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, 2002

                                       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  3,  2002,  there  were  5,893,110  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

                  Condensed Consolidated Balance Sheets as of March 31, 2002
                     and December 31, 2001..............................................................     3

                  Condensed Consolidated Statements of Operations for the three-month
                     periods ended March 31, 2002 and 2001 .............................................     4

                  Condensed Consolidated Statements of Cash Flows for the three-month
                     periods ended March 31, 2002 and 2001..............................................     5

                  Notes to Interim Condensed Consolidated Financial Statements..........................     6

ITEM 2:           Management's Discussion and Analysis of Financial
                     Condition and Results of Operations................................................    14

ITEM 3:           Quantitative and Qualitative Disclosures about Market Risk............................    35


PART II           OTHER INFORMATION

ITEM 1:           Legal Proceedings.....................................................................    36

ITEM 2:           Changes in Securities and Use of Proceeds.............................................    36

ITEM 3:           Defaults Upon Senior Securities.......................................................    36

ITEM 4:           Submission of Matters to a Vote of Security Holders...................................    36

ITEM 5:           Other Information.....................................................................    36

ITEM 6:           Exhibits and Reports on Form 8-K......................................................    36


SIGNATURES        ......................................................................................    37

</TABLE>


                                       2
<PAGE>


PART I.  FINANCIAL INFORMATION

ITEM 1.
                              Network Commerce Inc.
                      Condensed Consolidated Balance Sheets
                      (in thousands, except share amounts)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                            March 31,      December 31,
                                                                                         ------------------------------
                                                                                              2002             2001
                                                                                         --------------   -------------
    <S>                                                                                  <C>              <C>
                                          ASSETS
    Current assets:
       Cash and cash equivalents                                                         $        2,455   $       1,879
       Restricted cash                                                                              135             164
       Short-term investments                                                                         8               5
       Marketable equity securities                                                                 391           2,547
       Accounts receivable, net of allowance for bad debts of $1,288 and $1,468                   1,105           1,366
       Prepaid expenses and other current assets                                                  1,103           1,275
                                                                                         --------------   -------------
            Total current assets                                                                  5,197           7,236
    Property and equipment, net                                                                   1,439           1,705
    Other intangible assets, net                                                                     73             168
    Cost-basis investments                                                                          645             720
    Other assets, net                                                                               594             561
                                                                                         --------------   -------------
            Total assets                                                                 $        7,948   $      10,390
                                                                                         ==============   =============

                           LIABILITIES AND SHAREHOLDERS' EQUITY
    Current liabilities:
       Accounts payable                                                                  $        2,061   $       2,200
       Accrued liabilities                                                                        2,697           2,860
       Current portion of notes and leases payable                                                1,882             723
       Deferred revenues                                                                            739             750
                                                                                         --------------   -------------
            Total current liabilities                                                             7,379           6,533
    Notes and leases payable, less current portion                                                  215           1,630
    Deferred revenues                                                                               348             155
                                                                                         --------------   -------------
            Total liabilities                                                                     7,942           8,318
                                                                                         --------------   -------------
    Commitments and contingencies (Note 11)
    Shareholders' equity:
       Convertible preferred stock, $0.001 par value:  authorized shares - 5,000,000;
           none issued and outstanding                                                                -               -
       Common stock, $0.001 par value:  authorized shares - 200,000,000; issued
            and outstanding shares - 5,893,110 at March 31, 2002 and 5,878,030
            at December 31, 2001                                                                556,460         556,574
       Subscriptions receivable                                                                     (41)            (41)
       Common stock warrants                                                                     18,248          18,248
       Deferred compensation                                                                     (2,509)         (3,193)
       Accumulated other comprehensive loss                                                        (121)            (85)
       Accumulated deficit                                                                     (572,031)       (569,431)
                                                                                         --------------   -------------
            Total shareholders' equity                                                                6           2,072
                                                                                         --------------   -------------
            Total liabilities and shareholders' equity                                   $        7,948   $      10,390
                                                                                         ==============   =============


