##### 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,
    2003
|                                            
|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

Indicate by check mark whether registrant is an
accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes o     No 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 September 30,
2002 as reported on the Nasdaq National Market, was
approximately $25.0 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 6, 2003, the Registrant had
outstanding approximately 31.6 million shares of Common
Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our definitive Proxy Statement for
our 2003 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                                            
|PART II      
|              | Item 5.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                                                
|              | Item 14.Controls and Procedures                                                                       
|              | Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 10.20
|EXHIBIT 10.21
|EXHIBIT 21.1 
|EXHIBIT 99.1 
|EXHIBIT 99.2 



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##### Table of Contents



FORM 10-K

ANNUAL REPORT


For the Year Ended March 31,
2003


TABLE OF CONTENTS

|               |  |                                                                                                    |    |      |    | 
|-------------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                                    |    | Page
|               |  |                                                                                                    |    |     
|PART I        
|Item 1.        |  | Business                                                                                           |    |      | 1  | 
|Item 2.        |  | Properties                                                                                         |    |      | 6  | 
|Item 3.        |  | Legal Proceedings                                                                                  |    |      | 6  | 
|Item 4.        |  | Submission of Matters to a Vote of Security
    Holders                                            |    |      | 7  | 
|PART II       
|Item 5.        |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |    |      | 8  | 
|Item 6.        |  | Select Consolidated Financial Data                                                                 |    |      | 10 | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Conditions and Results of Operations         |    |      | 11 | 
|Item 7a.       |  | Quantitative and Qualitative Disclosure About
    Market Risk                                      |    |      | 28 | 
|Item 8.        |  | Financial Statements and Supplementary Data                                                        |    |      | 28 | 
|Item 9.        |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |    |      | 53 | 
|PART III      
|Item 10.       |  | Directors and Executive Officers of the Registrant                                                 |    |      | 53 | 
|Item 11.       |  | Executive Compensation                                                                             |    |      | 53 | 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Shareholder Matters |    |      | 53 | 
|Item 13.       |  | Certain Relationships and Related Transactions                                                     |    |      | 53 | 
|Item 14.       |  | Controls and Procedures                                                                            |    |      | 53 | 
|PART IV       
|Item 15.       |  | Exhibits, Financial Statements Schedules and
    Reports on Form 8-K                               |    |      | 54 | 
|Signatures     |  |                                                                                                    | 57 |     
|Certifications |  |                                                                                                    | 58 |     

i



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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 IMPACT hosted application
(IMPACT) forms the core of our online direct
marketing solutions. Leveraging a scalable, hosted technology
infrastructure, the IMPACT application facilitates many aspects
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 integrated marketing and analytics
workflow 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.

Digital Impact is organized into two segments:
Customer Marketing and Professional Services. The respective
revenue and gross profit of each of these segments is detailed
in Note 8 to the Consolidated Financial Statements.

1



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Customer Marketing 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 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 clients guidance, the
Campaign Services team targets, tests and executes email
marketing campaigns utilizing the IMPACT hosted application.
Clients 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.

Professional Services

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

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 competitiveness of our
product and service solutions. Digital Impact invests
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, 2003 we spent $7.0 million on research
and development activities.

Sales and Marketing

We sell our products and services in the United
States through a sales and marketing organization that consisted
of 69 employees as of March 31, 2003. These employees
are primarily located at our headquarters in

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San Mateo, California and also in our office in
New York City. We also maintain a sales and client services
organization of 9 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 500 to smaller
corporations. For the year ended March 31, 2003, one
customer, Hewlett Packard, accounted for more than 10% of our
total revenues and outstanding receivables, representing 14% of
total revenues and 18% of outstanding receivables at
March 31, 2003.

Competition

The market for online direct marketing services
is highly competitive, evolves rapidly and experiences rapid
technological change. We expect these market conditions to
continue as the use of the Internet for direct marketing expands
and because there are limited barriers to entry into our market.

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



| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | Breadth and 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                                                   
|
| |  | Credibility of clients and their willingness to
    act as references

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, Bigfoot Interactive, eDialog and
InfoUSA, as well as the in-house information technology
departments of our existing and prospective clients.

In addition, we expect competition to persist 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.

Intellectual Property

We rely upon a combination of patent, copyright,
trade secret and trademark laws to protect our intellectual
property. We currently have one issued U.S. patent 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

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essential to establishing and maintaining a
technology leadership position. Others may develop technologies
that are similar or superior to our technology and may receive
and enforce patents on such technology.


Government Regulation

Legislation has been enacted in several states
restricting or regulating the sending of unsolicited commercial
email. The federal government, foreign governments and several
other state governments 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, driven
primarily by our retail clients, but we are unable to isolate
and predict the magnitude of these effects.

Employees

As of March 31, 2003, we had a total of
266 full-time employees. Of the total number of employees,
34 were engaged in research and development, 69 in sales,
marketing and business development, 128 in account management,
professional services, production and technical support and 35
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.

Where You Can Find More Information

Our principal executive offices are located at
177 Bovet Road, San Mateo, California 94402, and our
telephone number at this address is (650) 356-3400. You may
request a copy of our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to these reports filed
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, at no cost, by writing or telephoning us
at our address above (Attention: Investor Relations). Our SEC
filings are also available to the public from the SECs web
site at http://www.sec.gov. Our Internet address is
http://www.digitalimpact.com. The information on our web site is
not incorporated by reference into this report.

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Executive Officers

The following table sets forth certain
information regarding the executive officers of the Company as
of June 6, 2003:

|                   |  |     |    |          |  |                                                                              
|------------------ |  | --- | -- | -------- |  | -----------------------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|William Park       |  |     | 35 |          |  | President, Chief Executive Officer and Chairman
    of the Board of Directors
|Gerardo Capiel     |  |     | 34 |          |  | Chief Technology Officer and Director                                        
|Kevin Johnson      |  |     | 38 |          |  | Senior Vice President, Products and Marketing                                
|David Oppenheimer  |  |     | 46 |          |  | Senior Vice President, Finance, Chief Financial
    Officer and Treasurer    
|John Ouren         |  |     | 33 |          |  | Senior Vice President, World Wide Field Operations                           
|Hans Peter Brondmo |  |     | 40 |          |  | Senior Vice President, Corporate Development and
    Strategy                

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.

Kevin Johnsonhas
served as our Senior Vice President, Products and Marketing
since February 2003, and as Senior Vice President, Client
Services from December 2001 to January 2003. 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. Before founding
Passporta.com, 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.

David Oppenheimerhas served as our Senior Vice
President, Finance, Chief Financial Officer and Treasurer since
July 1999. 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
Honeywell, Inc, formerly AlliedSignal, Inc., an advanced
technology and manufacturing company, including Chief Financial
Officer of AlliedSignal Electronic Materials, Vice President of
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.

John Ourenhas
served as our Senior Vice President, World Wide Field Operations
since February 2003, as Senior Vice President, Professional
Services from April 2002 to January 2003, 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 led the
companys Electronic Commerce Special Initiative and
Financial

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Institutions Group. Mr. Ouren holds a B.S.
in electrical engineering from the University of Texas and an
M.B.A. from Stanford University.


Hans Peter
Brondmohas served as our
Senior Vice President, Corporate Development and Strategy since
February 2003 and as Digital Impact Fellow from November 2001 to
January 2003. Prior to joining Digital Impact, Mr. Brondmo
founded and served as CEO and chairman of email marketing
pioneer Post Communications, (now YesMail). Brondmo has founded
three high-tech companies and has also held various positions
with Avid Technology, Apple Computer, CERN (the Center for
European Nuclear Research) and McKinsey & Co.
Mr. Brondmo holds a B.S. in computer science and performed
his graduate studies at the Media Laboratory and in the
Technology and Policy Program all at the Massachusetts Institute
of Technology.






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

Our principal executive offices are located in
San Mateo, California, where we lease approximately 36,000
square feet under three leases that expire in dates ranging from
2005 to 2007. Digital Impact also leases office space in New
York City and London for local sales and client service
personnel, and Santa Monica, California for research and
development staff. Our Cupertino facility is not occupied and is
available for sublease.

A summary of our significant leased office
facilities is as follows:

|                                     |  |                       |        |               |  |              
|------------------------------------ |  | --------------------- | ------ | ------------- |  | -------------
|                                     |  | Approximate Number of |        | Expiration of
|Location                             |  | Square Feet Leased(1) |        | Lease        
|                                     |  |                       |        |              
|San Mateo, California (headquarters) |  |                       | 36,000 |               |  | March 2007   
|New York, New York                   |  |                       | 12,000 |               |  | August 2008  
|Cupertino, California                |  |                       | 10,000 |               |  | March 2004   
|Santa Monica, California             |  |                       | 13,000 |               |  | December 2003
|London, England                      |  |                       | 1,000  |               |  | August 2003  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We currently occupy approximately 32,000 square
    feet of our San Mateo facility, approximately 6,000 square feet
    of our New York facility, 4,200 square feet of our Santa Monica
    facility and 1,000 square feet of our London facility. We do not
    occupy the Cupertino facility. We are currently pursuing several
    options with respect to unused space in our New York facility
    and our Cupertino facility, including subletting all or a
    portion of the vacant space in the facilities. As of
    March 31, 2003 the remaining obligations under the San
    Mateo, New York and Cupertino leases are approximately
    $6.7 million, $2.7 million and $338,000, respectively.

We are continually evaluating our facilities
requirements. Periodically, we evaluate the expenses likely to
be incurred for our facilities, and where appropriate, have
exited facilities and taken restructuring charges with respect
to these expenses. We cannot assure you that there will not be
additional restructuring charges recognized with respect to our
excess or idle facilities.




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 have been
consolidated under the caption Digital Impact, Inc., Initial
Public Offering Securities Litigation, Civil Action
No. 01-CV-4942. The complaints allege, among other things,
that undisclosed and improper practices concerning the
allocation of the Companys IPO shares, violated 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 in New York 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. Each of these
companies, including Digital Impact, filed a motion to dismiss
the complaints in the Southern District of

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New York in July 2002. In October 2002, the
complaints against the individual current and former directors
and officers were dismissed without prejudice. In February 2003,
the motion to dismiss was denied in part and granted in part.
The court did not dismiss any claims against Digital Impact.
However, 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.


On February 28, 2003, a related case,
captioned Liu v. Credit Suisse First Boston, et al., Case
No. 03-20459, was filed in the United States District Court
for the Southern District of Florida. The complaint names as
defendants over forty companies and their respective directors
and officers, including Digital Impact and two of its officers.
The Liu plaintiff is not alleged to have bought or sold
Digital Impact stock. The Company anticipates that this new case
will be transferred to the United States District Court for the
Southern District of New York and coordinated with the existing
IPO-related litigation, discussed above.




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

Not applicable

7



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##### Table of Contents






PART II




Item 5. 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 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 | 
|Fiscal Year 2003: |                                        |      |   |      |  |  |   |     
|                  | First quarter (from 4/01/02  6/30/02) |      | $ | 3.25 |  |  | $ | 1.53 | 
|                  | Second quarter                         |      |   | 1.90 |  |  |   | 1.25 | 
|                  | Third Quarter                          |      |   | 2.03 |  |  |   | 1.23 | 
|                  | Fourth Quarter                         |      |   | 2.01 |  |  |   | 1.26 | 

On March 31, 2003, the last sale price of
our common stock reported by the Nasdaq National Market was
$1.48 per share. On June 6, 2003 the last sale price of our
common stock reported by the Nasdaq National Market was $1.75
per share. As of June 6, 2003, the approximate number of
common stockholders of record was approximately 3,300.

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) 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.

(c) Equity
compensation plans

We maintain the 1998 Stock Plan (the employee
plan), the 1999 Director Equity Plan (the director plan) and the
1999 Employee Stock Purchase Plan (the ESPP), pursuant to which
we may grant equity

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##### Table of Contents



awards to eligible persons. The following table
sets forth aggregate information regarding the shares of our
common stock that may be issued under these plans as of
March 31, 2003.


|                                                           |  |                            |                      |                   |  |                                |      |  |  |  |             |     
|---------------------------------------------------------- |  | -------------------------- | -------------------- | ----------------- |  | ------------------------------ | ---- |  |  |  | ----------- | ----
|                                                           |  |                            |                      |                   |  | Number of Securities Remaining
|                                                           |  |                            |                      |                   |  | Available for Future Issuance 
|                                                           |  |                            |                      | Weighted-Average  |  | Under Equity Compensation     
|                                                           |  | Number of Securities to be |                      | Exercise Price of |  | Plans (Excluding Securities to
|                                                           |  | Issued Upon Exercise of    |                      | Outstanding       |  | be Issued Upon Exercise of    
|Plan Category                                              |  | Outstanding Options        |                      | Options           |  | Outstanding Options)          
|                                                           |  |                            |                      |                   |  |                               
|Equity compensation plans approved by stockholders         |  |                            | 7,875,622            |                   |  | $                              | 2.56 |  |  |  | 5,273,588(1 | )(2)
|Equity compensation plans not approved by
    stockholders |  |                            | Not applicable(3)(4) |                   |  |                                |      |  |  |  |             |     



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The employee plan incorporates an evergreen
    formula pursuant to which on January 1 of each year, the
    aggregate number of shares reserved for issuance under the plan
    will increase by a number of shares equal to the lesser of
    1,500,000 shares, 5% of our outstanding shares or an amount
    determined by our board of directors. The director plan
    incorporates an evergreen formula pursuant to which on
    January 1 of each year, the aggregate number of shares
    reserved for issuance under the plan will increase by a number
    of shares equal to the lesser of 250,000 shares or an
    amount determined by our board of directors. The ESPP
    incorporates an evergreen formula pursuant to which on
    September 16 of each year, the aggregate number of shares
    reserved for issuance under the plan will increase by a number
    of shares equal to the lesser of 700,000 shares, 2% of our
    outstanding shares or an amount determined by our board of
    directors.
|   
|(2) | Of these shares, 3,484,157 shares remain
    available for grant under the employee plan,
    1,210,000 shares remain available for grant under the
    director plan and 579,431 shares remain available for
    purchase under the ESPP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(3) | In our acquisition of MineShare, Inc. in July
    2000, we assumed options to purchase common stock under the
    MineShare, Inc. 1997 Stock Plan. As of March 31, 2003,
    options to purchase 59,165 shares of our common stock were
    outstanding under this plan having a weighted average exercise
    price of $3.57 per share. No further awards will be made under
    this plan. Statistics regarding the assumed options are not
    included in the table above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(4) | All of our equity compensation plans under which
    we may grant awards have been approved by our stockholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

9



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Item 6. Selected Consolidated
Financial Data

The selected consolidated financial data set
forth below with respect to Digital Impacts Consolidated
Statement of Operations for each of the years ended
March 31, 2003, 2002 and 2001 and with respect to Digital
Impacts consolidated balance sheets as of March 31,
2003 and 2002 have been derived from the audited financial
statements which are included elsewhere herein. The selected
consolidated data set forth with respect to Digital
Impacts Consolidated Statement of Operations for each of
the periods ended March 31, 2000 and 1999 and with respect
to Digital Impacts consolidated balance sheet as of
March 31, 2001, 2000, and 1999 are derived from the audited
financial statements of Digital Impact which are not included
herein. The selected financial data set forth below is qualified
in its entirety by, and should be read in conjunction with,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated
Financial Statements and the notes to those statements included
elsewhere herein.

