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


                                    FORM 10-Q


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

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001,

                                       OR

     |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM __________ TO __________


                         Commission File Number 0-26707


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


         WASHINGTON                                     91-1628103

(State or other jurisdiction of                        (IRS Employer
 incorporation or organization)                    Identification Number)

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


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




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 __


As of  November  2,  2001,  there  were  5,617,117  shares  outstanding  of  the
Registrant's common stock.

                                       1
<PAGE>


                              Network Commerce Inc.

                                    Form 10-Q

                                      Index
<Table>
<Caption>
                                                                                                          PAGE
<S>               <C>                                                                                     <C>
PART I            FINANCIAL INFORMATION

ITEM 1:           Financial Statements

                  Condensed Consolidated Balance Sheets as of September 30, 2001
                     and December 31, 2000..............................................................     4
                  Condensed Consolidated Statements of Operations for the three- and nine-month
                     periods ended September 30, 2001 and 2000 .........................................     5
                  Condensed Consolidated Statements of Cash Flows for the nine-month
                     periods ended September 30, 2001 and 2000..........................................     6
                  Notes to Condensed Consolidated Financial Statements..................................     7

ITEM 2:           Management's Discussion and Analysis of Financial
                     Condition and Results of Operations................................................    20

ITEM 3:           Quantitative and Qualitative Disclosures about Market Risk............................    40


PART II           OTHER INFORMATION

ITEM 1:           Legal Proceedings.....................................................................    41

ITEM 2:           Changes in Securities and Use of Proceeds.............................................    42

ITEM 3:           Defaults Upon Senior Securities.......................................................    42

ITEM 4:           Submission of Matters to a Vote of Security Holders...................................    42

ITEM 5:           Other Information.....................................................................    42

ITEM 6:           Exhibits and Reports on Form 8-K......................................................    42


SIGNATURES        ......................................................................................    43

EXHIBITS          ......................................................................................    44


</Table>
                                       2
<PAGE>


PART I. FINANCIAL INFORMATION

ITEM 1.








































                                       3
<PAGE>


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

<Table>
<Caption>
                                                                                         September 30,   December 31,
                                                                                       ---------------  -------------
                                                                                            2001            2000
                                                                                       ---------------  -------------
                                       ASSETS
<S>                                                                                    <C>              <C>
Current assets:
     Cash and cash equivalents                                                         $        2,900   $     11,715
     Restricted cash                                                                              233         16,599
     Short-term investments                                                                         3         21,592
     Marketable equity securities                                                               2,522            431
     Accounts receivable, less allowance for bad debts of $1,199 and $1,195                     1,810         19,658
     Notes receivable from employees                                                                -          2,900
     Prepaid expenses and other current assets                                                  3,027         11,363
                                                                                       ---------------  -------------
          Total current assets                                                                 10,495         84,258
Property and equipment, net                                                                     5,220         22,580
Goodwill and intangible assets, net                                                             1,563        135,628
Cost-basis investments                                                                          1,320         29,481
Other assets, net                                                                               1,098          5,773
                                                                                       ---------------  -------------
          Total assets                                                                 $       19,696   $    277,720
                                                                                       ===============  =============

                        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                                  $        2,256   $     18,933
     Accrued liabilities and other liabilities                                                  4,118         21,502
     Current portion of notes and leases payable and line of credit                             1,778         24,797
     Deferred revenues                                                                            927         11,338
                                                                                       ---------------  -------------
          Total current liabilities                                                             9,079         76,570
Notes and leases payable, less current portion                                                  1,635          1,741
Deferred revenues                                                                                   -          3,703
                                                                                       ---------------  -------------
          Total liabilities                                                                    10,714         82,014
                                                                                       ---------------  -------------
Commitments and contingencies (Note 11)
Shareholders' equity:
     Convertible preferred stock, $0.001 par value:  authorized shares - 5,000,000;
         none issued and outstanding                                                                -              -
     Common stock, $0.001 par value:  authorized shares - 200,000,000; issued
          and outstanding shares - 5,617,117 at September 30, 2001 and 5,214,838
          at December 31, 2000                                                                556,406        555,175
     Subscriptions receivable                                                                     (61)        (2,421)
     Common stock warrants                                                                     18,249         18,172
     Deferred compensation                                                                     (3,901)        (7,758)
     Accumulated other comprehensive loss                                                        (110)          (130)
     Accumulated deficit                                                                     (561,601)      (367,332)
                                                                                       ---------------  -------------
          Total shareholders' equity                                                            8,982        195,706
                                                                                       ---------------  -------------
          Total liabilities and shareholders' equity                                   $       19,696   $    277,720
                                                                                       ===============  =============
</Table>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
                                       4

<PAGE>
                              Network Commerce Inc.
                 Condensed Consolidated Statements of Operations
                      (in thousands, except share amounts)
                                   (unaudited)

<Table>
<Caption>
                                                              For the Three Months Ended           For the Nine Months Ended
                                                                    September 30,                        September 30,
                                                           -------------------------------     --------------------------------
                                                                 2001               2000              2001              2000
                                                           --------------    --------------    --------------    ---------------
<S>                                                        <C>               <C>               <C>               <C>
Revenues                                                   $       1,594     $      33,443     $      17,982     $       79,046
Cost of revenues                                                     454            15,191             4,702             38,424
Cost of revenues - unusual item                                        -             5,320                 -              5,320
                                                           --------------    --------------    --------------    ---------------
          Gross profit                                             1,140            12,932            13,280             35,302
                                                           --------------    --------------    --------------    ---------------
Operating expenses:
     Sales and marketing                                           3,151            24,114            27,230             70,246
     Research and development                                      1,299             6,660             8,693             16,070
     General and administrative                                    2,742             3,489             9,899             10,083
     Amortization of intangible assets                             1,039            23,842            24,378             55,634
     Stock-based compensation                                        498             1,484             1,765              4,626
     Restructuring and other impairment charges                    3,842                 -            65,915                  -
     Impairment of certain long-lived assets                       3,826                 -            46,962                  -
     Unusual item - settlement of claim                                -                 -             4,559                  -
                                                           --------------    --------------    --------------    ---------------
          Total operating expenses                                16,397            59,589           189,401            156,659
                                                           --------------    --------------    --------------    ---------------
          Loss from operations                                   (15,257)          (46,657)         (176,121)          (121,357)
                                                           --------------    --------------    --------------    ---------------
Nonoperating (expense) income:
     (Loss) gain on sale of marketable equity securities               -             4,163              (150)             5,542
     Interest income                                                  90             1,191               713              4,056
     Interest expense                                               (445)             (546)           (5,985)            (1,447)
     Other                                                            61                21                22                (27)
     Impairment of cost-basis investments                         (9,407)           (2,486)          (28,227)            (2,486)
                                                           --------------    --------------    --------------    ---------------
          Total nonoperating expense, net                         (9,701)            2,343           (33,627)             5,638
                                                           --------------    --------------    --------------    ---------------
          Loss before income tax benefit and
               extraordinary gain                                (24,958)          (44,314)         (209,748)          (115,719)
Income tax benefit                                                     -            15,680                 -             39,230
                                                           --------------    --------------    --------------    ---------------
          Loss before extraordinary gain                         (24,958)          (28,634)         (209,748)           (76,489)
Extraordinary gain                                                 6,505                 -            15,479                  -
                                                           --------------    --------------    --------------    ---------------
          Net loss                                         $     (18,453)    $     (28,634)    $    (194,269)    $      (76,489)
                                                           ==============    ==============    ==============    ===============



Basic loss per share:
Loss before extraordinary gain                             $       (4.82)    $       (7.15)    $      (41.81)    $       (20.34)
Extraordinary gain                                                  1.26                 -              3.09                  -
                                                           --------------    --------------    --------------    ---------------
Basic loss per share                                       $       (3.56)    $       (7.15)    $      (38.72)    $       (20.34)
                                                           ==============    ==============    ==============    ===============

Weighted average shares outstanding used to
     compute basic loss per share                              5,182,958         4,004,258         5,016,138          3,759,709
                                                           ==============    ==============    ==============    ===============
</Table>

The accompanying notes are an integral part of these condensed consolidated
balance sheets.

                                       5


<PAGE>


                              Network Commerce Inc.
                 Condensed Consolidated Statements of Cash Flows
                                 (in thousands)
                                   (unaudited)
<Table>
<Caption>
                                                                                           For the nine months ended
                                                                                                   September 30,
                                                                                           ----------------------------
                                                                                               2001            2000
                                                                                           -----------      -----------
<S>                                                                                        <C>              <C>
Operating activities:
     Net loss                                                                              $ (194,269)       $ (76,489)
     Adjustments to reconcile net loss to net cash used in operating activities-
         Depreciation and amortization                                                         31,004           63,743
         Cost of revenue - unusual item                                                             -            5,320
         Accretion of promissory note payable                                                   4,671                -
         Provision for bad debts                                                                  888                -
         Amortization of deferred compensation                                                  1,765            4,626
         Restructuring and impairment charges                                                  71,347                -
         Impairment of certain long-lived assets                                               46,962                -
         Impairment of marketable equity securities and investments                            28,228            2,486
         Extraordinary gains                                                                  (15,479)               -
         Unusual item - settlement of claim                                                     4,559                -
         Non-cash consideration received                                                            -           (5,213)
         Realized loss (gain) from sale of marketable equity securities                           150           (5,542)
         Deferred income tax benefit                                                                -          (39,230)
         Changes in operating assets and liabilities, excluding effects of acquired businesses-
              Accounts receivable                                                              13,514          (14,921)
              Prepaid expenses and other current assets                                         1,212           (6,702)
              Other assets                                                                       (105)            (703)
              Accounts payable and accrued liabilities                                        (24,117)           7,749
              Deferred revenue                                                                 (1,903)          (1,105)
                                                                                           -----------      -----------
Net cash used in operating activities                                                         (31,573)         (65,981)
                                                                                           -----------      -----------
Investing activities:
     Purchases of short-term investments                                                            -         (130,785)
     Sales of short-term investments                                                           38,586          112,883
     Proceeds from sale of investments                                                            920            9,243
     Purchases of property and equipment                                                          (53)         (18,232)
     Investments in equity and debt securities and other assets                                    (4)         (14,954)
     Acquisition of businesses, net of cash acquired of $ - in 2001 and $392 in 2000                -          (18,051)
                                                                                           -----------      -----------
Net cash provided by (used in) investing activities                                            39,449          (59,896)
                                                                                           -----------      -----------
Financing activities:
     Borrowings on line of credit, net of loan fees paid                                            -            9,095
     Payments on line of credit                                                               (10,146)               -
     Proceeds from debt financing                                                                   -           20,000
     Payments on long-term debt                                                                (6,564)          (7,502)
     Proceeds from sale of common stock and exercise of stock options                              16          110,591
     Proceeds from collection of subscription receivable                                            3                -
                                                                                           -----------      -----------
Net cash (used in) provided by financing activities                                           (16,691)         132,184
                                                                                           -----------      -----------
Net (decrease) increase in cash and cash equivalents                                           (8,815)           6,307
Cash and cash equivalents at beginning of period                                               11,715           10,660
                                                                                           -----------      -----------
Cash and cash equivalents at end of period                                                 $    2,900       $   16,967
                                                                                           ===========      ===========
Supplementary disclosure of cash flow information:
     Cash paid during the period for interest                                              $      714       $    1,236
                                                                                           ===========      ===========
     Cash paid during the period for income taxes                                          $      126       $        -
                                                                                           ===========      ===========
     Non-cash investing and financing activities:
         Common stock, options and warrants issued and liabilities assumed
              as part of business and technology acquisitions                              $        -       $  138,642
                                                                                           ===========      ===========
         Assets acquired under capital leases                                              $      160       $    1,070
                                                                                           ===========      ===========

</Table>

The accompanying notes are an integral part of these condensed consolidated
balance sheets.

                                       6

<PAGE>


                              Network Commerce Inc.

              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

Note 1. Organization and Background:

The Company

Network Commerce Inc. (the Company), a Washington  corporation,  is a technology
infrastructure  and  services  company.  The  Company  provides a  comprehensive
technology and business  services  platform that includes  domain  registration,
hosting,  commerce and online marketing services. The Company's headquarters are
located in Seattle, Washington.

Through December 31, 2000, the Company operated two commerce networks,  known as
the Network Commerce Consumer Network,  which aggregated  merchants and shoppers
over a  distributed  network of Web sites,  and the  Network  Commerce  Business
Network,  which was designed to enable businesses to engage in online activities
and transactions with other businesses and an eBusiness Services division, which
provided  consulting,   custom  commerce  solutions,  and  integrated  marketing
services for businesses conducting commerce online.

In January 2001,  the Company  restructured  these groups into NCI Marketing and
NCI Hosting and shutdown the eBusiness Services division. NCI Marketing includes
online marketing services and various online marketplaces  focused on gaming and
entertainment.  The gaming and entertainment  online marketplaces were closed in
March  2001.  NCI  Hosting  includes  domain  registration,  hosting,  and other
business services.  As a result of this restructuring,  certain of the Company's
previous business units and offerings were shut down. The restructuring  efforts
through September 2001 have resulted in the shutdown of SpeedyClick.com  and the
sale of Ubarter,  which were  components of NCI  Marketing,  and the sales of GO
Software and Internet Domain  Registrars,  which were components of NCI Hosting.
The Company's current focus is domain registration, hosting, commerce and online
marketing services as well as licensing certain of its patents.

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

Going Concern

The Company's condensed  consolidated  financial  statements for the nine months
ended  September  30, 2001 have been prepared on a going  concern  basis,  which
contemplates  the realization of assets and the settlement of liabilities in the
normal course of business. The Company has incurred net losses of $194.3 million
for the nine-month period ended September 30, 2001 and has accumulated  deficits
of $561.6  million as of  September  30,  2001.  The  Company  has  continuously
incurred net losses from  operations  and, as of September 30, 2001, has working
capital  of $1.4  million.  These  factors  raise  substantial  doubt  about the
Company's  ability to continue as a going concern.  The  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

The Company  believes that its cash reserves and cash flows from operations will
be adequate to fund its  operations  through  December 2001.  Consequently,  the
Company will  require  substantial  additional  funds to continue to operate its
business  beyond that  period.  Many  companies in the  Internet  industry  have



                                       7
<PAGE>

experienced difficulty raising additional financing in recent months. Additional
financing may not be available to the Company on favorable terms or at all. Even
if additional financing is available,  the Company may be required to obtain the
consent of its existing  lenders or the party from whom the Company  secured its
equity  line of  credit,  which  the  Company  may not be  able  to  obtain.  If
additional  financing  is not  available,  the  Company  may need to change  its
business plan, sell or merge its business, or file a petition in bankruptcy.  In
addition,  the issuance of equity or  equity-related  securities will dilute the
ownership interest of existing  stockholders and the issuance of debt securities
could increase the risk or perceived risk of the Company.

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

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

o    raising  additional  capital  to  fund  continuing  operations  by  private
     placements of equity and/or debt securities or through the establishment of
     other funding facilities; and

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

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

Public Offerings

Effective June 18, 2001, the Company  completed a 1-for-15  reverse split of the
Company's outstanding common stock. All common stock share and per share amounts
have been adjusted to reflect the reverse split.

On October 4, 1999,  the Company  closed its initial  public  offering  (IPO) of
483,334  shares of common  stock at  $180.00  per  share,  for  proceeds  net of
underwriters'  fees and  commissions  of $80.9 million.  At closing,  all of the
Company's  issued and  outstanding  shares of convertible  preferred  stock were
converted  into shares of common stock on a  one-for-one  basis.  On November 2,
1999, the underwriters of the IPO exercised their over-allotment option and sold
an  additional  72,500  shares  at  $180.00  per  share,  for  proceeds  net  of
underwriters'  fees and commissions of $12.1 million.  The combined net proceeds
to the Company,  less additional  offering costs of approximately  $1.9 million,
were $91.1 million.  In addition,  a $1.0 million  promissory note in connection
with the  Company's  acquisition  of GO Software,  Inc.  (GO) and a $4.0 million
bridge loan with a financial institution plus accrued interest were repaid.

On February 18, 2000, the Company closed a supplemental public offering (SPO) of
527,574  shares of common  stock at  $217.50  per  share,  for  proceeds  net of
underwriters' fees and commissions of $108.7 million. Offering costs incurred by
the Company relating to the SPO were approximately $700,000.