</TABLE>


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

                                       3
<PAGE>



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


<TABLE>
<CAPTION>
                                                                     For the Three Months Ended
                                                                               March 31,
                                                                  -------------------------------
                                                                       2002              2001
                                                                  -------------     -------------
<S>                                                               <C>               <C>

Revenues                                                          $       1,618     $      10,108
Cost of revenues                                                            506             2,316
                                                                  -------------     -------------
          Gross profit                                                    1,112             7,792
                                                                  -------------     -------------
Operating expenses:
     Sales and marketing                                                  1,661            17,291
     Research and development                                               429             5,268
     General and administrative                                           1,303             4,283
     Amortization of intangible assets                                       96            18,297
     Stock-based compensation                                               569               260
     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                                        4,058           164,082
                                                                  -------------     -------------
          Loss from operations                                           (2,946)         (156,290)
                                                                  -------------     -------------
Nonoperating income (expense):
     Loss on sale of investments                                           (388)             (150)
     Interest income                                                          6               557
     Interest expense                                                       (56)           (2,882)
     Other                                                                  597               (24)
     Impairment of cost-basis investments                                   (75)          (18,820)
                                                                  -------------     -------------
          Total nonoperating income (expense), net                           84           (21,319)
                                                                  -------------     -------------
          Loss before extraordinary gain                                 (2,862)         (177,609)
Extraordinary gain                                                          261                 -
                                                                  -------------     -------------
          Net loss                                                $      (2,601)    $    (177,609)
                                                                  =============     =============

Basic loss per share:
Loss before extraordinary gain                                    $       (0.52)    $      (36.77)
Extraordinary gain                                                         0.05                 -
                                                                  --------------    --------------
Basic loss per share                                              $       (0.47)    $      (36.77)
                                                                  ==============    ==============

Weighted average shares outstanding used to
     compute basic loss per share                                     5,559,621         4,830,563
                                                                  ==============    ==============


</TABLE>

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

                                       4
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                             For the Three Months Ended
                                                                                                        March 31,
                                                                                           ------------------------------
                                                                                                2002             2001
                                                                                           -------------    -------------
<S>                                                                                        <C>              <C>
Operating activities:
      Net loss                                                                             $      (2,601)   $    (177,609)
      Adjustments to reconcile net loss to net cash used in operating activities-
         Depreciation and amortization                                                               383           21,235
         Accretion of promissory note payable                                                         29            2,074
         Provision for bad debts                                                                      42            2,627
         Amortization of deferred compensation                                                       569              260
         Restructuring and impairment charges                                                          -           70,988
         Impairment of certain long-lived assets                                                       -           43,136
         Impairment of investments                                                                    75           18,820
         Extraordinary gains                                                                         261                -
         Unusual item - settlement of claim                                                            -            4,559
         Realized loss from sale of marketable equity securities                                     388              150
         Changes in operating assets and liabilities -
              Accounts receivable                                                                    219            8,730
              Prepaid expenses and other current assets                                              172             (260)
              Other assets                                                                           (33)            (283)
              Accounts payable and accrued liabilities                                              (563)         (16,825)
              Deferred revenue                                                                       182              706
                                                                                           -------------    -------------
Net cash used in operating activities                                                               (877)         (21,692)
                                                                                           -------------    -------------
Investing activities:
      Sales of short-term investments                                                                 26           32,694
      Proceeds from sale of investments                                                            1,732              148
      Purchases of property and equipment                                                            (21)             (35)
      Investments in other assets                                                                      -               (2)
                                                                                           -------------    -------------
Net cash provided by investing activities                                                          1,737           32,805
                                                                                           -------------    -------------
Financing activities:
      Payments on line of credit                                                                       -           (1,041)
      Payments on long-term debt                                                                    (286)          (1,157)
      Proceeds from sale of common stock and exercise of stock options                                 2                4
      Proceeds from collection of subscription receivable                                              -                3
                                                                                           -------------    -------------
Net cash used in financing activities                                                               (284)          (2,191)
                                                                                           -------------    -------------
Net increase in cash and cash equivalents                                                            576            8,922
Cash and cash equivalents at beginning of period                                                   1,879           11,715
                                                                                           -------------    -------------
Cash and cash equivalents at end of period                                                 $       2,455    $      20,637
                                                                                           =============    =============
Supplementary disclosure of cash flow information:
      Cash paid during the period for interest                                             $          26    $         427
                                                                                           =============    =============
      Non-cash investing and financing activities:
         Assets acquired under capital leases                                              $           -    $         160
                                                                                           =============    =============

