San Francisco, CA                         94107
          (Address of Principal Executive Offices)          (Zip Code)

       Registrant's telephone number, including area code: (415) 615-2000

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.001 par value
                                (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 the voting stock held by  non-affiliates  of the
Registrant based upon the closing sale price of the Registrant's Common Stock on
the Nasdaq  National  Market on March 19,  2001 was  approximately  $94,443,471.
Shares of Common Stock held by each  executive  officer and director and by each
person who owns 10% or more of the  outstanding  Common Stock have been excluded
in that such  persons  may be deemed to be  affiliates.  This  determination  of
affiliate  status  is not  necessarily  a  conclusive  determination  for  other
purposes.

There were 43,174,158 shares of Registrant's Common Stock issued and outstanding
as of March 19, 2001.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part  III  incorporates  information  by  reference  from the  definitive  Proxy
Statement for the Registrant's 2001 Annual Meeting of Stockholders  scheduled to
be held on Wednesday, June 6, 2001 (the "2001 Proxy Statement").


<PAGE>


REFERENCES AND FORWARD-LOOKING STATEMENTS

References  made in  this  Annual  Report  on Form  10-K to  "Netcentives,"  the
"Company" or the "Registrant"  refer to Netcentives  Inc. and its  subsidiaries.
Netcentives,  ClickRewards,  ClickMiles,  Custom  Loyalty  Programs,  Enterprise
Incentive  Programs,   RewardBroker,   SecureReward  Architecture,   PostDirect,
MaxMiles,  the  Netcentives  logo and the  ClickRewards  logo are  trademarks of
Netcentives.

This Annual Report on Form 10-K  contains  forward-looking  statements.  In some
cases,  readers can identify  forward-looking  statements by terminology such as
"may," "will," "should," "could," "expects," "plans," "anticipates," "believes,"
"estimates,"  "predicts,"  "potential," or "continue." These statements  involve
known  and  unknown  risks,  uncertainties  and  other  factors  that may  cause
Netcentives'  actual  results,  performance,  or  achievements  to be materially
different from those stated herein.  Although management of Netcentives believes
the expectations reflected in the forward-looking statements are reasonable, the
Company cannot guarantee future results,  performance, or achievements.  Factors
that could  cause  actual  results  to differ  materially  include,  but are not
limited  to,  the risks  detailed  below and  included  from time to time in the
Company's  other SEC reports and press  releases,  copies of which are available
from the Company upon request.  The Company  assumes no obligation to update any
forward-looking statements contained herein.

                                     PART I

Item 1. BUSINESS

Company Overview

San Francisco-based Netcentives Inc. is a leading provider of loyalty and direct
marketing  solutions.  The  company  delivers  a broad  suite  of  programs  for
relationship  marketing  technologies  and  services  to enable its Global  2000
client base to drive  customer,  employee and partner  behavior and maximize the
long-term  economic  value  of  these  relationships.   These  programs  include
consumer,  employee and business loyalty solutions;  customized email marketing;
and consulting services.

From organization in 1996 until March 1998, our operations  consisted  primarily
of various  start-up  activities,  such as research and  development,  personnel
recruiting,  capital  raising  and  trial  sales of our  products  with  initial
customers.  We launched the merchant-based  ClickRewards  solution in March 1998
and began  recognizing  revenue from  non-trial  program sales in April 1998. We
launched our first  Enterprise  Incentive  program in January 1999 and our first
Custom  Loyalty  program in July 1999.  In the year ended  December 31, 2000, we
derived  most of our  revenue  from our  merchant-based  ClickRewards  programs,
Enterprise/Corporate Incentives programs, and the Direct Marketing Solutions.

Since   inception,   Netcentives   has  grown  both   organically   and  through
acquisitions.  Netcentives  acquired Panttaja Consulting Group, Inc. in December
1998 in order to provide technical consulting services to Netcentives'  clients.
In January 2000,  Netcentives  acquired  MaxMiles,  Inc., a provider of personal
aggregation technologies. In March 2000, Netcentives acquired UVN Holdings, Inc.
(UVN), whose technologies  enable Netcentives to transparently  track and verify
credit card purchasing, and to award reward points across multiple companies and
multiple channels,  whether it be through store, catalog or online.  Finally, in
April 2000,  we acquired  Post  Communications,  Inc. to deliver a platform  for
email direct marketing.

Netcentives' Solutions

Loyalty Solutions

Netcentives' loyalty solutions maximize the economic value of customer, employee
and business relationships through large-scale custom programs, employee/partner
recognition systems and merchant-based programs. Netcentives' loyalty solutions
include the following:

o    Custom Loyalty Programs.  Custom Loyalty programs are large-scale,  private
     labeled  networks  rewards  programs  allowing  enterprises,   portals  and
     financial institutions to offer their own branded currency. Currency may be
     rewarded to support the desired member online or offline activity, such as:
     spending on payment cards, enrollment,  trial usage or site clicks. Members
     redeem currency through a customized online catalog.  Netcentives  provides
     services and technology  needed to build,  implement,  support and maintain
     the program including program design, web hosting,  operations, and program
     administration.

                                     Page 2
<PAGE>

o    Enterprise   Incentive   Programs.   Enterprise   Incentive  programs  help
     corporations  drive the  performance  of  employees  and channel  partners.
     Netcentives  provides  corporate  human  resources  departments  and  sales
     managers with a powerful,  efficient  and  paperless  means of tracking and
     awarding  desired  corporate  behaviors,  which may include  referring  new
     employees or meeting sales quotas.

o    Merchant-based ClickRewards Program. ClickRewards is a network developed on
     behalf of a few  scores of online  merchants  that  enables  them to reward
     their consumers with ClickMiles,  Netcentives' recognizable, branded awards
     currency for making purchases at their websites or offline.

o    Registered  Card Program.  Through the  acquisition of UVN Holdings,  Inc.,
     Netcentives  offers  offline  transaction-processing   technology  enabling
     businesses  to  recognize  and reward  purchase  behavior  both  online and
     offline  in  permission-based  programs  through  the  registration  of the
     consumer's  shopping card. This acquisition  gives Netcentives a 49% equity
     ownership  in  Golden  Retriever   Systems,   LLC  (GRS),   which  provides
     information  on  approximately  90 percent of U.S.  sources of payment card
     transactions.

o    Aggregation  Technology.   Through  the  acquisition  of  MaxMiles,   Inc.,
     Netcentives delivers personal information aggregation technology that, with
     the consumer's permission, collects and consolidates frequent flier account
     information  and other  data,  allowing  websites  to publish  personalized
     content that increases the frequency and length of consumer visits.

Customers may elect to include the following elements in a loyalty solution:

o    Overall Program  Management.  Turnkey management  services for implementing
     and operating loyalty programs from the definition phase to design,  launch
     and on-going operations.

o    Loyalty  Program  Design  Services.  Loyalty  and  rewards  program  design
     services  which  leverage  our   advertising,   promotions  and  technology
     experience.

o    Currency.   Minting  and  managing  promotional   currencies   specifically
     targeting the customer's  consumer base and utilizing the customer's  brand
     identity.

o    Awards  Transaction  Processing.   Secure  and  fault-tolerant  transaction
     processing  services to support the  storing,  tracking and  monitoring  of
     electronically recorded transactions,  the issuance of currencies,  and the
     exchange of awards.

o    Consumer  Services.  Software enabling consumer service  representatives to
     have access to real-time  consumer  information or to outsource the loyalty
     program consumer service function.

o    Risk  Management/Fraud  Control. Risk management and fraud control services
     to address and prevent potential fraudulent activity.

Direct Marketing Solutions

The Company's direct marketing  business  acquired through Post  Communications,
Inc., uses customized,  targeted email to help its customers  increase  response
rates and maximize the value of their membership base.

Consulting Services

Netcentives   Consulting   provides   professional   services  that   complement
Netcentives  programs and hosted  operations to deliver loyalty solutions to our
customers.  These services  include  strategy,  design and launch services which
enable customers to move quickly from business  concepts to successful  programs
and  solutions.  Netcentives  Consulting  works closely with  customers to apply
expertise in loyalty  strategy,  relationship  marketing,  creative design,  and
technology,  coupled with  Netcentives' core technology,  to achieve  customers'
business objectives.

Technology Platform and Software Products

To support our  various  solutions,  we have built a  technology  platforms  and
software  applications for the management of online loyalty and direct marketing
applications:

o    SecureReward   Architecture(TM)  is  a  technology  platform  that  enables
     businesses to  recognize,  reward and respond to their  customers.  Through
     this  scalable  platform,   Netcentives  offers  the  end-to-end  creation,
     delivery  and  management  of  e-commerce  loyalty  programs.  SecureReward
     includes multiple components that facilitate rewards management,  including
     real-time currency  transfer,  reward fulfillment with fraud protection and
     targeted database segmentation.


                                     Page 3
<PAGE>


o    RewardBroker(TM)  is software for the management  and secure  processing of
     loyalty  promotions and rewards  transactions.  A critical component of the
     SecureReward  Architecture,  RewardBroker is integrated at customers' sites
     to automate the rewards transaction process.

o    Payment System is an in-house "mint" that resides at the Netcentives'  data
     center,  where it receives and processes all promotional  transactions from
     RewardBroker using a variety of encryption and authentication tools.

o    PostDirect(TM)  is  Netcentives'   proprietary  Web-based  email  marketing
     management  system,  which allows customers to easily target,  personalize,
     schedule and deliver email based on customer profiles.

o    MaxMiles(TM)  gives  Netcentives'  business partners the tools they need to
     enable their customers to manage their account information,  frequent flyer
     miles and rewards all in one convenient location, in real time.

o    Netcentives  Registered  Card System  utilizes  the GRS  technology,  which
     receives nightly credit card transaction  information from banks,  tracking
     and  recording  the time,  location and amount of consumer  purchases  with
     their credit card numbers.

Marketing, Sales and Member Service

We have a direct  sales force that sells our entire  portfolio  of programs  and
services  and  includes  individuals  focused on distinct  markets and  specific
programs  and  services.  Our  sales  force  is based  out of our San  Francisco
headquarters,  with a sales  office in New York.  We plan to increase our direct
sales  force  and  open  additional  sales  offices  in the  United  States  and
internationally.  Our  marketing  department  supports  our  sales  efforts  and
coordinates  attendance  at industry  events and pursues trade  advertising  and
media relations.

In 2000, Nortel Networks  accounted for approximately 25% of total revenues.  In
1999, no customers  accounted for more than 10% of revenues.  In 1998, Yahoo and
Visa each accounted individually for 46% and 13% of total revenues.

We believe that to sell high volumes of loyalty  currencies to merchants we need
to offer them a large,  attractive base of potential consumers.  We believe that
our  ability to create a loyal and  valuable  membership  base for our  programs
depends on high quality member  service.  The member service team is responsible
for providing  phone support  during  business  hours and e-mail  support with a
24-hour  response time.  Representatives  are responsible for resolving  general
inquiries  about  programs,  and inquiries  relating to the status of orders and
redemption requests.  To customers of our Custom Loyalty programs and Enterprise
Incentive  programs,  we offer the option of outsourcing  member service support
for inquiries  related to their program,  or utilizing the member service module
of our software platform for their internal member service representatives.

International

We believe that  international  markets  present an attractive  marketplace  for
loyalty solutions, direct marketing programs and consulting services. During the
years ended 1998 and 1999, we did not recognize any revenues from  international
operations.  In the year ended  2000,  we  recognized  29% of our  revenue  from
international  operations (which includes Canada,  where Nortel is located).  On
January 31, 2000, we entered into an agreement with AOL pursuant to which we run
a rewards program under the brand name ICQ ClickRewards for ICQ, a subsidiary of
AOL with over 50 million  members,  two-thirds  of which  reside  outside of the
United States. ICQ ClickRewards offers ICQ registrants  worldwide the ability to
earn ClickMiles and redeem them for valuable brand-name products. In February of
2000,  we entered into an agreement  with Nortel  Networks  Limited in Canada to
provide an Enterprise  Incentive program enabling Nortel to reward and recognize
its employees on a global basis. This was followed by an agreement with Belix in
Brazil to license  the  loyalty  technology  to power the Dotz  program in Latin
America.  In January of 2001,  we entered into a joint  venture with a number of
leading Japanese companies,  including,  Itochu Corp., Dentsu, JCB Co. and cyber
communications inc. to do business in Japan as "Netcentives  Japan." The venture
will exclusively  license our technology  infrastructure and trademarks and will
benefit from our  expertise to provide  online  consumer  loyalty  offering.  We
intend to continue to expand programs to companies based in other countries.

Competition

As a provider  of loyalty  and direct  marketing  solutions,  we compete  with a
variety of businesses within the online promotions market including acquisition,
loyalty and direct email marketing programs.  In addition,  we generally compete
with  merchants,  financial  institutions  and card  issuers  running  their own
in-house programs and other  advertising and promotional  programs for a portion
of a customer's  total  marketing  budget.  Our primary  current and prospective
competition can be categorized as follows:

o    Points-based loyalty program providers;
o    Enterprise/corporate incentive providers;
o    Email marketing services providers; and,
o    In-house stand-alone solutions addressing the categories listed above.


                                     Page 4
<PAGE>


Many of our competitors have longer operating histories,  significantly  greater
financial,  technical and other  resources,  or greater name recognition than we
do. Our  competitors  may be able to  respond  more  quickly to new or  emerging
technologies and changes in customer  requirements.  Competition could seriously
harm  our  ability  to sell  additional  solutions  on  terms  favorable  to us.
Competitive pressures could cause us to lose market share or to reduce the price
of our solutions,  either of which could harm our business,  financial condition
and operating results.

We believe that the principal competitive factors in our market include:

o    Quality and reliability of services and solutions offered;
o    Scope of supported applications and technology platforms;
o    Scalability of the operational environment supported;
o    Extent  to which the  solutions  or  services  offered  provide a  complete
     solution to a potential customer's operations requirements;
o    Engineering and technical expertise and development of automation software;
o    Rapid deployment of solutions or services including ease of installation;
o    Quality  of  customer  service  and  support  including  ability to support
     implementation; and,
o    Price.

Although we believe our  solutions  compete  favorably  with  respect to each of
these factors, the market for our solutions is new and rapidly evolving.  We may
not be able to maintain our competitive  position  against current and potential
competitors, especially those with greater resources.

Proprietary Rights

We currently rely on a mixture of patents, copyrights, trademarks, trade secrets
and  agreements  with third  parties and  employees  to protect our  proprietary
rights.  We have  patents  which  relate  generally  to online  incentive  award
programs.  One  aspect of our  patents  is  directed  to a  computer  system for
implementing an incentive award program,  with the computer system  including an
online  product  catalog,  an online  awards  catalog and a database for storing
account information for each user of the incentive award program.  Trademarks of
Netcentives include the following: Netcentives, ClickRewards, ClickMiles, Custom
Loyalty programs,  Enterprise  Incentive  programs,  RewardBroker,  SecureReward
Architecture,  PostDirect,  MaxMiles,  the Netcentives logo and the ClickRewards
logo.  We  copyright  our Web site  content,  our  software  and our  sales  and
promotional  literature.  Despite our efforts to protect our proprietary rights,
unauthorized  parties may use aspects of our  business  model and  products  and
obtain and use information we regard as proprietary.  In addition, other parties
may breach confidentiality agreements or other protective contracts with us, and
we may not be able to  enforce  our  rights  in the event of such  breaches.  We
believe  that each of these  proprietary  rights is important to our business in
our effort to prevent  unauthorized  use of our  technology  and  processes  and
protect  our  investment  in  establishing   and  maintaining  our  brand.   Our
competitors may independently  develop  technologies or business models that are
substantially  equivalent  or superior to ours.  We have licensed our patents to
MyPoints.com,  The Sperry and Hutchinson Company,  Enhanced Services Corporation
and  FreeRide.com  LLC,  who use these  licenses to operate  programs  which may
compete with programs we develop or manage. We may decide to license our patents
to other  competitors.  Furthermore,  we may  expand  internationally,  and many
countries do not protect intellectual  property rights to the same extent as the
laws of the  United  States.  In the event  that we are  unable to  protect  our
proprietary rights, our business,  financial condition and results of operations
could be materially adversely affected.

The Internet, and specifically the market for e-commerce and online advertising,
direct  marketing and promotions,  is  characterized by a rapidly evolving legal
landscape.  A variety of patents relating to this market have been issued in the
past several  years,  including  our patents,  which relate  generally to online
incentive award programs.  We believe that several  additional,  related patents
are currently  pending.  We believe that there will  continue to be  substantial
activity  in this area and that  litigation  may arise due to our  attempts or a
third party's efforts to enforce patent rights. In fact, the Company initiated a
formal patent licensing program during the year 2000, and we are currently party
to litigation as a result of the active  enforcement of our patent  rights.  See
Item 3 entitled "Legal Proceedings" for a description of this litigation.

We may incur  substantial  expenses,  and the attention of our management may be
diverted as a result of existing or additional litigation. In addition,  whether
or not any claims against us are  meritorious,  we may be required to enter into
license agreements or be subject to injunctive or other equitable relief, any of
which would materially adversely affect our business,  results of operations and
financial condition.

Employees

As of December 31, 2000, Netcentives had 494 full time employees,  including 371
in marketing and sales,  91 in research and  development,  and 90 in finance and
administration.  Our employees are not represented by any collective  bargaining
unit or labor union and we have never  experienced a work  stoppage.  We believe
our relations with our employees are good.  (See Item 7,  Subsequent  Events and
Note 17 to the Consolidated Financial Statements.)



                                     Page 5
<PAGE>



Item 2. PROPERTIES

The Company has approximately  124,500 square feet under lease in San Francisco,
CA expiring  between 2001 and 2007.  We also lease  approximately  10,200 square
feet in New York which  expires in 2007;  3,300 square feet in Fort  Lauderdale,
Florida  expiring in September,  2001;  2,500 square feet in Tempe,  Arizona and
approximately  4,000  square feet in  Healdsburg,  California  the latter two of
which are under month to month  leases.  The Company  believes  that its present
level of operations and other capacity, along with its plans for expansion, will
be sufficient to accommodate its requirements.

Item 3.  LEGAL PROCEEDINGS

In February, March and July 2000, the Company filed suit in the Federal District
Court in the Northern  District of California  against  eleven  parties  seeking
monetary   damages  and  injunctive   relief  based  on  each  party's   alleged
infringement of certain patents held by the Company.  This litigation is pending
although two of the defendants have  subsequently  licensed the patents and have
been dismissed from the suit. A default was entered against  another  defendant.
Although no assurances  can be given as to the results of this case, the Company
believes its claims have merit and intends to prosecute the matter vigorously.

In July 2000, one of the defendants,  Carlson Companies, Inc.'s subsidiaries and
affiliates  ("Carlson"),  filed a  claim  against  the  Company  in the  Federal
District  Court in the  District of  Minnesota  seeking a  declaratory  judgment
alleging  (a) that  Carlson is the owner of the  patents  at issue  based on the
inventor's  earlier  employment at Carlson,  (b) that the Company's  patents are
invalid and  unenforceable  and (c) that Carlson is not infringing the Company's
patents.  In December 2000, the Minnesota action was transferred to the Northern
District of  California  and is pending  before the same judge that is presiding
over the infringement actions brought by the Company. Although no assurances can
be given as to the results of this case, the Company believes it has meritorious
defenses and intends to defend itself vigorously in the matter.

Legal  proceedings  tend to be  unpredictable  and costly and may be affected by
events  outside  the  control  of  the  Company.  In  the  event  that  a  final
unappealable judgment were rendered that the Company does not own the patents or
that the patents are invalid in  connection  with either of the actions,  such a
judgment  could  have a  material  adverse  effect  on the  Company's  financial
position and  operations.  Due to the nature of the  litigation  and because the
lawsuits are still in their  initial  stages,  the Company's  management  cannot
estimate the total  expenses,  the possible  loss,  if any, or the range of loss
that may ultimately be incurred.

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

No matters  were  submitted  for a vote of  security  holders  during the fourth
quarter of the fiscal year covered by this Report.



                                     Page 6
<PAGE>



                                     PART II

Item 5.  MARKET  FOR THE  REGISTRANT'S  COMMON  STOCK  AND  RELATED  SHAREHOLDER
         INFORMATION

(a)  Market Information

Netcentives'  Common Stock is traded on the NASDAQ Stock Market under the ticker
symbol NCNT.

The following  table shows the high and low bid prices of the  Company's  Common
Stock for the following periods:

            October 13, 1999 through        January 1, 2000 through
               December 31, 1999               December 31, 2000
            ------------------------        -----------------------
High                $ 96.00                         $ 68.6875
Low                 $ 10.25                         $  3.25

The closing  price of the  Company's  Common Stock on the NASDAQ Stock Market on
March 19, 2001 was $2.1875.


Future stock prices may be subject to  volatility,  particularly  on a quarterly
basis.  Any  shortfall  in  revenues  or net income  from  amounts  expected  by
securities  analysts could have an immediate and  significant  adverse effect on
the trading price of the Company's stock.

(b)  Holders

As of March 19, 2001, the Company had  approximately 506 stockholders of record.
This number excludes  shareholders whose stock is held in nominee or street name
by brokers.

(c)  Dividends

We have never paid cash  dividends on our common stock.  We currently  intend to
retain any future  earnings to fund the  development and growth of our business.
Therefore,  we do not  currently  anticipate  paying any cash  dividends  in the
foreseeable future.

(d)  Report of offering of securities and use of proceeds therefrom

On  October  13,  1999,  in  connection  with our  initial  public  offering,  a
Registration Statement on Form S-1 (No. 333-83443) was declared effective by the
Securities and Exchange  Commission,  pursuant to which 6,000,000  shares of the
Company's Common Stock were offered and sold for the account of the Company at a
price of $12.00 per share. In addition, on November 9, 1999, the Company sold an
additional  335,937 shares under the  underwriters'  overallotment  option.  The
managing  underwriters were Credit Suisse First Boston Corporation,  Hambrecht &
Quist LLC and Thomas Weisel  Partners LLC. After  deducting  approximately  $5.3
million in  underwriting  discounts and $1.9 million in other related  expenses,
the net proceeds of the  offering  were  approximately  $68.8  million.  Of such
amount,   approximately  $41.2  million  has  been  used  for  working  capital,
approximately  $9.3 million has been used for acquisitions,  approximately  $3.3
million has been used for debt repayment, and the remainder has been invested in
investment grade,  interest bearing  securities.  The Company intends to use the
remaining proceeds for capital  expenditures and for general corporate purposes,
including working capital to fund anticipated operating losses.

(e)  Sales of Unregistered Securities

During 2000,  we granted stock  options to purchase  3,990,256  shares of Common
Stock,  with  exercise  prices  ranging  from  $3.25 to $61.875  per  share,  to
employees and officers  pursuant to our 1996 Stock Option Plan, stock options to
purchase  100,000 shares of Common Stock at exercise  prices ranging from $11.56
to $58.50  pursuant  to our 1999  Directors  Stock  Plan,  and stock  options to
purchase 22,209 shares of Common Stock,  with exercise prices ranging from $0.03
to $10.44 per share, to employees and officers pursuant to our 1999 Stock Option
Plan.  During  2000,  options to purchase  929,205  shares of Common  Stock were
exercised,  with  exercise  prices  ranging from $0.02 to $11.00.  The sales and
issuances of these  securities were exempt from  registration  under either Rule
701 under the Securities Act of 1933 or under Section 4(2) of the Securities Act
of 1933.

From March 1998 through March 2001, we have issued and sold (without  payment of
any selling commission to any person) the following unregistered securities:

     (1)  Warrants  to  purchase  an  aggregate  of  31,948  shares  of Series C
Preferred  Stock in May 1998  with an  aggregate  value of  $31,000  to  Phoenix
Lending and Leasing in  consideration  for entering into an equipment  financing
relationship pursuant to which we financed $1,200,000 of equipment.


                                     Page 7
<PAGE>


     (2) An aggregate of 5,476,192  shares of Series D Preferred  Stock at $3.15
per share in August  1998 to  Affinity  Trust,  K.B.  Chandrasekhar  and Sukanya
Chandrasekhar,  Citicorp,  David A.  Duffield  Trust Dated July 14, 1988,  Huret
Family Partners,  L.P., Information Technology Ventures,  L.P., Integral Capital
Partners  IV MS Side  Fund,  L.P.,  Integral  Capital  Partners  IV,  L.P.,  ITV
Affiliates  Fund, L.P.,  Mayfield  Associates Fund III,  Mayfield VIII,  Mindful
Partners,  New Enterprise  Associates VII,  Limited  Partnership,  RRE Investors
Fund,  L.P.,  RRE  Investors,  L.P.,  Stuart L.  Rudick,  Margaret L. Taylor and
Wendell G. Van Auken & Ethel S. Van Auken Trust.

     (3) An  aggregate  of  808,780  shares  of  common  stock  with a value  of
$2,548,000 in connection  with the  acquisition  of 100 percent of the shares of
Panttaja Consulting Group, Inc. in December 1998.

     (4) An  aggregate  of 200,000  shares of common stock at $0.65 per share in
December 1998 to West Shell, III.

     (5) An aggregate of 5,278,283  shares of Series E Preferred  Stock at $6.82
per share in March,  April and June 1999 to 5S Ventures,  LLC,  Affinity  Trust,
American Express, Mari Baker, Black Marlin Investments,  LLC, Chancellor Private
Capital Offshore Partners I, C.V.,  Chancellor Private Capital Offshore Partners
II, L.P.,  Chancellor  Private Capital  Partners III, L.P.,  Citicorp  Strategic
Technology  Corp.,  David A. Duffield Trust Dated July 14, 1988, Robin and Chris
Donohoe,  Drake & Co for  the  account  of  Citiventure  96,  Drake & Co for the
account of  Citiventure  III,  Draper Fisher  Associates  Fund IV, L.P.,  Draper
Fisher Partners IV, L.P., Draper Richards Management  Company,  Draper Richards,
L.P.,  Tracy  Flynn,  Glynn  Ventures IV, L.P.,  Huret  Family  Partners,  L.P.,
Information  Technology  Ventures,  L.P.,  Integral  Capital Partners IV MS Side
Fund,  L.P.,  Integral  Capital  Partners IV, L.P., ITV Affiliates  Fund,  L.P.,
Mayfield  Associates Fund III, Mayfield VIII,  Mindful  Partners,  MSD Portfolio
L.P.  Investments,  NEA President's  Fund, L.P., New Enterprise  Associates VII,
Limited Partnership, P. William Parish, RRE Investors Fund, L.P., RRE Investors,
LP, Stuart L. Rudick,  Rhonda  Sinbaldi,  Spinnaker  Clipper Fund, LP, Spinnaker
Founders Fund, LP, Spinnaker  Offshore Founders Fund, Cayman Limited,  Spinnaker
Technology Fund, L.P., Spinnaker Technology Offshore Fund, Ltd., Starwood Hotels
& Resorts  Worldwide,  Inc.,  Margaret L.  Taylor,  TWP  Netcentives  Investors,
Wendell  G. Van  Auken & Ethel S. Van Auken  Trust,  Vermeer  Investments,  LLC,
Wasatch Venture Fund and The William H. Draper Revocable Trust.

     (6) Warrants to purchase  150,000 shares of common stock at $8.00 per share
in July 1999 to Infoseek Corporation.

     (7) An  aggregate  of  100,000  shares  of  common  stock  with a value  of
$1,000,000 in connection with the hiring of an employee in August 1999.

     (8) Warrants to purchase  85,000 shares of common stock at $11.00 per share
in September 1999 to United Airlines.

     (9) Warrants to purchase 100,000 shares of common stock at $11.00 per share
in October 1999 to US Airways.

     (10) An  aggregate  of  1,560,000  shares of common  stock  with a value of
$82,000,000 in connection with an agreement with America Online, Inc.

     (11) An  aggregate  of  153,058  shares  of  common  stock  with a value of
$10,200,000 in connection  with the  acquisition of 100 percent of the shares of
MaxMiles, Inc. in January 2000.

     (12) An  aggregate  of  335,532  shares  of  common  stock  with a value of
$16,300,000  and 36,000  shares  valued at  $1,700,000  in  connection  with the
acquisition  of 100 percent of the shares of UVN  Holdings,  Inc.,  SHC Venture,
LLC, and the outstanding  minority  interest in UVN's majority owned  subsidiary
Universal Value Network, LLC (collectively "UVN") in March 2000.

     (13) An  aggregate  of  6,282,289  shares of common  stock  with a value of
$308,790,000  in connection with the acquisition of 100 percent of the shares of
Post Communications, Inc. in April 2000.

     (14) An  aggregate  of  1,694,492  shares of common  stock  with a value of
$39,874,000 in connection with an agreement with CMGI, Inc.

     (15) Warrants to purchase  15,000 shares of common stock at $3.94 per share
in December 2000 to Silicon  Valley Bank in  consideration  for entering into an
equipment  financing  relationship  pursuant to which we financed  $2,500,000 of
equipment.

     (16) An aggregate of 7,586,866  options to purchase  shares of common stock
at  an  average  exercise  price  of  $7.44  per  share  to  our  employees  and
consultants.  In  general,  1/8 of the shares of common  stock  subject to these
options  vest  after  six  months  and the  remainder  vests  in  equal  monthly
installments for 42 months thereafter. The term of each option is ten years.

There were no  underwritten  offerings  employed in  connection  with any of the
transactions set forth above.

Issuances  numbered one through  four and six through  sixteen were deemed to be
exempt from registration (under the Securities Act in reliance upon Section 4(2)
thereof  as  transactions  by an issuer  not  involving  any  public  offering.)
Issuance  number five was deemed  exempt in reliance  upon  Regulation  D of the
Securities  Act.  Issuances  numbered  four,  and  sixteen,   to  our  founders,
executives,  employees  and  consultants,  are  also  exempt  from  registration
pursuant to Rule 701  promulgated  under the  Securities  Act. The recipients of
securities in each such transaction  represented their intentions to acquire the
securities for investment  only and not with a view to or for sale in connection
with any  distribution  thereof and  appropriate  legends  where  affixed to the
securities  issued in such  transactions.  All recipients  had adequate  access,
through their relationships with us, to information about us.



                                     Page 8
<PAGE>



Item 6. SELECTED FINANCIAL DATA

The following table sets forth summary consolidated financial information and
data for the years indicated.

<TABLE>
<CAPTION>
                                                                                                 June 21, 1996
                                                                 Years Ended                    (Inception) to
                                                                December 31,                      December 31,
                                                  -------------------------------------------------
                                                       2000         1999         1998        1997        1996
                                                  -------------------------------------------------------------
Consolidated Statements of Operations Data:                (In thousands, except per share amounts)
<S>                                                <C>           <C>         <C>          <C>          <C>
Revenues:
   Product                                         $  10,459     $    859    $     64     $     -      $     -
   Program-related services                           13,495        1,548         583           9            -
   Direct marketing services                          11,353        1,115           -           -            -
   Technical and marketing consulting services         7,547        4,319           -           -            -
                                                  -------------------------------------------------------------
          Total revenues                              42,854        7,841         647           9            -
                                                  -------------------------------------------------------------

Costs and expenses:
   Cost of product revenues                            9,335          968          59           -            -
   Program-related services, marketing and
         support cost                                 38,660       21,551       7,293       1,496          102
   Cost of direct marketing services                   5,935          616           -           -            -
   Cost of technical and marketing
     consulting services revenues                      3,960        3,056           -           -            -
   Research and development                           12,280        5,083       3,383       1,505           63
   Selling, general and administrative                34,772       10,635       3,134       1,210          108
   Amortization of deferred stock compensation,
     supplier stock awards and intangibles            88,178       14,433       1,186          63            -
                                                  -------------------------------------------------------------
              Total costs and expenses               193,120       56,342      15,055       4,274          273
                                                  -------------------------------------------------------------

   Loss from operations                             (150,266)     (48,501)    (14,408)     (4,265)        (273)
   Interest income, net                                3,185        1,673         297          85            7
   Income in equity investee                             454            -           -           -            -
   Realized loss on marketable securities            (37,570)           -           -           -            -
                                                  -------------------------------------------------------------

   Net loss                                        $(184,197)    $(46,828)   $(14,111)    $(4,180)     $  (266)
                                                  =============================================================

   Net loss per share- basic and diluted           $   (4.73)    $  (4.99)   $  (8.58)    $ (5.70)     $ (0.97)
                                                  =============================================================

   Shares used in computing per share amounts
        - basic and diluted                           38,924        9,376       1,644         734          273
                                                  =============================================================

   Pro forma net loss per share on a converted
         basis - basic and diluted (1)                           $  (1.95)   $  (1.05)
                                                               ============  ==========

   Shares used in computing pro forma per share
        amounts on a converted basis (1)                           24,020      13,422
                                                               ============  ==========
<FN>
(1) Gives  retroactive  effect to the  conversion of all  outstanding  shares of
preferred  stock into common stock which  occurred  upon the  completion  of the
Company's initial public offering,  as if it had occurred as of the beginning of
1998.
</FN>
</TABLE>

<TABLE>
<CAPTION>


                                                                    As of December 31,
                                                  -----------------------------------------------------
Consolidated Balance Sheet Data:                     2000       1999      1998      1997       1996
                                                  -----------------------------------------------------
                                                                     (In thousands)
<S>                                                 <C>        <C>       <C>        <C>        <C>
Cash and equivalents                                $ 31,670   $ 75,290  $ 13,651   $ 6,608    $ 1,118
Working capital (deficiency)                          (2,637)    71,771     9,923     6,348      1,027
Working capital excluding deferred revenue            29,530     81,832    11,829     6,407      1,027
Total assets                                         376,212    104,701    21,935     8,549      1,225
Deferred revenues--product and services               32,167     10,061     1,906        59          -
Long-term obligations                                  4,255      1,234     1,233       196          -
Total stockholders' equity                           316,201     84,264    14,334     7,128      1,146
</TABLE>

                                     Page 9
<PAGE>



Additional Operating Data:

A reconciliation of combined loyalty currencies  activity for the merchant-based
ClickRewards program, Custom Loyalty programs, Enterprise Incentive programs and
Registered Card program, deferred revenue-product and non-revenue points awarded
by Netcentives follows:

                                                           Years Ended
                                                           December 31,
                                                --------------------------------
                                                    2000       1999       1998
                                                -----------  ---------  --------
                                                          (in thousands)
Loyalty currencies activities (number of points):
   Beginning balance                               347,147     62,495     2,130
   Awarded by merchants                          2,084,777    211,943    48,554
   Redeemed by members                            (602,708)   (43,529)   (3,184)
   Sold to merchants not yet awarded, net (1)      134,097    117,831    24,895
   Expired (2)                                    (162,134)    (1,593)   (9,900)
                                                -----------  ---------  --------
   Ending balance                                1,801,179    347,147    62,495
                                                ===========  =========  ========

    In circulation (3)                           1,550,911    231,069    45,603
                                                ===========  =========  ========

Deferred Revenues--Product:
   Beginning balance                              $  6,489    $ 1,250   $    43
   Awarded by merchants                             24,683      4,141       971
   Redeemed by members                             (10,452)      (860)      (64)
   Sold to merchants not yet awarded, net (1)          184      1,990       498
   Expired (2)                                      (3,243)       (32)     (198)
                                                -----------  ---------  --------
   Ending balance                                 $ 17,661    $ 6,489   $ 1,250
                                                ===========  =========  ========

Non-revenue points awarded by Netcentives (4):
   Points outstanding at end of period             104,378    121,946    27,508
                                                ===========  =========  ========

   Accrued redemption costs                       $  1,931    $ 2,256   $   509
                                                ===========  =========  ========


(1)  In general,  merchants  are required to purchase  points in advance  before
awarding them to consumers.  This represents the buying activity,  net of awards
to members, of our merchants.

(2)  Some points purchased by merchants must be awarded within specified periods
and cannot be refunded.  In  addition,  certain  programs  require the member to
redeem  within a certain  time or they forfeit  their  redemption  rights.  This
represents  the number of points  which either  expired  unawarded or in members
accounts and the amounts recorded as revenue at that time

(3)  In circulation  represents that portion of the outstanding loyalty currency
points awarded by merchants and still held by members.  Upon redemption of these
points, Netcentives will recognize the related product revenue component.

(4)  In addition to points  purchased and awarded by merchants,  Netcentives has
issued points to its  merchants  and directly to its members in connection  with
promotional  campaigns and in lieu of cash for other expenses.  These points are
accounted for as an expense and an accrued obligation at the time of award. This
represents  the number of points  outstanding  at the end of each period and the
amount of related liability.



                                    Page 10
<PAGE>



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

Overview

San Francisco-based Netcentives Inc. is a leading provider of loyalty and direct
marketing  solutions.  The  company  delivers  a broad  suite  of  programs  for
relationship  marketing  technologies  and  services  to enable its Global  2000
client base to drive  customer,  employee and partner  behavior and maximize the
long-term  economic  value  of  these  relationships.   These  programs  include
consumer,  employee and business loyalty solutions;  customized email marketing;
and consulting services.

From organization in 1996 until March 1998, our operations  consisted  primarily
of various  start-up  activities,  such as research and  development,  personnel
recruiting,  capital  raising  and  trial  sales of our  products  with  initial
customers. We launched the merchant-based ClickRewards program in March 1998 and
began  recognizing  revenue  from  non-trial  program  sales in April  1998.  We
launched our first  Enterprise  Incentive  program in January 1999 and our first
Custom  Loyalty  program in July 1999.  In the year ended  December 31, 2000, we
derived  most of our  revenue  from our  merchant-based  ClickRewards  programs,
Enterprise/Corporate Incentives programs, and the Direct Marketing Solutions.

Since   inception,   Netcentives   has  grown  both   organically   and  through
acquisitions.  Netcentives  acquired Panttaja Consulting Group, Inc. in December
1998 in  order  to  provide  technical  and  marketing  consulting  services  to
Netcentives'  clients. In January 2000,  Netcentives acquired MaxMiles,  Inc., a
provider  of  personal  aggregation  technologies.  In March  2000,  Netcentives
acquired UVN Holdings,  Inc. (UVN),  whose  technologies  enable  Netcentives to
transparently  track and verify  credit  card  purchasing,  and to award  reward
points across multiple  companies and multiple  channels,  whether it be through
store,   catalog  or  online.   Finally,   in  April  2000,   we  acquired  Post
Communications, Inc. to deliver a platform for email direct marketing.

How our Programs Work

We have  focused  our  business  strategy on  providing  loyalty  solutions  and
services to our clients both online and offline.  Our most  established  rewards
currency  is  ClickMiles,  which we sell to  merchants  who  become  part of the
merchant-based  ClickRewards  program.  These  merchants,  in turn,  award these
ClickMiles to consumers as purchase,  loyalty and other  incentives.  ClickMiles
are redeemable  for, among other things,  frequent flyer miles on major airlines
at a ratio of one frequent flyer mile for each ClickMile. We have also developed
and continue to develop  customer  branded  loyalty and rewards  currencies  for
large Internet merchants,  portals,  content sites and other business customers.
We sell these custom currencies to our customers, who then distribute them under
their own  brands.  The  custom  loyalty  currencies  are  redeemable  for items
specific  to the  customer  for whom the  currency  has been  developed  and, in
certain  cases,  are  exchangeable  for  ClickMiles.  During  the  past  several
quarters,  we have expanded our  capabilities to offer offline loyalty  programs
through  the  Registered  Card  program  and  technology  acquired  in  the  UVN
acquisition.  We also offer email marketing  services through our acquisition of
Post Communications.