Note 2. Summary of Significant Accounting Policies:

Unaudited Interim Financial Data

The  condensed  consolidated  financial  statements  are unaudited and have been
prepared  pursuant to the rules and  regulations  of the Securities and Exchange
Commission.  Certain information and footnote  disclosures  normally included in
financial  statements  prepared in accordance with generally accepted accounting
principles   have  been  condensed  or  omitted   pursuant  to  such  rules  and
regulations. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included  in the  Company's  December  31,  2000  Form  10-K as  filed  with the
Securities and Exchange  Commission on April 17, 2001, as amended by Form 10-K/A
on April 30,  2001.  The  financial  information  included  herein  reflects all
adjustments (consisting only of normal recurring adjustments), which are, in the
opinion of  management,  necessary  for a fair  presentation  of the results for
interim periods.  The results of operations for the three-and nine-month periods
ended September 30, 2001 and 2000 are not necessarily  indicative of the results
to be expected for the full year.

Principles of Consolidation

The Company's condensed  consolidated  financial  statements include 100% of the
assets,  liabilities and results of operations of all  subsidiaries in which the



                                       8
<PAGE>


Company  has a  controlling  ownership  interest  of  greater  than 50%.  Equity
investments  in which the Company holds less than a 20%  ownership  interest and
does not exercise significant influence are recorded at cost and are included in
cost-basis  investments  in  the  accompanying  condensed  consolidated  balance
sheets.  All  significant  intercompany  transactions  and  balances  have  been
eliminated.

Use of Estimates

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

Revenue Recognition

Since restructuring in January 2001, the Company derives revenues primarily from
the  sale  of  online  marketing   services  within  NCI  Marketing  and  domain
registration,  hosting and commerce  services within NCI Hosting.  Revenues from
online  marketing  services are  recognized as the services are delivered to the
merchants  over the term of the  agreement,  which  typically  range from one to
three  months.  Revenues  from  domain  registrations  are  recognized  over the
registration  term,  which  typically  range from one to three  years.  Unearned
revenues  are  classified  as either  current  or  long-term  deferred  revenues
depending on the future recognition of those revenues. Revenues from hosting and
commerce  services are  recognized  over the term of the  agreements,  which are
generally twelve months.

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

Revenues from the Network  Commerce  Consumer  Network were generated  primarily
from the sale of online marketing  services,  leads and orders,  advertising and
merchandising.  Revenues from these  agreements  were recognized as the media or
services were delivered to the merchants over the term of the agreements,  which
typically  ranged from one to twelve months.  Where billings  exceeded  revenues
earned on these  agreements,  the  amounts  were  included  in the  accompanying
consolidated  balance  sheets as deferred  revenue.  The  Company  bore the full
credit risk with respect to these sales. In certain  circumstances,  the Company
offered  products  directly to shoppers.  In these  instances  where the Company
acted as  merchant-of-record,  the  Company  recorded  as revenue the full sales
price of the  product  sold and the full cost of the  product to the  Company as
cost of revenues,  upon shipment of the product.  Shipping charges billed to the
customer  were  included in revenues,  and the costs  incurred by the Company to
ship the product to the customer were included in cost of sales. The Company has
either sold or shut down the  operations  of this network with the  exception of
online marketing services.

Revenues from the Network Commerce  Business Network were derived primarily from
providing  domain  registration,  web-enablement  services,  commerce-enablement
services,  transaction  processing,  advertising  and  technology  licensing  to
businesses.  Revenues derived from domain registration fees, which are typically
paid in full at the time of the sale, are recognized over the registration term,
which typically range from one to three years.  Unearned revenues are classified
as either  current  or  long-term  deferred  revenues  depending  on the  future
recognition  of  those  revenues.  Revenues  from the  sale of  advertising  and
merchandising products and services were recognized similar to those sold on the
Network Commerce  Consumer  Network.  Revenues from transaction fees were earned
from member  businesses  that transacted over the online exchange system as well
as from products sold to other member  merchants of the online exchange  system.
Revenues from services were  generated  principally  through  development  fees,
domain registration fees, hosting fees and sales and marketing  services.  These
services  were  purchased  as  a  complete   end-to-end  suite  of  services  or
separately.  The Company  recognized  revenues  from the  development  of custom
applications  and online  stores  and  marketing  projects  on a  percentage  of
completion  basis over the period of  development or the period of the marketing
project.  These projects  generally  ranged from two to twelve  months.  Hosting
contracts  typically  had a term of one year,  with fees charged and earned on a
monthly  basis.  The Company  bore the full  credit  risk with  respect to these
sales.  Anticipated  losses on these  contracts  were recorded when  identified.
Contract costs included all direct labor, material, subcontract and other direct
project  costs and  certain  indirect  costs  related to  contract  performance.
Changes  in  job  performance,   job  conditions  and  estimated  profitability,
including  those arising from contract  penalty  provisions  and final  contract
settlements that may result in revision to costs and income,  were recognized in
the period in which the revisions were determined.  Unbilled services  typically
represented  amounts  earned  under the  Company's  contracts  not billed due to

                                       9
<PAGE>


timing or contract terms, which usually consider passage of time, achievement of
certain  milestones  or  completion  of the  project.  Where  billings  exceeded
revenues  earned on  contracts,  the amounts were  included in the  accompanying
consolidated  balance  sheets as customer  deposits,  as the  amounts  typically
relate to  ancillary  services,  whereby  the  Company  was  acting in an agency
capacity.  Fee revenue from ancillary services provided by the services division
was recognized upon completion of the related job by the applicable  third party
vendor.  The Company has either sold or shutdown the  operations of this network
with the exception of domain registration and hosting.

Revenues were also  generated  from fees paid to the Company by  businesses  and
merchants who licensed the Company's technology;  transaction processing,  fraud
prevention,  and online payment gateways,  as well as other e-commerce  enabling
technologies.  Revenues included  licensing fees,  per-transaction  fees and, in
certain cases,  monthly hosting and maintenance  fees,  which were recognized in
the period earned.  Revenues generated from technology licensing were recognized
in accordance with American Institute of Certified Public Accountants, Statement
of Position  97-2,  "Software  Revenue  Recognition."  Where  billings  exceeded
revenues  earned  on  these   contracts,   the  amounts  were  included  in  the
accompanying  consolidated  balance sheets as deferred  revenue.  Businesses and
merchants who utilized the Company's payment  processing  technologies  acted as
the merchant-of-record and bore the full credit risk on those sales of goods and
services. The Company sold this business unit during the second quarter 2001.

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

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

Cash, Restricted Cash and Cash Equivalents

For the purposes of consolidated statements of cash flows, the Company considers
investment  instruments with an original  maturity of three months or less to be
cash equivalents.  Cash equivalents are comprised of investments in money market
funds, government  mortgage-backed bonds, and highly rated corporate securities.
Approximately  $233,000 and $16.6  million of cash as of September  30, 2001 and
December 31, 2000,  respectively,  is  characterized  as  restricted in order to
secure certain  facilities  leasing and debt obligations under letters of credit
and  another  security  arrangement.  The  Company's  restricted  cash  and cash
equivalents are stated at cost, which approximates fair market value.

Short-Term Investments and Marketable Equity Securities

The Company  classifies  these  securities  as  available-for-sale  and they are
stated at fair value in accordance with the Financial Accounting Standards Board
(FASB) Statement of Financial  Accounting  Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." This statement specifies
that  available-for-sale  securities  are reported at fair value with changes in
unrealized gains and losses recorded directly to shareholders' equity, which are
also  reflected in  accumulated  other  comprehensive  loss in the  accompanying
consolidated  statement  of changes in  shareholders'  equity and  comprehensive
loss.  Fair value is based on quoted market  prices.  The  Company's  short-term
investments  consist of corporate notes and bonds,  commercial paper,  municipal
notes and bonds, auction preferreds and US government  securities and are stated
at cost,  which  approximates  fair value as of September  30, 2001.  Marketable
equity securities  consist solely of investments in the common stock of publicly
traded  companies  and are  recorded  at fair  value.  These  marketable  equity
securities  are not highly  liquid  securities  as they are thinly  traded.  The
Company's  primary  investment in marketable  equity  securities is in Return on
Investment  Corporation (ROI), which is subject to put and call provisions.  The
put  provision  provides  the Company the right to sell its shares in ROI to ROI
should their stock price close less than $2.01 per share and the call  provision


                                       10
<PAGE>

provides  ROI the right to purchase  the  Company's  shares in ROI should  their
stock  price close above  $3.99 per share.  Additionally,  the ROI common  stock
shares are not currently registered with the Securities and Exchange Commission.
Realized  gains and losses from the sale of  available-for-sale  securities  are
determined on a specific  identification basis. Dividend and interest income are
recognized  as earned.  Any changes in market values that are  considered  other
than temporary are recorded as realized gains or losses in current operations.

Stock Compensation

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

Income Taxes

Income taxes are accounted for under the asset and  liability  method.  Deferred
tax assets  and  liabilities  are  recognized  for the  future tax  consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and  liabilities  and their  respective tax bases and operating
loss and tax credit  carryforwards.  Deferred  tax assets  and  liabilities  are
measured  using  enacted tax rates  expected  to apply to taxable  income in the
years in which those  temporary  differences  are  expected to be  recovered  or
settled.  The effect on deferred tax assets and  liabilities  of a change in tax
rates is recognized as income in the period that includes the enactment date.

Recent Accounting Pronouncements

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

In June 2001, the FASB issued SFAS No. 141,  "Business  Combinations."  SFAS No.
141 establishes  accounting and reporting standards for business combinations to
use the purchase  method.  The effective  date of SFAS No. 141 is June 30, 2001.
All  acquisitions  by the Company  have been  accounted  for using the  purchase
method. The Company is evaluating the impact of adopting SFAS No. 141.

In June 2001,  the FASB  issued  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets."  SFAS No.  142  establishes  accounting  and  reporting  standards  for
acquired  goodwill and other  intangible  assets.  The statement  eliminates the
amortization of goodwill over its estimated useful life.  Rather,  goodwill will
be  subject  to at least an annual  assessment  for  impairment  by  applying  a
fair-value-based  test.  SFAS No. 142 is effective  for fiscal  years  beginning
after  December 14, 2001.  The Company is evaluating the impact of adopting SFAS
No. 142.

In August 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or
Disposal  of  Long-Lived  Assets."  SFAS  No.  144  establishes  accounting  and


                                       11
<PAGE>


reporting  standards for the  impairment  or disposal of  long-lived  assets and
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for  Long-Lived  Assets to Be Disposed Of." SFAS No. 144 is effective for fiscal
years  beginning after December 5, 2001. The Company is evaluating the impact of
adopting SFAS No. 142.

Reclassifications and Reverse Stock Split Adjustments

Certain  information  reported in  previous  periods  has been  reclassified  to
conform to the current period presentation. Effective June 18, 2001, the Company
initiated a 1-for-15  reverse split of the Company's  outstanding  common stock.
All common stock share and per share  amounts have been  adjusted to reflect the
reverse split.

Note 3. Acquisitions:

In June 1999,  the Company  acquired GO  Software,  Inc. GO develops and markets
transaction  processing  software for personal  computers that can function on a
stand-alone basis or can interface with core corporate  accounting systems.  The
Company  paid GO  shareholders  $4.7  million  in cash,  issued  a $1.0  million
promissory  note  bearing  interest at 10%, and issued  74,917  shares of common
stock, valued at $128.10 per share, for a total purchase price of $15.4 million.
The acquisition  was accounted for using the purchase  method of accounting.  Of
the excess  purchase price of  approximately  $14.4  million,  $13.8 million was
allocated to acquired  technology and $556,000 was allocated to goodwill,  which
were both being amortized over a three-year  life. The note bore interest at 10%
and was repaid in full upon completion of the Company's  initial public offering
completed in September 1999. In March 2001, the Company recognized an impairment
charge of $1.8 million to write-down the carrying value to the  approximate  net
realizable  value. On May 14, 2001,  pursuant to an Agreement and Plan of Merger
and Exchange of Stock dated as of May 11, 2001 (Merger  Agreement),  the Company
completed  the sale of GO to ROI through its  wholly-owned  subsidiary  for $1.0
million  in cash and $3.0  million in ROI  common  stock.  As part of the merger
transaction,  ROI  was  required  to  file  with  the  Securities  and  Exchange
Commission a registration statement to effect a registration of the common stock
received by the  Company in the  merger.  In third  quarter  2001,  ROI paid the
Company  $500,000,  plus  interest,  pursuant to the terms and  provisions  of a
promissory  note  issued by ROI to the  Company  at the  closing  of the  merger
transaction.  In  exchange  for  payment of the  promissory  note,  the  Company
returned to ROI 166,667  shares of ROI common stock,  valued at $3.00 per share,
received by the Company in the merger transaction.

Also in June 1999, the Company  acquired  CardSecure,  Inc.  (CardSecure)  for a
purchase  price of  approximately  $3.5  million.  CardSecure  is a developer of
e-commerce  enabled  Web sites.  The  acquisition  was  accounted  for using the
purchase method of accounting.  The excess purchase price of approximately  $3.5
million was  allocated  to acquired  technology  and is being  amortized  over a
three-year life. In September 2001, the Company  recognized an impairment charge
of $526,000 to write-down the carrying value to the  approximate  net realizable
value.

On November 12, 1999, the Company acquired SpeedyClick,  Corp. (SpeedyClick),  a
California corporation, for $55.6 million of cash, common stock and common stock
options.  SpeedyClick, a privately held company, maintained an Internet Web site
that focused on  entertainment  and  interactivity.  Upon  effectiveness  of the
acquisition,  a total of 253,283  shares of common  stock  valued at $199.65 per
share were issued to the owners of SpeedyClick.  Options to purchase SpeedyClick
common stock were assumed by the Company and  converted  into 10,502  options to
purchase the Company's common stock. The Company also paid cash consideration of
$3.0  million to the  owners of  SpeedyClick.  The  Company  accounted  for this
transaction  as  a  purchase.  Of  the  $55.6  million  in  consideration  paid,
approximately $27.9 million was allocated to proprietary concepts, $14.7 million
to customer lists and $13.0 million to goodwill.  These  intangible  assets were
being  amortized  over a three-year  life.  However,  in March 2001, the Company
decided to shut down the  operations  and  wrote-off  the  remaining  intangible
assets of $37.2 million.

On December 3, 1999, the Company  acquired  Cortix,  Inc.  (Cortix),  an Arizona
corporation doing business as  20-20Consumer.com,  for $14.4 million of cash and
common stock.  Cortix, a privately held company,  provided  comparison  shopping
services including online reviews and ratings for commerce-oriented  businesses,
merchants and products. Upon effectiveness of the acquisition,  47,429 shares of
common  stock  valued at $282.15  per share were issued to the owners of Cortix.
The  Company  also paid cash  consideration  of $1.0  million  to the  owners of
Cortix.  The Company accounted for this transaction as a purchase.  Of the $14.4
million in  consideration  paid,  approximately  $11.3  million was allocated to
acquired  technology,  $1.6  million  to  customer  lists  and $1.3  million  to

                                       12
<PAGE>


goodwill.  These intangible  assets were being amortized over a three-year life.
However,  in December 2000, the Company  decided to shut down the operations and
wrote-off the remaining intangible assets of $9.1 million.

On December 17, 1999,  the Company  acquired  WebCentric  Inc.  (WebCentric),  a
Kansas  corporation  doing  business as  bottomdollar.com,  for $40.2 million of
common  stock,  common  stock  options and  approximately  $1.4 million of cash.
WebCentric,   a  privately  held  company,   developed  e-commerce   integration
technology and applications, including a comparison shopping engine that allowed
consumers to search and compare the  products  and  services of several  leading
Internet  merchants.  Upon effectiveness of the acquisition,  a total of 144,127
shares of common  stock valued at $253.35 per share were issued to the owners of
WebCentric.  In  addition,  the  Company  issued  replacement  stock  options to
purchase an aggregate of 8,103 shares of the  Company's  common stock to certain
employees and owners of WebCentric.  The Company  accounted for this transaction
as a purchase.  Of the $40.2 million in consideration paid,  approximately $31.8
million was allocated to acquired technology, $3.3 million to customer lists and
$4.6 million to goodwill.  These  intangible  assets were being amortized over a
three-year life. However, in December 2000, the Company decided to shut down the
operations and wrote-off the remaining intangible assets of $24.3 million.