</TABLE>

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


<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 online services company. The Company provides technology and
online business services solutions through its two operating groups, NCI Hosting
and NCI Marketing. Currently, NCI Hosting includes domain registration, hosting
and other online business services, and NCI Marketing includes online database
marketing services. Additionally, the Company is pursuing licenses of certain
software patents. The Company's headquarters are located in Seattle, Washington.

The Company established NCI Hosting and NCI Marketing in January 2001 out of a
restructuring of the Company's two then-existing commerce networks, known as the
Network Commerce Consumer Network, which aggregated businesses and shoppers over
a distributed network of Web sites, and the Network Commerce Business Network,
which enabled businesses to engage in online activities and transactions with
other businesses. The Company also previously operated an eBusiness Services
division, which provided consulting, custom commerce solutions, and integrated
marketing services for businesses conducting commerce online, and which was
shutdown in January 2001 as part of the restructuring process. In addition, as a
result of the restructuring efforts in 2001, certain of the Company's previous
business units and offerings were shut down or sold, including SpeedyClick.com,
GO Software, Ubarter, Internet Domain Registrars and FreeMerchant.com.

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 restructuring activities. 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, 2002 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 a net loss of $2.6 million
for the three-month period ended March 31, 2002 and has accumulated deficits of
$572.0 million as of March 31, 2002. The Company has continuously incurred net
losses from operations and as of March 31, 2002 had a working capital deficit of
$2.2 million. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The condensed 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 may
be adequate to fund its operations through September 2002. 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, shareholders, or the party from whom the
Company secured the equity credit line, 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, shut down or reduce business units or
production lines, 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 shareholders and the issuance of debt securities could
increase the risk or perceived risk of the Company.


                                       6
<PAGE>


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

o    engaging a financial advisor to explore strategic alternatives, which may
     include a merger, asset sale, the shut down of assets or divisions, joint
     ventures or another comparable transaction;

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

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

o    loans from management or employees, salary deferrals or other cost cutting
     mechanisms.

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

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 (SEC). 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, 2001 Form 10-K as filed with the SEC on
April 1, 2002. 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, 2002 and 2001 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. Equity investments in which the
Company holds less than a 20% ownership interest and does not exercise
significant influence are recorded at cost and are included in cost-basis
investments in the accompanying condensed consolidated balance sheets. All
significant intercompany transactions and balances have been eliminated.

Use of Estimates

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

Revenue Recognition

Since restructuring in January 2001, the Company derives revenues primarily from
the sale of online database marketing services within NCI Marketing and domain
registration, hosting and other online business services within NCI Hosting.
Revenues from online database marketing services are recognized as the services
are delivered to the businesses over the term of the agreement, which typically
range from one to three months. Revenues from domain registrations are
recognized over the registration term, which typically range from one to three
years. Revenues from hosting and online business services are recognized over
the term of the agreements, which are generally twelve

                                       7

<PAGE>

months. Unearned revenues are classified as either current or long-term deferred
revenues depending on the future recognition of those revenues.

Revenues are also generated from fees paid to the Company by businesses that
licensed the Company's technology and patents: transaction processing, fraud
prevention, and online payment system, as well as other e-commerce enabling
technologies. Revenues may include licensing fees, per-transaction fees and, in
certain cases, monthly hosting and maintenance fees, which were recognized in
the period earned. Revenues generated from technology licensing were recognized
in accordance with American Institute of Certified Public Accountants, Statement
of Position 97-2, "Software Revenue Recognition."

