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 MARCH 31, 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 May 4, 2001, there were 77,027,788 shares  outstanding of the Registrant's
common stock.


<PAGE>


                              Network Commerce Inc.

                                    Form 10-Q

                                      Index

<TABLE>
<CAPTION>
                                                                                                           PAGE
<S>               <C>                                                                                      <C>
PART I            FINANCIAL INFORMATION

ITEM 1:           Financial Statements

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

ITEM 2:           Management's Discussion and Analysis of Financial
                     Condition and Results of Operations................................................    18

ITEM 3:           Quantitative and Qualitative Disclosures about Market Risk............................    39


PART II           OTHER INFORMATION

ITEM 1:           Legal Proceedings.....................................................................    40

ITEM 2:           Changes in Securities and Use of Proceeds.............................................    40

ITEM 3:           Defaults Upon Senior Securities.......................................................    40

ITEM 4:           Submission of Matters to a Vote of Security Holders...................................    40

ITEM 5:           Other Information.....................................................................    40

ITEM 6:           Exhibits and Reports on Form 8-K......................................................    41


SIGNATURES        ......................................................................................    42

EXHIBITS          ......................................................................................    43

</TABLE>

                                       2
<PAGE>


                         PART I. FINANCIAL INFORMATION

                                    ITEM 1.


































                                       3
<PAGE>

                              Network Commerce Inc.
                      Condensed Consolidated Balance Sheets
                                (in thousands)
<TABLE>
<CAPTION>
                                                                                  March 31,     December 31,
                                                                                     2001          2000
                                                                                 ------------   -----------
<S>                                                                              <C>            <C>
                                   ASSETS
Current assets:
    Cash and cash equivalents                                                         $ 6,907      $ 11,715
    Restricted cash                                                                    13,730        16,599
    Short-term investments                                                              5,627        21,592
    Accounts receivable, less allowance for bad debts of $2,260 and $1,195.             4,953        18,111
    Notes receivable from employees                                                         -         2,900
    Prepaid expenses and other current assets                                           9,720        13,341
                                                                                 ------------   -----------
         Total current assets                                                          40,937        84,258
Property and equipment, net                                                            14,901        22,580
Goodwill and intangible assets, net                                                    18,712       135,628
Cost-basis investments                                                                 11,425        29,481
Other assets, net                                                                       2,155         5,773
                                                                                 ------------   -----------
         Total assets                                                                $ 88,130     $ 277,720
                                                                                 ============   ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                                 $ 14,160      $ 18,933
    Accrued liabilities and other liabilities                                          12,594        21,502
    Current portion of notes and leases payable                                        25,260        24,797
    Deferred revenues                                                                  10,590        11,338
                                                                                 ------------   -----------
         Total current liabilities                                                     62,604        76,570
Notes and leases payable and line of credit, less current portion                       1,094         1,741
Non-current liability                                                                   1,300             -
Deferred revenues                                                                       2,734         3,703
                                                                                 ------------   -----------
         Total liabilities                                                             67,732        82,014
                                                                                 ------------   -----------
Commitments
Shareholders' equity:
    Convertible preferred stock, $0.001 par value:  authorized shares - 5,000,000;
        none issued and outstanding                                                         -             -
    Common stock, $0.001 par value:  authorized shares - 200,000,000; issued
         and outstanding shares - 78,253,578 at March 31, 2001 and 78,222,569
         at December 31, 2000                                                         554,463       555,175
    Subscriptions receivable                                                              (63)       (2,421)
    Common stock warrants                                                              18,172        18,172
    Deferred compensation                                                              (7,151)       (7,758)
    Accumulated other comprehensive loss                                                  (82)         (130)
    Accumulated deficit                                                              (544,941)     (367,332)
                                                                                 ------------   -----------
         Total shareholders' equity                                                    20,398       195,706
                                                                                 ------------   -----------
         Total liabilities and shareholders' equity                                  $ 88,130     $ 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)

<TABLE>
<CAPTION>
                                                                      For the Three Months Ended
                                                                              March 31,
                                                                     ----------------------------
                                                                         2001              2000
                                                                     ----------        ----------
<S>                                                                  <C>                <C>
Revenues                                                               $ 10,108          $ 18,682
Cost of revenues                                                          2,316            10,393
                                                                     ----------        ----------
          Gross profit                                                    7,792             8,289
                                                                     ----------        ----------
Operating expenses:
     Sales and marketing                                                 17,291            22,100
     Research and development                                             5,268             4,215
     General and administrative                                           4,283             3,234
     Amortization of intangible assets                                   18,297            13,492
     Stock-based compensation                                               260             1,856
     Restructuring and other impairment charges                          70,988                 -
     Impairment of certain long-lived assets                             43,136                 -
     Unusual item - settlement of claim                                   4,559                 -
                                                                     ----------        ----------
          Total operating expenses                                      164,082            44,897
                                                                     ----------        ----------
          Loss from operations                                         (156,290)          (36,608)
                                                                     ----------        ----------
Nonoperating (expense) income:
     (Loss) gain on sale of marketable equity securities                   (150)            1,086
     Interest income                                                        557             1,295
     Interest expense                                                    (2,882)             (441)
     Other                                                                  (24)              (20)
     Impairment of cost-basis investments                               (18,820)                -
                                                                     ----------        ----------
          Total nonoperating (expense) income, net                      (21,319)            1,920
                                                                     ----------        ----------
          Net loss before income tax benefit                           (177,609)          (34,688)
Income tax benefit                                                            -            11,916
                                                                     ----------        ----------
          Net loss                                                   $ (177,609)        $ (22,772)
                                                                     ==========        ==========

Basic and diluted net loss per share                                    $ (2.45)          $ (0.48)
                                                                     ==========        ==========
Weighted average shares outstanding used to
     compute basic and diluted net loss per share                    72,458,451        47,581,471
                                                                     ==========        ==========


</TABLE>



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

                                       5
<PAGE>

                              Network Commerce Inc.
                 Condensed Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                              For the three months ended
                                                                                                       March 31,
                                                                                              ----------------------------
                                                                                                  2001             2000
                                                                                              -----------      -----------
<S>                                                                                            <C>              <C>
Operating activities:
      Net loss                                                                                 $ (177,609)       $ (22,772)
      Adjustments to reconcile net loss to net cash used in operating activities-
         Depreciation and amortization                                                             21,235           15,806
         Accretion of promissory note payable                                                       2,074                -
         Provision for bad debts                                                                    2,627                -
         Amortization of deferred compensation                                                        260            1,856
         Restructuring and impairment charges                                                      70,988                -
         Impairment of certain ling-lived assets                                                   43,136                -
         Impairment of marketable equity securities and investments                                18,820                -
         Unusual item - settlement of claim                                                         4,559                -
         Realized loss from sale of marketable equity securities                                      150                -
         Deferred income tax benefit                                                                    -          (11,916)
         Changes in operating assets and liabilities, excluding effects of acquired businesses-
              Accounts receivable                                                                   8,730           (4,179)
              Prepaid expenses and other current assets                                              (260)          (7,764)
              Other assets                                                                           (283)               -
              Accounts payable and accrued liabilities                                            (16,825)           4,038
              Deferred revenue                                                                        706            3,231
                                                                                              -----------      -----------
              Net cash used in operating activities                                               (21,692)         (21,700)
                                                                                              -----------      -----------
Investing activities:
      Purchases of short-term investments                                                               -         (104,768)
      Sales of short-term investments                                                              32,694           49,703
      Proceeds from sale of investments                                                               148               29
      Purchases of property and equipment                                                             (35)          (6,483)
      Investments in equity and debt securities and other assets                                       (2)         (10,531)
      Acquisition of businesses, net of cash acquired of $ - in 2001 and $259 in 2000                   -           (5,826)
                                                                                              -----------      -----------
              Net cash provided by (used in) investing activities                                  32,805          (77,876)
                                                                                              -----------      -----------
Financing activities:
      Payments on line of credit                                                                   (1,041)               -
      Payments on long-term debt                                                                   (1,157)          (3,038)
      Proceeds from sale of common stock and exercise of stock options                                  4          109,347
      Proceeds from collection of subscription receivable                                               3                -
                                                                                              -----------      -----------
              Net cash (used in) provided by financing activities                                  (2,191)         106,309
                                                                                              -----------      -----------
Net increase in cash and cash equivalents                                                           8,922            6,733
Cash and cash equivalents at beginning of period                                                   11,715           10,660
                                                                                              -----------      -----------
Cash and cash equivalents at end of period                                                       $ 20,617         $ 17,393
                                                                                              ===========      ===========
Supplementary disclosure of cash flow information:
      Cash paid during the period for interest                                                      $ 427            $ 390
                                                                                              ===========      ===========
      Cash paid during the period for income taxes                                                    $ -              $ -
                                                                                              ===========      ===========
      Non-cash investing and financing activities:
         Common stock, options and warrants issued and liabilities assumed
              as part of business and technology acquisitions                                         $ -         $ 18,992
                                                                                              ===========      ===========
         Assets acquired under capital leases                                                       $ 160              $ -
                                                                                              ===========      ===========