|                                                                            |  |                             |        |      |  |      |         |      |  |      |         |      |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                            |  |                            
|                                                                            |  | Fiscal year ended March 31,
|                                                                            |  |                            
|                                                                            |  | 2003                        |        | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                                            |  |                             |        |      |  |      |         |      |  |     
|Statement of Operations Data                                                |  |                             |        |      |  |      |         |      |  |      |         |      |  |   |         |   |  |   |        |  
|Revenues                                                                    |  | $                           | 44,010 |      |  | $    | 39,038  |      |  | $    | 40,153  |      |  | $ | 12,991  |   |  | $ | 1,307  |  
|Gross profit                                                                |  |                             | 25,805 |      |  |      | 21,045  |      |  |      | 22,317  |      |  |   | 6,813   |   |  |   | 633    |  
|Loss from operations                                                        |  |                             | (3,767 | )(1) |  |      | (19,975 | )(2) |  |      | (59,763 | )(3) |  |   | (23,130 | ) |  |   | (3,311 | )
|Net loss                                                                    |  |                             | (3,974 | )(1) |  |      | (19,678 | )(2) |  |      | (56,731 | )(3) |  |   | (21,653 | ) |  |   | (3,240 | )
|Net loss per common share  basic and
    diluted                           |  | $                           | (0.13  | )(1) |  | $    | (0.70   | )(2) |  | $    | (2.33   | )(3) |  | $ | (2.28   | ) |  | $ | (2.86  | )
|Weighted average shares used in basic and diluted
    per share calculation |  |                             | 30,290 |      |  |      | 27,960  |      |  |      | 24,350  |      |  |   | 9,510   |   |  |   | 1,133  |  

|                                                  |  |           |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|------------------------------------------------- |  | --------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ----- | 
|                                                  |  |          
|                                                  |  | March 31,
|                                                  |  |          
|                                                  |  | 2003      |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                  |  |           |        |      |  |      |        |      |  |     
|Balance Sheet Data                                |  |           |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Cash, cash equivalents and short-term investments |  | $         | 23,767 |      |  | $    | 25,588 |      |  | $    | 35,038 |  |  | $ | 68,073 |  |  | $ | 2,864 | 
|Total assets                                      |  |           | 46,017 |      |  |      | 49,633 |      |  |      | 69,019 |  |  |   | 81,102 |  |  |   | 6,314 | 
|Long-term debt and capital lease obligations      |  |           |       |      |  |      | 1,324  |      |  |      | 2,653  |  |  |   | 726    |  |  |   | 691   | 
|Stockholders equity                              |  |           | 36,455 |      |  |      | 38,889 |      |  |      | 55,555 |  |  |   | 73,530 |  |  |   | 4,370 | 



---



|    |                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Loss from operations, net loss and net loss per
    common share include restructuring charges of $496,000 and
    write-off of fixed assets of $50,000.                                                               
|   
|(2) | Loss from operations, net loss and net loss per
    common share include a restructuring charge of $1.2 million
    and a fixed asset write-off of $0.6 million                                                        
|   
|(3) | 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

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited
consolidated quarterly statement of operations data for the
eight quarters ended March 31, 2003. 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

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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)
|2003                 |              |                                       |   |        |  |            |   |          |  |                   |   |                   |   |  |   |        |   |  |  |        |  |  |   |      
|                     | June 30      |                                       | $ | 10,518 |  |            | $ | 6,165    |  |                   | $ | (1,139            | ) |  | $ | (1,193 | ) |  |  | 29,640 |  |  | $ | (0.04 | )
|                     | September 30 |                                       |   | 11,128 |  |            |   | 6,626    |  |                   |   | (1,145            | ) |  |   | (1,163 | ) |  |  | 29,990 |  |  |   | (0.04 | )
|                     | December 31  |                                       |   | 11,490 |  |            |   | 6,954    |  |                   |   | (254              | ) |  |   | (297   | ) |  |  | 30,510 |  |  |   | (0.01 | )
|                     | March 31     |                                       |   | 10,874 |  |            |   | 6,060    |  |                   |   | (1,229            | ) |  |   | (1,321 | ) |  |  | 31,010 |  |  |   | (0.04 | )
|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 | )

In the fourth quarter of fiscal 2003, Digital
Impact recorded restructuring charges and write-off of fixed
assets totaling $546,000. The charge was primarily related to
closure of our Cupertino facility and severance payments related
to the involuntary termination of 18 employees. (See Note 7 to
the Consolidated Financial Statements.)

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 7 to the Consolidated 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.

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.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 Consolidated 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
Risk Factors, starting on page 23. 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

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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. In accordance with SFAS
No. 142, goodwill will be and has been reviewed annually
for impairment.


On January 22, 2003, the audit committee of
the board of directors approved the use of our auditors,
PricewaterhouseCoopers LLP, for certain tax planning services
and other non-audit services.

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, 2003 the Company had 266
full-time employees.

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, including those related to the
allowance for doubtful accounts, intangible assets,
restructuring costs and contingencies and litigation. Management
bases its estimates 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.

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



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | revenue recognition;                                                                  
|
| |  | restructuring charges;                                                                
|
| |  | accounting for internal-use software;                                                 
|
| |  | estimating valuation allowances, specifically the
    allowance for doubtful accounts;
|
| |  | valuation of long-lived assets and goodwill; and                                      
|
| |  | accounting for stock-based compensation.                                              

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 or email address matching service. ProspectNet
programs involve the strategic placement of a Digital

12



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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. Digital
Impact accounts for revenues and costs associated with Customer
Acquisition programs in accordance with Emerging Issues Task
Force Issue No. 99-19 (EITF 99-19,) Reporting
Revenue Gross as a Principal versus Net as an Agent. The
cost of Customer Acquisition campaigns are estimated using
Company records of outstanding purchase commitments when final
vendor invoices have not been received. The cost of Customer
Acquisition campaigns are recognized in the period that the
programs are executed and are netted against program revenue.


Digital Impact recognizes revenue net of third
party costs because the majority of client and supplier
contracts have the following characteristics: the supplier, not
the Company, is the primary obligor in the arrangement, the
Company has limited latitude in establishing the price charged
to the client, the Companys credit risk is sometimes
mitigated by receiving prepayment or reduced credit terms from
its clients before ordering from the supplier, the Company does
not maintain any inventory related to Customer Acquisition
programs, the Company does not make changes to any data acquired
from the supplier, and the client approves the supplier
selection and the service specifications.

Digital Impact provides other complementary
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 custom solutions, 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 its 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
reasonably assured, then revenue is recognized on a
cash-collected basis.

Restructuring charges.Digital Impacts restructuring
reserve is related to our facilities in Cupertino. In
calculating the restructuring charge we consulted with a third
party real estate firm to determine reasonable estimates of
future sublease income for our idle space, and to determine the
time necessary to identify sublessees. The analysis was
performed based on the current real estate market in the Silicon
Valley area. Digital Impacts restructuring charge related
to future lease commitments is based on a review of this
information. Should market conditions change this information
may be updated.

Accounting for internal-use
software.We account for internal-use
software in accordance with AICPA Statement of
Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal
Use. Internal-use software costs, including any fees
paid to third parties to implement the software, are capitalized
beginning when we have determined various factors are present,
including among others, that the technology exists to achieve
the performance requirements, we have made a decision as to
whether we will purchase the software or develop it internally
and we have authorized funding for the project. Capitalization
of software costs ceases when the software implementation is
substantially complete and is ready for its intended use, and
the capitalized costs are amortized over the softwares
estimated useful life (generally one to two years) using the
straight-line method. The estimated useful life is based on
technical and marketing management judgment as to the product or
feature life cycle. As of March 31, 2003, we had $84,000 of
capitalized internal-use software costs, all of which has been
subject to amortization based upon deployment dates of the
related projects.

When events or circumstances indicate the
carrying value of internal use software might not be
recoverable, we assess the recoverability of these assets by
determining whether the amortization of the asset balance over
its remaining life can be recovered through undiscounted future
operating cash flows. The

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amount of impairment, if any, is recognized to
the extent that the carrying value exceeds the projected
discounted future operating cash flows and is recognized as a
write down of the asset. In addition, if it is no longer
probable that computer software being developed will be placed
in service, the asset will be adjusted to the lower of its
carrying value or fair value, if any, less direct selling costs.
Any such adjustment would result in an expense in the period
recorded, which could have a material adverse effect on our
Consolidated Statement of Operations. Based on our assessment as
of March 31, 2003, we determined that no such impairment of
internal-use software existed.


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 account
disputes, 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 $7.9 million, net of allowance for
doubtful accounts of $345,000, as of March 31, 2003.

Valuation of long-lived assets and goodwill.We assess the impairment of identified
intangibles, long-lived assets and goodwill annually and
whenever events or a change 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 or 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
$11.1 million as of March 31, 2003.

Accounting for Stock-Based
Compensation

The Company accounts for stock-based awards to
employees and directors using the intrinsic value method of
accounting in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25). Under the intrinsic value
method, because the exercise price of the Companys
employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is
recognized in the Companys Consolidated Statement of
Operations. We believe this method is appropriate for the
Company because it avoids the volatility of other expense
methods which determine stock compensation expense typically by
using the Black-Scholes option pricing model which was developed
for use in estimating the value of traded options that have no
vesting restrictions and are fully transferable. In addition,
option pricing models require input of highly subjective
assumptions including the expected stock price volatility.

We have currently elected to apply the
disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. In
accordance with the provisions of SFAS No. 123, the Company
applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
No. 25), and related interpretations in accounting for its
stock option plans.

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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.

|                                                              |                          |                                          |        |        |   |      |       |      |    |   |         |         |   |  |       |       |    |   |         |         |   |  |        |        |   
|------------------------------------------------------------- | ------------------------ | ---------------------------------------- | ------ | ------ | - | ---- | ----- | ---- | -- | - | ------- | ------- | - |  | ----- | ----- | -- | - | ------- | ------- | - |  | ------ | ------ | --
|                                                              |                          |                                         
|                                                              |                          | Year Ended March 31,                    
|                                                              |                          |                                         
|                                                              |                          |                                          |        |        |   |     
|                                                              |                          | 2003                                     |        | 2002   |   | 2001
|                                                              |                          |                                          |        |        |   |     
|                                                              |                          |                                          |        |        |   |      |       |      |    |   |         |        
|                                                              |                          |                                         
|                                                              |                          | (In thousands except percentage amounts)
|Consolidated Statements of
    Operations Data:               |                          |                                          |        |        |   |      |       |      |    |   |         |         |   |  |       |       |    |   |         |         |   |  |        |       
|Net revenues                                                  |                          | $                                        | 44,010 |        |   |      | 100.0 | %    |    | $ | 39,038  |         |   |  | 100.0 | %     |    | $ | 40,153  |         |   |  | 100.0  | %     
|Cost of revenues                                              |                          |                                          | 18,205 |        |   |      | 41.4  |      |    |   | 17,993  |         |   |  | 46.1  |       |    |   | 17,836  |         |   |  | 44.4   |       
|                                                              |                          |                                          |        |        |   |      |       |      |    |   |         |         |   |  |       |       |    |   |         |         |   |  |        |       
|Gross profit                                                  |                          |                                          | 25,805 |        |   |      | 58.6  |      |    |   | 21,045  |         |   |  | 53.9  |       |    |   | 22,317  |         |   |  | 55.6   |       
|                                                              |                          |                                          |        |        |   |      |       |      |    |   |         |         |   |  |       |       |    |   |         |         |   |  |        |       
|Research and development                                      |                          |                                          | 7,042  |        |   |      | 16.0  |      |    |   | 10,573  |         |   |  | 27.1  |       |    |   | 17,163  |         |   |  | 42.7   |       
|Sales and marketing                                           |                          |                                          | 13,758 |        |   |      | 31.3  |      |    |   | 15,612  |         |   |  | 40.0  |       |    |   | 18,146  |         |   |  | 45.2   |       
|General and administrative                                    |                          |                                          | 7,196  |        |   |      | 16.4  |      |    |   | 8,548   |         |   |  | 21.9  |       |    |   | 11,301  |         |   |  | 28.1   |       
|Stock-based compensation                                      |                          |                                          | 386    |        |   |      | 0.8   |      |    |   | 2,319   |         |   |  | 5.9   |       |    |   | 5,049   |         |   |  | 12.6   |       
|Amortization of goodwill                                      |                          |                                          |       |        |   |      | 0.0   |      |    |   | 1,500   |         |   |  | 3.8   |       |    |   | 6,429   |         |   |  | 16.0   |       
|Amortization of purchased intangibles                         |                          |                                          | 644    |        |   |      | 1.5   |      |    |   | 644     |         |   |  | 1.7   |       |    |   | 429     |         |   |  | 1.1    |       
|Goodwill impairment charge                                    |                          |                                          |       |        |   |      |      |      |    |   |        |         |   |  |      |       |    |   | 19,000  |         |   |  | 47.3   |       
|Write-off of acquired in-process research and
    development |                          |                                          |       |        |   |      |      |      |    |   |        |         |   |  |      |       |    |   | 4,563   |         |   |  | 11.4   |       
|Restructuring charges and write-off of fixed
    assets       |                          |                                          | 546    |        |   |      | 1.2   |      |    |   | 1,824   |         |   |  | 4.7   |       |    |   |        |         |   |  |       |       
|                                                              |                          |                                          |        |        |   |      |       |      |    |   |         |         |   |  |       |       |    |   |         |         |   |  |        |       
|                                                              | Total operating expenses |                                          |        | 29,572 |   |      |       | 67.2 |    |   |         | 41,020  |   |  |       | 105.1 |    |   |         | 82,080  |   |  |        | 204.4  |   
|                                                              |                          |                                          |        |        |   |      |       |      |    |   |         |         |   |  |       |       |    |   |         |         |   |  |        |       
|Loss from operations                                          |                          |                                          | (3,767 | )      |   |      | (8.6  | )    |    |   | (19,975 | )       |   |  | (51.2 | )     |    |   | (59,763 | )       |   |  | (148.8 | )     
|Other income and (expense)                                    |                          |                                          | (207   | )      |   |      | (0.4  | )    |    |   | 297     |         |   |  | 0.8   |       |    |   | 3,032   |         |   |  | 7.5    |       
|                                                              |                          |                                          |        |        |   |      |       |      |    |   |         |         |   |  |       |       |    |   |         |         |   |  |        |       
|                                                              | Net loss                 |                                          | $      | (3,974 | ) |      |       | (9.0 | )% |   | $       | (19,678 | ) |  |       | (50.4 | )% |   | $       | (56,731 | ) |  |        | (141.3 | )%
|                                                              |                          |                                          |        |        |   |      |       |      |    |   |         |         |   |  |       |       |    |   |         |         |   |  |        |       

COMPARISON OF THE YEARS ENDED MARCH 31, 2003
AND 2002

Revenues

Our Customer Marketing business provides clients
with comprehensive solutions for creating and executing online
direct marketing programs. Our solutions are designed to enable
marketers to drive revenue and deepen customer relationships
with a comprehensive process that includes: collecting and
managing customer information, analyzing the information to
determine ideal segments and offers, and delivering highly
relevant, individualized email messages. Customer Marketing
represented 72% and 74% of revenue in fiscal 2003 and 2002,
respectively.