The Company recognized revenues from barter transactions when earned. The
Company valued the barter transactions based on the value of the consideration
received from the customer or from the value of the services provided to the
customer, whichever was more readily determinable. The Company recognized
approximately $0 and $1.4 million in revenues on such transactions during the
three-month periods ended March 31, 2002 and 2001, respectively.

The Company recognized revenues from the sale of online database marketing
services, leads and orders, advertising and merchandising in which the Company
received equity in the customer. The Company valued the equity received from
these transactions as cost-basis investments based on the value of the
consideration received from the customer or from the value of the services
provided to the customer, whichever was more readily determinable. The Company
monitors these cost-basis investments for impairment. When cost-basis
investments are deemed to be permanently impaired, the difference between cost
and market value is charged to operations. There can be no assurance that the
Company's investments in these early-stage technology companies will be
realized. The Company recognized approximately $0 and $205,000 in revenues on
such equity transactions during the three-month periods ended March 31, 2002 and
2001, respectively.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations."
SFAS No. 141 establishes accounting and reporting standards for business
combinations to use the purchase method. The effective date of SFAS No. 141 is
June 30, 2001. All acquisitions by the Company have been accounted for using the
purchase method. There have been no business combinations since June 30, 2001.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 establishes accounting and reporting standards for
acquired goodwill and other intangible assets. The statement eliminates the
amortization of goodwill over its estimated useful life. Rather, goodwill will
be subject to at least an annual assessment for impairment by applying a
fair-value-based test. SFAS No. 142 is effective for fiscal years beginning
after December 14, 2001. The Company adopted SFAS No. 142 on January 1, 2002 and
the impact was immaterial.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 establishes accounting and
reporting standards for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." The Company adopted SFAS No. 144 on
January 1, 2002 and the impact was immaterial.

Reclassifications and Reverse Stock Split Adjustments

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


                                       8
<PAGE>


Note 3. Acquisitions and Dispositions:

All acquisitions have been accounted for using the purchase method of
accounting.

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.
In May 2001, the Company completed the sale of GO to Return on Investment
Corporation ("ROI") for $1.0 million in cash and $3.0 million in ROI common
stock.

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

In November 1999, the Company acquired SpeedyClick, Corp. ("SpeedyClick"), a
California corporation that maintained an Internet Web site that focused on
entertainment and interactivity. In March 2001, the Company shut down the
operations and wrote-off the remaining intangible assets.

In January 2000, the Company acquired Pronet Enterprises Ltd. ("Pronet"), a
Canadian company, that operated a business-to-business portal and marketplace
that aggregates businesses that seek to transact with one another. In January
2001, the Company revised its estimated useful life for these assets and
amortized the remaining carrying value of Pronet over the first six months of
2001.

In April 2000, the Company acquired FreeMerchant.com, Inc. ("FreeMerchant"), a
Delaware corporation, that developed online store-builder technology for small-
to medium-sized businesses who seek a low-cost point of entry e-commerce
solution and provides hosting services to those businesses. In December 2001,
the Company sold substantially all of the assets of FreeMerchant.

In June 2000, the Company acquired Ubarter.com Inc. ("Ubarter"), 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 February 2001, the Company sold the Canadian-based
operations of Ubarter and in June 2001, the Company sold the US-based
operations.

In August 2000, the Company acquired Ivebeengood.com, d.b.a. UberWorks, a
developer of multi-merchant e-commerce purchasing tools and universal shopping
cart technology. In March 2001, the Company abandoned the technology and
wrote-off the remaining intangible assets.

In December 2000, the Company acquired ePackets.Net, Inc., a provider of
permission-based one-to-one email solutions. In March 2001, the Company shut
down the operations and wrote-off the remaining intangible assets.

In December 2000, the Company acquired Internet Domain Registrars Corporation
("IDR"), a domain name infrastructure company. In June 2001, the Company sold
substantially all of the assets and liabilities of IDR.