</TABLE>



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

                                       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  technology  and
services platform solution that includes domain registration,  hosting services,
commerce  services,  business services and one-to-one  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.  In January 2001, the Company  restructured  these groups
into  the  Network   Commerce   Portal   Services   and  the  Network   Commerce
Infrastructure  and Technology  (IT) groups.  The Portal Services group includes
one-to-one  marketing services and various online marketplaces focused on gaming
and   entertainment.   The  Network  Commerce  IT  group  includes  domain  name
registration,  technology and licensing and other business services. As a result
of this  restructuring,  certain of the Company's  previous  business  units and
offerings were shut down. Further  restructuring efforts in March 2001, resulted
in the shutdown of SpeedyClick.com and the sale of Ubarter Canada, components of
the Portal Services group.  The Company's  current focus is its IT group and its
one-to one marketing business.

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  acquisitions  and 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 three months
ended  March  31,  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 $177.6 million
for the three-month period ended March 31, 2001 and has accumulated  deficits of
$544.9 million as of March 31, 2001. The Company has  continuously  incurred net
losses from operations and, as of March 31, 2001, has working capital deficit of
$21.6  million.  The Company is out of compliance  with certain debt  covenants.
These factors raise substantial doubt about the Company's ability to continue as
a going  concern.  The  consolidated  financial  statements  do not  include any
adjustments that might result from the outcome of this uncertainty.

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


                                       7
<PAGE>

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

     exploring strategic  alternatives,  which may include a merger, asset sale,
     or another comparable transaction;

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

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

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


Public Offerings

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

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

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. 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-month  periods  ended  March  31,  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
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.

                                       8
<PAGE>

Use of Estimates

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

Revenue Recognition

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

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

Revenues  from the  Network  Commerce  Business  Network,  which is a network of
proprietary   and   affiliated   Web   sites,   including    www.registrars.com,
www.b2bnow.com,  www.freemerchant.com,  www.ehost.com and  www.ubarter.com,  are
derived primarily from providing domain registration,  web-enablement  services,
commerce-enablement  services,  transaction  processing,   advertising,  hosting
services and technology  licensing to businesses.  Revenues from  registrars.com
are derived from the sale of domain name registration  fees, which are typically
paid in full at the time of the sale and are  recognized  over the  registration
term,  which  typically  range from one to three  years.  Unearned  revenues are
classified as either  current or long-term  deferred  revenues  depending on the
future  recognition of those  revenues.  Revenues from  b2bNow.com are generated
primarily from the sale of advertising and  merchandising  products and services
similar to those sold on the Network Commerce  Consumer  Network.  Revenues from
Ubarter.com are generated from  transaction  fees earned from member  businesses
that transact over the Ubarter  exchange system as well as from products sold by
Ubarter.com to other member merchants of the Ubarter  exchange system.  Revenues
from  services  are  generated  principally  through  development  fees,  domain
registration fees, hosting fees and sales and marketing services. These services
can be purchased as a complete  end-to-end suite of services or separately.  The
Company  recognizes  revenues from the  development of custom  applications  and
online  stores and marketing  projects on a percentage of completion  basis over
the period of development or the period of the marketing project. These projects
generally range from two to twelve months.  Hosting  contracts  typically have a
term of one year,  with fees charged and earned on a monthly basis.  The Company
bears full credit risk with respect to these sales.  Anticipated losses on these
contracts  are  recorded  when  identified.   To  date,  losses  have  not  been
significant.  Contract costs include all direct labor, material, subcontract and
other  direct  project  costs and  certain  indirect  costs  related to contract
performance.   Changes  in  job   performance,   job  conditions  and  estimated
profitability,  including  those arising from contract  penalty  provisions  and
final contract  settlements that may result in revision to costs and income, are
recognized  in the  period  in which  the  revisions  are  determined.  Unbilled
services  typically  represent amounts earned under the Company's  contracts not
billed due to timing or contract terms,  which usually consider passage of time,
achievement of certain  milestones or completion of the project.  Where billings
exceed  revenues   earned  on  contracts,   the  amounts  are  included  in  the
accompanying  consolidated  balance sheets as customer deposits,  as the amounts
typically  relate to  ancillary  services,  whereby  the Company is acting in an
agency capacity.  Fee revenue from ancillary  services  provided by the services
division is  recognized  upon  completion  of the related job by the  applicable
third party vendor.

Revenues  are also  generated  from fees paid to the Company by  businesses  and
merchants who license the Company's technology;  transaction  processing,  fraud
prevention,  and online payment gateways,  as well as other e-commerce  enabling
technologies.  Revenues  include  licensing  fees,  per-transaction  fees and in
certain cases monthly hosting and maintenance  fees, which are recognized in the
period earned. Revenues generated from technology

                                       9
<PAGE>

licensing  are  recognized  in  accordance  with  Statement  of  Position  97-2,
"Software Revenue  Recognition."  Where billings exceed revenues earned on these
contracts,  the amounts are included in the  accompanying  consolidated  balance
sheets as deferred  revenue.  Businesses and merchants who utilize the Company's
payment processing  technologies act as the merchant-of-record and bear the full
credit risk on those sales of goods and services.

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

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

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  $13.7  million and $16.6 million of cash as of March 31, 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  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 March 31, 2001. Marketable equity securities consist solely of investments
in the common stock of publicly traded companies and are recorded at fair value.
Realized  gains and losses from the sale of  available-for-sale  securities  are
determined on a specific  identification basis. Dividend and interest income are
recognized  as earned.  Any changes in market values that are  considered  other
than temporary are recorded as realized gains or losses in current operations.

Stock Compensation

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

Income Taxes

Income taxes are accounted for under the asset and  liability  method.  Deferred
tax assets  and  liabilities  are  recognized  for the  future tax  consequences
attributable to differences  between the financial statement carrying

                                       10
<PAGE>

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.

Reclassifications

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

Note 3. Acquisitions:

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


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

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

                                       11
<PAGE>

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, 711,435 shares of
common stock valued at $18.81 per share were issued to the owners of Cortix. The
Company  also paid cash  consideration  of $1.0 million to the owners of Cortix.
The Company  accounted for this transaction as a purchase.  Of the $14.4 million
in  consideration  paid,  approximately  $11.3 million was allocated to acquired
technology,  $1.6 million to customer lists and $1.3 million to goodwill.  These
intangible  assets were being  amortized  over a three-year  life.  However,  in
December 2000, the Company decided to shut down the operations and wrote-off the
remaining intangible assets of $9.1 million.

