##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-K


|                                             |  |                                                                                                 
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|x                                            |  | ANNUAL REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|                                            
|For the fiscal year ended March 31,
    2002
|                                            
|o                                            |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|                                            
|Commission File Number: 000-27787           

DIGITAL IMPACT, INC.

(Exact name of the registrant as specified in
its charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 94-3286913                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. employer
    Identification No.)
|                                                                  
|177 Bovet Road, San Mateo,
    California                          |  | 94402                                   
|(Address of principal executive
    offices)                       |  | (Zip Code)                              

Registrants telephone number, including
area code: (650) 356-3400

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

|                    |  |                      
|------------------- |  | ---------------------
|                    |  | Name of each exchange
|Title of each class |  | on which registered  
|                    |  |                      
|None                |  | None                 

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

Common Stock, $0.001 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 o

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.  x

The aggregate market value of the voting Common
Stock held by non-affiliates of the Registrant, based upon the
closing sale price of the Common Stock on June 3, 2002 as
reported on the Nasdaq National Market, was approximately
$25.4 million. Shares of Common Stock held by each officer
and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded because such persons
may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.

As of June 3, 2002, the Registrant had
outstanding approximately 30.0 million shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our definitive Proxy Statement for
our 2002 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission within 120 days
after the end of our fiscal year, are incorporated by reference
into Part III hereof.



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TABLE OF CONTENTS



|                                                                   |                                                                                                        |  |  |  |  |  |  | 
|------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I                                                            
|                                                                   | Item 1.Business                                                                                       
|                                                                   | Item 2.Properties                                                                                     
|                                                                   | Item 3.Legal Proceedings                                                                              
|                                                                   | Item 4.Submission of Matters to a Vote of Security Holders                                            
|                                                                   | Item 4a.Executive Officers of Registrant                                                              
|PART II                                                           
|                                                                   | Item 5.a) Market for the Registrants Common Equity and Related Stockholder Matters                   
|                                                                   | Item 6.Selected Consolidated Financial Data                                                           
|                                                                   | Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations          
|Item 7A.Quantitative and Qualitative Disclosures About Market Risk
|                                                                   | Item 8.Financial Statements and Supplementary Data                                                    
|                                                                   | Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III                                                          
|                                                                   | Item 10.Directors and Executive Officers of the Registrant                                            
|                                                                   | Item 11.Executive Compensation                                                                        
|                                                                   | Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                                   | Item 13.Certain Relationships and Related Transactions                                                
|PART IV                                                           
|                                                                   | Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES                                                        
|EXHIBIT 10.9                                                      
|EXHIBIT 10.14                                                     
|EXHIBIT 10.15                                                     
|EXHIBIT 10.16                                                     
|EXHIBIT 21.1                                                      



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##### Table of Contents



FORM 10-K

ANNUAL REPORT


For the Year Ended March 31,
2002


TABLE OF CONTENTS

|           |  |                                                                                                    |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                                    |    | Page
|           |  |                                                                                                    |    |     
|PART I    
|Item 1.    |  | Business                                                                                           |    |      | 1  | 
|Item 2.    |  | Properties                                                                                         |    |      | 4  | 
|Item 3.    |  | Legal Proceedings                                                                                  |    |      | 5  | 
|Item 4.    |  | Submission of Maters to a Vote of Security Holders                                                 |    |      | 5  | 
|Item 4a.   |  | Executive Officers of the Registrant                                                               |    |      | 5  | 
|PART II   
|Item 5.    |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |    |      | 7  | 
|Item 6.    |  | Select Consolidated Financial Data                                                                 |    |      | 8  | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Conditions and Results of Operations         |    |      | 9  | 
|Item 7a.   |  | Quantitative and Qualitative Disclosure About
    Market Risk                                      |    |      | 23 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                                        |    |      | 23 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |    |      | 23 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                 |    |      | 24 | 
|Item 11.   |  | Executive Compensation                                                                             |    |      | 24 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Shareholder Matters |    |      | 24 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                                     |    |      | 24 | 
|PART IV   
|Item 14.   |  | Exhibits, Financial Statements Schedules and
    Reports on Form 8-K                               |    |      | 25 | 
|Signatures |  |                                                                                                    | 49 |     

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PART I

Forward-Looking Information

THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS
RELATED TO FUTURE EVENTS AND OUR FUTURE PERFORMANCE WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES AND EXCHANGE ACT OF
1934, AS AMENDED. STOCKHOLDERS ARE CAUTIONED THAT SUCH
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS
AND TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH
UNDER RISK FACTORS AND ELSEWHERE IN THIS REPORT AND
IN OUR OTHER PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION. IT IS ROUTINE FOR INTERNAL PROJECTIONS AND
EXPECTATIONS TO CHANGE AS THE YEAR OR EACH QUARTER IN THE YEAR
PROGRESSES, AND THEREFORE IT SHOULD BE CLEARLY UNDERSTOOD THAT
THE INTERNAL PROJECTIONS AND BELIEFS UPON WHICH WE BASE OUR
EXPECTATIONS MAY CHANGE PRIOR TO THE END OF EACH QUARTER OR THE
YEAR. ALTHOUGH THESE EXPECTATIONS MAY CHANGE, WE MAY NOT INFORM
YOU IF THEY DO. OUR COMPANY POLICY IS GENERALLY TO PROVIDE OUR
EXPECTATIONS ONLY ONCE PER QUARTER, BUT WE MAY CHOOSE NOT TO
UPDATE THAT INFORMATION UNTIL THE NEXT QUARTER EVEN IF
CIRCUMSTANCES CHANGE.




Item 1. Business

Overview

Digital Impact was incorporated in California in
October 1997 and reincorporated in Delaware in October 1999.
Digital Impact is the premier provider of online direct
marketing solutions for enterprises. Our solutions enable
corporations to create and deliver online direct marketing
programs that drive revenue, influence behavior and deepen
customer relationships. Our solutions provide customer insight
and powerful program execution through a combination of hosted
applications, technology infrastructure and world class services.

The IMPACTTM hosted application
(IMPACT) forms the core of our online direct
marketing solutions. Leveraging a highly scalable, hosted
technology infrastructure, the IMPACT application facilitates
every aspect of online direct marketing  including
data management, marketing analytics, campaign management and
message delivery. IMPACT is the first online direct marketing
application built specifically for enterprise marketing teams to
collaborate across departments, geographies and external
agencies to quickly analyze, design, implement and execute
complex targeted email marketing campaigns.

Enterprise marketers face two major challenges in
their email marketing programs: easily accessing and analyzing
large quantities of cross-channel customer information, often
stored in CRM databases, as well as coordinating the
time-sensitive email campaign process across marketing groups,
corporate divisions and outside agencies. IMPACT solves these
problems by providing round-trip integration of sophisticated
marketing analytics and collaborative email campaign management.
Marketers can quickly access and analyze a wide range of
cross-channel CRM data, identify new customer segments, easily
create and deliver email campaigns to those segments, and track
and measure the results, all in one application. Through its
built-in workflow, and role and task management, IMPACT lets
marketers control and accelerate the process of creating
coordinated email marketing campaigns with collaboration among
all stakeholders.

We provide our technology through a flexible
outsourcing model minimizing systems and application support
burden and giving clients a range of full-service and
self-service alternatives. Many of our clients contract for a
combination of professional services and industry-leading
technology, ensuring that we jointly create and implement online
direct marketing campaigns that achieve optimal results.

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On July 31, 2000 we acquired MineShare, Inc.
(MineShare), a customer intelligence and analysis
company based in Santa Monica, California, in exchange for
approximately 1,855,700 shares of our common stock.
Additionally, we assumed MineShares outstanding stock
options and warrants and reserved approximately 132,700 shares
of our common stock for issuance upon exercise of these options
and warrants. The acquisition was effected by means of a merger
pursuant to which a wholly owned subsidiary of Digital Impact
was merged with and into MineShare, with MineShare as the
surviving corporation. The acquisition has been accounted for as
a purchase.

Solutions

We provide comprehensive solutions for creating
and executing online direct marketing programs. Our solutions
are designed to enable marketers to build the foundation
required to develop online direct marketing programs, reach new
customers, and maximize the value of existing customers. Our
solutions consist of the following offerings:

IMPACTTM

IMPACT is a premier hosted online direct
marketing application built specifically to address the complex
needs of global enterprise marketers. IMPACT provides round-trip
integration of sophisticated marketing analytics with
collaborative email campaign management. Marketers can quickly
access and analyze a wide range of cross-channel CRM data,
identify new client-customer segments, easily create and deliver
email campaigns to those segments, and track and measure the
results, all in one application.

Campaign Services

Campaign Services provides marketers with an
account team to efficiently execute their online direct
marketing programs. Based upon a marketers guidance, the
Campaign Services team targets, tests and executes email
marketing campaigns utilizing the IMPACT hosted application.
Marketers maintain control and visibility over the entire
process.

Program Services

Program Services provides marketers with an
expert team designed to proactively build and manage their
online direct marketing programs around their email marketing
goals. The Program Services team delivers insight, analysis and
management to optimize the value of online customer
relationships.

Customer Acquisition

Customer acquisition is a full service marketing
offering that enables clients to cost-effectively reach new
prospects and drive online revenue by converting prospects into
customers. Digital Impact helps clients achieve superior results
by providing access to a rich base of prospect sources,
negotiating exceptional rates and optimizing campaigns to reach
the highest value customers. Our Customer Acquisition clients
receive full-service program management, including strategic
media plan development, comprehensive testing and results
analysis.

Professional Services

Professional services can be utilized by clients
to enhance marketing programs and improve results. Digital
Impact offers clients services to fulfill online direct
marketing needs in each of the following categories: Strategy,
Analysis, Data Management, Solutions Engineering, Web
Development, Creative and Design and Media Planning.

Research and Development

We believe that strong product development
capabilities are essential to our strategy of enhancing our core
technology, developing additional applications incorporating
that technology and maintaining the

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competitiveness of our product and service
solutions. Digital Impact invested significant time and
resources in creating a structured process for undertaking all
product development. This process involves several functional
groups at all levels within our organization and is designed to
provide a framework for defining and addressing the activities
required to bring product concepts and development projects to
market successfully. For the fiscal year ended March 31,
2002 we spent $11.2 million on activities related to
research and development.


Sales and Marketing

We sell our products and services in the United
States through a sales and marketing organization that consisted
of 67 employees as of March 31, 2002. These employees are
primarily located at our headquarters in San Mateo, California
and also in our offices in Chicago and New York City. We also
maintain a sales and client services organization of 6 employees
in London, England supporting the European region.

Clients

Our clients consist of a diverse group of
companies operating in many industries primarily throughout the
United States, ranging from Fortune 1000 to small private
companies. For the year ended March 31, 2002, one customer,
Hewlett Packard, accounted for more than 10% of our total
revenues and outstanding receivables, representing 11% of total
revenues and 17% of outstanding receivables at March 31,
2002.

Competition

The market for online direct marketing services
is highly competitive and rapidly evolving and experiences rapid
technological change. We expect competition to increase
significantly in the future because of the attention the
Internet has received as a means of advertising and direct
marketing and because there are limited barriers to entry into
our market.

We believe that the factors on which we
successfully compete include:



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | Credibility of clients and their willingness to
    act as references.
|
| |  | Quality of online direct marketing services.                          
|
| |  | Technology-enhanced service offerings.                                
|
| |  | Sophistication and reliability of technology.                         
|
| |  | Speed of implementation of online direct
    marketing campaigns.     
|
| |  | Cost-effective online direct marketing solutions.                     
|
| |  | Measurable results.                                                   

Although we believe that our solutions currently
compete favorably as to each of these factors, our market is
relatively new and is evolving rapidly. We may not be able to
maintain our competitive position against current and potential
competitors.

Our principal competitors include providers of
online direct marketing solutions such as DoubleClick,
Responsys, Cheetahmail, CMGIs Yesmail (through its recent
acquisition of Post Communications), eDialog and Clickaction, as
well as the in-house information technology departments of our
existing and prospective clients.

In addition, we expect competition to persist and
intensify in the future, which could harm our ability to
increase sales and maintain our prices. In the future, we may
experience competition from Internet service providers,
advertising and direct marketing agencies and other large
established businesses possessing large, existing customer
bases, substantial financial resources and established
distribution channels and could develop, market or resell a
number of online direct marketing solutions. These potential
competitors may also choose to enter, or have already entered,
the market for online direct marketing by acquiring one of our
existing competitors or by forming strategic alliances with a
competitor.

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Many of these potential competitors have broad
distribution channels and they may bundle competing products or
services. As a result of future competition, the demand for our
services could substantially decline. Any of these occurrences
could harm our ability to compete effectively.

Intellectual Property

We rely upon a combination of patent, copyright,
trade secret and trademark laws to protect our intellectual
property. We currently have no issued U.S. patents and two
U.S. patent applications pending.

In addition, we have several registered
U.S. trademarks and several more trademark applications
pending in the U.S., Europe and Japan. Although we rely on
patent, copyright, trade secret and trademark law to protect our
technology, we believe that factors such as the technological
and creative skills of our personnel, new product developments,
frequent product enhancements and reliable product maintenance
are more essential to establishing and maintaining a technology
leadership position. Others may develop technologies that are
similar or superior to our technology.

Government Regulation

Legislation has been enacted in several states
restricting the sending of unsolicited commercial email. The
federal government, foreign governments and several other states
are considering, or have considered, similar legislation.
Although the provisions of these current and contemplated laws
vary, they 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 such emails
honor any opt-out requests. We believe that our current suite of
services are not affected by such legislation because the list
management practices that we espouse to our clients are intended
to prevent the sending of unsolicited commercial email. We
cannot assure you that future legislation or the application of
existing legislation will not harm our business.

Seasonality

The traditional direct marketing industry has
typically generated lower revenue during the summer months and
higher revenue during the calendar year-end months. We believe
our business is affected by similar revenue fluctuations, but we
are unable to isolate and predict the magnitude of these effects.

Employees

As of March 31, 2002, we had a total of
267 full-time employees. Of the total number of employees,
44 were engaged in research and development, 67 in sales,
marketing and business development, 118 in account management,
professional services, production and technical support and 38
in operations, finance, and administration.

Our future performance depends in significant
part upon the continued service of our key technical, sales and
senior management personnel. Our future success also depends on
our continuing ability to attract, train and retain highly
qualified technical, sales and managerial personnel. None of our
employees is represented by a labor union. We have not
experienced any work stoppages and consider our relations with
our employees to be good.




Item 2. Properties

Our principal executive offices are located in
San Mateo, California, where we lease approximately 34,000
square feet under three leases that expire in dates ranging from
2005 to 2007. Digital Impact also leases office space in New
York City, Chicago and London for local sales and client service
personnel, and in Cupertino and Santa Monica, California for
research and development staff and data center personnel.

4



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Item 3. Legal
Proceedings

In June 2001, a series of putative securities
class actions were filed in United States District Court for the
Southern District of New York against certain investment bank
underwriters for the Companys initial public offering
(IPO), the Company, and various of the
Companys officers and directors. The complaints, which
have been consolidated under the caption Stein v. Digital
Impact, Inc.,et al., Civil Action No. 01-CV-4942,
allege undisclosed and improper practices by the underwriters
concerning the allocation of the Companys IPO shares, in
violation of the federal securities laws, and seek unspecified
damages on behalf of persons who purchased the Companys
stock during the period from November 22, 1999 to
December 6, 2000. Other actions have been filed making
similar allegations regarding the IPOs of more than 300 other
companies. All of these lawsuits have been coordinated for
pretrial purposes as In re Initial Public Offering Securities
Litigation, Civil Action No. 21-MC-92. The Company
believes it has meritorious defenses to the claims against it
and will defend itself vigorously. In the opinion of management,
after consultation with legal counsel and based on currently
available information, the ultimate disposition of these matters
is not expected to have a material adverse effect on our
business, financial condition or results of operations, and
hence no amounts have been accrued for these cases.




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

Not applicable.




Item 4a. Executive Officers of
Registrant

The following table sets forth certain
information regarding the executive officers of the Company as
of June 3, 2002:

|                  |  |     |    |          |  |                                                                              
|----------------- |  | --- | -- | -------- |  | -----------------------------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|William Park      |  |     | 34 |          |  | President, Chief Executive Officer and Chairman
    of the Board of Directors
|Gerardo Capiel    |  |     | 33 |          |  | Chief Technology Officer and Director                                        
|David Oppenheimer |  |     | 45 |          |  | Senior Vice President, Finance, Chief Financial
    Officer and Treasurer    
|Kevin Johnson     |  |     | 37 |          |  | Senior Vice President, Client Services                                       
|John Ouren        |  |     | 32 |          |  | Senior Vice President, Professional Services                                 
|Dave Kleinberg    |  |     | 43 |          |  | Senior Vice President, Marketing                                             
|Ronald Rasmussen  |  |     | 40 |          |  | Senior Vice President, Engineering and Operations                            

William Parkhas
served as our Chief Executive Officer since July 1999 and serves
as President and Chairman of our Board of Directors, positions
he has held since he co-founded Digital Impact in October 1997.
From July 1996 until November 1996, Mr. Park was Director
of Profile Marketing for NetAngels, an Internet company focused
on web personalization technologies. From 1989 to 1994,
Mr. Park held a variety of marketing positions at ZAI*NET
Software, Inc., an enterprise software company, where he became
Vice President of Marketing in 1993. Mr. Park holds a B.A.
from the University of Pennsylvania and an M.B.A. from Stanford
University.

Gerardo Capielhas
served as our Chief Technology Officer and as a member of our
Board of Directors since he co-founded Digital Impact in October
1997. From August 1996 to August 1997, Mr. Capiel was
Director of Internet/ Internet Solutions for Altro Solutions, an
information technology and business process consulting firm.
Mr. Capiel holds a B.S. in engineering systems and
computation from the Massachusetts Institute of Technology and
an M.B.A. from Stanford University.

David Oppenheimerhas served as our Senior Vice
President, Finance, Chief Financial Officer and Treasurer since
October 2000. From November 1997 to July 1999,
Mr. Oppenheimer was Vice President, Finance for Autodesk,
Inc., a supplier of design and visual effect software. From
January 1995 to November 1997, Mr. Oppenheimer held several
positions with AlliedSignal, Inc., an advanced technology and
manufacturing company, including Chief Financial Officer of
AlliedSignal Electronic Materials, Vice President of

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Finance for AlliedSignal Aerospace Services and
Controller of AlliedSignal Engines. From August 1985 to January
1995, Mr. Oppenheimer was employed by United Airlines, most
recently as Division Controller. Mr. Oppenheimer holds a
B.S. in mechanical engineering from State University of New
York, Buffalo and an M.B.A. from the University of California,
Berkeley.


Kevin Johnsonhas
served as our Senior Vice President, Client Services since
December 2001. Prior to joining Digital Impact, Mr. Johnson
was the Senior Vice President of Client Services at Netcentives,
a leading provider of relationship marketing technology and
services. Mr. Johnson managed all aspects of
Netcentives email marketing group (formerly Post
Communications). Prior to his tenure at Netcentives,
Mr. Johnson co-founded and served as CEO of Passporta.com,
an e-commerce business providing hard-to-find local specialties
from around the world and he spent five years with the Boston
Consulting Group, where he provided strategic and operating
expertise to leading multinational companies. Mr. Johnson
holds a B.A. from the University of California, Berkeley and an
M.B.A. from Stanford University.

John Ourenhas
served as our Senior Vice President, Professional Services since
April 2002, our Senior Vice President of Worldwide Sales from
March 2001 to April 2002, Vice President of Professional
Services from September 2000 to February 2001 and Director of
Strategic and Analytic Services from November 1999 to August
2000. Prior to joining Digital Impact, Mr. Ouren served as
an engagement manager in the Silicon Valley office of McKinsey
and Company, where he lead the companys Electronic
Commerce Special Initiative and Financial Institutions Group.
Mr. Ouren holds a B.S. in electrical engineering from the
University of Texas and an M.B.A. from Stanford University.

David Kleinberghas
served as our Senior Vice President, Marketing since November
2000. From August 1999 to November 2000, Mr. Kleinberg was
Founder and CEO of eStar, a provider of online celebrity
information. From November 1995 to July 1999, Mr. Kleinberg
served as co-founder and Executive Vice President of Products
for NetObjects, a leading provider of web site building
technology. From September 1992 to November 1995,
Mr. Kleinberg served as co-founder and Executive Vice
President, Marketing and Sales for Rae Technology, Inc., a
custom software development company. Mr. Kleinberg has also
held various director-level positions with Macromedia and Apple
Computer. Mr. Kleinberg holds a B.A. in English literature
and American Government from Georgetown University and an M.B.A.
from Stanford University.