The Professional Services group provides
expertise to enhance marketing programs and improve results.
Digital Impact offers clients services in each of the following
categories: Strategy, Analysis, Data Management, Solutions
Engineering, Web Development, Creative and Customer Acquisition.
Professional Services represented 28% and 26% of revenue in
fiscal 2003 and 2002, respectively.

Total revenues increased by 13% to
$44.0 million for the fiscal year ended March 31, 2003
from $39.0 million for the fiscal year ended March 31,
2002. The increase was primarily the result of growth in the
client base and email volume.

The increase in the average number of clients
from fiscal 2002 to fiscal 2003 is primarily the result of
retaining most existing clients and the addition of new mid-cap
and Fortune 1000 clients. The higher email volume for the twelve
months ended March 31, 2003 over the twelve months ended
March 31, 2002 was partially offset by an erosion in
pricing over the twelve-month period. Revenue generated by
Customer

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Marketing activities increased 9% for the twelve
months ended March 31, 2003 over the twelve months ended
March 31, 2002 and represented 72% of net revenues. Revenue
generated by Professional Services increased 22% for the twelve
months ended March 31, 2003 over the twelve months ended
March 31, 2002 and represented 28% of net revenues.


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
$18.2 million for the fiscal year ended March 31, 2003
from $18.0 million for the fiscal year ended March 31,
2002.

The increase in cost of revenue was primarily
related to an increase in equipment depreciation of $690,000, as
a result of our investments in our data center infrastructure
and a $380,000 increase in personnel costs, offset by lower
costs for consultants of $485,000, resulting from reductions in
outside staffing in our services and operations staff, and a
$475,000 reduction in data center rent resulting from lower
negotiated rates. Amortization of capitalized software
development costs was $177,000 and $0 for the fiscal year ended
March 31, 2003 and 2002, respectively.

Gross margin increased to 59% for the fiscal year
2003 from 54% for fiscal 2002. The increase was largely due to
efforts to control expenses while revenue grew by 13%.

Gross margins for Customer Marketing were 63% and
58% for the twelve months ended March 31, 2003 and 2002,
respectively. The rise in gross margin was driven by personnel
efficiencies and lower data center rent, offset by higher
depreciation expense resulting from investments in our data
center infrastructure.

Gross margins for Professional Services were 48%
and 43% for the twelve months ended March 31, 2003 and
2002, respectively. The increase in gross margins is the result
of higher utilization rates for our Professional Service
personnel, as revenue grew 22% and costs increased 11%.

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
purchased intangibles, goodwill impairment charges, write-off of
acquired in-process research and development and restructuring
charges and write-off of fixed assets.

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. Research and
development expense decreased by 33% to $7.0 million for
the year ended March 31, 2003 from $10.6 million for
year ended March 31, 2002. The decrease was mainly
attributable to reductions in personnel costs of
$3.7 million, resulting from a 27 person reduction in
headcount related to restructuring activities and completion of
our IMPACT product, and a $256,000 reduction in outside
consulting expense related to efforts to control costs and meet
development needs with internal personnel, offset by a $400,000
increase in depreciation and the amortization of software
maintenance contracts. We

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capitalized $84,000 and $120,000 for internally
developed software for the fiscal years ended March 31,
2003 and March 31, 2002, respectively. We expect research
and development expense to decrease in absolute dollars and as a
percentage of revenue for the next fiscal year. Research and
development expense is substantially dependent on the level of
development activity and related staffing.


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 12% to
$13.8 million for the fiscal year ended March 31, 2003
from $15.6 million for the year ended March 31, 2002.
The decrease was mainly attributable to a $1.2 million
reduction in personnel costs associated with restructuring
activities, a $360,000 reduction in marketing expenses, and a
$260,000 reduction in recruiting expenses. We expect sales and
marketing expense to decrease in absolute dollars and as a
percentage of revenue for the next fiscal year largely as a
result of cost reductions in fiscal 2003. Sales and marketing
expense can vary as a result of our expectations of future sales
growth. If sales growth were to exceed expectations, sales and
marketing expense may increase in line with revenue growth.

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 16% to $7.2 million
for the year ended March 31, 2003 from $8.5 million
for the year ended March 31, 2002. The decrease was
primarily due to decreased personnel costs of $200,000 related
to an 8% decline in headcount, a $540,000 decrease in bad debt
expense, a $400,000 reduction in outside consulting expense and
a $100,000 decline in travel and entertainment expense. For the
next fiscal year, we expect general and administrative expenses
to increase slightly in absolute dollars and to decline as a
percentage of revenue.

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 $17.4 million, net of forfeitures, from
fiscal 1999 through March 31, 2003. 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 non-cash expense,
decreased 83% to $386,000 for the year ended March 31, 2003
from $2.3 million for the year ended March 31, 2002.
The decline was primarily due to our use of the accelerated
method of amortization for our employee stock-based compensation
arrangements plus the reversal of balances of unamortized
stock-based compensation as a result of employee terminations.

As of March 31, 2003, approximately $125,000
of total unearned deferred stock-based compensation remains to
be amortized in fiscal 2004.

Amortization of goodwill.In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets,goodwill is no longer amortized as of April 1, 2002 but
is periodically tested for impairment. Goodwill amortization
expense was approximately $1.5 million for the twelve
months ended March 31, 2002.

Amortization of purchased intangibles.Amortization of purchased intangibles
consists of the amortization of purchased technology from our
July 2000 acquisition of MineShare. Prior to the quarter ended
September 30, 2002, amortization of purchased intangibles
was a component of research and development expense. These
amounts have been reclassified to conform to the current period
presentation. Amortization of purchased intangibles was $644,000
for the twelve months ended March 31, 2003 and 2002.

Restructuring charge, write-off of fixed
assets.In the fourth fiscal quarter
of 2003, the Company initiated a cost reduction program that
resulted in the involuntary termination of 18 employees and the
closure of our Cupertino facility. The Company recorded a charge
of $546,000 to operations during the fourth fiscal quarter. The
charge related to payments for severance of approximately
$131,000, the accrual for future lease

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payments of our Cupertino office of approximately
$365,000, net of estimated sublease income of zero and the
write-off of fixed assets of $50,000.


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. 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. 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.

During the year ended March 31, 2002 we
recorded a $600,000 loss related to the write-off of fixed
assets.

Other income and (expense).Other income and
(expense) decreased to ($207,000) for the fiscal year ended
March 31, 2003 from $297,000 for the fiscal year ended
March 31, 2002. Other expenses relate primarily to interest
paid on long-term debt. Other income relates to interest income
on cash, cash equivalents and short-term investments. The
decrease in other income and (expense) was largely due to lower
interest income on lower average cash and cash equivalents
balances resulting from the use of cash to fund current
operations, and lower prevailing interest rates.

Income taxes.No
provision for federal and state income taxes was recorded as we
incurred net operating losses from inception through
March 31, 2003. 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, 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 slight erosion in pricing.

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.

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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

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,
most research and development costs have been expensed as
incurred. Research and development expense decreased by 38% to
$10.6 million for the year ended March 31, 2002 from
$17.2 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.

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 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 non-cash 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 remained to be amortized.

Amortization of goodwill.In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets,goodwill is no longer amortized as of April 1, 2002 but
is periodically tested for impairment. Goodwill amortization
expense was approximately $1.5 million for the twelve
months 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.

Amortization of purchased
intangibles.Amortization of purchased
intangibles consists of the amortization of purchased technology
from our July 2000 acquisition of MineShare. Prior to the
quarter-ended September 30, 2002 amortization of purchased
intangibles was a component of research and development

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expense. These amounts have been reclassified to
conform to the current period presentation. Amortization of
purchased intangibles was $644,000 for the twelve months ended
March 31, 2002 and $429,000 for the twelve months ended
March 31, 2001.


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.During the year ended
March 31, 2001 we incurred $4.4 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.

Restructuring charges and write-off of fixed
assets.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.

During the fiscal years ended March 31, 2002
and 2001 we recorded a $600,000 and $131,000 loss related to the
write-off of fixed assets, respectively.

Other income and (expense).Other income and
(expense) decreased 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
interest income on lower average cash and cash equivalents
balances resulting from the use of cash to fund current
operations, and lower prevailing interest rates.

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

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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

As of March 31, 2003, we had
$23.8 million in cash, cash equivalents and short-term
investments and working capital of $23.5 million. In
addition, as of March 31, 2003, we had $1.1 million in
restricted cash supporting letters of credit issued against
certain contractual lease obligations.

Our operating activities generated
$4.4 million of cash for the year ended March 31,
2003. The net cash generated resulted from the net loss of
$4.0 million, offset by non-cash items of
$7.0 million, decreases in accounts receivable of $324,000,
and an increase in accruals and deferred revenue of
$1.1 million. Our operating activities used
$5.5 million of cash for the year ended March 31,
2002. The net cash used in operating activities in fiscal 2002
resulted from the net loss of $19.7 million, less non-cash
items of $12.0 million, decreases in accounts payable,
accrued liabilities and deferred revenue of $1.5 million
and increases in current and other assets of $1.2 million,
partially offset by a decreases in accounts receivable and
restricted cash totaling $4.2 million and $706,000,
respectively. Operating activities used $26.2 million of
cash for the year ended March 31, 2001. The net cash used
by operating activities in 2001 resulted from the net loss of
$56.7 million, which includes the non-cash 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, an increase in restricted cash of
$1.7 million and an increase in accounts receivable of
$9.7 million related to higher sales during the period.

Investing activities used $2.9 million of
cash for the year ended March 31, 2003, related to
acquisition of property and equipment totaling
$4.4 million, offset by the maturity of $1.5 million
in short term investments. Investing activities used
$4.0 million of cash for the year ended March 31,
2002, related to the acquisition of property and equipment
totaling $2.3 million and the investment of
$1.7 million in short-term marketable securities. During
the fiscal year 2001, net cash used in investing activities was
$9.4 million, primarily related to the purchase of property
and equipment.

Financing activities used $1.8 million of
cash for the year ended March 31, 2003, and consisted
primarily of principal payments on long-term debt totaling
$3.0 million, partially offset by proceeds from the
issuance of common stock resulting from the exercise of stock
options and shares issued under the Companys employee
stock purchase plan. 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 shares issued under the Companys 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 shares issued under
the Companys employee stock purchase plan.

At March 31, 2003 we had $23.8 million
in cash, cash equivalents and short-term investments. We had
borrowings in the form of long-term debt, capital leases and a
line of credit totaling $1.6 million, payable in monthly
installments through March 2004, with a weighted average
interest rate of 14%.

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. Our credit
agreements place restrictions on our ability to pay dividends.
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, 2003, there was $1.1 million outstanding
under this loan agreement.

We have made certain commercial commitments that
extend beyond our fiscal year ending March 31, 2004. These
commitments include letters of credit obtained from a financial
institution in lieu of a security

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deposit for leased office space. The aggregate
amount of the letters of credit is classified as restricted cash
of $1.1 million 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, 2003:

|                              |                  |                |        |        |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |     |     | 
|----------------------------- | ---------------- | -------------- | ------ | ------ |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | --- | --- | 
|                              |                  |               
|                              |                  | March 31,     
|                              |                  |               
|                              |                  | Total          |        | 2004   |  | 2005 |       | 2006  |  | 2007 |       | 2008 
|                              |                  |                |        |        |  |      |       |       |  |      |       |      
|                              |                  |               
|                              |                  | (In thousands)
|Contractual Obligations:      |                  |                |        |        |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |     |    
|                              | Long-term debt   |                | $      | 1,212  |  |      | $     | 1,212 |  |      | $     |      |  |   | $     |      |  |   | $     |      |  |   | $   |    | 
|                              | Capital leases   |                |        | 399    |  |      |       | 399   |  |      |       |      |  |   |       |      |  |   |       |      |  |   |     |    | 
|                              | Operating leases |                |        | 11,537 |  |      |       | 3,875 |  |      |       | 2,864 |  |   |       | 2,270 |  |   |       | 2,324 |  |   |     | 204 | 
|                              |                  |                |        |        |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |     |    
|Total Contractual Obligations |                  | $              | 13,148 |        |  | $    | 5,486 |       |  | $    | 2,864 |       |  | $ | 2,270 |       |  | $ | 2,324 |       |  | $ | 204 |    
|                              |                  |                |        |        |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |     |    

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 continues to face risks associated
with the execution of its strategy. Our future cash flows and
capital requirements depend on numerous factors, including
market acceptance of our services, competition from new and
existing competitors, the amount of resources we invest in our
data center infrastructure and new product development,
marketing and selling our products and services, our brand
promotions and any future acquisitions or divestitures.

The Companys primary source of liquidity is
$23.8 million in cash and cash equivalents, and short-term
investments. The Company believes it has the necessary financial
resources to fund its working capital needs, capital
expenditures and other business requirements for at least the
next 12 months.

Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3 Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred and states
that an entitys commitment to exit plan, by itself, does
not create a present obligation that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is
the objective for initial measurement of the liability. The
adoption of SFAS No. 146 did not have a material impact
upon our financial position, cash flows or results of operations.

In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires a guarantor to recognize a
liability for obligations it has undertaken in relation to the
issuance of a guarantee. It requires that the liability be
recorded at fair value on the date that the guarantee is issued.
It also requires a guarantor to provide additional disclosures
regarding guarantees, including the nature of the guarantee, the
maximum potential amount of future payments under the guarantee,
the carrying amount of the liability, if any, for the
guarantors obligations under the guarantee, and the nature
and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid
under the guarantee. The disclosure requirements under
FIN 45 are effective for the interim and annual periods
ending after December 15, 2002. The recognition and
measurement provisions under FIN 45 are effective for
guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material impact upon our
financial position, cash flows or results of operations.

In November 2002, the EITF reached consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF 00-21 provides guidance on how to
account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply
to revenue arrangements entered into in fiscal periods beginning
after June 15,

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2003. Management does not believe that the
adoption of this standard will have a material effect on its
financial position or results of operations.


In December 2002, the FASB issued FAS
No. 148, Accounting for Stock-Based Compensation,
Transition and Disclosure (FAS 148).
FAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting
for stock-based employee compensation. FAS 148 also
requires that disclosures of the pro forma effect of using the
fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular
format. Additionally, FAS 148 requires disclosure of the pro
forma effect in interim financial statements. The transition and
annual disclosure requirements of FAS 148 are effective for
fiscal years ending after December 15, 2002, and these
disclosures are contained in Note 2. The interim disclosure
requirements are effective for interim periods commencing after
December 15, 2002. Management will continue to apply the
APB 25 provisions and will disclose the fair value
information on a proforma basis.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51
(FIN 46). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective immediately for all
new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of
FIN 46 must be applied for the first interim or annual
period beginning after June 15, 2003. Management does not
believe that the adoption of this standard will have a material
effect on its financial position or results of operations.