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 2,161,904
shares of common  stock  valued at $16.89 per share were issued to the owners of
WebCentric.  In  addition,  the  Company  issued  replacement  stock  options to
purchase an aggregate of 121,544 shares of the Company's common stock to certain
employees and owners of WebCentric.  The Company  accounted for this transaction
as a purchase.  Of the $40.2 million in consideration paid,  approximately $31.8
million was allocated to acquired technology, $3.3 million to customer lists and
$4.6 million to goodwill.  These  intangible  assets were being amortized over a
three-year life. However, in December 2000, the Company decided to shut down the
operations and wrote-off the remaining intangible assets of $24.3 million.

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

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

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

                                       12
<PAGE>

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

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

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 2,601,562 shares of common stock
valued  at  approximately  $6.13  per  share  were  issued  to  shareholders  of
UberWorks,  of  which  423,253  are  being  held  back  by  the  Company  to  be
subsequently  released based on time vesting and on certain performance criteria
yet to be  achieved  (these  shares  have been  excluded  from  determining  the
Company's  weighted  average  shares  outstanding  used to  calculate  basic and
diluted  earnings per share).  The maximum term of the  retention is three years
from the effective date of the  acquisition.  In addition,  the Company issued a
warrant to Trilogy,  with a strike  price of  $0.000001  per share,  to purchase
additional  shares of the Company's common stock if on the one-year  anniversary
date of the  acquisition,  the shares  currently  held by Trilogy  (the  Trilogy
Shares) are not worth at least $13.1  million.  The maximum number of additional
shares that Trilogy can purchase  under the terms of the warrant is 2.6 million.
To the extent that the Trilogy  Shares  have a fair  market  value that  exceeds
$13.1  million on the one-year  anniversary  date,  the warrant is cancelled and
Trilogy  must  forfeit  the number of Trilogy  Shares  that would be required to
bring  their  fair  value  down to $13.1  million,  limited  to a maximum of 1.3
million  shares to be  forfeited  under this  scenario.  The Company also issued
options  to  purchase  248,162  shares  of  common  stock to  certain  UberWorks
employees.  The Company  accounted for this  transaction  as a purchase.  Of the
$22.8 million of consideration  paid,  approximately $12.3 million was allocated
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.

                                       13
<PAGE>

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
33,324 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
cash, $6.1 million in non-cash deferred tax liabilities assumed, $5.7 million in
common stock and $11.1 million in net liabilities  assumed. IDR is a domain name
infrastructure company, which owns and operates the www.registrars.com Web site.
In connection with this  acquisition,  the Company issued to the shareholders of
IDR a total of 7,650,000  shares of common stock, of which 1,000,000 were placed
in escrow for  indemnification  purposes.  In  addition,  3,281,000  shares were
issued  and  placed in escrow to be  released  to the  former  shareholders  and
certain  employees of IDR upon the  achievement  of  established  future revenue
targets  over an  eighteen  month  period,  and  219,000  shares  were issued to
employees  of IDR who  continued  to be employed  by IDR after the  acquisition.
Finally,  600,000  shares of 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 $0.69 per  share.  The  Company  accounted  for this  transaction  as a
purchase.  Of the $23.6  million  of  consideration  paid,  approximately  $10.5
million was  allocated to  proprietary  concept,  $874,000 to domain name,  $3.5
million to customer lists,  $874,000 to assembled  workforce and $7.8 million to
goodwill. These intangible assets are being amortized over a three-year life. 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.
Note 4. Restructuring and Impairment Charges:

Impairment of Certain Long-Lived Assets

During the first quarter 2001, the Company determined that the carrying value of
the intangible  assets for the GO,  FreeMerchant  and IDR business units,  which
were being considered for sale was in excess of anticipated  sales values.  As a
result,  the  Company  recognized  impairment  charges  of  approximately  $43.1
million.

Restructurings and related impairments

During the first  quarter  of 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  approximately  $2.3
million,  and the lay off of 245  employees,  which  resulted in  severance  and
related  payroll  charges of  approximately  $580,000  and  approximately  $68.1
million of restructuring charges.

Impairment of cost-basis investments

During the first  quarter of 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 March 31, 2001 consolidated statements of operations. Permanent
impairments in the Company's cost-basis investments were determined by examining
the  operations  of  each  company,  and  when  possible,  by  reviewing  recent
private-placement   valuations  for   comparable   companies  and  by  obtaining
professional business valuations.

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.

                                       14
<PAGE>

The  settlement  provides that the Company will purchase  262,000  shares of its
common  stock from Mr.  Walker in exchange for the tender of a $3.8 million note
payable from the Company (Company Note). In connection with the settlement,  the
Company agreed to consolidate all of Mr. Walker's  outstanding  promissory notes
to the Company,  executed by him since  September  28, 1999,  which totaled $4.5
million as of December  31, 2000 and were  recorded  in Notes  receivables  from
employees and Subscriptions receivable.  Principal and interest, at 7% per year,
are due on March 31,  2011.  Following  the  Company's  purchase  of the 262,000
shares,  Mr.  Walker may  endorse  the  Company  Note to the  Company in partial
satisfaction  of the new loan. In addition,  Mr. Walker agreed to transfer up to
1,171,158  shares of Company stock to the Company as  additional  payment of the
loan.  The  Company  agreed to reduce the balance of the loan by the fair market
value of the  1,171,158  shares on the date of the  transfer.  To the extent Mr.
Walker's outstanding promissory note has not been completely repaid by the above
actions,  the Company will immediately  extinguish any remaining  obligation Mr.
Walker may owe under the promissory note plus any applicable  withholding.  As a
result of the settlement,  the Company  recognized a $4.5 million dollar expense
in the first  quarter of 2001.  Mr.  Walker  also  agreed to take on  additional
responsibities 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 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 (term loan),  a
$4.0  million  bridge  loan  (bridge  loan)  and a line of  credit of up to $2.5
million.  The term loan had an outstanding  balance of $1.4 million at March 31,
2001 and bears  interest at 12%, is secured by a letter of credit and matures in
March 2002. In conjunction  with the agreement,  the Company issued  warrants to
acquire  72,000 shares of common stock at an exercise  price of $6.25 per share.
The warrants are exercisable  immediately and expire in March 2006. In May 1999,
the Company issued to the financial  institution  additional warrants to acquire
70,000  shares of common  stock at an  exercise  price of $7.00 per  share.  The
warrants are exercisable immediately and expire in June 2006.

On May 19, 2000, the Company  entered into a credit  agreement with a commercial
bank, with a maximum  commitment amount of $15.0 million to finance the purchase
of equipment, software and tenant improvements.  The credit agreement is secured
by substantially  all of the Company's assets and had an outstanding  balance of
$9.1 million at March 31, 2001. The outstanding  commitments bear interest at an
annual  rate  equal to the prime  lending  rate plus one and  one-half  percent.
Outstanding  commitments  under the  agreement  are  required to be repaid under
specific schedules, with all commitments to be repaid no later than November 18,
2003. The credit agreement  requires the Company to maintain  certain  financial
ratios and places limitations on certain financing and investing activities. The
credit agreement also contains other customary  conditions and events of default
that, in the event of  noncompliance  by the Company,  would prevent any further
borrowings  and  would  generally  require  the  repayment  of  any  outstanding
commitments under the credit agreement.