Ronald Rasmussenhas
led our Engineering and Operations group since October 1999,
first as Vice President and, since October 2000, as Senior Vice
President. From September 1997 to October 1999,
Mr. Rasmussen served as Vice President, Engineering and
Product Development of The Santa Cruz Operation Inc., a business
systems software company. From 1993 to September 1997,
Mr. Rasmussen served as Director of Engineering of The
Santa Cruz Operation Inc. Prior to that, Mr. Rasmussen
served in a variety of senior software engineering positions for
Hewlett-Packard. Mr. Rasmussen holds a B.A. in economics
and computer science from the University of California, Santa
Cruz.

6



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PART II




Item 5. a)Market for the
Registrants Common Equity and Related Stockholder
Matters

Our common stock has been quoted on the Nasdaq
National Market under the symbol DIGI since our initial public
offering on November 23, 1999. The following table sets
forth, for the periods indicated, the high and low sales prices
per share of common stock as reported on the Nasdaq National
Market.

|                  |                                        |      |  |       |  |  |  |      | 
|----------------- | -------------------------------------- | ---- |  | ----- |  |  |  | ---- | 
|                  |                                        | High |  | Low  
|                  |                                        |      |  |      
|Fiscal Year 2001: |                                        |      |  |       |  |  |  |     
|                  | First quarter (from 4/01/00  6/30/00) |      |  | 26.50 |  |  |  | 8.00 | 
|                  | Second quarter                         |      |  | 19.75 |  |  |  | 6.50 | 
|                  | Third quarter                          |      |  | 6.81  |  |  |  | 1.66 | 
|                  | Fourth quarter                         |      |  | 4.75  |  |  |  | 1.19 | 
|Fiscal Year 2002: |                                        |      |  |       |  |  |  |     
|                  | First quarter (from 4/01/01  6/30/01) |      |  | 2.10  |  |  |  | 1.10 | 
|                  | Second quarter                         |      |  | 1.60  |  |  |  | 0.69 | 
|                  | Third Quarter                          |      |  | 1.50  |  |  |  | 0.64 | 
|                  | Fourth Quarter                         |      |  | 3.71  |  |  |  | 1.47 | 

On March 28, 2002, the last sale price of
our common stock reported by the Nasdaq National Market was
$2.99 per share. On June 3, 2002, the last sale price of
our common stock reported by the Nasdaq National Market was
$1.80 per share. As of June 3, 2002, the approximate number
of common stockholders of record was 147.

Digital Impact has never declared or paid any
cash dividends on its capital stock. Digital Impact currently
intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
Furthermore, our credit agreements place restrictions on our
ability to pay dividends.

(b) Report of Offering
Securities and Use of Proceeds Therefrom:

In November 1999, we completed our initial public
offering of 5,175,000 shares of our common stock, which included
675,000 shares in connection with the exercise of the
underwriters overallotment option, at $15 per share. The
managing underwriters in the offering were Credit Suisse First
Boston; Hambrecht & Quist; Donaldson, Lufkin &
Jenrette; and U.S. Bancorp Piper Jaffray. The sale of our shares
of common stock in the offering was registered under the
Securities Act of 1933, as amended, on a Registration Statement
on Form S-1 (Reg. No. 333-87299) that was declared
effective by the Securities and Exchange Commission on
November 22, 1999. The aggregate offering amount including
the over-allotment exercise was approximately
$77.6 million. We incurred expenses of approximately
$6.8 million, of which approximately $5.4 million
represented underwriting discounts and commissions and
approximately $1.4 million represented other expenses
related to the offering.

(c) Unregistered Sales of
Equity Securities.

On or about February 20, 2001, pursuant to a
Note Conversion Agreement between us and certain holders of
notes issued by MineShare, Inc., we converted notes with an
aggregate unpaid principal and interest totaling approximately
$600,000 into approximately 190,000 shares of our common stock.
The transaction was exempt from registration by reason of
Section 4(2) of the Securities Act of 1933. The sales were
made in private transactions without general solicitation or
advertising. Digital Impact believes that each purchaser
(i) was an accredited investor with access to all relevant
information necessary, (ii) was acquiring Digital Impact
common stock solely for its own account and for investment, and
(iii) does not intend to offer, sell or dispose of such
shares except in compliance with the Securities Act of 1933.

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Item 6. Selected Consolidated
Financial Data

|                                                   |  |                                       |         |                  |  |      |         |      |  |                |         |   |  |   |        |   |  |   |       |  
|-------------------------------------------------- |  | ------------------------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | -------------- | ------- | - |  | - | ------ | - |  | - | ----- | -
|                                                   |  |                                       |         |                 
|                                                   |  | Fiscal year ended March 31,           |         |                 
|                                                   |  |                                       |         | October 16, 1997
|                                                   |  |                                       |         | (date of        
|                                                   |  |                                       |         | inception) to   
|                                                   |  | 2002                                  |         | 2001             |  | 2000 |         | 1999 |  | March 31, 1998
|                                                   |  |                                       |         |                  |  |      |         |      |  |               
|                                                   |  |                                      
|                                                   |  | (In thousands, except per share data)
|Statement of Operations Data                       |  |                                       |         |                  |  |      |         |      |  |                |         |   |  |   |        |   |  |   |       |  
|Revenues                                           |  | $                                     | 39,038  |                  |  | $    | 40,153  |      |  | $              | 12,991  |   |  | $ | 1,307  |   |  | $ | 4     |  
|Gross margin                                       |  |                                       | 21,045  | (1)              |  |      | 22,317  | (2)  |  |                | 6,813   |   |  |   | 633    |   |  |   |      |  
|Loss from operations                               |  |                                       | (19,975 | )(1)             |  |      | (59,763 | )(2) |  |                | (23,130 | ) |  |   | (3,311 | ) |  |   | (104  | )
|Net loss per common share  basic and
    diluted* |  | $                                     | (0.70   | )                |  | $    | (2.33   | )    |  | $              | (2.28   | ) |  | $ | (2.86  | ) |  | $ | (0.45 | )

|                                                  |  |           |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   |       | 
|------------------------------------------------- |  | --------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ----- |  |  | - | ----- | 
|                                                  |  |          
|                                                  |  | March 31,
|                                                  |  |          
|                                                  |  | 2002      |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                  |  |           |        |      |  |      |        |      |  |     
|Balance Sheet Data                                |  |           |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   |       | 
|Cash, cash equivalents and short-term investments |  | $         | 25,588 |      |  | $    | 35,038 |      |  | $    | 68,073 |  |  | $ | 2,864 |  |  | $ | 1,032 | 
|Total assets                                      |  |           | 49,633 |      |  |      | 69,019 |      |  |      | 81,102 |  |  |   | 6,314 |  |  |   | 1,078 | 
|Long-term debt and capital lease obligations      |  |           | 1,324  |      |  |      | 2,653  |      |  |      | 726    |  |  |   | 691   |  |  |   |      | 
|Stockholders equity                              |  |           | 38,889 |      |  |      | 55,555 |      |  |      | 73,530 |  |  |   | 4,370 |  |  |   | 1,056 | 




|  |                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------
|* | For the number of shares used in this calculation
    for fiscal 2002, 2001 and 2000, see Note 2 to the
    Consolidated Financial Statements.



|    |                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Loss from operations and net loss per common
    share include a restructuring charge of $1.2 million and a
    fixed asset write-off of $0.6 million                                                                  
|   
|(2) | Loss from operations and net loss per common
    share include a goodwill impairment charge of $19.0 million
    and the write-off of acquired in-process research and
    development and fixed assets of $4.6 million

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

You should read the following discussion of our
financial condition and results of operations in conjunction
with our financial statements and related notes. This discussion
contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a
result of factors including those discussed in Certain
Factors Which May Impact Future Operating Results,
starting on page 19. Any forward-looking statements speak
only as of the date such statements are made.

Overview

Digital Impact was incorporated in California in
October 1997 and reincorporated in Delaware in October 1999.
Digital Impact is the premier provider of online direct
marketing solutions for enterprises. Our solutions enable
corporations to create and deliver online direct marketing
programs that drive revenue, influence behavior and deepen
customer relationships. Our solutions provide customer insight
and powerful program execution through a combination of hosted
applications, technology infrastructure and world class services.

In July 2000, we completed an acquisition of
MineShare, Inc. (MineShare), a customer intelligence
and analysis company based in Santa Monica, California, under
which MineShare became our wholly owned subsidiary. The
transaction was accounted for using the purchase method of
accounting. The purchase price was approximately
$31.9 million. In connection with the acquisition, we
recorded goodwill and intangible assets of approximately
$30.9 million, which we are amortizing over a period of
three years. During the quarter ended March 31, 2001, we
performed an impairment assessment of the identified intangibles
and goodwill recorded in connection with the acquisition of
MineShare. As a result of our review, we recorded an impairment
charge of $19.0 million relating to goodwill. Please refer
to Recent Accounting Pronouncements below for a description of
accounting methodology for goodwill and intangibles beginning
April 1, 2002.

We derive our revenues from the sale of solutions
that enable businesses to proactively communicate with their
customers online. Primarily, these services have consisted of
the design and execution of online direct marketing campaigns,
the development and execution of customer acquisition programs
and additional services provided by our professional services
organization. Revenue for direct marketing and acquisition
campaigns are recognized when persuasive evidence of an
agreement exists, the campaign has been delivered, the fee is
fixed or determinable and collection of the resulting
receivables is reasonably assured. Revenue generated by our
professional service group is typically recognized as the
service is provided.

As of March 31, 2002 the Company had 267
full-time employees, 31% fewer than the 389 employed on
March 31, 2001. We restructured our organization throughout
fiscal 2002 in order to streamline operations, reduce costs and
bring our staffing structure in line with current economic
conditions.

Critical Accounting Policies and
Estimates

Digital Impacts consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. On an on-going basis, management
evaluates its estimates and evaluations, including those related
to the allowance for doubtful accounts, intangible assets,
restructuring costs and contingencies and litigation. Management
bases its estimates and evaluations on historical experience and
various factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.

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Management believes the following critical
accounting policies, among others, affects its more significant
judgments and estimates used in the preparation of its
consolidated financial statements:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | revenue recognition;                                                                      
|
| |  | estimating valuation allowances, specifically the
    allowance for doubtful accounts; and
|
| |  | valuation of long-lived assets and goodwill;                                              

Revenue recognition.We generate revenue from the sale of
solutions that enable businesses to proactively communicate with
their customers online.

Digital Impact applies the provisions of Staff
Accounting Bulletin 101 Revenue Recognition and
recognizes revenue when persuasive evidence of an agreement
exists, the service has been delivered, the fee is fixed or
determinable and collection of the resulting receivables is
reasonably assured. Customer marketing revenues are recognized
on delivery of the campaigns. Revenues attributable to one-time
set-up fees for service initiation are deferred and recognized
ratably over the term of the clients service agreement,
typically twelve months. Customer acquisition revenues are
derived primarily from programs that assist clients in growing
their email lists through the use of third party list rentals.
Customer acquisition programs fall into two general categories:
List Rental programs and ProspectNet programs. List Rental
programs involve the execution and delivery of email campaigns
to a defined number of individuals provided by a third party
list rental service. ProspectNet programs involve the strategic
placement of a Digital Impact client offer on a third party site
for the purpose of generating new opt-in email addresses for the
client. Digital Impact contracts with third party providers to
deliver secure names of individuals who opt-in to join the
clients email list. Digital Impact is obligated to make
payments to third parties for the cost of services associated
with the execution of List Rental and ProspectNet programs.
These costs are recognized in the period that the programs are
executed and are netted against program revenue. Digital Impact
provides other complimentary services to clients, such as,
strategy, solutions engineering, web-page development, creative
design and data analytics. These services are typically billed
on an hourly rate. The revenue for engagements that support the
delivery of future products and services, such as targeted email
delivery, is deferred at the time of delivery and recognized
pro-rata over the future periods of usage. The period over which
the revenue is recognized varies, generally between one and
twelve months, depending on the term of the contract or the
estimated period of usage. Management uses their best estimates
to determine the appropriate period for revenue deferral.

We assess probability of collection based on a
number of factors, including our past transaction history with
the customer and the credit-worthiness of the customer. New
customers and certain existing customers are subject to a credit
review process that evaluates the customers financial
position and ultimately their ability to pay according to the
original terms of the arrangement. Based on our review process,
if it is determined from the outset or during the term of an
arrangement that collection of the resulting receivable is not
probable, then revenue is recognized on a cash-collected basis.

Allowance for doubtful accounts.The preparation of financial
statements requires our management to make estimates and
assumptions that affect the reported amount of assets and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reported period. Specifically, management
must make estimates of the uncollectable portion of our accounts
receivable. Management specifically analyzes accounts receivable
and analyzes historical bad debt experience, customer
concentrations, customer credit worthiness, current economic
trends and changes in our customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts. Our
accounts receivable balance was $8.2 million, net of
allowance for doubtful accounts of $697,000, as of
March 31, 2002.

Valuation of long-lived assets and goodwill.We assess the impairment of identified
intangibles, long-lived assets and related goodwill and
enterprise level goodwill annually and whenever events or a
change

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in circumstances indicate the carrying value may
not be recoverable. Factors we consider important which could
trigger an impairment review include the following:




| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | significant underperformance relative to expected
    historical or projected future operating results;          
|
| |  | significant changes in the manner of our use of
    the acquired assets or the strategy for our overall business;
|
| |  | significant negative industry or economic trends;                                                                
|
| |  | significant decline in our stock price for a
    sustained period of time; and                                   
|
| |  | our market capitalization relative to net book
    value.                                                        

When we determine that the carrying value of
intangible assets, long-lived assets and related goodwill and
enterprise level goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment,
we measure any potential impairment based on a projected
discounted cash flow method using a discount rate determined by
our management to be commensurate with the risk inherent in our
current business model. Net intangible assets, long-lived
assets, and goodwill amounted to $12.3 million as of
March 31, 2002.

On April 1, 2002, we adopted Statement of
Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets and as a result
we will reclassify $1.2 million related to assembled
workforce to goodwill and cease amortizing the goodwill balance
of $2.0 million. We are required to perform an initial
impairment review of our goodwill in the first half of fiscal
2003 and an annual impairment review thereafter. We currently do
not expect to record an impairment charge upon the completion of
an initial, preliminary impairment review.

QUARTERLY RESULTS OF OPERATION

The following table sets forth certain unaudited
consolidated quarterly statement of operations data for the
eight quarters ended March 31, 2002. This information is
unaudited, but in the opinion of management, it has been
prepared on substantially the same basis as the audited
consolidated financial statements appearing elsewhere in this
report, and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated
below to present fairly the unaudited consolidated quarterly
results of operation. The consolidated quarterly data should be
read in conjunction with our audited consolidated financial
statements and the notes to such statements appearing elsewhere
in this report. The results of operations for any quarter are
not necessarily indicative of the results of operations for any
future period.

|                     |              |                                       |   |        |  |            |   |          |  |                   |   |                   |   |  |   |         |   |  |  |        |  |  |   |       |  
|-------------------- | ------------ | ------------------------------------- | - | ------ |  | ---------- | - | -------- |  | ----------------- | - | ----------------- | - |  | - | ------- | - |  |  | ------ |  |  | - | ----- | -
|                     |              |                                       |   |        |  |            |   |          |  | Weighted Average  |   | Basic and Diluted
|                     |              |                                       |   | Gross  |  | Loss From  |   |          |  | Common Shares    |   | Net Loss per     
|Fiscal Quarter Ended |              | Revenues                              |   | Profit |  | Operations |   | Net Loss |  | Basic and Diluted |   | Common Share     
|                     |              |                                       |   |        |  |            |   |          |  |                   |   |                  
|                     |              |                                      
|                     |              | (In thousands, except per share data)
|2002                 |              |                                       |   |        |  |            |   |          |  |                   |   |                   |   |  |   |         |   |  |  |        |  |  |   |      
|                     | June 30      |                                       | $ | 10,006 |  |            | $ | 5,446    |  |                   | $ | (6,799            | ) |  | $ | (6,615  | ) |  |  | 26,930 |  |  | $ | (0.25 | )
|                     | September 30 |                                       |   | 8,420  |  |            |   | 4,208    |  |                   |   | (6,692            | ) |  |   | (6,551  | ) |  |  | 27,610 |  |  |   | (0.24 | )
|                     | December 31  |                                       |   | 10,329 |  |            |   | 5,489    |  |                   |   | (3,181            | ) |  |   | (3,207  | ) |  |  | 28,340 |  |  |   | (0.11 | )
|                     | March 31     |                                       |   | 10,283 |  |            |   | 5,902    |  |                   |   | (3,303            | ) |  |   | (3,305  | ) |  |  | 28,960 |  |  |   | (0.11 | )
|2001                 |              |                                       |   |        |  |            |   |          |  |                   |   |                   |   |  |   |         |   |  |  |        |  |  |   |      
|                     | June 30      |                                       | $ | 8,474  |  |            | $ | 4,761    |  |                   | $ | (7,024            | ) |  | $ | (6,056  | ) |  |  | 22,160 |  |  | $ | (0.27 | )
|                     | September 30 |                                       |   | 9,371  |  |            |   | 5,217    |  |                   |   | (14,009           | ) |  |   | (13,141 | ) |  |  | 24,010 |  |  |   | (0.55 | )
|                     | December 31  |                                       |   | 12,156 |  |            |   | 6,830    |  |                   |   | (9,156            | ) |  |   | (8,492  | ) |  |  | 25,080 |  |  |   | (0.34 | )
|                     | March 31     |                                       |   | 10,152 |  |            |   | 5,509    |  |                   |   | (29,574           | ) |  |   | (29,042 | ) |  |  | 26,060 |  |  |   | (1.11 | )

In the fourth quarter of fiscal 2002, Digital
Impact recorded a restructuring charge of $1.2 million. The
components of the charge included the involuntary termination of
24 employees, the consolidation of leased office space in
Cupertino, CA, and the write-off of related fixed assets. (See
Note No. 8 to the Consolidated

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Financial Statements.) Also in the fourth quarter
of 2002, Digital Impact realized a loss of approximately
$600,000 related to the disposal of fixed assets.


In the fourth quarter of fiscal 2001, Digital
Impact recognized approximately $19.0 million in
impairments associated with the write down of the goodwill
generated in its acquisition of MineShare. (See Note No. 3
to the Consolidated Financial Statements.)

In the second quarter of fiscal 2001, Digital
Impact recognized approximately $4.6 million in write-offs
in the acquisition of MineShare related to the purchase of
in-process research and development and fixed assets.

The amount and timing of our operating expenses
will vary from quarter to quarter depending on our level of
actual and anticipated business activity. Our revenues and
operating results are difficult to forecast and will fluctuate,
and we believe you should not rely on them as an indication of
future performance.

Results of Operations

The following table sets forth, as a percentage
of revenues, statement of operations data for the periods
indicated. These operating results are not necessarily
indicative of results for any future periods.

|                     |                                                          |                             |     |      |     |      |      |    |      |    |      |    |      |   
|-------------------- | -------------------------------------------------------- | --------------------------- | --- | ---- | --- | ---- | ---- | -- | ---- | -- | ---- | -- | ---- | --
|                     |                                                          |                            
|                     |                                                          | Fiscal year ended March 31,
|                     |                                                          |                            
|                     |                                                          | 2002                        |     | 2001 |     | 2000
|                     |                                                          |                             |     |      |     |     
|Net revenues         |                                                          |                             | 100 | %    |     |      | 100  | %  |      |    | 100  | % 
|Cost of revenues     |                                                          |                             | 46  |      |     |      | 44   |    |      |    | 48   |   
|                     |                                                          |                             |     |      |     |      |      |    |      |    |      |   
|Gross margin         |                                                          |                             | 54  |      |     |      | 56   |    |      |    | 52   |   
|Operating expenses:  |                                                          |                             |     |      |     |      |      |    |      |    |      |   
|                     | Research and development                                 |                             |     | 29   |     |      |      | 44 |      |    |      | 57 |     
|                     | Sales and marketing                                      |                             |     | 40   |     |      |      | 45 |      |    |      | 59 |     
|                     | General and administrative                               |                             |     | 22   |     |      |      | 28 |      |    |      | 43 |     
|                     | Stock-based compensation                                 |                             |     | 6    |     |      |      | 13 |      |    |      | 71 |     
|                     | Amortization of goodwill and purchased intangibles       |                             |     | 4    |     |      |      | 16 |      |    |      |   |     
|                     | Goodwill impairment charge                               |                             |     |     |     |      |      | 47 |      |    |      |   |     
|                     | In-process research and development and fixed
    assets |                             |     | 2    |     |      |      | 11 |      |    |      |   |     
|                     | Restructuring charges                                    |                             |     | 3    |     |      |      |   |      |    |      |   |     
|                     |                                                          |                             |     |      |     |      |      |    |      |    |      |   
|                     |                                                          | Total operating expenses    |     |      | 105 |      |      |    | 204  |    |      |    | 230  |   
|                     |                                                          |                             |     |      |     |      |      |    |      |    |      |   
|Loss from operations |                                                          |                             | (51 | )    |     |      | (149 | )  |      |    | (178 | ) 
|Other income, net    |                                                          |                             | 1   |      |     |      | 8    |    |      |    | 11   |   
|                     |                                                          |                             |     |      |     |      |      |    |      |    |      |   
|                     |                                                          | Net loss                    |     |      | (50 | )%   |      |    | (141 | )% |      |    | (167 | )%
|                     |                                                          |                             |     |      |     |      |      |    |      |    |      |   

COMPARISON OF THE YEARS ENDED MARCH 31, 2002
AND 2001

Revenues

Total revenues decreased by 3% to
$39.0 million for the fiscal year ended March 31, 2002
from $40.2 million for the fiscal year ended March 31,
2001, primarily as a result of the factors listed below.