Custom Loyalty Programs and Enterprise Incentive Programs.  In 1999, we expanded
the  flexible  technology  platform  of our  ClickRewards  program  to meet  the
marketing  needs  of  large  portals  and  financial   institutions  with  large
constituencies,  and to enable  large  enterprises  to motivate and reward their
employees, channel partners, and other stakeholders via intranets and extranets.
These Custom Loyalty programs and Enterprise Incentive programs are delivered on
both a fully  configured  "turn  key"  basis  as well as on a  separately-priced
basis, and are powered by Netcentives'  secure and scalable  technology.  We may
separately charge these customers for various relationship  management and other
services  including  transaction  management,   promotional  consulting,  direct
marketing services and integration and maintenance of our enabling software.

Merchant-based  ClickRewards.  Merchants who  participate in the  merchant-based
ClickRewards  program  receive the benefit of our promotion of the  ClickRewards
brand and network,  which includes direct links to the merchants' sites from our
ClickRewards  web  page.  We  also  provide  merchants  who  participate  in the
merchant-based  ClickRewards  program  with a variety of related  marketing  and
promotional  services.  These services include  promotional  consulting,  direct
marketing  services to our member base and  integration  and  maintenance of our
enabling  software.  Depending  on the  specific  relationship  we have with the
merchant, we may either include some of these services in our ClickMiles pricing
or we may price them  separately.  To the extent that  services are bundled with
ClickMiles, we increase the price of the ClickMiles package to reflect the value
of these services.

Registered Card Program. In March 2000, the Company acquired UVN, which operates
the  Registered  Card program,  which allows  businesses to recognize and reward
purchase behavior both online and offline in permission based programs.

Direct  Marketing.  In April 2000,  the Company  acquired  Post  Communications.
Through Post  Communications,  the Company  offers  customized  email  marketing
services  including the  marketing  strategy,  program  design,  production  and
technologies required to retain customers and drive sales.


                                    Page 11
<PAGE>


Each Netcentives program can be supported by our promotional management services
such as account  monitoring,  reporting,  reward  fulfillment,  customer service
support,   customized   e-mail   communication   services  and  rewards  program
aggregation services. In the case of awards transaction processing,  we purchase
the relevant  awards and either have the  merchandise  delivered to the consumer
through  third-party  fulfillment houses, or in the case of frequent flyer miles
offered through the merchant-based  ClickRewards program,  electronically credit
their  chosen  frequent  flyer  account.  We also  provide  members with ongoing
support to assist them in managing and redeeming their currency.


Significant Transactions in 2000

In January 2000, the Company entered into an agreement with America Online, Inc.
("AOL") under which the Company's rewards technology became the exclusive online
support  infrastructure for  AOL/AAdvantage,  AOL's consumer rewards network. In
addition,  the companies also agreed to create "ICQ  ClickRewards"  -- a rewards
program  for  ICQ,  AOL's  online  communications  community.  As part of  these
agreements,  the Company  issued AOL 1,560,000  shares of the  Company's  common
stock.  The Company has recorded  $82.0 million in deferred stock expenses based
on the fair value of the stock  issued to AOL. A portion of the  deferred  stock
expense will be recorded as an offset to revenue earned by the Company over time
related to the AOL program and a portion  will be recorded  over the  three-year
agreement period as a non-cash marketing expense related to ICQ ClickRewards. In
the year ended December 31, 2000, the Company recorded $22.7 million of non-cash
marketing expenses related to the AOL program.

On January 31, 2000, the Company  completed the  acquisition of all  outstanding
capital stock of MaxMiles, Inc. ("MaxMiles"), a provider of personal aggregation
technologies, in exchange for issuance of 153,058 shares of the Company's common
stock  valued at $10.2  million  and options to  purchase  21,922  shares of the
Company stock at prices  ranging from $.03 to $10.44 per share,  of which 17,388
were vested at the date of the acquisition and have been included as part of the
acquisition  price at their  fair value of $1.1  million.  The  remaining  4,534
unvested  options have been recorded as deferred  stock expense in the amount of
$254,000 and will be amortized over the remaining three-year vesting period.

The acquisition was accounted for as a purchase and, accordingly, the results of
operations of MaxMiles since the date of  acquisition  have been included in the
Company's consolidated financial statements. In connection with the acquisition,
the purchase price was allocated, based on an independent valuation, to goodwill
of $11.1 million,  internal use software of $245,000 and assembled  workforce of
$121,000.  For the year ended  December  31,  2000,  the Company  recorded  $3.5
million for  amortization of these  intangibles,  which are amortized over their
useful lives of two to four years.

In February 2000, we entered into an agreement with Nortel  Networks  Limited in
Canada to provide an Enterprise  Incentive program enabling Nortel to reward and
recognize  its  employees  on a  global  basis.  In  fiscal  year  2000,  Nortel
represented  approximately 25% of total revenues. (See Item 7, Subsequent Events
and Note 17 to the Consolidated Financial Statements.)

On March 3, 2000,  the Company  completed  the  acquisition  of all  outstanding
capital  stock of UVN  Holdings,  Inc.,  SHC Venture,  LLC, and the  outstanding
minority  interest in UVN's majority owned  subsidiary  Universal Value Network,
LLC  (collectively,  "UVN").  UVN's  business  utilizes  payment  card  data  to
recognize and reward online and offline purchasing behavior.  The total purchase
price  includes the  issuance of 335,532  shares of the  Company's  common stock
valued at approximately $16.3 million, cash payments totaling approximately $4.9
million (including  approximately $2.1 million of transaction costs), and 36,000
shares of the  Company's  common stock valued at  approximately  $1.7 million to
extinguish  certain  debt of UVN. The  acquisition  also gives the Company a 49%
equity ownership in Golden Retriever Systems,  LLC which maintains  connectivity
to information on approximately 90% of U.S. sources of payment card transactions
including  data from  payment  card  processors,  merchant  acquiring  banks and
merchants.  Vital  Processing  Services,  LLC has the right to  require  that we
purchase all of their 51% equity interest in Golden Retriever  Systems,  LLC for
$10.0 million.  The Company has issued or will issue an additional 48,882 shares
of  common  stock  to  former  shareholders  of UVN  over  the 24  month  period
subsequent to the acquisition.

The acquisition was accounted for as a purchase and, accordingly, the results of
operations  of UVN  since the date of  acquisition  have  been  included  in the
Company's consolidated financial statements. In connection with the acquisition,
the purchase price was allocated, based on an independent valuation, to goodwill
of $17.1 million,  internal use software of $500,000,  investment in GRS of $7.7
million,   assembled  workforce  of  $40,000  and  sales  channel  and  customer
relationships  of $296,000.  For the year ended  December 31, 2000,  the Company
recorded $4.3 million for amortization of these intangibles, which are amortized
over their useful lives of five years.

On April 7, 2000,  the Company  completed  the  acquisition  of all  outstanding
capital stock of Post  Communications,  Inc. ("Post"),  a provider of customized
email marketing  services,  in exchange for the issuance of 6,282,289  shares of
the  Company's  common  stock  valued at $308.8  million and options to purchase
316,908  shares of the  Company's  common  stock at prices  ranging from $.36 to
$16.76  per  share.  Of  these  options  23,481  were  unvested  at the  date of
acquisition  and have been  recorded as deferred  stock expense in the amount of
$2.2 million and will be amortized over the remaining three year vesting period.
There  were  293,427  options  vested at the date of  acquisition  and have been
included as part of the acquisition  price at their fair value of  approximately
$13.6 million.


                                    Page 12
<PAGE>

This acquisition was accounted for as a purchase,  and accordingly,  the results
of  operations of Post since the date of  acquisition  have been included in the
Company's consolidated financial statements. In connection with the acquisition,
the purchase price was allocated, based on an independent valuation, to goodwill
of  $294.1   million,   internal  use  software  of  $10.2   million,   customer
relationships of $8.7 million and assembled  workforce of $3.4 million.  For the
year  ended  December  31,  2000,   the  Company   recorded  $59.3  million  for
amortization of these  intangibles,  which are amortized over their useful lives
of four years.

In all the acquisitions  completed in 2000, the sales, research and development,
and operations of these companies have been integrated into the Company.

On April 10,  2000,  the  Company  announced  an  agreement  to create an online
loyalty  program for the CMGI  network and its 70 member  companies.  As part of
this relationship,  CMGI received  approximately 4.9% or 1,694,492 shares of the
Company's  outstanding common stock with a value of approximately $39.9 million.
The Company also  received,  in exchange for its shares,  425,317 shares of CMGI
outstanding  common stock with a value of  approximately  $39.9  million.  These
shares are  restricted  from being resold until April 2001 and were  recorded as
Marketable  Securities on the Company's balance sheet. At December 31, 2000, the
Company  determined  that the  decline  in value of these  shares was other than
temporary  and valued these at market  value  recording a  $37,570,000  realized
loss.  During the fourth  quarter of 2000,  the  Company  and CMGI agreed to end
their  loyalty  network  arrangement,  with the opt-in  transition  of  existing
members from the AltaVista Rewards program to the ClickRewards program.

How We Recognize Revenues

Most of our  revenues  to date have been  derived  from the sale of rewards  and
loyalty  currencies.  In the  years  ended  December  31,  2000,  1999 and 1998,
revenues   from  these  sales  were  56%,  31%  and  100%  of  total   revenues,
respectively.  Due  to  the  complex  nature  of  revenue  recognition  and  the
significance of these revenues to our total revenues,  a detailed explanation of
the revenue recognition for these items follows.

Currency-related revenues; product and program-related services

The  revenues we receive  from the sale of rewards and  loyalty  currencies  and
points-based  programs  are  made up of two  components:  product  revenues  and
program-related  services  revenues.  Product  revenues reflect the value of the
reward our members will  ultimately  receive upon  redemption  of the  promotion
currency.  Program-related  services revenues reflect the value of services that
we perform for custom loyalty clients,  merchants and members.  As a result, our
revenues related to sale of currencies are recognized at various times.

A merchant or custom loyalty  customer  typically  purchases  currencies from us
before awarding them. Upon the sale of our loyalty currencies, we allocate these
revenues  between  the  product  component,  and  the  program-related  services
components.  The product  component  of  revenues  is deferred  until the member
redeems the currency for his or her selected reward.  At the time of redemption,
we  recognize  the product  component  of revenues  and the  associated  cost of
revenue based on the actual cost of the redemption  reward.  The revenue related
to the services component of the currency sale is deferred until the sale of the
currency  becomes  non-refundable,  which  in  the  merchant-based  ClickRewards
program has  historically  been upon award of the  currency to a consumer by the
merchant.   Services  revenues  relating  to   separately-priced   services  are
recognized when these services are delivered.  The remaining portion of services
revenues is recognized  ratably over the period during which these  services are
provided. For all ClickMiles sold through December 31, 2000, this service period
has been initially calculated for the maximum life of the ClickMile based on its
expiration date. To the extent ClickMiles are redeemed prior to expiration,  the
remaining  unamortized amount of deferred services revenues is recognized at the
time of redemption.

Currently,  ClickRewards  merchants  buy  ClickMiles  in advance  based on their
anticipated needs. New merchants are required to purchase a minimum of 1,400,000
ClickMiles.  On  an  ongoing  basis,  each  merchant  is  required  to  purchase
ClickMiles  in  quantities  at least equal to its expected  monthly usage and to
maintain a minimum balance  generally equal to its expected  bi-weekly usage. We
determine  each  merchant's  expected  usage based on past trends and forecasted
requirements in active promotions.  These ClickMiles are non-refundable and will
expire if not awarded by the merchant  within a six-month  period.  The merchant
services portion of revenues of any ClickMiles sold under these  arrangements is
amortized  over  the  maximum  period  during  which  the  merchant  may use the
ClickMiles.  The member services component of revenues continues to be amortized
over the expected life of the ClickMile.

If loyalty  currency points expire or are forfeited,  we recognize the remaining
amount of deferred product and program-related  services revenues at the time of
expiration or forfeiture.  Since we do not have sufficient experience concerning
the redemption or forfeiture of currency points,  we cannot currently predict in
which periods we will recognize these revenues.

We  typically  sell our  loyalty  currency  products  and  related  services  to
merchants or custom clients for cash. However,  from time to time, in connection
with promoting the merchant-based  ClickRewards program, we also sell ClickMiles
to  our  merchants  for  non-cash   consideration,   such  as  advertising   and
merchandise.  The revenue from the sale of these  ClickMiles is accounted for on
the same basis as cash sales and the value of the  advertising or merchandise is
recorded as an expense or a prepaid asset as appropriate. In 2000, approximately
$430,000 of advertising expense was recorded under these arrangements,  of which
82% was transacted with three merchants. In 1999,  approximately $1.0 million of
advertising  expense was  recorded  under these  arrangements,  of which 86% was
transacted with three merchants. In 1998,  approximately $956,000 of advertising
expense was recorded under these arrangements,  of which 74% was transacted with
two merchants.


                                    Page 13
<PAGE>


We also derive  program-related  service  revenues from the initial  set-up fees
received from some of our Custom  Loyalty  programs.  We recognize  these set-up
fees and  related  costs over the  minimum  life of the Custom  Loyalty  program
contract. Additionally, we derive program-related service revenues from currency
point expirations and from licensing activities. In the years ended December 31,
2000 and 1999,  we  recognized  $4.3  million  and  $295,000,  respectively,  of
revenues related to these activities.

Direct marketing services

The  Company  recognizes  revenue  related to email  marketing  services  as the
services are  provided.  Revenue and related costs  associated  with the initial
set-up of client email  marketing  programs are recognized over the minimum life
of the  client  contract,  beginning  on the launch  date of the email  program.
Deferred  project  revenues  and costs  represent  amounts  associated  with the
initial set-up of client email  programs  which have not been  recognized at the
balance sheet date.

Technical and marketing consulting services revenues

Netcentives   Consulting   provides   professional   services  that   complement
Netcentives  programs and hosted  operations to deliver loyalty solutions to our
customers.  These services  include  strategy,  design and launch services which
enable customers to move quickly from business  concepts to successful  programs
and  solutions.  Netcentives  Consulting  works closely with  customers to apply
expertise in loyalty  strategy,  relationship  marketing,  creative design,  and
technology,  coupled with  Netcentives' core technology,  to achieve  customers'
business objectives.

Results of Operations

Years Ended December 31, 2000, 1999 and 1998

Revenues

Total revenues  increased to $42.9 million in 2000 from $7.8 million in 1999 and
$647,000  million in 1998.  The  increases  in  revenues  from 1998 to 1999 were
primarily a result of increased technical consulting service revenues related to
the acquisition of Panttaja  Consulting Group in December 1998 and the growth of
our merchant-based ClickRewards program launched in March 1998. The increases in
revenues  from  1999  to  2000  were   primarily  a  result  of  growth  of  our
merchant-based  ClickRewards  program,  the growth in the Enterprise  Incentives
business, and the addition of Post Communications, Inc. in the second quarter of
2000.  Product  revenues  reflect the  redemption of currency  points for awards
during the year and increased to $10.5 million in 2000 from $859,000 in 1999 and
$64,000 in 1998.  Consumers  redeemed 602.7 million currency units in 2000, 43.5
million  currency  units  in  1999,  and 3.2  million  currency  units  in 1998.
Program-related  service  revenues were $13.5  million in 2000,  $1.5 million in
1999,  and $583,000 in 1998.  The  increases in  program-related  revenues  were
primarily due to growth in the merchant-based  ClickRewards  program, the Custom
Loyalty programs,  and Enterprise Incentive programs.  Program-related  revenues
for the year ended  December 31, 2000 included $2.9 million  related to consumer
point  expirations and $1.2 million related to licensing fees.  Direct marketing
services revenues  increased to $11.4 million in 2000 from $1.1 million in 1999.
This increase was primarily due to the business activity of Post  Communications
subsequent  to the  date of  acquisition.  Technical  and  marketing  consulting
services  revenues  were $7.5  million  in 2000 and $4.3  million  in 1999.  The
increase in technical  and  marketing  consulting  services  revenues was due to
having more consulting  engagements,  including marketing consulting engagements
with AOL in 2000.

Cost of Product Revenues

Cost of product  revenues  represents  the  actual  cost of awards  selected  by
members in exchange  for  currency  points.  Cost of product  revenues  was $9.3
million in 2000, $968,000 in 1999, and $59,000 in 1998,  respectively.  The cost
of product  revenues  represented  89%, 113% and 92% of product revenues for the
years ended  December 31, 2000,  1999, and 1998,  respectively.  The increase in
cost of product  revenues was a result of the  increased  redemption of currency
points by members,  which was  principally  related to the  increased  number of
currency points outstanding. The negative product margin in 1999 was principally
related to a special  promotion offered in July 1999 during which we offered our
members the ability to redeem their  outstanding  ClickMiles  for frequent flyer
miles  on  a  two-for-one  basis.  As  a  result  of  this  offer,  we  incurred
approximately  $138,000  of  additional  product  costs  during  the year  ended
December 31, 1999.

Program-Related Services, Marketing and Support Costs

Program-related  services,  marketing and support costs  represents the costs of
marketing services provided for the merchant-based ClickRewards program, as well
as costs incurred to support  merchants and members in the Network.  These costs
consist  primarily of  compensation  and related  costs for  marketing and sales
personnel,   advertising  and  marketing  for  the  merchant-based  ClickRewards
program,  merchant account and rewards supplier  management,  product management
activities and ClickMiles  issued to acquire new members for the  merchant-based
ClickRewards  program.  Program-related  marketing  and support costs were $38.7
million in 2000,  $21.6 million in 1999,  and $7.3 million in 1998. The increase


                                    Page 14
<PAGE>


between  2000 and 1999  relates to  increased  marketing  and  consumer  support
personnel expenses of $14.1 million, and an increase in allocated facilities and
office  expenses  of $5.9  million,  offset by a  decrease  in  advertising  and
promotions   expenses  of  $4.8  million   associated  with  the  merchant-based
ClickRewards  program.  The  increase  between 1999 and 1998 was  primarily  the
result of increased  marketing and consumer support  personnel  expenses of $3.7
million,   member  acquisition  costs  of  $2.2  million,  and  advertising  and
promotions  expenses  of $5.2  million  associated  with  the  promotion  of the
merchant-based   ClickRewards   program.   We  expect   maintain  our  marketing
expenditures,   particularly   those  related  to  acquiring   members  for  the
merchant-based  ClickRewards  program,  advertising and promoting our brands and
products,  recruiting  additional  marketing personnel and managing programs for
our Custom Loyalty program and Enterprise Incentive program customers.

Cost of Direct Marketing Services Revenues

Cost of direct marketing  services  consists of costs related to the delivery of
email marketing program services. The cost of direct marketing services was $5.9
million in 2000 and $616,000 in 1999.  These costs are primarily due to business
activity of Post Communications subsequent to the date of acquisition.  Costs of
direct marketing  services  represented 52% and 55% of direct marketing services
revenues for the years ended December 31 2000 and 1999, respectively.

Cost of Technical and Marketing Consulting Services Revenues

Cost of technical and marketing  consulting  services  consists of the personnel
and overhead costs incurred in connection with providing technical and marketing
consulting  services.  There were no technical and marketing consulting services
provided in 1998 and  therefore no cost of technical  and  marketing  consulting
services  revenues during that year. Cost of technical and marketing  consulting
services  totaled  $4.0 million for the year ended  December 31, 2000,  and $3.1
million for the year ended  December 31, 1999.  These  expenses  were related to
technical consulting services provided by Netcentives  Professional Services and
delivering  marketing  consulting  services in the year ended December 31, 2000.
Cost of technical and marketing  consulting service revenues were 52% and 71% of
technical  and marketing  consulting  services  revenues in 2000 and 1999.  This
decrease in costs as a percentage  of revenues was due to the Company  utilizing
fewer  high-cost  consultants  and achieving a higher rate of utilization on its
internal  resources  in the year ended  December  31,  2000 as  compared  to the
comparable period in 1999.

Research and Development

Research and development  expenses consist primarily of compensation and related
costs for research and development personnel,  including independent contractors
and consultants,  software licensing  expenses and allocated  operating expenses
such as site hosting, web site production,  facilities  expenses,  and equipment
costs.  Research  and  development  expenses  were $12.3  million in 2000,  $5.1
million in 1999 and $3.4 million in 1998,  respectively.  These  increases  were
primarily  the  result  of an  increase  in  expenses  for  enhancements  to the
merchant-based  ClickRewards  program,  as well as initial  development  efforts
relating to our Custom Loyalty programs and Enterprise  Incentive programs,  and
the addition of Post  Communications  in the second quarter of 2000. The largest
component of the  increases  was the growth in  compensation  and related  staff
expenses.  These expenses increased by $1.9 million between 2000 and 1999 and by
$1.3 million  between 1999 and 1998. We expect to continue to increase  research
and  development  spending in absolute  dollars as we develop new  products  and
maintain existing products.

Selling, General and Administrative

Selling,  general and administrative  expenses consist primarily of salaries and
related  expenses,   sales  commissions,   treasury  expenses,   accounting  and
administrative  expenses,  professional  fees,  and other  selling and corporate
expenses.  Selling,  general and  administrative  expenses were $34.8 million in
2000,  $10.6 million in 1999 and $3.1 million in 1998. The increases from period
to period  were  primarily  the  result of  increased  sales  efforts  to enroll
merchants  into the  merchant-based  ClickRewards  program,  increased  business
development  efforts  for our Custom  Loyalty  program,  increased  general  and
administrative  personnel  and  increased  facilities  and office  costs and the
addition  of Post  Communications  in the second  quarter of 2000.  The  largest
component  of the increase  was the growth in  compensation  expense and related
staff costs as a result of increased  staffing  levels which  increased by $12.1
million  between  2000 and 1999.  There was also an increase of $6.1  million in
facilities and office  expenditures for the year ended 2000 as compared to 1999.
We expect selling,  general and administrative  expenses to increase in absolute
amounts over the course of the next twelve months.

Amortization  of  Deferred  Stock   Compensation,   Supplier  Stock  Awards  and
Intangibles

Amortization of deferred stock  compensation  represents the difference  between
the  purchase or exercise  price of certain  restricted  stock and stock  option
grants,  and the deemed  fair  market  value of our common  stock at the time of
these  grants.  This  difference is amortized  over the vesting  period for such
grants,   which  is  typically  four  years.   Amortization  of  deferred  stock
compensation  was $2.2  million in 2000,  $4.1  million in 1999 and  $296,000 in
1998.  These amounts resulted from  amortization of deferred stock  compensation
related to stock option grants and stock awards granted in 1999 and 1998.


                                    Page 15
<PAGE>

Amortization  of supplier and other stock  arrangements  represents  the cost of
warrants granted to certain  airlines and other rewards  suppliers in return for
exclusivity  and the  cost of stock  related  to the ICQ  ClickRewards  program.
Expenses  related to contingent  stock warrants  granted to certain airlines and
other partners and the stock issued related to the ICQ ClickRewards  program was
$17.0 million in 2000,  $8.6 million in 1999, and $811,000 in 1998.  Because the
vesting of certain awards is subject to these rewards suppliers  maintaining the
exclusivity of the arrangement with  Netcentives,  the valuation of the warrants
is not finalized  until the vesting date.  As a result,  the charge  relating to
supplier stock awards may increase over remaining vesting periods through 2001.

In December  1998,  we acquired the Panttaja  Consulting  Group in a transaction
that was accounted for as a purchase.  The resulting intangibles of $3.5 million
recorded in the  acquisition  were amortized over two years. In January 2000, we
acquired  MaxMiles in a transaction  accounted for as a purchase.  The resulting
intangibles of $11.5 million  recorded in the  acquisition  are being  amortized
over an estimated  useful life of three years. In March 2000, we acquired UVN in
a transaction  accounted for as a purchase.  The resulting  intangibles of $25.7
million recorded in the acquisition are being amortized over an estimated useful
life of five  years.  In  April  2000,  we  acquired  Post  Communications  in a
transaction  accounted for as a purchase.  The resulting  intangibles  of $316.3
million recorded in the acquisition are being amortized over an estimated useful
life of four years.  In the years ended  December  31, 2000,  1999 and 1998,  we
incurred  $68.9  million,  $1.8  million  and  $79,000  of  expense  related  to
amortization of these intangibles.

Interest Income, Net

Interest income primarily  represents interest earned on short-term  investments
in  highly-liquid  debt instruments with a maturity at time of purchase of three
months or less.  Interest income, net, was $3.2 million in 2000, $1.7 million in
1999, and $297,000 in 1998. The increase was a result of increased cash balances
from the private  placement of preferred equity  securities in 1998 and 1999 and
from the initial public offering in October 1999,  offset in part by an increase
in interest expense relating to capital leases and other financing arrangements.
Interest income increased to $4.1 million from $2.0 million and $441,000 for the
years ended December 31, 2000,  1999 and 1998,  respectively.  Interest  expense
increased to $900,000  from  $305,000 and $144,000 for the years ended  December
31, 2000, 1999 and 1998, respectively.

Income Taxes

We have recorded losses since inception and therefore  recorded no provision for
income taxes for the years ended December 31, 2000, 1999 and 1998.

Net Loss

Net loss  increased to $184.2  million in 2000,  from $46.8  million in 1999 and
$14.1  million  in 1998.  The  increases  in net loss were  primarily  due to an
increase in revenues of $35.0 million  offset by an increase in operating  costs
and expenses of $136.8  million and a realized loss on marketable  securities of
$37.6 million  between the years ended  December 31, 2000 and December 31, 1999,
and an increase of $41.3  million in operating  costs and  expenses  between the
years ended December 31, 1999 and December 31, 1998.

Liquidity and Capital Resources

We have funded our  operations  since  inception  primarily  through the private
placement  of  preferred  equity  securities,  through  which we had  raised net
proceeds of $63.7 million through  December 31, 2000, and from an initial public
offering  in the fourth  quarter of 1999,  which  raised net  proceeds  of $68.8
million.  We have also financed our operations through equipment lease financing
and bank borrowings. As of December 31, 2000, we had outstanding equipment lease
financing and bank borrowings  totaling $8.1 million. We have no other available
lines of credit or credit available under existing arrangements.

Cash used in operations  was $21.7 million and $22.2 million for the years ended
December 31, 2000 and 1999 respectively.  The cash used was primarily the result
of our operating  losses in these  periods.  Cash used in  operations  primarily
reflected cash received from customers of $60.3 million and $13.7 million in the
years ended  December  31, 2000 and 1999,  respectively,  offset by cash paid to
suppliers and employees of $85.3 million and $37.6 million in the same periods.

We initially defer recording revenue at the time we sell our loyalty currencies,
even though we have  generally  received  cash up front from our  customers  for
these  sales.  A  significant  portion of revenue  is not  recognized  until the
consumer redeems the currency.  The remaining revenue is recognized on a ratable
basis over the periods in which  marketing and support  services are provided to
merchants and members.  As a result of this accounting method, the cash received
from customers is substantially greater than the amount of revenues reported for
these  periods.  The  difference in these  amounts is reflected  primarily as an
increase in the amount of deferred  revenues for products and services  shown on
our consolidated balance sheet. Total deferred revenues increased on a net basis
from cash  transactions by $21.1 million during the year ended December 31, 2000
and by $7.1 million during the year ended December 31, 1999.


                                    Page 16
<PAGE>


Cash paid to  suppliers  and  employees  was  significantly  less than costs and
expenses  reported for these same periods.  This resulted from non-cash  charges
relating to  depreciation,  the  amortization  of deferred  stock  compensation,
supplier stock awards and intangible  assets  arising from the  acquisitions  of
Panttaja Consulting Group, MaxMiles, UVN and Post Communications, and the use of
ClickMiles in lieu of cash to pay for certain  expenses.  Non-cash  amortization
charges  totaled $77.3 million and $4.4 million in the years ended  December 31,
2000 and 1999,  respectively.  The use of  ClickMiles in lieu of cash to pay for
certain expenses  resulted in the deferral of cash payments of $430,000 and $1.0
million during the years ended December 31, 2000 and 1999, respectively.

Investments in property and equipment were $25.5 million and $9.7 million in the
years ended December 31, 2000 and 1999,  respectively.  This increase was due to
additional  capital  expenditures  incurred  as a result  of the  build-out  and
furnishing of the  Company's  headquarters  and due to the Company's  purchasing
more  equipment as a result of headcount  increases.  Cash provided by financing
activities  was $4.3 million and $104.3  million in the years ended December 31,
2000 and 1999,  respectively.  Cash was provided by sales of preferred  stock of
$35.1  million in the year ended  December  31, 1999 and  through the  Company's
initial  public  offering  in October  and  November  1999.  Total net  proceeds
received from the sales of stock in connection  with the initial public offering
were approximately $68.8 million.

At December 31, 2000, we had 1.8 billion currency points outstanding,  including
ClickMiles  (that  are  issued  in the  ClickRewards  and  Enterprise  Incentive
programs),  Custom Loyalty  program points and Registered  Card program  points,
which had been sold to  merchants  and  clients  (of which 1.6  billion had been
awarded to members and are in circulation).  The December 31, 2000 balance sheet
includes $17.7 million of deferred revenues relating to the product component of
this  currency,  which will be recognized as revenue at the time of  redemption.
Other than barter exchanges,  we have already  generally  received cash from our
merchants and clients relating to these points,  which is unrestricted and which
we can use for any corporate purpose.  In addition,  an additional 104.4 million
currency  points that had been issued by us to pay for  expenses in lieu of cash
were  outstanding.  As of December  31,  2000,  we had an accrued  liability  of
approximately $1.9 million for the estimated cost of redemption of these points.
These points expire if not redeemed by December 31 in the second year  following
the award. Although we have purchased some frequent flyer miles in advance, most
of the funding to pay for the costs  associated  with these  product  redemption
liabilities  must come from  available cash resources at the time of redemption.
Although these  liabilities are reflected as current  liabilities in our balance
sheet,  the  timing  of the  related  liability  is  controlled  by  the  actual
redemptions,  which could occur in irregular patterns until expiration.  Because
we cannot control the timing of our members'  decision to redeem points,  should
the rate of redemption of points exceed our estimates, it could be necessary for
us to obtain  additional  working capital and our results of operations could be
materially and adversely affected.

At December  31,  2000,  we had cash and  equivalents  totaling  $31.7  million,
short-term   investments  totaling  $11.6  million  and  restricted   marketable
securities  totaling  $2.4  million.  We  anticipate  that  our  available  cash
resources will be sufficient to meet our presently  anticipated  working capital
and capital expenditure needs for at least the next twelve months.

Our future liquidity and capital  requirements  will depend on numerous factors.
For example, our pace of expansion will affect our future capital  requirements,
as may our  decision  to  acquire  or invest  in  complementary  businesses  and
technologies.  Therefore,  we may be required to raise  additional  funds in the
future through the issuance of debt or equity  securities.  If additional  funds
are raised through the issuance of equity securities,  our existing stockholders
may experience significant dilution.  Furthermore,  additional financing may not
be available  when needed or, if available,  such  financing may not be on terms
favorable to us or our stockholders. If financing is not available when required
or is not available on acceptable  terms, we may be unable to develop or enhance
our programs or other services.  In addition, we may be unable to take advantage
of business opportunities or to respond to competitive  pressures.  Any of these
events could harm our business and financial condition.

Recent Accounting Pronouncements

Statement of  Financial  Accounting  Standards  (SFAS) No. 133,  Accounting  for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended,  establishes accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments  embedded in other contracts and for hedging activities.  Under SFAS
133,  certain  contracts that were not formerly  considered  derivatives may now
meet the  definition of a derivative.  The Company will adopt SFAS 133 effective
January 1, 2001.  Management  does not expect the adoption of SFAS 133 to have a
significant  impact on the financial  position,  results of operations,  or cash
flows of the Company.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue  Recognition," which provides guidance on
the recognition,  presentation and disclosure of revenue in financial statements
filed with the  Securities and Exchange  Commission.  SAB 101 outlines the basic
criteria  that  must be met to  recognize  revenue  and  provides  guidance  for
disclosures  related to revenue recognition  policies.  SAB 101 is effective for
the fiscal  quarter  beginning  October 1, 2000,  although  earlier  adoption is
permitted.  The Company  has  determined  the impact of adopting  SAB 101 is not
material.

The Emerging Issues Task Force ("EITF") is reviewing an issue,  Issue No. 00-22,
"Accounting for 'Point' and Other Loyalty  Programs," that is closely related to
our currency  related programs and the way revenue is recognized for these types
of programs.  We  understand  that the EITF will provide  guidance on this issue
sometime  in 2001,  but a specific  date has not been set.  When Issue  00-22 is
issued, if it requires  modification of our present revenue  recognition policy,
we will adhere to the guidance provided.  Without knowing how the EITF will rule
on this issue, we are unable to assess the impact of Issue 00-22 at this time.


                                    Page 17
<PAGE>


Subsequent Events

In January  2001,  the Company  entered into a partnership  with seven  Japanese
companies including Itochu  Corporation,  Dentsu.com Inc., JCB Co., Ltd., Itochu
Techno-Science Corporation,  Itochu IT Capital, Inc., cyber communications inc.,
and EC-One,  Inc. to form a joint  venture,  Customer  Loyalty  Network K.K. The
joint  venture  will  exclusively  license from  Netcentives  certain use of its
technology  infrastructure and trademarks. In January 2001, the Company invested
$431,000 in Customer Loyalty Network KK.

The Company's President, Eric Larsen assumed the role of Chief Executive Officer
on March 30, 2001. West Shell III will remain as Chairman of the Board.

On April 2, 2001, the Company announced a cost reduction plan. The plan includes
a  decline  in  contract  labor,  cuts in  administrative,  travel  and  capital
expenditures,  and a reduction in work force of approximately  120 people.  As a
result of the  reduction  in force,  the Company  will be  recognizing  costs of
approximately $700,000 in its second quarter 2001 financial statements.

In  addition,  due to economic  conditions,  the Company has seen changes in its
relationship with Nortel, which launched their  employee-based  incentive system
powered  by the  Company  in June  2000.  While the  Company  expects  Nortel to
significantly decrease program volume levels for at least the second quarter, on
a longer term basis Nortel has indicated  that the program is an important  tool
for its employee  retention  and  productivity.  A copy of the  Company's  press
release is attached as Exhibit 99.1 hereto and incorporated by reference herein.













                                    Page 18
<PAGE>



RISK FACTORS

Business and Financial Risks

If the market for loyalty  programs  fails to grow or the economy  continues  to
experience a general slowdown, our revenues will not grow at the same rate.

Our  success  will  depend in large  part on the  continued  growth  in  loyalty
programs  and email  marketing  services  and,  in  general,  the  growth of the
economy.  We do not have direct  control over the adoption and growth of loyalty
programs or the growth of the economy. To the extent that the market for loyalty
programs  and  email  marketing  services  does not  increase  and the  economic
slowdown continues,  our customer base and revenues may not grow.  Additionally,
any of our customers that are  experiencing  financial  problems may decide that
our loyalty  solutions  and  services are  discretionary.  They may elect to not
renew,  reduce  or halt  their  relationship  with us.  This  could  damage  our
business.

If the market  for  loyalty  solutions  does not  evolve as we  anticipate,  our
business will be harmed.

The market for loyalty  solutions  has only  recently  developed  and is rapidly
changing.  As is typical for a new and  rapidly  evolving  industry,  demand and
market acceptance is uncertain,  and few proven offerings exist. Moreover, since
the market for our loyalty  solutions  is new and  evolving,  it is difficult to
predict the size of this  market or its future  growth  rate,  if any. We cannot
assure you that a sufficient  volume of  merchants  will accept  online  loyalty
solutions as an attraction and retention  device for consumers or our customer's
employees and channels.  If the market for loyalty  solutions  fails to develop,
develops more slowly than expected, or becomes saturated with competitors, or if
our solutions fail to achieve market acceptance, our business would be harmed.

Loss of our customers may harm our financial results.

In fiscal year 2000, one customer  accounted for  approximately 25% of our total
revenues.  The loss of, or  significant  reduction in sales from, any one of our
major customers could have a material adverse effect on our business and results
of operations.  Also, many businesses have recently been experiencing  financial
problems.  Many  Internet-based  businesses  have closed their doors in the last
twelve   months.   While  the  majority  of  our  revenue  does  not  come  from
Internet-based  business,  the loss of a number of these  customers could have a
material adverse effect on our business and results of our operations.  See Item
7, Subsequent Events and Note 17 to the Consolidated Financial Statements.

We have a history of losses and expect increasing future losses.

We incurred losses of $4.2 million in 1997, $14.1 million in 1998, $46.8 million
in 1999 and $184.2 million in 2000. Our net loss was 46,444%,  2,181%,  597% and
430% of our revenues for the years ended December 31, 1997, 1998, 1999 and 2000,
respectively.  As of December 31, 2000 we had an  accumulated  deficit of $249.6
million.  We  currently  expect that we will  continue  to incur  losses for the
foreseeable  future and that the  magnitude  of these  losses  will  continue to
increase.  We cannot be sure when or if we will  become  profitable.  We believe
that our  ability  to become  profitable  will be based on a number of  factors,
including the other risk factors listed in this section.

Because we have a limited  operating  history,  it is  difficult to evaluate our
business and prospects.

We have a limited operating history and the loyalty solution industry is new and
evolving.  As such,  our business is subject to certain  challenges  that a more
mature  company or a company  operating in a more mature  industry may not face,
such as:

o    we have an unproven business model;
o    members may not redeem loyalty currencies in regular patterns;
o    redemptions may exceed our available cash resources and cause  fluctuations
     in our operating results;
o    we have some  dependence on the expansion of the Internet and the growth of
     e-commerce; and,
o    we expect  competition to intensify as new competitors  emerge and existing
     competitors offer new products and services.

Because our business  model is unproven,  we cannot  assure you that our revenue
will grow or that we will become profitable.

Our business model depends upon our continuing ability to leverage and to expand
multiple revenue streams.  The potential  profitability of our business model is
unproven,  and to be successful we must, among other things,  develop and market
additional products and services to existing customers effectively.  Finally, we
may be forced by competitive pressures,  industry consolidation or otherwise, to
change our business model for certain or all of our customers, in which case our
financial results could be harmed.

Consumers may not redeem loyalty currencies in regular patterns.  If redemptions
are higher than we anticipate,  our available  cash resources  could be depleted
and our operating results could fluctuate.