On September 29, 2000, the Company sold $20.0 million of  convertible  notes and
warrants  to a private  institution.  The notes  have a  one-year  term and bear
interest at an annual rate of six  percent.  On October  26,  2000,  the Company
filed a  registration  statement  on Form S-3 with the SEC,  which was  declared
effective on December 4, 2000.  Also,  the Company  issued  warrants to purchase
4,050,633 shares of common stock to the private institution at an exercise price
of $10.37 per share. The warrants are immediately exercisable and expire in five
years.  These  warrants  were valued at $9.4 million and were recorded as common
stock  warrants  in the  accompanying  December  31, 2000  consolidated  balance
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.  As of March
31, 2001, the notes were valued at $11.5 million. The terms of the notes provide
for conversion to common stock at a conversion  price of $1.68 per share.  Under
the terms of the agreement, the notes can be called by the holder if the Company
were to be delisted from the NASDAQ stock exchange.

                                       15
<PAGE>
Note 8. Segment Information:

The Company's  segment  information for each of the three months ended March 31,
2001 and 2000, and the year ended  December 31, 2000 as follows (in  thousands):

<TABLE>
<CAPTION>
                                                                                                       Year ended
                                                                     Three months ended March 31,     December 31,
                                                                    -------------------------------  ---------------
                                                                         2001             2000            2000
                                                                    --------------   --------------  ---------------
<S>                                                                 <C>              <C>             <C>
 Revenues:
       Continuing operations                                              $ 6,571         $  1,604         $ 11,806
       Operations closed in 2001                                            3,537           17,078           94,315
                                                                    --------------   --------------  ---------------
                                                                           10,108           18,682          106,121
                                                                    --------------   --------------  ---------------
 Cost of revenues:
       Continuing operations                                                1,583               39            2,924
       Operations closed in 2001                                              733           10,354           56,375
                                                                    --------------   --------------  ---------------
                                                                            2,316           10,393           59,299
                                                                    --------------   --------------  ---------------
 Gross Profit:
       Continuing operations                                                4,988            1,565            8,882
       Operations closed in 2001                                            2,804            6,724           37,940
                                                                    --------------   --------------  ---------------
                                                                          $ 7,792          $ 8,289         $ 46,822
                                                                    ==============   ==============  ===============
</TABLE>

Note 9. Subsequent Events

Option Repricing and Exchange Program

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

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

Debt Obligations

On April 2, 2001, the Company repaid its obligation  under the credit  agreement
with a  commercial  bank,  which had a balance  of $9.1  million as of March 31,
2001.  The  obligation  was repaid  with the cash that was  restricted  for this
purpose.

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

During May 2001, the holders of the above mentioned  convertible notes converted
$2.5 million of the notes into common stock.

Also,  during May 2001, a lessor filed a Writ of  Attachment on our bank account
in the amount of $600,000. The Company is defending this matter.

On May 10, 2001, the Company  repaid its obligation  under the loan and security
agreement with a financial  institution,  which had a balance of $1.4 million as
of March 31, 2001.  The  obligation was repaid with the cash that was restricted
for this purpose.

                                       16
<PAGE>
Related Party Transactions

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

The  settlement  provides that the Company will purchase  262,000  shares of its
common  stock from Mr.  Walker in exchange for the tender of a $3.8 million note
payable from the Company (Company Note). In connection with the settlement,  the
Company agreed to consolidate all of Mr. Walker's  outstanding  promissory notes
to the Company,  executed by him since  September  28, 1999,  which totaled $4.5
million as of December  31, 2000 and were  recorded  in Notes  receivables  from
employees and Subscriptions receivable.  Principal and interest, at 7% per year,
are due on March 31,  2011.  Following  the  Company's  purchase  of the 262,000
shares,  Mr.  Walker may  endorse  the  Company  Note to the  Company in partial
satisfaction  of the new loan. In addition,  Mr. Walker agreed to transfer up to
1,171,158  shares of Company stock to the Company as  additional  payment of the
loan.  The  Company  agreed to reduce the balance of the loan by the fair market
value of the  1,171,158  shares on the date of the  transfer.  To the extent Mr.
Walker's outstanding promissory note has not been completely repaid by the above
actions,  the Company will immediately  extinguish any remaining  obligation Mr.
Walker may owe under the promissory note, plus any applicable withholding.  As a
result of the settlement,  the Company  recognized a $4.5 million dollar expense
in the first  quarter of 2001.  Mr.  Walker  also  agreed to take on  additional
responsibities as President.

Litigation

On  October 6, 2000,  Mall.com,  Inc.  filed  suit  against  the  Company in the
District Court of Travis  County,  Texas which was removed by the Company to the
United States  District  Court for the Western  District of Texas.  The suit was
based on a contract between Mall.com,  Inc. and IveBeenGood.com,  Inc. which the
Company acquired on August 24, 2000. The suit alleged that IveBeenGood.com, Inc.
breached the contract, breached a warranty given to Mall.com, Inc. and committed
fraud and negligent  misrepresentation.  The claims  asserted by Mall.com,  Inc.
were acquired by Mall Acquisition  Corp. On May 7, 2001, the Company,  Mall.com,
Inc.  and Mall  Acquisition  Corp.  entered  into a  Compromise  and  Settlement
Agreement and Mutual General Release.  Pursuant to the settlement agreement, the
Company paid Mall Acquisition Corp. the sum of $67,500,  and Mall.com,  Inc. and
Mall Acquisition Corp.  assigned to the Company any claims they may have against
Trilogy,  Inc., a former shareholder of  IveBeenGood.com,  Inc. The parties also
agreed  to  approve  a final  judgment  of  dismissal  that  will  refer  to the
Compromise and Settlement Agreement.

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

On May 10, 2001, a  shareholder  filed a lawsuit in the United  States  District
Court in Seattle,  Washington  against the  Company and its  chairman  and chief
executive  officer  alleging  violations  of  Sections  11 and  12(a)(2)  of the
Securities  Act of 1933 and  Sections  10(b),  15 and  20(a)  of the  Securities
Exchange Act of 1934.  The lawsuit is styled Jan  Sherman,  on behalf of herself
and all others  similarly  situated,  v. Dwayne M.  Walker and Network  Commerce
Inc.,  Case  Number:   C01-0675.  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 Company is
investigating  the  allegations  and intends to  vigorously  defend this action.
Nevertheless,  an  unfavorable  resolution of this lawsuit could have a material
adverse effect on the Company in one or more future periods.

On May 14,  2001,  pursuant to an  Agreement  and Plan of Merger and Exchange of
Stock dated as of May 11, 2001,  the Company  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 is required to file with the Securities  Exchange Commission a
registration statement to effect a registration of the common stock delivered to
Network Commerce.

                                       17
<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 with the  Securities and Exchange
Commission, as amended by Form 10-K/A on April 30, 2001.

Overview

We  are  a  technology   infrastructure  and  services  company  that  offers  a
comprehensive  technology  and  services  platform  solution,  including  domain
registration, hosting services, e-commerce services and online marketplaces. Our
technology and services platform operates across our core infrastructure,  which
includes four data centers,  more than 500 servers,  and operates at a bandwidth
in excess of 400 megabits per second. Through December 31, 2000, we operated two
commerce  networks  and an eBusiness  Services  division.  The Network  Commerce
Consumer Network aggregated merchants and shoppers over a distributed network of
Web sites,  and the Network  Commerce  Business  Network  enabled  businesses to
engage  in  online  activities  and  transactions  with  other  businesses.  The
eBusiness services division provided consulting,  custom commerce solutions, and
integrated  marketing  services for businesses  conducting  commerce online.  In
January  2001, we  restructured  these groups into the Network  Commerce  Portal
Services and the Network Commerce  Infrastructure  and Technology  ("IT") groups
and we shutdown the  eBusiness  Services  division.  The Portal  Services  group
includes one-to-one  marketing services and various online marketplaces  focused
on gaming and entertainment.  The Network Commerce IT group includes domain name
registration,  hosting,  commerce  service,  technology  and licensing and other
business   services.   As  a  result  of  this   restructuring,   we  recognized
approximately $64.9 million in restructuring and impairment charges for the year
ended  December  31,  2000.  During  the  first  quarter  of 2001,  our  further
restructuring  efforts  included  the  shut  down  of  certain  business  units,
including  SpeedyClick,  the  sale  of  Ubarter  Canada,  and the lay off of 245
employees.   As  a  result  of  this  further   restructuring,   we   recognized
approximately  $114.1 million of restructuring  and impairment  charges,  in the
three-months ended March 31, 2001.