The number of clients declined slightly from
March 31, 2001 to March 31, 2002. This decline in
clients was primarily the result of a loss of dot-com customers
as their businesses failed and they ceased operations. This
decline was partially offset by client additions among mid-cap
and Fortune 1000 companies. The volume of emails delivered
during fiscal 2002 was essentially equal to the prior year, and
we experienced a slight erosion in pricing.

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Cost of Revenue

Cost of revenue consists primarily of expenses
relating to the delivery of online direct marketing services,
including personnel costs of our services staff, the
amortization of equipment, purchased and licensed technology,
and data center expenses.

Total cost of revenues increased 1% to
$18.0 million for the fiscal year ended March 31, 2002
from $17.8 million for the fiscal year ended March 31,
2001.

The increase in cost of revenue was primarily
related to an increase in depreciation and maintenance expense
of $1.7 million, as a result of our investments in our data
center infrastructure and a $400,000 increase in data center
rent. These increases were largely offset by lower costs for
personnel salaries and consultants of $2.0 million,
resulting from reductions in staffing in the services and
operations staff.

Gross margin decreased to 54% for the fiscal year
2002 from 56% for the fiscal 2001, largely due to the increased
investment in our data center infrastructure which resulted in
excess capacity that, when spread over our revenue base produced
lower margins.

Operating Expenses

Our operating expenses are classified into three
general categories: research and development, sales and
marketing, and general and administrative. We classify all
charges to these operating expense categories based on the
nature of the expenditures. Although each category includes
expenses that are unique to each operating category, some
expenditures, such as compensation, employee benefits,
recruiting costs, equipment costs, travel and entertainment
costs, facilities costs and third-party professional service
fees, occur in each of these categories.

We allocate the total cost for information
services and facilities to each functional area that uses the
information services and facilities based on each areas
relative headcount. These allocated charges include rent and
other facility-related costs, communication charges and
depreciation expense for furniture and equipment.

Total operating expenses also include non-cash
expenses related to stock-based compensation, amortization of
goodwill and purchased intangibles, goodwill impairment charges,
write-off of acquired in-process research and development and
fixed assets and restructuring charges.

Research and
development.Research and development
expenses consist primarily of personnel and related costs,
consultants and outside contractor costs, and software and
hardware maintenance costs for our development efforts.
Historically, all research and development costs have been
expensed as incurred, however in the quarter ended
March 31, 2002, we capitalized $130,000 of research and
development expense related to the development of our IMPACT
product. Research and development expense decreased by 36% to
$11.2 million for the year ended March 31, 2002 from
$17.6 million for year ended March 31, 2001. The
decrease was mainly attributable to reductions in personnel
costs of $3.0 million resulting from a 44 person
reduction in headcount related to restructuring activities and
completion of the development of our IMPACT product, a
$2.5 million reduction in outside consulting expense
related to efforts to meet development needs with internal
personnel and a $500,000 reduction in recruiting expense. We
expect to continue to make substantial investments in research
and development.

Sales and marketing.Sales and marketing expenses consist
of personnel and related costs for our direct sales force and
marketing staff, and marketing programs which include trade
shows, advertisements, promotional activities and media events.
Sales and marketing expense decreased by 14% to
$15.6 million for the fiscal year ended March 31, 2002
from $18.1 million for the year ended March 31, 2001.
The decrease was mainly attributable to a $2.6 million
reduction in personnel costs associated with restructuring
activities.

General and administrative.General and administrative expenses
consist primarily of personnel and related costs for general
corporate purposes, including information services, finance,
accounting, human resources, facilities and legal. General and
administrative expenses decreased by 24% to $8.5 million
for the

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year ended March 31, 2002 from
$11.3 million for the year ended March 31, 2001. The
decrease was primarily due to decreased personnel costs of
$700,000 related to a 25% decline in headcount, a $900,000
decrease in bad debt expense, a $300,000 reduction in outside
consulting expense and a $300,000 decline in professional and
legal fees.


Stock-based compensation.In connection with the granting of
stock options and restricted stock to our employees and the
assumption of options related to the acquisition of MineShare,
we recorded unearned stock based compensation totaling
approximately $18.1 million, net of forfeitures, through
March 31, 2002. This amount represents the total difference
between the exercise prices of the stock options or the purchase
price of the restricted stock and the deemed fair market value
of the underlying common stock for accounting purposes on the
date granted. This amount is included as a component of
stockholders equity and is being amortized on an
accelerated basis by charges to operations over the vesting
period of the options or restricted stock, consistent with the
methods described in FASB Interpretation No. 28.

Stock-based compensation, a noncash expense,
decreased 54% to $2.3 million for the year ended
March 31, 2002 from $5.0 million for the year ended
March 31, 2001. The decline was primarily attributable to
the cancellation of unearned stock-based compensation for
terminated employees during fiscal 2002, offset by stock-based
compensation expense related to the granting of restricted stock
during fiscal 2002.

As of March 31, 2002, approximately
$1.2 million of total unearned deferred stock-based
compensation remains to be amortized.

Amortization of goodwill and purchased
intangibles.We recorded
$1.5 million in amortization in the fiscal year ended
March 31, 2002 compared to $6.4 million for the fiscal
year ended March 31, 2001. The decrease was due to a
$19.0 million goodwill impairment that was recorded in the
fourth quarter of fiscal 2001. The goodwill and purchased
intangibles relate to the July 31, 2000 acquisition of
MineShare and are being amortized over three years.

In accordance with SFAS No. 142, effective
April 1, 2002 Digital Impact no longer amortizes our
existing goodwill. In addition, we are required to review
goodwill for impairment effective April 1, 2002 as part of
the transition provisions. Any impairment resulting from the
transition provisions will be recorded as of April 1, 2002
and will be recognized as the effect of a change in accounting
principle. We currently do not expect to record an impairment
charge upon the completion of an initial, preliminary impairment
review.

Goodwill impairment.In the fourth quarter of 2001, we
performed an impairment assessment of the identified intangibles
and goodwill recorded in connection with the acquisition of
MineShare. The assessment was performed primarily as a result of
the significant sustained decline in our stock price since the
valuation date of the shares issued in the MineShare
acquisition, the overall decline in industry growth rates, and a
17% decline in fourth quarter of fiscal 2001 operating results,
the result of our first fall in revenues since inception. As a
result of our review, we recorded a $19.0 million
impairment charge to reduce goodwill. The charge was determined
based upon our estimated discounted cash flow over the remaining
useful life of the goodwill using a discount rate of 25%. The
assumptions supporting the cash flows including the discount
rate were determined using our best estimates as of such date.

Write-off of acquired in-process research and
development and fixed assets.During
the year ended March 31, 2002 we recorded a $600,000 loss
related to the write-off of fixed assets. During the year ended
March 31, 2001 we incurred $4.6 million of acquired
in-process research and development expense associated with our
acquisition of MineShare. The amount allocated to intangibles
was determined based on an appraisal completed by an independent
third party using established valuation techniques. The
in-process technology percentage of completion was estimated to
be 65%. The value of this in-process technology was determined
by estimating the costs to develop the purchased in-process
technology into a commercially viable product, estimating the
resulting net cash flows from the sale of the product resulting
from the completion of the in-process technology and discounting
the net cash flows back to their present value. The purchased
in-process technology was expensed upon acquisition, because
technological feasibility had not been established and no future
alternative uses existed.

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Restructuring
charges.For the year ended
March 31, 2002, we incurred restructuring charges of
approximately $1.2 million primarily related to exit costs
associated with certain excess leased facilities, asset
impairments and reductions in our workforce. The restructuring
charge included $434,000 for assets disposed of or removed from
operations. Assets disposed of or removed from operations
consisted primarily of leasehold improvements, computer
equipment and related software, office equipment and furniture
and fixtures. These assets were utilized by terminated employees
or related to facilities no longer in use.

The restructuring charge also included $100,000
for severance, benefits and related costs due to reductions in
our workforce. These severance payments related solely to the
24 employees terminated in our January 2002 restructuring.
As of March 31, 2002 we had 267 full-time employees. We
restructured our organization throughout 2002, with net
workforce reductions of approximately 122 employees, or
approximately 31% from March 31, 2001, in order to
streamline operations, reduce costs and bring our staffing and
structure in line with industry standards and current economic
conditions.

The restructuring charge also included $690,000
in lease termination costs resulting from our decision to exit
and reduce certain facilities. The costs were paid in the fourth
quarter of fiscal 2002.

Other income, net.Other income, net in 2002 and 2001 consisted primarily of
interest earned on cash and short-term investments offset by
interest expense and other expense. Other income, net decreased
by 90% to $297,000 for the fiscal year ended March 31, 2002
from $3.0 million for the fiscal year ended March 31,
2001. The decrease is largely due to lower average cash and cash
equivalent balances resulting from the use of cash to fund
current operations and secondarily to lower prevailing interest
rates during the period.

Income taxes.No
provision for federal and state income taxes was recorded as we
incurred net operating losses from inception through
March 31, 2002. Due to the uncertainty regarding the
ultimate utilization of the net operating loss carryforwards, we
have not recorded any benefit for losses and a valuation
allowance has been recorded for the entire amount of the net
deferred tax asset. The Tax Reform Act of 1986 limits the use of
net operating loss and tax credit carryforwards in certain
situations where changes occur in the stock ownership of a
company. If we should have an ownership change, as defined for
tax purposes, utilization of the carryforwards could be
restricted. In addition, sales of our stock, including shares
sold in the initial public offering, may further restrict our
ability to utilize our net operating loss carryforwards.

COMPARISON OF THE YEARS ENDED MARCH 31, 2001
AND 2000

Revenues

Total revenues increased by 209% to
$40.2 million for the fiscal year ended March 31, 2001
from $13.0 million for the fiscal year ended March 31,
2000, primarily as a result of the factors listed below.

The increase in revenues was driven by an
equivalent increase in year-over year email volume, resulting
from a substantial increase in the number of clients to which we
provide service and expansion of our core service offerings.

Cost of Revenue

Cost of revenue consisted primarily of expenses
relating to the delivery of online direct marketing services,
including personnel costs, primarily consisting of our
production services and customer service staff, the amortization
of equipment, purchased and licensed technology, and data center
expenses.

Total cost of revenues increased 189% to
$17.8 million for the fiscal year ended March 31, 2001
from $6.2 million for the fiscal year ended March 31,
2000, primarily due to the factors listed below.

The increase was primarily due to higher costs of
campaign creation and delivery associated with supporting our
growing client base, a higher volume of campaigns and the
expansion of our data center infrastructure. Gross margin
improved from 52% for the year ended March 31, 2000 to 56%
for the subsequent fiscal year, largely due to increased
productivity, the continued scaling of our operations as volumes
increased and an increase in the number of clients using our
professional services.

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Operating Expenses

Research and development.Research and development expenses
consist primarily of personnel and related costs, consultants
and outside contractor costs and software and hardware
maintenance costs for our development efforts. As of
March 31, 2001, all research and development costs had been
expensed as incurred. Research and development expense increased
by 135% to $17.6 million for the year ended March 31,
2001 from $7.5 million for year ended March 31, 2000.
The increase was attributable primarily to increased personnel
costs of $4.9 million, due to internal growth and an
increase in engineering staff associated with our MineShare
acquisition, and an increase in professional fees of
$1.2 million as we continued to invest in our technology
capabilities.

Sales and marketing.Sales and marketing expenses consist of personnel and related
costs primarily for our direct sales force and marketing staff,
in addition to marketing programs, which include trade shows,
advertisements, promotional activities and media events. Sales
and marketing expense increased 138% to $18.1 million for
the fiscal year ended March 31, 2001 from $7.6 million
for the year ended March 31, 2000. The increase was mainly
attributable to a $4.7 million increase in personnel costs
associated with growth of our sales force and marketing staff
including the additions of regional sales offices in Chicago and
Dallas and the addition of an international subsidiary in
London, England, a $1.0 million increase related to
expanded advertising and promotional activities, a
$1.0 million increase in travel and entertainment expense
and a $766,000 increase in professional fees.

General and administrative.General and administrative expenses
consist primarily of personnel and related costs for general
corporate purposes, including information services, finance,
accounting, human resources, facilities and legal. General and
administrative expenses increased by 102% to $11.3 million
for the year ended March 31, 2001 from $5.6 million
for the year ended March 31, 2000. The increase was
primarily due to increased personnel costs of $2.0 million
related to internal growth and the acquisition of MineShare, an
increase of $1.8 million in bad debt expense, and a
$500,000 increase in insurance costs related to an increase in
liability insurance during the fiscal year.

Stock-based compensation.In connection with the granting of
stock options to our employees and the assumption of options
related to the acquisition of MineShare, we recorded unearned
stock-based compensation totaling approximately
$18.6 million, net of forfeitures, through March 31,
2001. This amount represents the total difference between the
exercise prices of the stock options or the purchase price of
the restricted stock and the deemed fair market value of the
underlying common stock for accounting purposes on the date
these stock options were granted. This amount is included as a
component of stockholders equity and is being amortized on
an accelerated basis by charges to operations over the vesting
period of the options, consistent with the methods described in
FASB Interpretation No. 28.

Stock-based compensation, a noncash expense,
decreased 45% to $5.0 million for the year ended
March 31, 2001 from $9.2 million for the year ended
March 31, 2000.

Amortization of goodwill and purchased
intangibles.On July 31, 2000, we
completed the acquisition of MineShare. As a result of the
merger, we recorded $30.9 million of goodwill and purchased
intangibles. The amount is being amortized on a straight-line
basis over a period of three years from the date of the
acquisition. During the year ended March 31, 2001, we
recorded amortization of goodwill and intangibles of
$6.4 million.

Goodwill impairment.We performed an impairment assessment
of the identified intangibles and goodwill recorded in
connection with the acquisition of MineShare. The assessment was
performed primarily as a result of the significant sustained
decline in our stock price since the valuation date of the
shares issued in the MineShare acquisition, the overall decline
in industry growth rates, and a 17% decline in fourth quarter of
fiscal 2001 operating results, the result of our first fall in
revenues since inception. As a result of our review, we recorded
a $19.0 million impairment charge to reduce goodwill. The
charge was determined based upon our estimated discounted cash
flows over the remaining useful life of the goodwill using a
discount rate of 25%. The assumptions supporting the cash flows
including the discount rate were determined using our best
estimates as of such date.

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Write-off of acquired in-process research and
development and fixed assets.During
the year ended March 31, 2001 we incurred $4.6 million
of in-process research and development expense. We wrote-off
purchased in-process research and development associated with
the acquisition of MineShare. The fair value allocated to
in-process research and development was determined by
identifying the research projects for which technological
feasibility has not been achieved and which had no alternative
further use at the merger date.

Other income and (expense),
net.Other income and expense, net in
2001 and 2000 consisted primarily of interest earned on cash and
short-term investments offset by interest expense and other
expense. Other income and expense, net increased by 100% to
$3.0 million for the fiscal year ended March 31, 2001
from $1.5 million for the fiscal year ended March 31,
2000. The increase is largely due to higher average cash and
cash equivalents balances resulting from the $70.8 million
in net proceeds received during our initial public offering
completed in November 1999.

Income taxes.No
provision for federal and state income taxes was recorded as we
incurred net operating losses from inception through
March 31, 2001. Due to the uncertainty regarding the
ultimate utilization of the net operating loss carryforwards, we
have not recorded any benefit for losses and a valuation
allowance has been recorded for the entire amount of the net
deferred tax asset. The Tax Reform Act of 1986 limits the use of
net operating loss and tax credit carryforward in certain
situations where changes occur in the stock ownership of a
company. If we should have an ownership change, as defined for
tax purposes, utilization of the carryforwards could be
restricted. In addition, sales of our stock, including shares
sold in the initial public offering, may further restrict our
ability to utilize our net operating loss carryforwards.

Liquidity and Capital Resources

On November 23, 1999, we completed our
initial public offering of 5,175,000 shares of our common stock
at $15 per share. We received net proceeds of approximately
$70.8 million in cash. Prior to the offering, we had
financed our operations primarily through the issuance of
convertible preferred stock, and to a lesser extent, from bank
borrowings and lease financings.

As of March 31, 2002, we had
$25.6 million in cash, cash equivalents and short-term
investments and working capital of $25.9 million. In
addition, as of March 31, 2002, we had $1.1 million in
restricted cash supporting letters of credit issued against
certain contractual lease obligations.

Our operating activities used $6.2 million
of cash for the year ended March 31, 2002. The decrease in
net cash used in operating activities in fiscal 2002 resulted
from the net loss of $19.7 million, less non-cash items of
$11.3 million, decreases in accounts payable and accrued
liabilities of $1.5 million and increases in current and
other assets of $1.2 million, partially offset by a
decrease in accounts receivable of $4.9 million. Operating
activities used $24.4 million of cash for the year ended
March 31, 2001. The decrease in cash provided by operating
activities in 2001 resulted from the net loss of
$56.7 million, which includes the amortization of
stock-based compensation of $5.0 million, depreciation and
amortization expense of $11.7 million, a goodwill
impairment charge of $19.0 million, the write-off of
purchased in-process research and development of
$4.4 million, and an increase in accounts receivable of
$8.7 million related to higher sales during the period.
Operating activities used $10.0 million of cash for the
year ended March 31, 2000 which was primarily attributable
to net losses experienced during the period, partially offset by
the amortization of stock-based compensation and increases in
accounts payable and accrued liabilities.

Investing activities used $3.3 million of
cash for the year ended March 31, 2002, related to the
acquisition of property plant and equipment totaling
$2.3 million and the investment of $1.7 million in
short-term marketable securities and a reduction of
$0.7 million in restricted cash. During the fiscal years
2001 and 2000, net cash used in investing activities was
$7.7 million and $5.5 million respectively, primarily
related to the purchase of property and equipment.

Financing activities used $1.7 million of
cash for the year ended March 31, 2002, and consisted
primarily of principal payments on long-term debt totaling
$2.3 million, partially offset by proceeds from the
issuance of common stock resulting from the exercise of stock
options and purchases made under the Companys

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employee stock purchase plan. Financing
activities generated $2.5 million during the fiscal year
ended March 31, 2001, attributable primarily to the
proceeds from long-term debt, offset by principal payments on
long-term debt, including the repayment of a bridge loan related
to the MineShare subsidiary, and proceeds from the issuance of
common stock related to the exercise of stock options and
purchases made under the Companys employee stock purchase
plan. Net cash provided by financing activities during the
fiscal year ended March 31, 2000 was $80.8 million,
consisting primarily of the net proceeds of $70.8 million
related to our initial public offering and $10.7 million
related to the July 1999 issuance of 2.2 million shares of
Series C preferred stock.


At March 31, 2002 we had $23.9 million
in cash and cash equivalents and borrowings in the form of
long-term debt, capital leases and a line of credit totaling
$3.2 million payable in monthly installments through March
2004 with a weighted average interest rate of 12%.

We are committed to making cash payments in the
future on three types of contracts: long-term debt, capital
leases and non-cancelable operating leases. We have no
off-balance sheet debt or other such unrecorded obligations and
we have not guaranteed the debt of any other party. We have a
term loan that contains a cash covenant which requires that we
maintain a minimum of $11.5 million in unrestricted cash
and cash equivalents. In the event that the covenant is violated
the loan is immediately callable. As of March 31, 2002,
there was $2.1 million outstanding under this loan
agreement.

Digital Impact has made certain commercial
commitments that extend beyond our fiscal year ending
March 31, 2003. These commitments include letters of credit
obtained from a financial institution in lieu of a security
deposit for leased office space. The aggregate amount of the
letters of credit is classified as restricted cash and held in
long-term other assets.