                                    Page 19
<PAGE>


We may  receive  cash  from a  customer  using a custom  loyalty  solution  or a
merchant  for  loyalty   currencies   months  before  the  consumer   earns  and
subsequently  redeems the currency point.  However,  we typically do not pay for
the redemption reward until the consumer redeems the currency point.  Therefore,
we do not control when we will incur this cash  expenditure.  As a result,  over
time, as the number of currency  points in circulation  increases,  we will have
increasing  liabilities for the potential  eventual  redemption of these points,
and  consequently  we will need to maintain  adequate cash balances for any such
future redemptions. Because we have very limited historical data with respect to
redemption  behavior,  we cannot be sure  consumers  will redeem their points in
predictable   patterns.   If  redemption  requests  are  inconsistent  with  our
expectations  or exceed our available cash  resources,  our financial  condition
could be harmed. We do not currently have unused and available credit facilities
or similar  sources of  external  financing.  Therefore,  if we do not  maintain
adequate  cash  reserves we will be  obligated  to raise  additional  funds.  In
addition,  because we recognize a portion of our revenues upon redemption by the
consumer,  unexpected  redemptions  could cause  fluctuations  in our  operating
results and cause our stock price to fluctuate.

Our quarterly  operating  results are volatile and  difficult to predict.  If we
fail to meet the expectations of public market analysts or investors, the market
price of our common stock may decrease significantly.

Our operating results are likely to vary significantly from period to period. As
a result,  our  operating  results are difficult to predict and may not meet the
expectations of securities  analysts or investors.  If this occurs, the price of
our common stock would likely decline.

We operate  in a new,  highly  competitive  market,  and our  ability to compete
successfully  against new entrants and  established  companies  could affect our
ability to increase our market share and could harm our financial results.

As a provider  of  loyalty  and email  marketing  solutions,  we compete  with a
variety of business providing  acquisition and loyalty programs and direct email
marketing.   In  addition,  we  generally  compete  with  merchants,   financial
institutions  and card issuers  running  their own  in-house  programs and other
advertising  and  promotional  programs  for a  portion  of a  customer's  total
marketing  budget.  Our  primary  current  and  prospective  competition  can be
categorized as follows:

o    Points-based loyalty program providers;
o    Enterprise/Corporate Incentive solutions providers;
o    Email marketing services providers;
o    In-house stand-alone solutions addressing the categories listed above.

Many of our competitors have longer operating histories,  significantly  greater
financial,  technical and other  resources,  or greater name recognition than we
do. Our  competitors  may be able to  respond  more  quickly to new or  emerging
technologies and changes in customer  requirements.  Competition could seriously
harm  our  ability  to sell  additional  solutions  on  terms  favorable  to us.
Competitive pressures could cause us to lose market share or to reduce the price
of our solutions,  either of which could harm our business,  financial condition
and operating results.

We believe that the principal competitive factors in our market include:

o    Quality and reliability of services and solutions offered;
o    Scope of supported applications and technology platforms;
o    Scalability of the operational environment supported;
o    Extent  to which the  solutions  or  services  offered  provide a  complete
     solution to a potential customer's operations requirements;
o    Engineering and technical expertise and development of automation software;
o    Security and privacy features in delivered solutions;
o    Rapid deployment of solutions or services including ease of installation;
o    Quality  of  customer  service  and  support  including  ability to support
     implementation; and,
o    Price.

Although we believe our  solutions  compete  favorably  with  respect to each of
these factors, the market for our solutions is new and rapidly evolving.  We may
not be able to maintain our competitive  position  against current and potential
competitors, especially those with greater resources.

If we fail to develop our  solutions or services in a timely and cost  effective
manner,  or if our solutions or services do not achieve market  acceptance,  our
business would be seriously harmed.


                                    Page 20
<PAGE>


We may fail to introduce or deliver new releases or new  potential  solutions or
services on a timely and cost-effective basis or at all,  particularly given the
expansion  of our  offerings  as a result of our recent  acquisitions.  The life
cycles of our solutions or services are difficult to predict  because the market
for them is new and emerging and is characterized by rapid technological change,
changing  customer needs and evolving  industry  standards.  The introduction of
solutions  and  services   employing  new  technologies  and  emerging  industry
standards  could  render  our  existing  solutions  and  services  obsolete  and
unmarketable.  In addition,  we have  experienced  delays in the commencement of
commercial  shipments  of our new  releases  in the  past.  If new  releases  or
potential  new  solutions  or  services  are  delayed or do not  achieve  market
acceptance,  we  could  experience  a  delay  or loss of  revenue  and  customer
dissatisfaction.

To be successful,  our solutions and services must keep pace with  technological
developments  and emerging  industry  standards,  address the ever  changing and
increasingly sophisticated needs of our customers and achieve market acceptance.
In developing new products and services, we may:

o    Fail  to  develop  and  market   solutions  or  services  that  respond  to
     technological  changes  or  evolving  industry  standards  in a  timely  or
     cost-effective manner;
o    Encounter products,  capabilities or technologies  developed by others that
     render our  solutions  and  services  obsolete or  non-competitive  or that
     shorten the life cycles of our existing solutions and services;
o    Experience   difficulties  that  could  delay  or  prevent  the  successful
     development,   introduction  and  marketing  of  these  new  solutions  and
     services; or,
o    Fail to  develop  new  solutions  and  services  that  adequately  meet the
     requirements of the marketplace or achieve market acceptance.

As a result of the  foregoing  factors,  we could  experience a delay or loss of
revenues  and  customer   dissatisfaction  when  introducing  new  and  enhanced
solutions and services.

Implementation  of our loyalty  solutions by large  customers  is complex,  time
consuming and expensive.  We frequently experience long sales and implementation
cycles.

The  implementation  of our loyalty  solutions is complex,  time  consuming  and
expensive.  Our  customers  must  consider a wide range of other  issues  before
committing to acquire our solutions,  including benefits,  ease of installation,
ability to work with existing systems and ability to support implementation.  We
believe  the  purchase  of our  solution is often  discretionary  and  generally
involves a significant  commitment of capital and other resources by a customer.
It frequently takes several months to finalize a sale and requires approval at a
number of management levels within the customer organization. The implementation
and deployment of our solutions require a significant commitment of resources by
our customers.

If our supplier  relationships are terminated,  our competitive position will be
harmed.

We believe that our  relationships  with major  airlines,  their  frequent flyer
programs an our merchants are a source of competitive  advantage.  To the extent
we can no longer  offer  frequent  flyer  miles from one or more of our  current
rewards suppliers or products or services from our other suppliers, our business
would be harmed.

If the  customers  of our  loyalty  solution  fail  to  promote  their  programs
effectively, our revenues could suffer.

Our  business  model  is  substantially  dependent  upon  our  loyalty  solution
customers'  success in using our loyalty  solutions  including email services to
their  consumers,  employees or channels.  For example,  if our merchants do not
prominently  display  ClickRewards  offers  or do not  work  with  us to  create
promotional  offers that are attractive and  understandable  to their consumers,
their ClickRewards promotions may not be successful, and as a result, we may not
be successful.  If our customers do not successfully  promote their  promotional
programs, our revenues could suffer.

We do  not  currently  have  any  unused  credit  or  other  external  financing
facilities.  If we are unable to raise  additional  capital,  our  business  and
financial condition may suffer.

Since our inception, we have experienced negative cash flow from operations. We
are planning to reach cash flow break even by fourth quarter 2001. We believe
that our current capital resources will be sufficient to meet our anticipated
cash requirements for at least the next twelve months. However, we may be
required to raise additional capital, and there can be no assurance that we will
be able to raise these funds on reasonable terms, or at all. If we are unable to
raise additional capital on reasonable terms, our current stockholders could
suffer substantial dilution. In addition, we may be unable to pursue our current
strategy, respond to competitive pressures or otherwise conduct our business in
the manner in which we have planned. Any of these events would harm our business
and financial condition. In addition, Vital Processing Services, LLC has the
right to require that we purchase all of their 51% equity interest in Golden
Retriever Systems, LLC for $10.0 million. In the event we do not have adequate
capitalization to pay for the shares, Vital Processing Services, LLC can require
us to sell them our shares of GRS for $7.5 million (subject to adjustments).



                                    Page 21
<PAGE>



Technical Risks

If  our  systems  do not  prevent  fraudulent  transactions,  our  business  and
financial condition could suffer.

Even  though we have  implemented  network  security  measures,  our servers are
vulnerable  to  computer  viruses,   break-ins  and  similar   disruptions  from
unauthorized  tampering.  If  a  third  party  is  able  to  conduct  fraudulent
transactions on our servers or tamper with  transactions  that occur between our
servers and our suppliers,  members or merchants, we could be financially liable
for such transactions. In addition, our reputation and business could suffer.

Our network  infrastructure may be compromised or damaged,  which could harm our
business and financial condition.

We utilize the services of Exodus  Communications to host our production servers
and provide us with  telecommunications  links.  The successful  delivery of our
services is substantially  dependent on our ability and the ability of Exodus to
protect our server and network infrastructure against damage from:

o    human error;
o    fire;
o    flood;
o    power loss or unavailability;
o    telecommunications failure;
o    on-line or physical sabotage; and
o    intentional acts of vandalism.

In  addition,  our  primary  server and network  infrastructure  is located in a
single  location in Northern  California,  an area  susceptible to  earthquakes,
which could cause system  outages or failures if one should  occur.  Although we
have redundant systems for our server and network  infrastructure,  they are all
located  at a single  site.  Despite  precautions  taken by Exodus  and us,  the
occurrence of other  natural  disasters or other  unanticipated  problems at our
respective facilities,  such as the power problems ongoing in California,  could
result in interruption  in the services we provide or significant  damage to our
server and network infrastructure.  If any of these events occur, interruptions,
delays,  or the loss or corruption of critical data or cessations in service may
result, which could harm our business and financial condition.

System capacity constraints may result in a loss of revenues.

An increase in the use of our products could strain the capacity of our systems,
which could lead to slower response time or system failures.  System failures or
slowdowns   adversely  affect  the  speed  and  responsiveness  of  our  rewards
transaction processing.  These would diminish the experience for our members and
our customer's employees and channels. As a result, we face risks related to our
ability  to  scale  up to our  expected  transaction  levels  while  maintaining
satisfactory   performance.   If  our  usage  of  telecommunications   bandwidth
increases,  we will need to purchase additional servers and networking equipment
and rely more  heavily on Exodus and its  services  to  maintain  adequate  data
transmission  speeds.  The  availability  of these  products or services  may be
limited or their cost may be significant.

Software  defects or errors could damage our  reputation  or result in a loss of
revenues.

The software that we have developed is complex and may contain undetected errors
or defects,  especially when newer versions are released.  Any errors or defects
that are discovered after commercial  release or that delay a commercial release
could result in lost revenues,  errors in member account information,  delays in
the   introduction   of  new   solutions,   programs  or  services,   delays  in
implementation of promotions,  customer or member  dissatisfaction and damage to
our reputation.

Legal Risks

Any  disputes  regarding  the  validity of our patents may result in  unexpected
expenses and management distraction.

The Internet, and specifically the market for e-commerce,  loyalty solutions and
online  advertising,  direct  marketing and promotions,  is  characterized  by a
rapidly evolving legal  landscape.  A variety of patents relating to this market
have been issued in the recent  past,  including  our own patents  which  relate
generally  to online  incentive  award  programs.  One aspect of our  patents is
directed to a computer system for implementing an incentive award program,  with
the  computer  system  including an online  product  catalog,  an online  awards
catalog and a database  for  storing  account  information  for each user of the
incentive award program.  Our patents  protect the  architecture on which all of
our online  loyalty  products and services are based.  We also believe that many
current and potential  competitive  products may use the architecture covered by
our patents.  Therefore, we believe these patents are important to our business.
We believe that several  additional,  related patents are currently pending.  We
believe  that there will  continue to be  substantial  activity in this area and
that  litigation  may arise due to our  attempts or a third  party's  efforts to
enforce their respective patent rights.  Indeed,  the Company initiated a formal
patent  licensing  program during the year 2000,  and we are currently  party to
litigation as a result of the active enforcement of our patent rights. See, Item
3 entitled "Legal Proceedings" for a description of this litigation.


                                    Page 22
<PAGE>


Also,  we may incur  further  expenses and  management  attention may be further
diverted if additional litigation occurs. In addition, whether or not any claims
against us are meritorious,  we may be required to enter into license agreements
or be subject to injunctive or other equitable relief, any of which would result
in unexpected expenses and management distraction.

If we are unable to safeguard the confidential information of our customers, our
reputation may be harmed and we may be exposed to liability.

We currently retain highly  confidential  customer  information in a secure data
warehouse.  We  cannot  be  sure,  however,  that we  will  be  able to  prevent
unauthorized  individuals  from gaining  access to this data  warehouse.  If any
compromise or breach of security were to occur, it could harm our reputation and
expose us to possible  liability.  Any unauthorized  access to our servers could
result in the  misappropriation  of confidential  customer  information or cause
interruptions  in our  services.  It is also  possible that one of our employees
could  attempt  to misuse  confidential  customer  information,  exposing  us to
liability.  In  addition,  our  reputation  may be  harmed  if we lose  customer
information  maintained in our data  warehouse due to systems  interruptions  or
other reasons.

If the  delivery  of our emails is  limited or  blocked,  then our  clients  may
discontinue their use of our services.

One aspect of our loyalty  solution relies on our ability to deliver emails over
the Internet  through  Internet  service  providers to our  customers  and their
employees and customers.  Internet service  providers are able to block unwanted
messages to their users. In addition, legislative or regulatory action may limit
or block our ability to engage in the direct email marketing activities. If such
actions were enacted or adopted or blocking  activities  undertaken  by Internet
service providers, our clients may discontinue use of our services.

We may be subject to claims as a result of our database  marketing efforts which
could result in a loss of members and revenues.

A component of our strategy is leveraging our database  marketing  technologies.
We have  designed  our  technology  infrastructure  and  services to allow us to
aggregate data regarding  specific  member behavior  throughout the network.  We
have a strict  privacy  policy  that  governs how we use  information  about our
members.  We currently do not sell this information to third parties and have no
plans to do so in the future.  Furthermore,  our  communications are not sent to
members who have  declined to be contacted.  However,  we cannot assure you that
certain  persons  who  receive  promotional   materials  from  us  will  not  be
dissatisfied  with being contacted.  In addition,  while we strictly protect the
identity of  individual  members on our  networks,  we do provide  merchants and
rewards suppliers with aggregate  information  regarding network  participation,
and we cannot ensure that such aggregated  information  will not be the cause of
dissatisfaction  among  our  members.   There  has  been  substantial  publicity
regarding  privacy issues  surrounding the Internet,  and to the extent that our
database marketing efforts conflict with any privacy protection initiatives,  or
if any private  information is inadvertently  made public,  we may be subject to
legal claims. If members of our networks become  dissatisfied as a result of our
database marketing efforts,  or if we become the subject of legal proceedings in
this regard, our business and results of operations would suffer.

Federal,  state and local governments may further regulate e-commerce and travel
awards which could reduce our ability to become profitable.

The frequent flyer miles and other travel awards that we currently award are the
subject  of  substantial  government  regulation,  including  excise  taxes.  In
addition,  our rewards are frequently used as prizes in sweepstakes  operated by
our customers, which are subject to substantial regulation. Finally, as a result
of the  increasing  popularity  of the  Internet  and  e-commerce,  a number  of
legislative   and  regulatory   proposals  that  affect   e-commerce  are  under
consideration by federal,  state, local and foreign governmental  organizations.
Thus it is possible  that a number of laws or  regulations  may be adopted  with
respect to the Internet,  e-commerce and online database marketing, direct email
marketing.  This may result in our  customers  discontinuing  using our services
which may impact our profitability.

In the event that our  rewards,  the  promotions  operated by our  merchants  or
e-commerce  generally  becomes the subject of further  regulation  or  taxation,
including  the  taxation of frequent  flyer miles  received by  consumers,  this
regulation or taxation could have a negative effect on our financial  results or
our ability to sell our products.

Legislation has recently been enacted in several states  restricting the sending
of unsolicited  commercial  email.  We cannot assure you that existing or future
legislation  regarding commercial email will not harm our business.  The federal
government,  several U.S. states,  and foreign  governments are considering,  or
have  considered,  similar  legislation.  These  provisions  generally  limit or
prohibit both the transmission of unsolicited  commercial  emails and the use of
forged or  fraudulent  routing and header  information.  Some states,  including
California,   require  that  unsolicited   commercial   emails  include  opt-out
instructions and that senders of these emails honor any opt-out requests.


                                    Page 23
<PAGE>


Our business could be negatively impacted by new laws or regulations  applicable
to emarketing or the Internet,  the application of existing laws and regulations
to emarketing or the Internet or the  application of new laws and regulations to
our  business as we expand into new  jurisdictions.  There is a growing  body of
laws and  regulations  applicable  to access  to or  commerce  on the  Internet.
Moreover,  the  applicability  to the Internet of existing laws is uncertain and
may take  years to  resolve.  Due to the  increasing  popularity  and use of the
Internet,  it is likely that  additional  laws and  regulations  will be adopted
covering issues such as privacy,  pricing,  content,  copyrights,  distribution,
taxation,  antitrust,  characteristics  and  quality of  services  and  consumer
protection.  The adoption of any additional  laws or regulations  may impair the
growth of the Internet or emarketing,  which could, in turn, decrease the demand
for our services and prohibit, limit or increase our cost of doing business.

If we are unable to protect our proprietary rights  adequately,  our competitive
position would suffer.

We currently rely on a mixture of patents, copyrights, trademarks, trade secrets
and  agreements  with third  parties and  employees  to protect our  proprietary
rights.  We have  patents  which  relate  generally  to online  incentive  award
programs.  One  aspect of our  patents  is  directed  to a  computer  system for
implementing an incentive award program,  with the computer system  including an
online  product  catalog,  an online  awards  catalog and a database for storing
account information for each user of the incentive award program.  Trademarks of
Netcentives include the following: Netcentives, ClickRewards, ClickMiles, Custom
Loyalty Programs,  Enterprise  Incentive  Programs,  RewardBroker,  SecureReward
Architecture,  the Netcentives logo and the ClickRewards  logo. We copyright our
Web site content, our software and our sales and promotional literature. Despite
our  efforts to protect our  proprietary  rights,  unauthorized  parties may use
aspects of our business  model and products  and obtain and use  information  we
regard as  proprietary.  In addition,  other parties may breach  confidentiality
agreements  or other  protective  contracts  with us,  and we may not be able to
enforce our rights in the event of such breaches.  We believe that each of these
proprietary  rights is  important  to our  business  in our  effort  to  prevent
unauthorized  use of our  technology and processes and protect our investment in
establishing  and  maintaining  our brand.  Our  competitors  may  independently
develop  technologies  or business models that are  substantially  equivalent or
superior to ours. We have licensed our patents to  MyPoints.com,  The Sperry and
Hutchinson Company,  Enhanced Services Corporation and FreeRide.com LLC, who use
these licenses to operate programs which may compete with programs we develop or
manage. We may decide to license our patents to other competitors.  Furthermore,
we may expand  internationally,  and many countries do not protect  intellectual
property  rights to the same  extent as the laws of the  United  States.  In the
event  that we are unable to  protect  our  proprietary  rights,  our  business,
financial  condition  and results of operations  could be  materially  adversely
affected.


Our Certificate of Incorporation and Bylaws and Delaware law contain  provisions
that could discourage a takeover.

Certain  provisions of our Certificate of Incorporation  and Bylaws and Delaware
law may delay,  deter or prevent a merger or acquisition  that a stockholder may
consider favorable. These provisions include:

o    authorizing the board to issue additional preferred stock;
o    prohibiting cumulative voting in the election of directors;
o    limiting the persons who may call special meetings of stockholders;
o    establishing  a staggered  board of directors;
o    prohibiting stockholder action by written consent; and
o    establishing  advance notice  requirements  for nominations for election of
     the board of  directors  or for  proposing  matters that can be acted on by
     stockholders at stockholder meetings.

Management Risks

In order to  manage  our  growth  and  expansion,  we will need to  improve  and
implement new systems, procedures and controls.

Our ability to successfully  offer loyalty and direct marketing  solutions,  and
consulting  services  and  implement  our  business  plan  requires an effective
planning  and  management  process.  Since  we  began  our  operations,  we have
significantly increased the size of our operations.  This growth has placed, and
we expect  that any  future  growth we  experience  will  continue  to place,  a
significant  strain  on  our  management,   systems  and  resources.  To  manage
anticipated  growth of our operations,  we will be required to improve  existing
and implement new operational,  financial and management  information  controls,
reporting systems and procedures.

Recently instituted employee changes could have a material adverse effect.

While we have grown considerably since inception,  and plan to continue to do so
on an  absolute  basis,  we are  reducing  our work force by  approximately  120
employees,  as part of a cost cutting measure  announced on April 2, 2001. These
actions have created  uncertainty for our remaining work force and may result in
the loss of some key  personnel.  In  addition,  we do not  know  howcurrent  or
prospective customers, many of which are large institutions,  will react to this
reduction,  if at all. Also, while instituting processes to ensure efficiency as
we have grown has historically  been a risk, at least for the short-term,  there
is a risk that the reduction  will not be instituted in an efficient  manner and
could result in a negative impact on our operations and revenues.


                                    Page 24
<PAGE>


Our  success  depends on  retaining  our current key  personnel  and  attracting
additional key personnel.

Our  future  performance   depends  on  the  continued  service  of  our  senior
management,  product development and sales personnel, many of whom are not bound
by an employment  agreement.  The loss of the services of one or more of our key
personnel could  seriously harm our business.  Our future success depends on our
continuing  ability to attract,  hire, train and retain a substantial  number of
highly skilled managerial, technical, sales and marketing personnel.

Expanding internationally will create management and financial difficulties.

We intend to enter new  international  markets,  including  further expansion in
Asia and Europe.  This expansion will require significant  management  attention
and financial  resources.  International  operations  are subject to a number of
risks and uncertainties, including:

o    the  difficulties   and  costs  of  staffing  and  managing   international
     operations;
o    the need to establish  relationships  with distributors and the performance
     of these distributors;
o    the  difficulties  and  costs of  localizing  solutions  and  services  for
     international markets;
o    unexpected changes in regulatory requirements;
o    legal uncertainties  regarding liability,  Internet commerce  restrictions,
     tariffs, the offering of purchase incentives and trade barriers;
o    inadequate protection of intellectual property in some countries;
o    increased difficulty in collecting delinquent or unpaid accounts;
o    fluctuations in the value of the U.S. dollar relative to other currencies;
o    potentially adverse tax consequences; and
o    political and economic instability.

Any of these  factors  could  impair our  ability to expand  into  international
markets.  Similarly,  we  cannot  accurately  predict  the  impact  that  future
fluctuations  in currency  exchange  rates may have on our  business,  operating
results or financial condition.

We may not be successful in integrating  any businesses or  technologies we have
acquired and may acquire in the future,  which could harm our financial position
or result in management distraction.

We  have  acquired  and  may  continue  to  acquire  or  make   investments   in
complementary businesses,  products,  services or technologies.  For example, in
January  2000,  we  acquired  MaxMiles,  Inc.;  in March 2000,  we acquired  UVN
Holdings,  Inc., and in April 2000, we acquired Post  Communications,  Inc. From
time to time we have had  discussions  with  companies  regarding  acquiring  or
investing in their businesses,  products, services or technologies. We cannot be
certain  that we will be able to identify  suitable  acquisition  or  investment
candidates.  Even if we do identify  suitable  candidates,  we cannot be certain
that  we  will be able to  make  acquisitions  or  investments  on  commercially
acceptable terms. We may have difficulty  assimilating the solutions,  products,
services or  technologies  of companies we have acquired or may acquire into our
operations.  These difficulties could disrupt our ongoing business, distract our
management  and  employees,  increase  our  expenses  and  harm our  results  of
operations due to accounting  requirements such as goodwill.  For example, under
the terms of the UVN acquisition,  Vital Processing Services,  LLC has the right
to require that we purchase all of their 51% equity interest in Golden Retriever
Systems, LLC for $10.0 million.  Furthermore,  we may incur debt or issue equity
securities to pay for any future acquisitions. The issuance of equity securities
could be dilutive to our existing stockholders.



                                    Page 25
<PAGE>



Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We had no holdings of derivative financial or commodity  instruments at December
31, 2000;  however,  we are exposed to financial  market risks  associated  with
fluctuations in interest rates. Because all of the amounts in our portfolio have
expected  maturities  of three months or less, we believe that the fair value of
our investment  portfolio or related income would not be significantly  impacted
by increases or decreases in interest rates due mainly to the short-term  nature
of our investment portfolio.  If market rates were to increase immediately by 10
percent  from levels on December  31,  2000,  the fair value of this  investment
portfolio  would  decline by an immaterial  amount.  A sharp decline in interest
rates could reduce future  interest  earnings of our  investment  portfolio.  If
market rates were to decrease  immediately by 10 percent from levels on December
31,  2000,  the  resultant  decrease  in  interest  earnings  of our  investment
portfolio would not have a material impact on our earnings as a whole.

The table below presents  principal  amounts (in thousands) and related weighted
average fixed interest rates for our investment portfolio.

                                                               Estimated Fair
                                              Expected            Value at
                                            Maturity 2001    December 31, 2000
                                            -------------    -----------------

Federal instruments                            $ 10,588           $ 10,588
Weighted average fixed interest rate              6.19%
Commercial paper & short-term obligations      $ 21,082           $ 21,082
Weighted average fixed interest rate              6.62%
Total portfolio                                $ 31,670           $ 31,670

As of December 31, 2000, we had $31.7 million of cash and cash equivalents
earning a weighted average variable interest rate of 6.47%.



                                    Page 26
<PAGE>



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Netcentives Inc.:

We have audited the accompanying consolidated balance sheets of Netcentives Inc.
and its  subsidiaries  (the "Company") as of December 31, 2000 and 1999, and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the three years in the period ended  December  31,  2000.  Our
audits also included the  consolidated  financial  statement  schedule listed in
Item 14 (b). These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial  statements and the financial  statement  schedule
based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit 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  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material   respects,   the  financial  position  of  Netcentives  Inc.  and  its
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 of America.  Also, in our opinion,  such  financial  statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

/s/ DELOITTE & TOUCHE LLP

San Jose, California
February 2, 2001
(April 2, 2001 as to the last two paragraphs of Note 17)


                                    Page 27
<PAGE>


                                NETCENTIVES INC.
                           CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and par value amounts)


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

ASSETS
Current assets:
   Cash and equivalents                               $  31,670      $  75,290
   Short-term investments                                11,604         10,812
   Accounts receivable (net of allowance for
     for doubtful accounts of $547 and $50)               7,228          2,169
   Prepaid incentive awards                                 910          1,534
   Prepaid expenses and other current assets              1,707          1,169
                                                     -----------    -----------
        Total current assets                             53,119         90,974
   Property and equipment - net                          40,671          8,963
   Intangible assets - net                              269,724          1,724
   Marketable securities                                  2,403              -
   Other assets                                          10,295          3,040
                                                     -----------    -----------
        Total assets                                  $ 376,212      $ 104,701
                                                     ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                   $   6,263      $   1,134
   Accrued compensation and benefits                      6,029          1,818
   Accrued redemption costs                               1,931          2,256
   Other accrued liabilities                              5,496          2,926
   Deferred revenue-product                              17,661          6,489
   Deferred revenue-services                             14,506          3,572
   Current portion of long-term obligations               3,870          1,008
                                                     -----------    -----------
        Total current liabilities                        55,756         19,203
Long-term obligations                                     4,255          1,234

Commitments and contingencies
            (Notes 3, 5, 6, 7, 12, 13 and 17)

Stockholders' Equity:
   Preferred stock, $.001 par value--shares
     authorized: 5,000,000; no shares outstanding;            -              -
   Common stock, $.001 par value--shares
     authorized: 100,000,000; shares outstanding;
     2000, 43,017,419; 1999, 32,355,099                      43             33
   Paid-in capital                                      631,158        165,731
   Deferred stock expenses                              (65,524)       (15,665)
   Unrealized gain on marketable securities                 147              -
   Receivables from sales of stock                          (41)          (450)
   Accumulated deficit                                 (249,582)       (65,385)
                                                     -----------    -----------
        Total stockholders' equity                      316,201         84,264
                                                     -----------    -----------
        Total liabilities and stockholders' equity    $ 376,212      $ 104,701
                                                     ===========    ===========


               See notes to consolidated financial statements.



                                    Page 28
<PAGE>


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


                                                          Years Ended
                                                           December 31,
                                                 -------------------------------
                                                     2000      1999      1998
                                                 ---------- --------- ---------
Revenues:
     Product                                      $ 10,459  $    859  $     64
     Program-related services                       13,495     1,548       583
     Direct marketing services                      11,353     1,115         -
     Technical and marketing consulting services     7,547     4,319         -
                                                 ---------- --------- ---------
         Total revenues                             42,854     7,841       647
                                                 ---------- --------- ---------

Costs and expenses:
     Cost of product revenues                        9,335       968        59
     Program-related services, marketing and
        support costs                               38,660    21,551     7,293
     Cost of direct marketing services               5,935       616         -
     Cost of technical and marketing consulting
        services revenues                            3,960     3,056         -
     Research and development                       12,280     5,083     3,383
     Selling, general and administrative            34,772    10,635     3,134
     Amortization of deferred stock compensation     2,212     4,105       296
     Amortization of supplier and other stock
        arrangements                                17,040     8,551       811
     Amortization of intangibles                    68,926     1,777        79
                                                 ---------- --------- ---------
         Total costs and expenses                  193,120    56,342    15,055
                                                 ---------- --------- ---------

     Loss from operations                         (150,266)  (48,501)  (14,408)
                                                 ---------- --------- ---------
     Interest income                                 4,085     1,978       441
     Income from equity investee                       454         -         -
     Realized loss on marketable securities        (37,570)        -         -
     Interest expense                                 (900)     (305)     (144)
                                                 ---------- --------- ---------
     Net loss                                    $(184,197) $(46,828) $(14,111)
                                                 ========== ========= =========

     Net loss per share- basic and diluted       $   (4.73) $  (4.99) $  (8.58)
                                                 ========== ========= =========

     Shares used in computing per share
        amounts-basic and diluted                   38,924     9,376     1,644
                                                 ========== ========= =========


               See notes to consolidated financial statements.



                                    Page 29
<PAGE>


<TABLE>
<CAPTION>
                                                     NETCENTIVES INC.
                                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                       Years ended December 31, 1998, 1999 and 2000
                                     (Amounts in thousands, except per share amounts)

                                                                   Preferred Stock          Common Stock
                                                                 --------------------   ---------------------
                                                                  Shares     Amount      Shares      Amount    Paid-In Capital
                                                                 ---------  ---------   ---------   ---------  ---------------
<S>                                                               <C>         <C>        <C>         <C>           <C>
BALANCES, December 31, 1997                                        9,693      $  10       3,736      $   4         $ 12,080
   Net loss

   Total comprehensive income

   Sale of Series D preferred stock at $3.15 per
     share, net of expenses of $18                                 5,476          5                                  17,226
   Sale of common stock to officer                                                          200                         630
   Common stock issued for patent                                                            35                          76
   Exercise of common stock options                                                         115                          19
   Stock warrants issued                                                                                                 31
   Increase in value of unvested warrants                                                                             1,038
   Deferred stock compensation related to
     option grants                                                                                                    7,071
   Shares issued in Panttaja acquisition                                                    808          1            2,547
   Vested options issued in Panttaja
     acquisition                                                                                                        936
   Amortization of deferred stock expenses
                                                                -------------------------------------------------------------
BALANCES, December 31, 1998                                       15,169         15       4,894          5           41,654
   Net loss

   Total comprehensive income

   Sale of Series E preferred stock at $6.82 per
     share, net of expenses of $1,049                              5,278          6                                  34,941
   Sale of common stock at $12.00 per
     share, net of expenses of $7,193                                                     6,336          6           68,833
   Exercise of Series B preferred stock warrants                     135                                                132
   Conversion of preferred stock to common
     stock effective on the initial public offering              (20,582)       (21)     20,582         21
   Common stock issued to employee                                                          100                       2,046
   Issuance of recievable related to previously issued
     common stock
   Exercise of common stock options                                                         443          1              239
   Stock warrants and options issued to non-employees                                                                 8,098
   Increase in value of unvested warrants                                                                             9,718
   Deferred stock compensation related to
     option grants                                                                                                       70
   Amortization of deferred stock expenses
                                                                -------------------------------------------------------------
BALANCES, December 31, 1999                                            -          -      32,355         33          165,731
   Net loss
   Unrealized gain on marketable securities

   Total comprehensive income

   Shares issued in acquisitions                                                          6,269          6          352,393
   Options issued in acquisitions                                                                                     2,491
   Shares issued as part of agreement with AOL                                            1,560          1           82,044
   Shares issued as part of agreement with CMGI                                           1,694          2           39,872
   Warrants issued to non-employee                                                                                      43
   Stock to be issued to non-employee                                                                                  148
   Sale of  common stock to employees                                                       345                       2,500
   Exercise of common stock options                                                         929          1            1,540
   Exercise of warrants                                                                      62                          15
   Repurchases of common stock                                                             (197)                        (75)
   Decrease in value of unvested warrants and
     options issued to non-employees                                                                               (15,544)
   Amortization of deferred stock expenses
   Repayment of receivables from sales of stock
                                                                -------------------------------------------------------------
BALANCES, December 31, 2000                                            -      $   -      43,017      $  43        $ 631,158
                                                                =============================================================
</TABLE>

                See notes to consolidated financial statements



                                    Page 30
<PAGE>


<TABLE>
<CAPTION>
                                                               NETCENTIVES INC.
                                                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                 Years ended December 31, 1998, 1999 and 2000
                                               (Amounts in thousands, except per share amounts)

                                                                                                                           Total
                                                           Deferred    Receivables    Gains/                           Comprehensive
                                                           Expenses     of Stock     (Losses)   Deficit      Total        Income
                                                         ------------  ------------ --------- -----------  ---------- -------------
<S>                                                         <C>           <C>         <C>     <C>          <C>          <C>
BALANCES, December 31, 1997                                 $ (300)       $ (220)     $   -   $  (4,446)   $   7,128
   Net loss                                                                                     (14,111)     (14,111)   $  (14,111)
                                                                                                                       ------------
   Total comprehensive income                                                                                           $  (14,111)
                                                                                                                       ============
   Sale of Series D preferred stock at $3.15 per
     share, net of expenses of $18                                                                            17,231
   Sale of common stock to officer                            (500)         (130)                                  -
   Common stock issued for patent                                                                                 76
   Exercise of common stock options                                                                               19
   Stock warrants issued                                       (31)                                                -
   Increase in value of unvested warrants                   (1,038)                                                -
   Deferred stock Compensation related to
     option grants                                          (7,071)                                                -
   Shares issued in Panttaja acquisition                      (630)                                            1,918
   Vested options issued in Panttaja
     acquisition                                                                                                 936
   Amortization of deferred stock expenses                   1,137                                             1,137
                                                         ------------------------------------------------------------
BALANCES, December 31, 1998                                 (8,433)         (350)         -     (18,557)      14,334
   Net loss                                                                                     (46,828)     (46,828)   $  (46,828)
                                                                                                                       ------------
   Total comprehensive income                                                                                           $  (46,828)
                                                                                                                       ============
   Sale of Series E preferred stock at $6.82 per
     share, net of expenses of $1,049                                                                         34,947
   Sale of common stock at $12.00 per
     share, net of expenses of $7,193                                                                         68,839
   Exercise of Series B preferred stock warrants                                                                 132
   Conversion of preferred stock to common                                                                         -
     stock effective on the initial public offering
   Common stock issued to employee                          (2,046)                                                -
   Issuance of recievable related to previously issued
     common stock                                                           (100)                               (100)
   Exercise of common stock options                                                                              240
   Stock warrants and options issued to non-employees       (8,098)                                                -
   Increase in value of unvested warrants                   (9,718)                                                -
   Deferred stock compensation related to
     option grants                                             (70)                                                -
   Amortization of deferred stock expenses                  12,700                                            12,700
                                                         ------------------------------------------------------------
BALANCES, December 31, 1999                                (15,665)         (450)         -     (65,385)      84,264
   Net loss                                                                                    (184,197)    (184,197)   $ (184,197)
   Unrealized gain on marketable securities                                             147                      147           147
                                                                                                                       ------------
   Total comprehensive income                                                                                           $ (184,050)
                                                                                                                       ============
   Shares issued in acquisitions                                                                             352,399
   Options issued in acquisitions                           (2,491)         (209)                               (209)
   Shares issued as part of agreement with AOL             (82,045)                                                -
   Shares issued as part of agreement with CMGI                                                               39,874
   Warrants issued to non-employee                                                                                43
   Stock to be issued to non-employee                                                                            148
   Sale of  common stock to employees                                                                          2,500
   Exercise of common stock options                                                                            1,541
   Exercise of warrants                                                                                           15
   Repurchases of common stock                                                                                   (75)
   Decrease in value of unvested warrants and                                                                      -
     options issued to non-employees                        15,544                                                 -
   Amortization of deferred stock expenses                  19,133                                            19,133
   Repayment of receivables from sales of stock                              618                                 618
                                                         ------------------------------------------------------------
BALANCES, December 31, 2000                               $(65,524)       $  (41)     $ 147   $(249,582)   $ 316,201
                                                         ============================================================
</TABLE>

                See notes to consolidated financial statements



                                    Page 31
<PAGE>


                                NETCENTIVES INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                                             Years
                                                        Ended December 31,
                                                --------------------------------
                                                   2000       1999       1998
                                                ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Cash received from customers                   $ 60,343   $ 13,680   $  1,294
  Cash paid to suppliers and employees            (85,710)   (37,630)   (11,156)
  Cash paid for interest                             (888)      (261)      (114)
  Interest received                                 4,085      1,978        441
                                                ---------- ---------- ----------
    Net cash used in operating activities         (22,170)   (22,233)    (9,535)
                                                ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment             (25,483)    (9,729)    (1,157)
  Maturity (purchases) of short-term
    investments, net                                (792)   (10,812)      (150)
  Cash paid in UVN acquisition, net of
    cash acquired                                  (4,207)         -          -
  Cash acquired in MaxMiles acquisition                32          -          -
  Cash acquired in Post acquisition                 6,611          -          -
  Other long term assets                           (1,885)       110        (58)
                                                ---------- ---------- ----------
    Net cash used in investing activities         (25,724)   (20,431)    (1,365)
                                                ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Sales of common stock                             4,099     69,079         19
  Repayment (issuance) of receivable related
    to previous issuances of common stock             545       (100)         -
  Sales of preferred stock                              -     35,079     17,231
  Borrowings on long-term debt                      2,993      1,366      1,141
  Principal payments on long-term debt             (3,363)    (1,021)      (248)
  Principal payments on bank loan, net                  -       (100)      (200)
                                                ---------- ---------- ----------
    Net cash provided by financing activities       4,274    104,303     17,943
                                                ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS   (43,620)    61,639      7,043
CASH AND EQUIVALENTS, beginning of period          75,290     13,651      6,608
                                                ---------- ---------- ----------
CASH AND EQUIVALENTS, end of period              $ 31,670   $ 75,290   $ 13,651
                                                ========== ========== ==========


               See notes to consolidated financial statements.