On January 13, 2000, the Company,  through its wholly owned  subsidiary  3037952
Nova Scotia Company,  a Nova Scotia Company,  acquired Pronet  Enterprises  Ltd.
(Pronet),  a Canadian company,  for approximately  $12.8 million,  of which $3.2
million was paid in cash,  $2.2  million in non-cash  deferred  tax  liabilities
assumed and $7.4  million in common  stock and common  stock  options  issued to
Pronet   shareholders.   Pronet,   a   privately   held   company,   operated  a
business-to-business portal and marketplace that aggregates businesses that seek
to transact with one another. Upon effectiveness of the acquisition,  a total of
10,834 shares of common stock,  valued at $264.00 per share,  were issued to the
shareholders  of Pronet.  In addition,  the Company  issued  options to purchase
23,445  shares of common  stock to the two  principals  of Pronet.  The  Company
accounted  for  this  transaction  as  a  purchase.  Of  the  $12.8  million  in
consideration  paid,  approximately  $6.3  million  was  allocated  to  acquired
technology,  $2.7 million to customer lists and $3.8 million to goodwill.  These
intangible  assets were being amortized over a three-year life. In January 2001,
management  revised its estimated useful life for these assets and amortized the
remaining  carrying value of Pronet  (approximately  $9.1 million as of December
31, 2000) over the first six months of 2001.

On January 18, 2000, the Company  acquired AXC  Corporation  (AXC), a Washington
corporation,  for approximately $17.9 million, of which $2.2 million was paid in
cash,  $4.1  million in  non-cash  deferred  tax  liabilities  assumed and $11.6
million in common stock and common  stock  options  issued to AXC  shareholders.
AXC, a  privately  held  company,  provided  e-commerce  consulting  services to
businesses.  Upon effectiveness of the acquisition,  a total of 36,020 shares of
common  stock  valued at $264.00  per share were issued to the owners of AXC. In
addition,  the Company issued replacement stock options to purchase an aggregate
of 4,806 shares of the Company's common stock to certain employees and owners of
AXC. The Company  accounted  for this  transaction  as a purchase.  Of the $17.9
million in  consideration  paid,  approximately  $7.2  million was  allocated to
assembled  workforce,  $4.9 million to customer lists,  $5.0 million to goodwill
and $800,000 to working capital.  These  intangible  assets were being amortized
over a three-year life.  However,  in December 2000, the Company decided to shut
down the  operations  and  wrote-off the  remaining  intangible  assets of $14.2
million.

On April 11, 2000, the Company acquired FreeMerchant.com, Inc. (FreeMerchant), a
Delaware corporation, for approximately $38.1 million, of which $2.0 million was
paid in cash,  $10.0  million in  non-cash  deferred  tax  liabilities  assumed,
$500,000 of debt  assumed  and $25.6  million in common  stock and common  stock
options  issued to  FreeMerchant  shareholders.  FreeMerchant,  a privately held
company,   has  developed   online   store-builder   technology  for  small-  to
medium-sized  merchants  that seek a low-cost  point of entry to e-commerce  and
provides  hosting  services  to  those  merchants.  Upon  effectiveness  of  the
acquisition,  a total of 171,582  shares of common stock,  valued at $132.00 per
share, were issued to the shareholders of FreeMerchant. In addition, the Company
issued options to purchase 19,574 shares of common stock to certain FreeMerchant
shareholders  and  employees.  The Company  accounted for this  transaction as a
purchase.  Of the $38.1  million  in  consideration  paid,  approximately  $23.0
million  was  allocated  to  acquired  technology,  $4.1  million  to  assembled
workforce  and $11.0  million to  goodwill.  These  intangible  assets are being
amortized  over a three-year  life.  In March 2001,  the Company  recognized  an
impairment  charge of $22.4  million to  write-down  the  carrying  value to the
approximate net realizable  value. In September 2001, the Company  recognized an
additional impairment charge of $2.6 million to write-down the carrying value to
the approximate net realizable value.


                                       13
<PAGE>


On June 2, 2000,  the Company  effected  its  acquisition  of  Ubarter.com  Inc.
(Ubarter),  a Nevada  corporation,  pursuant to an agreement  and plan of merger
dated January 20, 2000, for approximately  $61.7 million,  of which $875,000 was
paid in cash,  $11.4  million in  non-cash  deferred  tax  liabilities  assumed,
$978,000 in net liabilities  assumed,  $7.6 million in the  cancellation of debt
between  Ubarter and the Company,  and $40.8  million in common stock and common
stock  warrants  issued to Ubarter  shareholders  and  creditors.  Ubarter was a
business-to-business e-commerce enterprise, which utilized the Ubarter Dollar as
payment for products and services by its member  businesses over its proprietary
barter  exchange  system.  Upon  effectiveness  of the  acquisition,  a total of
178,859  shares of common stock valued at  approximately  $226.50 per share were
issued to the  shareholders and creditors of Ubarter.  In addition,  the Company
issued  warrants to purchase  3,457  shares of common  stock to certain  Ubarter
shareholders,   employees  and  creditors.   The  Company   accounted  for  this
transaction  as  a  purchase.  Of  the  $61.7  million  in  consideration  paid,
approximately $7.5 million was allocated to acquired technology, $2.5 million to
assembled  workforce,  $25.1  million to  proprietary  concept,  $2.5 million to
customer  lists,  and $24.0 million to goodwill.  These  intangible  assets were
being  amortized over a three-year  life.  Early in the fourth quarter 2000, the
Company  launched a new user  interface and back-end  management  system for the
Ubarter.com merchant exchange, and executed various marketing efforts to promote
the new system. These efforts did not stimulate growth in the Ubarter economy as
expected,  which led to a  revision  in the  Company's  original  forecasts  and
projections for Ubarter.  These revised forecasts indicated that future expected
cash  flows from this  business  unit were less than the  carrying  value of its
intangible assets, thus triggering an impairment event in December 2000. At that
time, the carrying value of Ubarter's  intangible assets including  goodwill was
$51.6  million.  Based on  recent  comparable  sales of  other  barter  exchange
systems, management determined the fair value of Ubarter.com to be approximately
$5 million.  As a result,  the Company  recognized an impairment charge of $46.6
million in December  2000. In February  2001, the Company sold the assets of the
Canadian-based  operations of Ubarter and recognized a loss of $2.3 million.  In
March 2001,  the Company  recognized  an  impairment  charge of $4.2  million to
write-down the remaining carrying value to the approximate net realizable value.
In June 2001, the Company sold the assets of the US-based  operations of Ubarter
and recognized a loss of $1.2 million on the sale.

On August 24,  2000,  the Company  acquired  Ivebeengood.com,  d.b.a.  UberWorks
(UberWorks),   a  wholly  owned  subsidiary  of  Trilogy,  Inc.  (Trilogy),  for
approximately  $22.8  million,  of which $2.4  million  was  accrued as non-cash
deferred compensation, $5.9 million in non-cash deferred tax liabilities assumed
and $14.5 million in common stock and common stock  options  issued to UberWorks
shareholders  and  employees.   UberWorks  was  a  developer  of  multi-merchant
e-commerce  purchasing  tools  and  universal  shopping  cart  technology.  Upon
effectiveness  of the  acquisition,  a total of 173,438  shares of common  stock
valued  at  approximately  $91.95  per share  were  issued  to  shareholders  of
UberWorks, of which 28,217 are being held back by the Company to be subsequently
released  based on time  vesting and on certain  performance  criteria yet to be
achieved  (these  shares  have been  excluded  from  determining  the  Company's
weighted average shares outstanding used to calculate basic and diluted earnings
per share).  The maximum term of the retention is three years from the effective
date of the acquisition.  In addition,  the Company issued a warrant to Trilogy,
with an exercise price of $0.000015 per share, to purchase  additional shares of
the  Company's  common  stock  if,  on  the  one-year  anniversary  date  of the
acquisition,  the shares  currently held by Trilogy are not worth at least $13.1
million.  The maximum  number of additional  shares that Trilogy was entitled to
purchase under the terms of the warrant was 173,334. On August 24, 2001, Trilogy
exercised its right under the warrant and purchased 170,105 shares.  The Company
also  issued  options  to  purchase  16,545  shares of common  stock to  certain
UberWorks  employees.  The Company accounted for this transaction as a purchase.
Of the $22.8  million of  consideration  paid,  approximately  $12.3 million was
allocated  to  acquired  technology,  $2.4  million  to  deferred  compensation,
$726,000 to assembled  workforce and $7.3 million to goodwill.  These intangible
assets were being amortized over a three-year life.  However, in March 2001, the
Company decided to abandon the technology and wrote-off the remaining intangible
assets of $16.6 million.

On December 8, 2000,  the Company  acquired  ePackets.Net,  Inc.  (ePackets) for
approximately $270,000,  consisting of $150,000 in cash, $37,000 in common stock
and common  stock  options  and  $83,000 in net  liabilities  assumed.  ePackets
provided  permission-based  one-to-one email solutions.  In connection with this
acquisition, the Company issued to the shareholders of ePackets a total of 2,222
shares  of  common  stock.  The  Company  accounted  for this  transaction  as a
purchase.  The consideration  paid was allocated to acquired  technology and was
being  amortized  over a three-year  life.  However,  in March 2001, the Company
decided to shut down the  operations  and  wrote-off  the  remaining  intangible
assets of $255,000.

On  December  22,  2000,  the  Company  acquired   Internet  Domain   Registrars
Corporation  (IDR), for approximately  $23.6 million,  consisting of $750,000 in


                                       14
<PAGE>

cash, $6.1 million in non-cash deferred tax liabilities assumed, $5.7 million in
common stock and $11.1 million in net liabilities  assumed. IDR is a domain name
infrastructure company. In connection with this acquisition,  the Company issued
to the  shareholders  of IDR a total of 510,000 shares of common stock, of which
66,667 were placed in escrow for indemnification purposes. In addition,  218,734
shares  were  issued  and  placed  in  escrow  to  be  released  to  the  former
shareholders  and certain  employees of IDR upon the  achievement of established
future  revenue  targets over an eighteen  month period,  and 14,600 shares were
issued  to  employees  of IDR who  continued  to be  employed  by IDR  after the
acquisition. Finally, 40,000 shares of common stock was issued at the closing to
certain  other  persons in connection  with the  settlement of potential  claims
against IDR and as consideration of services  rendered to IDR in connection with
the acquisition. The closing price of the Company's common stock on December 22,
2000 was $10.35 per share.  The  Company  accounted  for this  transaction  as a
purchase.  Of the $23.6  million  of  consideration  paid,  approximately  $10.5
million was  allocated to  proprietary  concept,  $874,000 to domain name,  $3.5
million to customer lists,  $874,000 to assembled  workforce and $7.8 million to
goodwill.  These intangible  assets were being amortized over a three-year life.
In March 2001, the Company  recognized an impairment  charge of $17.6 million to
write-down the remaining carrying value to the approximate net realizable value.
In June 2001,  the  Company  sold  substantially  all of the assets and  certain
liabilities of IDR to Verisign Inc. and recognized a gain of $6.3 million on the
sale.

Note 4. Restructuring, Impairment Charges and Extraordinary Gains:

Impairment of Certain Long-Lived Assets

During  the first  quarter  2001,  the  Company  determined  that  goodwill  and
intangible  assets  associated with acquired  businesses had a carrying value in
excess of the  potential  sales value of the business  units.  As a result,  the
Company recognized an impairment charge of $43.1 million.

During the third quarter 2001, the Company,  due to the continued  deterioration
of the stock market,  determined that goodwill and intangible  assets associated
with acquired  businesses had a carrying value in excess of the potential  sales
value of the business units. As a result,  the Company  recognized an additional
impairment charge of $3.8 million.

Restructurings and related impairments

During the first quarter 2001, the Company continued its restructuring  efforts,
that commenced in December 2000, including the shutdown of SpeedyClick, the sale
of Ubarter Canada,  which resulted in a loss of $2.3 million, the lay off of 245
employees,  which resulted in severance and related payroll charges of $580,000,
the write-off of impaired goodwill and intangible  assets of $55.0 million,  and
of tenant improvements,  fixed assets,  software and supporting technologies and
infrastructure related to businesses that were shut down of $13.1 million.

During the second quarter 2001, the Company further  restructured its operations
by selling Ubarter USA, IDR and GO for total proceeds of $6.0 million cash and 1
million shares of Return on Investment  Corporation  stock,  which is subject to
lockup until November 2001. The Company recorded a gain in the second quarter of
$5.8  million  related to these  sales.  The gains on these  sales in the second
quarter  resulted from the fact that the Company wrote down these business units
by $23.6 million in first quarter 2001, based on the best available  evidence of
fair market value.  On an aggregate  basis,  for the nine months ended September
30, 2001, the Company  recognized  losses  totaling $18.5 million on the sale of
these business units.  Additionally,  the Company recognized gains totaling $3.1
million,  primarily  from  revising  estimates  on unused  operating  leases and
adjustment of other liabilities related to businesses shut down in first quarter
2001.

During the third quarter 2001, the Company continued its restructuring  efforts,
including  the  write-down  of  additional  fixed assets and other items,  which
resulted in a charge of $3.8 million.

Extraordinary gains

During the second quarter 2001, the Company negotiated with various creditors to
settle  liabilities  for less  than the  recorded  invoices.  These  settlements
resulted in an extraordinary gain of approximately $9.0 million.


                                       15
<PAGE>


During the third quarter 2001,  the Company  restructured  and reduced its $11.0
million  convertible note from Capital Ventures  International  (CVI). Under the
terms of the  restructuring,  the  Company  paid $2.2  million and issued a $1.5
million  convertible  promissory  note.  The  promissory  note will be due in 18
months and is  convertible,  at any time, into common stock at an exercise price
of $2.00 at the option of CVI. This settlement resulted in an extraordinary gain
of $6.5 million.

Impairment of cost-basis investments

During the first  quarter  2001,  the  Company  determined  that  certain of its
cost-basis  investments were permanently  impaired  relative to their historical
values.  As a result,  the  Company  recognized  an  impairment  charge of $18.8
million,  which is included as a component of nonoperating  income  (expense) in
the accompanying September 30, 2001 consolidated statements of operations.

During the third quarter 2001, the Company,  due to the continued  deterioration
of the stock market,  determined that certain of its cost-basis investments were
permanently  impaired  relative to their  historical  values.  As a result,  the
Company recognized an additional impairment charge of $9.4 million.

Permanent impairments in the Company's cost-basis investments were determined by
examining the operations of each company, and when possible, by reviewing recent
private-placement   valuations  for   comparable   companies  and  by  obtaining
professional business valuations.

Note 5. Unusual Item:

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

The settlement  provided that the Company  purchase  17,467 shares of its common
stock from Mr.  Walker in exchange for the tender of a $3.8 million note payable
from the Company (Company Note). In connection with the settlement,  the Company
agreed to consolidate all of Mr. Walker's  outstanding  promissory  notes to the
Company, executed by him since September 28, 1999, which totaled $4.5 million as
of December 31, 2000 and were recorded in Notes  receivables  from employees and
Subscriptions  receivable.  Principal and interest,  at 7% per year, were due on
March 31, 2011.  Following  the  Company's  purchase of the 17,467  shares,  Mr.
Walker  endorsed the Company Note to the Company in partial  satisfaction of the
new loan. In addition,  Mr. Walker transferred 78,078 shares of Company stock to
the Company as additional  payment of the loan. The Company agreed to reduce the
balance of the loan by the fair market value of the 78,078 shares on the date of
the  transfer.  The Company  immediately  forgave the  remaining  obligation  of
$537,000  Mr.  Walker  owed  under  the  promissory  note.  As a  result  of the
settlement,  the Company  recognized a $4.5 million  dollar expense in the first
quarter 2001. Mr. Walker also agreed to take on additional  responsibilities  as
President.