In April 2003, the FASB issued SFAS 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities, which amends SFAS 133 for
certain decisions made by the FASB Derivatives Implementation
Group. In particular, SFAS 149 (1) clarifies under
what circumstances a contract with an initial net investment
meets the characteristic of a derivative, (2) clarifies
when a derivative contains a financing component,
(3) amends the definition of an underlying to conform it to
language used in FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and (4) amends certain other existing
pronouncements. This Statement is effective for contracts
entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. In
addition, most provisions of SFAS 149 are to be applied
prospectively. We do not expect the adoption of SFAS 149 to
have a material impact upon our financial position, cash flows
or results of operations.

In May 2003, the FASB issue SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS 150 is
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. We do not
expect the adoption of SFAS 150 to have a material impact
upon our financial position, cash flows or results of operations.

Risk Factors

As indicated in this annual report on
Form 10-K under the caption Forward-Looking
Information, certain of the information contained in this
annual report consists of forward-looking statements. Important

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factors that could cause actual results to differ
materially from the forward-looking statements include the
following:


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.

We derive our revenue from marketing
services, which revenues tend to be cyclical and dependent on
the economic prospects of our clients and the economy in
general. A sustained reduction in expenditures by our clients or
a sustained downturn in the economy could cause our revenues to
decline significantly in any given period.

Our clients marketing and advertising
expenditures tend to be cyclical, reflecting overall economic
conditions as well as budgeting and buying patterns. The overall
market for marketing and advertising services, including
Internet marketing and advertising services, has been
characterized in recent quarters by softness of demand and lower
prices. We 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 our clients or the economy in general
could alter spending priorities or increase the time it takes to
close a sale with a prospective client. As a result, our
revenues from marketing services may decline significantly in
any given period.

We may not be able to forecast our revenues
accurately because our customers marketing budgets are
difficult to predict and may fluctuate from period to
period.

Our revenue and operating results depend upon the
marketing budgets of our existing and new clients. These
marketing budgets are difficult to predict and may vary from
period to period as a result of factors that are beyond our
control, including our clients marketing objectives for a
particular period, the general state of the economy and our
clients success in the marketplace. Consequently, we face
difficulty in predicting the amount of revenues each client will
generate in any particular quarter. 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.

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.

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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 twelve months ended March 31, 2003,
the loss of this client or another major client could have a
material adverse effect on our business and 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, Bigfoot Interactive,
eDialog and InfoUSA, as well as the in-house information
technology departments of our existing and prospective clients.
The loss of a client due to service quality or technology
problems could result in reputational harm to us and, as a
result, increase the effect of competition and negatively impact
our ability to attract new 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.

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 fail to respond to changing customer
preferences in our market, demand for our technology and
services may decline, causing our revenues to
suffer.

If we do not continue to develop new technology
and services that keep pace with competitive developments,
satisfy diverse and rapidly evolving customer requirements and
achieve market acceptance, we might be unable to attract new
customers and retain existing customers. The development of
proprietary technology and service enhancements entails
significant technical and business risks and requires
substantial expenditures and lead-time. We might not be
successful in marketing and supporting recently released
versions of our technology and services on a timely or
cost-effective basis. In addition, even if new technology and
services are developed and released, they might not achieve
market acceptance. We have experienced delays in releasing new
or enhanced technology and services in the past and could
experience similar delays in the future, which could cause us to
lose customers.

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 products and services and
our ability to provide comprehensive online direct marketing
expertise. Our main offices are located in the San Francisco Bay
Area and New York City, where competition for personnel with
Internet-related technology and marketing skills has
traditionally been intense. In addition, we restructure our
organization from time to time, including reductions in our
workforce, to streamline operations and reduce costs. These
measures may

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have unanticipated consequences, such as low
morale, unexpected litigation and difficulty in future employee
hiring and retention. 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.


If the delivery of our email messages is
limited or blocked, then the amount we may be able to charge our
clients for producing and sending their campaigns may be reduced
and 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 AOL. We do not have, nor are we required to
have, an agreement with AOL to deliver emails to their
customers. AOL 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, AOL and other Internet service
providers are able to block messages from reaching their users.
Recent releases of Internet service provider software and the
implementation of stringent new policies by Internet service
providers have caused periodic temporary blockages of our
ability to successfully deliver emails to their customers. We
continually improve our own technology and work with Internet
service providers to improve our ability to successfully deliver
our emails. However, if Internet service providers materially
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 the amount we
may be able to charge our clients for producing and sending
their online direct marketing campaigns may be reduced and 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
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, subject to
applicable insurance coverage, 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 or if third parties develop superior
intellectual property, third parties could use our intellectual
property without our consent and prevent us from using their
technology.

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, as well as contractual obligations. We have one issued U.S.
patent 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

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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.


We are one of several companies rapidly building
new technologies in our industry. It is possible that a third
party could be awarded a patent that applies to some portion of
our technology. If this occurs, we may be required to incur
substantial legal fees, cease using the technology or pay
significant licensing fees for such use.

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. 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 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. The federal
government, foreign governments and several state governments
are considering, or have considered, similar legislation. These
provisions generally limit or prohibit both the transmission of
unsolicited commercial emails and the use of forged or
fraudulent routing and header information. Some states,
including California, require that unsolicited commercial emails
include opt-out instructions and that senders of these emails
honor any opt-out requests.

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.

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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, 2003, 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
ended 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 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

Index to Consolidated Financial
Statements

|                                                                                                                     |  |  |    | 
|-------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Report of PricewaterhouseCoopers LLP, Independent
    Accountants                                                    |  |  | 29 | 
|Consolidated Balance Sheets as of March 31,
    2003 and 2002                                                        |  |  | 30 | 
|Consolidated Statements of Operations for the
    years ended March 31, 2003, 2002 and 2001                          |  |  | 31 | 
|Consolidated Statements of Comprehensive Loss for
    the years ended March 31, 2003, 2002 and 2001                  |  |  | 32 | 
|Consolidated Statements of Changes in
    Stockholders Equity for the years ended March 31,
    2003, 2002 and 2001 |  |  | 33 | 
|Consolidated Statements of Cash Flows for the
    years ended March 31, 2003, 2002 and 2001                          |  |  | 34 | 
|Notes to the Consolidated Financial Statements                                                                       |  |  | 35 | 
|Schedule II  Valuation and
    Qualifying Accounts                                                                  |  |  | 52 | 

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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 accompanying index, present fairly, in
all material respects, the financial position of Digital Impact,
Inc. (the Company) and its subsidiaries at
March 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in
the period ended March 31, 2003 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 accompanying index presents fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States 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.

As discussed in Note 4 to the consolidated
financial statements, effective April 1, 2002, the Company
changed its method of accounting for goodwill in accordance with
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.

PRICEWATERHOUSECOOPERS LLP

San Jose, California

April 24, 2003


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DIGITAL IMPACT, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)


|                                                |                                                                                                         |                                            |       |          |        |  |       |          |        | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | -------- | ------ |  | ----- | -------- | ------ | 
|                                                |                                                                                                         |                                           
|                                                |                                                                                                         | March 31,                                 
|                                                |                                                                                                         |                                           
|                                                |                                                                                                         | 2003                                       |       | 2002    
|                                                |                                                                                                         |                                            |       |         
|ASSETS                                          |                                                                                                         |                                            |       |         
|Current assets:                                 |                                                                                                         |                                            |       |          |        |  |       |         
|                                                | Cash and cash equivalents                                                                               |                                            | $     | 23,659   |        |  | $     | 23,937   |       
|                                                | Short-term investments                                                                                  |                                            |       | 108      |        |  |       | 1,651    |       
|                                                | Accounts receivable, net of allowance for
    doubtful accounts of $345 and $697                        |                                            |       | 7,903    |        |  |       | 8,191    |       
|                                                | Prepaid expenses and other current assets                                                               |                                            |       | 1,377    |        |  |       | 1,504    |       
|                                                |                                                                                                         |                                            |       |          |        |  |       |         
|                                                |                                                                                                         | Total current assets                       |       |          | 33,047 |  |       |          | 35,283 | 
|                                                |                                                                                                         |                                            |       |          |        |  |       |         
|Property and equipment, net                     |                                                                                                         |                                            | 8,909 |          |        |  | 9,484 |         
|Restricted cash                                 |                                                                                                         |                                            | 1,114 |          |        |  | 1,141 |         
|Goodwill                                        |                                                                                                         |                                            | 2,002 |          |        |  | 2,002 |         
|Intangible assets                               |                                                                                                         |                                            | 214   |          |        |  | 858   |         
|Other assets                                    |                                                                                                         |                                            | 731   |          |        |  | 865   |         
|                                                |                                                                                                         |                                            |       |          |        |  |       |         
|                                                |                                                                                                         | Total assets                               |       | $        | 46,017 |  |       | $        | 49,633 | 
|                                                |                                                                                                         |                                            |       |          |        |  |       |         
|LIABILITIES AND STOCKHOLDERS EQUITY            |                                                                                                         |                                            |       |          |        |  |       |         
|Current liabilities:                            |                                                                                                         |                                            |       |          |        |  |       |         
|                                                | Accounts payable                                                                                        |                                            | $     | 1,819    |        |  | $     | 2,529    |       
|                                                | Accrued payroll                                                                                         |                                            |       | 1,779    |        |  |       | 1,499    |       
|                                                | Accrued liabilities                                                                                     |                                            |       | 2,403    |        |  |       | 2,706    |       
|                                                | Deferred revenue                                                                                        |                                            |       | 1,975    |        |  |       | 829      |       
|                                                | Current portion of capital lease obligations                                                            |                                            |       | 374      |        |  |       | 320      |       
|                                                | Current portion of long term-debt                                                                       |                                            |       | 1,212    |        |  |       | 1,537    |       
|                                                |                                                                                                         |                                            |       |          |        |  |       |         
|                                                |                                                                                                         | Total current liabilities                  |       |          | 9,562  |  |       |          | 9,420  | 
|                                                |                                                                                                         |                                            |       |          |        |  |       |         
|Capital lease obligations, less current portion |                                                                                                         |                                            |      |          |        |  | 73    |         
|Long-term debt, less current portion            |                                                                                                         |                                            |      |          |        |  | 1,251 |         
|                                                |                                                                                                         |                                            |       |          |        |  |       |         
|                                                |                                                                                                         | Total liabilities                          |       |          | 9,562  |  |       |          | 10,744 | 
|                                                |                                                                                                         |                                            |       |          |        |  |       |         
|Commitments (See Note 5)                        |                                                                                                         |                                            |       |          |        |  |       |         
|Stockholders equity:                           |                                                                                                         |                                            |       |          |        |  |       |         
|                                                | Preferred stock, $0.001 par value; 5,000,000
    shares authorized; none outstanding                    |                                            |       |         |        |  |       |         |       
|                                                | Common stock, $0.001 par value; 100,000 shares
    authorized; 31,431 and 29,761 issued and outstanding |                                            |       | 31       |        |  |       | 30       |       
|                                                | Additional paid-in capital                                                                              |                                            |       | 142,482  |        |  |       | 141,877  |       
|                                                | Accumulated other comprehensive loss                                                                    |                                            |       | (12      | )      |  |       |         |       
|                                                | Unearned stock-based compensation                                                                       |                                            |       | (125     | )      |  |       | (1,169   | )     
|                                                | Accumulated deficit                                                                                     |                                            |       | (105,379 | )      |  |       | (101,405 | )     
|                                                | Less treasury stock, at cost, (454 and
    395) shares                                                  |                                            |       | (542     | )      |  |       | (444     | )     
|                                                |                                                                                                         |                                            |       |          |        |  |       |         
|                                                | Total stockholders equity                                                                              |                                            |       | 36,455   |        |  |       | 38,889   |       
|                                                |                                                                                                         |                                            |       |          |        |  |       |         
|                                                |                                                                                                         | Total liabilities and stockholders equity |       | $        | 46,017 |  |       | $        | 49,633 | 
|                                                |                                                                                                         |                                            |       |          |        |  |       |         

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

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DIGITAL IMPACT, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
data)


|                                                                             |                                                               |                             |        |        |        |      |         |        |        |   |         |        |        | 
|---------------------------------------------------------------------------- | ------------------------------------------------------------- | --------------------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                             |                                                               |                            
|                                                                             |                                                               | Fiscal year ended March 31,
|                                                                             |                                                               |                            
|                                                                             |                                                               | 2003                        |        | 2002   |        | 2001
|                                                                             |                                                               |                             |        |        |        |     
|Revenues                                                                     |                                                               | $                           | 44,010 |        |        | $    | 39,038  |        |        | $ | 40,153  |       
|Cost of revenues                                                             |                                                               |                             | 18,205 |        |        |      | 17,993  |        |        |   | 17,836  |       
|                                                                             |                                                               |                             |        |        |        |      |         |        |        |   |         |       
|Gross profit                                                                 |                                                               |                             | 25,805 |        |        |      | 21,045  |        |        |   | 22,317  |       
|                                                                             |                                                               |                             |        |        |        |      |         |        |        |   |         |       
|Operating expenses:                                                          |                                                               |                             |        |        |        |      |         |        |        |   |         |       
|                                                                             | Research and development                                      |                             |        | 7,042  |        |      |         | 10,573 |        |   |         | 17,163 |       
|                                                                             | Sales and marketing                                           |                             |        | 13,758 |        |      |         | 15,612 |        |   |         | 18,146 |       
|                                                                             | General and administrative                                    |                             |        | 7,196  |        |      |         | 8,548  |        |   |         | 11,301 |       
|                                                                             | Stock-based compensation                                      |                             |        | 386    |        |      |         | 2,319  |        |   |         | 5,049  |       
|                                                                             | Amortization of goodwill                                      |                             |        |       |        |      |         | 1,500  |        |   |         | 6,429  |       
|                                                                             | Amortization of purchased intangibles                         |                             |        | 644    |        |      |         | 644    |        |   |         | 429    |       
|                                                                             | Goodwill impairment charge                                    |                             |        |       |        |      |         |       |        |   |         | 19,000 |       
|                                                                             | Write-off of acquired in-process research and
    development |                             |        |       |        |      |         |       |        |   |         | 4,432  |       
|                                                                             | Restructuring charges and write-off of fixed
    assets       |                             |        | 546    |        |      |         | 1,824  |        |   |         | 131    |       
|                                                                             |                                                               |                             |        |        |        |      |         |        |        |   |         |       
|                                                                             |                                                               | Total operating expenses    |        |        | 29,572 |      |         |        | 41,020 |   |         |        | 82,080 | 
|                                                                             |                                                               |                             |        |        |        |      |         |        |        |   |         |       
|Loss from operations                                                         |                                                               |                             | (3,767 | )      |        |      | (19,975 | )      |        |   | (59,763 | )     
|Other income and (expenses)                                                  |                                                               |                             | (207   | )      |        |      | 297     |        |        |   | 3,032   |       
|                                                                             |                                                               |                             |        |        |        |      |         |        |        |   |         |       
|Net loss                                                                     |                                                               | $                           | (3,974 | )      |        | $    | (19,678 | )      |        | $ | (56,731 | )     
|                                                                             |                                                               |                             |        |        |        |      |         |        |        |   |         |       
|Net loss per common share  basic and diluted                                |                                                               | $                           | (0.13  | )      |        | $    | (0.70   | )      |        | $ | (2.33   | )     
|                                                                             |                                                               |                             |        |        |        |      |         |        |        |   |         |       
|Shares used in net loss per common share
    calculation  basic and diluted |                                                               |                             | 30,290 |        |        |      | 27,960  |        |        |   | 24,350  |       
|                                                                             |                                                               |                             |        |        |        |      |         |        |        |   |         |       