Below is a schedule of the future payments that
we are obligated to make based on agreements in place as of
March 31, 2002:

|                              |                  |                |        |        |  |      |       |       |  |      |       |       |  |       |       |       |  |   |       |       |  |   |       |       |  |   |   |   | 
|----------------------------- | ---------------- | -------------- | ------ | ------ |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  | ----- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | - | - | 
|                              |                  |               
|                              |                  | March 31,     
|                              |                  |               
|                              |                  | Total          |        | 2003   |  | 2004 |       | 2005  |  | 2006 |       | 2007  |  | After
|                              |                  |                |        |        |  |      |       |       |  |      |       |       |  |      
|                              |                  |               
|                              |                  | (In thousands)
|Contractual Obligations:      |                  |                |        |        |  |      |       |       |  |      |       |       |  |       |       |       |  |   |       |       |  |   |       |       |  |   |   |  
|                              | Long-term debt   |                | $      | 2,788  |  |      | $     | 1,539 |  |      | $     | 1,249 |  |       | $     |      |  |   | $     |      |  |   | $     |      |  |   | $ |  | 
|                              | Capital leases   |                |        | 408    |  |      |       | 333   |  |      |       | 75    |  |       |       |      |  |   |       |      |  |   |       |      |  |   |   |  | 
|                              | Operating leases |                |        | 10,655 |  |      |       | 2,707 |  |      |       | 2,717 |  |       |       | 2,193 |  |   |       | 1,630 |  |   |       | 1,408 |  |   |   |  | 
|                              |                  |                |        |        |  |      |       |       |  |      |       |       |  |       |       |       |  |   |       |       |  |   |       |       |  |   |   |  
|Total Contractual Obligations |                  | $              | 13,851 |        |  | $    | 4,579 |       |  | $    | 4,041 |       |  | $     | 2,193 |       |  | $ | 1,630 |       |  | $ | 1,408 |       |  | $ |  |  
|                              |                  |                |        |        |  |      |       |       |  |      |       |       |  |       |       |       |  |   |       |       |  |   |       |       |  |   |   |  

We have commercial commitments under letters of
credit that expire in amounts of $84,000 and $1.0 million
in fiscal year 2004 and fiscal year 2008, respectively.

The Company has incurred a consolidated net loss
of approximately $19.7 million for the year ended
March 31, 2002 and used cash of $6.2 million in
operations for that year.

The Company continues to face risks associated
with the execution of its strategy. The Companys future
cash flows will depend upon: (1) the level of the future
sales which depend on technology and product development,
changes in the marketplace, liquidity, competition from existing
and new competitors which may enter the marketplace and
retention of key personnel and (2) our ability to control
expenses.

The Company presently uses its cash and cash
equivalent balances to fund its operating, investing and
financing activities. If due to the risks outlined in the
previous paragraph, revenues were to decline significantly, this
could have an adverse effect on the Companys ability to
achieve its intended business objectives.

We believe that our existing cash and cash
equivalents will be sufficient to satisfy our currently
anticipated cash requirements for the next twelve months.

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Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 addresses financial
accounting and reporting for business combinations and
supersedes Accounting Principals Board (APB)
No. 16, Business Combinations. The provisions of SFAS
No. 141 were adopted July 1, 2001. The most
significant changes made by SFAS No. 141 are:
(1) requiring that the purchase method of accounting be
used for all business combinations initiated after June 30,
2001, (2) establishing specific criteria for the
recognition of intangible assets separately from goodwill, and
(3) requiring unallocated negative goodwill to be written
off immediately as an extraordinary gain.

SFAS No. 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to
their acquisition and supersedes APB No. 17, Intangible
Assets. The most significant changes made by SFAS No. 142
are: (1) goodwill and indefinite lived intangible assets
will no longer be amortized, (2) goodwill will be tested
for impairment at least annually at the reporting unit level,
(3) intangible assets deemed to have an indefinite life
will be tested for impairment at least annually, and
(4) the amortization period of intangible assets with
finite lives will no longer be limited to forty years.

We have adopted SFAS No. 142 effective
April 1, 2002, and as a result no longer amortize our
goodwill balance of $2.0 million. At March 31, 2002,
net goodwill was $820,000 and goodwill amortization expense was
$615,000 for the year ended March 31, 2002. We will be
required to measure goodwill for impairment effective
April 1, 2002 as part of the transition provisions. Any
impairment resulting from the transition provisions will be
recorded as of April 1, 2002 and will be recognized as the
effect of a change in accounting principle. We currently do not
expect to record an impairment charge upon completion of an
initial, preliminary impairment review.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which is required to be applied
starting with fiscal years beginning after December 15,
2001. SFAS No. 144 requires, among other things, the
application of one accounting model for long-lived assets that
are impaired or to be disposed of by sale. The adoption of SFAS
No. 144 is not expected to have a significant impact on our
financial statements or results of operations.

Certain Factors Which May Impact Future
Operating Results

Our future operating results may vary
substantially from period to period due to a number of factors,
many of which are beyond our control. The following discussion
highlights some of these factors and the possible impact of
these factors on future results of operations. If any of the
following factors actually occur, our business, financial
condition or results of operations could be harmed. In that
case, the price of our common stock could decline, and investors
could experience losses on their investment.

Because of our limited operating history
and the emerging nature of the online direct marketing industry,
any predictions about our future revenues and expenses may not
be as accurate as they would be if we had a longer business
history, and we cannot determine trends that may affect our
business.

We were incorporated in October 1997 in
California and reincorporated in Delaware in October 1999. Our
limited operating history makes financial forecasting and
evaluation of our business difficult. Since we have limited
financial data, any predictions about our future revenues and
expenses may not be as accurate as they would be if we had a
longer business history. Because of the emerging nature of the
online direct marketing industry, we cannot determine trends
that may emerge in our market or affect our business. The
revenue and income potential of the online direct marketing
industry, and our business, are unproven.

Our operating results have varied
significantly in the past and are likely to vary significantly
from period to period, and our stock price may decline if we
fail to meet the expectations of analysts and
investors.

Our operating results have varied significantly
in the past and 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.

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We derive a significant portion of our
revenue from advertising services, which revenues tend to be
cyclical and dependent on the economic prospects of advertisers
and direct marketers and the economy in general. A continued
decrease in expenditures by advertisers and direct marketers or
a continued downturn in the economy could cause our revenues to
decline significantly in any given period.

We derive, and expect to continue to derive for
the foreseeable future, a large portion of our revenue from
products and services we provide to advertisers, direct
marketers and agencies. Expenditures by advertisers tend to be
cyclical, reflecting overall economic conditions as well as
budgeting and buying patterns. The overall market for
advertising, including Internet advertising, has been
characterized in recent quarters by increasing softness of
demand, lower prices for advertisements, the reduction or
cancellation of advertising contracts, an increased risk of
uncollectible receivables from customer and the reduction of
marketing and advertising budgets, especially for online
advertising and by Internet-related companies. As a result of
these reductions, advertising spending across traditional media,
as well as the Internet, has decreased.

We cannot assure you that further reductions in
advertising spending will not occur. We also cannot assure you
that if economic conditions improve, marketing budgets and
advertising spending will increase from current levels. A
continued decline in the economic prospects of advertisers or
the economy in general could alter current or prospective
advertisers spending priorities or increase the time it
takes to close a sale with a customer. As a result, our revenues
from advertisements and advertising services may decline
significantly in any given period.

Seasonal trends may cause our quarterly
operating results to fluctuate, which may adversely affect the
market price of our common stock.

The traditional direct marketing industry has
typically generated lower revenues during the summer months and
higher revenues during the calendar year-end months. We believe
our business is affected by similar revenue fluctuations, but
our limited operating history is insufficient to isolate and
predict the magnitude of these effects. Because we do experience
these effects, analysts and investors may not be able to predict
our quarterly or annual operating results. If we fail to meet
expectations of analysts and investors, our stock price could
decline.

If businesses and consumers fail to accept
online direct marketing as a means to attract new customers,
demand for our services may not develop and the price of our
stock could decline.

The market for online direct marketing services
is relatively new and rapidly evolving, and our business may be
harmed if sufficient demand for our services does not develop.
Our current and planned services are very different from the
traditional methods that many of our clients have historically
used to attract new customers and maintain customer
relationships.

The loss of a major client could result in
lower than expected revenues.

The loss of a major client could harm our
business. While only one client accounted for more than 10% of
our revenues for the fiscal year ended March 31, 2002, the
loss of this client or another major client could have a
material adverse effect on our business and results of
operations. Additionally, many Internet-based businesses have
recently been experiencing financial problems. While the
majority of our clients are not Internet-based businesses, the
loss of a number of these clients could have a material adverse
effect on our business and our results of operations.

The online direct marketing industry is
highly competitive, and if we are unable to compete effectively,
the demand for, or the prices of, our services may
decline.

The market for online direct marketing is highly
competitive, rapidly evolving and experiencing rapid
technological change. Intense competition may result in price
reductions, reduced sales, gross margins and operating margins,
and loss of market share. Our principal competitors include
providers of online direct marketing solutions such as
DoubleClick, Responsys, Cheetahmail, CMGIs Yesmail
(through its recent acquisition of Post Communications), eDialog
and Clickaction, as well as the in-house information technology
departments of our existing and prospective clients.

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In addition, we expect competition to persist and
intensify in the future, which could harm our ability to
increase sales and maintain our prices. In the future, we may
experience competition from Internet service providers,
advertising and direct marketing agencies and other large
established businesses possessing large, existing customer
bases, substantial financial resources and established
distribution channels and could develop, market or resell a
number of online direct marketing solutions. These potential
competitors may also choose to enter, or have already entered,
the market for online direct marketing by acquiring one of our
existing competitors or by forming strategic alliances with a
competitor.

Many of these potential competitors have broad
distribution channels and they may bundle competing products or
services. As a result of future competition, the demand for our
services could substantially decline. Any of these occurrences
could harm our ability to compete effectively.

If we do not attract and retain additional
highly skilled personnel, we may be unable to execute our
business strategy.

Our business depends on the continued
technological innovation of our core services and our ability to
provide comprehensive online direct marketing expertise. Our
main offices are located in the San Francisco Bay Area, where
competition for personnel with Internet-related technology and
marketing skills has traditionally been intense. If we fail to
identify, attract, retain and motivate these highly skilled
personnel, we may be unable to successfully introduce new
services or otherwise implement our business strategy. As a
public company we face greater difficulty attracting and
retaining personnel than we did as a private company.

We rely on the services of our founders and
other key personnel, whose knowledge of our business and
technical expertise would be extremely difficult to
replace.

Our future success depends to a significant
degree on the skills, experience and efforts of our senior
management. In particular, we depend upon the continued services
of our co-founders William Park, our Chief Executive Officer,
and Gerardo Capiel, our Chief Technology Officer, whose vision
for our company, knowledge of our business and technical
expertise would be extremely difficult to replace. In addition,
we have not obtained life insurance benefiting Digital Impact
covering any of our key employees. If any of our key employees
left or was seriously injured and unable to work and we were
unable to find a qualified replacement, the level of services we
are able to provide could decline or we could be otherwise
unable to execute our business strategy.

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

Our business model relies on our ability to
deliver emails over the Internet through Internet service
providers and to recipients in major corporations. In
particular, a significant percentage of our emails are sent to
recipients who use America Online. We do not have, and we are
not required to have, an agreement with America Online to
deliver emails to their customers. America Online uses a
proprietary set of technologies to handle and deliver email and
the value of our services will be reduced if we are unable to
provide emails compatible with these technologies. In addition,
America Online and other Internet service providers are able to
block unwanted messages to their users. If these companies limit
or halt the delivery of our emails, or if we fail to deliver
emails in such a way as to be compatible with these
companies email handling technologies, then our clients
may discontinue their use of our services.

Our facilities and systems are vulnerable
to natural disasters and other unexpected events, and any of
these events could result in an interruption of our ability to
execute our clients online direct marketing
campaigns.

We depend on the efficient and uninterrupted
operations of our data center and hardware systems. Our data
center and hardware systems are located in northern California,
an area susceptible to earthquakes. Our data center and hardware
systems are also vulnerable to damage from fire, floods, power
loss, telecommunications failures, and similar events. If any of
these events results in damage to our data center or systems, we

21



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may be unable to execute our clients online
direct marketing campaigns until the damage is repaired, and may
accordingly lose clients and revenues. In addition, we may incur
substantial costs in repairing any damage.


Our data center is located at facilities
provided by a third party, and if this party is unable to
adequately protect our data center, our reputation may be harmed
and we may lose clients.

Our data center, which is critical to our ongoing
operations, is located at facilities provided by a third party.
Our operations depend on this partys ability to protect
our data center from damage or interruption from human error,
break-ins, sabotage, computer viruses, intentional acts of
vandalism and similar events. If this party is unable to
adequately protect our data center and information is lost or
our ability to deliver our services is interrupted, our
reputation may be harmed and we may lose clients.

If we are unable to protect our
intellectual property, third parties could use our intellectual
property without our consent.

Our ability to successfully compete is
substantially dependent upon our internally developed technology
and intellectual property, which we protect through a
combination of patent, copyright, trade secret and trademark
law, and contractual obligations. We have no issued patents and
have two U.S. patent applications pending. We have several
registered U.S. trademarks and have several more
applications pending in the U.S., Europe and Japan. We may not
be able to protect our proprietary rights. Unauthorized parties
may attempt to obtain and use our proprietary information.
Policing unauthorized use of our proprietary information is
difficult, and we cannot be certain that the steps we have taken
will prevent misappropriation, particularly in foreign countries
where the laws may not protect our proprietary rights as fully
as in the United States.

If we are unable to safeguard the
confidential information in our data warehouse, our reputation
may be harmed and we may be exposed to liability.

We currently store confidential customer
information in a secure data warehouse. We cannot be certain,
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.

Activities of our clients could damage our
reputation or give rise to legal claims against
us.

Our clients promotion of their products and
services may not comply with federal, state and local laws,
including but not limited to laws and regulations surrounding
the Internet. We cannot predict whether our role in facilitating
these marketing activities would expose us to liability under
these laws. Any claims made against us could be costly and
time-consuming to defend. If we are exposed to this kind of
liability, we could be required to pay substantial fines or
penalties, redesign our business methods, discontinue some of
our services or otherwise expend resources to avoid liability.

Our services involve the transmission of
information through the Internet. Our services could be used to
transmit harmful applications, negative messages, unauthorized
reproduction of copyrighted material, inaccurate data or
computer viruses to end-users in the course of delivery. Any
transmission of this kind could damage our reputation or could
give rise to legal claims against us. We could spend a
significant amount of time and money defending against these
legal claims.

New regulation of, and uncertainties
regarding the application of existing laws and regulations to,
online direct marketing and the Internet could prohibit, limit
or increase the cost of our business.

Legislation has been enacted in several states
regulating the sending of unsolicited commercial email. We
cannot assure you that existing or future legislation regarding
commercial email will not harm our business.

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##### Table of Contents



The federal government, foreign governments and
several other states 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 emails include opt-out instructions and that senders
of these emails honor any opt-out requests.


Our business could be negatively impacted by new
laws or regulations applicable to online direct marketing or the
Internet, the application of existing laws and regulations to
online direct marketing 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 online direct marketing, which
could, in turn, decrease the demand for our services and
prohibit, limit or increase the cost of our doing business.

Internet-related stock prices are
especially volatile and this volatility may depress our stock
price.

The stock market and specifically the stock
prices of Internet-related companies have been very volatile.
Because we are an Internet-related company, we expect our stock
price to be similarly volatile. As a result of this volatility,
the market price of our common stock could significantly
decrease. This volatility is often not related to our operating
performance and may accordingly reduce the price of our common
stock without regard to our operating performance.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

For the period from our inception through
March 31, 2002, we provided our services to clients
primarily in the United States. As a result, our financial
results have not been materially affected by factors such as
changes in foreign currency exchange rates or weak economic
conditions in foreign markets. The majority of our sales are
currently denominated in U.S. dollars. During the fiscal
year ending March 31, 2001, we established a subsidiary in
the United Kingdom which has had minimal operations to date. As
the operations of this subsidiary expand, our future operating
results could be directly impacted by changes in foreign
currency exchange rates or economic conditions in this region.

Our exposure to market risk for changes in
interest rates relates primarily to the increase or decrease in
the amount of interest income we can earn on our investment
portfolio and on the increase or decrease in the amount of
interest expense we must pay on our outstanding debt
instruments. The risk associated with fluctuating interest
expense is limited, however, to the exposure related to those
debt instruments and credit facilities which are tied to market
rates. We do not plan to use derivative financial instruments in
our investment portfolio. We plan to ensure the safety and
preservation of our invested principal funds by limiting default
risk, market risk and reinvestment risk. We plan to mitigate
default risk by investing in high-credit quality securities.






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

Our consolidated financial statements, together
with related notes and the report of PricewaterhouseCoopers LLP,
independent accountants, are set forth on the pages indicated in
Item 14, and incorporated herein by this reference.






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

None

23



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##### Table of Contents






PART III

Certain information required by Part III
is omitted from this Report because the Registrant will file a
definitive proxy statement pursuant to Regulation 14A (the
Proxy Statement) not later than 120 days after
the end of the fiscal year covered by this Report and certain
information included therein is incorporated herein by
reference. Only those sections of the Proxy Statement that
specifically address the items set forth herein are incorporated
by reference.






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

The information concerning the Companys
directors and executive officers required by this Item is
incorporated by reference to Item 1, Executive
Officers of the Registrant, and to the Companys
Proxy Statement, Proposal One  Election of
Directors.

There is no family relationship among any of the
directors or executive officers of Digital Impact.

The information regarding compliance with
Section 16 of the Securities Exchange Act of 1934 is
incorporated by reference to the Companys Proxy Statement,
Beneficial Ownership of Shares 
Section 16(a) Beneficial Ownership Reporting
Compliance.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item is
incorporated by reference to our Proxy Statement,
Executive Compensation (except for the subsection
entitled Report of the Compensation Committee on Executive
Compensation, which is not incorporated herein by
reference).






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

The information regarding the securities
authorized for issuance under equity compensation plans required
by this item is incorporated by reference to our Proxy
Statement, Equity Compensation Plan Information. The
information regarding the security ownership by certain
beneficial owners required by this Item is incorporated by
reference to our Proxy Statement, Beneficial Ownership of
Shares.






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

The information required by this Item is
incorporated by reference to our Proxy Statement,
Indebtedness of Management.

24



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##### Table of Contents






PART IV




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

(a) The following documents are filed as a
part of this Report:

1. Financial Statements:

|                                                                                                      |  |      |    | 
|----------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                      |  | Page
|                                                                                                      |  |     
|Report of Independent Accountants                                                                     |  |      | 27 | 
|Consolidated Balance Sheets as of March 31,
    2002 and 2001                                         |  |      | 28 | 
|Consolidated Statements of Operations for the
    Years Ended March 31, 2002, 2001 and 2000           |  |      | 29 | 
|Consolidated Statements of Stockholders
    Equity for the Years Ended March 31, 2002, 2001 and 2000 |  |      | 30 | 
|Consolidated Statements of Cash Flows for the
    Years Ended March 31, 2002, 2001 and 2000           |  |      | 31 | 
|Notes to Consolidated Financial Statements                                                            |  |      | 32 | 

2. Financial Statement Schedule:The
following consolidated financial statement schedule of Digital
Impact, Inc., for the fiscal years ended March 31, 2002,
2001 and 2000, is filed as a part of this Report and should be
read in conjunction with the financial statements of Digital
Impact, Inc.

|                                              |  |      |    | 
|--------------------------------------------- |  | ---- | -- | 
|                                              |  | Page
|                                              |  |     
|Schedule II Valuation and Qualifying Accounts |  |      | 47 | 

Schedules not listed above have been omitted
because they are not applicable or are not required or the
information required to be set forth therein is included in the
consolidated financial statements or notes thereto.