Note 6. Deferred Revenues:

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

Note 7. Debt Obligations:

In March 1999,  the Company  entered into a loan and security  agreement  with a
financial  institution  for a term loan and line of  credit.  In May  1999,  the
agreement  was  amended  and  restated to allow the Company to borrow up to $8.5
million at any one time,  consisting of a $3.5 million term loan, a $4.0 million
bridge loan and a line of credit of up to $2.5  million.  On May 10,  2001,  the
Company  repaid  its  obligation  under  the loan and  security  agreement.  The
obligation  was repaid with the cash that had been  restricted for this purpose.
In conjunction with the loan and security agreement, the Company issued warrants
to  acquire  4,800  shares of common  stock at an  exercise  price of $93.75 per
share. The warrants are exercisable immediately and expire in March 2006. In May


                                       16
<PAGE>

1999, the Company  issued to the financial  institution  additional  warrants to
acquire 4,667 shares of common stock at an exercise  price of $105.00 per share.
The warrants are exercisable immediately and expire in June 2006.

On May 19, 2000, the Company  entered into a credit  agreement with a commercial
bank, with a maximum  commitment amount of $15.0 million to finance the purchase
of equipment,  software and tenant  improvements.  On April 2, 2001, the Company
repaid its obligation under the credit agreement. The obligation was repaid with
the cash that had been restricted for this purpose.

On September  28,  2000,  the Company sold $20.0  million of  convertible  notes
(Convertible  Notes) and  warrants  to CVI  pursuant  to a  securities  purchase
agreement  (Securities  Purchase  Agreement).  The notes had a one-year term. On
October 26, 2000,  the Company filed a  registration  statement on Form S-3 with
the SEC,  which was declared  effective on December 4, 2000.  Also,  the Company
issued warrants to purchase 270,043 shares of common stock to CVI at an exercise
price of $155.55  per share.  The  warrants  were  immediately  exercisable  and
expired five years from closing.  These warrants were valued at $9.4 million and
were  recorded as common stock  warrants in the  accompanying  December 31, 2000
consolidated balance sheets. The notes were valued at $10.6 million. Immediately
after the effective  date,  $5.0 million of the notes were converted into common
stock.  In May 2001, $4.0 million of the notes were converted into common stock.
The terms of the notes  provided for  conversion to common stock at a conversion
price of $25.23 per share.

On April 3, 2001,  the  Company  received  a notice of  default  from CVI for an
alleged violation of certain covenants of the Securities Purchase Agreement. The
notice of default  demanded that the Company redeem the convertible  notes on or
before  April 9,  2001  for an  amount  equal to  $17.25  million.  The  Company
responded  to the notice of default on April 4, 2001 and denied that an event of
default  occurred under the Convertible  Notes.  CVI then filed suit against the
Company on May 22, 2001 in the United  States  District  Court for the  Southern
District of New York under Civil Action No. 01CV-4390.

On July 25,  2001,  the Company  entered into a  settlement  agreement  with CVI
(Settlement  Agreement)  with  respect  to  certain  claims  arising  out of the
Securities Purchase Agreement. As a result of the Settlement Agreement,  the $11
million  convertible notes and all warrants were retired.  The Company paid $2.2
million and delivered a $1.5 million  convertible  promissory  note  (Settlement
Note).  The Settlement Note has a term of 18 months and is  convertible,  at any
time,  into common stock at an exercise price of $2.00 at the option of CVI. CVI
agreed  that,  upon the  payment of the $2.2  million  and the  delivery  of the
Settlement  Note,  the  Company  satisfied  all  of  past,  present  and  future
obligations  to CVI under the  Securities  Purchase  Agreement  and all  related
documents other than the Registration  Rights  Agreement.  However,  CVI did not
release its claim against the Company,  certain  current and former officers and
directors for the alleged security violations and for fraudulent inducement. CVI
agreed not to assert a claim in excess of the  principal  amount of $20  million
less any value  received  pursuant to the Settlement  Agreement.  The Company is
vigorously  defending  against  these  claims.   Nevertheless,   an  unfavorable
resolution of these claims could have a material  adverse  effect on the Company
in one or more future periods.

Note 8. Equity Financing:

On July 10, 2001,  the Company  entered into a Common Stock  Purchase  Agreement
(Agreement) with Cody Holdings Inc. (Investor) to provide the Company with up to
$18 million in equity financing (Equity Line). Under the terms of the Agreement,
the Company will have the right, but not the obligation during the 18-month term
of the  Agreement,  to obtain  equity  financing  through the issuance of common
stock to the  Investor in a series of  periodic  draw downs at a discount to the
market price at the time of sale to the Investor.  The maximum  available amount
for draw down each period is determined using a formula that utilizes a weighted
average  stock price and stock  volume over a  sixty-day  period.  The shares of
common  stock may be sold to the  Investor  during  this  period at times and in
amounts,  subject to certain  minimum and  maximum  volumes,  determined  at the
discretion  of the  Company.  If the Company  chooses to draw down on the Equity
Line, it will use the proceeds of the financing for general corporate  purposes.
The  Company  filed  a  registration   statement  on  Form  S-1  to  effect  the
registration  of these  shares  prior to drawing on this  equity  line,  and the
registration statement was declared effective on September 28, 2001.

In  connection  with the Equity Line,  the Company also issued to the Investor a
warrant to  purchase  up to 350,000  shares of the common  stock at an  exercise
price of $0.57 per share (Warrants).  The Warrants have a term of five years and


                                       17
<PAGE>

the exercise price of the Warrants is subject to antidilution  adjustments.  The
Company also issued  warrants to purchase  350,000 shares of the common stock at
an exercise  price of $0.57 per share to a placement  agent,  and certain of its
affiliates,  as a finder's fee (Placement Agent  Warrants).  The Placement Agent
Warrants  also have a term of five years.  The Warrant and the  Placement  Agent
Warrants and the common stock  issuable  upon the exercise of such warrants were
not registered under the Securities Act of 1933, and were granted pursuant to an
exemption set forth in Section 4(2) thereunder.

Note 9. Segment Information:

The Company's  segment  information for each of the nine- months ended September
30, 2001 and 2000, (in thousands):

<Table>
<Caption>
                                                                     Nine months ended September 30,
                                                                    --------------------------------
                                                                         2001             2000
                                                                    -------------     --------------
<S>                                                                <C>               <C>
 Revenues:
       Continuing operations                                        $       4,726    $       1,004
       Operations closed in 2001                                           13,256           78,042
                                                                    --------------   --------------
                                                                           17,982           79,046
                                                                    --------------   --------------
 Cost of revenues:
       Continuing operations                                                  334               56
       Operations closed in 2001                                            4,368           43,688
                                                                    --------------   --------------
                                                                            4,702           43,744
                                                                    --------------   --------------
 Gross Profit:
       Continuing operations                                                4,392              948
       Operations closed in 2001                                            8,888           34,354
                                                                    --------------   --------------
                                                                    $      13,280     $     35,302
                                                                    ==============   ==============
</Table>

Note 10. Option Repricing and Exchange Programs and Grants:

In April 2001, the Company repriced options to purchase 302,053 shares issued in
December 2000 from a price of $11.70 to a price of $1.35.  This  repricing  will
result in  variable  accounting  treatment  for these  stock  options.  Variable
accounting  treatment  will  result in  unpredictable  stock-based  compensation
dependent on fluctuations in quoted prices for the Company's common stock.

In April 2001, the Company offered a voluntary stock option exchange  program to
its employees.  The plan allows employees,  if they so choose, to exchange three
options for one option  priced at $1.35 per share.  The  vesting  period will be
quarterly over the next four quarters. This exercise price change will result in
variable  accounting  treatment  for these stock  options.  Variable  accounting
treatment  will  result in  unpredictable  amounts of  stock-based  compensation
charges  dependent on  fluctuations  in quoted prices for the  Company's  common
stock.

On July 30, 2001, the Company offered a voluntary stock option exchange  program
to its employees.  The plan allows employees, if they so choose, to exchange two
options for one option to be priced at market price in August 2001.  The vesting
period will be quarterly over the next four quarters.  Additionally, the Company
offered 1,560,000 stock options with an exercise price of $0.25 per share to its
employees.  The vesting period will be monthly over three quarters.  The options
covered  under the  exchange  program  and these  grants will result in variable
accounting treatment for these stock options. Variable accounting treatment will
result in unpredictable  stock-based  compensation  dependent on fluctuations in
quoted prices for the Company's common stock.

Note 11. Litigation:

On December 20, 2000,  an action was  initiated  in Los Angeles  Superior  Court
styled Futurist Entertainment,  Inc. v. Network Commerce,  Inc., Jackie Sutphin,
SpeedyClick.com,  Case No. BC242139.  In the complaint plaintiff alleged,  among
other things,  breach of contract and business torts against defendants relating
to a Development and Website  Agreement  between  Futurist  Entertainment,  Inc.
(Futurist)  and Network  Commerce  dated  February 25, 2000.  The website was to
serve as the official website for the Jackson 5's upcoming album and world tour.
Plaintiff  alleged damages "in an amount yet to be ascertained,  but in no event
less than  $4,400,000." On July 9, 2001, the Company and Futurist entered into a
Settlement  Agreement.  Under  the  terms of the  settlement,  Futurist  and the
Company  entered into a mutual  release of claims and the lawsuit was  dismissed
with prejudice.



                                       18
<PAGE>


On May 10,  2001,  Jan Sherman  and other  shareholders  filed suit  against the
Company and Mr. Walker,  the Company's  chairman,  chief  executive  officer and
president,  alleging  violations of federal  securities  laws. The lawsuit seeks
unspecified damages and certification of a class consisting of purchasers of the
Company's  common stock during the period from  September 28, 1999 through April
16, 2001.  Subsequently,  the  following  similar  lawsuits  were filed:  Joseph
Carreiro v. Network  Commerce,  Inc. and Dwayne M. Walker,  C01-0767L (filed May
25,  2001);  Stephen  Leong v.  Network  Commerce,  Inc.  and Dwayne M.  Walker,
C01-0770L  (filed May 25,  2001);  Alan  Danse,  et al. v.  Dwayne M. Walker and
Network Commerce,  Inc.,  C01-852L (filed June 7, 2001); James Lindsay v. Dwayne
M. Walker and Network Commerce, Inc., C01-0918R (filed June 20, 2001); and Kelly
Christianson v. Dwayne M. Walker and Network  Commerce,  Inc.,  C01-1063L (filed
July 11, 2001). Also, a class action lawsuit was filed July 16, 2001 in the U.S.
District  Court for the Southern  District of California,  David  Breidenback v.
Dwayne M.  Walker and  Network  Commerce,  Inc.,  Case No. '01 CV 1270 JM (NLS).
Additionally,  on September 26, 2001,  Jan Sherman,  James  Michaelson and Jason
Elkin  filed a complaint  captioned  In re:  Network  Commerce  Inc.  Securities
Litigation  (Case No.  C01-0675L)  in the United States  District  Court for the
Western  District of  Washington.  The  lawsuit  seeks  unspecified  damages and
certification  of a class consisting of purchasers of the Company's common stock
during the period from  September 28, 1999 through April 16, 2001. The complaint
names as defendants the Company,  Dwayne M. Walker,  certain  current and former
directors and certain  underwriters.  The Company is vigorously  defending these
lawsuits. Nevertheless, an unfavorable resolution of these lawsuits could have a
material adverse effect on the Company in one or more future periods.

On September 26, 2001 the Company filed a lawsuit  against  Return on Investment
Corporation  ("ROI") in the Superior  Court of King County,  Washington.  In the
complaint the Company  alleges ROI's breach of implied  duties of good faith and
fair  dealing,  and breach of warranty  arising out of the Agreement and Plan of
Merger and  Exchange of Stock dated as of May 11, 2001 which  provided for ROI's
acquisition  of the  Company's  subsidiary,  GO  Software,  Inc.  The Company is
seeking specific  performance of a clause in the Merger Agreement  requiring ROI
to register with the Securities and Exchange  Commission certain shares of ROI's
Common  Stock that were  delivered  to the Company  under the Merger  Agreement.
Given the preliminary  stage of this  proceeding,  the Company cannot provide an
evaluation of the likelihood of a favorable outcome for the Company.

Note 12. 1 for 15 Reverse Stock Split:

On June  15,  2001,  the  Company  completed  a  1-for-15  reverse  split of the
Company's  outstanding common stock. Upon the effectiveness of the reverse stock
split, 15 shares of Common Stock were converted and reclassified as one share of
post-split  common  stock,  and  each  existing  stock  certificate  represented
one-fifteenth the number of shares shown thereon. Fractional shares were rounded
up. The reverse stock split was effective and applied to  shareholders of record
immediately  prior to the  opening of trading on the Nasdaq  National  Market on
Monday, June 18, 2001.

Note 13. NASDAQ Delisting :

On July 26,  2001 the  Company  attended a hearing  before  the Nasdaq  Listings
Qualification Panel to appeal the Nasdaq Staff  Determination  Notice dated June
15, 2001 that  informed the Company that the  Company's  stock would be delisted
from the Nasdaq National Market.  As of August 29, 2001, the Company's stock was
delisted  from  The  Nasdaq  National  Market.  The  Company's  common  stock is
presently listed on the OTC Bulletin Board under the symbol "NWKC".

Note 14. Subsequent Events:

Stock Option Grants

During October 2001, the Company  granted  2,395,000 stock options with exercise
prices ranging from $0.10 to $0.14 per share to its employees.  The options vest
ratably over six months with  vesting  commencing  on the grant date.  The stock
options covered under these grants will result in variable accounting treatment.
Variable   accounting   treatment  will  result  in  unpredictable   stock-based
compensation dependent on fluctuations in quoted prices for the Company's common
stock.

Equity Financing

In October 2001, the Company initiated a draw down of $25,000 under the terms of
the Company's Agreement with Cody Holdings Inc.

                                       19
<PAGE>

ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS

The matters  discussed in this report contain  forward-looking  statements  that
involve  known and unknown  risks and  uncertainties,  such as statements of our
plans,  objectives,  expectations and intentions.  Words such as "may," "could,"
"would," "expect,"  "anticipate,"  "intend," "plan," "believe,"  "estimate," and
variations of such words and similar  expressions  are intended to identify such
forward-looking  statements.  You  should  not  place  undue  reliance  on these
forward-looking  statements,  which are based on our  current  expectations  and
projections about future events, are not guarantees of future  performance,  are
subject to risks,  uncertainties  and  assumptions  (including  those  described
below) and apply only as of the date of this report.  Our actual  results  could
differ  materially  from those  anticipated in the  forward-looking  statements.
Factors that could cause or contribute to such differences  include, but are not
limited to, those discussed below in "Additional  Factors That May Affect Future
Results"  as well as those  discussed  in this  section  and  elsewhere  in this
report,  and the risks discussed in the "Risk Factors"  section  included in our
December  31,  2000 10-K filed on April 17,  2001,  as amended by Form 10-K/A on
April 30, 2001, with the Securities and Exchange Commission.

Overview

We  are  a  technology   infrastructure  and  services  company  that  offers  a
comprehensive  technology and business  services  platform that includes  domain
registration,  hosting, commerce and online marketing services. Through December
31,  2000,  we operated  two commerce  networks,  known as the Network  Commerce
Consumer  Network,  which  aggregated  merchants and shoppers over a distributed
network of Web sites,  and the  Network  Commerce  Business  Network,  which was
designed to enable  businesses to engage in online  activities and  transactions
with  other  businesses  and an  eBusiness  Services  division,  which  provided
consulting,  custom commerce  solutions,  and integrated  marketing services for
businesses conducting commerce online.

In January 2001, we restructured these groups into NCI Marketing and NCI Hosting
and shutdown the eBusiness  Services  division.  NCI Marketing  includes  online
marketing  services  and  various  online  marketplaces  focused  on gaming  and
entertainment.  The gaming and entertainment  online marketplaces were closed in
March  2001.  NCI  Hosting  includes  domain  registration,  hosting,  and other
business services.  As a result of this  restructuring,  certain of our previous
business units and offerings were shut down. The  restructuring  efforts through
September 2001 have resulted in the shutdown of SpeedyClick.com, and the sale of
Ubarter,  which were  components of NCI Marketing,  and the sales of GO Software
and Internet  Domain  Registrars,  which were  components  of NCI  Hosting.  Our
current focus is domain  registration,  hosting,  commerce and online  marketing
services as well as licensing certain of our software patents.