                                    Page 32
<PAGE>


                                NETCENTIVES INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Continued)
                                 (In thousands)
                                                                  Years
                                                            Ended December 31,
                                                      --------------------------
                                                       2000      1999     1998
                                                     --------- -------- --------

 NONCASH INVESTING AND FINANCING ACTIVITIES:
   Acquisition of UVN:
     Value of stock issued                           $ 18,028
     Cash paid                                          4,207
     Liabilities assumed                                4,628
       Assets acquired (including intangibles
                                                     ---------
         of $25,652)                                 $ 26,863
                                                     =========

   Acquisition of MaxMiles:
     Value of stock and options issued,
       net of deferred stock compensation            $ 11,326
     Cash acquired                                        (32)
     Liabilities assumed                                  360
       Assets acquired (including intangibles
                                                     ---------
         of $11,509)                                 $ 11,654
                                                     =========

   Acquisition of Post Communications:
     Value of stock issued and options assumed,
       net of deferred stock compensation            $322,835
     Cash acquired                                     (6,611)
     Liabilities assumed                                6,402
       Assets acquired (including intangibles
                                                     ---------
         of $316,297)                                $322,626
                                                     =========

   Warrants issued in connection with notes payable  $     43
                                                     =========

   Stocks and warrant issued in exchange for patent                     $    76
                                                                        ========

   Sale of stock for notes and accounts receivable                      $   130
                                                                        ========

   Acquisition of Panttaja:
     Value of stock issued and options assumed                          $ 2,854
     Cash acquired                                                          194
     Liabilities assumed                                                  1,090
       Assets acquired (including intangibles
                                                                        --------
         of $3,526)                                                     $ 4,138
                                                                        ========


                See notes to consolidated financial statements



                                    Page 33
<PAGE>



NETCENTIVES INC.

NOTES TO CONSOLIDATED  FINANCIAL  STATEMENTS
Years ended December 31, 2000, 1999 and 1998

1.   Business and Operations

San Francisco-based Netcentives Inc. is a leading provider of loyalty and direct
marketing  solutions.  The  company  delivers  a broad  suite  of  programs  for
relationship  marketing  technologies  and  services  to enable its Global  2000
client base to drive  customer,  employee and partner  behavior and maximize the
long-term  economic  value  of  these  relationships.   These  programs  include
consumer,  employee and business loyalty solutions;  customized email marketing;
and consulting services. The Company was incorporated in California in June 1996
and was  reincorporated  in Delaware in February  1999. On October 13, 1999, the
Company completed its initial public offering of common stock.

The Company has developed an Internet-based network (the "ClickRewards Network")
of merchants ("Merchants"), consumers ("Members") and redemption award suppliers
("Suppliers").  The Company has developed a promotional currency  ("ClickMiles")
which is used throughout the network.  The Company sells ClickMiles to Merchants
who use them as  promotional  incentives to drive their  consumers'  behavior in
areas such as brand  loyalty and  increased  transaction  size. As consumers are
awarded ClickMiles,  they establish accounts and become Members of the Company's
ClickRewards  program.  Consumers can accumulate and manage  ClickMiles on their
personal  online  account and redeem these for frequent  flyer  airline miles or
other  merchandise.  ClickMiles expire if not redeemed within specified periods.
Members who do not record any activity for a  twelve-month  period forfeit their
accumulated  ClickMiles.  The  Company  also  offers its  Merchants  consulting,
promotional,  and direct marketing  services for a variety of fee  arrangements.
The  Company  also  offers  programs  similar to the  ClickRewards  Network  for
Enterprise  Incentive clients  ("Enterprise  Incentive  Programs") and to Custom
Loyalty clients ("Custom Loyalty Programs").

In December 1998, the Company acquired Panttaja Consulting Group, Inc. (see Note
3). The Company now provides technical  consulting  services to its Merchants as
well as other customers through this wholly-owned subsidiary.

On January 31, 2000, the Company  completed the  acquisition of all  outstanding
capital stock of MaxMiles, Inc. ("MaxMiles"), a provider of personal aggregation
technologies (see Note 3).

On March 3, 2000,  the Company  completed  the  acquisition  of all  outstanding
capital  stock of UVN  Holdings,  Inc.,  SHC Venture,  LLC, and the  outstanding
minority  interest in UVN's majority owned  subsidiary  Universal Value Network,
LLC  (collectively,  "UVN").  UVN's  business  utilizes  payment  card  data  to
recognize and reward online and offline purchasing behavior (see Note 3).

On April 7, 2000,  the Company  completed  the  acquisition  of all  outstanding
capital stock of Post  Communications,  Inc. ("Post"),  a provider of customized
email marketing services (see Note 3).

In all the acquisitions  completed in 2000, the sales, research and development,
and operations of these companies have been integrated into the Company.

2. Summary of Significant Accounting Policies

Principles of Consolidation--The  accompanying consolidated financial statements
include the accounts of Netcentives Inc. and its wholly-owned subsidiaries.  All
significant intercompany accounts and transactions have been eliminated.

Cash equivalents  consist of  highly-liquid  debt instruments with a maturity at
time of purchase of three months or less.

Short term investments consist of highly-liquid debt instruments with a maturity
at time of purchase of three months or greater but less than one year.

Prepaid Incentive Awards--The Company has purchased frequent flyer airline miles
("airmiles") under frequent flyer programs from several airlines.  Such airmiles
are stated at cost determined on a weighted-average basis.

Property  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Depreciation is computed using the  straight-line  method over estimated  useful
lives of three to seven years.

Income Taxes--The Company accounts for income taxes using an asset and liability
approach.  Deferred  income tax assets and  liabilities  result  from  temporary
differences  between the tax basis of assets and  liabilities and their reported
amounts in the  financial  statements  that will result in taxable or deductible
amounts in future years.  Valuation  allowances  are provided when  necessary to
reduce deferred tax assets to the amount expected to be realized.


                                    Page 34
<PAGE>


Revenue Recognition--The Company allocates the sales price of ClickMiles and the
rewards points used in Custom Loyalty programs and Enterprise Incentive programs
(collectively  "Reward  Points")  based on  relative  fair  values  between  the
redemption  component  of the  award  ultimately  provided  to the  Member  (the
"product  component")  and its  service  components.  These  service  components
consist  of  support  services  provided  to  Custom  Loyalty   customers;   and
ClickRewards Members, as well as marketing services provided to Merchants in the
ClickRewards  Network.  The fair value of the product component of the ClickMile
is determined  based on separate pricing offered by the Company as well as other
objective  evidence;  the product component of other Rewards Points is specified
under the arrangement with the Custom Loyalty client. Service component revenues
represent the difference  between the product  component and the amount received
from the sale of the  Reward  Points.  The  product  component  of  revenues  is
deferred  until the Member redeems the Reward Points for frequent flyer miles or
other awards, or until the Reward Points expire.  The service  components of the
Reward  Points sale are initially  deferred  until the sale of the Reward Points
becomes non-  refundable,  which  typically is upon award of the currency by the
Merchant to the Member.

Upon  award  of  the  Reward  Points  by  the  Merchant  to a  Member,  revenues
attributable to the support service  component  generally are amortized over the
period from award through  expected  redemption  or expiration  (the life of the
Reward Points).  The expected life used to date has been the maximum life of the
Reward Point,  which the Company has set as the third December  following  award
for  ClickMiles and which Custom Loyalty  clients have  established  for periods
generally of two to three years.  To the extent Reward Points are redeemed prior
to their  expiration  date,  the remaining  amount of deferred  service  revenue
associated  with the  support  service  is  recognized  at that  time.  Revenues
attributable  to the marketing  services  component of ClickMiles are recognized
over  different  periods  based on the terms of the  Merchant  arrangement.  For
Merchants who purchase  ClickMiles on a nonrefundable  basis and which expire if
not  awarded  within  a  six-month  period,  the  marketing  service  period  is
determined  to be that  six-month  period  and  revenue is  amortized  over that
period.  For  Merchants who purchase  ClickMiles on a refundable  non-expiration
basis, the marketing  service period is assumed to be the life of the ClickMile.
Upon  termination  of a  Merchant  relationship,  unamortized  deferred  service
revenue attributable to the Merchant is recognized as revenue.

Deferred revenues arising from non-refundable  Reward Points which have not been
awarded by a Merchant are recognized as program-related  service revenues at the
time the Reward Points are forfeited by the Merchant.

The Company  exchanges Reward Points with certain of its Merchants in return for
advertising  and  merchandise.  Such  advertising  services  are  recorded as an
expense or prepaid asset,  as  appropriate,  based on the lower of the estimated
fair value of the  services  received  or the cash  value of the  Reward  Points
issued.  Revenues  from such barter  transactions  are accounted for on the same
basis as cash transactions;  i.e., the product component of revenues is deferred
until  redemption and the marketing  services  component is recognized  over the
service  period.  In 2000,  approximately  $430,000 of  advertising  expense was
recorded  under  these  arrangements,  of which 82% was  transacted  with  three
merchants.  ClickMiles  exchanged for advertising are non-returnable and must be
awarded by the Merchant within a specified time frame.  Program-related  service
revenues for 1998 include  $296,000 from an Internet  portal which  provided the
advertising  services  but  permitted  the  ClickMiles  it  purchased  to expire
unissued.

Program-related revenues are comprised of the service component of Reward Points
described  above,  as well as advertising  and other direct  marketing  services
provided to Merchants,  and are recognized as these  services are performed.  In
addition,  program-related  revenues  include the initial set-up fees on some of
our Custom Loyalty  programs.  We recognize  these set-up fees and related costs
related to these revenues over the minimum life of the Custom  Loyalty  programs
contracts.

Technical  and  marketing  consulting  service  revenues are  recognized  as the
services are  performed.  Consulting  services  are provided to deliver  loyalty
solutions to our customers.

The  Company  recognizes  revenue  related to email  marketing  services  as the
services are  provided.  Revenue and related costs  associated  with the initial
set-up of client email  marketing  programs are recognized over the minimum life
of the  client  contract,  beginning  on the launch  date of the email  program.
Deferred  project  revenues  and costs  represent  amounts  associated  with the
initial set-up of client email  programs  which have not been  recognized at the
balance sheet date.

Accrued Redemption  Costs--The Company issues ClickMiles to certain Merchants in
exchange for Member referrals and other cross-promotional activities, and awards
ClickMiles  directly  to  Members  in  connection  with  promotional  and  other
activities.  These  ClickMiles  are  accounted for as expenses and an accrual is
recorded at the time they are  exchanged  for these  services  for the  expected
costs to be incurred at redemption.

Advertising  Costs--Advertising costs are expensed as incurred. The Company does
not  incur  any  direct-response  advertising  costs.  Advertising  expense  was
approximately $9,296,000 in 2000, $7,753,000 in 1999, and $3,652,000 in 1998.

Stock-Based   Compensation--The  Company  accounts  for  stock-based  awards  to
employees  using the  intrinsic  value  method  in  accordance  with  Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.

The Company accounts for equity instruments issued to nonemployees in accordance
with the provisions of Statement of Financial  Accounting Standards ("SFAS") No.
123,  Accounting for  Stock-Based  Compensation,  and Emerging Issues Task Force
("EITF") Issue No. 96-18,  Accounting for Equity  Instruments That Are Issued to
Other Than Employees for Acquiring,  or in  Conjunction  with Selling,  Goods or
Services,  which requires that the fair value of such  instruments be recognized
as an expense over the period in which the related services are received.


                                    Page 35
<PAGE>


Comprehensive  Income--the Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 130,."Reporting  Comprehensive Income", which establishes
standards for reporting and displaying  comprehensive income and its components.
Comprehensive income is defined as the change in equity of a business enterprise
during a period  from  transactions  and other  events  and  circumstances  from
non-owner sources.

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.  Actual results
will differ from these estimates.

Concentration of Credit Risk--Financial instruments that potentially subject the
Company  to  concentrations  of credit  risk  consist  of cash and  equivalents,
short-term investments,  and accounts receivable. Risks associated with cash are
mitigated  by  banking  and  creditworthy  institutions.  Cash  equivalents  and
short-term investments consist primarily of governmental obligations, commercial
paper  and  bank  certificates  of  deposit  and  are  regularly   monitored  by
management.  Credit risk with  respect to the trade  receivables  is spread over
diverse customers who make up the Company's customer base. At December 31, 2000,
two  customers  accounted  for 25%  and 11% of  total  accounts  receivable.  At
December 31, 1999,  two customers  accounted  for 18% and 13% of total  accounts
receivable.  At December  31,  1998,  one  customer  accounted  for 17% of total
accounts receivable.

Risks and  Uncertainties--  We believe that our  available  cash  resources  and
projected  sales will be sufficient to meet our  presently  anticipated  working
capital  and  capital  expenditure  needs for at least the next  twelve  months.
However, to the extent that our sales do not occur as anticipated and we are not
able to raise  additional  financing,  we may need to  reduce  the  scope of our
planned capital  expenditures and product development and reduce other operating
costs (see Note 17).

Recently Issued Accounting  Standards--In  March 1998, the American Institute of
Certified  Public   Accountants  issued  Statement  of  Position  ("SOP")  98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, which requires the  capitalization of direct costs after management commits
to funding a project  it  believes  will be  completed  and used to perform  the
functions intended.  The Company adopted SOP 98-1 in 1999 as it is applicable to
certain  software  systems  internally  developed  by the  Company.  The Company
capitalized  development  costs of $3,614,000 and $2,554,000 for the years ended
December 31, 2000 and 1999 respectively.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue  Recognition," which provides guidance on
the recognition,  presentation and disclosure of revenue in financial statements
filed with the  Securities and Exchange  Commission.  SAB 101 outlines the basic
criteria  that  must be met to  recognize  revenue  and  provides  guidance  for
disclosures  related to revenue recognition  policies.  SAB 101 is effective for
the fiscal  quarter  beginning  October 1, 2000,  although  earlier  adoption is
permitted.  The Company  has  determined  the impact of adopting  SAB 101 is not
material.

Statement of  Financial  Accounting  Standards  (SFAS) No. 133,  Accounting  for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended,  establishes accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments  embedded in other contracts and for hedging activities.  Under SFAS
133,  certain  contracts that were not formerly  considered  derivatives may now
meet the  definition of a derivative.  The Company will adopt SFAS 133 effective
January 1, 2001.  Management has  determined  that the adoption of SFAS 133 will
not have a significant impact on the financial position,  results of operations,
or cash flows of the Company.

The Emerging Issues Task Force ("EITF") is reviewing an issue,  Issue No. 00-22,
"Accounting for 'Point' and Other Loyalty  Programs," that is closely related to
our currency  related programs and the way revenue is recognized for these types
of programs.  We  understand  that the EITF will provide  guidance on this issue
sometime  in 2001,  but a specific  date has not been set.  When Issue  00-22 is
issued, if it requires  modification of our present revenue  recognition policy,
we will adhere to the guidance provided.  Without knowing how the EITF will rule
on this issue, we are unable to assess the impact of Issue 00-22 at this time.

Fair  Value  of  Financial  Instruments--The  carrying  amount  of cash and cash
equivalents,  accounts receivable, capital leases and long-term debt approximate
fair value, because the Company's financial instruments are either short-term or
reflect interest rates that are consistent with current market interest rates.

Reclassifications--Certain   prior  year  amounts  have  been  reclassified  for
consistency with the current year presentation.  Such  reclassifications  had no
impact to net loss or total stockholders' equity.


                                    Page 36
<PAGE>


3.   Acquisitions

On December 18, 1998,  the Company  acquired all of the  outstanding  shares and
assumed the outstanding options of Panttaja Consulting Group, Inc. ("Panttaja"),
a software  consulting  firm,  in exchange  for 808,780  shares of common  stock
valued at $2,548,000, cash of $194,000 and options to purchase 455,648 shares of
Company  stock at $0.254 per share,  of which 306,755 were vested at the date of
the acquisition and have been included as part of the acquisition price at their
fair value of $936,000.  The common stock  includes  200,000  shares  subject to
vesting over a four-year  period,  which has initially been recorded as deferred
stock  compensation  and will be expensed over the vesting  period.  The Company
agreed to pay the  stockholders  up to an  additional  $450,000  each  within 13
months  following  closing,   based  on  meeting  certain  employment  retention
milestones, which was considered probable at the time of the acquisition and was
accrued as part of the  purchase  price of Panttaja.  Remaining  amounts owed at
December 31, 1999 were paid in January 2000.

The acquisition was accounted for as a purchase and, accordingly, the results of
operations of Panttaja since the date of  acquisition  have been included in the
Company's  consolidated  financial statements.  The total consideration exceeded
the fair value of the net assets  acquired by $3,526,000,  which  represents the
value of the  existing  consulting  relationships  and is being  amortized  on a
straight-line  basis over two years.  For the year ended  December 31, 2000, the
Company  recorded  $1,622,000 for amortization of these  intangibles,  which are
amortized over their useful lives of two years.

On January 31, 2000, the Company  completed the  acquisition of all  outstanding
capital stock of MaxMiles, Inc. ("MaxMiles"), a provider of personal aggregation
technologies,  in exchange for the issuance of 153,058  shares of the  Company's
common stock valued at approximately  $10,200,000 and options to purchase 21,922
shares of Company  stock at prices  ranging  from $.03 to $10.44  per share,  of
which 17,388 were vested at the date of the  acquisition  and have been included
as  part  of  the  acquisition  price  at  their  fair  value  of  approximately
$1,100,000.  The remaining 4,534 unvested options have been recorded as deferred
stock expense in the amount of $254,000 and will be amortized over the remaining
three year vesting period.

The acquisition was accounted for as a purchase and, accordingly, the results of
operations of MaxMiles since the date of  acquisition  have been included in the
Company's  consolidated  financial  statements.  For the year ended December 31,
2000,  the  Company  recorded  $3,530,000  for  amortization  of  the  purchased
intangibles, which are amortized over their useful lives of two to four years.

In  connection  with the  acquisition,  net assets  acquired were as follows (in
thousands):

   Current assets               $     69
   Cash acquired                      32
   Property and equipment, net        76
   Goodwill                       11,143
   Internal use software             245
   Assembled workforce               121
   Liabilities assumed              (360)
                                ---------
   Net assets acquired          $ 11,326
                                ========

On March 3, 2000,  the Company  completed  the  acquisition  of all  outstanding
capital  stock of UVN  Holdings,  Inc.,  SHC Venture,  LLC, and the  outstanding
minority  interest in UVN's majority owned  subsidiary  Universal Value Network,
LLC  (collectively  referred to as "UVN").  UVN's business utilizes payment card
data to recognize and reward online and offline purchasing  behavior.  The total
purchase price  includes the issuance of 335,532 shares of the Company's  common
stock valued at approximately $16,300,000,  cash payments totaling approximately
$4,900,000 (including approximately $2,100,000 of transaction costs), and 36,000
shares of the  Company's  common stock  valued at  approximately  $1,700,000  to
extinguish  certain  debt of UVN. The  acquisition  also gives the Company a 49%
equity  ownership  in Golden  Retriever  Systems,  LLC  (GRS),  which  maintains
connectivity to information on approximately 90% of U.S. sources of payment card
transactions  including data from payment card  processors,  merchant  acquiring
banks and merchants.  Vital  Processing  Services,  LLC has the right to require
that we purchase all of their 51% equity interest in Golden  Retriever  Systems,
LLC for $10.0 million. The Company has issued or will issue an additional 48,882
shares of common  stock to former  shareholders  of UVN over the 24 month period
subsequent to the acquisition.

The acquisition was accounted for as a purchase and, accordingly, the results of
operations  of UVN  since the date of  acquisition  have  been  included  in the
Company's  consolidated  financial  statements.  For the year ended December 31,
2000,  the  Company  recorded  $4,275,000  for  amortization  of  the  purchased
intangibles, which are amortized over their useful lives of five years.



                                    Page 37
<PAGE>



In  connection  with the  acquisition,  net assets  acquired were as follows (in
thousands):

   Current assets               $    930
   Cash paid                      (4,207)
   Property and equipment, net       281
   Goodwill                       17,147
   Internal use software             500
   Investment in GRS               7,669
   Assembled workforce                40
   Sales channel and
       customer relationships        296
   Liabilities assumed           (4,628)
                                ---------
   Net assets acquired          $ 18,028
                                =========

On April 7, 2000,  the Company  completed  the  acquisition  of all  outstanding
capital stock of Post  Communications,  Inc. ("Post"),  a provider of customized
email marketing  services,  in exchange for the issuance of 6,282,289  shares of
the  Company's  common  stock  valued at  $308,790,000  and  options to purchase
316,908 shares of Company stock at prices ranging from $.36 to $16.76 per share.
Of these shares  23,481 were unvested at the date of  acquisition  and have been
recorded  as  deferred  stock  expense in the amount of  $2,237,000  and will be
amortized  over the  remaining  three year  vesting  period.  There were 293,427
options vested at the date of acquisition  and have been included as part of the
acquisition price at their fair value of approximately $13,600,000.

This acquisition was accounted for as a purchase,  and accordingly,  the results
of  operations of Post since the date of  acquisition  have been included in the
Company's  consolidated  financial  statements.  For the year ended December 31,
2000,  the  Company  recorded  $59,306,000  for  amortization  of the  purchased
intangibles, which are amortized over their useful lives of four years.

In  connection  with the  acquisition,  net assets  acquired were as follows (in
thousands):

   Current assets               $   3,015
   Cash acquired                    6,611
   Property and equipment, net      3,314
   Goodwill                       294,147
   Internal use software           10,150
   Assembled workforce              3,350
   Customer relationships           8,650
   Liabilities assumed             (6,402)
                                ----------
   Net assets acquired          $ 322,835
                                ==========

The following  unaudited pro forma  information  shows the results of operations
for the  years  ended  December  31,  2000 and 1999 as if the  acquisitions  had
occurred  at  the  beginning  of the  year.  The  results  are  not  necessarily
indicative of what would have occurred had the acquisition actually been made at
the beginning of the respective periods presented or of future operations of the
combined companies (in thousands, except per share information).

                                              ------------------------------
                                                  2000              1999
                                              ------------      ------------
Total revenues                                 $   43,067        $   13,519
Net loss                                       $ (189,226)       $ (142,179)
Net loss per share, basic and diluted          $    (4.67)       $    (4.69)



                                    Page 38
<PAGE>



4. Property and Equipment

Property and equipment consists of (in thousands):

                                                  December 31,
                                           ------------------------

                                              2000           1999
                                           ----------     ---------

Computer equipment                          $ 20,314       $ 8,036
Office and furniture equipment                 5,641           496
Leasehold improvments                          8,941         1,205
Internal use software                         17,142         2,554
                                           ----------     ---------
Total                                         52,038        12,291
Accumulated depreciation                     (11,367)       (3,328)
                                           ----------     ---------

Total property and equipment - net          $ 40,671       $ 8,963
                                           ==========     =========

At December  31, 2000,  the  capitalized  internal use software  costs relate to
projects both completed and under development. Such costs are amortized over two
to three  years,  depending on the specific  project.  Amortization  relating to
internal use software  was  $959,000  for the year ended  December 31, 2000.  At
December 31, 2000 and 1999,  the Company had assets under  capital  lease with a
cost basis of  $1,644,00  and  $388,000,  and a net book value of  $740,000  and
$107,000, respectively.

5.   Bank Loan Payable and Line of Credit

In  connection  with the Post  Communications  acquisition  in April  2000,  the
Company assumed a $500,000 line of credit. In a subsequent transaction, the line
of credit was fully  pledged  against a letter of credit for new office space in
San Francisco (see Note 13).

6.   Long-term Obligations

Long-term obligations consist of the following (in thousands):

                                            December 31,
                                    -------------------------
                                       2000           1999
                                    ---------       ---------
Notes payable                        $ 5,886         $ 1,984
Capital lease obligations              2,234             106
Panttaja acquisition payable               -             152
Other                                      5               -
                                    ---------       ---------

Total                                  8,125           2,242
Less current portion                   3,870           1,008
                                    ---------       ---------
Long-term obligations                $ 4,255         $ 1,234
                                    =========       =========

In  1999,  the  Company  borrowed  $1,200,000  under a note  payable,  which  is
collateralized  by  certain  assets  of  the  Company.  The  notes  payable  are
collateralized by the assets purchased with the proceeds of these borrowings and
are payable in monthly  installments  through  June 2002.  The  borrowings  bear
interest ranging from 9.15% to 14.44%.

In connection  with the  acquisition  of UVN Holdings,  Inc. in March 2000,  the
Company  assumed a $2,000,000  note payable that is due to a related party.  The
note is  payable in  quarterly  installments  and is due and  payable in full in
April 2002.  The note bears interest at an annual rate of 2.25% in excess of the
prime rate of interest.

In  December  2000,  the  Company  obtained  a  $2,500,000  bank  loan  that  is
collateralized by certain assets of the Company.  The loan is payable in monthly
installments through December 2002. The loan bears interest at an annual rate of
1.75% in excess of the prime rate of interest.



                                    Page 39
<PAGE>



Maturities of long-term  debt and capital  leases as of December 31, 2000 are as
follows (in thousands):

                     Year Ending December 31,
                     ------------------------
                                    Capital
                         Debt       Leases
                     -----------  ----------

2001                   $  2,146    $  1,724
2002                      3,426         759
2003                          -          70
                     -----------  ----------

Total payments         $  5,572    $  2,553
                     ===========  ==========


7.   Stockholders' Equity

Initial Public Offering

On October 13, 1999, in connection with the Company's initial public offering, a
Registration Statement on Form S-1 (No. 333-83443) was declared effective by the
Securities and Exchange  Commission,  pursuant to which 6,000,000  shares of the
Company's Common Stock were offered and sold for the account of the Company at a
price of $12.00 per share. In addition, on November 9, 1999, the Company sold an
additional 335,937 shares under the underwriter's  overallotment  option.  After
deducting  approximately  $5,300,000 in underwriting discounts and $1,900,000 in
other  related  expenses,  the net proceeds of the offering  were  approximately
$68,800,000. On the effective date of the initial public offering, each share of
the Company's preferred stock was converted to one share of common stock.

Deferred Stock Expense-Stock and Warrants

During 1997, the Company issued warrants to purchase  410,000 shares of Series N
preferred stock at $1.00 per share to various  airlines in connection with their
airmile  purchase  agreements (see Note 12). The warrants vest over three years,
subject to  continuation  of exclusivity  arrangements  with such airlines,  and
expire in four or five years.  Also during 1997, the Company issued  warrants to
purchase 120,000 shares of Series N preferred stock at $1.30 per share to one of
its Merchants.  The warrants vest over two years, subject to certain exclusivity
provisions,  and expire in four years.  All of the warrants permit the holder to
"net  exercise"  and  receive  shares  of  stock  with a value  equal to the net
appreciation  at the time of exercise.  Because the vesting of these warrants is
subject to maintaining the  exclusivity of the arrangement  with these partners,
the  valuation of the warrants is not finalized  until their  vesting date.  The
value of these  warrants  has been  estimated  using  the  Black-Scholes  option
pricing model with the following  assumptions:  expected  life,  the term of the
option; risk-free interest rate of 5.0% in both 2000 and 1999, and 4.6% in 1998;
volatility  of 95% in all of 2000,  1999 and 1998;  and no  dividend  during the
expected term.  The estimated  value of such warrants is being expensed over the
related  exclusivity  periods.  At December  31, 2000,  1999 and 1998,  530,000,
485,967,  and 204,000  warrants,  respectively,  were  vested.  The value of the
warrants  is  estimated  and is  adjusted  each  period  until  the  exclusivity
milestones  are met and the  warrants  vest.  The initial  value of the warrants
issued in 1997 was  estimated at $281,000;  this was  increased by $1,038,000 in
1998, and $9,718,000 in 1999, and was decreased by $8,339,000 in 2000. Operating
expenses include $(6,250,000),  $8,068,000, and $811,000 in 2000, 1999 and 1998,
respectively, relating to these warrants.

During 1997, the Company issued warrants to purchase  175,391 shares of Series B
preferred  stock at an average price of $1.16 per share in  connection  with the
Company's  financing  transactions.  During 1998, the Company issued warrants to
purchase  31,948 shares of Series C preferred stock at an average price of $1.30
per share in connection with the Company's financing transactions. The estimated
fair  value of these  warrants  on their  grant  date was  $105,000  in 1997 and
$31,000  in  1998,  which  is  being  expensed  over  the  term  of the  related
financings.  The Company has included in interest expense  $23,000,  $44,000 and
$30,000 in 2000, 1999 and 1998, respectively, relating to these warrants.

In 1999, the Company  issued to a customer a warrant to purchase  150,000 shares
of  common  stock at an  exercise  price  of $8.00  per  share in  exchange  for
advertising to be provided on the  customer's  web sites.  The warrant was fully
vested upon issuance and expires in July 2001.  The estimated  fair value of the
advertising  to be received,  which is equal to the fair value of the warrant of
approximately $630,000 was recorded in 1999 and will be expensed at the time the
advertising  services are provided.  In 2000 and 1999,  the Company  recorded no
expense related to such warrant,  as none of the  advertising  services had been
provided.

In 1999, the Company issued to one of its suppliers a warrant to purchase 85,000
shares of common stock at $11.00 per share in  connection  with the extension of
its  exclusive  supply  arrangement.  The warrant is fully vested and expires in
September 2002. The estimated fair value of the warrant of $489,000 was recorded
in 1999 and will be  expensed  over the one  year  exclusivity  term.  Operating
expenses  included  $326,000 and  $163,000  relating to this warrant in 2000 and
1999.


                                    Page 40
<PAGE>


In 1999,  the  Company  issued to one of its  suppliers  a warrant  to  purchase
100,000  shares  of common  stock at an  exercise  price of $11.00  per share in
connection with the extension of its exclusive supply  arrangement.  The warrant
was 60% vested upon issuance, with 20% vested on each anniversary of the date of
grant and expires in October  2002.  Because  the  vesting of these  warrants is
subject to maintaining the exclusivity of the arrangement with this partner, the
valuation  of the  warrants is not  finalized  until  their  vesting  date.  The
estimated fair value of the warrant of approximately $2,954,000, was recorded in
1999 and will be  expensed  over the  three  year  exclusivity  term.  Operating
expenses  include  $94,000 and $330,000  relating to these  warrants in 2000 and
1999.

Warrants to purchase  134,943 shares of Series B preferred  stock were exercised
in the year ended  December  31,  1999.  Warrants to purchase  61,668  shares of
common  stock were  exercised in the year ended  December  31,  2000.  All other
warrants previously issued by the Company were outstanding at December 31, 2000.

In 2000, the Company entered into an agreement with America Online, Inc. ("AOL")
under which the Company's  rewards  technology will become the exclusive  online
support  infrastructure for  AOL/AAdvantage,  AOL's consumer rewards network. In
addition,  the companies also agreed to create "ICQ  ClickRewards"  -- a rewards
program  for  ICQ,  AOL's  online  communications  community.  As part of  these
agreements,  the Company  issued AOL 1,560,000  shares of the  Company's  common
stock. The Company has recorded  $82,000,000 in deferred stock expenses based on
the fair  value of the stock  issued to AOL.  A portion  of the  deferred  stock
expense will be recorded as an offset to revenue earned by the Company over time
related to the AOL program and a portion  will be recorded  over the  three-year
agreement period as a non-cash marketing expense related to ICQ ClickRewards. In
the year ended December 31, 2000, the Company  recorded  $22,700,000 of non-cash
marketing expenses related to the AOL program.

In 2000, the Company issued to Silicon Valley Bank a warrant to purchase  15,000
shares of common  stock at an  exercise  price of $3.94 per share in  connection
with a lease arrangement. The warrant was fully vested upon issuance and expires
in 2005. The estimated fair value of the warrant of $43,000 was recorded in 2000
and will be expensed over the two year lease agreement term.

In 2000, as part of the Post  acquisition,  the Company  assumed 29,529 warrants
related to equipment  lease  agreements.  The Company,  using the  Black-Scholes
option  pricing  model,  recorded  $47,000 in  additional  interest  expense and
additional paid-in capital associated with these warrants.

Receivables from Sales of Stock

At December 31, 1999,  receivables from sales of stock included notes receivable
from an officer of the Company and were comprised of:

                                  Stock Purchased          Per     Interest
                             -------------------------
     Issue Date                Amount        Number       Share      Rate
---------------------        ----------    -----------   --------  --------
August 1997                   $ 60,000        500,000     $ 0.12     6.29%
November 1997                  157,290      1,048,600       0.15     6.01
December 1998                  130,000        200,000       0.65     4.47
January 1999                   100,000            N/A        N/A     4.47

These  notes are  secured by common  stock and are due four years from the issue
date.  The  1997  and  1998  notes  are  full  recourse  and  the  1999  note is
non-recourse.  The 1997 stock sales were made at fair market value. The December
1998 loan financed a stock  purchase  made in October 1998.  That stock sale was
made when the fair value of the  shares  was  deemed to be $3.15 per share,  and
accordingly,  $500,000 of deferred  compensation  was recorded  relating to this
transaction.  The January 1999 loan represents a cash loan secured by the shares
of ock previously  purchased by the officer.  The stock sold in connection  with
these notes is subject to  repurchase  at the  original  sale price;  this right
lapses  ratably  over a  four-year  period  subject to the  officer's  continued
employment. At December 31, 1999, 722,392 shares of common stock were subject to
this repurchase right. In January 2000, these notes were repaid in full.

At December  31,  2000,  there were  receivables  from sales of stock of $41,000
related  to  the  early  exercise  of  stock  options  by  Post  Communication's
employees.



                                    Page 41
<PAGE>



Stock Option Plans

The Company has a stock  option plan (the 1996 Stock Option  Plan),  under which
incentive  and  non-qualified  options to purchase  10,921,400  shares of common
stock may be granted to employees and independent contractors. Options generally
vest in  installments  over four  years from the grant date and expire ten years
from the grant date. In 1999, the  stockholders  of the Company  approved annual
increases in the number of authorized  shares under the plan of 1,250,000 shares
in each of the following five years.  In 2000, the  stockholders  of the Company
approved a 2,000,000 share increase in the plan.

In 1999, the stockholders of the Company  approved  adoption of the 1999 Outside
Directors  Stock Option Plan (1999 Directors  Option Plan) and reserved  400,000
shares of common stock  (increasing  by 50,000  shares in each of the  following
five  years) for grants of options  to  outside  directors.  The 1999  Directors
Option Plan provides for initial grants to each outside director of an option to
purchase  40,000  shares of common  stock at fair  market  value as of the grant
date. These options vest in equal installments over four years. On the first day
of each fiscal year, each  non-employee  director who has served on our Board of
Directors  for at least 6 months  shall  be  granted  an  additional  option  to
purchase  10,000 shares of common stock,  which shall vest in full on the fourth
anniversary of the date of grant.

A summary of activity under the option plans is set forth below:

                                                               Outstanding
                                                              Stock Options
                                                          ----------------------
                                                                        Weighted
                                                                        Average
                                                                        Exercise
                                                           Number of   Price per
                                                             Shares       Share
                                                          ------------  --------
Outstanding, December 31, 1997 (284,749 exercisable
  at a weighted average price of $0.10)                     1,288,967    $ 0.12
Granted (weighted average fair value of $0.70 per share)    2,676,645      0.64
Issued in conjunction with Pantajja acquisition               455,648      0.25
Exercised                                                    (114,606)     0.17
Cancelled                                                    (218,137)     0.25
                                                          ------------  --------
Outstanding, December 31, 1998 (914,132 exercisable
  at a weighted average price of $0.26)                     4,088,517      0.51
Granted (weighted average fair value of $9.50 per share)    3,160,335     10.68
Exercised                                                    (442,745)     0.54
Cancelled                                                    (435,422)     3.10
                                                          ------------  --------
Outstanding, December 31, 1999 (1,678,331 exercisable
  at a weighted average price of $1.43)                     6,370,685      5.39
Granted (weighted average fair value of $12.87 per share)   4,090,543     12.57
Issued in conjunction with MaxMiles acquisition                21,922     10.44
Issued in conjunction with Post acquisition                   316,908      5.88
Exercised                                                    (929,205)     1.66
Cancelled                                                  (1,387,814)    12.78
                                                          ------------  --------
Outstanding, December 31, 2000 (2,832,925 exercisable
  at a weighted average price of $5.11)                     8,483,039    $ 8.01
                                                          ============  ========

At December 31, 2000,  options to purchase 1,498,236 shares of common stock were
available for grant.



                                    Page 42
<PAGE>



Additional  information regarding options outstanding as of December 31, 2000 is
as follows:

<TABLE>
<CAPTION>
                                                         Stock Options Outstanding                Options Exercisable
                                               -------------------------------------------   -----------------------------

                                                                   Average        Weighted                      Weighted
                                                                  Remaining       Average                        Average
                                                 Number          Contractual      Exercise        Number        Exercise
Range of Exercise                              Outstanding          Life           Price       Exercisable        Price
-------------------------------------------------------------   --------------   ---------   ---------------  ------------
<S>                                                <C>               <C>          <C>          <C>              <C>
$0.10- $0.15.................................        773,254         6.87         $  0.14        573,481        $  0.14
$0.20- $0.25.................................        409,923         7.22         $  0.25        332,754        $  0.25
$0.35- $0.65.................................        354,404         7.91         $  0.60        228,703        $  0.57
$1.05- $1.40.................................        862,461         8.10         $  1.08        470,760        $  1.11
$3.15- $6.75.................................      1,057,230         9.83         $  3.59         73,956        $  3.22
$6.82- $10.00...............................       1,989,708         8.90         $  8.24        524,201        $  8.05
$10.19-$12.75...............................       2,195,605         9.11         $ 11.00        503,322        $ 11.10
$13.13-$37.94...............................         668,621         9.30         $ 19.01         99,074        $ 21.90
$40.94-$61.88...............................         171,833         9.09         $ 55.33         26,044        $ 55.36
                                             ----------------                                ------------
                                                   8,483,039         8.72         $  8.01      2,832,295        $  5.11
                                             ================                                ============

</TABLE>

Shares of common stock sold to employees,  directors and consultants under stock
purchase  agreements  are subject to  repurchase  at the  Company's  option upon
termination of their  employment or services at the original  purchase price. At
December  31,  2000,  562,401  shares  of  common  stock  were  subject  to this
repurchase right.

Employee Stock Purchase Plan

In 1999,  the  stockholders  approved  the adoption of the 1999  Employee  Stock
Purchase Plan, and reserved 300,000 shares of common stock (increasing by 75,000
shares in each of the following  five years) for sale to employees at a price no
less  than 85% of the lower of the fair  market  value at the  beginning  of the
two-year  offering period or the end of each of the six-month  purchase periods.
345,336  shares were issued under the Employee  Stock  Purchase Plan in 2000. In
2000, the Company's  stockholders granted a 1,000,000 share increase in the plan
plus a change to the automatic  annual  increase to the lesser of 500,000 shares
or 2% of our  outstanding  common  stock as of the  last day of the  immediately
proceeding  fiscal  year,  or such  lesser  amount  determined  by the  Board of
Directors.