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

Our condensed  consolidated financial statements for the quarter ended March 31,
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 $177.6 million for the three-months  ended March 31,
2001 and have  accumulated  deficits of $544.9 million as of March 31, 2001. The
Company has  continuously  incurred net loss from operations and as of March 31,
2001  has  working  capital  deficit  of  $21.7  million.  These  factors  raise
substantial  doubt  about  our  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.  Our plans to mitigate the risk of
this  uncertainty  include,  but are not limited to, the following:

                                       18
<PAGE>

     exploring strategic  alternatives,  which may include a merger, asset sale,
     or another comparable transaction;

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

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

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

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

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

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

Revenues  from the  Network  Commerce  Business  Network,  which is a network of
proprietary   and   affiliated   Web   sites,   including    www.registrars.com,
www.b2bnow.com,  www.freemerchant.com,   www.domainzero.com,  www.ehost.com  and
www.ubarter.com,  are derived  primarily  from  providing  domain  registration,
web-enablement services,  commerce-enablement services,  transaction processing,
advertising and technology licensing to businesses. Revenues from registrars.com
are derived from the sale of domain name registration  fees, which are typically
paid in full at the time of the sale and are  recognized  over the  registration
term, which typically  ranges from one to three years.  Revenues from b2bNow.com
are generated primarily from the sale of advertising and merchandising  products
and services  similar to those sold on the Network  Commerce  Consumer  Network.
Revenues from Ubarter.com are generated from transaction fees earned from member
businesses  that  transact  over the  Ubarter  exchange  system  as well as from
products sold by Ubarter.com to other member  merchants of the Ubarter  exchange
system.  Revenues from services are generated  principally  through  development
fees, domain  registration fees, hosting fees and sales and marketing  services.
These  services can be purchased as a complete  end-to-end  suite of services or
separately.  We recognize  revenues from the development of custom  applications
and online  stores and marketing  projects on a percentage  of completion  basis
over the period of  development  or the period of the marketing  project.  These
projects generally range from two to twelve months.  Hosting contracts typically
have a term of one year,  with fees  charged and earned on a monthly  basis.  We
bear the full credit risk with respect to these sales.  Contract  costs  include
all direct  labor,  material,  subcontract  and other direct  project  costs and
certain indirect costs related to contract performance.

                                       19
<PAGE>

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

We recognize  revenues from barter  transactions  when earned,  and value barter
transactions based on the value of the consideration  received from the customer
or from the value of the services  provided to the  customer,  whichever is more
readily   determinable.   During  the  first  quarter  of  2001,  we  recognized
approximately $1.4 million in revenues on such transactions.

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

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

Acquisitions

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

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.

                                       20
<PAGE>

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  3,799,237 shares of
common stock valued at $13.31 per share.  Options to purchase SpeedyClick common
stock were  assumed by us and  converted  into  157,527  options to purchase our
common stock. We also paid cash  consideration  of $3.0 million to the owners of
SpeedyClick.  We  accounted  for this  transaction  as a purchase.  Of the $55.6
million in  consideration  paid,  approximately  $27.9  million was allocated to
proprietary  concepts,  $14.7  million to  customer  lists and $13.0  million to
goodwill.  These intangible  assets were being amortized over a three-year life.
However, in March 2001, we decided to shut down the operations and 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  711,435  shares of common stock  valued at $18.81 per share  together
with cash consideration of $1.0 million.  We accounted for this transaction as a
purchase.  Of the $14.4  million  in  consideration  paid,  approximately  $11.3
million was allocated to acquired technology, $1.6 million to customer lists and
$1.3 million to goodwill.  These  intangible  assets were being amortized over a
three-year  life.  However,  in  December  2000,  we  decided  to shut  down the
operations and wrote-off the remaining intangible assets of $9.1 million.

On December 17,  1999,  we acquired  WebCentric  Inc.  ("WebCentric"),  a 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  2,161,904 shares
of common  stock valued at $16.89 per share  together  with  approximately  $1.4
million of cash. In addition, we issued replacement stock options to purchase an
aggregate of 121,544 shares of our common stock to certain  employees and owners
of WebCentric.  We accounted for this  transaction  as a purchase.  Of the $40.2
million in  consideration  paid,  approximately  $31.8  million was allocated to
acquired  technology,  $3.3  million  to  customer  lists  and $4.6  million  to
goodwill.  These intangible  assets were being amortized over a three-year life.
However,  in December 2000, we decided to shut down the operations and wrote-off
the remaining intangible assets of $24.3 million.

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

On  January  18,  2000,  we  acquired  AXC  Corporation  ("AXC"),  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 540,296  shares of common  stock  valued at $17.60 per. In  addition,  we
issued  replacement  stock  options to purchase an aggregate of 72,089 shares of
our common stock to certain  employees  and owners of AXC. We accounted for this
transaction  as  a  purchase.  Of  the  $17.9  million  in  consideration  paid,
approximately $7.2 million was allocated to assembled workforce, $4.9 million to
customer lists, $5.0 million to goodwill and $800,000 to working capital.  These
intangible  assets were being  amortized  over a three-year  life.

                                       21
<PAGE>
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  entry  point to  e-commerce,  and
provides  hosting   services  to  those  merchants.   In  connection  with  this
acquisition,  we issued to the shareholders of FreeMerchant  2,573,723 shares of
common  stock,  valued at $8.80 per share.  In  addition,  we issued  options to
purchase 293,596 shares of common stock to certain FreeMerchant stockholders and
employees. We accounted for this transaction as a purchase. Of the $38.1 million
in  consideration  paid,  approximately  $23.0 million was allocated to acquired
technology,  $4.1 million to assembled  workforce and $11.0 million to goodwill.
These  intangible  assets are being  amortized over a three-year  life. In March
2001,  we recognized  an  impairment  charge of $22.4 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,  a publicly traded company,  is a  business-to-business
e-commerce enterprise, which utilizes the Ubarter Dollar as payment for products
and  services by its member  businesses  over its  proprietary  barter  exchange
system. In connection with this  acquisition,  we issued to the stockholders and
creditors  of  Ubarter a total of  2,682,871  shares of common  stock  valued at
approximately  $15.10 per share.  In  addition,  we issued  warrants to purchase
51,842  shares of common stock to certain  Ubarter  stockholders,  employees and
creditors. We accounted for this transaction as a purchase. Of the $61.7 million
in  consideration  paid,  approximately  $7.5 million was  allocated to acquired
technology,  $2.5 million to assembled  workforce,  $25.1 million to proprietary
concept,  $2.5 million to customer lists,  and $24.0 million to goodwill.  These
intangible  assets are being  amortized  over a  three-year  life.  Early in the
fourth  quarter 2000, we launched a new user  interface and back-end  management
system for the Ubarter.com  merchant  exchange,  and executed various  marketing
efforts to promote the new system. These efforts did not stimulate growth in the
Ubarter economy as expected,  which led to a revision in our original  forecasts
and  projections  for Ubarter.  These revised  forecasts  indicated  that future
expected cash flows from this business unit were less than the carrying value of
its intangible assets,  thus triggering an impairment event in December 2000. At
that time, the carrying value of Ubarter's  intangible assets including goodwill
was $51.6 million.  Based on recent  comparable  sales of other barter  exchange
systems,  we determined  the fair value of Ubarter.com  to be  approximately  $5
million.  As a result,  we recognized  an impairment  charge of $46.6 million in
December 2000. In February 2001, the Company sold 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 carrying  value to the
approximate net realizable value.