3. Exhibits:The Exhibits listed on
the accompanying Index to Exhibits immediately following the
consolidated financial statement schedules are filed as part of,
or incorporated by reference into, this Report.

|        |         |             |  |                                                                                                                                                                                                                                                                                                                   
|------- | ------- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 2.1(2)  |             |  | Agreement and Plan of Reorganization dated as of
    July 19, 2000, by and among the Registrant, Candlestick
    Acquisition Corp., MineShare, Inc., David Mariani, as the
    Founding Shareholder, David Mariani, as Shareholder
    Representative, and Computershare Investor Services, as Exchange
    Agent.
|        | 2.2(2)  |             |  | Agreement and Plan of Merger among MineShare,
    Inc. and Candlestick Acquisition Corp. dated as of July 31, 2000.                                                                                                                                                                                               
|        | 3.1(1)  |             |  | Form of Amended and Restated Certificate of
    Incorporation of the Registrant                                                                                                                                                                                                                                   
|        | 3.2(1)  |             |  | Bylaws of the Registrant                                                                                                                                                                                                                                                                                          
|        | 4.1(1)  |             |  | Amended and Restated Investor Rights Agreement                                                                                                                                                                                                                                                                    
|        | 4.2(6)  |             |  | Registration Rights Agreement, dated
    July 31, 2000, by and among the Registrant and each of the
    Stockholders listed on Exhibit A thereto.                                                                                                                                                                 
|        | 10.1(5) |             |  | Registrants 1998 Stock Plan, as Amended and
    Restated*                                                                                                                                                                                                                                                        
|        | 10.2(1) |             |  | Registrants 1999 Employee Stock Purchase
    Plan*                                                                                                                                                                                                                                                               
|        | 10.3(1) |             |  | Registrants 1999 Director Option Plan*                                                                                                                                                                                                                                                                           
|        | 10.4(1) |             |  | Employment Agreement by and between Registrant
    and David Oppenheimer*                                                                                                                                                                                                                                         
|        | 10.5(7) |             |  | Employment Agreement by and between Registrant
    and Kevin Johnson*                                                                                                                                                                                                                                             
|        | 10.7(1) |             |  | Master Lease Agreement by and between Registrant
    and Comdisco, Inc.                                                                                                                                                                                                                                           
|        | 10.8(1) |             |  | Standard Form Lease by and between
    Registrant and Casiopea Venture Corporation                                                                                                                                                                                                                                

25



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##### Table of Contents



|        |          |             |  |                                                                                                                                                                  
|------- | -------- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.9     |             |  | Standard Form Lease by and between
    Registrant and Casiopea Venture Corporation                                                                               
|        | 10.10(1) |             |  | Form of Indemnification Agreement by and between
    Registrant and each of its directors and executive officers*                                                
|        | 10.12(6) |             |  | Master Loan and Security Agreement by and between
    the Registrant and Wells Fargo Equipment Finance, Inc.                                                     
|        | 10.13(6) |             |  | Form of Retention Agreement with Key Employees                                                                                                                   
|        | 10.14    |             |  | Form of Retention Agreement with a Key Employee                                                                                                                  
|        | 10.15    |             |  | Form of Retention Agreement with a Key Employee                                                                                                                  
|        | 10.16    |             |  | Promissory Note by and between the Registrant and
    William Park                                                                                               
|        | 21.1     |             |  | Subsidiaries of the Registrant                                                                                                                                   
|        | 23.1     |             |  | Consent of PricewaterhouseCoopers LLP (included
    on page 48 of this Report)                                                                                   
|        | 24.1     |             |  | Power of Attorney (included on page 49 of
    this Report)                                                                                                       
|        | 99.1(4)  |             |  | Note Conversion Agreement between Registrant and
    Enterprise Partners III, Associates, LLP and Enterprise
    Partners III, LLP, dated as of February 16, 2001




| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| | * | Indicates management contracts or compensatory
    plans or arrangements required to be filed as exhibits to this
    Report on Form 10-K.



| |     |                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to Digital
    Impacts registration statement on Form S-1, File
    No. 333-87299, originally filed with the Commission on
    September 17, 1999, as subsequently amended.
|
| | (2) | Incorporated by reference to Digital
    Impacts Report on Form 8-K, filed with the Commission
    on August 14, 2000.                                                                               
|
| | (3) | Incorporated by reference to Digital
    Impacts Report on Form 8-K, filed with the Commission
    on February 16, 2001                                                                              
|
| | (4) | Incorporated by reference to Exhibit 99.1 of
    Digital Impacts Report on Form 8-K filed with the
    Commission on February 16, 2001.                                                              
|
| | (5) | Incorporated by reference to Digital
    Impacts definitive proxy statement filed with the
    Commission on June 22, 2000.                                                                          
|
| | (6) | Incorporated by reference to Digital
    Impacts Report on 10-K filed with the Commission on
    June 13, 2001.                                                                                      
|
| | (7) | Incorporated by reference to Digital
    Impacts Report on 10-Q filed with the Commission on
    February 14, 2002.                                                                                  

(b) Reports on Form 8-K

None

26



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of

Digital Impact, Inc.:


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 14(a)(1) on page 25, present fairly, in all
material respects, the financial position of Digital Impact,
Inc. (the Company) and its subsidiaries at
March 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in
the period ended March 31, 2002 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2)
on page 25 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

San Jose, California

April 24, 2002


27



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##### Table of Contents



DIGITAL IMPACT, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share
data)


|                                                |                                                                                                         |                                            |       |          |        |  |        |         |        | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | -------- | ------ |  | ------ | ------- | ------ | 
|                                                |                                                                                                         |                                           
|                                                |                                                                                                         | March 31,                                 
|                                                |                                                                                                         |                                           
|                                                |                                                                                                         | 2002                                       |       | 2001    
|                                                |                                                                                                         |                                            |       |         
|ASSETS                                          |                                                                                                         |                                            |       |          |        |  |        |        
|Current assets:                                 |                                                                                                         |                                            |       |          |        |  |        |        
|                                                | Cash and cash equivalents                                                                               |                                            | $     | 23,937   |        |  | $      | 35,038  |       
|                                                | Short-term investments                                                                                  |                                            |       | 1,651    |        |  |        |        |       
|                                                | Accounts receivable, net of allowance for
    doubtful accounts of $697 and $883                        |                                            |       | 8,191    |        |  |        | 12,899  |       
|                                                | Prepaid expenses and other current assets                                                               |                                            |       | 1,504    |        |  |        | 551     |       
|                                                |                                                                                                         |                                            |       |          |        |  |        |        
|                                                |                                                                                                         | Total current assets                       |       |          | 35,283 |  |        |         | 48,488 | 
|                                                |                                                                                                         |                                            |       |          |        |  |        |        
|Property and equipment, net                     |                                                                                                         |                                            | 9,484 |          |        |  | 13,100 |        
|Restricted cash                                 |                                                                                                         |                                            | 1,141 |          |        |  | 1,847  |        
|Intangible assets                               |                                                                                                         |                                            | 2,860 |          |        |  | 5,005  |        
|Other assets                                    |                                                                                                         |                                            | 865   |          |        |  | 579    |        
|                                                |                                                                                                         |                                            |       |          |        |  |        |        
|                                                |                                                                                                         | Total assets                               |       | $        | 49,633 |  |        | $       | 69,019 | 
|                                                |                                                                                                         |                                            |       |          |        |  |        |        
|LIABILITIES AND STOCKHOLDERS EQUITY            |                                                                                                         |                                            |       |          |        |  |        |        
|Current liabilities:                            |                                                                                                         |                                            |       |          |        |  |        |        
|                                                | Accounts payable                                                                                        |                                            | $     | 2,529    |        |  | $      | 4,557   |       
|                                                | Accrued payroll                                                                                         |                                            |       | 1,499    |        |  |        | 2,342   |       
|                                                | Accrued liabilities                                                                                     |                                            |       | 2,706    |        |  |        | 1,087   |       
|                                                | Deferred revenue                                                                                        |                                            |       | 829      |        |  |        | 1,050   |       
|                                                | Current portion of capital lease obligations                                                            |                                            |       | 320      |        |  |        | 862     |       
|                                                | Current portion of long term-debt                                                                       |                                            |       | 1,537    |        |  |        | 913     |       
|                                                |                                                                                                         |                                            |       |          |        |  |        |        
|                                                |                                                                                                         | Total current liabilities                  |       |          | 9,420  |  |        |         | 10,811 | 
|                                                |                                                                                                         |                                            |       |          |        |  |        |        
|Capital lease obligations, less current portion |                                                                                                         |                                            | 73    |          |        |  | 524    |        
|Long-term debt, less current portion            |                                                                                                         |                                            | 1,251 |          |        |  | 2,129  |        
|                                                |                                                                                                         |                                            |       |          |        |  |        |        
|                                                |                                                                                                         | Total liabilities                          |       |          | 10,744 |  |        |         | 13,464 | 
|                                                |                                                                                                         |                                            |       |          |        |  |        |        
|Commitments (See Note 5)                        |                                                                                                         |                                            |       |          |        |  |        |        
|Stockholders equity:                           |                                                                                                         |                                            |       |          |        |  |        |        
|                                                | Common stock, $0.001 par value; 100,000 shares
    authorized; 29,761 and 27,866 issued and outstanding |                                            |       | 30       |        |  |        | 27      |       
|                                                | Additional paid-in capital                                                                              |                                            |       | 141,877  |        |  |        | 141,823 |       
|                                                | Accumulated other comprehensive loss                                                                    |                                            |       |         |        |  |        | (34     | )     
|                                                | Unearned stock-based compensation                                                                       |                                            |       | (1,169   | )      |  |        | (4,387  | )     
|                                                | Accumulated deficit                                                                                     |                                            |       | (101,405 | )      |  |        | (81,727 | )     
|                                                | Less treasury stock, at cost, (395) shares                                                              |                                            |       | (444     | )      |  |        | (147    | )     
|                                                |                                                                                                         |                                            |       |          |        |  |        |        
|                                                | Total stockholders equity                                                                              |                                            |       | 38,889   |        |  |        | 55,555  |       
|                                                |                                                                                                         |                                            |       |          |        |  |        |        
|                                                |                                                                                                         | Total liabilities and stockholders equity |       | $        | 49,633 |  |        | $       | 69,019 | 
|                                                |                                                                                                         |                                            |       |          |        |  |        |        

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

28



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##### Table of Contents



DIGITAL IMPACT, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
data)


|                                                                             |                                                                                |                             |         |        |        |      |         |        |        |   |         |       |        | 
|---------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ----- | ------ | 
|                                                                             |                                                                                |                            
|                                                                             |                                                                                | Fiscal year ended March 31,
|                                                                             |                                                                                |                            
|                                                                             |                                                                                | 2002                        |         | 2001   |        | 2000
|                                                                             |                                                                                |                             |         |        |        |     
|Revenues                                                                     |                                                                                | $                           | 39,038  |        |        | $    | 40,153  |        |        | $ | 12,991  |      
|Cost of revenues                                                             |                                                                                |                             | 17,993  |        |        |      | 17,836  |        |        |   | 6,178   |      
|                                                                             |                                                                                |                             |         |        |        |      |         |        |        |   |         |      
|Gross margin                                                                 |                                                                                |                             | 21,045  |        |        |      | 22,317  |        |        |   | 6,813   |      
|                                                                             |                                                                                |                             |         |        |        |      |         |        |        |   |         |      
|Operating expenses:                                                          |                                                                                |                             |         |        |        |      |         |        |        |   |         |      
|                                                                             | Research and development                                                       |                             |         | 11,217 |        |      |         | 17,592 |        |   |         | 7,452 |       
|                                                                             | Sales and marketing                                                            |                             |         | 15,612 |        |      |         | 18,146 |        |   |         | 7,630 |       
|                                                                             | General and administrative                                                     |                             |         | 8,548  |        |      |         | 11,301 |        |   |         | 5,633 |       
|                                                                             | Stock based-compensation                                                       |                             |         | 2,319  |        |      |         | 5,049  |        |   |         | 9,228 |       
|                                                                             | Amortization of goodwill and purchased intangibles                             |                             |         | 1,500  |        |      |         | 6,429  |        |   |         |      |       
|                                                                             | Goodwill impairment charge                                                     |                             |         |       |        |      |         | 19,000 |        |   |         |      |       
|                                                                             | Write-off of acquired in-process research and
    development and fixed assets |                             |         | 600    |        |      |         | 4,563  |        |   |         |      |       
|                                                                             | Restructuring charges                                                          |                             |         | 1,224  |        |      |         |       |        |   |         |      |       
|                                                                             |                                                                                |                             |         |        |        |      |         |        |        |   |         |      
|                                                                             |                                                                                | Total operating expenses    |         |        | 41,020 |      |         |        | 82,080 |   |         |       | 29,943 | 
|                                                                             |                                                                                |                             |         |        |        |      |         |        |        |   |         |      
|Loss from operations                                                         |                                                                                |                             | (19,975 | )      |        |      | (59,763 | )      |        |   | (23,130 | )    
|Other income, net                                                            |                                                                                |                             | 297     |        |        |      | 3,032   |        |        |   | 1,477   |      
|                                                                             |                                                                                |                             |         |        |        |      |         |        |        |   |         |      
|Net loss                                                                     |                                                                                | $                           | (19,678 | )      |        | $    | (56,731 | )      |        | $ | (21,653 | )    
|                                                                             |                                                                                |                             |         |        |        |      |         |        |        |   |         |      
|Net loss per common share  basic and
    diluted                            |                                                                                | $                           | (0.70   | )      |        | $    | (2.33   | )      |        | $ | (2.28   | )    
|                                                                             |                                                                                |                             |         |        |        |      |         |        |        |   |         |      
|Shares used in net loss per common share
    calculation  basic and diluted |                                                                                |                             | 27,960  |        |        |      | 24,350  |        |        |   | 9,510   |      
|                                                                             |                                                                                |                             |         |        |        |      |         |        |        |   |         |      

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

29



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##### Table of Contents



DIGITAL IMPACT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(In thousands)


|                                                                                                          |  |                 |         |              |  |                |     |            |  |               |        |             |  |             |    |        |  |              |      |         |  |       |      |   |  |  |         |   |  |  |     |   |  |  |         |   |  |  |          |   |  |  |         |  
|--------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ------------ |  | -------------- | --- | ---------- |  | ------------- | ------ | ----------- |  | ----------- | -- | ------ |  | ------------ | ---- | ------- |  | ----- | ---- | - |  |  | ------- | - |  |  | --- | - |  |  | ------- | - |  |  | -------- | - |  |  | ------- | -
|                                                                                                          |  |                 |         |              |  |                |     |            |  |               |        |             |  |             |    |        |  |              |      |        
|                                                                                                          |  | Convertible     |         |              |  |                |     |            |  | Accumulated   |        |             |  |             |    |       
|                                                                                                          |  | Preferred Stock |         | Common Stock |  | Treasury Stock |     | Additional |  | Other         |        | Unearned    |  |             |    |       
|                                                                                                          |  |                 |         |              |  |                |     | Paid-in    |  | Comprehensive |        | Stock-Based |  | Accumulated |    |       
|                                                                                                          |  | Shares          |         | Amount       |  | Shares         |     | Amount     |  | Shares        |        | Amount      |  | Capital     |    | Income |  | Compensation |      | Deficit |  | Total
|                                                                                                          |  |                 |         |              |  |                |     |            |  |               |        |             |  |             |    |        |  |              |      |         |  |      
|Balances, March 31, 1999                                                                                  |  |                 | 10,040  |              |  |                | 10  |            |  |               | 6,022  |             |  |             | 6  |        |  |              |     |         |  |       |     |   |  |  | 8,925   |   |  |  |    |   |  |  | (1,227  | ) |  |  | (3,343   | ) |  |  | 4,371   |  
|Issuance of Series C convertible preferred
    stock, net of issuance costs of $24                        |  |                 | 2,228   |              |  |                | 2   |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | 10,636  |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  | 10,638  |  
|Exercise of convertible preferred stock warrants                                                          |  |                 | 48      |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | 11      |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  | 11      |  
|Issuance of common stock upon exercise of stock
    options and warrants, net of repurchases              |  |                 |        |              |  |                |    |            |  |               | 981    |             |  |             | 1  |        |  |              |     |         |  |       |     |   |  |  | 127     |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  | 128     |  
|Issuance of common stock options for services                                                             |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | 212     |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  | 212     |  
|Conversion of convertible preferred stock to
    common stock                                             |  |                 | (12,316 | )            |  |                | (12 | )          |  |               | 12,316 |             |  |             | 12 |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  |        |  
|Issuance of common stock in conjunction with
    initial public offering, net of issuance costs of $6,800 |  |                 |        |              |  |                |    |            |  |               | 5,175  |             |  |             | 5  |        |  |              |     |         |  |       |     |   |  |  | 70,817  |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  | 70,822  |  
|Unearned stock-based compensation                                                                         |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | 19,138  |   |  |  |    |   |  |  | (19,138 | ) |  |  |         |   |  |  |        |  
|Amortization of unearned stock-based compensation                                                         |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  |    |   |  |  | 9,016   |   |  |  |         |   |  |  | 9,016   |  
|Unrealized losses on marketable securities                                                                |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  | (15 | ) |  |  |        |   |  |  |         |   |  |  | (15     | )
|Net loss                                                                                                  |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  |    |   |  |  |        |   |  |  | (21,653  | ) |  |  | (21,653 | )
|                                                                                                          |  |                 |         |              |  |                |     |            |  |               |        |             |  |             |    |        |  |              |      |         |  |       |      |   |  |  |         |   |  |  |     |   |  |  |         |   |  |  |          |   |  |  |         |  
|Balances, March 31, 2000                                                                                  |  |                 |        |              |  |                |    |            |  |               | 24,494 |             |  |             | 24 |        |  |              |     |         |  |       |     |   |  |  | 109,866 |   |  |  | (15 | ) |  |  | (11,349 | ) |  |  | (24,996  | ) |  |  | 73,530  |  
|Issuance of common stock upon exercise of stock
    options and warrants, net of repurchases              |  |                 |        |              |  |                |    |            |  |               | 492    |             |  |             | 1  |        |  |              |     |         |  |       |     |   |  |  | 304     |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  | 305     |  
|Issuance of common stock  ESPP                                                                           |  |                 |        |              |  |                |    |            |  |               | 285    |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | 1,376   |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  | 1,376   |  
|Issuance of common stock  restricted
    stock bonus                                                     |  |                 |        |              |  |                |    |            |  |               | 548    |             |  |             |   |        |  |              | (110 | )       |  |       | (147 | ) |  |  | 883     |   |  |  |    |   |  |  | (375    | ) |  |  |         |   |  |  | 361     |  
|Issuance of common stock  Mineshare
    promissory notes                                                 |  |                 |        |              |  |                |    |            |  |               | 191    |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | 598     |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  | 598     |  
|Issuance of common stock for Mineshare acquisition                                                        |  |                 |        |              |  |                |    |            |  |               | 1,856  |             |  |             | 2  |        |  |              |     |         |  |       |     |   |  |  | 31,925  |   |  |  |    |   |  |  | (841    | ) |  |  |         |   |  |  | 31,086  |  
|Amortization of unearned stock-based compensation                                                         |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  |    |   |  |  | 5,049   |   |  |  |         |   |  |  | 5,049   |  
|Cancellations of unvested options                                                                         |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | (3,129  | ) |  |  |    |   |  |  | 3,129   |   |  |  |         |   |  |  |        |  
|Unrealized losses on marketable securities                                                                |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  | (19 | ) |  |  |        |   |  |  |         |   |  |  | (19     | )
|Net loss                                                                                                  |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  |    |   |  |  |        |   |  |  | (56,731  | ) |  |  | (56,731 | )
|                                                                                                          |  |                 |         |              |  |                |     |            |  |               |        |             |  |             |    |        |  |              |      |         |  |       |      |   |  |  |         |   |  |  |     |   |  |  |         |   |  |  |          |   |  |  |         |  
|Balances, March 31, 2001                                                                                  |  |                 |        |              |  |                |    |            |  |               | 27,866 |             |  |             | 27 |        |  |              | (110 | )       |  |       | (147 | ) |  |  | 141,823 |   |  |  | (34 | ) |  |  | (4,387  | ) |  |  | (81,727  | ) |  |  | 55,555  |  
|Issuance of common stock in respect of exercise
    of stock options and ESPP, net of repurchases         |  |                 |        |              |  |                |    |            |  |               | 1,141  |             |  |             | 2  |        |  |              |     |         |  |       |     |   |  |  | 954     |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  | 956     |  
|Issuance of common stock  restricted
    stock award                                                     |  |                 |        |              |  |                |    |            |  |               | 704    |             |  |             | 1  |        |  |              |     |         |  |       |     |   |  |  | 1,619   |   |  |  |    |   |  |  | (1,620  | ) |  |  |         |   |  |  |        |  
|Repurchase of common stock                                                                                |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              | (285 | )       |  |       | (297 | ) |  |  |        |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  | (297    | )
|Issuance of common stock to non-employees                                                                 |  |                 |        |              |  |                |    |            |  |               | 50     |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | 43      |   |  |  |    |   |  |  | (43     | ) |  |  |         |   |  |  |        |  
|Amortization of unearned stock-based compensation                                                         |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  |    |   |  |  | 2,319   |   |  |  |         |   |  |  | 2,319   |  
|Cancellations of unvested options and restricted
    stock                                                |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | (2,562  | ) |  |  |    |   |  |  | 2,562   |   |  |  |         |   |  |  |        |  
|Unrealized gains on marketable securities                                                                 |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  | 34  |   |  |  |        |   |  |  |         |   |  |  | 34      |  
|Net loss                                                                                                  |  |                 |        |              |  |                |    |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  |    |   |  |  |        |   |  |  | (19,678  | ) |  |  | (19,678 | )
|                                                                                                          |  |                 |         |              |  |                |     |            |  |               |        |             |  |             |    |        |  |              |      |         |  |       |      |   |  |  |         |   |  |  |     |   |  |  |         |   |  |  |          |   |  |  |         |  
|Balances, March 31, 2002                                                                                  |  |                 |        |              |  |                |    |            |  |               | 29,761 |             |  |             | 30 |        |  |              | (395 | )       |  |       | (444 | ) |  |  | 141,877 |   |  |  |    |   |  |  | (1,169  | ) |  |  | (101,405 | ) |  |  | 38,889  |  
|                                                                                                          |  |                 |         |              |  |                |     |            |  |               |        |             |  |             |    |        |  |              |      |         |  |       |      |   |  |  |         |   |  |  |     |   |  |  |         |   |  |  |          |   |  |  |         |  