On June 15,  2001,  we  completed a 1-for-15  reverse  split of our  outstanding
common stock.  Upon the  effectiveness  of the reverse stock split, 15 shares of
Common Stock were converted and  reclassified as one share of post-split  common
stock, and each existing stock certificate represented  one-fifteenth the number
of shares shown  thereon.  Fractional  shares were rounded up. The reverse stock
split was effective and applied to shareholders of record  immediately  prior to
the opening of trading on the Nasdaq National  Market on Monday,  June 18, 2001.
All common stock share and per share  amounts have been  adjusted to reflect the
reverse split.

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

Our  condensed  consolidated  financial  statements  for the nine  months  ended
September 30, 2001 were prepared on a going concern  basis,  which  contemplates
the realization of assets and the settlement of liabilities in the normal course
of business.  We have incurred net losses of $194.3  million for the  nine-month
period ended September 30, 2001 and have accumulated  deficits of $561.6 million
as of  September  30,  2001.  We have  continuously  incurred  net  losses  from
operations  and, as of September 30, 2001, have working capital of $1.4 million.
These factors raise  substantial  doubt about our ability to continue as a going
concern.  The consolidated  financial  statements do not include any adjustments


                                       20
<PAGE>

that might  result from the outcome of this  uncertainty.  Our plans to mitigate
the risk of this uncertainty include, but are not limited to, one or more of the
following:

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

     o    raising  additional  capital to fund continuing  operations by private
          placements   of  equity   and/or  debt   securities   or  through  the
          establishment of other funding facilities; and

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

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

We were  incorporated  in  January  1994 and  initially  operated  as a computer
services  company.  In 1996,  we began to change  the focus of our  business  to
conducting  commerce over the Internet.  In April 1999, we changed our name from
TechWave  Inc. to  ShopNow.com  Inc. In May 2000, we changed our name to Network
Commerce Inc. We consummated five acquisitions  during 1999 and seven additional
acquisitions  during 2000.  During the fourth quarter 2000, we announced the lay
off of 209  employees  through  staff  reductions  and from the closure of Media
Assets, Inc., AXC Corporation, Cortix, Inc. and WebCentric, Inc. In addition, we
initiated a restructuring plan to lower costs and improve  profitability,  which
has resulted in the shutdown of  ShopNow.com  and  SpeedyClick.com,  the sale of
assets of  Ubarter.com,  Inc.  and  Internet  Domain  Registrars  Corp.  and the
disposition of GO Software Inc.

Since  restructuring in January 2001, we derive our revenues  primarily from the
sale of online marketing services within NCI Marketing and domain  registration,
hosting and commerce services within NCI Hosting. Revenues from online marketing
services are  recognized as the services are delivered to the merchants over the
term of the agreement,  which typically range from one to three months. Revenues
from domain  registrations  are recognized  over the  registration  term,  which
typically  range from one to three years.  Unearned  revenues are  classified as
either  current  or  long-term   deferred  revenues   depending  on  the  future
recognition of those revenues.  Revenues from hosting and commerce  services are
recognized over the term of the agreements, which are generally twelve months.

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

Revenues from the Network  Commerce  Consumer  Network were generated  primarily
from the sale of online marketing  services,  leads and orders,  advertising and
merchandising.  Revenues from these  agreements  were recognized as the media or
services were delivered to the merchants over the term of the agreements,  which
typically  ranged from one to twelve months.  Where billings  exceeded  revenues
earned on these agreements,  the amounts were included as deferred  revenue.  We
bore the full credit risk with respect to these sales. In certain  circumstances
we offered products  directly to shoppers.  In these instances where we acted as
merchant-of-record,  we  recorded as revenue the full sales price of the product
sold and the full cost of the product to us as cost of revenues,  upon  shipment
of the  product.  Shipping  charges  billed to the  customer  were  included  in
revenues,  and the costs incurred by us to ship the product to the customer were
included in cost of sales.  We have either sold or shut down the  operations  of
this network with the exception of online marketing services.

Revenues from the Network Commerce  Business Network were derived primarily from
providing  domain  registration,  web-enablement  services,  commerce-enablement
services,  transaction  processing,  advertising  and  technology  licensing  to
businesses.  Revenues derived from domain registration fees, which are typically
paid in full at the time of the sale are recognized over the registration  term,
which typically range from one to three years.  Unearned revenues are classified
as either  current  or  long-term  deferred  revenues  depending  on the  future
recognition  of  these  revenues.  Revenues  from the  sale of  advertising  and
merchandising products and services were recognized similar to those sold on the
Network Commerce  Consumer  Network.  Revenues from transaction fees were earned
from member  businesses  that transacted over the online exchange system as well
as from products sold to other member  merchants of the online exchange  system.
Revenues from services were  generated  principally  through  development  fees,
domain registration fees, hosting fees and sales and marketing  services.  These
services  were  purchased  as  a  complete   end-to-end  suite  of  services  or
separately.  We recognized  revenues from the development of custom applications
and online  stores and marketing  projects on a percentage  of completion  basis
over the period of  development  or the period of the marketing  project.  These
projects generally ranged from two to twelve months. Hosting contracts typically
have a term of one year,  with fees  charged and earned on a monthly  basis.  We
bore the full credit risk with  respect to these  sales.  Anticipated  losses on
these contracts were recorded as identified.  Contract costs included all direct
labor, material, subcontract and other direct project costs and certain indirect
costs  related  to  contract  performance.   Changes  in  job  performance,  job


                                       21
<PAGE>

conditions and estimated  profitability,  including  those arising from contract
penalty provisions and final contract settlements that may result in revision to
costs and income,  were  recognized  in the period in which the  revisions  were
determined.  Unbilled services  typically  represented  amounts earned under our
contracts not billed due to timing or contract  terms,  which  usually  consider
passage of time, achievement of certain milestones or completion of the project.
Where billings exceeded revenues earned on contracts,  the amounts were included
as customer  deposits,  as the amounts typically related to ancillary  services,
whereby  we were  acting in an  agency  capacity.  Fee  revenue  from  ancillary
services provided by the services division was recognized upon completion of the
related  job by the  applicable  third  party  vendor.  We have  either  sold or
shutdown  the   operations   of  this  network  with  the  exception  of  domain
registration and hosting.

Revenues were also  generated  from fees paid to us by businesses  and merchants
who licensed our  technology;  transaction  processing,  fraud  prevention,  and
online payment  gateways,  as well as other  e-commerce  enabling  technologies.
Revenues included  licensing fees,  per-transaction  fees and, in certain cases,
monthly hosting and maintenance fees, which are recognized in the period earned.
Revenues generated from technology  licensing were recognized in accordance with
American Institute of Certified Public Accountants,  Statement of Position 97-2,
"Software Revenue Recognition." Where billings exceeded revenues earned on these
contracts,  the  amounts  were  included  as deferred  revenue.  Businesses  and
merchants  who  utilized  our  payment  processing  technologies  acted  as  the
merchant-of-record  and bore the full  credit  risk on those  sales of goods and
services. We sold this business unit during the second quarter 2001.

We  recognized  revenues  from barter  transactions  when earned.  We valued the
barter  transactions  based on the value of the consideration  received from the
customer or from the value of the services  provided to the customer,  whichever
was more readily determinable.  During the nine months ended September 30, 2001,
we recognized approximately $1.4 million in revenues on such transactions.

We recognized revenues from sale of online marketing services, leads and orders,
advertising and  merchandising  in which we received equity in our customer.  We
valued the equity  received from these  transactions  as cost-basis  investments
based on the value of the  consideration  received from the customer or from the
value of the  services  provided to the  customer,  whichever  was more  readily
determinable.  We monitor these  cost-basis  investments  for  impairment.  When
cost-basis  investments  are deemed to be permanently  impaired,  the difference
between  cost and  market  value  is  charged  to  operations.  There  can be no
assurance that our investments in these early-stage technology companies will be
realized.  During the nine  months  ended  September  30,  2001,  we  recognized
approximately $205,000 in revenues on such equity transactions.

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

                                       22
<PAGE>

Acquisitions

In June 1999,  we acquired  GO  Software,  Inc.  (GO).  GO develops  and markets
transaction  processing  software for personal  computers that can function on a
stand-alone basis or can interface with core corporate  accounting  systems.  We
paid GO shareholders $4.7 million in cash, issued a $1.0 million promissory note
bearing  interest at 10%, and issued 74,917  shares of common  stock,  valued at
$128.10 per share, for a total purchase price of $15.4 million.  The acquisition
was  accounted  for  using the  purchase  method of  accounting.  Of the  excess
purchase price of  approximately  $14.4 million,  $13.8 million was allocated to
acquired  technology  and  $556,000 was  allocated to goodwill,  which were both
being  amortized  over a three-year  life. The note bore interest at 10% and was
repaid in full upon  completion  of our initial  public  offering  completed  in
September  1999.  In March 2001,  we  recognized  an  impairment  charge of $1.8
million to  write-down  the carrying  value to the  approximate  net  realizable
value. On May 14, 2001, pursuant to an Agreement and Plan of Merger and Exchange
of Stock  dated as of May 11,  2001,  we  completed  the sale of GO to Return on
Investment  Corporation  (ROI)  through  its  wholly-owned  subsidiary  for $1.0
million  in cash and $3.0  million in ROI  common  stock.  As part of the merger
transaction,  ROI  was  required  to  file  with  the  Securities  and  Exchange
Commission a registration statement to effect a registration of the common stock
received by us in the merger. In third quarter 2001, ROI paid us $500,000,  plus
interest,  pursuant to the terms and  provisions of a promissory  note issued by
ROI to us at the closing of the merger  transaction.  In exchange for payment of
the  promissory  note,  we returned to ROI 166,667  shares of ROI common  stock,
valued at $3.00 per share, received by us in the merger transaction.

Also in June 1999,  we acquired  CardSecure,  Inc.  (CardSecure)  for a purchase
price of  approximately  $3.5  million.  CardSecure is a developer of e-commerce
enabled Web sites.  The  acquisition was accounted for using the purchase method
of  accounting.  The excess  purchase  price of  approximately  $3.5 million was
allocated to acquired  technology and is being amortized over a three-year life.
In September 2001, we recognized an impairment  charge of $526,000 to write-down
the carrying value to the approximate net realizable value.

On November 12, 1999, we acquired SpeedyClick, Corp. (SpeedyClick), a California
corporation,  for $55.6 million of cash,  common stock and common stock options.
SpeedyClick,  a privately  held  company,  maintained  an Internet Web site that
focused on entertainment and interactivity. In connection with this acquisition,
we issued to the  shareholders  of  SpeedyClick  253,283  shares of common stock
valued at $199.65 per share.  Options to purchase  SpeedyClick common stock were
assumed by us and converted into 10,502 options to purchase our common stock. We
also paid cash  consideration  of $3.0 million to the owners of SpeedyClick.  We
accounted  for  this  transaction  as  a  purchase.  Of  the  $55.6  million  in
consideration  paid,  approximately  $27.9 million was allocated to  proprietary
concepts,  $14.7 million to customer lists and $13.0 million to goodwill.  These
intangible assets were being amortized over a three-year life. However, in March
2001,  we  decided  to shut down the  operations  and  wrote-off  the  remaining
intangible assets of $37.2 million.

On December 3, 1999, we acquired Cortix,  Inc. (Cortix),  an Arizona corporation
doing business as 20-20Consumer.com, for $14.4 million of cash and common stock.
Cortix,  a  privately  held  company,   provided  comparison  shopping  services
including online reviews and ratings for commerce-oriented businesses, merchants
and products. In connection with this acquisition, we issued to the shareholders
of Cortix  47,249  shares of common stock  valued at $282.15 per share  together
with cash consideration of $1.0 million.  We accounted for this transaction as a
purchase.  Of the $14.4  million  in  consideration  paid,  approximately  $11.3
million was allocated to acquired technology, $1.6 million to customer lists and
$1.3 million to goodwill.  These  intangible  assets were being amortized over a
three-year  life.  However,  in  December  2000,  we  decided  to shut  down the
operations and wrote-off the remaining intangible assets of $9.1 million.

On  December  17,  1999,  we acquired  WebCentric  Inc.  (WebCentric),  a Kansas
corporation  doing  business  as  bottomdollar.com,  for $41.6  million of cash,
common stock,  and common stock options.  WebCentric,  a privately held company,
developed  e-commerce  integration  technology  and  applications,  including  a
comparison  shopping  engine that  allowed  consumers  to search and compare the
products and services of several leading Internet merchants.  In connection with
this acquisition,  we issued to the shareholders of WebCentric 144,127 shares of
common  stock  valued at $253.35  per share  together  with  approximately  $1.4
million of cash. In addition, we issued replacement stock options to purchase an
aggregate of 8,103 shares of our common stock to certain employees and owners of
WebCentric.  We  accounted  for this  transaction  as a  purchase.  Of the $40.2
million in  consideration  paid,  approximately  $31.8  million was allocated to
acquired  technology,  $3.3  million  to  customer  lists  and $4.6  million  to
goodwill.  These intangible  assets were being amortized over a three-year life.
However,  in December 2000, we decided to shut down the operations and wrote-off
the remaining intangible assets of $24.3 million.

                                       23
<PAGE>

On January 13,  2000,  through a wholly owned Nova Scotia  company,  we acquired
Pronet Enterprises Ltd. (Pronet),  a Canadian company,  for approximately  $12.8
million,  consisting of $3.2 million in cash, $2.2 million in non-cash  deferred
tax  liabilities  assumed  and $7.4  million in common  stock and  common  stock
options  issued  to Pronet  shareholders.  Pronet,  a  privately  held  company,
operated  a   business-to-business   portal  and  marketplace   that  aggregates
businesses  that seek to transact  with one  another.  In  connection  with this
acquisition,  we issued to the  shareholders  of Pronet  10,834 shares of common
stock,  valued at $264.00 per share. In addition,  we issued options to purchase
23,445 shares of common stock to the two principal  shareholders  of Pronet.  We
accounted  for  this  transaction  as  a  purchase.  Of  the  $12.8  million  in
consideration  paid,  approximately  $6.3  million  was  allocated  to  acquired
technology,  $2.7 million to customer lists and $3.8 million to goodwill.  These
intangible  assets were being amortized over a three-year life. In January 2001,
we  revised  our  estimated  useful  life for these  assets  and  amortized  the
remaining  carrying value of Pronet  (approximately  $9.1 million as of December
31, 2000) over the first six months of 2001.

On  January  18,  2000,  we  acquired  AXC   Corporation   (AXC),  a  Washington
corporation,  for  approximately  $17.9  million,  consisting of $2.2 million in
cash,  $4.1  million in  non-cash  deferred  tax  liabilities  assumed and $11.6
million in common stock and common  stock  options  issued to AXC  shareholders.
AXC, a  privately  held  company,  provided  e-commerce  consulting  services to
businesses.  In connection with this acquisition,  we issued to the shareholders
of AXC 36,020  shares of common stock valued at $264.00 per share.  In addition,
we issued  replacement stock options to purchase an aggregate of 4,806 shares of
our common stock to certain  employees  and owners of AXC. We accounted for this
transaction  as  a  purchase.  Of  the  $17.9  million  in  consideration  paid,
approximately $7.2 million was allocated to assembled workforce, $4.9 million to
customer lists, $5.0 million to goodwill and $800,000 to working capital.  These
intangible  assets were being  amortized  over a three-year  life.  However,  in
December  2000,  we  decided  to shut  down the  operations  and  wrote-off  the
remaining intangible assets of $14.2 million.

On April 11, 2000, we acquired FreeMerchant.com, Inc. (FreeMerchant), a Delaware
corporation,  for  approximately  $38.1  million,  consisting of $2.0 million in
cash, $10.0 million in non-cash  deferred tax liabilities  assumed,  $500,000 of
debt assumed and $25.6 million in common stock and common stock  options  issued
to  FreeMerchant  stockholders.  FreeMerchant,  a privately  held  company,  has
developed online store-builder  technology for small- to medium-sized  merchants
who seek a low-cost point of entry  e-commerce and provides  hosting services to
those  merchants.  In  connection  with  this  acquisition,  we  issued  to  the
shareholders of FreeMerchant  171,582 shares of common stock,  valued at $132.00
per share.  In addition,  we issued options to purchase  19,574 shares of common
stock to certain FreeMerchant  stockholders and employees. We accounted for this
transaction  as  a  purchase.  Of  the  $38.1  million  in  consideration  paid,
approximately $23.0 million was allocated to acquired  technology,  $4.1 million
to assembled  workforce and $11.0 million to goodwill.  These intangible  assets
are being  amortized  over a three-year  life.  In March 2001,  we recognized an
impairment  charge of $22.4  million to  write-down  the  carrying  value to the
approximate net realizable value. In September 2001, we recognized an additional
impairment  charge of $2.6  million  to  write-down  the  carrying  value to the
approximate net realizable value.