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

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DIGITAL IMPACT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS

(In thousands)


|                                                |                                          |                             |        |      |   |      |         |    |  |   |         |     |  
|----------------------------------------------- | ---------------------------------------- | --------------------------- | ------ | ---- | - | ---- | ------- | -- |  | - | ------- | --- | -
|                                                |                                          |                            
|                                                |                                          | Fiscal year ended March 31,
|                                                |                                          |                            
|                                                |                                          | 2003                        |        | 2002 |   | 2001
|                                                |                                          |                             |        |      |   |     
|Net loss                                        |                                          | $                           | (3,974 | )    |   | $    | (19,678 | )  |  | $ | (56,731 | )  
|                                                |                                          |                             |        |      |   |      |         |    |  |   |         |    
|Other comprehensive income (loss):              |                                          |                             |        |      |   |      |         |    |  |   |         |    
|                                                | Cumulative translation adjustment        |                             |        | (12  | ) |      |         |   |  |   |         |    |  
|                                                | Unrealized gains (losses) on investments |                             |        |     |   |      |         | 34 |  |   |         | (19 | )
|                                                |                                          |                             |        |      |   |      |         |    |  |   |         |    
|Net change in other comprehensive income (loss) |                                          |                             | (12    | )    |   |      | 34      |    |  |   | (19     | )  
|                                                |                                          |                             |        |      |   |      |         |    |  |   |         |    
|Comprehensive loss                              |                                          | $                           | (3,986 | )    |   | $    | (19,644 | )  |  | $ | (56,750 | )  
|                                                |                                          |                             |        |      |   |      |         |    |  |   |         |    

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

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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, 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  |  
|Issuance of common stock upon exercise of stock
    options and warrants, net of repurchases      |  |                 |  |              |  |                |  |            |  |               | 741    |             |  |             | 1  |        |  |              |     |         |  |       |     |   |  |  | 568     |   |  |  |    |   |  |  |        |   |  |  |          |   |  |  | 569     |  
|Issuance of common stock  ESPP                                                                   |  |                 |  |              |  |                |  |            |  |               | 1,024  |             |  |             |    |        |  |              |     |         |  |       |     |   |  |  | 695     |   |  |  |    |   |  |  |        |   |  |  |          |   |  |  | 695     |  
|Repurchase of restricted stock                                                                    |  |                 |  |              |  |                |  |            |  |               | (95    | )           |  |             |    |        |  |              | (59  | )       |  |       | (98  | ) |  |  |        |   |  |  |    |   |  |  |        |   |  |  |          |   |  |  | (98     | )
|Non-employee option grant                                                                         |  |                 |  |              |  |                |  |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | 22      |   |  |  |    |   |  |  |        |   |  |  |          |   |  |  | 22      |  
|Amortization of unearned stock- based compensation                                                |  |                 |  |              |  |                |  |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  |    |   |  |  | 310     |   |  |  |          |   |  |  | 310     |  
|Acceleration of vesting for an employee option                                                    |  |                 |   |              |  |                |   |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | 54      |   |  |  |    |   |  |  |        |   |  |  |         |   |  |  | 54      |  
|Cancellations of unvested options and restricted
    stock                                        |  |                 |  |              |  |                |  |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  | (734    | ) |  |  |    |   |  |  | 734     |   |  |  |          |   |  |  |        |  
|Cumulative translation adjustment                                                                 |  |                 |  |              |  |                |  |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  | (12 | ) |  |  |        |   |  |  |          |   |  |  | (12     | )
|Net loss                                                                                          |  |                 |  |              |  |                |  |            |  |               |       |             |  |             |   |        |  |              |     |         |  |       |     |   |  |  |        |   |  |  |    |   |  |  |        |   |  |  | (3,974   | ) |  |  | (3,974  | )
|                                                                                                  |  |                 |   |              |  |                |   |            |  |               |        |             |  |             |    |        |  |              |      |         |  |       |      |   |  |  |         |   |  |  |     |   |  |  |         |   |  |  |          |   |  |  |         |  
|Balances, March 31, 2003                                                                          |  |                 |  |              |  |                |  |            |  |               | 31,431 |             |  |             | 31 |        |  |              | (454 | )       |  |       | (542 | ) |  |  | 142,482 |   |  |  | (12 | ) |  |  | (125    | ) |  |  | (105,379 | ) |  |  | 36,455  |  
|                                                                                                  |  |                 |   |              |  |                |   |            |  |               |        |             |  |             |    |        |  |              |      |         |  |       |      |   |  |  |         |   |  |  |     |   |  |  |         |   |  |  |          |   |  |  |         |  

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

33



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##### Table of Contents



DIGITAL IMPACT, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                                |                                                               |                                           |        |        |       |      |         |        |        |   |         |        |        |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------- | ----------------------------------------- | ------ | ------ | ----- | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                                                |                                                               |                                          
|                                                                                |                                                               | Fiscal year ended March 31,              
|                                                                                |                                                               |                                          
|                                                                                |                                                               | 2003                                      |        | 2002   |       | 2001
|                                                                                |                                                               |                                           |        |        |       |     
|Cash flows from operations:                                                     |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|Net loss                                                                        |                                                               | $                                         | (3,974 | )      |       | $    | (19,678 | )      |        | $ | (56,731 | )     
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|                                                                                | Write-off of acquired in-process research and
    development |                                           |        |       |       |      |         |       |        |   |         | 4,432  |       
|                                                                                | Depreciation and amortization                                 |                                           |        | 6,556  |       |      |         | 7,905  |        |   |         | 11,654 |       
|                                                                                | Goodwill impairment charge                                    |                                           |        |       |       |      |         |       |        |   |         | 19,000 |       
|                                                                                | Provision for (recovery of) bad debts                         |                                           |        | (36    | )     |      |         | 501    |        |   |         | 1,735  |       
|                                                                                | Amortization of unearned stock-based compensation             |                                           |        | 386    |       |      |         | 2,319  |        |   |         | 5,049  |       
|                                                                                | Amortization of restricted stock bonus                        |                                           |        |        |       |      |         |       |        |   |         | 361    |       
|                                                                                | Loss on write-off of fixed assets                             |                                           |        | 64     |       |      |         | 1,265  |        |   |         | 131    |       
|                                                                                | Unrealized loss (gain) on cash and cash
    equivalents       |                                           |        |       |       |      |         | 34     |        |   |         | (19    | )     
|                                                                                | Change in operating assets and liabilities:                   |                                           |        |        |       |      |         |        |        |   |         |        |       
|                                                                                |                                                               | Accounts receivable                       |        |        | 324   |      |         |        | 4,207  |   |         |        | (9,710 | )
|                                                                                |                                                               | Prepaid expenses and other current assets |        |        | 127   |      |         |        | (953   | ) |         |        | 141    |  
|                                                                                |                                                               | Restricted cash                           |        |        | 27    |      |         |        | 706    |   |         |        | (1,739 | )
|                                                                                |                                                               | Other assets                              |        |        | 134   |      |         |        | (286   | ) |         |        | (356   | )
|                                                                                |                                                               | Accounts payable                          |        |        | (291  | )    |         |        | (2,028 | ) |         |        | 512    |  
|                                                                                |                                                               | Accrued liabilities and accrued payroll   |        |        | (23   | )    |         |        | 776    |   |         |        | (1,410 | )
|                                                                                |                                                               | Deferred revenue                          |        |        | 1,146 |      |         |        | (221   | ) |         |        | 794    |  
|                                                                                |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|Net cash provided by (used in) operating
    activities                         |                                                               |                                           | 4,440  |        |       |      | (5,453  | )      |        |   | (26,156 | )     
|                                                                                |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|Cash flows from investing activities:                                           |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|                                                                                | Purchases of investments in marketable securities             |                                           |        |       |       |      |         | (1,651 | )      |   |         |       |       
|                                                                                | Maturities of investments in marketable securities            |                                           |        | 1,543  |       |      |         |       |        |   |         |       |       
|                                                                                | Acquisition of property and equipment                         |                                           |        | (4,416 | )     |      |         | (2,307 |        |   |         | (9,662 | )     
|                                                                                | Acquisition of MineShare beginning cash                       |                                           |        |       |       |      |         |       |        |   |         | 264    |       
|                                                                                |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|Net cash used in investing activities                                           |                                                               |                                           | (2,873 | )      |       |      | (3,958  | )      |        |   | (9,398  | )     
|                                                                                |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|Cash flows from financing activities:                                           |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|                                                                                | Proceeds from long-term debt                                  |                                           |        |       |       |      |         |       |        |   |         | 3,000  |       
|                                                                                | Principal payments on long-term debt                          |                                           |        | (2,999 | )     |      |         | (2,349 | )      |   |         | (2,162 | )     
|                                                                                | Proceeds from issuance of common stock                        |                                           |        | 1,264  |       |      |         | 956    |        |   |         | 1,681  |       
|                                                                                | Purchases of treasury stock                                   |                                           |        | (98    | )     |      |         | (297   | )      |   |         |       |       
|                                                                                |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|Net cash (used in) provided by financing
    activities                         |                                                               |                                           | (1,833 | )      |       |      | (1,690  | )      |        |   | 2,519   |       
|                                                                                |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|Effect of exchange rates on cash and cash
    equivalents                       |                                                               |                                           | (12    | )      |       |      |        |        |        |   |        |       
|Net (decrease) increase in cash and cash
    equivalents                        |                                                               |                                           | (278   | )      |       |      | (11,101 | )      |        |   | (33,035 | )     
|Cash and cash equivalents at beginning of year                                  |                                                               |                                           | 23,937 |        |       |      | 35,038  |        |        |   | 68,073  |       
|                                                                                |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|Cash and cash equivalents at end of year                                        |                                                               | $                                         | 23,659 |        |       | $    | 23,937  |        |        | $ | 35,038  |       
|                                                                                |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|Supplemental disclosure of cash flow information:                               |                                                               |                                           |        |        |       |      |         |        |        |   |         |       
|Cash paid for interest                                                          |                                                               | $                                         | 386    |        |       | $    | 520     |        |        | $ | 355     |       
|Supplemental disclosure of non-cash 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                     |                                                               |                                           | 1,404  |        |       |      | 1,102   |        |        |   | 140     |       
|Unearned stock-based compensation                                               |                                                               | $                                         | (658   | )      |       | $    | (899    | )      |        | $ | (1,552  | )     

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

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##### Table of Contents



DIGITAL IMPACT, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1. The Company

Digital Impact, Inc. (the Company)
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. The Companys solutions enable corporations to
create and deliver online direct marketing programs that drive
revenue, influence behavior and deepen customer relationships.
The Company 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 to proactively communicate
with its 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 years consolidated financial statements to conform
to the current years presentation. The reclassifications
had no effect on prior years stockholders equity or
results of operation.

The Company incurred a consolidated net loss of
approximately $4.0 million for the year ended
March 31, 2003 and generated cash of $4.4 million from
operating activities for that period.

The Company continues to face risks associated
with the execution of its strategy. Its future cash flows and
capital requirements depend on numerous factors, including
market acceptance of the Companys services, competition
from new and existing competitors, the amount of resources it
invests in its data center infrastructure and new product
development, marketing and selling the Companys products
and services, its brand promotions and any future acquisitions
or divestitures.

The Companys primary source of liquidity is
$23.7 million in cash and cash equivalents, and $108,000 in
short-term investments. The Company believes it has the
necessary financial resources to fund its working capital needs,
capital expenditures and other business requirements for at
least the next 12 months.

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
U.K. subsidiary is the U.K. Pound. 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. Translation gains and losses are
accumulated as a separate component of stockholders
equity. Net gains and losses from

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

foreign currency transactions are included in the
Consolidated Statement of Operations and were not significant
during any of the periods presented.

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 or email address marketing 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. Digital Impact accounts for
revenues and costs associated with Customer Acquisition programs
in accordance with Emerging Issues Task Force Issue
No. 99-19 (EITF 99-19), Reporting Revenue Gross
as a Principal versus Net as an Agent. The cost of
Customer Acquisition campaigns are recognized in the period that
the programs are executed and are netted against program
revenue. The cost of Customer Acquisition campaigns are
estimated using Company records of outstanding purchase
commitments when final vendor invoices have not been received.

Digital Impact recognizes revenue net of third
party costs because the majority of client and supplier
contracts have the following characteristics: the supplier, not
the Company, is the primary obligor in the arrangement, the
Company has limited latitude in establishing the price charged
to the client, the Companys credit risk is sometimes
mitigated by receiving prepayment or reduced credit terms from
its clients before ordering from the supplier, the Company does
not maintain any inventory related to Customer Acquisition
programs, the Company does not make changes to any data acquired
from the supplier, and the client approves the supplier
selection and the service specifications.

Digital Impact provides other complementary
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 assesses the 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.

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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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, 2003,
approximately $1.1 million of cash was pledged as
collateral for outstanding letters of credit (see Note 5).

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 the credit risk of
customers, historical trends and other information. For the
fiscal years ended March 31, 2003 and 2002, one customer
represented 14% and 11% of revenue, respectively. As of
March 31, 2003 and 2002, one customer represented 18% and
17% of 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 at March 31, 2001.

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.
Advertising expenses primarily relate to public relations and
trades shows. Advertising expense for the years ended
March 31, 2003, 2002 and 2001 was $0.4 million,
$0.8 million and $3.3 million, respectively.

Research and development expense

Research and development expenses consist
primarily of salary and related personnel expense, consulting
fees and other operating expenses related to the research and
development departments. The research and development
departments perform new product development, enhance and
maintain existing products and perform quality assurance. With
the exception of capitalized software development costs,
research and development costs are expensed as incurred.

The Company follows the provisions outlined in
Statement of Position 98-1 Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use
related to the treatment of costs.

The Company capitalizes certain direct costs
incurred in the development of internal use software. For the
fiscal years ended March 31, 2003 and 2002, the Company
capitalized approximately $84,000 and $120,000 in software
development costs, respectively. These costs are being amortized
using the straight-line method over the estimated useful life of
the software, generally one to two years, beginning when the
software

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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

is ready for use. These amounts are included in
property and equipment in the accompanying consolidated balance
sheet.

Long-lived assets

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.

Long-lived assets, such as property and
equipment, and purchased intangibles subject to amortization,
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to estimate undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Assets to be disposed
of are separately presented in the balance sheet and reported at
the lower of the carrying amount or fair value less costs to
sell, and are no longer depreciated.