Deferred Stock Expense-Employee Compensation

In connection with certain equity  transactions  during the years ended December
31, 1999 and 1998, the Company recorded  deferred stock  compensation of $70,000
and $7,571,000,  respectively,  for the difference  between the exercise or sale
price of the stock and deemed  fair  value of the stock at that  time.  The 1998
total consists of $7,071,000 related to stock option grants (including  $432,000
arising from the Panttaja acquisition) and $500,000 related to common stock sold
to an officer of the Company. An additional $630,000 arose from shares of common
stock issued in connection  with the Panttaja  acquisition  which are subject to
vesting.  The 1999 total  consists of $70,000  related to stock  option  grants.
Deferred compensation related to stock option grants is being amortized over the
four-year  vesting periods of the related options.  Amortization of such expense
during 2000,  1999 and 1998 totaled  approximately  $2,160,000,  $2,188,000  and
$296,000, respectively.

In 1999, the Company  issued  100,000 shares of common stock in connection  with
the hiring of an  employee,  of which  80,000 of the shares  vested  over a five
month  period and were fully  vested at December  31,  1999.  The value of these
shares at December 31, 1999 was $2,046,000,  of which $800,000 has been included
in operating  expenses in 1999.  The  remaining  20,000 shares vested based on a
performance  based  measurement.  At December 31, 1999,  it was unknown if these
performance  based  measurements  would be met and as such no  expense  on these
shares had been  recorded.  In 2000,  this  employee  left the  Company  and the
Company vested the remaining  20,000  shares,  and $200,000 has been included in
operating expenses in 2000.

In 1999,  the Company  issued 75,000 shares of common stock options to two Board
of Director  members.  Because  these  shares were above and beyond  those to be
issued in  accordance  with the 1999  Directors  Option  Plan,  the  Company has
recorded deferred stock  compensation of $4,385,000 in 1999.  Operating expenses
include  $(174,000)  and  $1,117,000 in 2000 and 1999 related to the issuance of
these options.


                                    Page 43
<PAGE>


In connection with the Post acquisition, the Company assumed options to purchase
316,908 of the Company's common stock at prices ranging from $0.36 to $16.76 per
share, of which 23,481 were unvested at the date of acquisition.  At the date of
acquisition,  the Company  recorded  deferred stock  compensation of $2,237,000.
Amortization of such expense during 2000 totaled approximately $1,618,000.

In connection  with the MaxMiles  acquisition,  the Company  assumed  options to
purchase  21,922 of the Company's  common stock at prices  ranging from $0.03 to
$10.44 per share, of which 17,388 were vested at the date of acquisition. At the
date of  acquisition,  the  Company  recorded  deferred  stock  compensation  of
$254,000.  Amortization  of  such  expense  during  2000  totaled  approximately
$77,000.

Additional Stock Plan Information

As discussed in Note 1, the Company  accounts for its  stock-based  awards using
the  intrinsic  value method in  accordance  with  Accounting  Principles  Board
Opinion  No. 25,  Accounting  for Stock  Issued to  Employees,  and its  related
interpretations.

Statement of Financial  Accounting Standards No. 123, Accounting for Stock-Based
Compensation,  requires  the  disclosure  of pro forma net loss and net loss per
share  had the  Company  adopted  the  fair  value  method.  The  fair  value of
stock-based  awards to employees  has been  calculated  using the  Black-Scholes
method  subsequent to its public  offering in 1999, and the minimum value method
in prior periods with the following weighted average assumptions: expected life,
48  months;  risk-free  interest  5.0% in both 2000 and 1998,  and 4.6% in 1998;
volatility  of 148% in 2000,  and 155% in the  fourth  quarter  of 1999;  and no
dividends  during the expected term. The Company's  calculations  are based on a
single option valuation approach,  and forfeitures are recognized as they occur.
If the  computed  fair  values of the  Company's  awards had been  amortized  to
expense  over their  related  vesting  periods,  the  effect  would have been to
increase net loss to $198,220,000 ($5.03 per share) in 2000,  $50,402,000 ($5.38
per share) in 1999, and $1,000 ($8.78 per share) in 1998.



                                    Page 44
<PAGE>



8.   Net Loss Per Share

The following is a  reconciliation  of the numerators and  denominators  used in
computing basic and diluted net loss per share:

                                                          Years Ended
                                                          December 31,
                                              ----------------------------------
                                                 2000        1999        1998
                                              ----------  ----------  ----------
                                        (In thousands, except per share amounts)

Net loss (numerator), basic and diluted       $(184,197)  $ (46,828)  $ (14,111)
                                              ==========  ==========  ==========

Shares (denominator):
Weighted average common shares outstanding       40,205      11,043       3,818
Weighted average common shares outstanding
  subject to repurchase                          (1,281)     (1,667)     (2,174)
                                              ----------  ----------  ----------

Shares used in computation, basic and diluted    38,924       9,376       1,644
                                              ==========  ==========  ==========

Net loss per share, basic and diluted         $   (4.73)  $   (4.99)  $   (8.58)
                                              ==========  ==========  ==========

For the above-mentioned  periods,  the Company had securities  outstanding which
could  potentially  dilute  basic  earnings  per share in the  future,  but were
excluded  in the  computation  of  diluted  net  loss per  share in the  periods
presented,  as their  effect  would  have been  antidilutive.  Such  outstanding
securities consist of the following (in thousands):

                                                2000         1999         1998
                                               -------      -------     --------
Convertible preferred stock                         -            -       15,169
Shares of common stock subject to repurchase      448        1,205        2,106
Outstanding options                             8,483        6,371        4,089
Warrants                                          982          937          737



                                    Page 45
<PAGE>



9.   Income Taxes

The  Company's  net deferred  tax assets were  comprised  of the  following  (in
thousands):

                                                           December 31,
                                                 -------------------------------
                                                    2000       1999       1998
                                                 ---------  ---------  ---------
Net deferred tax assets:
   Net operating loss carryforwards              $ 58,425   $ 17,933    $ 6,058
   Credit carryovers                                1,219        264        158
   Reserves and accrued liabilities                 2,514      1,331        438
   Other                                            1,000        463          -
   Deferred revenue                                 4,442      1,503        827
   Deferred stock expense, warrants                     -      3,490        380
   Deferred stock expense, employee compensation      403      1,318          -
   Basis difference in investment                  12,995          -          -
                                                 -------------------------------
                                                   80,998     26,302      7,861
Valuation allowance                               (70,681)   (25,260)    (7,757)
                                                 -------------------------------
Total net deferred tax assets                      10,317      1,042        104

   Deferred tax liabilities:
      Capitalized software                         (6,187)    (1,042)         -
      Purchased intangibles                        (4,130)         -          -
      Other                                             -          -       (104)
                                                 ---------  ---------  ---------
   Total deferred tax liabilities                 (10,317)    (1,042)      (104)
                                                 ---------  ---------  ---------

   Total net deferred tax assets                 $      -   $      -    $     -
                                                 =========  =========  =========


Deferred  income taxes result from temporary  differences in the  recognition of
certain assets and liabilities for financial  statement and tax return purposes,
and from net operating  loss and credit  carryforwards.  Due to the  uncertainty
surrounding  the  realization  of its net deferred  tax assets,  at December 31,
2000,  1999 and 1998, the Company has fully reserved its net deferred tax assets
of approximately $70,681,000, $25,260,000 and $7,757,000, respectively.

The  Company's  effective  tax rate  differed  from the expected  benefit at the
federal statutory tax rate as follows:

                                                   Years Ended
                                                   December 31,
                                        --------------------------------
                                           2000       1999        1998
                                        ---------   --------   ---------

Federal statutory tax rate                (35.0%)    (35.0%)     (35.0%)
State taxes, net of federal benefit        (5.8%)     (5.8%)      (5.7%)
Other                                      (0.1%)      3.4%       (4.2%)
Valuation allowance                        29.0%      37.4%       44.9%
Goodwill                                   11.9%       0.0%        0.0%
                                        ---------   --------   ---------
  Effective tax rate                        0.0%       0.0%        0.0%
                                        =========   ========   =========

At December 31, 2000,  the Company has a net  operating  loss  carryforward  for
federal income tax purposes of approximately  $144,709,000 which expires through
2020. In addition,  the Company has, at December 31, 2000, a net operating  loss
carryforward   for  California   state  income  tax  purposes  of  approximately
$133,283,000 which expires through 2015.

At December 31, 2000,  the Company  also has  research  and  development  credit
carryforwards of approximately  $677,000 and $542,000 available to offset future
federal and state income taxes, respectively. The federal credit expires through
2020, and the state credit carryforward has no expiration.


                                    Page 46
<PAGE>


Included in the above net  operating  loss  carryforwards  are  $14,496,000  and
$9,579,000 of federal and state net  operating  losses  related to  acquisitions
accounted  for under the  purchase  method of  accounting.  The  benefit of such
losses,  if and when  realized,  will be  credited  first to  reduce to zero any
goodwill related to the respective  acquisition,  second to reduce to zero other
non-current intangible assets related to the respective  acquisition,  and third
to reduce income tax expense.

Included  in  the  deferred  tax  assets   before   valuation   allowance,   are
approximately   $1,055,000  of  cumulative  tax  deductions  related  to  equity
transactions,  the benefit of which will be credited to stockholders' equity, if
and when realized.

Current federal and California state tax laws include  substantial  restrictions
on the  utilization  of net operating  losses and tax credits in the event of an
"ownership  change" of a  corporation.  Accordingly,  the  Company's  ability to
utilize  net  operating  loss and tax credit  carryforwards  may be limited as a
result of such "ownership change", as defined. Such a limitation could result in
the expiration of carryforwards before they are utilized.

10.  Employee Benefit Plan

The Company has a 401(k) plan for its employees who meet certain service and age
requirements.  Participants  may  contribute  up to 25% of their  salaries up to
amounts  specified  under  the  Internal  Revenue  Code.  The  Company  does not
contribute to this plan.

11.  Significant Customer Relationships

In 2000, Nortel Networks  accounted for approximately 25% of total revenues (see
Note 17). In 1999,  no customers  accounted  for more than 10% of  revenues.  In
1998,  Yahoo  and Visa each  accounted  for  approximately  46% and 13% of total
revenues.

In 2000, the Company  announced an agreement to create an online loyalty program
for the CMGI network and its 70 member companies.  As part of this relationship,
CMGI  received   approximately   4.9%  or  1,694,492  shares  of  the  Company's
outstanding common stock with a value of approximately $39,900,000.  The Company
also received,  in exchange for its shares,  425,317 shares of CMGI  outstanding
common  stock  with a value  of  approximately  $39,900,000.  These  shares  are
restricted  from being resold until April 2001 and were  recorded as  Marketable
Securities on the Company's  balance  sheet.  At December 31, 2000,  the Company
determined  that the decline in value of these  shares was other than  temporary
and valued these at market value recording a $37,570,000  realized loss.  During
the fourth  quarter of 2000,  the Company  and CMGI agreed to end their  loyalty
network  arrangement,  with the opt-in  transition of existing  members from the
AltaVista Rewards program to the ClickRewards program.



                                    Page 47
<PAGE>


12.  Airline Arrangements

The Company has entered into certain long-term arrangements to purchase airmiles
from its airline  suppliers.  At December 31, 2000,  the Company had prepaid for
airmiles with a cost of $910,000  that are available for  redemption by Members.
Certain of these  airmiles  expire if not  exchanged  by Members for  ClickMiles
within specified time periods,  including $66,000 that are subject to expiration
in 2001.

The contracts  require certain minimum annual airmile purchases in order for the
Company to maintain its exclusivity  agreement.  These future minimum  payments,
including excise tax, are as follows (in thousands):

Year Ending December 31,
2001                             $ 4,170
2002                               4,265
                                ---------
Total                            $ 8,435
                                =========


13.  Commitments and Contingencies

The  following  is  a  schedule  of  future  lease   payments   required   under
non-cancelable operating leases, as of December 31, 2000 (in thousands):

Year Ending December 31,
2001                             $  4,991
2002                                4,584
2003                                4,462
2004                                3,463
Thereafter                          6,598
                                ----------
  Total minimum payments         $ 24,098
                                ==========


Rent expense under all rental  agreements  was  $4,430,000 in 2000,  $958,000 in
1999 and $334,000 in 1998.

In 1999,  the  Company  entered  into a  seven-year  operating  lease  for a new
headquarters facility located in San Francisco,  California,  which commenced in
March 2000 and  expires in March 2007.  The Company  obtained a letter of credit
for approximately  $2,400,000 as a security deposit prior to lease  commencement
as  required  under the lease.  The letter of credit is  collateralized  by time
deposits  which are  included  in other  assets,  and a portion of the letter of
credit and the related time deposits may be released over the term of the lease.

In 2000,  the Company  entered into a four-year  operating  lease for new office
space located in San Francisco,  California,  which commenced in August 2000 and
expires in May 2004. The Company  obtained a letter of credit for  approximately
$510,000 as a security deposit prior to the lease commencement as required under
the lease. A line of credit for $500,000 was fully pledged against the letter of
credit, and the remainder was collateralized by a time deposit which is included
in other  assets (see Note 5). A portion of the letter of credit and the related
time deposits may be released over the term of the lease.

The Company is party to various litigation  related to its patents.  The Company
is not engaged in any legal proceedings either that are expected individually or
in the aggregate to have a material  adverse  effect on the Company's  financial
position.

                                    Page 48
<PAGE>



14.  Segment Reporting

In 1999,  the Company  adopted SFAS No. 131,  Disclosures  about  Segments of an
Enterprise and Related Information. SFAS No. 131 requires disclosures of certain
information  regarding  operating  segments,  products and services,  geographic
areas  of  operation  and  major  customers.  The  method  of  determining  what
information  to  report  under  SFAS  No.  131 is  based  upon  the  "management
approach," or the way that management  organizes the operating segments within a
company, for which separate financial information is available that is evaluated
regularly by management  in deciding how to allocate  resources and in assessing
performance.

The Company's operating businesses are organized based on the nature of products
and  services  provided.  Based on this  approach,  the Company  classifies  its
businesses into three identifiable segments: Currency, Direct Marketing Services
and Technical and Marketing  Consulting.  Certain of the Company's businesses do
not meet  the  definition  of a  reportable  operating  segment  and  have  been
aggregated.   These  include  the  ClickRewards  Network,  Enterprise  Incentive
programs and Custom Loyalty  programs which has been  aggregated  into Currency.
Segment accounting policies are the same as the policies described in note 1.

Financial  information  for the  Company's  business  segments is as follows (in
thousands):

                                                          Years Ended
                                                          December 31,
                                               ---------------------------------
                                                   2000       1999       1998
                                               ----------  ----------  ---------

Revenues:
  Currency                                     $  23,954   $   2,407   $    647
  Direct marketing services                       11,842       1,115          -
  Technical and marketing consulting services      7,890       5,221          -
  Elimination of intersegment revenues              (832)       (902)         -
                                               ----------  ----------  ---------
           Consolidated revenues               $  42,854   $   7,841   $    647
                                               ==========  ==========  =========

Gain/(Loss) from operations:
  Currency                                     $ (88,476)  $ (46,443)  $(14,408)
  Direct marketing services                      (62,351)        499          -
  Technical and marketing consulting services        787      (2,075)         -
  Elimination of intersegment profits               (226)       (482)         -
                                               ----------  ----------  ---------
           Consolidated loss from operations   $(150,266)  $ (48,501)  $(14,408)
                                               ==========  ==========  =========

Assets:
  Currency                                     $ 111,474   $ 102,078   $ 17,567
  Direct marketing services                      263,282           -          -
  Technical consulting services                    1,456       2,623      4,368
                                               ----------  ----------  ---------
           Consolidated assets                 $ 376,212   $ 104,701   $ 43,623
                                               ==========  ==========  =========

Geographical Information

During the years ended 1998 and 1999,  we did not  recognize  any revenues  from
international  operations (which includes Canada,  where Nortel is located).  In
the year  ended  2000,  we  recognized  29% of our  revenue  from  international
operations.


                                    Page 49
<PAGE>



15.  Consolidated Statements of Cash Flows Information

A reconciliation  of net loss to net cash used in operating  activities  follows
(in thousands);

                                                              Years
                                                        Ended December 31,
                                                --------------------------------
                                                   2000       1999       1998
                                                ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                      $(184,197) $ (46,828) $ (14,111)
  Reconciliation to net cash used in operating
    activities:
    Depreciation and amortization                  77,267      4,401        629
    Deferred stock compensation expense             2,211      4,105        296
    Expenses relating to stock warrants and
      other stock arrangements                     17,070      8,595        841
    Advertising expense arising from
      barter transactions                             430      1,040        956
    Income in equity investee                        (454)         -          -
    Realized loss on marketable securities         37,570
    ClickMiles issued for services                  2,079      2,836        587
    Changes in operating assets and liabilities:
      Accounts receivable                          (3,652)    (1,276)      (201)
      Prepaid incentive awards                        624         66       (897)
      Prepaid expenses                              1,113     (1,022)       115
      Other assets                                  1,824     (2,865)      (155)
      Accounts payable                              2,868       (190)       281
      Accrued compensation and benefits             3,441      1,151        877
      Accrued redemption costs                     (2,404)    (1,089)       (78)
      Other accrued liabilities                       899      1,728        477
      Deferred revenue- product and services       21,141      7,115        848
                                                ---------- ---------- ----------

        Net cash used in operating activities   $ (22,170) $ (22,233) $  (9,535)
                                                ========== ========== ==========


                                    Page 50
<PAGE>



16.  Quarterly Results of Operations (UNAUDITED)

Following are the quarterly results of operations for the fiscal years ended
December 31, 2000 and 1999.

<TABLE>
<CAPTION>
                                                                                  Quarters Ended
                                                            -----------------------------------------------------
                                                              Dec. 31,     Sept. 30,      June 30,      Mar. 31,
                                                                2000          2000          2000         2000
                                                            -----------   -----------   -----------   -----------
                                                                      (in thousands, except per share amounts)
<S>                                                          <C>           <C>           <C>           <C>
Revenues:
  Product revenues                                           $   5,674     $   3,146     $   1,152     $     487
  Program-related services                                       4,771         4,943         2,136         1,645
  Direct marketing services                                      3,911         3,112         3,010         1,320
  Technical and marketing consulting services                    3,056           658         2,647         1,186
                                                            -----------   -----------   -----------   -----------
    Total revenues                                              17,412        11,859         8,945         4,638
                                                            -----------   -----------   -----------   -----------

Costs and expenses:
  Cost of product revenues                                       5,250         2,714           963           408
  Program-related services, marketing and support costs         12,308        10,171         8,486         7,706
  Cost of direct marketing services                              2,111         1,984         1,656           184
  Cost of technical and marketing consulting services            1,575           480         1,420           474
  Research and development                                       4,234         3,403         2,990         1,653
  Selling, general and administrative                           10,242        10,312         9,432         4,786
  Amortization of deferred stock compensation,
   supplier stock awards and intangibles                        29,101        27,935        27,449         3,693
                                                            -----------   -----------   -----------   -----------
    Total costs and expenses                                    64,821        56,999        52,396        18,904
                                                            -----------   -----------   -----------   -----------
Loss from operations                                           (47,409)      (45,140)      (43,451)      (14,266)
Interest income, net                                               514           852           642         1,177
Income in equity investee                                          454             -             -             -
Realized loss on marketable securities                         (37,570)            -             -             -
                                                            -----------   -----------   -----------   -----------
Net loss                                                     $ (84,011)    $ (44,288)    $ (42,809)    $ (13,089)
                                                            ===========   ===========   ===========   ===========

Net loss per share--basic and diluted                        $   (1.99)    $   (1.06)    $   (1.07)    $   (0.40)
                                                            ===========   ===========   ===========   ===========
Shares used in computing per share amounts--
  basic and diluted                                             42,307        41,964        39,902        32,590
                                                            ===========   ===========   ===========   ===========

                                                              Dec. 31,     Sept. 30,      June 30,      Mar. 31,
                                                                1999          1999          1999         1999
                                                            -----------   -----------   -----------   -----------
                                                                      (in thousands, except per share amounts)
Revenues:
  Product revenues                                           $     179     $     464     $     113     $     103
  Program-related services                                         736           398           297           117
  Direct marketing services                                      1,045            56            14             -
  Technical and marketing consulting services                      857         1,085           941         1,436
                                                            -----------   -----------   -----------   -----------
    Total revenues                                               2,817         2,003         1,365         1,656
                                                            -----------   -----------   -----------   -----------

Costs and expenses:
  Cost of product revenues                                         230           553            93            92
  Program-related services, marketing and support costs          5,889         7,059         4,983         4,538
  Cost of direct marketing services                                545             -             -             -
  Cost of technical and marketing consulting services              680           880           679           817
  Research and development                                       1,668         1,663           844         1,087
  Selling, general and administrative                            4,188         1,842         2,261         1,318
  Amortization of deferred stock compensation,
    supplier stock awards and intangibles                        9,558         1,970         1,397         1,508
                                                            -----------   -----------   -----------   -----------
    Total costs and expenses                                    22,758        13,967        10,257         9,360
                                                            -----------   -----------   -----------   -----------
Loss from operations                                           (19,941)      (11,964)       (8,892)       (7,704)
Interest income, net                                               850           376           351            96
                                                            -----------   -----------   -----------   -----------
Net loss                                                     $ (19,091)    $ (11,588)    $  (8,541)    $  (7,608)
                                                            ===========   ===========   ===========   ===========

Net loss per share--basic and diluted                        $   (0.70)    $   (3.12)    $   (2.56)    $   (2.53)
                                                            ===========   ===========   ===========   ===========
Shares used in computing per share amounts--
  basic and diluted                                             27,212         3,711         3,330         3,004
                                                            ===========   ===========   ===========   ===========

</TABLE>


                                    Page 51
<PAGE>



17. Subsequent Events

In January  2001,  the Company  entered into a partnership  with seven  Japanese
companies including Itochu  Corporation,  Dentsu.com Inc., JCB Co., Ltd., Itochu
Techno-Science Corporation,  Itochu IT Capital, Inc., cyber communications inc.,
and EC-One,  Inc. to form a joint  venture,  Customer  Loyalty  Network K.K. The
joint  venture  will  exclusively  license from  Netcentives  certain use of its
technology  infrastructure and trademarks. In January 2001, the Company invested
$431,000 in Customer Loyalty Network KK.

On April 2, 2001, the Company announced a cost reduction plan. The plan includes
a  decline  in  contract  labor,  cuts in  administrative,  travel  and  capital
expenditures,  and a reduction in work force of approximately  120 people.  As a
result of the  reduction  in force,  the Company  will be  recognizing  costs of
approximately $700,000 in its second quarter 2001 financial statements.

In  addition,  due to economic  conditions,  the Company has seen changes in its
relationship with Nortel, which launched their  employee-based  incentive system
powered  by the  Company  in June  2000.  While the  Company  expects  Nortel to
significantly decrease program volume levels for at least the second quarter, on
a longer term basis Nortel has indicated  that the program is an important  tool
for its employee  retention  and  productivity.  A copy of the  Company's  press
release is attached as Exhibit 99.1 hereto and incorporated by reference herein.


                                    Page 52
<PAGE>



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE

Not applicable.



                                    Page 53
<PAGE>



                                    PART III


Certain information required by Part III is omitted from this report because the
Registrant will file its 2001 Proxy  Statement  within 120 days after the end of
its fiscal year pursuant to Regulation 14A as promulgated by the U.S. Securities
and Exchange  Commission for its Annual Meeting of  Shareholders to be held June
6, 2001.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding Registrant's directors will be set forth under the caption
"Election of Directors - Nominees" in the Registrant's 2001 Proxy Statement.

Executive Officers of the Company

The  executive  officers of the Company and their ages, as of March 19, 2001 are
as follows:

Name                  Age          Position

West Shell III        46           Chairman of the Board of Directors

Eric Larsen           48           Chief Executive Officer and President

Elizabeth S. Ames     43           Senior Vice President, Product
                                   Development & Services

Kamal Arafeh          37           Senior Vice President, Sales

Hans-Peter Brondmo    38           Fellow

Murray Brozinsky      36           President, Loyalty Solutions

Tim J. O. Catlin      36           Chief Technical Officer

Kevin Johnson         36           Senior Vice President,

Steve Koenig          38           Vice President, Strategic Consulting

John F. Longinotti    55           Chief Operating Officer

Judith A. Player      44           Vice President, General Counsel

Edward Fong Soo Hoo   48           Senior Vice President, Global
                                   Development

Mr.  West Shell was  elected to our Board of  Directors  in January  1997 and as
Chairman of the Board of Directors in July 1999.  He served as our President and
Chief Executive  Officer from June 1997 up to January 2000. From January 2000 to
March 2001,  Mr. Shell served as the Chief  Executive  Officer.  As of March 30,
2001 Mr. Shell  continues to serve as Chairman of the Board.  In 1986, Mr. Shell
founded Pacific Marketing Group  (subsequently  Highway One  Communications),  a
marketing firm, and acted as its Managing  Partner until November 1996. Prior to
founding Pacific  Marketing  Group, Mr. Shell held marketing  positions at Atari
Corp.,  a video game  manufacturer,  Johnson & Johnson,  a  healthcare  products
company,  and Grey Advertising  Inc., an advertising  agency.  Mr. Shell holds a
B.S. in Business Administration from the University of Vermont.

Mr. Eric Larsen joined Netcentives as our President and was elected to our Board
of Directors in January  2000. As of March 30, 2001 Mr. Larsen has served as the
President and Chief Executive Officer. Prior to joining Netcentives,  Mr. Larsen
held the position of President  with Impiric,  formerly  Wunderman Cato Johnson,
which he joined in 1998.  From 1996 to 1998, Mr. Larsen served as vice president
of Global  Client  Care at  Gateway  Computers.  From 1995 to 1996,  Mr.  Larsen
co-founded  and was  employed  by M(2)  Communications.  From 1987 to 1995,  Mr.
Larsen  was  employed  by Apple  Computer  where he spent  nine years in various
capacitates,  including serving as marketing director for Apple's North American
Customer  Communications  division and as a regional sales  manager.  Mr. Larsen
received his undergraduate education at the University of Iowa.


                                    Page 54
<PAGE>


Ms.  Elizabeth  Ames joined  Netcentives in November 1998 and has served us in a
variety of  capacities  since  that time,  including  currently  as Senior  Vice
President,  Product  Development & Services.  From July 1999 until May 2000, Ms.
Ames served as the Senior Vice President and General Manager,  Loyalty Networks.
From May 1998 to November 1998, Ms. Ames was General Manager,  Internet Merchant
Group at VeriFone,  Inc., an electronic  payment system  company,  where she had
profit and loss responsibility for sales,  marketing and product development for
the  Internet  merchant  market.  While at  VeriFone,  Ms.  Ames also  served as
Director,  Product  Marketing,  Internet Commerce Division from June 1997 to May
1998.  From October 1996 to June 1997,  Ms. Ames was an  independent  consultant
with a focus on Internet commerce and marketing  technology.  From November 1995
to October 1996, Ms. Ames was Vice President, Product Development at Eagle River
Interactive,  an interactive  advertising  agency. From January 1994 to November
1995,  Ms. Ames was a Principal at Opus  Consulting,  a strategic  marketing and
Internet  consulting group.  Prior to 1994, Ms. Ames held a variety of positions
with Apple Computer, Inc., a computer manufacturer. Ms. Ames holds a B.F.A. from
the  Hartford  Art  School at the  University  of  Hartford  and an M.B.A.  from
Southern Methodist University.

Mr. Kamal Arafeh joined Netcentives as Senior Vice President, Sales, in February
2001. Just before joining Netcentives, Mr. Arafeh was the Vice President, Global
Accounts and  Telesales  with  Broadvision.  Between 1997 and 2000,  Mr.  Arafeh
served, first, as Vice President,  North American Channel Sales and then as Vice
President,  U.S. Sales (Magic Solution  Division) of  Broadvision.  From 1995 to
1996,  Mr.  Arafeh  was  a  Corporate  Development  Executive  in  the  Personal
Productivity  Products Division with Texas  Instruments.  From 1988 to 1995, Mr.
Arafeh was an Account Manager with Zenith Data Systems.  Mr. Arafeh holds a B.A.
from Johnson & Wales University.

Mr. Hans-Peter  Brondmo serves as the first Netcentives  fellow  responsible for
corporate strategy and evangelizing next generation relationship marketing.  Mr.
Brondmo  founded  Post  Communications  in 1996 and  developed  email  marketing
programs for known online and offline brands including  Victoria's Secret,  Palm
and Petopia. Mr. Brondmo holds a B.S. degree from the Massachusetts Institute of
Technology and did his Master's research at the MIT Media Lab.

Mr. Murray  Brozinsky  joined  Netcentives  in April 1998 and has served us in a
variety of capacities since that time, including currently as President, Loyalty
Solutions and Managing  Director,  North  America,  a position he has held since
July 1999.  From September  1994 to April 1998,  Mr.  Brozinsky was a consultant
with the  Boston  Consulting  Group,  a  management  consulting  firm,  where he
specialized  in  developing   e-commerce  strategies  for  high  technology  and
financial services clients. Prior to September 1994, Mr. Brozinsky served as the
Director  of  Finance  at  McCaw  Cellular   Communications   Inc.,  a  cellular
telecommunications  company,  General Manager of Monitor Marine, a subsidiary of
Monitor Aerospace Corporation,  a high technology  manufacturing company, and as
an investment banker with Morgan Stanley and Company,  Inc., an investment bank.
Mr.  Brozinsky  holds a B.S.  in  Finance  and a B.A.  in  Philosophy  from  the
University of Pennsylvania  and an M.B.A. in management and  manufacturing  from
Northwestern University's Kellogg and McCormick schools.

Mr.  Tim Catlin  joined  Netcentives  in  November  1996 as our Vice  President,
Research  &  Development  and  became  our  Senior  Vice  President,  Research &
Development in July 1999.  From July 1996 to October 1996, Mr. Catlin was Senior
Director  of  Engineering  at Eagle River  Interactive.  From March 1995 to July
1996,  Mr.  Catlin  was an  Engineering  Manager at Intuit,  Inc.,  a  financial
software company.  From September 1993 to January 1995, Mr. Catlin was President
and Chief Executive Officer of Streetlight  Software,  Inc., a software services
company. Mr. Catlin holds a B.A. in Computer Science from Brown University.

Mr. Kevin Johnson joined Netcentives as Senior Vice President,  Client Services,
Email Marketing Group in December 2001. Just prior to joining  Netcentives,  Mr.
Johnson  founded and  launched  Passporta.com.  From 1993 to 1999,  Mr.  Johnson
served in a variety of  positions  with The Boston  Consulting  Group  including
Manager,  Case  Leader and  Consultant  in the United  States and the Asia.  Mr.
Johnson holds an M.B.A.from the Stanford  Graduate School of Business and a B.A.
from the University of California at Berkeley.

Mr. Steve Koenig joined Netcentives as Vice President,  Strategic Consulting, in
January 2001. From 1998 to 2001, Mr. Koenig served as General Manager and Senior
Client Partner of Viant Corporation. From 1994 to 1998, Mr. Koenig served in two
roles with  Strategic  Decisions  Group:  Independent  Marketing  Consultant and
Senior Associate. Mr. Koenig holds an M.B.A. from the Harvard Graduate School of
Business Administration. Mr. Koenig holds an M.S., Engineering Economic Systems,
and B.A., Mathematical Sciences, from Stanford University.

Mr. Jack  Longinotti  joined  Netcentives  in January 1998 and has served as our
Executive  Vice  President,  Operations  since July 1999 and as Chief  Financial
Officer since January 1998. Mr. Longinotti served as a consultant to Netcentives
from  October  1997 to January  1998.  From April 1995 to January 1998 he was an
independent consultant in an operational and financial consulting practice. From
July 1993 to March 1995 Mr.  Longinotti was Chief  Executive  Officer of Digital
Collections,  Inc., a graphics  software and  multimedia  firm.  Mr.  Longinotti
started his career at U.S. Leasing International where he spent sixteen years in
a variety of executive  positions,  followed by two years at AT&T  Capital.  Mr.
Longinotti  holds a B.S. in Engineering  from Stanford  University and an M.B.A.
from the University of California at Berkeley's Haas School of Business.

Ms. Judith  Player,  Vice  President,  General  Counsel,  joined  Netcentives in
December  2000.  Prior to joining  Netcentives,  Ms.  Player served as Corporate
Counsel  with  Hewlett-Packard  Company  from  October  1999.  From June 1997 to
October 1999, Ms. Player was Senior Group Counsel,  Enterprise  Computing Group,
Telecommunications  Group. From December 1995 to June 1996, Ms. Player served as
Corporate  Counsel of Informix  Software,  Inc. Ms. Player holds a J.D. from the
University  of  Connecticut,  School  of Law,  an  M.B.A.  from San  Jose  State
University and a B.A. from Ithaca College.


                                    Page 55
<PAGE>


Mr. Ed Soo Hoo has served as our Senior Vice  President,  Corporate  Development
since March 1998.  From  September 1997 to March 1998, Mr. Soo Hoo was Executive
Vice  President  of Sales at  Quote.com,  Inc., a Web-based  financial  services
information  company.  From  February  1996 to September  1997,  Mr. Soo Hoo was
Director  of Business  Development  at  CyberCash,  Inc.,  an Internet  commerce
payment solutions  company.  From January 1994 to February 1996, Mr. Soo Hoo was
Business  Development  Manager, OEM at Novell, Inc., a network operating systems
manufacturer. Mr. Soo Hoo studied business administration at both the University
of San Francisco and California State University, Hayward.

Item 11. EXECUTIVE COMPENSATION

The  information  required by this item is  incorporated  by reference into this
Form 10-K from the  information  set forth  under the caption  "Compensation  of
Executive Officers" in the Company's 2001 Proxy Statement.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required by this item is  incorporated  by reference into this
Form 10-K  from the  information  set forth  under  the  caption  "Common  Stock
Ownership of Certain  Beneficial  Owners and  Management"  in the Company's 2000
Proxy Statement.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required by this item is  incorporated  by reference into this
Form  10-K  from  the   information   set  forth  under  the  caption   "Certain
Relationships and Related Transactions" in the Company's 2001 Proxy Statement.



                                    Page 56
<PAGE>



                                     PART IV


Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Exhibits

The following exhibits are included in this report.

Exhibit No.                                Description

2.1*                Agreement  and Plan of Merger  among the  Netcentives  Inc.,
                    Brown Dog Acquisition Corporation and UVN Holdings, Inc.

2.2**               Agreement   and  Plan  of   Reorganization   by  and   among
                    Netcentives  Inc.,  Arachnid  Acquisition   Corporation  and
                    MaxMiles, Inc.

2.3***              Agreement   and  Plan  of   Reorganization   by  and   among
                    Netcentives Inc., Correspondence Acquisition Corporation and
                    Post Communications, Inc.

3.1****             Amended and Restated  Certificate  of  Incorporation  of the
                    Registrant.

3.2****             Bylaws of the Registrant.

3.3****             Form of Amended and Restated Certificate of Incorporation.

3.4****             Form of Amended and Restated Bylaws.

4.1****             Form of Netcentives common stock certificate.

10.1****            Form of Indemnification Agreement for directors and officers
                    of Netcentives.

10.2****            1996 Stock Option Plan, as amended, and form of stock option
                    agreement and restricted stock purchase agreement.

10.3****            1999 Employee Stock  Purchase Plan and form of  subscription
                    agreement.

10.4****            1999  Directors'  Stock Option Plan and form of stock option
                    agreement.

10.8****            Confidential  Advantage   Participation   Agreement  between
                    American  Airlines,  Inc. and Netcentives  Inc. dated August
                    19, 1997.

10.12****           Amended and Restated Supply Agreement  between Mileage Plus,
                    Inc. and Netcentives Inc. dated September 9, 1999.

10.16****           Office Lease between Netcentives and SKS Brannan Associates,
                    LLC dated May 5, 1999.

10.17****           Employment Agreement between Netcentives and West Shell, III
                    dated June 26, 1997 and  Amendment to  Employment  Agreement
                    dated October 29, 1998.

10.18****           Change of Control Agreement between  Netcentives and John F.
                    Longinotti dated January 15, 1998.

10.19****           Amended and Restated Rights  Agreement  between  Netcentives
                    and certain stockholders dated March 19, 1999.

                                    Page 57
<PAGE>

Exhibit No.                                Description

10.21****           Internet  Services and  Products  Agreement  between  Exodus
                    Communications,  Inc. and  Netcentives  Inc. dated August 1,
                    1997.

10.22*****+         Interactive Marketing and Software Distribution Agreement by
                    and between America Online,  Inc. and Netcentives Inc. dated
                    as of January 28,2000.

10.23+ (Page 61)    Master  Services  Agreement  between  Netcentives  Inc.  and
                    Nortel Networks Limited dated February 7, 2000.

10.24  (Page 94)    BT   Commercial   Sublease   dated  July  20,  2000  between
                    Netcentives   Inc.  and   Pets.com,   and   Assignment   and
                    Termination Agreement between Netcentives Inc., Pets.com and
                    the Paulsen Family Partnership dated December 22, 2000.

21.1***             Subsidiaries of the Registrant.

23.1   (Page 106)   Independent Auditors' Consent.

99.1   (Page 107)   News release dated April 2, 2001.

*    Incorporated   by  reference  to  the  exhibit  with  the  same   numerical
     designation filed as part of the Report on Form 8-K of the Registrant dated
     March 3, 2000, filed with the SEC on March 20, 2000.
**   Incorporated   by  reference  to  the  exhibit  with  the  same   numerical
     designation  filed as part of the  Company's  Report  on form  10-Q for the
     quarterly period ended March 31, 2000 filed with the SEC on May 15, 2000.
***  Incorporated  by reference to the exhibit  designated  2.1 filed as part of
     the Company's  Report on Form 10-Q for the quarterly  period ended June 30,
     2000, filed with the SEC on August 14, 2000.
**** Incorporated   by  reference  to  the  exhibit  with  the  same   numerical
     designation  filed  as  part  of  the  Company's   Registration   Statement
     333-83443,  as  amended,  declared  effective  on October 19,  1999.  *****
     Incorporated   by  reference  to  the  exhibit  with  the  same   numerical
     designation  filed  as  part of the  Company's  Report  on Form  8-K of the
     Registrant dated January 23, 2000, filed with the SEC on February 15, 2000.
+    Confidential Treatment Requested.