On June 2, 2000, we acquired  Ubarter.com Inc. (Ubarter),  a Nevada corporation,
pursuant  to an  agreement  and plan of  merger  dated  January  20,  2000,  for
approximately  $61.7 million,  consisting of $875,000 in cash,  $11.4 million in
non-cash deferred tax liabilities assumed,  $978,000 of net liabilities assumed,
$7.6  million in the  cancellation  of debt  between  Ubarter  and us, and $40.8
million in common stock and common stock warrants issued to Ubarter stockholders
and creditors.  Ubarter was a business-to-business  e-commerce enterprise, which
utilized  the Ubarter  Dollar as payment for products and services by its member
businesses over its proprietary  barter exchange system. In connection with this
acquisition,  we issued to the  stockholders and creditors of Ubarter a total of
178,859  shares of common stock valued at  approximately  $226.50 per share.  In
addition, we issued warrants to purchase 3,457 shares of common stock to certain
Ubarter stockholders, employees and creditors. We accounted for this transaction
as a purchase.  Of the $61.7 million in consideration  paid,  approximately $7.5
million  was  allocated  to  acquired  technology,  $2.5  million  to  assembled
workforce, $25.1 million to proprietary concept, $2.5 million to customer lists,
and $24.0 million to goodwill. These intangible assets were being amortized over
a three-year  life.  Early in the fourth  quarter  2000,  we launched a new user
interface and back-end management system for the Ubarter.com  merchant exchange,
and executed various marketing efforts to promote the new system.  These efforts
did not  stimulate  growth in the Ubarter  economy as  expected,  which led to a
revision in our original  forecasts and projections  for Ubarter.  These revised
forecasts indicated that future expected cash flows from this business unit were
less than the  carrying  value of its  intangible  assets,  thus  triggering  an
impairment event in December 2000. At that time, the carrying value of Ubarter's
intangible  assets  including  goodwill  was  $51.6  million.  Based  on  recent
comparable sales of other barter exchange systems,  we determined the fair value
of Ubarter.com to be  approximately  $5 million.  As a result,  we recognized an


                                       24
<PAGE>

impairment  charge of $46.6 million in December  2000. In February 2001, we sold
the assets of the Canadian-based  operations of Ubarter and recognized a loss of
$2.3 million.  In March 2001, we recognized an impairment charge of $4.2 million
to write-down  the remaining  carrying value to the  approximate  net realizable
value.  In June 2001,  we sold the assets of the US-based  operations of Ubarter
and recognized a loss of $1.2 million on the sale.

On August 24, 2000, we acquired Ivebeengood.com, d.b.a. UberWorks (UberWorks), a
wholly owned subsidiary of Trilogy,  Inc.  (Trilogy),  for  approximately  $22.8
million,  consisting of $2.4 million accrued as non-cash deferred  compensation,
$5.9 million in non-cash  deferred tax liabilities  assumed and $14.5 million in
common  stock and common stock  options  issued to  UberWorks  shareholders  and
employees.  UberWorks was a developer of  multi-merchant  e-commerce  purchasing
tools  and  universal   shopping  cart  technology.   In  connection  with  this
acquisition,  we issued to the  shareholders  of  UberWorks  a total of  173,438
shares of common stock valued at  approximately  $91.95 per share. Of the total,
28,217  are being  held  back by us to be  subsequently  released  based on time
vesting and on certain performance criteria yet to be achieved. The maximum term
of the retention is three years from the effective date of the  acquisition.  In
addition,  we issued a warrant to Trilogy,  with an exercise  price of $0.000015
per share, to purchase additional shares of our common stock if, on the one-year
anniversary  date of the  acquisition,  the shares currently held by Trilogy are
not worth at least $13.1 million.  The maximum number of additional  shares that
Trilogy was entitled to purchase under the terms of the warrant was 173,334.  On
August 24, 2001,  Trilogy  exercised  its right under the warrant and  purchased
170,105 shares. We also issued options to purchase 16,545 shares of common stock
to certain UberWorks employees. We accounted for this transaction as a purchase.
Of the $22.8  million of  consideration  paid,  approximately  $12.3 million was
allocated  to  acquired  technology,  $2.4  million  to  deferred  compensation,
$726,000 to assembled  workforce and $7.3 million to goodwill.  These intangible
assets were being amortized over a three-year life.  However,  in March 2001, we
decided to abandon the technology and wrote-off the remaining  intangible assets
of $16.6 million.

On December 8, 2000, we acquired ePackets.Net, Inc. (ePackets) for approximately
$270,000,  consisting  of $150,000 in cash,  $37,000 in common  stock and common
stock  options  and  $83,000  in  net  liabilities  assumed.  ePackets  provided
permission-based   one-to-one   email   solutions.   In  connection   with  this
acquisition,  we issued to the  shareholders of ePackets a total of 2,222 shares
of  common  stock.  We  accounted  for  this  transaction  as  a  purchase.  The
consideration paid was allocated to acquired  technology and was being amortized
over a  three-year  life.  However,  in March 2001,  we decided to shut down the
operations and wrote-off the remaining intangible assets of $255,000.

On December 22, 2000, we acquired Internet Domain Registrars  Corporation (IDR),
for approximately $23.6 million, consisting of $750,000 in cash, $6.1 million in
non-cash  deferred  tax  liabilities  assumed,  $5.7 million in common stock and
$11.1 million in net liabilities  assumed.  IDR is a domain name  infrastructure
company.  In connection with this acquisition,  we issued to the shareholders of
IDR a total of 510,000  shares of common  stock,  of which 66,667 were placed in
escrow for indemnification purposes. In addition, 218,734 shares were issued and
placed in escrow to be released to the former shareholders and certain employees
of IDR upon the  achievement  of  established  future  revenue  targets  over an
eighteen  month  period,  and 14,600  shares were issued to employees of IDR who
continued to be employed by IDR after the acquisition. Finally, 40,000 shares of
our  common  stock  were  issued at the  closing  to  certain  other  persons in
connection  with  the  settlement  of  potential   claims  against  IDR  and  as
consideration  of services  rendered to IDR in connection with the  acquisition.
The closing price of our common stock on December 22, 2000 was $10.35 per share.
We  accounted  for this  transaction  as a  purchase.  Of the $23.6  million  of
consideration  paid,  approximately  $10.5 million was allocated to  proprietary
concept,  $874,000 to domain name, $3.5 million to customer  lists,  $874,000 to
assembled  workforce and $7.8 million to goodwill.  These intangible assets were
being  amortized  over a  three-year  life.  In March  2001,  we  recognized  an
impairment charge of $17.6 million to write-down the remaining carrying value to
the approximate net realizable value. In June 2001, we sold substantially all of
the assets and certain  liabilities  of IDR to Verisign,  Inc. and  recognized a
gain of $6.3 million on the sale.

Results of Operations

Overview.  In light of the recent instability within the technology and Internet
infrastructure  sectors and our current  position within those sectors,  we lack
visibility to our future  revenues and related costs of revenues.  Additionally,
our ability to anticipate  future  trends in our operating  expenses is impaired
due to possible  required changes to our business plans or additional  reduction
in expenses.

Revenues.  Total revenues for the three- and nine- month periods ended September
30, 2001 were $1.6 million and $18.0 million compared to $33.4 million and $79.0
million for the  comparable  periods in 2000.  The decrease was due primarily to


                                       25
<PAGE>

the shutdown of ShopNow.com,  the elimination of product sales,  and the sale of
IDR, GO and Ubarter  Canada and USA.  Revenue  from  continuing  business  units
during the three- and nine- month  periods  ending  September  30, 2001 was $1.5
million  and $4.7  million  compared  to $613,000  and $1.0  million  during the
comparable periods in 2000.

Cost of Revenues.  The cost of revenues  for the three- and nine- month  periods
ended  September  30, 2001,  were  $454,000  and $4.7 million  compared to $15.2
million and $38.4  million,  before the unusual item of $5.3 million  recognized
during the third quarter 2000, for the comparable  periods in 2000. The decrease
in our cost of revenues  was directly  attributable  to the decrease in revenues
during the same period and due to the shutdown of  ShopNow.com,  the elimination
of product sales, and the sale of IDR, GO and Ubarter Canada and USA, which were
all low profit margin operations.

Gross  Profit.  Gross  profit  for the  three-  and nine-  month  periods  ended
September 30, 2001, was $1.1 million and $13.3 million compared to $18.3 million
and $40.6 million, before the unusual item of $5.3 million recognized during the
third  quarter  2000,  for the  comparable  periods  in 2000.  As a  percent  of
revenues,  our gross  margins were 71.5% and 73.9%  compared to 54.6% and 51.4%,
before the unusual  item of $5.3  million  recognized  during the third  quarter
2000,  for the  comparable  periods  in 2000.  This  increase  in  gross  profit
percentage was due primarily to the shutdown of ShopNow.com,  the elimination of
product  sales,  and the sale of IDR, GO and Ubarter  Canada and USA, which were
all low profit margin operations.

Sales and Marketing.  Sales and marketing  expenses  consist  primarily of costs
associated with marketing programs such as advertising and public relations,  as
well as salaries and  commissions.  Sales and marketing  expenses for the three-
and nine- month  periods  ended  September  30, 2001 were $3.2 million and $27.2
million  compared to $24.1 million and $70.2 million for the comparable  periods
in 2000. The decrease was due primarily to elimination of nationwide television,
radio and print advertising during 2001, as well as eliminating the acquisitions
of traffic for our Consumer Network.

Research and Development. Research and development expenses consist primarily of
salaries and related costs  associated  with the development of new products and
services, the enhancement of existing products and services, and the performance
of quality  assurance and  documentation  activities.  Research and  development
expenses for the three- and nine- month  periods  ended  September 30, 2001 were
$1.3 million and $8.7 million compared to $6.7 million and $16.1 million for the
comparable  periods in 2000.  The  decrease was  primarily  due to a decrease in
personnel and related costs during 2001.

General  and  Administrative.   General  and  administrative   expenses  consist
primarily  of  salaries  and  other   personnel-related   costs  for  executive,
financial,  human  resources,  information  services  and  other  administrative
personnel,  as well as  legal,  accounting  and  insurance  costs.  General  and
administrative  expenses for the three- and nine- month periods ended  September
30, 2001 were $2.7 million and $9.9  million  compared to $3.5 million and $10.1
million for the comparable  periods in 2000. The decrease was primarily due to a
decrease in personnel and related costs during 2001.

Amortization of Intangible  Assets.  Amortization of intangible assets resulting
from  acquisitions is primarily  related to the  amortization of customer lists,
domain names, acquired technology, proprietary concepts, assembled workforce and
goodwill.  Amortization  of intangible  assets  expense for the three- and nine-
month  periods  ended  September  30, 2001 was $1.0  million  and $24.4  million
compared to $23.8 million and $55.6 million for the comparable  periods in 2000.
This decrease was due primarily to the decrease in intangible assets and related
amortization  expenses  from  the  sale  of  businesses  and the  write-down  of
intangible  assets.  Intangible  assets  acquired in business  combinations  are
amortized over a three-year period.

Stock-Based  Compensation.  Stock-based  compensation  expense is related to the
amortization  of deferred  compensation  resulting  from stock option  grants to
employees with an option exercise price below the estimated fair market value of
our common stock as of the date of grant.  Stock-based  compensation expense for
the three- and nine- month  periods  ended  September  30, 2001 was $498,000 and
$1.8  million  compared  to $1.5  million and $4.6  million  for the  comparable
periods in 2000. The amount of deferred compensation resulting from these grants
is generally amortized over a one- to three-year vesting period. As of September
30, 2001,  we have $3.9 million of deferred  compensation  to be amortized  over
future periods.

Restructuring and Other Impairment Charges. Restructuring and impairment charges
in the three- and nine- month periods ended September 30, 2001 were $3.8 million


                                       26
<PAGE>

and $65.9 million, respectively. During the first quarter 2001, we continued our
restructuring  efforts, which commenced in December 2000, including the shutdown
of  SpeedyClick,  the sale of Ubarter  Canada,  which resulted in a loss of $2.3
million,  the lay off of 245 employees,  which resulted in severance and related
payroll charges of $580,000,  the write-off of impaired  goodwill and intangible
assets of $55.0 million, and of tenant improvements,  fixed assets, software and
supporting  technologies and infrastructure related to businesses that were shut
down of $13.1 million.  During the second quarter 2001, we further  restructured
our  operations  by selling  Ubarter USA, IDR and GO for total  proceeds of $6.0
million cash and 1 million  shares of Return on  Investment  Corporation  stock,
which is subject to lockup until November 2001. We recorded a gain in the second
quarter of $5.8 million related to these sales.  The gains on these sales in the
second quarter resulted from the fact that we wrote down these business units by
$23.6  million in first quarter 2001,  based on the best  available  evidence of
fair market value.  On an aggregate  basis,  for the nine months ended September
30, 2001,  we  recognized  losses  totaling  $18.5  million on the sale of these
business  units.  Additionally,  we  recognized  gains  totaling  $3.1  million,
primarily from revising  estimates on unused  operating leases and adjustment of
other  liabilities  related to businesses  previously shut down in first quarter
2001.  During the third quarter 2001,  we continued our  restructuring  efforts,
including  the  write-down  of  additional  fixed  assets and other  items which
resulted in a charge of $3.8 million.

Impairment  of  Certain  Long-Lived  Assets.  As part of the  restructuring,  we
determined  that  goodwill  and  intangible   assets  associated  with  acquired
businesses  had a carrying  value in excess of the potential  sales value of the
business units. Impairment of certain long-lived assets for the three- and nine-
month  periods  ended  September  30, 2001 were $3.8 million and $47.0  million,
respectively. There were no such charges for the comparable periods last year.

Unusual Item - Settlement of Claim. In April 2001, we settled  potential  claims
held by Mr. Dwayne Walker, our Company's  Chairman,  Chief Executive Officer and
President,  against us arising from the withdrawal of Mr. Walker's shares of our
common stock from our  secondary  public  offering  completed in February  2000.
There were not such settlements in the comparable periods of 2000.

(Loss) Gain on Sale of Marketable Equity Securities.  Loss on sale of marketable
equity  securities  for the three- and nine- month periods  ended  September 30,
2001 was $0 and $150,000  compared to gains of $4.2 million and $5.5 million for
the comparable periods in 2000.

Interest Income.  Interest income is earned on our cash and cash equivalents and
short-term  investments.  Interest income for the three- and nine- month periods
ended  September 30, 2001 was $90,000 and $713,000  compared to $1.2 million and
$4.1 million for the comparable periods in 2000.

Interest  Expense.   Interest  expense  is  incurred  on  our  outstanding  debt
obligations and the accretion of convertible  promissory note.  Interest expense
for the three- and nine- month  periods  ended  September  30, 2001 was $445,000
million  and  $6.0  million  compared  to  $546,000  and  $1.4  million  for the
comparable  periods in 2000.  Interest expense for the three-month  period ended
September  30,2001  decreased  due  to the  decrease  in  our  outstanding  debt
obligations.  Interest  expense  increased  for  the  nine-month  periods  ended
September 30, 2001 due to the accretion of the convertible promissory note.

Impairment of  Cost-Basis  Investments.  Impairment  of  cost-basis  investments
occurs  when  we  determine  that  certain  of our  cost-basis  investments  are
permanently  impaired  compared  to  their  historical  values.   Impairment  of
cost-basis  investments  for the three- and nine- month periods ended  September
30, 2001 was $9.4  million and $28.2  million  compared to $2.5 million and $2.5
million for the comparable periods in 2000.

Income Tax Benefit.  The income tax benefit resulted principally from reductions
of deferred tax liabilities created as a result of business combinations.  There
was no income tax benefit for the three- and nine- month periods ended September
30,  2001  compared  to  benefits  of $15.7  million  and $39.2  million for the
comparable  periods  in  2000.  We do not  expect  to pay  income  taxes  in the
foreseeable future.