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

30



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##### Table of Contents



DIGITAL IMPACT, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                                |                                                                   |                                           |         |        |        |      |         |        |        |   |         |        |        |  
|------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                                                |                                                                   |                                          
|                                                                                |                                                                   | Fiscal year ended March 31,              
|                                                                                |                                                                   |                                          
|                                                                                |                                                                   | 2002                                      |         | 2001   |        | 2000
|                                                                                |                                                                   |                                           |         |        |        |     
|Cash flows from operations:                                                     |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|Net loss                                                                        |                                                                   | $                                         | (19,678 | )      |        | $    | (56,731 | )      |        | $ | (21,653 | )     
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|                                                                                | Write-off of for acquired in-process research and
    development |                                           |         |       |        |      |         | 4,432  |        |   |         |       |       
|                                                                                | Depreciation and amortization                                     |                                           |         | 7,905  |        |      |         | 11,654 |        |   |         | 1,622  |       
|                                                                                | Goodwill impairment charge                                        |                                           |         |       |        |      |         | 19,000 |        |   |         |       |       
|                                                                                | Provision for bad debts                                           |                                           |         | (186   | )      |      |         | 713    |        |   |         | 160    |       
|                                                                                | Warrants issued for services                                      |                                           |         |       |        |      |         |       |        |   |         | 212    |       
|                                                                                | Amortization of unearned stock-based compensation                 |                                           |         | 2,319  |        |      |         | 5,049  |        |   |         | 9,016  |       
|                                                                                | Amortization of restricted stock bonus                            |                                           |         |       |        |      |         | 361    |        |   |         |       |       
|                                                                                | Loss on write-off of fixed assets                                 |                                           |         | 1,265  |        |      |         | 130    |        |   |         |       |       
|                                                                                | Unrealized loss (gain) on cash and cash
    equivalents           |                                           |         | 34     |        |      |         | (19    | )      |   |         | 15     |       
|                                                                                | Change in operating assets and liabilities:                       |                                           |         |        |        |      |         |        |        |   |         |        |       
|                                                                                |                                                                   | Accounts receivable                       |         |        | 4,894  |      |         |        | (8,688 | ) |         |        | (4,301 | )
|                                                                                |                                                                   | Prepaid expenses and other current assets |         |        | (953   | )    |         |        | 141    |   |         |        | (510   | )
|                                                                                |                                                                   | Other assets                              |         |        | (286   | )    |         |        | (356   | ) |         |        | (113   | )
|                                                                                |                                                                   | Accounts payable and accrued liabilities  |         |        | (1,473 | )    |         |        | (103   | ) |         |        | 5,504  |  
|                                                                                |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|Net cash used in operating activities                                           |                                                                   |                                           | (6,159  | )      |        |      | (24,417 | )      |        |   | (10,048 | )     
|                                                                                |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|Cash flows from investing activities:                                           |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|                                                                                | Purchases of investments in marketable securities                 |                                           |         | (1,651 | )      |      |         |       |        |   |         |       |       
|                                                                                | Restricted cash                                                   |                                           |         | 706    |        |      |         | (1,739 | )      |   |         |       |       
|                                                                                | Acquisition of property and equipment                             |                                           |         | (2,307 | )      |      |         | (9,662 | )      |   |         | (5,494 | )     
|                                                                                | Acquisition of MineShare beginning cash                           |                                           |         |       |        |      |         | 264    |        |   |         |       |       
|                                                                                |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|Net cash used in investing activities                                           |                                                                   |                                           | (3,252  | )      |        |      | (7,659  | )      |        |   | (5,494  | )     
|                                                                                |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|Cash flows from financing activities:                                           |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|                                                                                | Proceeds from long-term debt                                      |                                           |         |       |        |      |         | 3,000  |        |   |         |       |       
|                                                                                | Principal payments on long-term debt                              |                                           |         | (2,349 | )      |      |         | (2,162 | )      |   |         | (849   | )     
|                                                                                | Proceeds from initial public offering, net of
    issuance costs  |                                           |         |       |        |      |         |       |        |   |         | 70,822 |       
|                                                                                | Proceeds from issuance of common stock                            |                                           |         | 956    |        |      |         | 1,681  |        |   |         | 128    |       
|                                                                                | Purchases of treasury stock                                       |                                           |         | (297   | )      |      |         |       |        |   |         |       |       
|                                                                                | Proceeds from issuance of convertible preferred
    stock, net    |                                           |         |       |        |      |         |       |        |   |         | 10,650 |       
|                                                                                |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|Net cash (used) provided by financing
    activities                            |                                                                   |                                           | (1,690  | )      |        |      | 2,519   |        |        |   | 80,751  |       
|                                                                                |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|Net (decrease) increase in cash and cash
    equivalents                        |                                                                   |                                           | (11,101 | )      |        |      | (33,035 | )      |        |   | 65,209  |       
|Cash and cash equivalents at beginning of year                                  |                                                                   |                                           | 35,038  |        |        |      | 68,073  |        |        |   | 2,864   |       
|                                                                                |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|Cash and cash equivalents at end of year                                        |                                                                   | $                                         | 23,937  |        |        | $    | 35,038  |        |        | $ | 68,073  |       
|                                                                                |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|Supplemental disclosure of cash flow information:                               |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|Cash paid for interest                                                          |                                                                   | $                                         | 520     |        |        | $    | 355     |        |        | $ | 93      |       
|Supplemental disclosure of noncash financing
    activities:                    |                                                                   |                                           |         |        |        |      |         |        |        |   |         |       
|Issuance of common stock upon conversion of
    convertible note payable        |                                                                   |                                           |        |        |        |      | 598     |        |        |   |         |       
|Fair value of net assets acquired (excluding
    transaction costs)             |                                                                   |                                           |        |        |        |      | 31,145  |        |        |   |        |       
|Assets acquired under capital leases and
    long-term debt                     |                                                                   |                                           | 1,102   |        |        |      | 140     |        |        |   | 943     |       
|Unearned stock-based compensation                                               |                                                                   | $                                         | (899    | )      |        | $    | (1,552  | )      |        | $ | 19,138  |       

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

31



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##### Table of Contents



DIGITAL IMPACT, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1. The Company

Digital Impact was incorporated in California in
October 1997 and reincorporated in Delaware in October 1999.
Digital Impact is premier provider of online direct marketing
solutions for enterprises. Our solutions enable corporations to
create and deliver online direct marketing programs that drive
revenue, influence behavior and deepen customer relationships.
Our solutions provide customer insight and powerful program
execution through a combination of hosted applications,
technology infrastructure and world class services.

Digital Impact derives its revenues from the sale
of solutions that enable businesses proactively communicate with
their customers online. Primarily, these services have consisted
of the design and execution of online direct marketing
campaigns, the development and execution of customer acquisition
programs and additional services provided by its professional
services organization.

Note 2. Summary of Significant Accounting
Policies

Basis of presentation and liquidity

The consolidated financial statements include the
accounts of Digital Impact and its wholly owned subsidiaries.
All significant intercompany accounts and balances have been
eliminated.

Certain reclassifications have been made to the
prior years consolidated financial statements to conform
to the current years presentation. The reclassifications
had no effect on prior years stockholders equity or
results of operation.

The Company has incurred a consolidated net loss
of approximately $19.7 million for the year ended March 31,
2002 and used cash of $6.2 million in operations for that year.

The Company continues to face risks associated
with the execution of its strategy. The Companys future
cash flows will depend upon: (1) the level of the future
sales which depend on technology and product development,
changes in the marketplace, liquidity, competition from existing
and new competitors which may enter the marketplace and
retention of key personnel and (2) our ability to control
expenses.

The Company presently uses its cash and cash
equivalent balances to fund its operating, investing and
financing activities. If due to the risks outlined in the
previous paragraph, revenues were to decline significantly, this
could have an adverse effect on the Companys ability to
achieve its intended business objectives.

Use of estimates

Preparation of the accompanying financial
statements in conformity with generally accepted accounting
principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Significant
estimates include those required in the valuation of intangible
assets acquired in business combinations, allowances for
doubtful accounts and sales allowances. Actual results could
differ from those estimates.

Foreign currency translation

The functional currency for the Companys
international subsidiary is the local currency of the country in
which it operates. Assets and liabilities are translated using
the exchange rate at the balance sheet date. Revenues, expenses,
gains, and losses are translated using the exchange rate at the
end of the month in which the transaction occurred.

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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Revenue recognition

The Company generates revenue from the sale of
solutions that enable businesses to proactively communicate with
its customers online.

Digital Impact applies the provisions of Staff
Accounting Bulletin 101 Revenue Recognition and
recognizes revenue when persuasive evidence of an agreement
exists, the service has been delivered, the fee is fixed or
determinable and collection of the resulting receivables is
reasonably assured. Customer marketing revenues are recognized
on delivery of the campaigns. Revenues attributable to one-time
set-up fees for service initiation are deferred and recognized
ratably over the term of the clients service agreement,
typically twelve months. Customer acquisition revenues are
derived primarily from programs that assist clients in growing
their email lists through the use of third party list rentals.
Customer acquisition programs fall into two general categories:
List Rental programs and ProspectNet programs. List Rental
programs involve the execution and delivery of email campaigns
to a defined number of individuals provided by a third party
list rental service. ProspectNet programs involve the strategic
placement of a Digital Impact client offer on a third party site
for the purpose of generating new opt-in email addresses for the
client. Digital Impact contracts with third party providers to
deliver secure names of individuals who opt-in to join the
clients email list. Digital Impact is obligated to make
payments to third parties for the cost of services associated
with the execution of List Rental and ProspectNet programs.
These costs are recognized in the period that the programs are
executed and are netted against program revenue. Digital Impact
provides other complimentary services to clients, such as,
strategy, solutions engineering, web-page development, creative
design and data analytics. These services are typically billed
on an hourly rate. The revenue for engagements that support the
delivery of future products and services, such as targeted email
delivery, is deferred at the time of delivery and recognized
pro-rata over the future periods of usage. The period over which
the revenue is recognized varies, generally between one and
twelve months, depending on the term of the contract or the
estimated period of usage. Management uses their best estimates
to determine the appropriate period for revenue deferral.

The Company assess probability of collection
based on a number of factors, including its past transaction
history with the customer and the credit-worthiness of the
customer. New customers and certain existing customers are
subject to a credit review process that evaluates the
customers financial position and ultimately their ability
to pay according to the original terms of the arrangement. Based
on the Companys review process, if it is determined from
the outset or during the term of an arrangement that collection
of the resulting receivable is not probable, then revenue is
recognized on a cash-collected basis.

Cash, cash equivalents and short-term
investments

The Company considers all highly liquid
investments with an original or remaining maturity of three
months or less at the time of purchase to be cash equivalents.
The Company has classified its cash and cash equivalents and
short-term investments as available for sale. These
items are carried at fair market value, based on quoted market
prices, and unrealized gains and losses are reported as a
separate component of accumulated other comprehensive loss in
stockholders equity. All short-term investments are
maintained in certificates of deposit. To date, unrealized gains
or losses have not been material. At March 31, 2002,
approximately $1.1 million of cash was pledged as
collateral for outstanding letters of credit (see Note 6).

Concentration of credit risk and other risks
and uncertainties

Financial instruments subjecting the Company to
concentration of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Companys
cash and cash equivalents are maintained at a major U.S.
financial institution. Deposits in this institution may exceed
the amount of insurance provided on such deposits.

The Companys customers are primarily
concentrated in the United States. The Company performs ongoing
credit evaluations and establishes an allowance for doubtful
accounts based upon factors surrounding

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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

the credit risk of customers, historical trends
and other information. For the fiscal year ended March 31,
2002, one customer accounted for 11% and 17% of revenue and
accounts receivable, respectively. For the fiscal year ended
March 31, 2001, no single customer accounted for more than
10% of revenues, and one customer represented 13% of outstanding
accounts receivable. For the fiscal year ended March 31,
2000, no customer accounted for more than 10% of revenues or
accounts receivable.

Financial instruments

The carrying value of the Companys
financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable and accounts payable,
approximate their fair value due to their relatively short
maturities. The carrying value of long-term debt approximates
fair value due to the market interest rates that such debt bears.

Advertising expense

Expenses related to advertising and promotion of
products are charged to sales and marketing expense as incurred,
except for production costs, if any, which are expensed the
first time the advertising takes place. Advertising expenses
primarily relate to public relations and trades shows.
Advertising expense for the years ended March 31, 2002,
2001 and 2000 was $0.8 million, $3.3 million and
$2.3 million, respectively.

Research and development expense

Research and development costs are expensed as
incurred. Capitalization of software development costs begins
upon the establishment of technological feasibility of the
product and ends when the product is available for general
release to customers. Capitalized costs are then amortized on a
straight-line basis over the estimated product life, or on the
ratio of current revenue to the total projected product revenue,
whichever is greater. To date, the period between achieving
technological feasibility, which the Company has defined as the
establishment of a working model and typically occurs when beta
testing commences, and the general availability of such software
has been short. For the fiscal year ended March 31, 2002
the Company capitalized approximately $130,000 in software
development costs. The capitalized costs are being amortized
over a period of 12 months.

Property and equipment

Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and
amortization is computed using the straight-line method over the
shorter of the estimated useful lives of the assets, generally
three to five years, or the lease term, if applicable. Gains and
losses upon asset disposal are taken into operations in the year
of disposition. Maintenance and repairs are charged to
operations as incurred.

Intangible assets and impairment of long-lived
assets

Goodwill and identified intangible assets are
carried at cost less accumulated amortization. The Company
amortized goodwill and other identified intangibles on a
straight-line basis over their estimated useful lives for the
fiscal years ended March 31, 2002 and 2001.

The Company evaluated the recoverability of
long-lived assets in accordance with Statement of Financial
Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of (SFAS No. 121). SFAS
No. 121 requires recognition of impairment of long-lived
assets in the event that the net book value of such assets
exceeds the estimated future undiscounted cash flows
attributable to such assets.

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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company also assessed the impairment of
enterprise level goodwill periodically in accordance with the
provisions of Accounting Principles Board (APB)
No. 17, Intangible Assets. An impairment review
is performed whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors
the Company considers important which could trigger an
impairment review include, but are not limited to, significant
underperformance relative to expected historical or projected
future operating results, significant changes in the manner of
use of the acquired assets or the strategy for the overall
business, significant negative industry or economic trends, a
significant decline in the stock price for a sustained period,
and the Companys market capitalization relative to net
book value. When the Company determines that the carrying value
of goodwill and other intangible assets may not be recoverable
based on the existence of one or more of the above indicators of
impairment, the Company measures any impairment based on a
projected discounted cash flow method using a discount rate
commensurate with the risk inherent in its current business
model.

In the year ended March 31, 2001, the
Company performed an impairment assessment of the identified
intangibles and goodwill recorded in connection with the
acquisition of MineShare, Inc. The assessment was performed
primarily as a result of the significant sustained decline in
the Companys stock price since the valuation date of the
shares issued in the MineShare acquisition, the overall decline
in the industry growth rates, and the Companys lower
performance in the fourth quarter of fiscal 2001 and projected
operating results. As a result, the Company recorded a
$19.0 million impairment charge to reduce goodwill. The
charge was based on the estimated discounted cash flows over the
remaining useful life of the goodwill using a discount rate of
25%. The assumptions supporting the cash flows, including the
discount rate, were determined using the Companys best
estimates as of such date.

The Company has adopted SFAS No. 142
effective April 1, 2002, and as a result, the Company
reclassified $1.2 million related to assembled workforce to
goodwill and will no longer amortize the goodwill balance of
$2.0 million. The Company will be required to review
goodwill for impairment effective April 1, 2002 as part of
the transition provisions. Any impairment resulting from the
transition provisions will be recorded as of April 1, 2002
and will be recognized as the effect of a change in accounting
principle. In the first quarter of fiscal 2003 we are required
to perform an initial impairment of our goodwill and an annual
impairment review thereafter. We currently do not expect to
record an impairment charge upon the completion of an initial,
preliminary impairment review.

Income taxes

Deferred tax assets and liabilities are
determined based on the differences between financial reporting
and tax basis of assets and liabilities, measured at tax rates
that will be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be
realized.

Accounting for stock-based
compensation

The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of
APB Opinion No. 25, Accounting for Stock issued to
Employees (APB No. 25) as interpreted by
FASB Interpretation No. 44 Accounting for Certain
Transactions Involving Stock Compensation  an
Interpretation of APB Opinion No. 25, and Financial
Accounting Standards Board Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans
(FIN 28), and complies with the disclosure
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123).

Under APB No. 25, compensation expense is
based on the difference, if any, on the date of the grant,
between the fair value of the Companys stock and the
exercise price. SFAS No. 123 defines a fair
value based method of accounting for an employee stock
option or similar equity investment.

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company accounts for equity instruments
issued to non-employees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force 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.

Comprehensive loss

Comprehensive loss 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. Other comprehensive loss, a component of
stockholders equity, recorded by the Company for the
fiscal years ended March 31, 2002, 2001 and 2000 was
attributable to unrealized gains and losses on cash equivalents.

|                                         |  |                      |         |      |  |      |         |   |  |  |         |  
|---------------------------------------- |  | -------------------- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                                         |  |                     
|                                         |  | Year ended March 31,
|                                         |  |                     
|                                         |  | 2002                 |         | 2001 |  | 2000
|                                         |  |                      |         |      |  |     
|Unrealized gains (losses) on investments |  |                      | 34      |      |  |      | (19     | ) |  |  | (15     | )
|Net loss                                 |  |                      | (19,678 | )    |  |      | (56,731 | ) |  |  | (21,653 | )
|                                         |  |                      |         |      |  |      |         |   |  |  |         |  
|Total comprehensive loss                 |  |                      | (19,644 | )    |  |      | (56,750 | ) |  |  | (21,668 | )
|                                         |  |                      |         |      |  |      |         |   |  |  |         |  

Net loss per common share

Basic net loss per share is calculated by
dividing net loss by the weighted average number of vested
common shares outstanding for the period. Diluted net loss per
share is calculated giving effect to all dilutive potential
common shares, including options, warrants and preferred stock.
A reconciliation of the numerators and denominators used in the
basic and diluted net loss per share amounts follows:

|                                                  |                                                                   |                             |        |         |   |      |        |         |   |   |       |         |  
|------------------------------------------------- | ----------------------------------------------------------------- | --------------------------- | ------ | ------- | - | ---- | ------ | ------- | - | - | ----- | ------- | -
|                                                  |                                                                   |                            
|                                                  |                                                                   | Fiscal year ended March 31,
|                                                  |                                                                   |                            
|                                                  |                                                                   | 2002                        |        | 2001    |   | 2000
|                                                  |                                                                   |                             |        |         |   |     
|                                                  |                                                                   |                            
|                                                  |                                                                   | (In thousands)             
|Numerator:                                        |                                                                   |                             |        |         |   |      |        |         |   |   |       |        
|                                                  | Net loss                                                          |                             | $      | (19,678 | ) |      | $      | (56,731 | ) |   | $     | (21,653 | )
|                                                  |                                                                   |                             |        |         |   |      |        |         |   |   |       |        
|Denominator:                                      |                                                                   |                             |        |         |   |      |        |         |   |   |       |        
|                                                  | Weighted average common shares outstanding                        |                             |        | 28,315  |   |      |        | 26,170  |   |   |       | 12,780  |  
|                                                  | Weighted average unvested common shares subject
    to repurchase |                             |        | (355    | ) |      |        | (1,820  | ) |   |       | (3,270  | )
|                                                  |                                                                   |                             |        |         |   |      |        |         |   |   |       |        
|Denominator for basic and diluted calculation     |                                                                   |                             | 27,960 |         |   |      | 24,350 |         |   |   | 9,510 |        
|                                                  |                                                                   |                             |        |         |   |      |        |         |   |   |       |        
|Net loss per common share  basic and
    diluted |                                                                   | $                           | (0.70  | )       |   | $    | (2.33  | )       |   | $ | (2.28 | )      
|                                                  |                                                                   |                             |        |         |   |      |        |         |   |   |       |        

The following outstanding stock options, shares
subject to repurchase by the Company and warrants have been
excluded from the calculation of diluted net loss per common
share because all such securities are antidilutive for all
periods presented (in thousands):

|                             |  |                             |       |      |  |      |       |  |  |  |       | 
|---------------------------- |  | --------------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                             |  |                            
|                             |  | Fiscal year ended March 31,
|                             |  |                            
|                             |  | 2002                        |       | 2001 |  | 2000
|                             |  |                             |       |      |  |     
|Options                      |  |                             | 8,410 |      |  |      | 7,696 |  |  |  | 4,496 | 
|Shares subject to repurchase |  |                             | 389   |      |  |      | 1,821 |  |  |  | 3,270 | 
|Warrants                     |  |                             |      |      |  |      |      |  |  |  | 117   | 

Recent accounting pronouncements

In July 2001, the FASB issued SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 established new standards
for accounting and reporting requirements for business
combinations and requires that the purchase method of accounting
be used for all business

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

combinations initiated after June 30, 2001.
Use of pooling-of-interests method is prohibited. SFAS
No. 142 established new standards for goodwill acquired in
business combination, eliminated amortization of goodwill and
set forth methods to periodically evaluate goodwill for
impairment. Intangible assets with a determined useful life will
continue to be amortized over that life. SFAS No. 141 and
142 are effective for business combinations completed after
June 30, 2001. Digital Impact adopted these statements on
April 1, 2002.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which is required to be applied
starting with fiscal years beginning after December 15,
2001. SFAS No. 144 requires, among other things, the
application of one accounting model for long-lived assets that
are impaired or to be disposed of by sale. The adoption of SFAS
No. 144 is not expected to have a significant impact on our
financial statements or results of operations.