(b)  The following financial  statements and schedules are filed as part of this
     report:

      (page 27)     Independent  Auditors' Report
      (page 28)     Consolidated Balance Sheets at December 31, 2000 and 1999
      (page 29)     Consolidated  Statements of  Operations  for the years ended
                    December 31, 2000, 1999 and 1998
      (page 30)     Consolidated  Statements  of  Stockholders'  Equity  for the
                    years ended December 31, 2000, 1999 and 1998
      (page 33)     Consolidated  Statements  of Cash Flows for the years  ended
                    December 31, 2000, 1999 and 1998
      (page 34)     Notes to Consolidated Financial Statements
      (page 59)     Schedule II-Valuation and Qualifying Accounts


                                    Page 58
<PAGE>



                                  SCHEDULE II

                                NETCENTIVES INC.

                       VALUATION AND QUALIFYING ACCOUNTS
              For the Years Ended December 31, 2000, 1999 and 1998
                                 (In thousands)

                                             Additions
                                Balance at      and     Write-offs
                                 Beginning   Charges to     and       Balance at
                                 of Year      Expenses   Deductions  End of Year
                                ----------   ---------- -----------  -----------

Description
Year Ended December 31, 1998
Accounts receivable allowance      $   -       $   -        $   -       $   -
                                  =======     =======      =======     =======

Year Ended December 31, 1999
Accounts receivable allowance      $   -       $  50        $   -       $  50
                                  =======     =======      =======     =======
Year Ended December 31, 2000
Accounts receivable allowance      $  50       $ 685        $ 188       $ 547
                                  =======     =======      =======     =======


(c)  Reports on Form 8-K:

No  reports on Form 8-K have been  filed  during the last  quarter of the period
covered by this report.



                                    Page 59
<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.

                                NETCENTIVES INC.

Date: March 30, 2001          By:       /s/ John F. Longinotti
                                        ----------------------
                                        John   F.   Longinotti,   Executive
                                        Vice President, COO and CFO

                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature  appears
below  constitutes and appoints John F.  Longinotti and West Shell III,  jointly
and  severally,   his  or  her   attorneys-in-fact,   each  with  the  power  of
substitution,  for him or her in any and all capacities,  to sign any amendments
to this Report on Form 10-K,  and to file the same,  with  exhibits  thereto and
other  documents  in  connection  therewith  with the  Securities  and  Exchange
Commission,   hereby   ratifying   and   confirming   all  that   each  of  said
attorneys-in-fact,  or his or her substitute or substitutes,  may do or cause to
be done by virtue hereof.

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

     Signature                        Title                          Date
     ---------                        -----                          ----

/s/ West Shell III        Chairman of the Board of Directors    March 30, 2001
----------------------
   (West Shell III)

/s/ John F. Longinotti    Executive Vice President,  Chief      March 30, 2001
----------------------
   (John F. Longinotti)    Operating  Officer and Chief
                          Financial  Officer  (Principal
                         Financial and Accounting Officer)

/s/ Stewart Alsop                   Director                    March 30, 2001
----------------------
   (Stewart Alsop)

/s/ Tom Byers                       Director                    March 30, 2001
----------------------
   (Tom Byers)

/s/ Eric Larsen               President, Chief Executive        March 30, 2001
----------------------
   (Eric Larsen)                 Officer and Director
                             (Principal Executive Officer)

/s/ Michael Solomon                 Director                    March 30, 2001
----------------------
   (Michael Solomon)

/s/ Virginia Turezyn                Director                    March 30, 2001
----------------------
  (Virginia Turezyn)

/s/ Wendell Van Auken               Director                    March 30, 2001
----------------------
  (Wendell Van Auken)



                                    Page 60
<PAGE>
                                                                   Exhibit 10.23


                                              Nortel Agreement No. 142330/010502
                                              Contractor Agreement No. _________

                            MASTER SERVICES AGREEMENT

Master Services Agreement  ("Agreement") by and between Nortel Networks Limited,
a corporation  incorporated  under the laws of Canada,  having an office at 8200
Dixie Road,  Suite 100,  Brampton,  Ontario L6T 5P6 ("Nortel")  and  Netcentives
Inc., a corporation incorporated under the laws of Delaware, having an office at
475  Brannan  Street,   San  Francisco,   California   94107   ("Contractor"  or
"Netcentives") effective as of February 7, 2000 ("Effective Date"):

     WHEREAS, Nortel and Contractor desire to agree on the provisions applicable
to the obtaining of Services (as defined in Section 1) from Contractor by Nortel
or any entity of which Nortel directly or indirectly  either owns at least fifty
percent  (50%)  of  the  voting  securities  of  any  such  entity,  or,  for an
unincorporated  entity,  may exercise at least fifty percent (50%) of the voting
power of any such entity (each, including Nortel, a "Nortel Company");

     NOW,  THEREFORE,  in consideration of the mutual promises herein contained,
Nortel and Contractor hereby agree as follows:

1.   Orders,  Blanket Orders and Releases. Any Nortel Company may, but shall not
be obligated to, issue purchase  orders  ("Orders")  for the services  described
generally in Exhibit A  ("Services")  during the Term (as defined in Section 5).
Exhibit A is attached  hereto and  incorporated  herein by  reference.  An Order
issued hereunder shall create  contractual rights and obligations solely between
the Nortel Company which issued the Order and Contractor,  and no Nortel Company
shall have any  obligation or liability to  Contractor  with respect to an Order
not issued by it.  Contractor shall supply Services  specified in any Order in a
timely  manner and to the  satisfaction  of the Nortel  Company which issued the
Order.  If a Nortel Company  provides  Contractor with a forecast or estimate of
the volume of Services that it may order,  Contractor  acknowledges that neither
such Nortel Company nor any other Nortel Company shall be obligated to submit an
Order for all or any portion of such forecast or estimate.
     Any Nortel Company may, for its  convenience,  issue Orders during the Term
which do not set forth a quantity of  particular  Services,  a  particular  time
period or milestone start or completion dates for such Services, which quantity,
time periods and/or milestone start and completion  dates, as applicable,  shall
subsequently  be set forth in a release  document  issued by such Nortel Company
pursuant to such an Order  ("Release").  All  Releases  for the purposes of this
Agreement shall be included in the term "Order."
     An Order or Release, or attachments  thereto,  may set forth the following,
as applicable:
          (a) type of Services to be supplied, including:
               (i) specific description of Services for a particular project
               (ii) milestone descriptions
          (b)  the anticipated time period for the supply of Services;
               (i)  milestone start and completion dates
          (c)  description of Deliverables (as defined in Section 6) including:
               (i)  form or media
               (ii) due date

  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 61
<PAGE>

          (d)  fees for project or rates for supply of Services,  such  Services
               being supplied by Workers of Contractor; "Workers" shall mean all
               employees, agents (including without limitation employees of such
               agents)  and   sub-contractors   (including   without  limitation
               employees  of such  sub-contractors)  of  Contractor  who  supply
               Services;
          (e)  maximum amount of the fees for Services;
          (f)  payment schedule and payment milestones;
          (g)  acceptance criteria for Services and/or the Deliverables;
          (h)  location where Services shall be supplied;
          (i)  the location where invoices shall be rendered for payment;
          (j)  the  identity  of  Nortel  Company  Coordinator  who  will be the
               primary contact for the designated Services; and
          (k)  equipment   and/or  software  to  be  provided  by  and  used  by
               Contractor in the supply of Services.

     Notwithstanding  that an Order does not refer to this Agreement,  any Order
issued for Services by a Nortel  Company during the Term shall be deemed to have
been issued  pursuant to this Agreement  unless the parties  expressly  agree in
writing to the contrary.

2.   Nortel  Company   Coordinator.   Contractor  shall  address  all  questions
regarding an Order, and shall submit all Deliverables to, the applicable  Nortel
Company Coordinator.

3.   Fees,  Expenses,  Taxes.  The fees or rates  specified  in  Exhibit A shall
remain in effect  throughout  the Term;  provided,  however,  that if Contractor
notifies  Nortel in writing  prior to the first day of the last * of the first *
(*) * of the Term that  Contractor  wishes  the  parties to review the rates set
forth in Exhibit A, the  parties  shall so review such rates and  negotiate  any
changes in those rates, based upon *, proposed for the * (*) months of the Term.
If (a) Contractor does not so notify Nortel in writing or (b) the parties, after
so negotiating *, the rates  specified in Exhibit A shall continue for the * (*)
* of the Term.  Any revised rates  mutually  agreed upon by the parties shall be
set forth in an amendment to this Agreement.

     No Nortel Company shall be charged for Services in excess of the applicable
rates or project fees specified in Exhibit A. In no event shall a Nortel Company
be liable to pay any fees in excess of the  relevant  limitations  stated on the
face of, or in  attachments  to, the  applicable  Order.  A Nortel  Company  and
Contractor may by mutual agreement in writing add to this Agreement services not
described in Exhibit A and the project fees or rates applicable thereto.  Unless
otherwise specified in an Order,  Contractor shall only issue an invoice for the
fees for Services as follows: (a) with respect to Services supplied on an hourly
basis,  not more often than one time per month and (b) with  respect to Services
supplied  on a project  basis,  not until  Services  are  accepted by the Nortel
Company  which issued the Order.  The invoice shall be paid within * (*) days or
the amount of time specified in the Exhibits attached hereto,  after the date of
invoice  provided  that  the  Nortel  Company   Coordinator  has  approved  such
invoice(s) for payment.

     The Nortel  Company which issued the Order shall  reimburse  Contractor for
approved reasonable expenses identified in Exhibit A which are incurred and paid
by  Contractor  in connection  with the  fulfillment  of an Order issued by such
Nortel Company, provided:

     a.   such Nortel  Company has authorized the incurrence of such expenses in
          writing in advance; and

     b.   such expenses do not exceed the  allowances  such Nortel Company makes
          for its own employees, if applicable.

  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 62
<PAGE>

     Contractor  shall invoice such Nortel Company for such authorized  expenses
no less often than monthly. All invoices shall be substantiated with receipts or
other evidence of payment and shall be subject to audit by such Nortel Company.

     Other than the reimbursement of the  above-approved  expenses,  in no event
shall any Nortel  Company be liable for any costs or  expenses  incurred  in the
course of a Worker supplying Services.

     The Nortel  Company which issued the Order shall withhold the amount of any
tax required to be withheld from  payments  made to Contractor  pursuant to this
Agreement.  To assist in obtaining any tax credits for the amounts withheld from
payments made to Contractor,  Nortel Company shall promptly  furnish  Contractor
with such evidence as may be required by the  applicable  taxing  authorities to
establish that any such tax has been paid.

     Such Nortel  Company shall pay to Contractor  the amount of any  applicable
sales, use or service tax which Contractor may be required to collect because of
its performance of this Agreement, except for any franchise tax, withholding tax
(as described  above) or any tax imposed on  Contractor's  net income,  provided
Contractor  identifies  any such tax as a separate  line item on each invoice it
submits for the payment of fees, failing which, the amount of any such tax shall
be deemed to have been (a)  included  in the fees for  Services  and (b) paid in
full  when  payment  is made for the  fees for  Services  to which  they  apply.
Notwithstanding the foregoing,  Contractor has relied on the advice of Nortel in
excluding  GST  tax  from  the  invoices  issued  pursuant  to  this  Agreement.
Accordingly,  Contractor reserves the right to retroactively include such tax in
future invoices if required.

4.   Reports and Inspections. In connection with the Services, Contractor shall,
in addition to reports described elsewhere in this Section 4, provide reports to
Nortel or to the applicable Nortel Company,  containing information as specified
by Nortel or Nortel  Company,  in a format and on a schedule as set forth in the
Exhibits attached hereto,  and such reports shall be subject to verification and
audit.

     Upon  written  request  by Nortel,  thirty  (30) days after the end of each
calendar  year,  Contractor  shall  prepare and submit to Nortel,  c/o  Contract
Manager,  Nortel Networks Supply Management  identified in Section 24, an annual
report, in a manner and form acceptable to Nortel, identifying those Workers who
have  supplied  Services  pursuant to this  Agreement in the United  States on a
substantially  full-time  basis  for at least one (1) year.  In  addition,  upon
written request,  Contractor shall provide within thirty (30) days of the end of
a calendar year a certification that the representations contained in Section 10
hereof are true and  correct  in all  material  respects  as of the date of such
annual certification with the same effect as if such representation were made on
and as of such date.

     Contractor shall prepare and submit to Nortel, c/o Contract Manager, Nortel
Networks  Supply  Management  identified in Section 24,  monthly  reports,  in a
manner  and form  acceptable  to  Nortel,  identifying  those  Workers  who have
supplied  Services  pursuant  to this  Agreement  for forty (40) weeks or longer
immediately preceding the date of such report.


  *  Material has been redacted pursuant to a request for confidential treatment


                                    Page 63
<PAGE>


     *  during  the * of  the  term  and *  thereafter,  Nortel  and  any of its
authorized  representatives  shall have the right during ordinary business hours
to visit and inspect  Contractor's  facilities  and/or any systems or  processes
pertaining  to the supply of Services  under this  Agreement.  Contractor  shall
provide all reasonable  facilities and assistance for the safety and convenience
of such visitors and inspectors during their visits,  including making personnel
engaged, whether directly or indirectly, in the supply of Services available for
consultation at all reasonable times.  Every visitor and inspector  attending at
any facility of Contractor or other relevant site shall comply at all times with
all  applicable  safety and security  rules and  regulations  established by the
Contractor or other relevant party.

5.   Term.  The term of this  Agreement  shall commence as of the Effective Date
and shall expire * (*) *  thereafter,  unless sooner  terminated as  hereinafter
provided  ("Term").  To the extent that any Services have not been  completed by
the end of the Term, all of the  provisions of this Agreement  shall continue to
govern such Services. The Term may be renewed or extended pursuant to the mutual
written agreement of the parties. If Contractor is acquired, merged or sold to a
Direct  Competitor of Nortel (as defined  below),  Nortel  reserves the right to
terminate this Agreement  immediately upon written notice.  If Nortel acquires a
Direct  Competitor of Netcentives  (as defined below),  Contractor  reserves the
right to terminate this Agreement  immediately  upon written  notice.  A "Direct
Competitor  of Nortel"  means (a) any entity  listed in Exhibit C and/or (b) any
Affiliate  (as defined  herein) of any entity listed in Exhibit C, provided that
Nortel may amend Exhibit C no more than once per quarter with Contractor's prior
written consent,  which shall not be unreasonably withheld or delayed. A "Direct
Competitor of  Netcentives"  means (a) any entity listed in Exhibit D and/or (b)
any  Affiliate  (as defined  herein) of any entity listed in Exhibit D, provided
that  Contractor may amend Exhibit D no more than once per quarter with Nortel's
prior written consent, which shall not be unreasonably withheld or delayed.

6.   Rights in Data.  Contractor  and  Nortel  acknowledge  that the  consulting
services to be provided by Contractor to Nortel under this  Agreement may result
in the  development of original  written  material,  inventions,  discoveries or
improvements, and therefore agree as follows:

a.   Nortel Materials.  Contractor * to Nortel to operate the software developed
under this  Agreement  (the  "Software")  for the sole purpose of operating  the
Nortel  System.  This * may be used  solely for the benefit of Nortel by Nortel,
its  subsidiaries  or an  authorized  agent  of  Nortel  .  This  * may  not  be
transferred  or sold to any other  entity.  Nortel  shall own (a) *  including *
Nortel  under  this  Agreement,  (b) all  Nortel  branded  web pages and (c) any
software * the of * with  Nortel's *. This Section 6.1 * developed by * and * of
* Nortel hereunder; provided, however, that * of the *.

6.2  Uses of Concepts. Any ideas,  concepts,  know-how or techniques relating to
data processing that are developed  during the course of performance of services
under this Agreement,  * or * Nortel, * provided that Section 8 (Confidentiality
Information) is adhered to.

6.3  Ownership of Inventions.  Each  invention,  discovery or  improvement  that
includes  ideas,  concepts,  know-how or techniques  relating to data processing
developed pursuant to this Agreement shall be treated *.

6.4  Other Contractor  Activities.  This Agreement shall not preclude Contractor
from * Nortel.

6.5  Contractor  shall execute and have Workers  execute,  without charge to the
Nortel  Company  which  issued  the Order,  a "  Confidentiality  and  Invention
Assignment  Agreement" in the form of Exhibit B Attached hereto and incorporated
herein by reference.


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 64
<PAGE>


6.6  Contractor  represents  and warrants  that it (a) is the sole and exclusive
owner of Deliverables and the Intellectual  Property Rights therein, (b) has the
free, clear and absolute right to sell, transfer,  assign and convey the same to
the applicable Nortel Company, (c) has obtained and possesses the written waiver
of any and all moral rights  which may be held by all creators of  Deliverables,
including  Workers,  and (d) has obtained and possesses the written agreement of
all  creators  of  Deliverables,   including  Workers,  selling,   transferring,
assigning and conveying to Contractor unrestricted and complete right, title and
interest in such persons'  contributions  to Deliverables  and the  Intellectual
Property  Rights  in such  contributions  (including,  without  limitation,  the
unrestricted  right of Contractor to further sell,  transfer,  assign and convey
such right, title and interest to such Nortel Company).

7.   Warranties.

     Contractor represents and warrants that (a) Services shall be supplied in a
professional  and highly  skilled  manner and to  standards  not less than those
generally accepted in the industry and (b) Deliverables shall (i) conform to the
specifications or other requirements of this Agreement or requirements,  if any,
which are described on or attached to a particular  Order and (ii) shall be free
from defects in material and  workmanship  for twelve (12) months  following the
date of  acceptance  by the Nortel  Company which issued the Order except to the
extent that such defects in material and workmanship are solely  attributable to
specific Nortel Company instructions or directions, including without limitation
any instructions or directions with respect to testing.

     Contractor  further  represents and warrants that a) Deliverables which are
comprised of software or other  technology  that processes date and time related
data and b) any  software or systems of  Contractor  used by  Contractor  in the
supply of Services or  performance  of this  Agreement  in any way  ("Contractor
Systems")  shall (i) process  date and time  related  data  without  causing any
processing  interruptions,  abnormal  terminations,  or changes  in  performance
characteristics, and (ii) shall process and manipulate all date and time related
functions  correctly.  Without  limiting the generality of the  foregoing,  such
Contractor Systems and Deliverables shall:

(w)  correctly  handle  date and time  related  data  before,  during  and after
     January 1, 2000,  including  but not  limited  to  accepting  date and time
     input, providing date and time output, and performing ongoing operations on
     dates and times and portions of dates and times including,  but not limited
     to,  calculating,  comparing  and  sequencing  of dates  and times (in both
     forward and backward operations spanning century boundaries);

(x)  correctly  handle  leap year  calculations  including,  but not limited to,
     identification  of leap years,  interval  calculations (in both forward and
     backward operations spanning century boundaries), day-in-year calculations,
     day-of-the-week calculations, and week-of-the-year calculations);

(y)  correctly handle all two digit date and time related input in a manner that
     resolves ambiguity as to century in a disclosed,  defined and predetermined
     manner; and

(z)  correctly store, retrieve and provide output of all date and time data in a
     manner that is unambiguous as to century.


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 65
<PAGE>


     Contractor shall use commercially reasonable efforts to correct any failure
of  Contractor  Systems,  Services  or  Deliverables  to  conform  to the  above
warranties on a timely basis except where such failure is solely attributable to
specific Nortel Company instructions or directions, including without limitation
any instructions or directions with respect to testing and/or the combination of
the  Deliverables  with software or other  technology that process date and time
related  data  not  supplied  by  Contractor.   Notwithstanding  the  foregoing,
Contractor  shall honor for the benefit of the Nortel  Company  which issued the
Order the terms of its  standard  warranties  with  respect to  services  and/or
Deliverables to the extent any such standard  warranties  exceed in either scope
or duration the above warranties.

     Any  provisions  of this  Agreement  that  tend to limit or  eliminate  the
liability of Contractor  shall have no application with respect to the year 2000
compliance warranty set out above.

     Each party to this Agreement  represents and warrants to the other that (a)
such party has the full corporate right, power, and authority to enter into this
Agreement and perform the acts  required of it  hereunder,  (b) the execution of
this  Agreement  by  such  party,  and the  performance  by  such  party  of its
obligations and duties  hereunder,  do not and will not violate any agreement to
which  such  party is a party or by which it is  otherwise  bound,  and (c) when
executed and delivered by such party,  this Agreement will constitute the legal,
valid and binding  obligation of such party,  enforceable  against such party in
accordance with its terms.

     Except for the express warranties stated in this Section,  Contractor makes
no  warranty,  express,  implied,  statutory or  otherwise,  with respect to the
Services and  Deliverables,  and Contractor  specifically  disclaims any implied
warranties of title, merchantability,  fitness for a particular purpose, freedom
from computer virus, and any implied  warranties  arising from course of dealing
or course of performance.

8.   Confidential  Information and Publicity.  Contractor considers Contractor's
information relating to pricing and any personal  information  regarding Workers
disclosed  to  a  Nortel  Company  in  a  resume  or  similar   document  to  be
confidential. Nortel Company agrees to utilize the same degree of care as Nortel
Company  uses with  respect to its own  information  of a similar  nature to not
disclose the  information  set forth herein to parties  other than  employees of
Nortel or the  other  Nortel  Companies  having a need to know in order to place
Orders under this Agreement.

     Any  information  provided by a party (the  "Discloser") to the other party
(the  "Recipient")  in connection  with the  negotiation  or performance of this
Agreement or any Order, regardless of form, including, but not limited (note; we
will be adding to this list to make it more comprehensive) to technical drawings
and manuals,  designs and concepts;  software programs,  routines,  formulae and
concepts; production plans, designs, layouts and schedules;  marketing analyses,
plans,  customer  data and  surveys;  all matters  relating  to any  Discloser's
finances and personnel; and all Deliverables, shall be deemed to be confidential
information  of the Discloser , except if such  information is (a) in or becomes
part of the  public  domain  through no fault of  Recipient,  (b)  disclosed  to
Recipient by a third party  without  restriction,  (c) known to Recipient at the
time of  disclosure  and is so  documented  or (d)  independently  developed  by
Recipient without access to any information  furnished to it by Discloser and is
so documented ("Confidential  Information").  All Confidential Information shall
be held in  confidence  by Recipient  and, if in written  form,  returned to the
Discloser upon its request.  Recipient shall (w) not reproduce the  Confidential
Information  without  the  written  consent of the  Discloser  , (x) not use the
Confidential  Information  for  any  purpose  other  than  the  satisfaction  of
Recipient's   obligations   under  this   Agreement  and  (y)  not  divulge  the
Confidential Information other than to its employees and consultants with a bona
fide need to know and (z) cause each  Worker to execute a  "Confidentiality  and
Inventions  Assignment Agreement " and provide copies as described in Section 6.
All  Confidential  Information  shall be owned and remain the sole and exclusive
property of the Discloser,  and all rights to Confidential  Information shall be
held  in  trust  by  Recipient  for the  exclusive  benefit  of such  Discloser.
Recipient acknowledges that monetary damages may not be adequate in the event of
a default of this Section by Recipient,  and the Discloser  shall be entitled to
injunctive or other affirmative relief and/or to give notice of default pursuant
to Section 17, or both.  Contractor  shall be liable for any losses arising from
the failure of Workers,  for whatever  reason,  to execute the form of agreement
set out in Exhibit B hereof or to comply with the terms thereof.


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 66
<PAGE>


     Contractor shall not in any advertising,  sales promotion materials,  press
releases  or  any  other  publicity  matters  use  the  name  "Nortel",  "Nortel
Networks",  "Northern  Telecom",  "Nortel  Technology",  "Bay Networks",  "BNR",
"Bell-Northern  Research",  or the name of any  Nortel  Company,  any  variation
thereof or language from which the connection of said names may be implied,  nor
shall  Contractor  disclose  or  advertise  in any manner the nature of Services
supplied  or any Order or the fact  that it has  entered  into  this  Agreement,
unless  Nortel,  in  its  sole  discretion,   grants  Contractor  prior  written
permission to do so.. Upon the mutual  agreement of the parties,  press releases
which may, among other things,  confirm the existence of a relationship  between
the parties may be issued. Neither party shall issue a press release or make any
statement to the general public  concerning this Agreement,  or the relationship
created  hereby,  without the express prior written  consent of the other party,
provided,  however, that each party may make such disclosures required by law or
that such party  reasonably  determines  is  required  for any  governmental  or
regulatory filings, without the prior written consent of the other party.

     Contractor  shall  maintain  and manage the Nortel  Member  Information  on
behalf of Nortel,  and shall comply with Contractor's  privacy policy located at
www.clickrewards.com/privacy.html with respect to the Nortel Member Information.
Contractor shall have the right to use aggregate  information and results (which
information  will contain no identifying  information  about  individual  Nortel
Members) regarding the Nortel Program in its sole discretion for the purposes of
marketing  its own  products  and  services.  Other  than  its  maintenance  and
management of the Nortel  Member  Information,  Contractor  shall have no direct
access  to or right  to use any  Nortel  Member  Information,  unless  otherwise
authorized  by a  Nortel  Member  either  through  his  or her  enrollment  as a
ClickRewards member or otherwise. Notwithstanding the foregoing, nothing in this
Agreement shall give Nortel any rights to any information  relating to consumers
participating in other programs run by Contractor,  including without limitation
the  ClickRewards  Program (to the extent that a Nortel Member has enrolled as a
ClickRewards  member)  (the  "Netcentives  Member  Information"),  even  if such
information  also relates to a Nortel Member.  Contractor  shall retain complete
and exclusive ownership of all Netcentives Member Information.  For the purposes
of this Agreement,  "Nortel Member  Information" means the information of Nortel
Members that  specifically  relate to their  participation in the Nortel Program
(i.e.,  names,  addresses,  employee  information and point earning activity and
balances relating to the Nortel Program).

9.   Computer and Related  Access.  If it is necessary  for  Contractor  to have
access (either  on-site or remotely) to, and use of any Nortel Company  computer
systems in supplying Services, Contractor shall limit such access and use solely
to supply  Services  and shall not  access or  attempt  to access  any  computer
systems, files, software or services other than those required for the supply of
Services.  Contractor  shall limit such access to those  Workers with an express
requirement  to have such access in  connection  with supply of Services,  shall
advise the applicable  Nortel Company in writing of the name of each such Worker
who will be granted such access and shall strictly follow all security rules and
procedures  of such  Nortel  Company  for  restricting  access  to its  computer
systems.  All user identification  numbers and passwords disclosed to Contractor
and any information  obtained by Contractor as a result of  Contractor's  access
to, and use of, a Nortel  Company's  computer systems shall be deemed to be, and
treated  as,  Confidential  Information.   Contractor  shall  cooperate  in  the
investigation of any apparent unauthorized access to any Nortel Company computer
system.  The  requirements of this Section shall apply equally to any access and
use by Contractor of any Nortel Company's  electronic mail system, of any Nortel
Company's  electronic  switched network,  either directly or via a direct inward
service access (DISA) feature or of any other property,  equipment or service of
any Nortel Company.


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 67
<PAGE>


10.  Independent Contractor.  Contractor and Workers shall supply Services as an
independent contractor,  and nothing contained in this Agreement or in any Order
shall  be   construed  to  create  or  imply  a  joint   venture,   partnership,
principal-agent  or employment  relationship  between the parties or between any
Nortel Company and Workers.  Contractor and Workers shall not take any action or
permit any action to be taken on their behalf  which  purports to be done in the
name of or on behalf of any Nortel Company.

     Neither  Contractor,  nor  Workers,  shall,  in any  sense,  be  considered
employees or agents of any Nortel  Company,  nor shall  Contractor or Workers be
eligible or entitled to any  compensation,  benefits,  perquisites or privileges
given or extended to any Nortel Company employees, even if Contractor or Workers
are later determined under the applicable  statute or regulation by the relevant
authority  or under the common law by a court of  competent  jurisdiction  to be
employees  of any  Nortel  Company or are  treated  as such  under a  settlement
agreement.  Neither the  reservation  nor the exercise of any rights by a Nortel
Company  under  this  Agreement  shall be deemed to create an  employer/employee
relationship between Workers and any Nortel Company.

     Contractor  shall indemnify and hold all Nortel Companies free and harmless
from all losses, damages, liabilities and costs (including,  without limitation,
legal fees and  disbursements)  and amounts agreed upon in settlement or awarded
in connection with any claim, suit or proceeding alleging that Contractor and/or
any Worker has a  relationship  with any  Nortel  Company  that is other than an
independent contractor relationship.

     Contractor represents and warrants that it and any sub-contractor shall pay
all applicable  income,  old age insurance,  unemployment and similar employment
taxes with respect to Workers  supplying  Services and shall  indemnify and hold
all Customer Companies free and harmless from all losses,  damages,  liabilities
and costs  (including  without  limitation,  legal fees and  disbursements)  and
amounts  agreed upon in settlement or awarded in  connection  with  Contractor's
failure to pay such employment taxes.

11.  Insurance.  Contractor  represents and warrants that during the Term it and
any Subcontractor (as defined below) shall either (a) maintain adequate workers'
compensation insurance and other employee insurance coverages required by law or
(b) pay or cause to be paid any and all assessments or contributions required to
be paid pursuant to applicable workers' compensation law. If Contractor fails to
do either of the above, the applicable Nortel Company,  in addition to any other
rights reserved to it under this Agreement,  may, but shall not be obligated to,
deduct the amount of any such assessments or contributions from any payment then
due or later due to Contractor under this Agreement. A "Subcontractor" means any
third party retained by Contractor  that is directly  involved in developing the
Nortel System.

     In addition,  Contractor  represents and warrants that, during the Term, it
shall maintain general liability insurance with deductibles acceptable to Nortel
and with an  aggregate  annual  limit of (US) * for bodily  injury and  property
damage.  The  Nortel  Companies  shall  be  added  to the  Contractors'  general
liability  policy  as an  "additional  insured"  with  respect  to the  Services
provided by and the  operations  of the  Contractor.  Contractor  shall  furnish
Nortel with certificates evidencing its insurance coverages,  and Nortel and the
other  Nortel  Companies  each  reserve  the  right at any  time to  immediately
terminate  or suspend the supply of Services or any portion  thereof,  if in the
opinion of any such entity such insurance coverages are inadequate.

  *  Material has been redacted pursuant to a request for confidential treatment


                                    Page 68
<PAGE>


12.  Removal of a Worker from the Supply of Services; Assignment of New Workers.
Contractor  shall assign Workers who possess the  experience and  qualifications
required to supply Services.  Contractor shall not assign a former employee of a
Nortel Company or any individual  who previously  supplied  services to a Nortel
Company,  whether pursuant to this Agreement or any other  agreement,  to supply
Services for any Nortel  Company  without first  advising that Nortel Company in
writing of such individuals'  previous  employment and/or supply of services and
obtaining the written consent of such Nortel Company to the assignment. A Nortel
Company shall have the right,  *, to request that  Contractor  remove any Worker
from the supply of Services for any reason not  unlawful.  Nortel  Company shall
not be  responsible  for payment for Services  supplied by that Worker after the
date of such request.  Moreover, in the event that a Nortel Company requests the
removal of a Worker before * after such Worker was first  assigned to the supply
of Services, such Nortel Company shall *. A Worker who is removed from supply of
Services  shall not be assigned to supply  Services for another  Nortel  Company
without the prior written consent of that Nortel Company after Contractor having
first advised that Nortel  Company in writing of the request by the other Nortel
Company to remove such Worker.

     Any such request by a Nortel  Company for removal of a Worker or subsequent
failure of Nortel  Company to give written  consent to  assignment of previously
removed  Worker shall not be  considered  to be a request for a  termination  of
employment or other relationship between the Worker and Contractor. Any decision
to terminate such employment or other relationship with the Worker shall be made
solely  by the  Contractor.  Contractor  shall  indemnify  and hold  all  Nortel
Companies  free and harmless  from all losses,  damages,  liabilities  and costs
(including, without limitation, legal fees and disbursements) and amounts agreed
upon in settlement or awarded in connection with any claim,  suit or proceeding,
arising out of any such request for removal,  refusal to consent to  assignment,
and/or any termination of any employment or other relationship with the Worker.

     Once a Worker has commenced to supply Services,  but prior to completion of
any  Deliverables,  Worker may be removed by Contractor  from the  assignment to
supply  Services  provided  that thirty  (30) days prior  notice is given to the
applicable  Nortel  Company  Coordinator,  and provided  further that a suitable
replacement  Worker is  available  with  equivalent  skills,  at a  minimum,  to
complete the Services and  Deliverables as required.  Contractor  shall make all
reasonable efforts to allow such replacement Worker and the Worker being removed
an opportunity to work together or to otherwise suitably communicate information
pertaining  to the Services and  Deliverables  to be supplied.  The  immediately
preceding  sentence  shall not apply  where the  Worker is  removed  because  of
termination of employment or other relationship by the Contractor or the Worker.

13.  Other Indemnities. Contractor shall indemnify and hold all Nortel Companies
free and harmless from any losses,  damages,  liabilities and costs  (including,
without  limitation,  legal fees and  disbursements)  and amounts agreed upon in
settlement  or  awarded  in  connection  with  any  third-party  claim,  suit or
proceeding,  arising out of this  Agreement  relating to *  (excluding  any * in
connection  with  this  Agreement),  any  portion  thereof  or the use  thereof.
Contractor  shall not be required to  indemnify  any Nortel  Company  under this
Agreement to the extent any claims, losses, damages, suits, judgments, costs and
expenses for which  indemnification  is sought are  determined to be a result of
the gross negligence or willful misconduct of Nortel.


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 69
<PAGE>


     Nortel shall  indemnify  and hold  Contractor  free and  harmless  from any
losses,  damages,  liabilities and costs (including,  without limitation,  legal
fees and  disbursements)  and amounts  agreed upon in  settlement  or awarded in
connection with any third-party  claim, suit or proceeding,  arising out of this
Agreement  relating to * thereof.  Nortel  shall not be  required  to  indemnify
Contractor  under this  Agreement  to the extent any  claims,  losses,  damages,
suits,  judgments,  costs and expenses for which  indemnification  is sought are
determined  to be a result of the gross  negligence  or  willful  misconduct  of
Contractor.

14.  Assignment  and  Subcontracts.  Each party shall not assign this  Agreement
without the prior written consent of the other party, provided that such consent
is not unreasonably  withheld.  Consent shall not be required in the event of an
assignment by a party to its Affiliate.  Contractor  shall not  subcontract  any
portion of its rights,  duties or obligations  under any Order unless the Nortel
Company  which  issued  the Order,  in its sole  discretion,  grants  Contractor
written permission to do so. Notwithstanding any such consent,  Contractor shall
continue to be fully  responsible  and liable for full  performance  of any such
Order.

15.  Accuracy of Invoices.  Contractor  certifies that each invoice issued by it
shall be based  solely on Services  actually  supplied by  Contractor,  or shall
consist of  approved  reasonable  expenses  as provided in Section 3 and that no
part or portion of any invoice  represents  or is  attributable  to any payment,
gift, gratuity or other thing of value given to any person, organization, entity
or governmental  body (except for those payments required by law), other than as
payments  made to  Workers  for  Services.  *  during  the * of the  term  and *
thereafter,  a Nortel Company reserves the right to audit all invoices submitted
to it in connection  with Orders issued by such Nortel  Company,  and Contractor
shall afford  reasonable  access to all supporting  documentation to enable such
Nortel Company to do so.

16.  Termination  for  Convenience.  Upon *, a Nortel Company may terminate this
Agreement,  any Order or any  portion  thereof *, *  supplied  prior to the * of
termination  specified in such notice. If so requested in such written notice of
termination,  * specified in the notice,  and the terms of the applicable  Order
and this Agreement shall continue to govern such Services; otherwise, Contractor
shall use  commercially  reasonable  efforts to * termination.  Unless otherwise
instructed  by such  Nortel  Company and  subject to the  immediately  preceding
sentence,  Deliverables  shall * issuing such notice of  termination in the * on
the * termination. Contractor shall include in any * issued by it for * a clause
similar  to  this  which  will   enable   Contractor   to   terminate   such  *.
Notwithstanding  any of the  foregoing  language  in this  Section 16, no Nortel
Company shall be permitted to terminate any Order or any portion  thereof during
the * period  after the  Effective  Date.  Following  the *  anniversary  of the
Effective  Date,  Nortel may terminate this Agreement upon * (*) * prior written
notice to  Contractor.  In the  event  that  Nortel  terminates  this  Agreement
pursuant to this Section, then a percentage of US$* shall become immediately due
and payable. The percentage shall be a fraction, the numerator of which shall be
the number of days between the * (*) * anniversary of the Effective Date and the
date written notice of the termination is received, and the denominator of which
shall be *.

17.  Default.  If a Nortel  Company  defaults in payment of an invoice under any
Order  (other than a default  because an amount is in dispute)  and such default
shall  continue for more than thirty (30) days after notice  thereof is given to
the Nortel Company,  Contractor may suspend performance of any obligations under
such Order and may refuse further Orders, but only from the Nortel Company which
has defaulted in payment and only until such payment is made.


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 70
<PAGE>


     If  Contractor  shall default in  performance  of an Order and such default
shall  continue for more than thirty (30) days after notice  thereof is given to
Contractor  by the Nortel  Company that issued such Order,  such Nortel  Company
shall be entitled to terminate  such Order.  If Contractor  shall default in the
performance of any other  obligation under this Agreement and such default shall
continue  for more  than  thirty  (30) days  after  notice  thereof  is given to
Contractor,  Nortel shall be entitled to terminate this Agreement.  The election
to  terminate  shall not be  construed to be an election of remedies or a waiver
thereof,  and the Nortel Company availing itself of the right to terminate shall
also be  entitled  to each and every  other  remedy  available  at law and/or in
equity.

18.  Materials  Furnished by a Nortel Company.  Any materials  and/or  equipment
furnished by a Nortel Company in connection with an Order by it, with or without
charge to Contractor,  shall be deemed bailed to  Contractor,  and title thereto
shall at all times  remain in such  Nortel  Company.  Upon the  earlier  of such
Nortel  Company's  request  therefor or the completion of the Order,  Contractor
shall return,  at its expense and risk, all such materials  and/or  equipment in
the same condition as they were when furnished to  Contractor,  reasonable  wear
and tear excepted.

     Nortel  Company  makes no warranties  with respect to any materials  and/or
equipment  furnished by Nortel Company to Contractor,  whether  written or oral,
statutory,  express or implied including,  without  limitation,  any warranty of
merchantability or fitness for a particular purpose.

19.  Limitation on Liability. In no event shall any party be liable to the other
party in excess of the  greater of (a) * (or * in the event of claims  resulting
from death or bodily injury) or (b) * preceding the event which gave rise to the
claim . In no event  shall  either  party be  liable  to the  other for costs of
procurement  of substitute  goods or services,  lost profits,  lost data, or any
consequential,  special,  exemplary,  incidental,  or indirect damages,  however
caused  and  on  any  theory  of  liability  (including   negligence  or  strict
liability),  arising out of this Agreement,  even if such party has been advised
of the possibility of such damages.