On August 24, 2000, we acquired Ivebeengood.com, d.b.a. UberWorks ("UberWorks"),
a wholly owned subsidiary of Trilogy, Inc. ("Trilogy"),  for approximately $22.8
million,  consisting of $2.4 million accrued as non-cash deferred  compensation,
$5.9 million in non-cash  deferred tax liabilities  assumed and $14.5 million in
common stock and common stock options issued to Trilogy and UberWorks employees.
UberWorks  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 2,601,562  shares of common
stock valued at approximately  $6.13 per share. Of the total,  913,459 are being
held back by us to be subsequently released based on time vesting and on certain
performance  criteria  yet to be achieved.  In addition,  we issued a warrant to
Trilogy,  with a strike price of  $0.000001  per share,  to purchase  additional
shares  of  our  common  stock  if on  the  one-year  anniversary  date  of  the
acquisition;  the shares issued to Trilogy are not worth at least $13.1 million.
The maximum  number of  additional  shares that Trilogy can  purchase  under the
terms of the warrant is 2.6  million.  To the extent that the shares have a fair
market value that exceeds $13.1 million on the one-year  anniversary  date,  the
warrant is cancelled and Trilogy must forfeit the number of shares that would be
required to bring their fair value down to $13.1  million,  limited to a maximum
of 1.3 million  shares.  We also issued  options to purchase  248,162  shares of
common stock to certain UberWorks  employees.  We accounted for this transaction
as a purchase.  Of the $22.8 million of consideration paid,  approximately $12.3
million  was  allocated  to  acquired  technology,   $2.4  million  to  deferred
compensation,  $726,000
                                       22
<PAGE>
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   wrote-off  the  remaining  intangible  assets  of
approximately $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 33,324 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, which owns and operates the www.registrars.com Web site.
In connection  with this  acquisition,  we issued to the  shareholders  of IDR a
total of 7,650,000  shares of common stock,  of which  1,000,000  were placed in
escrow for indemnification  purposes. In addition,  3,281,000 shares were issued
and placed in escrow to be  released  to the  former  shareholders  and  certain
employees of IDR upon the achievement of established future revenue targets over
an eighteen month period, and 219,000 shares were issued to employees of IDR who
continued to be employed by IDR after the acquisition.  Finally,  600,000 shares
of our common  stock were  issued at the  closing  to certain  other  persons in
connection  with  the  settlement  of  potential   claims  against  IDR  and  as
consideration  of services  rendered to IDR in connection with the  acquisition.
The closing  price of our common stock on December 22, 2000 was $0.69 per share.
We  accounted  for this  transaction  as a  purchase.  Of the $23.6  million  of
consideration  paid,  approximately  $10.5 million was allocated to  proprietary
concept,  $874,000 to domain name, $3.5 million to customer  lists,  $874,000 to
assembled  workforce and $7.8 million to goodwill.  These intangible  assets are
being  amortized  over a  three-year  life.  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.

Results of Operations

Revenues.  Total revenues for the  three-month  period ended March 31, 2001 were
$10.1 million  compared to $18.7 million for the comparable  period in 2000. The
decrease was due primarily to the shutdown of  ShopNow.com,  the  elimination of
product sales, and the sale of Ubarter Canada.  Revenue during the first quarter
from continuing  business units was $6.6 million compared to $1.6 million during
the comparable period in 2000. Internet Domain Registrars,  acquired on December
22, 2000, provided revenues of $3.1 million in the first quarter.

Cost of Revenues.  The cost of revenues for the  three-month  period ended March
31, 2001, were $2.3 million compared to $10.4 million for the comparable  period
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 Ubarter Canada,
which were all low profit margin operations.

Gross Profit.  Gross profit for the three-month period ended March 31, 2001, was
$7.8 million  compared to $8.3 million for the  comparable  period in 2000. As a
percent of  revenues,  our gross  margins  were 77.1%  compared to 44.4% for the
comparable  period 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 Ubarter Canada, 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-month  period  ended March 31, 2001 were $17.3  million  compared to $22.1
million of the  comparable  period in 2000.  The decrease  was due  primarily to
elimination of nationwide  television,  radio and print  advertising  during the
first quarter 2001, as well as we no longer  purchased  traffic for our Consumer
Network.
                                       23
<PAGE>
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-month  periods ended March 31, 2001 were
$4.3 million  compared to $3.2 million for the  comparable  period in 2000.  The
increase was due primarily to an increase in personnel and related costs.

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-month  period  ended March 31,  2001 were $5.3  million
compared to $4.2 million for the comparable period in 2000.

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-month  period
ended  March 31,  2001 was  $18.3  million  compared  to $13.5  million  for the
comparable  period in 2000.  This  increase was due primarily to the increase in
intangible assets and related amortization  expenses from business  acquisitions
completed  during 2000 described above.  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-month  period  ended  March 31,  2001 was  $260,000  compared to $1.9
million for the comparable  period in 2000. The amount of deferred  compensation
resulting  from these grants is generally  amortized  over a one- to  three-year
vesting  period.  As of March 31,  2001,  we have  recognized  $7.1  million  of
deferred compensation to be amortized over future periods















                                       24
<PAGE>

Restructuring and other impairment charges.  Restructuring and impairment charge
consists  primarily  of $57.6  million of  write-off  of impaired  goodwill  and
intangible assets, $12.8 million of tenant improvements,  fixed assets, software
and supporting  technologies and infrastructure  related to previously  acquired
businesses  that were shut down, and $580,000  relating to severance and related
benefits for terminated  employees.  There was no such charge for the comparable
period last year.

Impairment  of  certain  long-lived  assets.  As part of the  restructuring,  we
determined  that  goodwill  and  intangibles  assets  associated  with  acquired
businesses  had a carrying  value in excess of the potential  sales value of the
business  units.  As a  result,  we  recognized  an  impairment  charge of $43.1
million.

Unusual item - settlement of claim. 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.  There were not such  settlements in the comparable
period of 2000.

(Loss) gain on sale of investments. Loss on sale of marketable equity securities
for the  three-month  period ended March 31, 2001 was $150,000  compared to $1.1
million gain for the comparable period in 2000.

Interest Income.  Interest income is earned on our cash and cash equivalents and
short-term  investments.  Interest income for the three-month period ended March
31,  2001 was  $557,000  compared  to  interest  income of $1.3  million for the
comparable period 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-month  period ended March 31, 2001 was $2.9  million  compared to
$441,000 for the comparable  period in 2000.  Interest expense increased for the
three-month  period ended March 31, 2000 due to the accretion of the convertible
promissory note.

Impairment  of  Cost-Basis  Investments.  During the first  quarter of 2001,  we
determined that certain of our cost-basis  investments were permanently impaired
to between 50% and 100% of their historical  values.  As a result, we recognized
an impairment charge of $18.8 million during the three-month  period ended March
31, 2001. There were no such charges for the comparable period 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-month  period  ended  March 31,  2001
compared to $11.9 million for the  comparable  period in 2000. If we continue to
consummate  additional  business  combinations that result in the recognition of
deferred taxes, we may experience  additional deferred tax benefits. We have not
paid nor have we received  refunds for federal income taxes and we do not expect
to pay income taxes or receive income tax refunds in the foreseeable future.