Note 3. Business Combinations

MineShare, Inc.

Effective July 31, 2000, Digital Impact
acquired MineShare, Inc. (MineShare) for
approximately $31.9 million. In connection with the
acquisition, which has been accounted for under the purchase
method, Digital Impact recorded approximately $26.3 million
in goodwill. Under the terms of the acquisition approximately
1,855,700 shares of Digital Impacts common stock were
issued in exchange for 100% of the outstanding preferred and
common shares of MineShare. Additionally, the Company assumed
MineShares outstanding stock options and warrants and
reserved approximately 132,700 shares of the Companys
common stock for issuance upon exercise of these options and
warrants. The acquisition was effected by means of a merger
pursuant to which a wholly owned subsidiary of the Company was
merged with and into MineShare, with MineShare as the surviving
corporation. The acquisition has been accounted for as a
purchase.

The allocation of the $31.9 million purchase
price is summarized as follows (amounts in thousands):

|                                                    |                     |   |        |        | 
|--------------------------------------------------- | ------------------- | - | ------ | ------ | 
|Net assets (deficit) at the date of
    acquisition |                     | $ | (3,368 | )     
|Goodwill                                            |                     |   | 26,273 |       
|In-process technology                               |                     |   | 4,432  |       
|Purchased technology                                |                     |   | 1,930  |       
|Other intangibles                                   |                     |   | 2,660  |       
|                                                    |                     |   |        |       
|                                                    | Net assets acquired |   | $      | 31,927 | 
|                                                    |                     |   |        |       

The amounts allocated to goodwill and other
intangible assets was being amortized over a three-year period.
The amount allocated to the purchased in-process technology and
other items was determined based on an appraisal completed by an
independent third party using established valuation techniques.
The amount allocated to intangibles was determined based on an
appraisal completed by an independent third party using
established valuation techniques. The in-process technology
percentage of completion was estimated to be 65%. The value of
this in-process technology was determined by estimating the
costs to develop the purchased in-process technology into a
commercially viable product, estimating the resulting net cash
flows from the sale of the product resulting from the completion
of the in-process technology and discounting the net cash flows
back to their present value. The purchased in-process technology
was expensed upon acquisition, because technological feasibility
had not been established and no future alternative uses existed.

The purchase price of $31.9 million, was
based on the average closing price of Digital Impacts
stock from July 12, 2000 to July 26, 2000, five
trading days before and after the merger agreement was
announced, plus the fair value of the vested options and
warrants assumed by Digital Impact in the merger, calculated
using

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

the Black Scholes option pricing model, and other
costs directly related to the merger as follows (amounts in
thousands):

|                                                       |       |   |        |        | 
|------------------------------------------------------ | ----- | - | ------ | ------ | 
|Fair market value of Digital Impacts common
    stock |       | $ | 30,304 |       
|Fair value of options and warrants assumed             |       |   | 841    |       
|Acquisition related costs                              |       |   | 782    |       
|                                                       |       |   |        |       
|                                                       | Total |   | $      | 31,927 | 
|                                                       |       |   |        |       

The following unaudited pro forma revenues, net
loss, and net loss per share data for the twelve months ended
March 31, 2001 and 2000 are based on the respective
historical financial statements of the Company and MineShare.
The pro forma data reflects the consolidated results of
operations as if the merger with MineShare had occurred at the
beginning of each of the periods indicated and includes the
amortization of the resulting goodwill and other intangible
assets. The pro forma financial data presented is not
necessarily indicative of the Companys results of
operations that might have occurred had the transaction been
completed at the beginning of the periods specified, and do not
purport to represent what the Companys consolidated
results of operations might be for any future period.

|                                                  |  |                       |         |      |  |   |         |  
|------------------------------------------------- |  | --------------------- | ------- | ---- |  | - | ------- | -
|                                                  |  |                      
|                                                  |  | Twelve months ended  
|                                                  |  | March 31,            
|                                                  |  |                      
|                                                  |  | 2001                  |         | 2000
|                                                  |  |                       |         |     
|                                                  |  |                      
|                                                  |  | (Unaudited Pro Forma)
|                                                  |  | (In thousands, except
|                                                  |  | per share data)      
|Revenue                                           |  | $                     | 40,415  |      |  | $ | 14,829  |  
|Net loss                                          |  | $                     | (59,284 | )    |  | $ | (43,761 | )
|Net loss per common share  basic and
    diluted |  | $                     | (2.26   | )    |  | $ | (3.85   | )

During the year ended March 31, 2001, the
Company recorded a $19.0 million impairment charge to
reduce goodwill resulting from the MineShare acquisition. As of
March 31, 2002 the remaining goodwill and other intangible
assets related to the MineShare acquisition were as follows
(amounts in thousands):

|                     |  |   |       | 
|-------------------- |  | - | ----- | 
|Goodwill             |  | $ | 820   | 
|Purchased technology |  |   | 858   | 
|Assembled workforce  |  |   | 1,182 | 
|                     |  |   |       | 
|Total                |  | $ | 2,860 | 
|                     |  |   |       | 

On April 1, 2002 in connection with the
Companys adoption of SFAS No. 142, the assembled
workforce was reclassified to goodwill and the goodwill of $2.0
million will no longer be amortized.

Note 4. Balance Sheet Components

Property and equipment, net

|                                |  |                |         |      |  |   |        |  
|------------------------------- |  | -------------- | ------- | ---- |  | - | ------ | -
|                                |  |               
|                                |  | March 31,     
|                                |  |               
|                                |  | 2002           |         | 2001
|                                |  |                |         |     
|                                |  |               
|                                |  | (In thousands)
|Furniture and office equipment  |  | $              | 1,369   |      |  | $ | 2,002  |  
|Computer equipment and software |  |                | 19,036  |      |  |   | 17,767 |  
|                                |  |                |         |      |  |   |        |  
|Total cost                      |  |                | 20,405  |      |  |   | 19,769 |  
|Less accumulated depreciation   |  |                | (10,921 | )    |  |   | (6,669 | )
|                                |  |                |         |      |  |   |        |  
|                                |  | $              | 9,484   |      |  | $ | 13,100 |  
|                                |  |                |         |      |  |   |        |  

Depreciation and amortization expense for
property and equipment was approximately $5.8 million,
$4.8 million and $1.6 million for the years ended
March 31, 2002, 2001 and 2000, respectively.

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

During the year ended March 31, 1999, the
Company sold to a financial institution computer equipment and
software at cost and leased-back the assets, which were
classified as capital leases. The cost of the assets acquired
under capital leases was $1.8 million, $1.8 million
and $1.7 million at March 31, 2002, 2001 and 2000,
respectively. The accumulated amortization on these assets was
approximately $1.3 million, $826,000 and $305,000 at
March 31, 2002, 2001 and 2000, respectively.

Intangible Assets

|                         |  |                |        |      |  |   |        |  
|------------------------ |  | -------------- | ------ | ---- |  | - | ------ | -
|                         |  |               
|                         |  | March 31,     
|                         |  |               
|                         |  | 2002           |        | 2001
|                         |  |                |        |     
|                         |  |               
|                         |  | (In thousands)
|Goodwill                 |  | $              | 7,273  |      |  | $ | 7,273  |  
|Purchased technology     |  |                | 1,930  |      |  |   | 1,930  |  
|Assembled workforce      |  |                | 2,660  |      |  |   | 2,660  |  
|                         |  |                |        |      |  |   |        |  
|                         |  |                | 11,863 |      |  |   | 11,863 |  
|Accumulated amortization |  |                | (9,003 | )    |  |   | (6,858 | )
|                         |  |                |        |      |  |   |        |  
|                         |  | $              | 2,860  |      |  | $ | 5,005  |  
|                         |  |                |        |      |  |   |        |  

Note 5. Long-Term Debt and
Commitments

Long-term debt

In March 2001, the Company signed an agreement
with a finance company for a line of credit of
$3.0 million. Amounts borrowed under the agreement bear
interest at a rate equal to the three-year Treasury rate (4.31%
as of March 31, 2002) plus 950 basis points (13.81%) and
are collateralized by the assets purchased with the line of
credit. Through March 31, 2002, the Company has used
$3.0 million of this line of credit, of which
$2.1 million remains outstanding as of March 31, 2002.

In fiscal 2002, the Company signed agreements to
finance the purchase of computer equipment and software. Amounts
borrowed under the agreements totaled $1.1 million, are
collateralized by the assets and bear interest at a rate of
9.0%. As of March 31, 2002, $686,000 remained outstanding.

Capital leases

The company has entered into agreements with
leasing companies for leasing lines of credit totaling
$3.8 million, which bear interest at rates of 6.2% to
10.1%. Amounts borrowed under these agreements totaled
$2.9 million, of which $393,000 remains outstanding at
March 31, 2002. These amounts borrowed are collateralized
by the leased assets.

Operating leases

The Company leases its facilities under operating
leases, which expire between 2003 and 2007. Rent expense for the
years ended March 31, 2002, 2001 and 2000 was
$4.5 million, $3.7 million and $892,000, respectively.

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Future minimum debt and lease payments under
noncancelable capital and operating leases, including lease
commitments entered into as of March 31, 2002, are as
follows (in thousands):

|                                               |                        |           |       |         |  |           |      |     |  |   |       |        | 
|---------------------------------------------- | ---------------------- | --------- | ----- | ------- |  | --------- | ---- | --- |  | - | ----- | ------ | 
|                                               |                        | Long-term |       | Capital |  | Operating
|Year Ending March 31,                          |                        | Debt      |       | Leases  |  | Leases   
|                                               |                        |           |       |         |  |          
|2003                                           |                        | $         | 1,539 |         |  | $         | 333  |     |  | $ | 2,707 |       
|2004                                           |                        |           | 1,249 |         |  |           | 75   |     |  |   | 2,717 |       
|2005                                           |                        |           |      |         |  |           |     |     |  |   | 2,193 |       
|2006                                           |                        |           |      |         |  |           |     |     |  |   | 1,630 |       
|2007 and thereafter                            |                        |           |      |         |  |           |     |     |  |   | 1,408 |       
|                                               |                        |           |       |         |  |           |      |     |  |   |       |       
|                                               | Total minimum payments |           | $     | 2,788   |  |           | $    | 408 |  |   | $     | 10,655 | 
|                                               |                        |           |       |         |  |           |      |     |  |   |       |       
|Less: Amount representing interest             |                        |           |       |         |  |           | (15  | )   |  |   |       |       
|                                               |                        |           |       |         |  |           |      |     |  |   |       |       
|Present value of capital lease obligations     |                        |           |       |         |  |           | 393  |     |  |   |       |       
|Less: Current portion                          |                        |           |       |         |  |           | (320 | )   |  |   |       |       
|                                               |                        |           |       |         |  |           |      |     |  |   |       |       
|Long-term portion of capital lease obligations |                        |           |       |         |  |           | 73   |     |  |   |       |       
|                                               |                        |           |       |         |  |           |      |     |  |   |       |       

Letter of credit

The Company obtained a letter of credit from a
financial institution totaling $1.1 million in lieu of a
security deposit for leased office space. The aggregate amount
of the letters of credit is classified as restricted cash and
held in long-term other assets. No amounts have been drawn
against the letter of credit at March 31, 2002.

Note 6. Stockholders Equity

Reincorporation

In September 1999, the Board of Directors
approved the reincorporation of the Company in the state of
Delaware and increased the Companys authorized common
stock to 100,000,000 shares.

Stock splits

In August 1999, the Company effected a 2-for-1
forward split of its preferred and common stock. The
accompanying financial statements have been retroactively
restated to reflect the effect of this stock split.

Initial public offering

In November 1999, the Company completed its
initial public offering (IPO) of 5,175,000 shares of
its common stock, par value $0.001 per share, which included
675,000 shares issued in connection with the exercise of the
underwriters overallotment option, at $15 per share. The
Company received approximately $70.8 million in cash, net
of underwriting discounts, commissions and other offering costs.
Simultaneously with the closing of the IPO, all of the
Companys remaining preferred stock automatically converted
into an aggregate of approximately 12.3 million shares of
common stock.

Convertible preferred stock

In conjunction with the Companys IPO, the
number of authorized shares of convertible preferred stock, par
value $0.001 per share, was decreased to 5,000,000 shares. As of
March 31, 2002, there were no shares of preferred stock
issued or outstanding.

40



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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Common stock

The Company has issued 6,000,000 shares of its
common stock to the founders of the Company under restrictive
stock purchase agreements, under which the Company has the
option to repurchase issued shares of common stock. Generally
25% of the Companys repurchase rights lapse within one
year, with the remaining rights lapsing at a rate of 2.083% per
month until all shares have been released. At March 31,
2002, all shares issued to founders have been released and no
shares were subject to repurchase. At March 31, 2001,
900,000 outstanding shares of common stock were subject to
repurchase.

Each share of common stock has the right to one
vote. The holders of common stock are also entitled to receive
dividends whenever funds are legally available and when declared
by the Board of Directors, subject to the prior rights of
holders of all classes of stock outstanding having priority
rights as to dividends. No dividends have been declared or paid
through March 31, 2002.

Stock option plans

The Companys 1998 Stock Plan (the
Plan) provides for the grant of options and other
equity-based incentives covering up to 12,643,000 shares of the
Companys common stock to the Companys employees,
directors, and consultants, plus an annual increase to be added
on January 1 of each year, equal to the lesser of 1,500,000
shares, 5% of outstanding shares on such date or a lesser amount
determined by the Board of Directors. Options granted under the
Plan may be incentive stock options or non-statutory stock
options. Incentive stock options may only be granted to
employees. Although the Board of Directors has the authority to
set the period over which options becomes exercisable, generally
the options will become exercisable for 20% or 25% of the option
shares one year from the date of grant and then ratably over the
following 48 or 36 months, respectively. The exercise price
of incentive stock options and non-statutory stock options shall
be no less than 100% and 85%, respectively, of the fair market
value per share of the Companys common stock on the grant
date.

In Connection with the merger with MineShare in
July 2000, the Company assumed all of the outstanding stock
options issued under MineShares 1997 Stock Plan. These
options retain all the rights, terms and conditions of this 1997
Stock Plan. As a result of the assumption of the outstanding
stock options, the Company reserved approximately 130,000 shares
of the Companys common stock and recorded unearned
stock-based compensation of approximately $841,000.

41



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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of the stock option activity for all
plans for the three years ended March 31, 2002 is as
follows:

|                         |  |                       |        |                  |  |   |      | 
|------------------------ |  | --------------------- | ------ | ---------------- |  | - | ---- | 
|                         |  | Outstanding           |        | Weighted        
|                         |  | number of             |        | average exercise
|                         |  | options               |        | price           
|                         |  |                       |        |                 
|                         |  |                      
|                         |  | (Shares in thousands)
|Balances, March 31, 1999 |  |                       | 1,887  |                  |  | $ | 0.08 | 
|Options granted          |  |                       | 3,835  |                  |  | $ | 6.41 | 
|Options exercised        |  |                       | (916   | )                |  | $ | 0.15 | 
|Options cancelled        |  |                       | (338   | )                |  | $ | 2.01 | 
|                         |  |                       |        |                  |  |   |      | 
|Balances, March 31, 2000 |  |                       | 4,468  |                  |  | $ | 5.30 | 
|Options granted          |  |                       | 5,818  |                  |  | $ | 5.49 | 
|Options exercised        |  |                       | (577   | )                |  | $ | 0.56 | 
|Options cancelled        |  |                       | (2,018 | )                |  | $ | 7.24 | 
|                         |  |                       |        |                  |  |   |      | 
|Balances, March 31, 2001 |  |                       | 7,691  |                  |  | $ | 5.29 | 
|Options granted          |  |                       | 5,009  |                  |  | $ | 0.85 | 
|Options exercised        |  |                       | (641   | )                |  | $ | 0.81 | 
|Options cancelled        |  |                       | (3,649 | )                |  | $ | 5.75 | 
|                         |  |                       |        |                  |  |   |      | 
|Balances, March 31, 2002 |  |                       | 8,410  |                  |  | $ | 2.78 | 
|                         |  |                       |        |                  |  |   |      | 

At March 31, 2002, 2001 and 2000, there were
2,612,000, 3,240,000 and 3,390,000 shares available for grant,
respectively.

1999 director option plan

In September 1999, the Company adopted the 1999
Director Option Plan under which 500,000 shares of common stock
have been reserved for issuance to non-employee members of the
Companys Board of Directors. As of March 31, 2002,
30,000 options have been granted under this plan.

Options outstanding and exercisable

The following table summarizes information about
options outstanding and exercisable at March 31, 2002.

|                                    |                 |                |       |                  |  |                |     |                |  |                |      |       |  |  |       |     |  |   |      |       | 
|----------------------------------- | --------------- | -------------- | ----- | ---------------- |  | -------------- | --- | -------------- |  | -------------- | ---- | ----- |  |  | ----- | --- |  | - | ---- | ----- | 
|                                    |                 |                |       |                  |  |               
|                                    |                 | Outstanding    |       |                  |  |               
|                                    |                 |                |       |                 
|                                    |                 |                |       | Weighted         |  |                |     | Exercisable   
|                                    |                 |                |       | Average          |  |                |     |               
|                                    |                 |                |       | Remaining        |  | Weighted       |     |                |  | Weighted      
|                                    |                 | Number of      |       | Contractual Life |  | average        |     | Number of      |  | average       
|                                    |                 | options        |       | (years)          |  | exercise price |     | options        |  | exercise price
|                                    |                 |                |       |                  |  |                |     |                |  |               
|                                    |                 | (in thousands) |       |                  |  |                |     | (in thousands) |  |               
|Range of per share exercise prices: |                 |                |       |                  |  |                |     |                |  |                |      |       |  |  |       |     |  |   |      |      
|                                    | $ 0.02  $ 0.25 |                |       | 330              |  |                |     | 6.7            |  |                | $    | 0.16  |  |  |       | 207 |  |   | $    | 0.14  | 
|                                    | $ 0.50  $ 0.75 |                |       | 3,554            |  |                |     | 9.6            |  |                | $    | 0.70  |  |  |       | 396 |  |   | $    | 0.68  | 
|                                    | $ 0.90  $ 1.94 |                |       | 2,004            |  |                |     | 9.3            |  |                | $    | 1.60  |  |  |       | 859 |  |   | $    | 1.80  | 
|                                    | $ 2.38  $ 7.00 |                |       | 1,505            |  |                |     | 8.0            |  |                | $    | 3.91  |  |  |       | 751 |  |   | $    | 3.90  | 
|                                    | $ 8.00  $17.50 |                |       | 933              |  |                |     | 8.2            |  |                | $    | 9.21  |  |  |       | 425 |  |   | $    | 9.22  | 
|                                    | $30.69  $50.00 |                |       | 84               |  |                |     | 7.9            |  |                | $    | 37.33 |  |  |       | 49  |  |   | $    | 37.40 | 
|                                    |                 |                |       |                  |  |                |     |                |  |                |      |       |  |  |       |     |  |   |      |      
|                                    |                 |                | 8,410 |                  |  |                | 8.9 |                |  | $              | 2.78 |       |  |  | 2,687 |     |  | $ | 3.92 |      
|                                    |                 |                |       |                  |  |                |     |                |  |                |      |       |  |  |       |     |  |   |      |      

42



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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

At March 31, 2001 and March 31, 2000,
there were 1,508,000 and 480,000 options outstanding and
exercisable at a weighted average exercise price of $4.63 and
$0.68, respectively.

Restricted stock grants

In March 2001, the Company issued approximately
548,000 shares of restricted stock with a fair value of $1.34 as
part of a retention program designed to retain key employees.
Half of the restricted stock vested on the date of issuance. The
remainder vested on September 16, 2001. As a result, the
Company recognized approximately $361,000 of compensation
expense in the fiscal year ended March 31, 2001, for the
shares that vested immediately, and recorded unearned
stock-based compensation totaling approximately $375,000 for the
shares that vest in September 2001. The $375,000 of recorded
unearned stock-based compensation was recognized as stock-based
compensation expense in the fiscal year ended March 31,
2002.