20.  Bankruptcy.  If either party shall be declared insolvent or bankrupt, or if
any  assignment  of its  property  shall be made for the benefit of creditors or
otherwise,  or if its interest  herein  shall be levied upon under  execution or
seized by  virtue of any writ of any  court,  or if a  petition  is filed in any
court to declare such party  bankrupt and not dismissed  within sixty (60) days,
or if a trustee in bankruptcy,  receiver or  receiver-manager or similar officer
is appointed for such party or for any of such party's assets,  then l the other
party may, at its option, terminate, without charge, this Agreement. The ability
of each Nortel  Company to terminate in such  instances  shall be subject to the
applicable bankruptcy and insolvency statutes.

21.  Force  Majeure.  Neither  party shall be liable for any default or delay in
the  performance  of its  obligations  due to any causes  beyond its  reasonable
control.  In such event,  the  non-performing  party  shall be excused  from any
further  performance or observance of the  obligation(s) so affected for as long
as such  circumstances  prevail  and such party  continues  to use  commercially
reasonable  efforts to  recommence  performance  or  observance  whenever and to
whatever  extent  possible  without  undue  delay.  If any such default or delay
extends  for more than  thirty (30) days,  each  Nortel  Company  shall have the
right,  without obligation or liability,  to cancel any Order or portion thereof
affected by such default or delay.

22.  Successors.  This  Agreement  shall  inure to the benefit of and be binding
upon the parties hereto and their successors and permitted assigns.

23.   Waiver. The failure of a party to enforce any provision of this Agreement
shall not constitute a waiver of such provision or the right of such party to
enforce such provision and every other provision.


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 71
<PAGE>


24.  General.

     Nortel  Company  Rules  and  Regulations.  Contractor,  when in or upon the
premises of a Nortel Company or a customer of a Nortel  Company,  shall obey all
workplace health, safety and security rules and regulations  established by such
Nortel Company or, if applicable,  such customer of a Nortel Company,  regarding
the  conduct  of its own  employees  and any  additional  rules and  regulations
established  by  such  Nortel  Company  for  non-employees,   including  without
limitation, security rules and regulations.

     Contractor  or its  Subcontractor  has performed  reference  checks on each
Worker  assigned  to  provide  Services  under  this  Agreement.  Upon  request,
Contractor shall provide information to Customer Company regarding its procedure
for performing reference checks.


     U.S. Laws and Regulations.  With respect to Services supplied in the United
States and with respect to any Deliverables or any portion thereof to the extent
developed,  manufactured  or  otherwise  produced  in the United  States,  at no
additional  charge to any Nortel Company,  Contractor shall comply with all laws
and regulations  applicable to Services  supplied and/or  Deliverables  produced
pursuant to this Agreement and with all other laws, rules,  governmental  orders
and  regulations  of  any  governmental  authority  having  jurisdiction  at the
location  where Services are supplied,  including,  without  limitation,  to the
extent   applicable,   the  following   United  States  laws  and   regulations:
Comprehensive Environmental Response,  Compensation,  and Liability Act of 1980,
Consumer Product Safety Act, Toxic Substances Control Act,  Occupational  Safety
and  Health  Act of 1970,  Radiation  Control  for  Health & Safety Act of 1968,
Resource  Conservation and Recovery Act of 1976, Clean Air Act, Clean Water Act,
Hazardous  Materials  Transportation  Act,  Vietnam  Era  Veterans  Readjustment
Assistance Act (including,  without limitation, the affirmative action clause as
set forth in 41 CFR 60-250.4),  Rehabilitation  Act of 1973 (including,  without
limitation,  the equal  opportunity  clause as set forth in 41 CFR 60-741.5(a)),
Americans With  Disabilities  Act,  Executive  Order 11246  (including,  without
limitation, the equal opportunity clause as set forth in 41 CFR 60-1.4 (a)), and
the  clauses set forth in Federal  Acquisition  Regulation  ("FAR")  (subject to
"Contractor,"  "Subcontractor"  and "Contract"  used in such clauses meaning the
appropriate Nortel Company,  Contractor and Agreement,  respectively)  52.219-8,
52.219-9,   52.219-13,   52.220-3,  52.220-4,  52.222-1,  52.222-4,   52.222-20,
52.222-21,  52.222-26  (subparagraphs  b(1)-b(11)),   52.222-35,  52.222-36  and
52.222-37  (provided,  however,  if Services and  Deliverables are a "commercial
item", as defined in the clause set forth in FAR 52.202-1, then only the clauses
set forth in the following FARs shall be deemed applicable: 52.222-26, 52.222-35
and 52.222-36), which clauses are incorporated by reference, with the same force
and effect as if they were given in full text.

     Canadian Laws and Regulations.  With respect to Services supplied in Canada
and with  respect  to any  Deliverables  or any  portion  thereof  to the extent
developed, manufactured or otherwise produced in Canada, at no additional charge
to any Nortel  Company,  Contractor  shall comply with all laws and  regulations
applicable to Services  supplied and/or  Deliverables  produced pursuant to this
Agreement and with all other laws,  rules,  by-laws,  codes and  regulations  of
governmental  agencies,  including  federal,  provincial,  municipal,  and local
governing  bodies  having  jurisdiction  over  Services  or  any  part  thereof,
including,  without limitation, to the extent applicable, the following types of
Canadian laws and regulations as may be applicable in particular  jurisdictions:
employment standards  legislation,  labour relations  legislation,  occupational
health  and  safety  legislation,   human  rights   legislation,   and  workers'
compensation legislation.


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 72
<PAGE>


     Laws and Regulations of Other Countries:  With respect to Services supplied
in  countries  other  than the United  States or Canada and with  respect to any
Deliverables  or any portion  thereof to the extent  developed,  manufactured or
otherwise  produced in any such country,  at no additional  charge to any Nortel
Company,  Contractor  shall comply with all laws and  regulations  applicable to
Services  supplied and/or  Deliverables  produced pursuant to this Agreement and
with  all  other  laws,  rules,  governmental  orders  and  regulations  of  any
governmental  authority  having  jurisdiction at the location where Services are
supplied.

     Notices and Consents. All notices and consents required to be given or made
by the parties shall be sent to the addresses set forth at the beginning of this
Agreement or such other address as may be established by notice  hereunder,  and
shall be deemed  received  on the  fourth  business  day after  deposit  or when
actually  received,  whichever  is sooner.  Such  notices or  consents  shall be
directed to:

      For Nortel:       Contract Manager for Services
                        Nortel Networks Supply Management
                        c/o Central Region Purchasing Manager
                        with a copy to the Law Dept. at the address first set
                        forth above

                        For Contractor:
                        General Counsel
                        Netcentives Inc.
                        With a copy to the EVP, Operations at the address first
                        set forth above

     Survival. All  obligations  and  liabilities  which,  by their nature,  are
intended to survive the expiration or the earlier  termination of the Term shall
remain in effect beyond any expiration or termination.

     Governing Law. This Agreement shall be governed by the laws of the State of
New York, notwithstanding its rules regarding the conflict of laws.

     Entire Agreement: This Agreement, including the Exhibits to it, constitutes
the entire  agreement  between the parties  with  respect to the subject  matter
hereof and supersedes all prior agreements and communications,  written or oral,
with respect  thereto.  Except for the information  which may be set forth in an
Order or Release in accordance  with Section 1, any additional or different term
set forth in any Order,  Release,  Contractor  acknowledgment  form,  Contractor
personnel  timecard  or other  document  hereafter  issued  shall be void.  This
Agreement may not be modified or any right of a party waived, except by means of
an amendment which  expressly  references this Agreement and is duly executed by
each of the parties.


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 73
<PAGE>


IN WITNESS  WHEREOF,  each party hereto has caused this Agreement to be executed
by its duly authorized representative.

NORTEL NETWORKS LIMITED             NETCENTIVES INC.
("Nortel")                            ("Contractor")

By: /s/ Margaret Kerr                 By: /s/ J. Longinotti
   -----------------------------         ---------------------------------

Print Name: Margaret Kerr             Print Name: J. Longinotti
           ---------------------                 -------------------------

Title: SVP Human Resources            Title: COO & CFO
      --------------------------            ------------------------------

Date: May 24, 2000                    Date: May 30, 2000
     ---------------------------           -------------------------------




By: /s/ Richard A. Bratt
   ---------------------------------

Print Name: Richard A. Bratt
           -------------------------

Title: Gen'l Counsel - SP&C Group
      ------------------------------

Date: May 25, 2000
     -------------------------------


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 74
<PAGE>



                                    Exhibit B
               CONFIDENTIALITY AND INVENTIONS ASSIGNMENT AGREEMENT

     In exchange for my becoming  employed (or my employment being continued) by
or retained as a consultant (or my consulting  relationship  being continued) by
Netcentives Inc., or its subsidiaries,  affiliates,  or successors  (hereinafter
referred to collectively as the "Company"), I hereby agree as follows:

1.   I will  perform for the Company  such  duties as may be  designated  by the
     Company from time to time.  During my period of  employment  or  consulting
     relationship  with  the  Company,  I will  devote  my best  efforts  to the
     interests of the Company and will not engage in other  employment or in any
     activities  detrimental  to the best  interests of the Company  without the
     prior  written  consent of the Company.  During my period of  employment or
     consulting  relationship with the Company,  I will not engage,  directly or
     indirectly,  in any business  that is  competitive  with the Company or its
     subsidiaries,  nor solicit,  or in any other manner work for or assist, any
     business that is competitive with the Company or its  subsidiaries.  During
     the period of my employment or consulting  relationship with the Company, I
     will undertake no planning for, or organization  of, any business  activity
     competitive with the work I perform for the Company.  I agree,  that during
     the period of my employment or consulting  relationship with the Company, I
     will not,  directly  or  indirectly,  induce or entice any  employee of the
     Company or its  subsidiaries to leave such  employment.  Unless approved in
     writing  by the  President  of the  Company,  at no time  shall I  permit a
     conflict of interest to occur, which shall be deemed to include:

          a.   Any substantial  direct or indirect financial interest whether by
ownership,  management,  control or  performance  of services,  by myself or any
member of my family,  in any outside concern that does business with the Company
or its subsidiaries; or

          b.   Acceptance  by myself or by any member of my immediate  family of
any gifts of more than token value, loans other than from established banking or
financial institutions, excessive entertainment or other substantial favors from
any outside  concern or any  individual  which does or is seeking to do business
with, or is a competitor of the Company or its subsidiaries.

     2.   As  used in this  Agreement,  the  term  "Inventions"  means  designs,
trademarks,  discoveries,  formulae, processes,  manufacturing techniques, trade
secrets, inventions,  improvements,  ideas or copyrightable works, including all
rights to obtain, register, perfect and enforce these proprietary interests.

     3.   As used in this Agreement,  the term "Confidential  Information" means
information  pertaining to any aspects of the Company's business which is either
information  not known by actual or potential  competitors  of the Company or is
proprietary information of the Company or its customers or suppliers, whether of
a technical nature or otherwise.

     4.   Without further  compensation,  I hereby agree promptly to disclose to
the  Company,  and I hereby  assign  and agree to assign to the  Company  or its
designee,  my entire right, title, and interest in and to all Inventions which I
may solely or  jointly  develop  or reduce to  practice  during the period of my
employment or consulting  relationship with the Company (a) which pertain to any
line of  business  activity  of the  Company,  (b) which are aided by the use of
time,  material or  facilities  of the  Company,  whether or not during  working
hours,  or (c) which relate to any of my work during the period of my employment
or  consulting  relationship  with the  Company,  whether or not  during  normal
working hours. No rights are hereby  conveyed in Inventions,  if any, made by me
prior to my  employment or  consulting  relationship  with the Company which are
identified  in a sheet  attached  to and made a part of this  Agreement,  if any
(which attachment contains no confidential information).


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 75
<PAGE>


     5.   I agree to  perform,  during  and after my  employment  or  consulting
relationship,  all acts deemed  necessary  or desirable by the Company to permit
and assist it, at its expense,  in obtaining and  enforcing  the full  benefits,
enjoyment,  rights  and  title  throughout  the world in the  Inventions  hereby
assigned  to the  Company  as set  forth in  paragraph  4 above.  Such  acts may
include,  but are not limited to,  execution  of  documents  and  assistance  or
cooperation  in legal  proceedings.  However,  the Company  agrees to limit such
necessary or desirable acts (and the time needed to perform such acts) to permit
and assist it in obtaining and enforcing the full  benefits,  enjoyment,  rights
and title  throughout  the world in the  Inventions.  Further,  the  timing  and
scheduling of such acts shall be mutually acceptable to me and the Company.

     6.   If the  Company  is unable for any  reason to secure my  signature  to
apply for or to pursue any  application for any United States or foreign letters
patent or mask work or copyright registration covering inventions, mask works or
original  works of  authorship  assigned to the Company as above,  then I hereby
irrevocably  designate and appoint the Company and its duly authorized  officers
and  agents as my agent and  attorney  in fact,  to act for and in my behalf and
stead to execute  and file any such  applications  and to do all other  lawfully
permitted acts to further the prosecution and issuance of letters patent or mask
work or copyright  registrations thereon with the same legal force and effect as
if  executed  by me. I hereby  waive and  quitclaim  to the  Company any and all
claims,  of  any  nature  whatsoever,  which  I now or may  hereafter  have  for
infringement  of any patents,  mask works or copyrights  resulting from any such
application for letters patent or mask work or copyright  registrations assigned
hereunder to the Company.

     7.   I agree to hold in confidence  and not directly or  indirectly  use or
disclose,  either  during or after  termination  of my  employment or consulting
relationship with the Company,  any Confidential  Information I obtain or create
during the period of my employment or  consulting  relationship,  whether or not
during working hours, except to the extent authorized by the Company, until such
Confidential  Information becomes generally known. I agree not to make copies of
such  Confidential  Information  except  as  authorized  by  the  Company.  Upon
termination  of my  employment  or  consulting  relationship  or upon an earlier
request of the  Company,  I will return or deliver to the  Company all  tangible
forms of such  Confidential  Information in my possession or control,  including
but not limited to drawings, specifications, documents, records, devices, models
or any other material and copies or reproductions thereof.

     8.   I represent that my performance of all the terms of this Agreement and
as an employee of or  consultant to the Company does not and will not breach any
agreement  to keep in  confidence  proprietary  information,  knowledge  or data
acquired  by me in  confidence  or in trust  prior to my becoming an employee or
consultant of the Company, and I will not disclose to the Company, or induce the
Company  to  use,  any  confidential  or  proprietary  information  or  material
belonging  to any  previous  employer  or others.  I agree not to enter into any
agreement  either  written  or oral in  conflict  with  the  provisions  of this
Agreement.

     9.   I represent that I am joining the Company as an employee or consultant
of my own  free  will  and that I have not  been  solicited  as an  employee  or
consultant in any way by the Company.

     10.  I  recognize  that the  Company  has  received  and in the  future may
receive from third parties their confidential or proprietary information subject
to a duty  on the  Company's  part  to  maintain  the  confidentiality  of  such
information and to use it only for certain limited purposes.  I agree that I owe
the  Company  and  such  third  parties,  during  the term of my  employment  or
consulting relationship with the Company and thereafter, a duty to hold all such
confidential or proprietary  information in the strictest  confidence and not to
disclose such  information  (except as necessary in carrying out my work for the
Company consistent with the Company's agreement with such third party) or to use
such  information for the benefit of anyone other than the Company or such third
party  (consistent  with the Company's  agreement with such third party) without
the prior written consent of the Company.


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 76
<PAGE>


     11.  During the period of my employment or consulting relationship with the
Company  and for one  year  thereafter,  I will not  encourage  or  solicit  any
employee or consultant of the Company to terminate their  relationship  with the
Company  for any or no  reason.  Further,  for a  period  of one  year  after my
employment or consulting  relationship with the Company,  I will not solicit any
licensor to or customer of the Company or licensee of the Company's products, in
each  case that are known to me,  with  respect  to any  business,  products  or
services that are competitive to the products or services offered by the Company
or  under  development  as of the  last  date  of my  employment  or  consulting
relationship with the Company.

1.   Any dispute or claim arising out of or in connection  with your  employment
with  the  Company,  will  be  finally  settled  by  bindingarbitration  in  San
Francisco,  California in accordance with the then-current rules of the American
Arbitration  Association  by one  arbitrator  appointed in accordance  with said
rules. The arbitrator shall apply California law, without  reference to rules of
conflicts of law or rules of statutory  arbitration,  to the  resolution  of any
dispute.  Judgment on the award rendered by the arbitrator may be entered in any
court having jurisdiction  thereof.  Notwithstanding the foregoing,  the parties
may apply to any court of competent  jurisdiction  for equitable  relief,  or to
compel  arbitration in accordance  with this  paragraph,  without breach of this
arbitration provision.

1.   This   Agreement   (a)  shall   survive  my  employment  by  or  consulting
relationship with the Company,  (b) does not in any way restrict my right or the
right of the Company to terminate my employment or consulting relationship,  (c)
inures to the  benefit of  successors  and  assigns of the  Company,  and (d) is
binding upon my heirs and legal representatives.

1.   This Agreement does not apply to an Invention  which  qualifies fully under
the  provisions  of Section  2870 of the Labor  Code.  I agree to  disclose  all
Inventions made by me in confidence to the Company to permit a determination  as
to whether or not the Inventions should be the property of the Company.

1.   I certify that, to the best of my information and belief,  I am not a party
to any other  agreement  which will interfere with my full  compliance with this
Agreement.

1.   I certify and acknowledge  that I have carefully read all of the provisions
of this  Agreement and that I understand  and will fully and  faithfully  comply
with such provisions.


NETCENTIVES INC.                          EMPLOYEE


By:_______________________________        __________________________________
                                                 (Type or Print Name)
Title:____________________________        __________________________________
                                                     (Signature)
Dated: _______________, 20____



  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 77
<PAGE>



                                    Exhibit C
                                    ---------

                      Direct Competitors of Nortel Networks
                      -------------------------------------

 *



  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 78
<PAGE>




                                    Exhibit D
                                    ---------

                        Direct Competitors of Netcentives
                        ---------------------------------

 *




  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 79
<PAGE>



                                   EXHIBIT A-1
                                   -----------

                      PRE-LAUNCH DELIVERABLES -- CONSULTING
                      -------------------------------------


1.0  Service Description

The Vendor  shall  create a  customer  branded  web site  allowing  for  program
initiation, award nomination, approval, validation,  notification,  tracking and
redemption of awards on-line.  The functionality of this dynamically  served web
site to be  delivered at launch date (or within  three weeks  thereafter  if the
program can reasonably be launched without full functionality) has been mutually
agreed  to by both  parties  in the  requirements  document  (the  "Requirements
Document").  The  Service  Description  provided  below  is not a  comprehensive
listing of every element of the web site's functionality or all of its features,
but highlights key elements of the functionality to be delivered at launch date.

1.   PRIDE program home page with links to the Nortel World Online home page, as
     well to other  PRIDE  program  pages  which allow  employees  to  nominate,
     approve,  validate,  choose  cash or  non-cash  points,  view  personalized
     employee award statements, view the reward catalogue, and redeem points.
2.   On a separate page,  individuals will also be able to see stories from past
     award recipients.
3.   Employee nomination process includes:
        *

4.   Automated award approval process includes:
        *
5.   Notification of approved award
        *
*
1.   *
2.   *
3.   *
4.   Functionality unique to Platinum PRIDE awards
        *
5.    Additional functionality includes:
        *

2.0  Deliverables

     The following  table  outlines the  deliverables  and due dates for the web
     site development and marketing:



  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 80
<PAGE>

--------------------------------------------------------------------------------
                         Description           Development Fee  Deliverable Date

--------------------------------------------------------------------------------
Enterprise      ERS is the front end of the
Reward System   reward system, allowing               *           May 15, 2000
(ERS)           individuals to efficiently award                    for user
                and approves Nortel's * awards.                    acceptance
                                                                    testing.
                Included in the cost of ERS
                is Nortel specific
                customization and on-site                         Anticipated
                set-up.                                          program launch
                -     English UI Only                           on May 30, 2000
--------------------------------------------------------------------------------
Cash or         -     * opportunity to select         *
Merchandise        cash or merchandise points.                    May 15, 2000
Selection       -                                                   for user
                                                                   acceptance
                                                                     testing.

                                                                   Anticipated
                                                                  program launch
                                                                   on May 30,
                                                                       2000
--------------------------------------------------------------------------------
Data reporting  -     Development of  Nortel          *           Anticipated
                   specified web based                           Program Launch
                   reporting requirements.                       Date (May 30,
                -     Features defined in                            2000)
                   proposal
                *

--------------------------------------------------------------------------------
Language        ERS Custom Site                       *
Localization    * language conversion                                 N/A
                requirements as specified by
                Nortel
--------------------------------------------------------------------------------
Statement and   -     Nortel Branded
Rewards         -     Web Based Awards
Catalog Web        Statement
Site            -     Web Based Catalog               *
                -     Nortel will supply
                   design of Web templates
                -     Complete on-line
                   redemption functionality
                -     Reward points redeemed                     May 15 , 2000
                   for Frequent Flyer Miles                         for user
                   are deposited directly                          acceptance
                   into the recipients                              testing.
                   frequent flyer account
                -     Catalog includes, but                       Anticipated
                   will not be limited to, *,                    program launch
                   (new suppliers to be added                      on May 30,
                   to existing Netcentives                         2000, with
                   supplier list as necessary                      additional
                   to create appropriate                         items added to
                   regional catalogs) (covers                    the catalogues
                   all regions)                                   according to
                -     Initial Catalog Site                      mutually agreed
                   will be broken out into                       upon schedule
                   five sections
                -     *
                -     Statement and
                   Redemption Catalog system *
                -     Includes personalized
                   email with each transaction
--------------------------------------------------------------------------------


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 81
<PAGE>


--------------------------------------------------------------------------------
Statement and   Localization-per language -           *
Rewards         single byte                                           N/A
Catalog Site    -     Nortel Branded
Language        -     Additional suppliers /
Localization       catalogs costs based on
                   negotiated supplier
                   agreement and # of products
--------------------------------------------------------------------------------
Optional        -.....Specifications to be            *
System Feature     determined                                         N/A
- Nortel as an  -     Nortel will receive *
award supplier     per point redeemed for the
                   award.  This amount may be
                   credited to additional
                   purchases of points.
--------------------------------------------------------------------------------
Provision of    The catalogue is a * system -         *             Included
catalogues,     associated costs are as outlined
debit cards     above
and other       Printed materials such as
materials       catalogues can be *.
--------------------------------------------------------------------------------
Change Control  All software and services as
Procedure       described in this Exhibit A
                will be delivered as
                specified. Requests for
                changes to any element           TBD based on
                specified, and any additions       time and
                or deletions will be              materials
                documented by the Netcentives
                Project Manager, reviewed by
                the Nortel Project Manager
                and approved by the
                appropriate Nortel authority
                for both payment of
                associated costs and schedule
                impact of the changes,
                additions or deletions,
                notwithstanding any other
                contract provisions related
                to schedule or cost.  The
                Netcentives Project Manager
                will deliver  each of these
                Change Control Documents as
                part of the project
                documentation.
--------------------------------------------------------------------------------
      TOTAL                                           *

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


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 82
<PAGE>


4.0  Payment Schedule

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

            Invoice         Payment Description            Payment
            Timing

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

      End of each quarter     Portion of work          A maximum of *
                             performed and accepted
                             * by Nortel Networks in
                            such quarter on a *
---------------------------------------------------------------------------
* Acceptance in Q2 2000 shall occur upon the successful completion of reasonable
and customary User Acceptance Testing standards (includes full functionality and
content).
**  *.




  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 83
<PAGE>



                                   EXHIBIT A-2
                                   -----------

                        PRE-LAUNCH DELIVERABLES -- OTHER
                        --------------------------------

1.0  Service Description

1.   The Vendor shall assist Nortel  personnel with the  installation of one (1)
     Reward  Broker  Software  (RBS)  System which will  integrate  with the ERS
     system  to allow  real-time  awarding  of award  points  into the  Vendor's
     central system:

1.   The Vendor shall  integrate the Nortel  program into its Standard  Customer
     Service process. Prior to the launch of the program, Netcentives will train
     and prepare its customer  service team to support the Nortel PRIDE program.
     More  information on the on-going  customer service support is contained in
     Exhibit A-4.
          a.   Guaranteed * email response time.
          b.   * phone support - * only.
          c.   *

2.0  Marketing The Vendor shall develop,  script,  tape and re-edit * (*) videos
     for use during the introduction and launch of the program. The * video will
     be  developed  to  introduce  the program to Nortel  managers and will be a
     re-edit of the "*" video developed for Nortel. The * video will be scripted
     and produced  based on shooting  new footage in up to * locations  and will
     run  approximately  4-5  minutes in length.  The * video will be a 15 to 30
     second edited version of the * video for use on Nortel  Networks'  in-house
     TV system.

     *, the Vendor shall produce a digitized version of the video in MPEG format
     for posting to the  Customer's  Intranet  and/or  transfer to CDROM,  kiosk
     format, etc.

     Online Demo:  When  requested by the  Customer,  the Vendor shall  develop,
     copywrite  and  produce  (including  HTML) a demo for  posting  to  company
     Intranet and/or transfer to CDROM,  kiosk etc. at the development  fees set
     forth below.

3.0  Deliverables

     The following table outlines the deliverables and due dates for the RBS and
     Customer Service Integration.


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 84
<PAGE>


--------------------------------------------------------------------------------
                Description                    Development Fee  Deliverable Date

--------------------------------------------------------------------------------
Reward Broker   -     One RBS System                  *
                Integration                                       May 15, 2000
                RBS system allows for                               for user
                secure real-time                                   acceptance
                communications between the                          testing.
                ERS and Netcentives central
                awards system.                                    Anticipated
                System testing will be                           program launch
                done with the Netcentives                       on May 30, 2000
                test network and not the live
                transaction system. All
                transactions against the live
                system will cause real value
                and points to be transferred.
--------------------------------------------------------------------------------
Customer        Customer Service- Standard,           *           Anticipated
Service         which includes the following:                    program launch
                1) Participant Maintenance                      on May 30, 2000
                Set-up and Training
                2) Program Specific Training
                3) Program Set-up & Consulting
                      a) FAQ's, Scripts, User
                Experience
                      b) Client download and
                consulting
                4) Technical Set-up (Kana,
                e-mail's)

--------------------------------------------------------------------------------
                Customer Service - *                  *               N/A
                * support
                * number
                Business day Pacific
                Time Zone
                *
                * This fee is in addition to
                Standard Customer Service
--------------------------------------------------------------------------------
                Multi-lingual Customer                *               N/A
                Support Option
                Netcentives' can
                provide multi-lingual
                support.
                * Standard Customer
                Service Fees
--------------------------------------------------------------------------------


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 85
<PAGE>


--------------------------------------------------------------------------------
                Customer Service - *                  *               N/A
--------------------------------------------------------------------------------
Integration     Netcentives has developed the         *           Anticipated
Consulting      market leading expertise in                      program launch
services,       creating and managing                           on May 30, 2000
Account         Internet based incentive and
Management and  promotional programs.
Consulting
--------------------------------------------------------------------------------
Computer        BEA Weblogic                    *
Hardware and    Sun Enterprise 3500                                Anticipated
Software        server                                           program launch
                Sun Enterprise 450                              on May 30, 2000
                server
                Server Rack
                Apache WebServer
                *
--------------------------------------------------------------------------------
Marketing       Managers/Launch Video:                *
Services        Development, scripting,
                re-edit of pitch video;                          April 27, 2000
                development, scripting,
                taping, travel/per diem (*
                locations) and
                post-production for *15-30
                second "*."

                Online Demo: Developing,                          Deferred to
                copywriting and production                      future date, if
                (incl. HTML) of demo for                          requested by
                posting to company Intranet                         Customer
                and/or transfer to CDROM,
                kiosk
--------------------------------------------------------------------------------
                Total Services                        *
                Hardware and Software
                Total
--------------------------------------------------------------------------------


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 86
<PAGE>


4.0   Payment Schedule


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

     Invoice Timing         Payment Description            Payment

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

                                                               *

                            Computer Hardware and
May 30, 2000                Software; Marketing
                            Services


Upon the  successful        Remaining Services
completion of reasonable    described in this
and customary User          Exhibit A-2
Acceptance  Testing
standards  (includes
full  functionality and
content) anticipated to
 be May 30, 2000

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



  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 87
<PAGE>



                                   EXHIBIT A-3
                                   -----------
                        PRIDE Points/ClickMiles Currency
                        --------------------------------

1.0  Service Description

As described in Exhibit A-1, the Vendor shall create a customer branded web site
allowing  for  program  initiation,  award  nomination,   approval,  validation,
notification,  tracking and redemption of awards on-line.  The  functionality of
this  dynamically  served web site to be  available  at launch date (or within 3
weeks  thereafter  if the  program  can  reasonably  be  launched  without  full
functionality)  has been mutually agreed to by both parties in the  requirements
document  (the  "Requirements  Document")  and key  elements of the web site and
system have been described in Exhibit A-1.

Employees  who  choose to  participate  in the PRIDE  program  and who choose to
receive  their PRIDE award in points to be used for  non-cash  awards,  *. PRIDE
points are *.

As for the other services  rendered in accordance to the  Agreement,  * "Awards"
that shall include but shall not be limited to :
     Various types of merchandise;
     Experiential trips;
     Travel opportunities;
     Airline frequent flyer points; and
     Gift certificates.

The * Awards will  ensure  that the  services  agreed to with the  employee  are
provided in a  satisfactory  manner.  However,  if the employee does not receive
satisfactory  resolution  within a reasonable  period of time,  Netcentives will
work with the * to provide satisfactory service to the employee.

These Awards shall be obtained by Employees through the redemption of points for
items  described  and listed in the Nortel  branded,  or  ClickRewards  Shopping
Network catalogs.

In order to supply the above service, Vendor agrees to:

1.   *.
2.   Manage all aspects of the *
3.   Allow  Employees  to redeem  points  on-line for awards  from their  Nortel
     branded regional catalogue (or the ClickRewards Shopping Network catalog).
4.   Deduct from the Employees' personal  accumulated point balance those points
     used for the redemption of the Award.
5.   Update the Employee's  account and points  statement within * of redemption
     in addition to  e-mailing to employee the  confirmation  of the  redemption
     transaction.
6.   Collect Employee information needed to deliver the chosen Award.
7.   When appropriate,  advise Employee at the time of redemption of approximate
     delivery time for the chosen award.
8.   Deposit  frequent flyer miles into Employee's  frequent flyer miles account
     when points are redeemed for said frequent flyer miles .


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 88
<PAGE>


The  Parties  agree that for  merchandise  type Awards that are to be shipped or
delivered to the Employee,  the *. It is understood that the Award item received
will  be in  reasonable  working  order  when  the  Employee  receives  it.  All
warrantees and guarantees  associated  with the item will pass from the supplier
to the Employee. Any merchandise that is defective or damaged in transit will be
replaced or fixed in accordance with the supplier's "damaged or defective goods"
procedures.  Notwithstanding  the  above,  if  the  Employee  does  not  receive
satisfactory resolution or replacement of the item within a reasonable period of
time,  Netcentives  will work with the  supplier to provide  satisfactory  award
fulfillment to the Employee.

The Parties further agree that for Awards such as trips, vacations,  air travel,
hotel  stays,  concierge  services,  or other  types of  services,  the *. It is
understood  that the  suppliers  of said above Awards shall ensure that they are
provided in a satisfactory  and safe manner.  Notwithstanding  the above, if the
Employee is reasonably  unsatisfied with the Award,  Netcentives  agrees to work
with the supplier to provide the Employee with a satisfactory result.

2.0  ClickMile Currency

The Vendor will supply the ClickMile  incentive  currency  pursuant to the terms
and conditions below.

-------------------------------------------------------------------------------
Actual award value   Average $* / Point
of each point        Range $* to $*
                     Netcentives will price each item in the catalog using
                     the above scale *.
-------------------------------------------------------------------------------
Shipping, duties     *.
and applicable       The cost of *. This simplifies the actual redemption
taxes, etc.          process.

-------------------------------------------------------------------------------
Management of *      *. There are *.  * compliant with Netcentives' * should
(i.e., concierge     not result in additional charges.  Any damages incurred
service providers)   will be handled according to * "Damaged goods" procedure
-------------------------------------------------------------------------------



  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 89
<PAGE>



3.0  PRIDE Points/ClickMiles Program

1.   The Customer  makes an initial  purchase of US$* worth of points  (refer to
     table 4.1 for price  schedule).  This initial purchase will be invoiced and
     paid prior to program launch date, which is anticipated to be May 30, 2000.
2.   The Customer  agrees to purchase  additional  points based on the following
     schedule  and  payment  terms of * date only for the  payments  made  under
     Exhibit A-3:

---------------------------------------------------------------------------
Invoice Date              Payment Due Date         Payment Amount
---------------------------------------------------------------------------
Upon Contract Signing     May 30,  2000 (or launch *
                          date)
---------------------------------------------------------------------------
June 1, 2000              June 15, 2000            *
---------------------------------------------------------------------------
June 15, 2000             June 30, 2000            *
---------------------------------------------------------------------------

          The  invoice  and  payment  pattern  set forth in the table above will
          continue for the months of July and August 2000,  subject to the terms
          below.

1.   After  August 2000,  the * invoice and payment  amount will be based on the
     greater of the average * award  during the last 3 months or the  equivalent
     of the  last  month's  *  award  rate.  If the run  rate  is  substantially
     different  than the $* / month rate that has been billed  during month *the
     parties  will  mutually  agree on an  invoicing  rate that  will  bring the
     balance up or down to the *.
2.   Nortel  Networks agrees to *, determined by the average weekly usage during
     the * or if the usage is  increasing  on a * basis  Netcentives  and Nortel
     will  mutually  agree  on a * which  will not be less  than the  previously
     stated average. The * will include all *.
3.   If, on a scheduled  invoice  date,  the * exceeds *,  Netcentives  will not
     issue the regular * invoice for that date.  This will prevent the pre-paid,
     but not yet awarded balance from growing significantly.
4.   *.
5.   All points *.  Netcentives  will mint  points for Nortel  when the  overall
     number of points in Nortel  accounts  reaches * worth of usage based on the
     average  during  the last  month.  Points  that  have been paid for and not
     minted will not have * until such points are  minted.  On a monthly  basis,
     the Netcentives account manager on the Nortel account will advise Nortel as
     to the status of points such as how many are paid for and not  minted,  and
     how many are paid for and minted and their *.
6.   Once awarded to individuals, points earned through the Nortel PRIDE program
     will expire on * following the * award.  On a monthly basis the Netcentives
     account  manager on the Nortel  account will advise  Nortel as to the total
     number of points awarded to employees, but not yet redeemed and their *.
7.   All payments will be in US Dollars.



  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 90
<PAGE>



4.0  PRIDE Points/ClickMiles Currency Costs

     4.1  Currency Costs

     For each 12 month period  following  the Program  Launch  Date,  each point
     (PRIDE Point/ClickMile) will be charged using the following schedule:

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

             Annual Point Expenditure          Cost/Point
         ------------------------------------------------------
               $0 - *                             *
         ------------------------------------------------------
              *                                   *
         ------------------------------------------------------
              *                                   *
         ------------------------------------------------------
              *                                   *
         ------------------------------------------------------
                More than *                       *
         ------------------------------------------------------

     N.B. The  price at each tier is based on a  marginal  price.  For  example,
          after the  purchase  of US *, the next * worth of  ClickMiles  will be
          purchased at * per ClickMile.

5.0  Minimum Purchases and Minimum Purchase Charge

          Customer  agrees to pay for and mint a minimum  of * of points in each
          contract * of the Term.  In the event of any shortfall at the end of a
          contract * (which shall be a * period), Customer agrees to pay for and
          mint an amount of points  to reach the *  minimum.  If the  Customer's
          spending of points is less than * in each * after Program Launch Date,
          the Vendor will be entitled to the following Minimum Purchase Charge:


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

           Actual Spending during Each      Minimum Purchase
               Twelve Month Period               Charge
         ------------------------------------------------------
              < $*                                *
         ------------------------------------------------------
              *                                   *
         ------------------------------------------------------
              *                                   *
         ------------------------------------------------------
              *                                   *
         ------------------------------------------------------
              * or greater                        *
         ------------------------------------------------------

          N.B. Any payment made towards the * minimum  purchase  requirement for
          each * period will be considered pre-payment of ClickMiles,  which can
          subsequently be awarded to employees. These points, and any previously
          purchased,  but  non-minted  points,  will be  minted  at the  time of
          purchase and will be subject to the rules governing minted points. The
          payment of the other  service  credits  will not result in  additional
          ClickMiles.

          The minimum purchase requirement and Minimum Purchase Charge will also
          apply for the * after the program launch date.



  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 91
<PAGE>



                                   Exhibit A-4
                                   -----------
                               Program Maintenance
                               -------------------

Netcentives shall support the ERS, RBS and a customer-branded  web site allowing
for initiation, approval, validation, tracking and reporting of awards on-line.

The Parties will use best efforts to amend this Exhibit A-4 to include a Service
Level Agreement for Program Maintenance by July 15, 2000.

Details of Program  Maintenance  including technical support and service levels,
schedules of new releases,  site  maintenance,  customer  service and data feeds
will be  determined  by July 15, 2000 and shall be in  accordance  with the fees
described in the following table:

Annual Maintenance Fees
-----------------------

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

                                General Description          Annual Fee to be
                                                             paid quarterly upon
                                                                  Program Launch
--------------------------------------------------------------------------------
Enterprise Reward         -      Described in Exhibit A-1           *
System  (ERS)
--------------------------------------------------------------------------------
Hardware Support for

Hardware Support for         - Nortel will support all              *
hardware at Nortel Site     computer hardware at its site.

--------------------------------------------------------------------------------
Reward Broker Software        Described in Exhibit A-1              *

--------------------------------------------------------------------------------
Statement and Rewards          - Standard maintenance               *
Catalog Web Site           agreement to be determined and
                              agreed to by the Parties
--------------------------------------------------------------------------------
Customer Service             -Described in A-2 and that             *
                           which shall be determined and
                              agreed to by the Parties
--------------------------------------------------------------------------------
On-going Consulting       The Netcentives dedicated                 *
services                  Account Manager will be the
Account Management and    primary interface between
Consulting                Nortel Networks and Netcentives
                          Responsibilities will include
                           - Working closely with the
                          Nortel Networks Rewards and
                          Recognition Program Administrator
                          and subsequent Nortel Departmental
                          program administrators.
                           - Handling questions, requests
                          and provide information
                           - Maintaining smooth operation
                          of Rewards and Recognition Program
                           - Providing and coordination
                          marketing/Promotional consulting
                           - Review and development of client
                          site
                           - Coordination of site releases
--------------------------------------------------------------------------------
Management of               *. There are *. * compliant             *
Sub-contractor                 with Netcentives' * *.
relationships (i.e.,
concierge service
providers)
--------------------------------------------------------------------------------
                          TOTAL                                     *


  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 92
<PAGE>


The Parties further agree to abide by the Payment Schedule set forth below:

     a.   Maintenance fees will be billed *, on the * day of each *. Payment for
          each *  maintenance  will be billed at  Nortel's  standard *. When the
          program launches,  Netcentives will * and Nortel will * the program *.
          Nortel  Networks  will be * at the start of each * and will pay this *
          under their standard *.
     b.   The first maintenance fee payment will be * at the * of the * and be *
          for the * portion *.