Goodwill and other intangible assets

Goodwill and identified intangible assets are
carried at cost less accumulated amortization. The Company
amortizes intangible assets on a straight-line basis over their
estimated useful lives. In accordance with
SFAS No. 142, goodwill is no longer subject to
amortization, but rather is subject to at least an annual
assessment for impairment.

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. As of March 31, 2003, the Company had net
deferred tax assets of zero.

Accounting for stock-based
compensation

The Company accounts for its employee stock
option plans under the intrinsic value method, in accordance
with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related
interpretations. As such, compensation expense related to the
granting of employee stock options is recorded over the vesting
period only if, on the date of grant, the fair value of the
underlying stock exceeds the options exercise price.
Digital Impact has adopted the disclosure-only requirements of
SFAS No. 123, Accounting for Stock-Based
Compensation, which allows entities to continue to
apply the provisions of APB No. 25 for transactions
with employees and provide pro forma net income and pro forma
earnings per share disclosures for employee stock grants made as
if the fair value based method of accounting in SFAS
No. 123 had been applied to these transactions.

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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Had the Company determined compensation expense
of employee stock options based on the estimated fair value of
the stock options at the grant date, consistent with the
guidelines of SFAS 123, the net loss would have been
increased to the pro forma amounts indicated below (in
thousands, except per share amounts):

|                                                                                                   |  |           |        |      |  |      |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | --------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                   |  |          
|                                                                                                   |  | March 31,
|                                                                                                   |  |          
|                                                                                                   |  | 2003      |        | 2002 |  | 2001
|                                                                                                   |  |           |        |      |  |     
|Net loss, as reported                                                                              |  | $         | (3,974 | )    |  | $    | (19,678 | ) |  | $ | (56,731 | )
|Add: Stock-based employee compensation expense
    included in reported net loss                   |  |           | 363    |      |  |      | 2,256   |   |  |   | 4,923   |  
|Deduct: total stock-based compensation determined
    under fair value based method for all awards |  |           | (3,085 | )    |  |      | (3,691  | ) |  |   | (12,359 | )
|                                                                                                   |  |           |        |      |  |      |         |   |  |   |         |  
|Pro forma net loss, fair value method for all
    stock-based awards                               |  | $         | (6,696 | )    |  | $    | (21,113 | ) |  | $ | (64,167 | )
|                                                                                                   |  |           |        |      |  |      |         |   |  |   |         |  
|Basic and diluted net loss per share:                                                              |  |           |        |      |  |      |         |   |  |   |         |  
|As reported                                                                                        |  | $         | (0.13  | )    |  | $    | (0.70   | ) |  | $ | (2.33   | )
|Pro forma                                                                                          |  | $         | (0.22  | )    |  | $    | (0.76   | ) |  | $ | (2.64   | )

The fair value for each option granted was
estimated at the date of grant using the Black-Scholes
option-pricing model, assuming no expected dividends and the
following weighted average assumptions:

|                                         |  |                      |           |                              |  |      |           |      |  |      |           |      |  |  |            |  |  |  |            |  |  |  |            | 
|---------------------------------------- |  | -------------------- | --------- | ---------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | ---- |  |  | ---------- |  |  |  | ---------- |  |  |  | ---------- | 
|                                         |  |                      |           |                             
|                                         |  | Stock Options        |           | Employee Stock Purchase Plan
|                                         |  |                      |           |                             
|                                         |  |                      |           |                             
|                                         |  | Year ended March 31, |           | Year ended March 31,        
|                                         |  |                      |           |                             
|                                         |  | 2003                 |           | 2002                         |  | 2001 |           | 2003 |  | 2002 |           | 2001
|                                         |  |                      |           |                              |  |      |           |      |  |      |           |     
|Expected volatility                      |  |                      | 90%       |                              |  |      | 115%      |      |  |      | 100%      |      |  |  | 90%        |  |  |  | 115%       |  |  |  | 100%       | 
|Weighted average risk-free interest rate |  |                      | 3.45%     |                              |  |      | 4.23%     |      |  |      | 5.63%     |      |  |  | 2.11%      |  |  |  | 3.39%      |  |  |  | 5.44%      | 
|Expected life                            |  |                      | 6.5 years |                              |  |      | 6.5 years |      |  |      | 6.5 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 was $12.92 for the year ended March 31, 2001.
No options were granted below fair market value for the fiscal
years ended March 31, 2003 and 2002. The weighted average
fair value per share of options granted at fair market value for
the years ended March 31, 2003, 2002 and 2001 was $1.18,
$0.72 and $3.69, respectively.

The pro forma impact of options on the net loss
for the years ended March 31, 2003, 2002 and 2001, may not
be representative of the effects on net income (loss) for future
years, as future years will include the effects of additional
years of stock option grants.

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, 2003, 2002 and 2001 was
attributable to unrealized gains and losses on cash equivalents
and the impact of foreign currency translation losses.

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 (amounts in
thousands, except per share data):

|                                                  |                                                                   |                             |        |        |   |      |        |         |   |   |        |         |  
|------------------------------------------------- | ----------------------------------------------------------------- | --------------------------- | ------ | ------ | - | ---- | ------ | ------- | - | - | ------ | ------- | -
|                                                  |                                                                   |                            
|                                                  |                                                                   | Fiscal year ended March 31,
|                                                  |                                                                   |                            
|                                                  |                                                                   | 2003                        |        | 2002   |   | 2001
|                                                  |                                                                   |                             |        |        |   |     
|Numerator:                                        |                                                                   |                             |        |        |   |      |        |         |   |   |        |        
|                                                  | Net loss                                                          |                             | $      | (3,974 | ) |      | $      | (19,678 | ) |   | $      | (56,731 | )
|                                                  |                                                                   |                             |        |        |   |      |        |         |   |   |        |        
|Denominator:                                      |                                                                   |                             |        |        |   |      |        |         |   |   |        |        
|                                                  | Weighted average common shares outstanding                        |                             |        | 30,300 |   |      |        | 28,315  |   |   |        | 26,170  |  
|                                                  | Weighted average unvested common shares subject
    to repurchase |                             |        | (10    | ) |      |        | (355    | ) |   |        | (1,820  | )
|                                                  |                                                                   |                             |        |        |   |      |        |         |   |   |        |        
|Denominator for basic and diluted calculation     |                                                                   |                             | 30,290 |        |   |      | 27,960 |         |   |   | 24,350 |        
|                                                  |                                                                   |                             |        |        |   |      |        |         |   |   |        |        
|Net loss per common share  basic and
    diluted |                                                                   | $                           | (0.13  | )      |   | $    | (0.70  | )       |   | $ | (2.33  | )      
|                                                  |                                                                   |                             |        |        |   |      |        |         |   |   |        |        

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,
|                             |  |                            
|                             |  | 2003                        |       | 2002 |  | 2001
|                             |  |                             |       |      |  |     
|Options                      |  |                             | 7,935 |      |  |      | 8,410 |  |  |  | 7,696 | 
|Shares subject to repurchase |  |                             | 220   |      |  |      | 389   |  |  |  | 1,821 | 

Recent accounting pronouncements

In July 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred
and states that an entitys commitment to exit plan, by
itself, does not create a present obligation that meets the
definition of a liability. SFAS No. 146 also
establishes that fair value is the objective for initial
measurement of the liability. The adoption of
SFAS No. 146 did not have a material impact upon the
Companys financial position, cash flows or results of
operations.

In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires a guarantor to recognize a
liability for obligations it has undertaken in relation to the
issuance of a guarantee. It requires that the liability be
recorded at fair value on the date that the guarantee is issued.
It also requires a guarantor to provide additional disclosures
regarding guarantees, including the nature of the guarantee, the
maximum potential amount of future payments under the guarantee,
the carrying amount of the liability, if any, for the
guarantors obligations under the guarantee, and the nature
and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid
under the guarantee. The disclosure

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

requirements under FIN 45 are effective for
the interim and annual periods ending after December 15,
2002. The recognition and measurement provisions under
FIN 45 are effective for guarantees issued or modified
after December 31, 2002. The adoption of FIN 45 did
not have a material impact upon our financial position, cash
flows or results of operations.

In November 2002, the EITF reached consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF 00-21 provides guidance on how to
account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply
to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company does not believe that the
adoption of this standard will have a material effect on its
financial position or results of operations.

In December 2002, the FASB issued
FAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure
(FAS 148). FAS 148 provides alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. FAS 148 also requires that disclosures of the
pro forma effect of using the fair value method of accounting
for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, FAS 148
requires disclosure of the pro forma effect in interim financial
statements. The transition and annual disclosure requirements of
FAS 148 are effective for fiscal years ending after
December 15, 2002, and these disclosures are contained in
Note 2. The interim disclosure requirements are effective
for interim periods commencing after December 15, 2002. The
Company will continue to apply the APB 25 provisions and
will disclose the fair value information on a proforma basis.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51
(FIN 46). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of
FIN 46 must be applied for the first interim or annual
period beginning after June 15, 2003. The Company does not
believe that the adoption of this standard will have a material
effect on its financial position or results of operations.

In April 2003, the FASB issued SFAS 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities, which amends SFAS 133 for
certain decisions made by the FASB Derivatives Implementation
Group. In particular, SFAS 149 (1) clarifies under
what circumstances a contract with an initial net investment
meets the characteristic of a derivative, (2) clarifies
when a derivative contains a financing component,
(3) amends the definition of an underlying to conform it to
language used in FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and (4) amends certain other existing
pronouncements. This Statement is effective for contracts
entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. In
addition, most provisions of SFAS 149 are to be applied
prospectively. The Company does not expect the adoption of
SFAS 149 to have a material impact upon our financial
position, cash flows or results of operations.

In May 2003, the FASB issue SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS 150 is
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for
financial instruments created before

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

the issuance date of the Statement and still
existing at the beginning of the interim period of adoption.
Restatement is not permitted. The Company does not expect the
adoption of SFAS 150 to have a material impact upon our
financial position, cash flows 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 were 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 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 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

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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       
|                                                  |  |                      
|                                                  |  | (Unaudited Pro Forma)
|                                                  |  | (In thousands, except
|                                                  |  | per share data)      
|Revenue                                           |  | $                     | 40,415  |  
|Net loss                                          |  | $                     | (59,284 | )
|Net loss per common share  basic and
    diluted |  | $                     | (2.26   | )

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 completed the transitional
impairment test upon adoption of SFAS 142 and completed its
annual impairment review in the fourth quarter of fiscal 2003
and determined that no impairment existed at either of these
dates.

Note 4. Balance Sheet Components

Property and equipment, net

|                                 |  |                |         |      |  |   |         |  
|-------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                 |  |               
|                                 |  | March 31,     
|                                 |  |               
|                                 |  | 2003           |         | 2002
|                                 |  |                |         |     
|                                 |  |               
|                                 |  | (In thousands)
|Furniture and office equipment   |  | $              | 1,322   |      |  | $ | 1,369   |  
|Capitalized software development |  |                | 204     |      |  |   | 120     |  
|Computer equipment and software  |  |                | 22,172  |      |  |   | 18,916  |  
|                                 |  |                |         |      |  |   |         |  
|Total cost                       |  |                | 23,698  |      |  |   | 20,405  |  
|Less accumulated depreciation    |  |                | (14,789 | )    |  |   | (10,921 | )
|                                 |  |                |         |      |  |   |         |  
|                                 |  | $              | 8,909   |      |  | $ | 9,484   |  
|                                 |  |                |         |      |  |   |         |  

Depreciation and amortization expense for
property and equipment was approximately $5.7 million,
$5.8 million and $4.8 million for the years ended
March 31, 2003, 2002 and 2001, respectively. Amortization
of capitalized software development was approximately $177,000
for the year ended March 31, 2003. There was no
amortization of capitalized software development for the fiscal
years ended March 31, 2002 and 2001.

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, 2003, 2002 and

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2001, respectively. The accumulated amortization
on these assets was approximately $1.8 million,
$1.3 million and $826,000 at March 31, 2003, 2002 and
2001, respectively.

Goodwill

Goodwill consisted of the following: (in
thousands)

|                         |  |           |        |      |  |   |        |  
|------------------------ |  | --------- | ------ | ---- |  | - | ------ | -
|                         |  |          
|                         |  | March 31,
|                         |  |          
|                         |  | 2003      |        | 2002
|                         |  |           |        |     
|Goodwill                 |  | $         | 9,933  |      |  | $ | 9,933  |  
|Accumulated amortization |  |           | (7,931 | )    |  |   | (7,931 | )
|                         |  |           |        |      |  |   |        |  
|                         |  | $         | 2,002  |      |  | $ | 2,002  |  
|                         |  |           |        |      |  |   |        |  

During the fiscal year ended March 31, 2003
there was no change in the carrying amount of goodwill. The
carry amount of goodwill was $2.0 million at April 1,
2002 and March 31, 2003, respectively.

Upon adoption of SFAS No. 142 on
April 1, 2002, the Company ceased amortizing goodwill. The
following adjusts reported net loss and basic and diluted net
loss per share as if the adoption of SFAS No. 142 occurred
as of April 2000.

|                                                                  |                       |                                          |        |       |   |      |         |       |   |   |         |       |  
|----------------------------------------------------------------- | --------------------- | ---------------------------------------- | ------ | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                  |                       |                                         
|                                                                  |                       | Year ended March 31,                    
|                                                                  |                       |                                         
|                                                                  |                       | 2003                                     |        | 2002  |   | 2001
|                                                                  |                       |                                          |        |       |   |     
|                                                                  |                       |                                         
|                                                                  |                       | (In thousands, except per share amounts)
|Reported net loss                                                 |                       | $                                        | (3,974 | )     |   | $    | (19,678 | )     |   | $ | (56,731 | )    
|Goodwill amortization                                             |                       |                                          |       |       |   |      | 1,500   |       |   |   | 6,429   |      
|                                                                  |                       |                                          |        |       |   |      |         |       |   |   |         |      
|Adjusted net loss                                                 |                       | $                                        | (3,974 | )     |   | $    | (18,178 | )     |   | $ | (50,302 | )    
|                                                                  |                       |                                          |        |       |   |      |         |       |   |   |         |      
|Basic and Diluted net loss per share                              |                       |                                          |        |       |   |      |         |       |   |   |         |      
|                                                                  | Reported net loss     |                                          | $      | (0.13 | ) |      | $       | (0.70 | ) |   | $       | (2.33 | )
|                                                                  | Goodwill amortization |                                          |        |      |   |      | $       | 0.05  |   |   | $       | 0.26  |  
|                                                                  |                       |                                          |        |       |   |      |         |       |   |   |         |      
|                                                                  | Adjusted net loss     |                                          | $      | (0.13 | ) |      | $       | (0.65 | ) |   | $       | (2.07 | )
|                                                                  |                       |                                          |        |       |   |      |         |       |   |   |         |      
|Shares used in computing basic and diluted net
    loss per share |                       |                                          | 30,290 |       |   |      | 27,960  |       |   |   | 24,350  |      

Intangible Assets

Intangible assets consist of the following: (in
thousands)

|                         |  |           |        |      |  |   |        |  
|------------------------ |  | --------- | ------ | ---- |  | - | ------ | -
|                         |  |          
|                         |  | March 31,
|                         |  |          
|                         |  | 2003      |        | 2002
|                         |  |           |        |     
|Intangible assets        |  | $         | 1,930  |      |  | $ | 1,930  |  
|Accumulated amortization |  |           | (1,716 | )    |  |   | (1,072 | )
|                         |  |           |        |      |  |   |        |  
|                         |  | $         | 214    |      |  | $ | 858    |  
|                         |  |           |        |      |  |   |        |  

Amortization expense was $644,000, $644,000, and
$429,000 for the years ended March 31, 2003, 2002 and 2001,
respectively.