Extraordinary  Gains. During the third quarter 2001 we entered into a settlement
agreement  with Capital  Ventures  International  (CVI).  In exchange for a $2.2
million payment and a $1.5 million  promissory note, CVI agreed we had satisfied
all  obligations  under  the  Securities  Purchase  Agreement  and  all  related
documents  other than the  Registration  Rights  Agreement,  resulting in a $6.5
million  gain.  During the second  quarter  2001,  we  negotiated  with  various
creditors  to settle  liabilities  for less than the  recorded  invoices.  These
settlements resulted in a gain of approximately $9.0 million.

                                       27
<PAGE>


Net Income (Loss).  Net loss for three- and nine- month periods ended  September
30, 2001 was $18.5  million  and $194.3  million  compared to $28.6  million and
$76.5 million for the  comparable  periods in 2000.  The net loss for the three-
and nine- month periods ended September 30, 2001 was due primarily to impairment
charges   related  to  cost-basis   investments   and   intangible   assets  and
restructuring  charges  related to closure of business units. We expect to incur
additional net losses in 2001.

Liquidity and Capital Resources

Since  inception,  we have  experienced  net losses and negative cash flows from
operations.  As of September 30, 2001, we had an  accumulated  deficit of $561.6
million. We have financed our activities largely through issuances of common and
preferred stock, from the issuance of short- and long-term  obligations and from
capital leasing  transactions for certain of our fixed asset purchases.  Through
September 30, 2001,  our  aggregate  net proceeds have been $272.2  million from
issuing equity securities and $52.3 million from issuing debt securities.  As of
September 30, 2001, we had $3.1 million in cash, cash equivalents and short-term
investments,  of which $233,000 of such amounts is  characterized  as restricted
cash to secure our obligations  under certain letters of credit. As of September
30, 2001, we had $2.5 million in marketable equity securities.  These marketable
equity  securities  are not highly liquid  securities as they are thinly traded.
Our primary  investment in  marketable  equity  securities  is in ROI,  which is
subject to put and call provisions.  The put provision  provides us the right to
sell our shares in ROI to ROI should their stock price close less than $2.01 per
share and the call  provision  provides  ROI the right to purchase our shares in
ROI should their stock price close above $3.99 per share. Additionally,  the ROI
common  stock  shares  are not  currently  registered  with the  Securities  and
Exchange Commission.

Net cash used in  operating  activities  was $31.6  million  for the  nine-month
period ended  September 30, 2001,  compared to $66.0 million for the same period
in 2000.

Net cash provided by investing  activities  was $39.7 million for the nine-month
period  ended  September  30,  2001,  compared  to net  cash  used in  investing
activities  of $59.9  million  for the same  period in 2000.  The change was due
primarily to no purchases of short-term  investments  in the  nine-month  period
ended  September 30, 2001,  compared to the purchases of $130.8  million for the
same period in 2000, the decrease in the sales of short-term investments for the
nine-month period ended September 30, 2001 of $38.8 million,  compared to $112.9
million for the same period in 2000,  the decrease in the proceeds from sales of
investments  for the  nine-month  period ended  September  30, 2001 of $920,000,
compared to $9.2 million for the same period in 2000,  the decrease in purchases
of property and equipment of $53,000 for the nine-month  period ended  September
30, 2001, compared to $18.2 million for the same period in 2000, the decrease in
investments  in equity and debt  securities  and other  assets of $4,000 for the
nine-month  period ended  September 30, 2001,  compared to $15.0 million for the
same period in 2000,  and the decrease in  acquisition  of businesses of nil for
the nine-month  period ended  September 30, 2001,  compared to $18.1 million for
the same period in 2000.

Net cash used in  financing  activities  was $16.7  million  for the  nine-month
period  ended  September  30,  2001,  compared  to cash  provided  by  financing
activities  of $132.2  million for the same  period in 2000.  The change was due
primarily to the  repayment of line of credit of $10.1  million and repayment of
long-term debt  obligations  of $6.6 million for the period ended  September 30,
2001  compared  to the closing of our public  offering  on February  18, 2000 of
527,574 shares of common stock at $217.50 per share,  which resulted in proceeds
to us net of underwriters' fees and commissions of $108.7 million, borrowings on
line of credit,  net of loan fees paid of $9.1  million  and  proceeds  of $20.0
million in debt financing for the nine-months ended September 30, 2000.

In March 1999,  we entered into a loan and security  agreement  with a financial
institution  for a term loan and line of credit.  In May 1999, the agreement was
amended and  restated to allow us to borrow up to $8.5  million at any one time,
consisting of a $3.5 million term loan (term loan),  a $4.0 million  bridge loan
and a line of credit  of up to $2.5  million.  On May 10,  2001,  we repaid  our
obligation under the loan and security agreement. The term loan balance was $1.4
million as of March 31, 2001.  The  obligation was repaid with the cash that had
been restricted for this purpose.

On May 19, 2000, we entered into a credit agreement with a commercial bank, with
a  maximum  commitment  amount of $15.0  million  to  finance  the  purchase  of
equipment,  software and tenant  improvements.  On April 2, 2001,  we repaid the
obligation under this credit  agreement,  which had a balance of $9.1 million as
of March  31,  2001.  The  obligation  was  repaid  with the cash  that had been
restricted for this purpose.

                                       28
<PAGE>

On September 28, 2000, we sold $20.0 million of convertible  notes  (Convertible
Notes) and  warrants to CVI, a private  institution,  pursuant  to a  securities
purchase agreement  (Securities  Purchase  Agreement).  The notes had a one-year
term. The original conversion price for the notes was 95% of the average closing
bid  price of our  common  stock  during a 20-day  trading  period  prior to the
conversion  date  (which  automatically  occurs  upon  the  effectiveness  of  a
registration  statement  filed with the  Securities  and  Exchange  Commission),
subject to a maximum conversion price of the lower of our common stock's closing
bid price the day prior to closing or $112.50 per share. On October 26, 2000, we
filed a  registration  statement  on Form S-3 with the  Securities  and Exchange
Commission,  which was declared  effective on December 4, 2000. Also at closing,
we issued warrants to purchase 270,043 shares of our common stock to the private
institution  at an  exercise  price of $155.55  per  share.  The  warrants  were
immediately  exercisable and expired five years from closing.  Immediately after
the effective  date, $5.0 million of the notes were converted into common stock.
The terms of the notes were also amended such that the conversion  price was set
at $25.20 per share.  In May 2001, $4.0 million of the notes were converted into
common stock

On April 3,  2001,  we  received  a notice of  default  from CVI for an  alleged
violation of certain  provisions of Article VI of the Convertible Notes relating
to the breach of certain negative  financial  covenants  contained in our Credit
Agreement  with Imperial Bank and the breach by us of certain  material terms of
the Securities  Purchase Agreement dated as of September 28, 2000. The notice of
default demanded that we redeem the Convertible Notes on or before April 9, 2001
for an amount  equal to $17.25  million,  which  amount  represents  115% of the
aggregate  principal amount of the remaining  Convertible Notes. We responded to
the  notice of  default  on April 4, 2001 and  denied  that an event of  default
occurred  under the Notes.  If we become  insolvent or enter into a  liquidation
proceeding,  after payment to our creditors  there is likely to be  insufficient
assets remaining for any distribution to shareholders.

On July 25, 2001, we restructured the $20 million convertible notes, with a face
value of $11  million  and all  warrants,  with a payment  of $2.2  million  and
issuance of a $1.5 million  non-interest  bearing  convertible  promissory  note
(Settlement  Note).  The  Settlement  Note  has a  term  of  18  months  and  is
convertible,  at any time,  into common stock at an exercise  price of $2.00 per
share at the option of the holder.  Additionally,  the restructuring  eliminates
any event of default under the prior convertible  notes.  Additionally,  CVI did
not  release its claim  against us,  certain  current  and former  officers  and
directors for the alleged security violations and for fraudulent inducement. CVI
agreed not to assert a claim in excess of the  principal  amount of $20  million
less any value received pursuant to the Settlement Agreement.  We are vigorously
defending against these claims. Nevertheless, an unfavorable resolution of these
claims could have a material adverse effect on us in one or more future periods.

On July 10, 2001, we entered into a Common Stock Purchase Agreement  (Agreement)
with Cody  Holdings  Inc.  (Investor)  to provide  us with up to $18  million in
equity financing (Equity Line).  Under the terms of the Agreement,  we will have
the right, but not the obligation during the 18-month term of the Agreement,  to
obtain equity financing  through the issuance of common stock to the Investor in
a series of periodic draw downs at a discount to the market price at the time of
sale to the  Investor.  The shares of common  stock may be sold to the  Investor
during  this  period at times and in  amounts,  subject to certain  minimum  and
maximum volumes,  determined at our discretion. If we choose to draw down on the
Equity Line,  we will use the proceeds of the  financing  for general  corporate
purposes.  We filed with the Securities  and Exchange  Commission a registration
statement  on Form S-1 to  effect  the  registration  of these  shares  prior to
drawing on this  equity line and the SEC  declared  the  registration  statement
effective on September  28, 2001.  In October  2001, we initiated a draw down of
$25,000.

In connection  with the Equity Line, we also issued to the Investor a warrant to
purchase up to 350,000  shares of the common stock at an exercise price of $0.57
per share  (Warrants).  The Warrants  have a term of five years and the exercise
price of the  Warrants is subject to  antidilution  adjustments.  We also issued
warrants to purchase  350,000 shares of the common stock at an exercise price of
$0.57 per share to a  placement  agent,  and  certain  of its  affiliates,  as a
finder's fee (Placement Agent Warrants).  The Placement Agent Warrants also have
a term of five years.  The  Warrant and the  Placement  Agent  Warrants  and the
common stock  issuable upon the exercise of such  warrants  were not  registered
under the Securities Act of 1933, and were granted  pursuant to an exemption set
forth in Section 4(2) thereunder.

We  believe  that our cash  reserves  and cash  flows  from  operations  will be
adequate to fund our operations  through  December 2001.  Consequently,  we will
require substantial  additional funds to continue to operate our business beyond
that period. Many companies in the Internet industry have experienced difficulty
raising additional  financing in recent months.  Additional financing may not be

                                       29
<PAGE>

available to us on favorable  terms or at all. Even if  additional  financing is
available,  we may be required to obtain the consent of our existing  lenders or
the party from whom we secured  our equity  line of credit,  which we may not be
able to obtain. If additional financing is not available,  we may need to change
our business plan, sell or merge our business, or file a petition in bankruptcy.
In addition, our issuance of equity or equity-related securities will dilute the
ownership interest of existing  stockholders and our issuance of debt securities
could  increase the risk or perceived  risk of our company.  Our future  capital
requirements  depend  upon many  factors,  including,  but not limited to:

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

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

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

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

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

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

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

     o    raising  additional  capital to fund continuing  operations by private
          placements   of  equity   and/or  debt   securities   or  through  the
          establishment of other funding facilities; and

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

Recent Accounting Pronouncements

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

In June 2001, the FASB issued SFAS No. 141,  "Business  Combinations."  SFAS No.
141 establishes  accounting and reporting standards for business combinations to
use the purchase  method.  The effective  date of SFAS No. 141 is June 30, 2001.
All  acquisitions  by the Company  have been  accounted  for using the  purchase
method. The Company is evaluating the impact of adopting SFAS No. 141.

In June 2001,  the FASB  issued  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets."  SFAS No.  142  establishes  accounting  and  reporting  standards  for
acquired  goodwill and other  intangible  assets.  The statement  eliminates the
amortization of goodwill over its estimated useful life.  Rather,  goodwill will
be  subject  to at least an annual  assessment  for  impairment  by  applying  a
fair-value-based  test.  SFAS No. 142 is effective  for fiscal  years  beginning
after December 14, 2001. We are evaluating the impact of adopting SFAS No. 142.

In August 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or
Disposal  of  Long-Lived  Assets."  SFAS  No.  144  establishes  accounting  and
reporting  standards for the  impairment  or disposal of  long-lived  assets and
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for  Long-Lived  Assets to Be Disposed Of." SFAS No. 144 is effective for fiscal
years beginning after December 5, 2001. We are evaluating the impact of adopting
SFAS No. 144.
                                       30
<PAGE>

Additional Factors That May Affect Future Results

You  should  carefully   consider  the  risks  described  below  and  the  other
information  in this quarterly  report.  While we have attempted to identify the
primary  known  risks  and  uncertainties  that are  material  to our  business,
additional  risks that we have not yet identified or that we currently think are
immaterial  may also impair our business  operations.  The trading  price of our
common stock could decline due to any of these risks.  In assessing these risks,
you  should  also  refer to the  other  information  in this  quarterly  report,
including the consolidated  financial statements and related notes and the risks
discussed in the "Factors  Affecting Our Operating  Results,  Business and Stock
Price"  section  included in our December 31, 2000 10-K filed on April 17, 2001,
as amended by Form 10-K/A on April 30, 2001,  with the  Securities  and Exchange
Commission.

Risks Related to Our Business

Our future capital  requirements  are likely to be substantial and we may not be
able to obtain  financing on favorable  terms, if at all, and we have received a
"Going Concern" opinion from our accountants.

Our future capital requirements depend upon many factors, including, but not
limited to:

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

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

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

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

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

We  believe  that our cash  reserves  and cash  flows  from  operations  will be
adequate to fund our present operations through December 2001.  However, we will
require substantial  additional funds in the future. Our plans for financing may
include, but are not limited to, the following:

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

     o    raising  additional  capital to fund continuing  operations by private
          placements   of  equity   and/or  debt   securities   or  through  the
          establishment of other funding facilities; and

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

We have  secured an $18 million  equity line of credit,  under which we have the
right, but not the obligation during the eighteen month term of the agreement to
obtain  equity  financing  through the  issuance of common  stock in a series of
periodic  draw downs at a discount to the market  price at the time of sale.  In
October  2001,  we  initiated a $25,000  draw down.  While we have  secured such
financing,  many companies in the Internet industry have experienced  difficulty
raising additional  financing in recent months.  Additional financing may not be
available to us on favorable  terms or at all. Even if  additional  financing is
available,  we may be required to obtain the consent of our existing  lenders or
the party from whom we secured  our equity  line of credit,  which we may not be
able to obtain. If additional financing is not available,  we may need to change
our business plan, sell or merge our business, or file a petition in bankruptcy.
In addition, our issuance of equity or equity-related securities will dilute the
ownership interest of existing  stockholders and our issuance of debt securities
could increase the risk or perceived risk of our company.

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

Failure to restructure payments to our creditors could result in our bankruptcy.

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

Our OTC Bulletin Board Listing could make it more difficult to raise capital.

On August 29,  2001,  our common  stock was  delisted  from the Nasdaq  National
Market.  Our common Stock is presently listed on the OTC Bulletin Board which is
viewed by most investors as a less desirable and less liquid marketplace.  Among
other  things,  our common  stock  constitutes  "penny  stock,"  which places an
increased  regulatory  burden  upon  brokers,  making them less likely to make a
market in our common stock.  The loss of our Nasdaq  National  Market status may
make it more difficult for us to raise capital or complete  acquisitions and may
also complicate compliance with state blue sky laws.

Furthermore,  our  continued  listing on the OTC Bulletin  Board is not assured.
Although the OTCBB does not have any listing requirements per se, to be eligible
for  quotation  on the OTCBB,  we must remain  current in our  filings  with the
Securities and Exchange Commission.

Several  of our board  members  have  resigned.  Our board  currently  has three
independent  members and one management member.  There can be no assurances that
there will not be additional  resignations  or that suitable  replacement  board
members can be found.

We have a history of losses.

We incurred  net losses of $24.7  million for the year ended  December 31, 1998,
$75.9 million for the year ended December 31, 1999,  $262.0 million for the year
ended December 31, 2000 and $194.3 million for the  nine-months  ended September
30,  2001.  At  September  30,  2001,  we had an  accumulated  deficit of $561.6
million.  We  have  historically   invested  heavily  in  sales  and  marketing,
technology  infrastructure  and research and development.  As a result,  we must
generate significant revenues to achieve and maintain  profitability.  There can
be no  assurance  that we will ever become  profitable  on an annual  basis.  We
expect that our sales and  marketing  research and  development  and general and
administrative  expenses will decrease in absolute dollars but may increase as a
percentage of revenues.