   ----------------------------------------------------------------
           Payment Date                   Maintenance Fee
   ----------------------------------------------------------------
                                                 *
         Launch of program
   ----------------------------------------------------------------

                 *                               *
   ----------------------------------------------------------------
                                                 *
                 *
   ----------------------------------------------------------------
                                                 *
                 *
   ----------------------------------------------------------------
                                                 *
                 *
   ----------------------------------------------------------------

                 *                               *
   ----------------------------------------------------------------

  *  Material has been redacted pursuant to a request for confidential treatment

                                    Page 93
<PAGE>


                                                                   Exhibit 10.24

                                  BT COMMERCIAL
                                    SUBLEASE

1.   PARTIES.  This  Sublease  ("Sublease"),  dated July 20,  2000,  ("Effective
     Date")  is  made  between  Pets.com   ("Sublessor")  and  Netcentives  Inc.
     ("Sublessee").

2.   MASTER LEASE.  Sublessor is the Tenant under a written lease dated April 8,
     1999 wherein The Paulsen Family Partnership  ("Lessor") leased to Sublessor
     the real  property  located  in the City of San  Francisco,  County  of San
     Francisco,   State  of  CA,   described  as  435  Brannan  Street  ("Master
     Premises").  Said lease has been amended by the following  amendments:  1,2
     and 3; said lease and amendments are herein collectively referred to as the
     "Master Lease" and are attached hereto as Exhibit "A".

3.   PREMISES.  Sublessor  hereby  subleases  to  Sublessee  on  the  terms  and
     conditions  set  forth  in  this  Sublease  all  of  the  Master   Premises
     ("Premises") which consists of approximately 17,500 rentable square feet on
     the ground and second floors.

4.   WARRANTY BY SUBLESSOR.  Sublessor warrants and represents to Sublessee that
     the Master Lease has not been amended or modified  except as expressly  set
     forth herein,  that Sublessor is not now, and as of the commencement of the
     Term hereof will not be, in default or breach of any of the  provisions  of
     the Master  Lease,  and that  Sublessor  has no  knowledge  of any claim by
     Lessor that  Sublessor is in default or breach of any of the  provisions of
     the master Lease.

5.   TERM.  The  Term  of  this  Sublease  shall  commence  on  August  1,  2000
     ("Commencement  Date"),  or when Lessor  consents to this Sublease (if such
     consent is required  under the Master Lease),  whichever  shall last occur,
     and end on May 31,  2004  ("Termination  Date"),  unless  otherwise  sooner
     terminated in accordance with the provisions of this Sublease. In the event
     that  the Term  commences  on a date  other  than  the  Commencement  Date,
     Sublessor and Sublessee shall execute a memorandum setting forth the actual
     date of commencement of the Term. Possession of the Premises ("Possession")
     shall be delivered to Sublessee on the commencement of the Term. If for any
     reason   Sublessor  does  not  deliver   Possession  to  Sublessee  on  the
     commencement  of the Term,  Sublessor shall not be subject to any liability
     for such failure,  the Termination Date shall not be extended by the delay,
     and the validity of this  Sublease  shall not be  impaired,  but rent shall
     abate until  delivery of  Possession.  Notwithstanding  the  foregoing,  if
     Sublessor has not delivered Possession to Sublessee within thirty (30) days
     after  the  Commencement  Date,  then at any  time  thereafter  and  before
     delivery of  Possession,  Sublessee may give written notice to Sublessor of
     Sublessee's intention to cancel this Sublease.  Said notice shall set forth
     an effective  date for such  cancellation  which shall be at least ten (10)
     days after  delivery of said notice to  Sublessor.  If  Sublessor  delivers
     Possession  to Sublessee on or before such  effective  date,  this Sublease
     shall  remain in full  force and  effect.  If  Sublessor  fails to  deliver
     Possession  to Sublessee on or before such  effective  date,  this Sublease
     shall be  cancelled,  in which case all  consideration  previously  paid by
     Sublessee  to Sublessor  on account of this  Sublease  shall be returned to
     Sublessee, this Sublease shall thereafter be of no further force or effect,
     and  Sublessor  shall have no further  liability to Sublessee on account of
     such  delay  or  cancellation.  If  Sublessor  permits  Sublessee  to  take
     Possession  prior to the  commencement of the Term,  such early  Possession
     shall  not  advance  the  Termination  Date  and  shall be  subject  to the
     provisions of this Sublease,  including  without  limitation the payment of
     rent.

                                       2

                                    Page 94
<PAGE>


6.   OPTION TO RENEW. Sublessee shall have no option to renew the Sublease.

7.   RENT.

     7.1  Minimum  Rent.  Sublessee  shall pay to  Sublessor  as  minimum  rent,
          without deduction,  setoff,  notice, or demand at 945 Bryant Street or
          at such other place as Sublessor  shall designate from time to time by
          notice to Sublessee,  the sum of one hundred two thousand eighty-three
          dollars and  thirty-three  cents  ($102,083.33)  upon  execution  of a
          sublease  document,  for the first month's rent. If the Term begins or
          ends on a day other than the first or last day of the month,  the rent
          for  the  partial  months  shall  be  prorated  on a per  diem  basis.
          Additional  provisions:   Tenant  shall  pay  its  own  utilities  and
          janitorial service costs.

     7.2  Operating  Costs.  If the Master  Lease  requires  Sublessor to pay to
          Lessor all or a portion of the  expenses  of  operating  the  building
          and/or project of which the Premises are a part  ("Operating  Costs"),
          including  but not  limited to taxes,  utilities  or  insurance,  then
          Sublessee  shall  pay to  Sublessor  as  additional  rent one  hundred
          percent (100%) of the amounts payable by Sublessor for Operating Costs
          incurred during the Term. Such additional rent shall be payable as and
          when Operating Costs are payable by Sublessor to Lessor. If the Master
          Lease provides for the payment by Sublessor of Operating  costs on the
          basis of an estimate  thereof,  then as and when  adjustments  between
          estimated and actual  Operating Costs are made under the Master Lease,
          the obligations of Sublessor and Sublessee hereunder shall be adjusted
          in a like  manner;  and if any such  adjustment  shall occur after the
          expiration or earlier termination of the Term, then the obligations of
          Sublessor and Sublessee  under this  Subsection 6.2 shall survive such
          expiration or termination. Sublessor shall, upon request by Sublessee,
          furnish Sublessee with copies of all statements submitted by Lessor of
          actual or estimated Operating costs during the term.

                                       3

                                    Page 95
<PAGE>


8.   SECURITY DEPOSIT.  Sublessee shall deposit with Sublessor upon execution of
     this Sublease the sum of five hundred thousand four hundred sixteen dollars
     and sixty-seven  cents  ($510,416.67) as security for Sublessee's  faithful
     performance of Sublessee's  obligations hereunder ("Security Deposit").  If
     Sublessee  fails to pay rent or other charges when due under this Sublease,
     or fails to perform any of its other obligations  hereunder,  Sublessor may
     use or apply all or any portion of the Security  Deposit for the payment of
     any rent or other amount then due hereunder and unpaid,  for the payment of
     any  other  sum for  which  Sublessor  may  become  obligated  by reason of
     Sublessee's  default  or  breach,  or for any loss or damage  sustained  by
     Sublessor  as a result of  Sublessee's  default or breach.  If Sublessor so
     uses any portion of the Security Deposit,  Sublessee shall, within ten (10)
     days after written demand by Sublessor, restore the Security Deposit to the
     full amount originally  deposited,  and Sublessee's  failure to do so shall
     constitute a default under this Sublease.  Sublessor  shall not be required
     to keep the Security Deposit separate from its general accounts,  and shall
     have no  obligation  or  liability  for payment of interest on the Security
     Deposit.  In the event  Sublessor  assigns its  interest in this  Sublease,
     Sublessor shall deliver to its assignee so much of the Security  Deposit as
     is then held by Sublessor. Within ten (10) days after the Term has expired,
     or Sublessee has vacated the Premises,  or any final adjustment pursuant to
     Subsection  6.2 hereof  has been made,  whichever  shall  last  occur,  and
     provided  Sublessee  is not  then  in  default  of  any of its  obligations
     hereunder,  the Security  Deposit or so much  thereof as had not  therefore
     been  applied by  Sublessor,  shall be returned to Sublessee or to the last
     assignee, if any of Sublessee's interest hereunder.

9.   USE OF PREMISES. The Premises shall be used for general office purposes.

10.  ASSIGNEMENT  OF  SUBLETTING.  Sublessee  shall not assign this  Sublease or
     further  sublet  all or part of the  Premises  without  the  prior  written
     consent of Sublessor (and the consent of Lessor,  if such is required under
     the terms of the Master Lease).  The consent by Sublessor and Lessor to any
     assignment  of  subletting  shall  not waive  the need for  Sublessee  (and
     Sublessee's  assignee or  subtenant) to obtain the consent of Sublessor and
     Lessor to any different or further assignment or subletting. All Conditions
     and  Standards  set forth in the Master  Lease  regarding  assignments  and
     subletting shall apply,  and to the extent there is any Bonus Rents,  (Rent
     paid by such Assignee or  SubSublessee  in excess of Rent paid by Sublessee
     hereunder after  deducting  leasing  commissions and reasonable  attorney's
     fees)  fifty  percent  (50%) of the  Bonus  Rent  shall  be paid to  Lessor
     pursuant to the Master Lease and the remaining fifty percent (50%) shall be
     split 50/50  between  Sublesee  and  Sublessor,  with  payment to Sublessor
     within  five  (5) days of  receipt  by  Sublessee.  As a  condition  to its
     consent,  Sublessor  shall  require  Sublessee  to pay  all of  Sublessor's
     reasonable expenses,  including reasonable attorney fees in connection with
     the  assignment  or subletting  within  fifteen (15) days after notice from
     Sublessor.

                                       4

                                    Page 96
<PAGE>


11.  OTHER  PROVISIONS OF SUBLEASE.  All applicable  terms and conditions of the
     Master Lease are  incorporated  into and made a part of this Sublease as if
     Sublessor were the Landlord  thereunder,  Sublessee the Tenant  thereunder,
     and the  Premises  the  Master  Premises,  except  for the  following:  the
     reference  to the  Landlord in section 8 of the Master Lease shall refer to
     the Lessor only, the Sublessee shall insure all improvements required to be
     insured by Sublessor as the "Tenant"  under the Master  Lease,  Sections 34
     and 35 of the Master Lease are not  incorporated  herein,  Sublessee  shall
     have no right to surrender  suite 207 as set forth in the Second  Amendment
     to Commercial  Lease nor to surrender suites 201 and/or 202 as set forth in
     the Third Amendment to Commercial  Lease,  Sublessee shall have no right or
     option  to  renew  or  extend  this  Sublease  and  the  Sublessee  will be
     responsible  for  the  new  lobby  renovation  to  make  it ADA  compliant.
     Sublessee assumes and agrees to perform the Tenant's  obligations under the
     Master  Lease to the extent that such  obligations  are  applicable  to the
     Premises,  except that the  obligation  to pay rent to  Landlord  under the
     Master Lease shall be  considered  performed by Sublessee to the extent and
     in the amount rent is paid to  Sublessor  in  accordance  with Section 6 of
     this  Sublease.  Sublessee  shall not commit or suffer any act or  omission
     that will  violate any of the  provisions  of the Master  Lease.  Sublessee
     shall  neither do not permit  anything  to be done  which  would  cause the
     Master  Lease to be  terminated  or  forfeited  by  reason  of any right of
     termination  of  forfeiture  reserved or vested in Master  Lessor under the
     Master Lease,  and Sublessee  shall  indemnify and hold Sublessor  harmless
     from and against all liability,  judgements,  costs,  demands,  claims, and
     damages of any kind whatsoever (including,  without limitation,  attorneys'
     fees and court  costs) by reason of any failure on the part of Sublessee to
     perform  any of the  obligations  of Tenant  under the Master  Lease  which
     Sublessee  has become  obligated  hereunder  to  perform.  Sublessor  shall
     exercise  due  diligence  in  attempting  to cause  Lessor to  perform  its
     obligations  under the Master  Lease for the benefit of  Sublessee,  except
     that  Sublessor  shall  not be  required  to  incur  any  costs in any such
     attempt.  If, despite  Sublessor's  due  diligence,  Sublessor is unable to
     cause the Lessor to perform its obligations  under the Master Lease for the
     benefit of Sublessee,  Sublessor assigns to Sublessee any claim it may have
     against Lessor so that Sublessee may seek to enforce  Lessor's  obligations
     under the Master Lease. If the Master Lease terminates, this Sublease shall
     terminate,  provided  however,  that if the Master  Lease  terminated  as a
     result of a default or breach by Sublessor or Sublessee under this Sublease
     and/or the Master Lease,  then the defaulting  party shall be liable to the
     non-defaulting   party  for  the  damage  suffered  as  a  result  of  such
     termination.  Notwithstanding  the  foregoing,  if the Master  Lease  gives
     Sublessor  any  right to  terminate  the  Master  Lease in the event of the
     partial  of  total  damage,  destruction,  or  condemnation  of the  Master
     Premises  or the  building  or project of which the Master  Premises  are a
     part,  the  exercise of such right by  Sublessor  shall not  consititute  a
     default or breach hereunder,  provided,  however,  that Sublessor shall not
     exercise  such  termination  right  without  the prior  written  consent of
     Sublessee, which shall not be unreasonably withheld.

12.  ATTORNEY'S FEES. If Sublessor, Sublessee or Broker shall commence an action
     against the other arising out of or in connection  with this Sublease,  the
     prevailing  party  shall  be  entitled  to  recover  its  costs of suit and
     reasonable attorney's fees.

                                       5

                                    Page 97
<PAGE>


13.  AGENCY  DISCLOSURE.  Sublessor  and  Sublessee  each warrant that they have
     dealt with no other real estate broker in connection with this  transaction
     except BT  COMMERCIAL.  In the event  that BT  COMMERCIAL  represents  both
     Sublessor and Sublessee,  Sublessor and Sublessee  hereby confirm that they
     were timely advised of the dual representation and that they consent to the
     same,  and that they do not expect said broker to disclose to other of them
     the confidential information of the other party.

14.  COMMISSION.  Upon execution of this Sublease, and consent thereto by Lessor
     (if  such  consent  is  required  under  the  terms of the  Master  Lease),
     Sublessor shall pay Broker a real estate brokerage commission in accordance
     with  Sublessor's  contract with Broker for the  subleasing of the Premises
     dated July 5, 2000. Broker is hereby made a third party beneficiary of this
     Sublease for the purpose of enforcing its right to said commission.

15.  NOTICES.  All  notices  and  demands  which  may or are to be  required  or
     permitted  to be given to either party on the other  hereunder  shall be in
     writing.  All notices and demands by the  Sublessor to  Sublessee  shall be
     sent by United States Mail, postage prepaid,  addressed to the Sublessee at
     the  premises,  and to the address  hereinbelow,  or to such other place as
     Sublessee may from time to time designate in a notice to the Sublessor. All
     notices and demands by the  Sublessee to Sublessor  shall be sent by United
     States Mail, postage prepaid, addressed to the Sublessor at the address set
     forth  herein,  and to such other person or place as the Sublessor may from
     time to time designate in a notice to the Sublessee.

            To Sublessor:           945 Bryant Street, San Francisco CA

            To Sublessee:           475 Brannan Street, San Francisco CA

16.  CONSENT BY LESSOR.  THE MASTER LEASE  REQUIRES  THAT  SUBLESSOR  OBTAIN THE
     CONSENT OF MASTER  LESSOR TO ANY  SUBLETTING  BY  SUBLESSOR.  THIS SUBLEASE
     SHALL NOT BE EFFECTIVE  UNLESS AND UNTIL  MASTER  LESSOR SIGNS A CONSENT TO
     THIS SUBLETTING SATISFACTORY TO SUBLESSOR AND SUBLESSEE.

17.  CONFLICT  WITH MASTER LEASE;  INTERPRETATION.  In the event of any conflict
     between the  provisions of the Master Lease and this  Sublease,  the Master
     Lease shall govern and control except to the extent  directly  contradicted
     by  the  terms  of  this  Sublease.  No  presumption  shall  apply  in  the
     interpretation  or  construction  of this Sublease as a result of Sublessor
     having drafted any part hereof.

18.  SUBLESSOR MADE A PARTY TO LITIGATION.  If Sublessor  becomes a party to any
     litigation  brought by someone  other than  Sublessee and  concerning  this
     Sublease, the Premises, or Sublessee's use and occupancy of the Premises to
     the extent,  based upon any real or alleged act or omission of Sublessee or
     its authorized representatives,  Sublessee shall be liable to Sublessor for
     reasonable  attorneys'  fees and court costs  incurred by  Sublessor in the
     litigation.

                                       6

                                    Page 98
<PAGE>


19.  CERTAIN  LITIGATION  BETWEEN  THE  PARTIES.  In the  event  any  action  or
     proceeding at law or in equity or any arbitration  proceeding be instituted
     by either party,  for an alleged  breach of any  obligation of Sublessee or
     Sublessor under this Sublease, to recover rent, to terminate the tenancy of
     the Sublessee at the  Premises,  or to enforce,  protect,  or establish any
     right or  remedy  of a party to this  Sublease,  the  prevailing  party (by
     judgment or settlement)  in such action or proceeding  shall be entitled to
     recover as party of such action or proceeding  such  reasonable  attorneys'
     fees,  expert  witness fees, and court costs as my be fixed by the court or
     jury, but this provision  shall not apply to any  cross-complaint  filed by
     anyone other than Sublessor or Sublessee in such action and proceeding.

20.  SURRENDER.  Sublessee  shall  keep the  Premises,  and every  part  thereof
     (except for the  obligations of the Lessor under  paragraph 8 of the Master
     Lease) in good order and repair.  In addition to  Sublessee's  requirements
     under the Master Lease,  Sublessee shall surrender the Premises in the same
     condition as received,  acts of God or other  casualties  and ordinary wear
     and tear  excepted,  provided,  with  respect  to  ordinary  wear and tear,
     Sublessee  performs  all  necessary  maintenance,  repair and  cleaning  to
     maintain the Premises in the condition it was delivered at the Commencement
     Date so as to reasonably minimize the effects of ordinary wear and tear.

21.  SUBLESSEE'S  INSURANCE.  With respect to the Lessee's  insurance  under the
     Master  Lease,  the same is to be provided by Sublessee as described in the
     Master  Lease,  and such  policies  of  insurance  shall  include  as named
     insureds  Master  Lessor and Sublessor and any lender as required by Master
     Lessor.

22.  WAIVER OF SUBROGATION.  With respect to the waiver of subrogation contained
     in  Section  13 of the  Master  Lease,  such  waiver  shall be deemed to be
     modified to constitute an agreement by and among Master  Lessor,  Sublessor
     and Sublessee (and Master Lessor's consent to this sublease shall be deemed
     to constitute their approval of this modification).

23.  HAZARDOUS MATERIALS.

     23.1  Notwithstanding  anything  contained herein or in the Master Lease to
     the contrary,  Sublessee shall not store,  use, or dispose of any Hazardous
     or Toxic Material on, under,  or about the Premises,  except  Sublessee may
     use de minimus  amounts  of  ordinary  and  customary  office and  cleaning
     supplies  so long as such use  does  not  violate  any  Environmental  Laws
     (defined  below).  As used herein,  "Hazardous  or Toxic  Materials"  shall
     include but not be limited to the definition of Hazardous  Materials in the
     Master  Lease  and  to  asbestos  containing  materials  ("ACM")  petroleum
     products,  radioactive  materials,  polychlorinated  biphenyls  (PCBs)  and
     substances  or  compounds   containing   PCBs  and  all  other   materials,
     substances, wastes, and chemicals classified, defined, listed, or regulated
     as, or  containing,  a "hazardous  substances,"  "hazardous  materials," or
     "toxic  substances,"  "pollutant,"  "contaminant,"  "solid waste" under any
     Environmental  Law or which may become  regulated by or under the authority
     of any Environmental  Law. As used herein,  the term  "Environmental  Laws"
     shall include any and all local,  state or federal laws,  statutes,  rules,
     regulations,  ordinances,  orders,  permits,  licenses or other  applicable
     governmental  restrictions,  guidelines  or  legal  requirements,  relating
     directly or  indirectly  to human health or safety or  environment,  or the
     presence, handling,  treatment,  storage, disposal,  recycling,  reporting,
     remediation,  investigation,  or monitoring of hazardous or toxic  material
     including  but not  limited to the  Comprehensive  Environmental  Response,
     Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601,
     et seq.;  the Hazardous  Materials  Transportation  Act, 49 U.S.C.  Section
     1801,  et seq.;  the  Resource  Conservation  and  Recovery  Act, 42 U.S.C.
     Section 6901, et seq.

                                       7

                                    Page 99
<PAGE>


     23.1 INDEMNITY. Sublessee shall be solely responsible for and shall defend,
          indemnify and hold  Sublessor  and its partners,  employees and agents
          harmless  from  and  against  all  claims,  penalties,   expenses  and
          liabilities,  including  attorneys' and  consultants'  fees and costs,
          arising out of or caused in whole or in part,  directly or indirectly,
          by or in connection  with its storage,  use,  disposal or discharge of
          Hazardous  Materials  whether in  violation of this section or not, or
          Sublessee's  failure to comply  with any  Environmental  or  Hazardous
          Materials law.  Sublessee shall further be solely  responsible for and
          shall defend,  indemnify and hold Sublessor  harmless from and against
          any and all claimsm costs and  liabilities,  including  attorneys' and
          consultants' fees and costs,  arising out of or in connection with the
          removal, cleanup, detoxification, decontamination and restoration work
          and  materials  necessary  to return the  Premises to their  condition
          existing  prior  to  Sublessee's  storage,  use  or  disposal  of  the
          Hazardous Materials on the Premises. For the purposes of the indemnity
          provisions hereof, any acts or omissions of Sublessee or by employees,
          agents (except Sublessor), assignees, contractors or subcontractors of
          Sublessee (whether or not they are negligent, intentional or unlawful)
          shall be strictly  attributable to Sublessee.  Sublesse's  obligations
          under this section shall  survive the  termination  of this  Sublease.
          Notwithstanding the foregoing,  Sublessee shall not be responsible for
          any Hazardous Materials on the Premises prior to the Commencement Date
          nor for any Hazardous Materials on the Premises after the Commencement
          Date,  if  not  placed  there  by  Sublessee,  Sublessee's  employees,
          contractors, agents or invitees.

24.  HOLDING OVER. Sublessee shall have no right to hold over. If Sublessee does
     not surrender and vacate the Premises at Termination Date of this Sublease,
     Sublessee  shall be a tenant at  sufferance  and the parties  having agreed
     that the Rent shall be at a daily  rate of one  hundred  and fifty  percent
     (150%) of the monthly  Base Rent set forth in Article 3,  divided by thirty
     (30). In connection with the foregoing,  Sublessor and Sublessee agree that
     the reasonable rental value of the Premises  following the Termination Date
     of the Sublease  shall be the amounts set forth above per month.  Sublessor
     and Sublessee acknowledge and agree that, under the circumstances  existing
     as of the Effective Date, it is impracticable and/or extremely difficult to
     ascertain the  reasonable  rental value of the Premises on the  Termination
     Date  and  that  the  reasonable  rental  value  established  herein  is  a
     reasonable  estimate of the damage that Sublessor  would suffer as a result
     of the  failure of the  Sublessee  to timely  surrender  possession  of the
     Premises.  The parties  acknowledge that the liquidated damages established
     herein is not  intended as a  forfeiture  or penalty  within the meaning of
     California  Civil Code sections 3275 or 3369, but is intended to constitute
     liquidated  damages to Sublessor pursuant to California Civil Code sections
     1671, 1676 and 1677.  Notwithstanding the foregoing, and in addition to all
     other rights and  remedies on the part of  Sublessor if Sublessee  fails to
     surrender the Premises upon the termination or expiration of this Sublease,
     in addition  to any other  liabilities  to  Sublessor  accruing  therefrom,
     Sublessee  shall  indemnify,  defend and hold  Sublessor  harmless from all
     claims  resulting from such failure,  including,  without  limitation,  any
     claims by any third parties based on such failure to surrender and any lost
     profits to Sublessor resulting therefrom.

25.  COUNTERPARTS.  This Sublease may be executed in counterparts, each of which
     shall be  deemed  to be an  original,  but such  counterparts,  when  taken
     together, shall constitute but one agreement. In addition, an executed copy
     hereof received by facsimile transmission shall be effective as an original
     for all purposes.


                                       8

                                    Page 100
<PAGE>



CONSULT YOUR  ADVISORS - This  document  has been  prepared for approval by your
attorney. No representation or recommendation is made by BT COMMERCIAL as to the
legal  sufficiency or tax  consequences  of this document or the  transaction to
which it relates. These are questions for your attorney.

In any real  estate  transaction,  it is  recommended  that you  consult  with a
professional,  such as a civil engineer,  industrial  hygienist or other person,
with  experience  in evaluating  the  condition of the  property,  including the
possible  presence of asbestos,  hazardous  materials  and  underground  storage
tanks.




SUBLESSEE:

Netcentives, Inc., a Delaware corporation


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

By: _________________________________

Its: _________________________________





SUBLESSOR:

Pets.com, a California corporation



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

By: ______________________________

Its: _________________________________



                                    Page 101
<PAGE>



                      ASSIGNMENT AND TERMINATION AGREEMENT

This  assignment  and  Termination  Agreement  (the  "Agreement")  is made as of
December  22, 2000 by and between The  Paulsen  Family  Partnership  ("Lessor"),
Pets.com  ("Lessee")  and  Netcentives  Inc.  ("Sublessee")  in reference to the
following facts:

A.   Lessor and Lessee entered into that certain Lease of Commercial Space dated
     as of April 8, 1999, as amended  ("Lease") for the Premises  located at 435
     Brannan Street as more particularly described in the Lease ("Premises").

B.   Lessee and Sublessee entered into that certain BT Commercial Sublease dated
     July 20, 2000, as amended  ("Sublease") for the entire Premises.  As a part
     of the Sublease transaction,  Lessor's consent, and Sublessee's willingness
     to enter into the Sublease were conditioned upon Sublessee attorning to and
     becoming  a direct  tenant of Lessor  in the event  that the Lease  between
     Lessor and Lessee should be terminated.  Lessor assured  Sublessee that its
     occupancy  of the  Premises  would  not be  disturbed  and that  its  quiet
     enjoyment of the Premises would be assured, so long as Sublessee was not in
     default under the Sublease.

C.   Lessor  and  Lessee  desire to  terminate  the  Lease.  Lessor,  Lessee and
     Sublessee  desire to assign the Sublease to Lessor,  and amend the Sublease
     so that it becomes a direct lease  between  Lessor and Sublessee on exactly
     the same terms and conditions as the Sublease.

          NOW THEREFORE, the parties agree as follows:

Section 1. Lease Termination.

The Lease is hereby  terminated  as of December 31, 2000  ("Termination  Date").
From and  after the  Termination  Date,  Lessor  and  Lessee  are  released  and
discharged from their respective rights and obligations under the Lease.

Section 2. Assignment and Amendment of Sublease.

     (a)  As of the Termination Date: (i) Lessee hereby assigns to Lessor all of
          Lessee's right, title and interest in and to the Sublease,  and Lessor
          assumes  all  of  Lessee's  obligations  arising  under  the  sublease
          accruing  on or after the  Termination  Date or  accruing  before  the
          Termination  Date, if not satisfied;  and (ii) the Sublease is amended
          as follows:  (a) it is retitled "Lease," (b) it becomes a direct lease
          between  Lessor and  Sublessee  (the "New  Lease") on exactly the same
          terms and conditions contained in the Sublease,  (c) all references to
          "Pets.com"  in the  Sublease  shall be  deemed  to be to "The  Paulson
          Family  Partnership;"  (d) all  references to the "Master Lease" shall
          refer to the Lease and specific  provisions therein as applicable,  as
          existing   immediately  prior  to  termination;   and  (e)  any  other
          references  needed  to cause the  document  to be  understood  to be a
          direct lease between Lessor and Sublessee shall be deemed made. Lessee
          hereby assigns to Lessor all of Lessee's right,  title and interest in
          and to Sublessee's  security  deposit under Section 8 of the Sublease.
          On or before the Termination Date, Sublessee shall amend its letter of
          credit in the amount of $510,416.67 to name Lessor as beneficiary  and
          shall look solely to Lessor for return of its security deposit. Lessee
          shall  reasonably  cooperate  with  Sublessee and shall take all steps
          reasonably  necessary  to effect such  assignment.  All fees and costs
          charged by the Issuer of the letter of credit in connection  with such
          assignment shall be paid by Lessee.


                                    Page 102
<PAGE>


     (b)  It is the  intention  of Lessor and  Sublessee  that the  Sublease not
          terminate but rather that it become a lease  directly  between  Lessor
          and  Sublessee.  If by  operation  of law the  Sublease,  nonetheless,
          terminates  on account  of the  termination  of the Lease,  Lessor and
          Sublessee  shall  execute a new lease  agreement on the same terms and
          conditions as would have pertained had the Sublease not terminated and
          so as to effect the intent of the  parties to this  Agreement  to have
          the New Lease be on the same  terms  and  conditions  as the  Sublease
          except as specifically set forth in this Agreement.

     (c)  As of the Termination Date, Sublessee shall have no further obligation
          to Lessee  under  the  Sublease  and  Sublessee's  performance  of any
          obligations  under the Sublease or New Lease  directly to Lessor shall
          satisfy any obligations previously accrued to Lessee.

Section 3. Release; Indemnity.

     (a)  Lessor and Sublessee  hereby  release  Lessee from and against any and
          all claims,  losses,  damages,  judgments,  liabilities  and  expenses
          (collectively,  "Claims")  including without limitation Claims arising
          from or relating to the Lease,  Sublease or New Lease,  but  excepting
          Claims  arising under this  Agreement.  Sublessee's  release of Lessee
          shall  not be  deemed  a  release  of  Lessor  for  any  Claims  which
          originally  arose under the Sublease and which constitute a continuing
          default  under the New Lease.  Lessor and Sublessee  acknowledge  that
          they are familiar with Section 1542 of the California Civil Code which
          provides as follows:

               A GENERAL  RELEASE  DOES NOT EXTEND TO CLAIMS  WHICH THE CREDITOR
               DOES NOT  KNOW OR  SUSPECT  TO EXIST IN HIS  FAVOR AT THE TIME OF
               EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
               AFFECTED THIS SETTLEMENT WITH THE DEBTOR.

          Lessor and Lessee waive and relinquish any right or benefit which they
     have or may have under  California  Civil Code  Section 1542 or any similar
     provision of the statutory or nonstatutory law of any other jurisdiction.

     (b)  From and after the Termination  Date,  Lessor shall indemnify,  defend
          and hold Lessee  harmless from and against any and all Claims  arising
          from or  relating  to the  Lease,  the  Sublease  (as  amended by this
          Agreement) or the New Lease.

                                       2

                                    Page 103
<PAGE>


Section 4. Miscellaneous.

     (a)  This Agreement  constitutes the entire  agreement  between the parties
          with respect to the subject  matter of this  Agreement and  supersedes
          all prior offers, negotiations, whether oral or written.

     (b)  Time is of the essence in the  performance  of the  obligations  under
          this Agreement.

     (c)  This Agreement shall be binding upon and shall inure to the benefit of
          Lessor,  Lessee  and  Sublessee  and their  respective  successors  in
          interest and assigns.

     (d)  This Agreement shall be governed by and interpreted in accordance with
          the laws of the State of California.

     (e)  The individuals  executing this Agreement for and on behalf of Lessor,
          Lessee  and  Sublessee  represent  and  warrant  that  they  are  duly
          authorized   representatives   of  Lessor,   Lessee,   and   Sublessee
          respectively,  with full right,  power and authority to make and enter
          into this Agreement.

     (f)  Any  initially  capitalized  terms  which  are used and not  otherwise
          expressly  defined  herein  shall have the  meanings  specified in the
          Sublease.

     (g)  This  Agreement  is  hereby  incorporated  into and made a part of the
          Sublease and all terms and  provisions  of the Sublease  which are not
          expressly modified herein shall remain in full force and effect.

     (h)  This Agreement may be executed in counterparts, each of which shall be
          deemed an original document.  All executed counterparts together shall
          constitute one and the same document,  and any signature  pages may be
          assembled to form a single  original  document.  A signed copy of this
          Agreement  transmitted  via  facsimile  to one or  more  of the  other
          parties hereto shall be binding upon the signatory thereto.

     (i)  If Sublessee,  Lessee or Lessor  commences an action against the other
          arising out of or in connection  with this  Agreement,  the prevailing
          party shall be  entitled  to recover its costs of suit and  reasonable
          attorneys' fees.

     IN  WITNESS  WHEREOF,  Lessor,  Lessee and  Sublessee  have  executed  this
     Agreement as of the date written above.

                                       3

                                    Page 104
<PAGE>


   LESSOR:

   PAULSEN FAMILY PARTNERSHIP

   By:      (signed) Albert R. Paulsen, Partner

   By:      (signed) Alice H. Paulsen, Partner

   SUBLESSEE:

   NETCENTIVES INC.

   By:      (signed) J.F. Longinotti

   Name:    J.F. Longinotti

   Its:     Chief Operating Officer & CFO


   LESSEE:

   PETS.COM, a California corporation

   By:      (signed) P. Manca

   Name:    P. Manca

   Its:     CFO

                                       4


                                    Page 105
<PAGE>

                                                                    Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

     We consent to the incorporation by reference in Registration Statement Nos.
333-92205,  333-34470,  and  333-41232  of  Netcentives  Inc. on Form S-8 of our
report dated  February 2, 2001 (April 2, 2001 as to the last two  paragraphs  of
Note 17),  appearing in this Annual Report on Form 10-K of Netcentives  Inc. for
the year ended December 31, 2000.

/S/ DELOITTE & TOUCHE LLP

San Jose, California
April 2, 2001


                                    Page 106
<PAGE>

                                                                    Exhibit 99.1



Stacey Levitz
                                             Senior Director, Investor Relations
                                             Netcentives Inc.
                                             415.615.2365
                                             stacey@netcentives.com

  Netcentives to Recognize Approximately $40 Million in Operating Efficiencies
                    Larsen Tapped as Chief Executive Officer
           First Quarter Revenue and EPS On Track to Meet Expectations

SAN FRANCISCO,  April 2, 2001 -- Netcentives Inc.(TM) (Nasdaq:  NCNT), a leading
provider of loyalty and direct marketing  solutions,  today announced that it is
taking action to realize  approximately  $40 million in cost  savings,  which is
expected to result in  earnings  per share  improvements  during its fiscal year
ended 2001. In addition,  the Company  announced that President Eric Larsen will
assume  the role of Chief  Executive  Officer.  West  Shell  III will  remain as
Chairman of the Board.

"Eric and I have formed a very effective  partnership  leveraging our respective
strengths.  The Board and I are confident  that with his proven track record and
broad management expertise,  Eric is the right leader to take Netcentives to the
next stage in its  growth,"  said West Shell III.  The Company is  committed  to
investing  in  our  technology  platform  while  focusing  sales  and  marketing
resources  on  high  growth  markets  where  we have a  significant  competitive
advantage. These areas include enterprise incentive programs,  registered credit
card programs,  email  communications and custom loyalty programs focused on the
financial services market."

The Company's  cost  reduction  plan  includes  several  initiatives  such as: a
reduction  in  contract  labor,  cuts  in  administrative,  travel  and  capital
expenditures,  and  a  reduction  in  workforce  of  approximately  120  people.
Factoring in reductions,  the Company expects to report full year revenue in the
range  of  $65  million  to  $70  million,   representing   an  approximate  55%
year-over-year  increase,  but below  original  forecasts.  Year-end  EPS is now
expected to be between ($0.90) and ($0.95),  which represents an approximate 40%
improvement compared to previous forecasts.  The Company will give more detailed
financial guidance on its first quarter conference call scheduled for April 24.

Netcentives  attributes  this top line  forecast  change to the  broad  economic
slowdown.  In addition,  the Company has seen  changes in its business  activity
with Nortel Networks,  which has been a significant contributor to the Company's
earnings.

"The  Netcentives  leadership  team is being very  aggressive  in  aligning  our
expense  structure with growth  expectations.  Our cost cutting  initiatives are
imperative  in today's  market  environment,  said Eric  Larsen.  "Despite  this
lackluster  economy,  we expect first  quarter's  top line results to be in line
with  expectations and our EPS to improve.  However,  due to longer sales cycles
within our Global 2000 prospect base, and a more  conservative  outlook for full
year 2001, we are revising  revenue guidance which is expected to yield improved
EPS guidance."

Netcentives  expects first quarter  revenue between $15 million and $16 million,
which is in line with Wall  Street's  expectations.  Netcentives'  earnings  per
share is projected to be slightly  better than expected and between the range of
($0.39)  to  ($0.41).   The  Company  expects  to  take  a  one-time  charge  of
approximately  $700,000  related to severance  costs  during its second  quarter
ended June 30,  2001.  Along with its first  quarter  expectations,  the Company
reiterated  plans today to achieve cash flow  breakeven  from  operations by the
fourth quarter of 2001.

About Netcentives Inc.
San  Francisco-based  Netcentives  Inc.  (Nasdaq:  NCNT), a leading  provider of
loyalty solutions,  delivers a broad suite of relationship  marketing technology
and  services  including  business,  consumer  and  employee  loyalty  programs,
customized email marketing and consulting services.  With a global 2000 customer
base and over 50 million managed  relationships,  Netcentives' patented business
processes and scalable technology  infrastructure provide clients with the power
and  flexibility  to drive  enduring  customer  relationships  both  online  and
offline.   For  more  information   about   Netcentives  and  its  portfolio  of
relationship   marketing   solutions,    visit   www.netcentives.com   or   call
415.538.1888.

(C)2001  Netcentives  Inc. All rights  reserved.  Netcentives  is a trademark of
Netcentives  Inc.  Other  product and company  names herein may be trademarks of
their respective owners. This press release contains forward-looking  statements
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995,
regarding  Netcentives' business strategy and future plans and projected results
of operations.  Forward-looking  statements  involve known and unknown risks and
uncertainties,  both general and specific to the matters discussed in this press
release. These and other important factors, including those mentioned in various
Securities and Exchange Commission filings made periodically by Netcentives, may
cause Netcentives'  actual results and performance to differ materially from the
future results and performance  expressed in or implied by such  forward-looking
statements. The forward-looking statements contained in this press release speak
only as of the date hereof and Netcentives expressly disclaims any obligation to
provide  public  updates,   revisions  or  amendments  to  any   forward-looking
statements made herein to reflect changes in Netcentives' expectations or future
events.


                                    Page 107