The remaining amortization expense of $214,000
will be recognized in the fiscal year ending March 31, 2004.

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 5. Long-Term Debt and
Commitments

Long-term debt

In March 2001, the Company signed an agreement
with a finance company for a credit facility of
$3.0 million and borrowed the same amount. Amounts borrowed
under the agreement are payable in 36 equal monthly
installments, bear interest at a rate equal to 13.3% and are
collateralized by the assets purchased with the borrowed funds.
The resulting term loan places restrictions on the
Companys ability to pay dividends and contains a cash
covenant which requires that the Company 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, 2003, $1.1 million remains
outstanding of the original term loan of $3.0 million. The
term loan matures on March 10, 2004.

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, are payable in equal monthly
installments and bear interest at a rate of 9.0%. As of
March 31, 2003, $76,000 remained outstanding.

Capital leases

The Company has entered into agreements with
leasing companies for leasing lines of credit totaling
$5.2 million, which bear interest at rates of 6.2% to
13.3%. Amounts borrowed under these agreements totaled
$4.3 million, of which $374,000 remains outstanding at
March 31, 2003. These amounts borrowed are collateralized
by the leased assets.

Operating leases

The Company leases its facilities under operating
leases, which expire between 2003 and 2008. Rent expense for the
years ended March 31, 2003, 2002 and 2001 was
$2.9 million, $4.5 million and $3.7 million,
respectively.

Future minimum debt and lease payments under
noncancelable capital and operating leases, including lease
commitments entered into as of March 31, 2003, are as
follows (in thousands):

|                                               |                        |           |       |         |  |           |      |     |  |   |       |        | 
|---------------------------------------------- | ---------------------- | --------- | ----- | ------- |  | --------- | ---- | --- |  | - | ----- | ------ | 
|                                               |                        | Long-term |       | Capital |  | Operating
|Year Ending March 31,                          |                        | Debt      |       | Leases  |  | Leases   
|                                               |                        |           |       |         |  |          
|2004                                           |                        | $         | 1,212 |         |  | $         | 399  |     |  | $ | 3,875 |       
|2005                                           |                        |           |      |         |  |           |     |     |  |   | 2,864 |       
|2006                                           |                        |           |      |         |  |           |     |     |  |   | 2,270 |       
|2007                                           |                        |           |      |         |  |           |     |     |  |   | 2,324 |       
|2008 and thereafter                            |                        |           |      |         |  |           |     |     |  |   | 204   |       
|                                               |                        |           |       |         |  |           |      |     |  |   |       |       
|                                               | Total minimum payments |           | $     | 1,212   |  |           | $    | 399 |  |   | $     | 11,537 | 
|                                               |                        |           |       |         |  |           |      |     |  |   |       |       
|Less: Amount representing interest             |                        |           |       |         |  |           | (25  | )   |  |   |       |       
|                                               |                        |           |       |         |  |           |      |     |  |   |       |       
|Present value of capital lease obligations     |                        |           |       |         |  |           | 374  |     |  |   |       |       
|Less: Current portion                          |                        |           |       |         |  |           | (374 | )   |  |   |       |       
|                                               |                        |           |       |         |  |           |      |     |  |   |       |       
|Long-term portion of capital lease obligations |                        |           |       |         |  |           |     |     |  |   |       |       
|                                               |                        |           |       |         |  |           |      |     |  |   |       |       

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 which is collateralized
by an amount of $1.1 million of cash which is

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DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

classified as restricted cash and held in
long-term other assets. No amounts have been drawn against the
letter of credit at March 31, 2003.

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.

Convertible preferred stock

The Company is authorized to issue up to
5,000,000 shares of convertible preferred stock, par value
$0.001 per share. As of March 31, 2003 and 2002, there were
no shares of preferred stock issued or outstanding.

Common stock

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, 2003.

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
25% of the option shares one year from the date of grant and
then ratably over the following 36 months, respectively.
Under the Plan, options expire no later than ten years from the
grant date. 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.

46



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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, 2003 is as
follows:

|                         |  |                       |        |                  |  |   |      | 
|------------------------ |  | --------------------- | ------ | ---------------- |  | - | ---- | 
|                         |  | Outstanding           |        | Weighted        
|                         |  | number of             |        | average exercise
|                         |  | options               |        | price           
|                         |  |                       |        |                 
|                         |  |                      
|                         |  | (Shares in thousands)
|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 | 
|Options granted          |  |                       | 1,778  |                  |  | $ | 1.54 | 
|Options exercised        |  |                       | (741   | )                |  | $ | 0.75 | 
|Options cancelled        |  |                       | (1,512 | )                |  | $ | 3.42 | 
|                         |  |                       |        |                  |  |   |      | 
|Balances, March 31, 2003 |  |                       | 7,935  |                  |  | $ | 2.57 | 
|                         |  |                       |        |                  |  |   |      | 

At March 31, 2003, 2002 and 2001, there were
4,694,000, 2,612,000 and 3,240,000 shares available for
grant, respectively.

1999 director option plan

In September 1999, the Company adopted the 1999
Director Option Plan under which 1,250,000 shares of common
stock have been reserved for issuance to non-employee members of
the Companys Board of Directors. As of March 31,
2003, 40,000 options have been granted under this plan.

Options outstanding and exercisable

The following table summarizes information about
options outstanding and exercisable at March 31, 2003.

|                                    |                |                |       |                  |  |                |     |                |  |                |      |       |  |  |       |       |  |   |      |       | 
|----------------------------------- | -------------- | -------------- | ----- | ---------------- |  | -------------- | --- | -------------- |  | -------------- | ---- | ----- |  |  | ----- | ----- |  | - | ---- | ----- | 
|                                    |                |                |       |                  |  |               
|                                    |                | 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  $ 0.67 |                |       | 1,422            |  |                |     | 8.1            |  |                | $    | 0.59  |  |  |       | 1,170 |  |   | $    | 0.57  | 
|                                    | $0.73  $ 0.73 |                |       | 1,477            |  |                |     | 8.7            |  |                | $    | 0.73  |  |  |       | 757   |  |   | $    | 0.73  | 
|                                    | $0.90  $ 1.37 |                |       | 1,460            |  |                |     | 9.3            |  |                | $    | 1.27  |  |  |       | 390   |  |   | $    | 1.21  | 
|                                    | $1.39  $ 1.94 |                |       | 1,452            |  |                |     | 8.4            |  |                | $    | 1.77  |  |  |       | 847   |  |   | $    | 1.86  | 
|                                    | $2.05  $ 7.00 |                |       | 1,324            |  |                |     | 7.4            |  |                | $    | 3.61  |  |  |       | 818   |  |   | $    | 3.91  | 
|                                    | $8.00  $50.00 |                |       | 800              |  |                |     | 7.2            |  |                | $    | 11.61 |  |  |       | 565   |  |   | $    | 11.87 | 
|                                    |                |                |       |                  |  |                |     |                |  |                |      |       |  |  |       |       |  |   |      |      
|                                    |                |                | 7,935 |                  |  |                | 8.3 |                |  | $              | 2.57 |       |  |  | 4,547 |       |  | $ | 2.90 |      
|                                    |                |                |       |                  |  |                |     |                |  |                |      |       |  |  |       |       |  |   |      |      

47



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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

At March 31, 2002 and March 31, 2001,
there were 2,687,000 and 1,508,000 options outstanding and
exercisable at a weighted average exercise price of $3.92 and
$4.63, 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 $1.67 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. The
Company recorded unearned stock-based compensation of
approximately $1.3 million for these cancelled options
which will be recognized over the vesting period of the
restricted stock.

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. As a result, the Company recognized
approximately $177,000 of compensation expense in the fiscal
year ended March 31, 2002 for the restricted stock units
that vested in that fiscal year, and recorded stock-based
compensation expense totaling $98,000 for the restricted stock
units that vest 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, 2003, 2002 and 2001 the Company had issued
1.8 million, 806,000 and 285,000 shares under the plan at a
weighted average price of $1.45, $2.44 and $4.82, respectively.

Stock-based compensation

During each of the years ended March 31,
2003 and 2002 the Company recorded unearned stock-based
compensation totaling $0 and $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, 2003, 2002 and 2001, the Company recorded
stock-based compensation expense of $386,000, $2.3 million
and $5.0 million, respectively, in respect of options and
restricted stock granted to employees and non-employees.

48



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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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.

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.

During the year ended March 31, 2002, the
Company recorded a $600,000 loss related to the write-off of
fixed assets that were no longer in use and excess to
requirements.

Fiscal 2003 restructuring

In the fourth fiscal quarter of 2003, the Company
initiated a cost reduction program that resulted in the
involuntary termination of 18 employees and the closure of our
Cupertino facility. The Company recorded a charge of $546,000 to
operations during the fourth fiscal quarter. The charge related
to payments for severance of approximately $131,000, the accrual
of future lease costs (net of estimated sublease income) of
approximately $365,000, and the write-off of fixed assets of
approximately $50,000. As of March 31, 2003, approximately
$350,000 and $8,000 remained in Accrued Liabilities,
for future lease payments and severance, respectively. All
restructuring liabilities will be paid in fiscal 2004.

Note 8. Segment Reporting

Digital Impact is organized into two segments:
Customer Marketing and Professional Services. These segments
were determined in fiscal 2003 based on the alignment of the
Companys organization structure and selected management
financial reporting with the nature of the service product
offerings. The respective revenue and gross profit of each of
these segments are detailed in this report.

Customer Marketing provides clients with
comprehensive solutions for creating and executing online direct
marketing programs. The Companys solutions are designed to
enable marketers to drive revenue and deepen customer
relationships with a comprehensive process that includes:
collecting and managing customer information, analyzing the
information to determine ideal segments and offers, and
delivering highly relevant, individualized email messages.
Customer Marketing represented 72% and 74% of revenue in fiscal
2003 and 2002, respectively. Gross margins for Customer
Marketing were 63% and 58% for the twelve months ended
March 31, 2003 and 2002, respectively. The rise in gross
margin was driven by personnel efficiencies and lower

49



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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

data center rent, offset by higher depreciation
expense resulting from investments in our data center
infrastructure.

Professional Services can be utilized by clients
to enhance marketing programs and improve results. Digital
Impact offers clients services in each of the following
categories: Strategy, Analysis, Data Management, Solutions
Engineering, Web Development, Creative and Customer Acquisition.
Professional Services represented 28% and 26% of revenue in
fiscal 2003 and 2002, respectively. Gross margins for
Professional Services were 48% and 43% for the twelve months
ended March 31, 2003 and 2002, respectively. The increase
in gross margins is the result of higher utilization rates for
our Professional Service personnel, as revenue growth exceeded
the growth in cost of revenue which is primarily related to
personnel costs.

During the fiscal year ended March 31, 2001
the Company did not record or breakout revenue by segments
because the amount of Professional Service revenue was not
material. The respective revenue and gross profit of each of
these segments are as follows:

|                     |  |                                    |        |                                    |  |       |        |            |  |              |        |       |  |   |        |  |  |   |        |  |  |   |        | 
|-------------------- |  | ---------------------------------- | ------ | ---------------------------------- |  | ----- | ------ | ---------- |  | ------------ | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                     |  |                                    |        |                                   
|                     |  | Twelve Months Ended March 31, 2003 |        | Twelve Months Ended March 31, 2002
|                     |  |                                    |        |                                   
|                     |  | Campaign                           |        | Professional                       |  |       |        | Campaign   |  | Professional |        |      
|                     |  | Management                         |        | Services                           |  | Total |        | Management |  | Services     |        | Total
|                     |  |                                    |        |                                    |  |       |        |            |  |              |        |      
|Revenue              |  | $                                  | 31,776 |                                    |  | $     | 12,234 |            |  | $            | 44,010 |       |  | $ | 29,034 |  |  | $ | 10,004 |  |  | $ | 39,038 | 
|                     |  |                                    |        |                                    |  |       |        |            |  |              |        |       |  |   |        |  |  |   |        |  |  |   |        | 
|Segment Gross Profit |  | $                                  | 19,915 |                                    |  | $     | 5,890  |            |  | $            | 25,805 |       |  | $ | 16,758 |  |  | $ | 4,287  |  |  | $ | 21,045 | 
|                     |  |                                    |        |                                    |  |       |        |            |  |              |        |       |  |   |        |  |  |   |        |  |  |   |        | 

Segment information is presented in accordance
with SFAS 131, Disclosures about Segments of an Enterprise
and Related Information. This standard is based on a management
approach and internal accounting methods. Operating costs and
operating profits are not presented because the Company does not
allocate research and development, sales and marketing, or
general and administrative expenses between segments in the
internal accounting system.

Note 9. Income Taxes

At March 31, 2003, the Company had federal
and state net operating loss carryforwards of approximately
$84.5 million and $38.0 million respectively available
to offset future regular taxable income, if any. The
Companys federal and state net operating loss
carryforwards begin to expire in the year 2006, if not utilized.

At March 31, 2003, the Company had federal
and state research and development and other credits of
approximately $2.0 million and $1.5 million,
respectively. The federal research and development credit
carryforwards expire beginning in 2018, if not utilized, and the
state research credit can be carried forward indefinitely.

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, 2003 and 2002 are as follows (in thousands):

|                                              |                           |           |         |        |  |   |         |        | 
|--------------------------------------------- | ------------------------- | --------- | ------- | ------ |  | - | ------- | ------ | 
|                                              |                           |          
|                                              |                           | March 31,
|                                              |                           |          
|                                              |                           | 2003      |         | 2002  
|                                              |                           |           |         |       
|Net operating loss carryforwards              |                           | $         | 31,050  |        |  | $ | 29,259  |       
|Research and development credit carryover     |                           |           | 2,707   |        |  |   | 2,292   |       
|Fixed assets                                  |                           |           | (198    | )      |  |   | (717    | )     
|Stock based compensation                      |                           |           | 2,994   |        |  |   | 2,994   |       
|Capitalized research and development expenses |                           |           | 1,326   |        |  |   | 1,494   |       
|Capitalized start-up and other                |                           |           | 861     |        |  |   | 1,021   |       
|                                              |                           |           |         |        |  |   |         |       
|                                              | Total deferred tax assets |           |         | 38,740 |  |   |         | 36,343 | 
|Less valuation allowance                      |                           |           | (38,740 | )      |  |   | (36,343 | )     
|                                              |                           |           |         |        |  |   |         |       
|Net deferred tax asset                        |                           | $         |        |        |  | $ |        |       
|                                              |                           |           |         |        |  |   |         |       

50



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##### Table of Contents



DIGITAL IMPACT, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Due to the uncertainty surrounding the
realization of the favorable tax attributes in future tax
returns, the Company has established a 100% valuation allowance
against its deferred tax asset. The valuation allowance for the
period ended March 31, 2003 increased by $2.4 million.