Net Loss.  Net loss for the  three-month  period ended March 31, 2001 was $177.6
million  compared  to $22.8  million  for the  comparable  period in 2000.  This
increase  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 March  31,  2001,  we had an  accumulated  deficit  of $544.9
million.  We have financed our activities  largely  through  issuances of common
stock and preferred stock, from the issuance of short- and long-term obligations
and from capital leasing  transactions for certain of our fixed asset purchases.
Through March 31, 2001, our aggregate net proceeds have been $272.1 million from
issuing equity securities and $52.3 million from issuing debt securities.  As of
March 31, 2001, we had $26.3 million in cash,  cash  equivalents  and short-term
investments,  of  which  $13.7  million  of such  amounts  is  characterized  as
restricted cash to secure our obligations under certain letters of credit.

Net cash used in  operating  activities  was $21.7  million for the  three-month
period  ended March 31, 2001,  compared to $21.7  million for the same period in
2000.
                                       25
<PAGE>
Net cash provided by investing  activities was $32.8 million for the three-month
period ended March 31, 2001,  compared to net cash used in investing  activities
of $77.9 million for the same period in 2000. The change was due primarily to no
purchases of short-term  investments in the  three-month  period ended March 31,
2001,  compared to the purchases of $104.8  million for the same period in 2000,
the decrease in the sales of short-term  investments for the three-month  period
ended March 31, 2001 of $32.7  million,  compared to $49.7  million for the same
period in 2000,  the decrease in purchases of property and  equipment of $35,000
for the  three-month  period ended March 31, 2001,  compared to $6.5 million for
the same  period  in 2000,  the  decrease  in  investments  in  equity  and debt
securities and other assets of $2,000 for the three-month period ended March 31,
2001, compared to $10.5 million for the same period in 2000, and the decrease in
acquisition  of  businesses  of nil for the  three-month  period ended March 31,
2001, compared to $5.8 million for the same period in 2000.

Net cash used in  financing  activities  was $2.2  million  for the  three-month
period ended March 31, 2001,  compared to cash provided by financing  activities
of $106.3  million for the same period in 2000.  The change was due primarily to
the closing of our public  offering on February 18, 2000 of 7,913,607  shares of
common  stock at $14.50 per  share,  which  resulted  in  proceeds  to us net of
underwriters' fees and commissions of $108.7 million.

In March 1999,  we entered into a loan and security  agreement  with a financial
institution  for a term loan and line of credit.  In May 1999, the agreement was
amended and  restated to allow us to borrow up to $8.5  million at any one time,
consisting of a $3.5 million term loan (the "term loan"),  a $4.0 million bridge
loan (the "bridge  loan") and a line of credit of up to $2.5  million.  The term
loan bears  interest  at 12%,  is  secured by a letter of credit and  matures in
March 2002.  The term loan balance was $1.4  million as of March 31,  2001.  The
outstanding  credit line and bridge loan  balances  were both $0 as of March 31,
2001.

On May 19, 2000, we entered into a credit agreement with a commercial bank, with
a  maximum  commitment  amount of $15.0  million  to  finance  the  purchase  of
equipment, software and tenant improvements.  The credit agreement is secured by
substantially  all of our assets and had an outstanding  balance of $9.1 million
at March 31, 2001. The outstanding  commitments  bear interest at an annual rate
equal to the prime  lending  rate  plus one and  one-half  percent.  Outstanding
commitments  under  the  agreement  are  required  to be repaid  under  specific
schedules,  with all  commitments  to be repaid no later than November 18, 2003.
The credit agreement requires us to maintain certain financial ratios and places
limitations on certain financing and investing activities.  The credit agreement
also  contains  other  customary  conditions  and events of default that, in the
event of  noncompliance  by us, would prevent any further  borrowings  and would
generally require the repayment of any outstanding  commitments under the credit
agreement.  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 was restricted for this purpose.

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

On April 3,  2001,  we  received  a notice of  default  from CVI for an  alleged
violation of certain  provisions of Article VI of the Convertible Notes relating
to the breach of certain negative financial covenants contained in the Company's
Credit  Agreement  with  Imperial  Bank and the breach by the Company of certain
material terms of the Securities  Purchase  Agreement  dated as of September 28,
2000.  The notice of default  demanded that the Company  redeem the  Convertible
Notes on or before  April 9, 2001 for an amount equal to $17.25  million,  which
amount  represents  115% of the  aggregate  principal  amount  of the  remaining
Convertible  Notes.  Management  responded  to

                                       26
<PAGE>
the  notice of  default  on April 4, 2001 and  denied  that an event of  default
occurred  under  the  Notes.  If  the  Company  were  to be in  default  of  the
Convertible  Notes and if the  default is not cured,  or waived by the holder of
the  Convertible  Notes,  and the  Company is  required  to redeem  the  amounts
outstanding under the Convertible  Notes, the holder could seek remedies against
us, which may include penalty rates of interest, immediate repayment of the debt
and the filing of an  involuntary  petition  in  bankruptcy.  In  addition,  the
Company  may have no  alternative  but to file a petition in  bankruptcy.  If we
become  insolvent or enter into a liquidation  proceeding,  after payment to our
creditors  there  is  likely  to  be  insufficient   assets  remaining  for  any
distribution to shareholders.

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

     the magnitude of our future losses;

     asset sales, if any;

     any future restructuring; and;

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

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

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

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

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

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

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

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

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

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

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

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
                                       27
<PAGE>

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.



























                                       28

<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 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,  2001  10-K  filed on April  17,  2000  with the
Securities and Exchange Commission, as amended by Form 10-K/A filed on April 30,
2001.

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

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

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

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

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

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

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

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

                                       29
<PAGE>
If we become insolvent or enter into a liquidation proceeding,  after payment to
our  creditors,  there is likely to be  insufficient  assets  remaining  for any
distribution to shareholders.

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

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

     failure  to  maintain a minimum  bid price for the  common  stock of either
     $1.00 per share or $5.00 per  share,  depending  on,  among  other  things,
     whether or not tangible net assets for the company are greater than or less
     than $4 million;

     failure to maintain an audit committee  which comports to the  independence
     and other standards of the Nasdaq and the SEC;

     failure to maintain a board with an adequate number of independent members;
     and

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

Our common stock has been trading  below the $1 minimum bid  requirement,  which
could  lead  to  Nasdaq's  initiation  of  delisting  procedures  at  any  time.
Furthermore,  as of April 17, 2001, we have only two independent directors, both
of whom are members of the audit committee. Our failure to maintain a sufficient
number of  independent  directors on the board of directors to satisfy  Nasdaq's
audit committee requirements could also lead to Nasdaq's initiation of delisting
procedures.

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

Several  of our  board  members  have  resigned.  Our  board  currently  has two
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 $177.6 million for the three-months  ended March 31,
2001. At March 31, 2001, we had an  accumulated  deficit of $544.9  million.  We
have   historically   invested  heavily  in  sales  and  marketing,   technology
infrastructure  and  research and  development.  As a result,  we must  generate
significant  revenues to achieve  and  maintain  profitability.  There can be no
assurance that we will ever become profitable on an annual basis. We expect that
our sales and marketing  research and development and general and administrative
expenses will  decrease in absolute  dollars but may increase as a percentage of
revenues.

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

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<PAGE>


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

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

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

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

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

     the mix of products and services that we sell.