Additionally, if our remaining cost-basis investments,  which are in early-stage
technology  companies  and  acquisitions,  are not  successful,  we  will  incur
additional losses from asset impairment charges, lease and employee terminations
and other restructuring costs.

Our future  revenues are  unpredictable  and we expect our operating  results to
fluctuate from period to period.

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

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

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

                                       32
<PAGE>


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

     o    the mix of products and services that we sell.

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

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

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

     o    a decrease in the growth of Internet usage; and

     o    the pricing policies of our competitors.

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

Our business model is unproven and changing.

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

If we fail to effectively manage the rapid change of our operations our business
will suffer.

Our ability to  successfully  offer our products and services and  implement our
business plan in a rapidly  evolving market  requires an effective  planning and
management   process.  We  are  diversifying  and  changing  the  scope  of  our
operations.  In January 2001, we announced  plans to discontinue the ShopNow.com
marketplace  that we launched in August 1998. In March 2001, we announced  plans
to discontinue our gaming and  entertainment  site,  SpeedyClick.com.  In recent
months,  we have  increasingly  focused on developing  and providing  technology
infrastructure  and online  business  services.  Due to the recent shifts in our
business focus,  our historical  results are likely not indicative of our future
performance and you may have  difficulty  evaluating our business and prospects.
While our operations  have been changing,  we have reduced our overall number of
employees from 620 in October 2000 to 80 as of September 30, 2001. These changes
in our business plan and reduction in personnel  have placed,  and will continue
to place, a significant  strain on our management  systems,  infrastructure  and
resources.  Simultaneously,  the  reduction  in our  workforce  may make it more
difficult to execute and implement  our business  plan. We will need to continue
to improve our  financial  and  managerial  controls and  reporting  systems and
procedures,  and will  need to  continue  to train  and  manage  our  workforce.
Furthermore,  we expect that we will be required to manage an increasing  number
of relationships with various customers and other third parties.  Any failure to
adapt to any of the foregoing areas  efficiently and effectively could cause our
business to suffer.

Our success depends upon achieving adequate market share to increase our
revenues and become profitable.

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

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

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

     o    enhance existing products and services;

                                       33
<PAGE>

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

     o    complete projects on time;

     o    increase the number of businesses and merchants using our products and
          online business services; and

     o    continue  to  increase  the   attractiveness   of  the  eHost.com  and
          Freemerchant.com Web sites.

We face significant competition.

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

     o    fewer  businesses and merchants  using our  technology  infrastructure
          products and services;

     o    the  obsolescence  of  the  technology  underlying  our  products  and
          services;

     o    a decrease in traffic on our Web sites; and

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

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

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

     o    larger customer or user bases;

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

     o    greater name recognition and larger marketing budgets and resources;

     o    substantially greater financial, technical and other resources;

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

     o    larger production and technical staffs.

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

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

We cannot predict with any certainty the effect that new governmental and
regulatory policies, or industry reactions to those policies, will have on our
domain registration business.

Before April 1999, the domain name  registration  system for the .com,  .net and
 .org  domains  was  managed  by  Network  Solutions  pursuant  to a  cooperative
agreement with the U.S. government. In November 1998, the Department of Commerce
recognized the Internet  Corporation  for Assigned  Names and Numbers,  commonly
known as ICANN, to oversee key aspects of the Internet domain name  registration
system. We cannot predict with any certainty that future measures adopted by the

                                       34
<PAGE>

Department of Commerce or ICANN will benefit us or that they will not materially
harm our business,  financial condition and results of operations.  In addition,
we continue to face the  following  risks:

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

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

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

Our business will suffer if we fail to maintain our strategic business
relationships or are unable to enter into new relationships.

An  important   element  of  our  strategy   involves   entering  into  business
relationships with other companies.  Our success is dependent on maintaining our
current  contractual  relationships and developing new strategic  relationships.
These contractual relationships typically involve joint marketing,  licensing or
promotional  arrangements.  Although these relationships are an important factor
in our  strategy  because  they  enable us to enhance  our  product  and service
offerings,  the parties with which we contract may not view their  relationships
with us as significant to their own businesses.  Most of these relationships may
be  terminated  by either  party with little  notice.  Accordingly,  in order to
maintain our strategic  business  relationships  with some of these  partners we
will need to meet our partners' specific business objectives,  which may include
incremental  revenue,  brand awareness and implementation of specific e-commerce
applications.  If our strategic business  relationships are discontinued for any
reason,  or if we are  unsuccessful  in entering into new  relationships  in the
future, our business and results of operations may be harmed.

We may not derive substantial benefits from our strategic relationships.

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

We depend on our key personnel for successful operation of our business.

Our success  depends on the skills,  experience  and  performance  of our senior
management and other key personnel,  specifically  including Dwayne Walker,  our
Chairman,  Chief Executive  Officer and President,  N. Scott Dickson,  our Chief
Financial Officer and Secretary,  Sanjay Anand, our Chief  Information  Officer,
Anne-Marie K. Savage,  our Executive Vice President,  Joan Wright, our Executive
Vice President,  and Joseph Shatara,  our Vice President.  Many of our executive
officers  have joined us within the past three  years.  If we do not quickly and
efficiently  integrate these new personnel into our management and culture,  our
business  could  suffer.  If we  fail  to  successfully  attract  and  retain  a
sufficient  number of  qualified  executive,  technical,  managerial,  sales and
marketing,  business  development and administrative  personnel,  our ability to
manage and expand our business could suffer. Our current financial situation may
make it more difficult to attract and retain key employees.

Our ability to develop and integrate infrastructure technologies is subject to
uncertainties.

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


                                       35
<PAGE>

maintain an adequate testing and technical support  infrastructure to ensure the
successful introduction of products and services.

Our computer systems may be vulnerable to system failures.

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

Our business may be harmed by defects in our software and systems.

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

We will need to expand and upgrade our systems in order to maintain customer
satisfaction.

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

Our operations from foreign markets involve risks.

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

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

     o    restrictions on the export of encryption technology; and

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

We may be unable to adequately protect our intellectual property and proprietary
rights.

We regard our  intellectual  property rights as critical to our success,  and we
rely on trademark and copyright law, trade secret protection and confidentiality
and license  agreements with our employees,  customers and others to protect our
proprietary  rights.  Despite our precautions,  unauthorized third parties might
copy portions of or reverse  engineer our software and use  information  that we
regard as  proprietary.  We currently have been granted two patents and have six
patent  applications  pending in the United States  Patent and Trademark  Office
covering different aspects of our product architecture and technology.  However,

                                       36
<PAGE>

there is no  assurance  that any pending  patent  application  will result in an
issued  patent,  or that our existing  patents or any future  patent will not be
challenged,  invalidated or  circumvented,  or that the rights granted under any
patent will provide us with a competitive advantage.  The laws of some countries
do not  protect  proprietary  rights  to the same  extent  as do the laws of the
United States, and our means of protecting our proprietary rights abroad may not
be  adequate.  Any  misappropriation  of our  proprietary  information  by third
parties could adversely affect our business by enabling third parties to compete
more effectively with us.

Our technology may infringe the intellectual property rights of others.

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

If the security provided by our e-commerce, hosting or marketing services is
breached, we may be liable to our clients and our reputation could be harmed.

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

     o    secure online payment services;

     o    secure order processing services; and

     o    fraud prevention and management services.

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

Risks Related to Our Industry

We are vulnerable to downturns experienced by other Internet companies or the
Internet Industry in general.

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

Difficulties  such as these may  affect  our  ability  to  collect  revenues  or
advances  against  revenues from our existing  partners or  advertisers  as such
amounts  become due and may impair the value of the equity we hold in certain of
our  partners.  If the  current  environment  for  Internet  companies  does not
improve, our business and financial results may suffer.

                                       37
<PAGE>

Our success depends on continued increases in the use of the Internet as a
commercial medium.

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

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

Rapid technological change could negatively affect our business.

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

We rely on the Internet infrastructure provided by others to operate our
business.

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

Future governmental regulation and privacy concerns could adversely affect our
business.

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

                                       38
<PAGE>

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

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

We could face liability for material transmitted over the Internet by others.

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

We do not currently collect sales tax from all transactions.

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



                                       39
<PAGE>


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The fair  value of our  investment  portfolio  or  related  income  would not be
significantly  impacted  by either a 100 basis  point  increase  or  decrease in
interest rates due mainly to the  short-term  nature of the major portion of our
investment  portfolio.  All of the  potential  changes  noted above are based on
sensitivity  analyses  performed  on our  investment  portfolio  balances  as of
September 30, 2001.













                                       40
<PAGE>


PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

On May 22, 2001, Capital Ventures  International  ("CVI") filed suit against the
Company in the United  States  District  Court for the Southern  District of New
York under Civil  Action No.  01CV-4390  ("Complaint").  On July 25,  2001,  the
Company entered into a settlement  agreement with CVI  ("Settlement  Agreement")
with respect to certain claims arising out of the Securities  Purchase Agreement
dated as of September  28, 2000 between the Company and CVI, and all  amendments
thereto,  and all  documents  (other  than the  Registration  Rights  Agreement)
executed in connection therewith  (collectively  referred to as the "Contract").
Pursuant to the Settlement Agreement,  CVI released the Company, and the Company
released CVI, from all claims,  demands and causes of action,  whether direct or
indirect,  known or  unknown,  which  either  CVI or the  Company  owned or held
against  the other  based upon the  Contract.  However,  CVI did not release (a)
CVI's claim against the Company for an alleged violation of section 10(b) of the
Securities Exchange Act of 1934, and Rule 10b-5 promulgated  thereunder,  stated
in count I of its Complaint, (b) CVI's claim against certain individual officers
and current and former  directors  mentioned in the Complaint  (the  "individual
defendants")  for an  alleged  violation  of  section  20(a)  of the  Securities
Exchange Act of 1934,  stated in count II of the Complaint,  and (c) CVI's claim
for fraudulent  inducement  set forth in count III of the Complaint.  CVI agreed
that in partial consideration for its receipt of a $2.2 million cash payment and
a $1.5 million  convertible  promissory  note, CVI would not, in prosecuting its
claims against the Company and the  Individual  Defendants  preserved  under the
Settlement  Agreement,  assert a claim in excess of the principal  amount of $20
million less any value  received  (and not  returned,  paid-over or disgorged as
more fully  described in the  Settlement  Agreement)  pursuant to the Settlement
Agreement. The parties agreed to promptly execute and file a stipulated order of
dismissal with prejudice of counts IV through VI of the Complaint.

On December 20, 2000,  an action was  initiated  in Los Angeles  Superior  Court
styled Futurist Entertainment,  Inc. v. Network Commerce,  Inc., Jackie Sutphin,
SpeedyClick.com,  Case No. BC242139.  In the complaint plaintiff alleged,  among
other things,  breach of contract and business torts against defendants relating
to a Development and Website  Agreement  between  Futurist  Entertainment,  Inc.
("Futurist")  and Network  Commerce  dated February 25, 2000. The website was to
serve as the official website for the Jackson 5's upcoming album and world tour.
Plaintiff  alleged damages "in an amount yet to be ascertained,  but in no event
less than  $4,400,000." On July 9 2001, the Company and Futurist  entered into a
Settlement  Agreement.  Under  the  terms of the  settlement,  Futurist  and the
Company  entered into a mutual  release of claims and the lawsuit was  dismissed
with prejudice.

On September 26, 2001 the Company filed a lawsuit  against  Return on Investment
Corporation  ("ROI") in the Superior  Court of King County,  Washington.  In the
complaint the Company  alleges ROI's breach of implied  duties of good faith and
fair  dealing,  and breach of warranty  arising out of the Agreement and Plan of
Merger and Exchange of Stock dated as of May 11, 2001 ("Merger Agreement") which
provided for ROI's acquisition of the Company's  subsidiary,  GO Software,  Inc.
The Company is seeking specific  performance of a clause in the Merger Agreement
requiring ROI to register with the  Securities and Exchange  Commission  certain
shares of ROI's Common Stock that were delivered to the Company under the Merger
Agreement.  Given the preliminary  stage of this proceeding,  the Company cannot
provide an evaluation of the likelihood of a favorable outcome for the Company.

On September 26, 2001,  Jan Sherman,  James  Michaelson  and Jason Elkin filed a
complaint captioned In re: Network Commerce Inc. Securities Litigation (Case No.
C01-0675L)  in the United  States  District  Court for the  Western  District of
Washington.  The complaint was filed under the same cause number as the original
complaint filed on May 10, 2001 by Jan Sherman against the Company and the other
defendants   named   therein.   The  lawsuit  seeks   unspecified   damages  and
certification  of a class consisting of purchasers of the Company's common stock
during the period from  September 28, 1999 through April 16, 2001. The complaint
names as defendants the Company,  Dwayne M. Walker,  certain  current and former
directors and certain  underwriters.  The Company is vigorously  defending  this
lawsuit.  Nevertheless, an unfavorable resolution of these lawsuits could have a
material adverse effect on the Company in one or more future periods.


                                       41
<PAGE>


ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

Between  June 30, 2001 and  September  30,  2001,  the  Company  issued and sold
unregistered securities as set forth below:

On July 10, 2001,  the Company  entered into a Common Stock  Purchase  Agreement
("Agreement")  with Cody Holdings Inc.  ("Investor") to provide the Company with
up to $18 million in equity financing  ("Equity  Line").  Under the terms of the
Agreement,  the Company will have the right,  but not the obligation  during the
18-month term of the Agreement,  to obtain equity financing through the issuance
of common stock to the Investor in a series of periodic draw downs at a discount
to the market  price at the time of sale to the  Investor.  The shares of common
stock may be sold to the  Investor  during  this period at times and in amounts,
subject to certain minimum and maximum volumes, determined at our discretion. If
the Company  chooses to draw down on the Equity  Line,  the Company will use the
proceeds of the financing for general corporate purposes. The Company filed with
the Securities and Exchange  Commission a registration  statement on Form S-1 to
effect the  registration  of these  shares prior to drawing on this equity line,
and the SEC declared the registration statement effective on September 28, 2001.

In  connection  with the Equity Line,  the Company also issued to the Investor a
warrant to purchase up to 350,000  shares of the  Company's  common  stock at an
exercise price of $0.57 per share ("Warrants"). The Warrants have a term of five
years  and the  exercise  price  of the  Warrants  is  subject  to  antidilution
adjustments.  The Company also issued warrants to purchase 350,000 shares of the
common stock at an exercise price of $0.57 per share to a placement  agent,  and
certain of its affiliates,  as a finder's fee ("Placement Agent Warrants").  The
Placement Agent Warrants also have a term of five years.

No underwriters were engaged in connection with these issuances and sales. These
securities  were  issued in  transactions  exempt  from  registration  under the
Securities  Act of 1933 in reliance upon Section 4(2) of the  Securities Act and
Regulation D  promulgated  thereunder.  Between July 1, 2001 and  September  30,
2001,  the  Company  issued no shares of common  stock in  conjunction  with the
exercise of options  granted under the Company's  stock option plans. No options
were granted outside of the Company's stock option plans.  These securities were
issued in transactions exempt from registration under the Securities Act of 1933
in reliance upon Rule 701  promulgated  under the Securities Act of 1933.  Where
Rule 701 was not available,  the securities were issued in  transactions  exempt
from registration under the Securities Act of 1933 in reliance upon Section 4(2)
of the Securities Act of 1933.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
None.

ITEM 5: OTHER INFORMATION
None.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

Number   Description

10.1      Offer of Employment for N. Scott Dickson dated August 6, 2001.

(b)  Reports on Form 8-K

         Form 8-K filed July 2, 2001
         Form 8-K filed  July 16, 2001
         Form 8-K filed July 31, 2001
         Form 8-K/A filed July 31, 2001
         Form 8-K filed August 7, 2001


                                       42
<PAGE>


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                         NETWORK COMMERCE INC.



Date: November 14, 2001
                                         By:   /s/ Dwayne M. Walker
                                              ------------------------------
                                              Dwayne M. Walker
                                              Chief Executive Officer

                                         By:   /s/ N. Scott Dickson
                                              ------------------------------
                                              N. Scott Dickson
                                              Chief Financial Officer




                                       43

<Page>



                                 EXHIBIT INDEX

Number   Description

10.1      Offer of Employment for N. Scott Dickson dated August 6, 2001.
























                                       44