The difference between the income tax benefit at
the statutory of 34% and the companys effective tax rate
is due primarily to the valuation allowance established to
offset the deferred tax assets. The provision for income tax is
different than the amount computed using the applicable
statutory federal income tax rate with the difference for the
years summarized below:

Rate reconciliation

|                                         |                      |                |        |                |   |                |        |      |   |  |        |      |  
|---------------------------------------- | -------------------- | -------------- | ------ | -------------- | - | -------------- | ------ | ---- | - |  | ------ | ---- | -
|                                         |                      | March 31, 2003 |        | March 31, 2002 |   | March 31, 2001
|                                         |                      |                |        |                |   |               
|Federal tax benefit                      |                      |                | 34.00  | %              |   |                | 34.00  | %    |   |  | 34.00  | %   
|State tax benefit, net of federal        |                      |                | 5.83   |                |   |                | 5.83   |      |   |  | 5.83   |     
|Research and development credits         |                      |                |       |                |   |                |       |      |   |  | 3.68   |     
|Permanent differences                    |                      |                | (0.45  | )              |   |                | (2.63  | )    |   |  | (20.72 | )   
|California net operating loss limitation |                      |                | (4.23  | )              |   |                | (1.45  | )    |   |  | 6.07   |     
|Other                                    |                      |                | 25.16  |                |   |                | 8.65   |      |   |  | 2.10   |     
|Valuation allowance                      |                      |                | (60.31 | )              |   |                | (44.40 | )    |   |  | (30.96 | )   
|                                         |                      |                |        |                |   |                |        |      |   |  |        |     
|                                         | Total effective rate |                |        | 0.00           | % |                |        | 0.00 | % |  |        | 0.00 | %
|                                         |                      |                |        |                |   |                |        |      |   |  |        |     

Note 10. Related Party Transactions

In January 2002, the Company loaned $300,000 to
William Park, our Chief Executive Officer. The loan matures on
February 1, 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. As of March 31, 2003 approximately, $260,000
remained outstanding.

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##### Table of Contents



Schedule II

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, 2003 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       
|                                 | Allowance for doubtful accounts        |                | $ | 697        |  |            | $ | (36         | ) |  | $ | 316   |  |  | $ | 345    | 
|                                 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       
|Fiscal year ended March 31, 2002 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       
|                                 | Allowance for doubtful accounts        |                | $ | 883        |  |            | $ | 501         |   |  | $ | 687   |  |  | $ | 697    | 
|                                 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       
|Fiscal year ended March 31, 2001 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       
|                                 | Allowance for doubtful accounts        |                | $ | 170        |  |            | $ | 1,735       |   |  | $ | 1,022 |  |  | $ | 883    | 
|                                 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       
|Fiscal year ended March 31, 2003 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       
|                                 | Deferred tax asset valuation allowance |                | $ | 36,343     |  |            | $ | 2,397       |   |  | $ |      |  |  | $ | 38,740 | 
|                                 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       
|Fiscal year ended March 31, 2002 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       
|                                 | Deferred tax asset valuation allowance |                | $ | 27,607     |  |            | $ | 8,736       |   |  | $ |      |  |  | $ | 36,343 | 
|                                 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       
|Fiscal year ended March 31, 2001 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       
|                                 | Deferred tax asset valuation allowance |                | $ | 10,048     |  |            | $ | 17,559      |   |  | $ |      |  |  | $ | 27,607 | 
|                                 |                                        |                |   |            |  |            |   |             |   |  |   |       |  |  |   |       

52



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

None




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.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Evaluation of disclosure controls and
procedures.Based on the our evaluation of our disclosure
controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this Annual
Report on Form 10-K, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls
and procedures are designed to ensure that information required
to be disclosed by us in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms and are operating in an effective manner.

(b) Changes in internal controls.There were no significant changes in our internal controls
or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation.

53



---



##### Table of Contents








|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) 1.  Financial
Statements:

The financial statements as set forth under
Item 8 of this report are incorporated by reference.

2.     Financial
Statement Schedule:

The financial statements as set forth under
Item 8 of this report are incorporated by reference.

(b) Reports on Form 8-K

On April 24, 2003, we filed a Form 8-K
announcing our financial results for our fourth fiscal quarter
ended March 31, 2003.

(c) Exhibits:

|        |          |             |  |                                                                                                                                                                                                                                                                                                                  
|------- | -------- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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)  |             |  | The Registrants 1998 Stock Plan, as amended
    and restated                                                                                                                                                                                                                                                    
|        | 10.2(1)  |             |  | The Registrants 1999 Employee Stock
    Purchase Plan                                                                                                                                                                                                                                                           
|        | 10.3(1)  |             |  | The Registrants 1999 Director Option Plan                                                                                                                                                                                                                                                                       
|        | 10.4(1)  |             |  | Employment Agreement between the Registrant and
    David Oppenheimer                                                                                                                                                                                                                                            
|        | 10.5(7)  |             |  | Employment Agreement between the Registrant and
    Kevin Johnson                                                                                                                                                                                                                                                
|        | 10.7(1)  |             |  | Master Lease Agreement between the Registrant and
    Comdisco, Inc.                                                                                                                                                                                                                                             
|        | 10.8(1)  |             |  | Standard Form Lease between the Registrant
    and Casiopea Venture Corporation                                                                                                                                                                                                                                  
|        | 10.9(8)  |             |  | Standard Form Lease between the Registrant
    and Casiopea Venture Corporation                                                                                                                                                                                                                                  
|        | 10.10(1) |             |  | Form of Indemnification Agreement between the
    Registrant and each of its directors and executive officers                                                                                                                                                                                                    
|        | 10.12(6) |             |  | Master Loan and Security Agreement between the
    Registrant and Wells Fargo Equipment Finance, Inc.                                                                                                                                                                                                            
|        | 10.13(6) |             |  | Form of Retention Agreement with Key Employees                                                                                                                                                                                                                                                                   
|        | 10.14(8) |             |  | Retention Agreement between the Registrant and
    William Park                                                                                                                                                                                                                                                  
|        | 10.15(8) |             |  | Retention Agreement between the Registrant and
    Gerardo Capiel                                                                                                                                                                                                                                                
|        | 10.16(8) |             |  | Promissory Note of William Park                                                                                                                                                                                                                                                                                  
|        | 10.17(9) |             |  | Amendment to Retention Agreement between the
    Registrant and William Park                                                                                                                                                                                                                                     
|        | 10.18(9) |             |  | Amendment to Retention Agreement between the
    Registrant and Gerardo Capiel                                                                                                                                                                                                                                   
|        | 10.19(4) |             |  | Note Conversion Agreement between the Registrant
    and Enterprise Partners III, Associates, LLP and Enterprise
    Partners III, LLP, dated as of February 16, 2001                                                                                                                                            

54



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##### Table of Contents



|        |       |             |  |                                                                                                              
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.20 |             |  | Transition Agreement by and between the
    Registrant and Ron Rasmussen dated October 1, 2002               
|        | 10.21 |             |  | Transition Agreement and Release by and between
    the Registrant and Dave Kleinberg dated February 10, 2003
|        | 21.1  |             |  | Subsidiaries of the Registrant                                                                               
|        | 23.1  |             |  | Consent of PricewaterhouseCoopers LLP (included
    on page 56 of this Report)                               
|        | 24.1  |             |  | Power of Attorney (included on page 57 of
    this Report)                                                   
|        | 99.1  |             |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.      
|        | 99.2  |             |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.      




| |     |                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to Digital
    Impacts registration statement on Form S-1 (SEC 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 Registration Statement on Form S-8 (SEC File
    No. 333-67686) filed with the Securities and Exchange
    Commission on August 16, 2001.
|
| | (6) | Incorporated by reference to Digital
    Impacts Report on Form 10-K filed with the Commission
    on June 13, 2001.                                                                      
|
| | (7) | Incorporated by reference to Digital
    Impacts Report on Form 10-Q filed with the Commission
    on February 14, 2002.                                                                  
|
| | (8) | Incorporated by reference to Digital
    Impacts Report on Form 10-K filed with the Commission
    on June 7, 2002.                                                                       
|
| | (9) | Incorporated by reference to Digital
    Impacts Report on Form 10-Q filed with the Commission
    on February 14, 2003                                                                   

55



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##### Table of Contents



CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by
reference in the Registration Statements on Form S-8
(Nos. 333-101435, 333-83032, 333-67686, 333-44782,
333-43714 and 333-34678) of Digital Impact, Inc. of our report
dated April 24, 2003 relating to the financial statements
and financial statement schedule, which appears in this
Form 10-K.

PRICEWATERHOUSECOOPERS LLP

San Jose, California

June 12, 2003


56



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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 12, 2003

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 12, 2003
|                                      
|/s/ DAVID OPPENHEIMERDavid Oppenheimer |  | Senior Vice President, Finance, Chief Financial
    Officer and Treasurer (Principal Financial and Accounting
    Officer) |  | June 12, 2003
|                                      
|/s/ GERARDO CAPIELGerardo Capiel       |  | Chief Technology Officer, Director                                                                                         |  | June 12, 2003
|                                      
|/s/ MICHAEL BROWNMichael Brown         |  | Director                                                                                                                   |  | June 12, 2003
|                                      
|/s/ RUTHANN QUINDLENRuthann Quindlen   |  | Director                                                                                                                   |  | June 12, 2003
|                                      
|/s/ EDWARD J. SPIEGELEdward J. Spiegel |  | Director                                                                                                                   |  | June 12, 2003

57



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##### Table of Contents



CERTIFICATION OF CHIEF EXECUTIVE
OFFICER

I, William Park, certify that:

1.     I have reviewed
this annual report on Form 10-K of Digital Impact, Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:

a) Designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) Presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;

5.     The
registrants other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of
directors (or persons performing the equivalent function):

a) All significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and

b) Any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and

6.     The
registrants other certifying officer and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: June 12, 2003

| |     |                                                                                 
| | --- | --------------------------------------------------------------------------------
| | By: | /s/ WILLIAM PARK 
     ______________________________________ 
     William Park

| |                                          
| | -----------------------------------------
| | President and Chief Executive
    Officer

58



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##### Table of Contents



CERTIFICATION OF CHIEF FINANCIAL
OFFICER

I, David Oppenheimer, certify that:

1.     I have reviewed
this annual report on Form 10-K of Digital Impact, Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:

a) Designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) Presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;

5.     The
registrants other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of
directors (or persons performing the equivalent function):

a) All significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and

b) Any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and

6.     The
registrants other certifying officer and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: June 12, 2003

| |     |                                                                                           
| | --- | ------------------------------------------------------------------------------------------
| | By: | /s/ DAVID OPPENHEIMER 
     ______________________________________ 
     David Oppenheimer

| |                        
| | -----------------------
| | Chief Financial Officer

59



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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)  |             |  | The Registrants 1998 Stock Plan, as amended
    and restated                                                                                                                                                                                                                                                    
|        | 10.2(1)  |             |  | The Registrants 1999 Employee Stock
    Purchase Plan                                                                                                                                                                                                                                                           
|        | 10.3(1)  |             |  | The Registrants 1999 Director Option Plan                                                                                                                                                                                                                                                                       
|        | 10.4(1)  |             |  | Employment Agreement between the Registrant and
    David Oppenheimer                                                                                                                                                                                                                                            
|        | 10.5(7)  |             |  | Employment Agreement between the Registrant and
    Kevin Johnson                                                                                                                                                                                                                                                
|        | 10.7(1)  |             |  | Master Lease Agreement between the Registrant and
    Comdisco, Inc.                                                                                                                                                                                                                                             
|        | 10.8(1)  |             |  | Standard Form Lease between the Registrant
    and Casiopea Venture Corporation                                                                                                                                                                                                                                  
|        | 10.9(8)  |             |  | Standard Form Lease between the Registrant
    and Casiopea Venture Corporation                                                                                                                                                                                                                                  
|        | 10.10(1) |             |  | Form of Indemnification Agreement between the
    Registrant and each of its directors and executive officers                                                                                                                                                                                                    
|        | 10.12(6) |             |  | Master Loan and Security Agreement between the
    Registrant and Wells Fargo Equipment Finance, Inc.                                                                                                                                                                                                            
|        | 10.13(6) |             |  | Form of Retention Agreement with Key Employees                                                                                                                                                                                                                                                                   
|        | 10.14(8) |             |  | Retention Agreement between the Registrant and
    William Park                                                                                                                                                                                                                                                  
|        | 10.15(8) |             |  | Retention Agreement between the Registrant and
    Gerardo Capiel                                                                                                                                                                                                                                                
|        | 10.16(8) |             |  | Promissory Note of William Park                                                                                                                                                                                                                                                                                  
|        | 10.17(9) |             |  | Amendment to Retention Agreement between the
    Registrant and William Park                                                                                                                                                                                                                                     
|        | 10.18(9) |             |  | Amendment to Retention Agreement between the
    Registrant and Gerardo Capiel                                                                                                                                                                                                                                   
|        | 10.19(4) |             |  | Note Conversion Agreement between the Registrant
    and Enterprise Partners III, Associates, LLP and Enterprise
    Partners III, LLP, dated as of February 16, 2001                                                                                                                                            
|        | 10.20    |             |  | Transition Agreement by and between the
    Registrant and Ron Rasmussen dated October 1, 2002                                                                                                                                                                                                                   
|        | 10.21    |             |  | Transition Agreement and Release by and between
    the Registrant and Dave Kleinberg dated February 10, 2003                                                                                                                                                                                                    
|        | 21.1     |             |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                   
|        | 23.1     |             |  | Consent of PricewaterhouseCoopers LLP (included
    on page 56 of this Report)                                                                                                                                                                                                                                   
|        | 24.1     |             |  | Power of Attorney (included on page 57 of
    this Report)                                                                                                                                                                                                                                                       
|        | 99.1     |             |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                          
|        | 99.2     |             |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                          



---



##### Table of Contents








|    |                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Digital
    Impacts registration statement on Form S-1 (SEC 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 Registration Statement on Form S-8 (SEC File
    No. 333-67686) filed with the Securities and Exchange
    Commission on August 16, 2001.               
|   
|(6) | Incorporated by reference to Digital
    Impacts Report on Form 10-K filed with the Commission
    on June 13, 2001.                                                                                     
|   
|(7) | Incorporated by reference to Digital
    Impacts Report on Form 10-Q filed with the Commission
    on February 14, 2002.                                                                                 
|   
|(8) | Incorporated by reference to Digital
    Impacts Report on Form 10-K filed with the Commission
    on June 7, 2002.                                                                                      
|   
|(9) | Incorporated by reference to Digital
    Impacts Report on Form 10-Q filed with the Commission
    on February 14, 2003