In April 2001, the Company issued approximately
797,500 shares of restricted stock with a fair value of $1.17 in
exchange for the cancellation of approximately 737,500 options.
The restricted stock was issued with a purchase price of $0.001
with one-sixth of the stock vesting on the grant date and the
remainder vesting over three years.

In December 2001, the Company issued
approximately 375,000 restricted stock units with a fair value
of $0.73 per underlying share to an executive officer in
exchange for the cancellation of 375,000 options. Approximately
140,000 restricted stock units were vested on the grant date,
with the remaining units vesting quarterly through February 2004.

Employee stock purchase plan

In September 1999, the Board of Directors adopted
the employee stock purchase plan under which 1.0 million
shares have been reserved for issuance. That amount is subject
to an annual increase as defined in the plan document. The 1999
employee stock purchase plan contains successive six-month
offering periods and the price of stock purchased under the plan
is 85% of the lower of the fair value of the common stock either
at the beginning of the period or at the end. As of
March 31, 2002, the Company had issued 806,000 shares under
the plan at a weighted average price of $2.44.

Pro forma stock-based compensation

The Company has adopted the disclosure-only
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Had compensation cost been
determined based on the fair value at the grant date for the
awards for the years ended March 31, 2002, 2001 and 2000
consistent with the provisions of SFAS No. 123, the
Companys net loss would have been as follows (in
thousands, except per share amounts):

|                                                               |  |                      |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------------------------- |  | -------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                               |  |                     
|                                                               |  | Year ended March 31,
|                                                               |  |                     
|                                                               |  | 2002                 |         | 2001 |  | 2000
|                                                               |  |                      |         |      |  |     
|Net loss attributable to common
    stockholders  as reported |  | $                    | (19,678 | )    |  | $    | (56,731 | ) |  | $ | (21,653 | )
|Net loss attributable to common
    stockholders  pro forma   |  | $                    | (23,015 | )    |  | $    | (69,018 | ) |  | $ | (24,323 | )
|Net loss per common share  basic and
    diluted as reported  |  | $                    | (0.70   | )    |  | $    | (2.33   | ) |  | $ | (2.28   | )
|Net loss per common share  basic and
    diluted pro forma    |  | $                    | (0.84   | )    |  | $    | (2.83   | ) |  | $ | (2.56   | )

43



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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Such pro forma disclosures may not be
representative of future compensation cost because options vest
over several years and additional grants are made each year. The
fair value of each option grant is estimated on the date of
grant with the following assumptions used for grants:

|                                         |  |                      |         |                              |  |      |         |      |  |      |         |      |  |  |            |  |  |  |            |  |  |  |            | 
|---------------------------------------- |  | -------------------- | ------- | ---------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  |  | ---------- |  |  |  | ---------- |  |  |  | ---------- | 
|                                         |  |                      |         |                             
|                                         |  | Stock Options        |         | Employee Stock Purchase Plan
|                                         |  |                      |         |                             
|                                         |  |                      |         |                             
|                                         |  | Year ended March 31, |         | Year ended March 31,        
|                                         |  |                      |         |                             
|                                         |  | 2002                 |         | 2001                         |  | 2000 |         | 2002 |  | 2001 |         | 2000
|                                         |  |                      |         |                              |  |      |         |      |  |      |         |     
|Expected volatility                      |  |                      | 115%    |                              |  |      | 100%    |      |  |      | 100%    |      |  |  | 115%       |  |  |  | 100%       |  |  |  | 100%       | 
|Weighted average risk-free interest rate |  |                      | 4.23%   |                              |  |      | 5.63%   |      |  |      | 5.56%   |      |  |  | 3.39%      |  |  |  | 5.44%      |  |  |  | 6.33%      | 
|Expected life (from vesting date)        |  |                      | 4 years |                              |  |      | 4 years |      |  |      | 4 years |      |  |  | 0.75 years |  |  |  | 0.75 years |  |  |  | 0.75 years | 
|Expected dividends                       |  |                      | 0%      |                              |  |      | 0%      |      |  |      | 0%      |      |  |  | 0%         |  |  |  | 0%         |  |  |  | 0%         | 

Based on the above assumptions, the weighted
average fair values per share of options granted below fair
market value were $12.92 and $6.08 for the years ended
March 31, 2001 and 2000. The weighted average fair value
per share of options granted at fair market value in the years
ended March 31, 2002 and 2001 was $0.72 and $3.69,
respectively.

Stock-based compensation

During each of the years ended March 31,
2002 and 2001 the Company recorded unearned stock-based
compensation totaling $1.6 million, which is being
amortized to expense over the period during which the options
and restricted stock vest, generally four years using the method
set out in Example 2 of FASB Interpretation No. 28
(FIN 28). Under the FIN 28 method, each
vested tranche of options is accounted for as a separate option
grant awarded for past services. Accordingly, the compensation
expense is recognized over the period during which the services
have been provided. This method results in accelerated
recognition of the compensation expense. For the years ended
March 31, 2002, 2001 and 2000, the Company recorded
stock-based compensation expense of $2.3 million,
$5.0 million and $9.2 million, respectively, in
respect of options and restricted stock granted to employees and
non-employees.

Warrants

In March 1998, the Company granted fully
exercisable warrants to purchase 86,000 shares of Series A
convertible preferred stock for $0.2083 per share in connection
with the issuance of Series A convertible preferred stock.
Using the Black-Scholes pricing model, the Company determined
that the fair value of the warrants was $12,000 on the date of
grant. During fiscal year 2000, warrants for 48,000 of shares
were exercised to purchase Series A preferred stock. These
shares were converted into common stock at the time of the
Companys initial public offering. During the fiscal year
ended March 31, 2001, the remaining warrants for 38,000
shares were exercised. Instead of paying cash upon the exercise
of the warrants, the warrant holders surrendered 3,200 shares of
common stock back to the Company in a net exercise of the
amount. As of March 31, 2001 none of these warrants were
outstanding.

In February 1999, the Company granted a fully
exercisable warrant to purchase 66,000 shares of Series B
convertible preferred for $1.2085 per share in connection with a
capital lease agreement. Using the Black Scholes pricing model,
the Company determined that the fair value of these warrants was
$52,000 at the time of grant. The value of the warrants was
recorded as a discount on the debt and is being amortized over
the life of the underlying borrowings. Instead of paying cash
upon exercise of the warrants in March 2000, the warrant holders
surrendered 2,158 shares of common stock back to the Company.

44



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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 7. Restructuring Charges

Fiscal 2002 restructuring

In the fourth quarter of fiscal 2002, the
Companys management took certain actions to increase
operational efficiencies and bring costs in line with revenues.
These measures included the involuntary terminations of
approximately 24 employees, as well as the consolidation of some
leased office space. As a consequence, the Company recorded a
$1.2 million charge to operations during the fiscal year
ended March 31, 2002. This charge included approximately
$100,000 for severance-related payments to terminated employees,
approximately $690,000 related to the Companys decision to
exit and reduce certain facilities and approximately $434,000
for the write-off of fixed assets situated in office locations
that were closed or consolidated. As of March 31, 2002, all
restructuring liabilities were paid.

Note 8. Income Taxes

At March 31, 2002, the Company had federal
and state net operating loss carryforwards of approximately
$80.2 million and $34.0 million respectively available
to offset future regular and alternative minimum taxable income,
if any. The Companys federal and state net operating loss
carryforwards begin to expire in the year 2005, if not utilized.

At March 31, 2002, the Company had federal
and state research and development and other credits of
approximately $1.6 million and $1.1 million,
respectively. The research and development credit carryforwards
expire beginning in 2018, if not utilized.

The Tax Reform Act of 1986 limits the use of net
operating loss and tax credit carryforward in certain situations
where changes occur in the stock ownership of a company. If the
Company has been or is subject to an ownership change, as
defined for tax purposes, utilization of the carryforwards could
be restricted. The amount of such limitation, if any, has not
been determined.

Temporary differences which give rise to
significant portions of deferred tax assets and liabilities at
March 31, 2001 and 2000 are as follows (in thousands):

|                                              |                           |           |         |        |  |   |         |        | 
|--------------------------------------------- | ------------------------- | --------- | ------- | ------ |  | - | ------- | ------ | 
|                                              |                           |          
|                                              |                           | March 31,
|                                              |                           |          
|                                              |                           | 2002      |         | 2001  
|                                              |                           |           |         |       
|Net operating loss carryforwards              |                           | $         | 29,259  |        |  | $ | 21,189  |       
|Research and development credit carryover     |                           |           | 2,292   |        |  |   | 2,088   |       
|Fixed assets                                  |                           |           | (717    | )      |  |   | 324     |       
|Stock based compensation                      |                           |           | 2,994   |        |  |   | 2,713   |       
|Capitalized research and development expenses |                           |           | 1,494   |        |  |   |        |       
|Capitalized start-up and other                |                           |           | 1,021   |        |  |   | 1,293   |       
|                                              |                           |           |         |        |  |   |         |       
|                                              | Total deferred tax assets |           |         | 36,343 |  |   |         | 27,607 | 
|Less valuation allowance                      |                           |           | (36,343 | )      |  |   | (27,607 | )     
|                                              |                           |           |         |        |  |   |         |       
|Net deferred tax asset                        |                           | $         |        |        |  | $ |        |       
|                                              |                           |           |         |        |  |   |         |       

The Company has established a 100% valuation
allowance at March 31, 2001 as it appears more likely than
not that no benefit will be realized for its deferred tax assets.

45



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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Rate reconciliation

|                                         |                      |                |        |                |   |                |        |      |   |  |        |      |  
|---------------------------------------- | -------------------- | -------------- | ------ | -------------- | - | -------------- | ------ | ---- | - |  | ------ | ---- | -
|                                         |                      | March 31, 2002 |        | March 31, 2001 |   | March 31, 2000
|                                         |                      |                |        |                |   |               
|Federal tax benefit                      |                      |                | 34.00  | %              |   |                | 34.00  | %    |   |  | 34.00  | %   
|State tax benefit, net of federal        |                      |                | 5.83   |                |   |                | 5.83   |      |   |  | 5.83   |     
|Research and development                 |                      |                |       |                |   |                | 3.68   |      |   |  | 2.44   |     
|Permanent differences                    |                      |                | (2.63  | )              |   |                | (20.72 | )    |   |  | (0.16  | )   
|California net operating loss limitation |                      |                | (1.45  | )              |   |                | 6.07   |      |   |  |       |     
|Capitalized research and development     |                      |                | 8.59   |                |   |                |       |      |   |  |       |     
|Other                                    |                      |                | 0.06   |                |   |                | 2.10   |      |   |  |       |     
|Valuation allowance                      |                      |                | (44.40 | )              |   |                | (30.96 | )    |   |  | (42.11 | )   
|                                         |                      |                |        |                |   |                |        |      |   |  |        |     
|                                         | Total effective rate |                |        | 0.00           | % |                |        | 0.00 | % |  |        | 0.00 | %
|                                         |                      |                |        |                |   |                |        |      |   |  |        |     

Note 9. Related Party Transactions

In January 2002, the Company loaned $300,000 to
William Park, our Chief Executive Officer, to facilitate his
purchase of a primary residence. The loan will be repaid in
three annual installments in January 2003, January 2004 and
January 2005. Interest, compounded annually and paid in full
upon maturity, accrues at a rate of 2.74%. Mr. Park is
required to prepay the loan with 50% of the after-tax proceeds
of any sale by him of the Companys common stock and with
100% of any bonus or severance payment to which he becomes
entitled prior to the full repayment of the loan. In addition,
the loan will become immediately due and payable in full in the
event of certain terminations of Mr. Parks employment.

In February 2002, the Board of Directors approved
a loan in the amount of $150,000 to Gerardo Capiel, the chief
technology officer. Under the terms of the agreement the loan
will be repaid in two installments with $50,000 due in February
2003 and the remaining principal and interest due in August
2003. Interest, compounded annually and paid in full upon
maturity, accrues at a rate of 2.74%. Mr. Capiel is
required to prepay the loan with 50% of the after-tax proceeds
of any sale by him of the Companys common stock and with
100% of any bonus or severance payment to which he becomes
entitled prior to the full repayment of the loan. In addition,
the loan will become immediately due and payable in full in the
event of certain employment termination events. As of
March 31, 2002, no amounts have been borrowed under this
agreement.

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DIGITAL IMPACT, INC.

Valuation and Qualifying Accounts

|                                 |                                 |                |   |            |  |            |   |             |  |  |   |       |  |  |   |     | 
|-------------------------------- | ------------------------------- | -------------- | - | ---------- |  | ---------- | - | ----------- |  |  | - | ----- |  |  | - | --- | 
|                                 |                                 |                |   | Additions  |  |            |   |            
|                                 |                                 | Balance at     |   | Charged to |  |            |   |            
|                                 |                                 | Beginning of   |   | Costs and  |  | Deductions |   | Balance at 
|                                 |                                 | Period         |   | Expenses   |  | Write-Offs |   | End of Year
|                                 |                                 |                |   |            |  |            |   |            
|                                 |                                 |               
|                                 |                                 | (In thousands)
|Fiscal year ended March 31, 2002 |                                 |                |   |            |  |            |   |             |  |  |   |       |  |  |   |    
|                                 | Allowance for doubtful accounts |                | $ | 883        |  |            | $ | 1,034       |  |  | $ | 1,220 |  |  | $ | 697 | 
|                                 |                                 |                |   |            |  |            |   |             |  |  |   |       |  |  |   |    
|Fiscal year ended March 31, 2001 |                                 |                |   |            |  |            |   |             |  |  |   |       |  |  |   |    
|                                 | Allowance for doubtful accounts |                | $ | 170        |  |            | $ | 1,935       |  |  | $ | 1,222 |  |  | $ | 883 | 
|                                 |                                 |                |   |            |  |            |   |             |  |  |   |       |  |  |   |    
|Fiscal year ended March 31, 2000 |                                 |                |   |            |  |            |   |             |  |  |   |       |  |  |   |    
|                                 | Allowance for doubtful accounts |                | $ | 10         |  |            | $ | 160         |  |  | $ |      |  |  | $ | 170 | 
|                                 |                                 |                |   |            |  |            |   |             |  |  |   |       |  |  |   |    

47



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CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by
reference in the Registration Statements on Form S-8
(Nos. 333-67686 and 333-83032) of Digital Impact, Inc. of
our report dated April 24, 2002 relating to the financial
statements and financial statement schedule, which appears in
this Form 10-K.

PRICEWATERHOUSECOOPERS LLP

San Jose, California

June 6, 2002


48



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##### Table of Contents






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.



| |                     
| | --------------------
| | DIGITAL IMPACT, INC.



| |     |                 
| | --- | ----------------
| | By: | /s/ WILLIAM PARK

| |                                          
| | -----------------------------------------
| |                                          
| | William Park                             
| | President and Chief Executive
    Officer

Dated: June 6, 2002

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
William Park and David Oppenheimer as his or her
attorney-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
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 on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                       |  |                                                                                                                            |  |              |  |     
|-------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ----
|                                       |  | Signature                                                                                                                  |  | Title        |  | Date
|                                       |  |                                                                                                                            |  |              |  |     
|                                      
|/s/ WILLIAM PARKWilliam Park           |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)                                          |  | June 6, 2002
|                                      
|/s/ DAVID OPPENHEIMERDavid Oppenheimer |  | Senior Vice President, Finance, Chief Financial
    Officer and Treasurer (Principal Financial and
    Accounting Officer) |  | June 6, 2002
|                                      
|/s/ GERARDO CAPIELGerardo Capiel       |  | Chief Technology Officer, Director                                                                                         |  | June 6, 2002
|                                      
|/s/ RUTHANN QUINDLENRuthann Quindlen   |  | Director                                                                                                                   |  | June 6, 2002
|                                      
|/s/ WARREN PACKARDWarren Packard       |  | Director                                                                                                                   |  | June 6, 2002
|                                      
|/s/ MICHAEL BROWNMichael Brown         |  | Director                                                                                                                   |  | June 6, 2002
|                                      
|/s/ EDWARD J. SPIEGELEdward J. Spiegel |  | Director                                                                                                                   |  | June 6, 2002

49



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##### Table of Contents



EXHIBIT INDEX

|        |          |             |  |                                                                                                                                                                                                                                                                                                                   
|------- | -------- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 2.1(2)   |             |  | Agreement and Plan of Reorganization dated as of
    July 19, 2000, by and among the Registrant, Candlestick
    Acquisition Corp., MineShare, Inc., David Mariani, as the
    Founding Shareholder, David Mariani, as Shareholder
    Representative, and Computershare Investor Services, as Exchange
    Agent.
|        | 2.2(2)   |             |  | Agreement and Plan of Merger among MineShare,
    Inc. and Candlestick Acquisition Corp. dated as of July 31,
    2000.                                                                                                                                                                                           
|        | 3.1(1)   |             |  | Form of Amended and Restated Certificate of
    Incorporation of the Registrant                                                                                                                                                                                                                                   
|        | 3.2(1)   |             |  | Bylaws of the Registrant                                                                                                                                                                                                                                                                                          
|        | 4.1(1)   |             |  | Amended and Restated Investor Rights Agreement                                                                                                                                                                                                                                                                    
|        | 4.2(6)   |             |  | Registration Rights Agreement, dated
    July 31, 2000, by and among the Registrant and each of the
    Stockholders listed on Exhibit A thereto.                                                                                                                                                                 
|        | 10.1(5)  |             |  | Registrants 1998 Stock Plan, as Amended and
    Restated*                                                                                                                                                                                                                                                        
|        | 10.2(1)  |             |  | Registrants 1999 Employee Stock Purchase
    Plan*                                                                                                                                                                                                                                                               
|        | 10.3(1)  |             |  | Registrants 1999 Director Option Plan*                                                                                                                                                                                                                                                                           
|        | 10.4(1)  |             |  | Employment Agreement by and between Registrant
    and David Oppenheimer*                                                                                                                                                                                                                                         
|        | 10.5(7)  |             |  | Employment Agreement by and between Registrant
    and Kevin Johnson*                                                                                                                                                                                                                                             
|        | 10.7(1)  |             |  | Master Lease Agreement by and between Registrant
    and Comdisco, Inc.                                                                                                                                                                                                                                           
|        | 10.8(1)  |             |  | Standard Form Lease by and between
    Registrant and Casiopea Venture Corporation                                                                                                                                                                                                                                
|        | 10.9     |             |  | Standard Form Lease by and between
    Registrant and Casiopea Venture Corporation                                                                                                                                                                                                                                
|        | 10.10(1) |             |  | Form of Indemnification Agreement by and between
    Registrant and each of its directors and executive officers*                                                                                                                                                                                                 
|        | 10.12(6) |             |  | Master Loan and Security Agreement by and between
    the Registrant and Wells Fargo Equipment Finance, Inc.                                                                                                                                                                                                      
|        | 10.13(6) |             |  | Form of Retention Agreement with Key Employees                                                                                                                                                                                                                                                                    
|        | 10.14    |             |  | Form of Retention Agreement with a Key Employee                                                                                                                                                                                                                                                                   
|        | 10.15    |             |  | Form of Retention Agreement with a Key Employee                                                                                                                                                                                                                                                                   
|        | 10.16    |             |  | Promissory Note by and between the Registrant and
    William Park                                                                                                                                                                                                                                                
|        | 21.1     |             |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                    
|        | 23.1     |             |  | Consent of Independent Auditors (included on
    page 48 of this Report)                                                                                                                                                                                                                                          
|        | 24.1     |             |  | Power of Attorney (included on page 49 of
    this Report)                                                                                                                                                                                                                                                        
|        | 99.1(4)  |             |  | Note Conversion Agreement between Registrant and
    Enterprise Partners III, Associates, LLP and Enterprise Partners
    III, LLP, dated as of February 16, 2001                                                                                                                                                 






|  |                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------
|* | Indicates management contracts or compensatory
    plans or arrangements required to be filed as exhibits to this
    Report on Form 10-K.



|    |                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Digital
    Impacts registration statement on Form S-1, File
    No. 333-87299, originally filed with the Commission on
    September 17, 1999, as subsequently amended.
|   
|(2) | Incorporated by reference to Digital
    Impacts Report on Form 8-K, filed with the Commission
    on August 14, 2000.                                                                               
|   
|(3) | Incorporated by reference to Digital
    Impacts Report on Form 8-K, filed with the Commission
    on February 16, 2001.                                                                             
|   
|(4) | Incorporated by reference to Exhibit 99.1 of
    Digital Impacts Report on Form 8-K filed with the
    Commission on February 16, 2001.                                                              



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##### Table of Contents





|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(5) | Incorporated by reference to Digital
    Impacts proxy statement filed with the Commission on
    June 22, 2000.   
|   
|(6) | Incorporated by reference to Digital
    Impacts Report on 10-K filed with the commission on
    June 13, 2001.    
|   
|(7) | Incorporated by reference to Digital
    Impacts Report on 10-Q filed with the Commission on
    February 14, 2002.