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

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

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

     a decrease in the growth of Internet usage; and

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

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

OUR BUSINESS MODEL IS UNPROVEN AND CHANGING

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

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

Our ability to  successfully  offer our products and services and  implement our
business plan in a rapidly  evolving market  requires an effective  planning and
management   process.  We  are  diversifying  and  changing  the  scope  of  our
operations. While our operations have been changing, we have reduced our overall
number of employees  from 620 in October 2000 to 220 in May 2001.  These changes
in our business
                                       31
<PAGE>
plan and  reduction in  personnel  have placed,  and will  continue to place,  a
significant  strain on our  management  systems,  infrastructure  and resources.
Simultaneously,  the reduction in our  workforce  may make it more  difficult to
execute and implement our business plan. We will need to continue to improve our
financial and managerial controls and reporting systems and procedures, and will
need to continue to train and manage our workforce  worldwide.  Furthermore,  we
expect that we will be required to manage an increasing  number of relationships
with various  customers and other third parties.  Any failure to adapt to any of
the foregoing  areas  efficiently  and  effectively  could cause our business to
suffer.

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

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

ACQUISITIONS INVOLVE A NUMBER OF RISKS

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

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

     diverting management's attention from other business concerns;

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

     entering markets in which we have no direct prior experience;

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

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

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

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

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

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

To  successfully  market and sell our  products  and  services we must: o become
recognized as a leading provider of technology infrastructure and services;

     enhance existing products and services;

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

     complete projects on time;


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

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

WE FACE SIGNIFICANT COMPETITION

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

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

     the obsolescence of the technology underlying our products and services;

     a decrease in traffic on our Web sites; and

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

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

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

     larger customer or user bases;

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

     greater name recognition and larger marketing budgets and resources;

     substantially greater financial, technical and other resources;

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

     larger production and technical staffs.

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

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

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

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

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

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

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

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

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

WE MAY NOT DERIVE SUBSTANTIAL BENEFITS FROM OUR STRATEGIC RELATIONSHIPS

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

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<PAGE>

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

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

OUR COMPUTER SYSTEMS MAY BE VULNERABLE TO SYSTEM FAILURES

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

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

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

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

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

                                       35
<PAGE>
OUR INTERNATIONAL OPERATIONS INVOLVE RISKS

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

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

     restrictions on the export of encryption technology; and

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

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

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

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

OUR TECHNOLOGY MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS

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

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

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

     secure online payment services;

     secure order processing services; and

     fraud prevention and management services.

Third  parties may  attempt to breach the  security  provided by our  e-commerce
products and services or the security of our clients' internal systems.  If they
are successful,  they could obtain confidential information about businesses and
shoppers using our online  marketplaces,  including their  passwords,  financial
account information,  credit card

                                       36
<PAGE>
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.

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,

                                       37
<PAGE>
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.

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

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

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

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

WE DO NOT CURRENTLY COLLECT SALES TAX FROM ALL TRANSACTIONS

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

                                       38
<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 March
31, 2001.



































                                       39
<PAGE>

PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

On  October 6, 2000,  Mall.com,  Inc.  filed  suit  against  the  Company in the
District Court of Travis  County,  Texas which was removed by the Company to the
United States  District  Court for the Western  District of Texas.  The suit was
based on a contract between Mall.com,  Inc. and IveBeenGood.com,  Inc. which the
Company acquired on August 24, 2000. The suit alleged that IveBeenGood.com, Inc.
breached the contract, breached a warranty given to Mall.com, Inc. and committed
fraud and negligent  misrepresentation.  The claims  asserted by Mall.com,  Inc.
were acquired by Mall Acquisition  Corp. On May 7, 2001, the Company,  Mall.com,
Inc.  and Mall  Acquisition  Corp.  entered  into a  Compromise  and  Settlement
Agreement and Mutual General Release.  Pursuant to the settlement agreement, the
Company paid Mall Acquisition Corp. the sum of $67,500,  and Mall.com,  Inc. and
Mall Acquisition Corp.  assigned to the Company any claims they may have against
Trilogy,  Inc., a former shareholder of  IveBeenGood.com,  Inc. The parties also
agreed  to  approve  a final  judgment  of  dismissal  that  will  refer  to the
Compromise and Settlement Agreement.

On May 10, 2001, a  shareholder  filed a lawsuit in the United  States  District
Court in Seattle,  Washington  against the  Company and its  chairman  and chief
executive  officer  alleging  violations  of  Sections  11 and  12(a)(2)  of the
Securities  Act of 1933 and  Sections  10(b),  15 and  20(a)  of the  Securities
Exchange Act of 1934.  The lawsuit is styled Jan  Sherman,  on behalf of herself
and all others  similarly  situated,  v. Dwayne M.  Walker and Network  Commerce
Inc.,  Case  Number:   C01-0675.  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 Company is
investigating  the  allegations  and intends to  vigorously  defend this action.
Nevertheless,  an  unfavorable  resolution of this lawsuit could have a material
adverse effect on the Company in one or more future periods.

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

Between  January  1,  2001  and  March  31,  2001,  we did  not  issue  or  sell
unregistered securities.

Between  January 1, 2001 and March 31, 2001, we issued  642,636 shares of common
stock in conjunction with the exercise of options granted under our stock option
plans.  The  options  granted  under the stock  option  plan were  issued to our
officers,  employees and  consultants  at exercise  prices ranging from $1.20 to
$0.09.  No  options  were  granted  outside  of our 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.




                                       40
<PAGE>

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

<TABLE>
<CAPTION>
Number         Description
<S>            <C>
3.1***          Amended and Restated Articles of Incorporation of the registrant.
3.2***          Amended and Restated Bylaws of the registrant.
4.1***          Second Amended and Restated Registration Rights Agreement dated as of November 30, 1998
4.2***          Amendment No. 1 to Second Amended and Restated Registration Rights Agreement dated as of June 15, 1999.
4.3***          Amendment No. 2 to Second Amended and Restated Registration Rights Agreement dated as of June 16, 1999.
10.1*           Amendment to Employment Agreement of Dr. Ganapathy Krishman dated February 28, 2001.
10.2*           Amendment to Employement Agreement of Joe Arciniega dated March 6, 2001.
10.3*           Amended and Restated Offer of Employment for Randy Cerf dated March 19, 2001.
10.4*           First Amendment to Credit Agreement and Limited Waiver dated January 23, 2001.
10.5*           Second Amendment to Credit Agreement dated March 22, 2001.
10.7***         Amended and Restated 1999 Employee Stock Purchase Plan and form of agreement thereunder.
10.8***         Amended and Restated 1996 Combined Incentive and Nonqualified Stock Option Plan and form of agreements thereunder.
10.10***        Employment Agreement effective as of July 1, 1999, between Dwayne M. Walker and the registrant.
10.11**         Promissory Note, dated May 26, 2000 from Dwayne Walker to registrant.
10.12**         Promissory Note, dated June 1, 2000 from Dwayne Walker to registrant.
10.13**         Promissory Note, dated September 19, 2000 from Dwayne Walker to registrant.
10.14**         Promissory Note, dated October 25, 2000 from Dwayne Walker to registrant.
10.15**         Promissory Note, dated November 16, 2000 from Dwayne Walker to registrant.

----------
   *     Filed herewith
   **    Incorporated by reference to the Annual Report filed on Form 10-K on April 17, 2001, as
          amended by Form 10-K/A filed on April 30, 2001.
   ***   Incorporated by reference to the Registration Statement on Form S-1
          (No. 333-80981) filed by the registrant on September 28, 1999, as
           amended.

</TABLE>

(b)      Reports on Form 8-K

                FORM 8-K dated January 4, 2001

                FORM 8-K dated January 24, 2001

                FORM 8-K dated February 2, 2001

                FORM 8-K dated April 4, 2001



                                       41
<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:  May 15, 2001
                                        By:     /s/ Dwayne M. Walker
                                            -----------------------------------
                                          Dwayne M. Walker
                                          Chief Executive Officer

                                       By:      /s/ Randy Cerf
                                           ------------------------------------
                                          Randy Cerf
                                          Chief Financial Officer




























                                       42