Note 4. Restructuring, Impairment and Extraordinary Gains:

Restructurings and related impairments

During the first quarter 2001, the Company continued its restructuring efforts,
which commenced in fourth quarter 2000. The restructuring included the shutdown
of SpeedyClick, the sale of Ubarter Canada, which resulted in a loss of
approximately $2.3 million, the lay off of 245 employees, which resulted in
severance and related payroll charges of $580,000 and the write-off of impaired
goodwill and intangible assets of $55.2 million, and of tenant improvements,
fixed assets, software and supporting technologies and infrastructure related to
businesses that were shut down of $13.0 million.


                                       9
<PAGE>

Impairment of Certain Long-Lived Assets

During the first quarter 2001, the Company determined that goodwill and
intangible assets associated with acquired businesses had a carrying value in
excess of the discounted cash flow expected to be received from the business
units. As a result, the Company recognized an impairment charge of $43.1
million.

Impairment of cost-basis investments

During the first quarter 2002, 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 $75,000,
which is included as a component of nonoperating (expense) income in the
accompanying March 31, 2002 condensed 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. During the first quarter 2001, the Company
recognized an impairment charge of $18.8 million.

Extraordinary gains

During the first quarter 2002, the Company negotiated with various creditors to
settle liabilities for less than the recorded invoices. These settlements
resulted in an extraordinary gain of approximately $261,000.

Note 5. Unusual Item:

During the first quarter 2001, the Company recorded a charge resulting from a
settlement of 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.

Note 6. Marketable Equity Securities:

In February 2002, the Company sold 700,000 shares of ROI at $2.50 per share and
recognized a loss of $371,000 on the sale. The Company's primary investment in
marketable equity securities is in ROI, which is recorded at $333,000, as of
March 31, 2002. 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.

Note 7. 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 8. Debt Obligations:

In September 2000, the Company sold $20.0 million of convertible notes and
warrants to Capital Ventures International ("CVI") pursuant to a securities
purchase agreement. The notes had a one-year term. In April 2001, the Company
received a notice of default from CVI for an alleged violation of certain
covenants. CVI filed suit against the Company in May 2001 in the United States
District Court for the Southern District of New York under Civil Action No.
01CV-4390.

In July 2001, the Company entered into a settlement agreement with CVI with
respect to certain claims arising out of the securities purchase agreement. As a
result, convertible notes with a face value of $11 million and all warrants were
retired. The Company paid $2.2 million and delivered a $1.5 million non-interest
bearing convertible


                                       10
<PAGE>

promissory note, which is due January 2003 and is convertible, at any time at
the option of CVI, into common stock at an exercise price of $2.00 per share.
CVI agreed that, upon payment of the $2.2 million and delivery of the promissory
note, the Company satisfied all of past, present and future obligations to CVI
under the securities purchase agreement and all related documents other than the
Registration Rights Agreement. However, CVI did not release its claim against
the Company, certain current and former officers and directors for the alleged
security violations and for fraudulent inducement. The Company is vigorously
defending against these claims. Nevertheless, an unfavorable resolution of these
claims could have a material adverse effect on the Company in one or more future
periods.

Note 9. Equity Financing:

In July 2001, the Company entered into an agreement with Cody Holdings Inc.
(Investor) to provide the Company with up to $18 million in equity financing
(Equity Line). Under the terms of the agreement, the Company will have the
right, but not the obligation during the 18-month term of the agreement, to
obtain equity financing through the issuance of common stock to the Investor in
a series of periodic draw downs at a discount to the market price at the time of
sale to the Investor. The maximum available amount for draw down each period is
determined using a formula that utilizes a weighted average stock price and
stock volume over a sixty-day period. The shares of common stock may be sold to
the Investor during this period at times and in amounts, subject to certain
minimum and maximum volumes, determined at the discretion of the Company. If the
Company chooses to draw down on the Equity Line, it will use the proceeds of the
financing for general corporate purposes. In October 2001, the Company completed
a draw down of $25,000. Based on the Company's stock price and average trading
volume as of March 31, 2002, it would be unable to make a draw down.

Note 10. Segment Information:

The Company's segment information for each of the three-months ended March 31,
2002 and 2001, as follows (in thousands):



<TABLE>
<CAPTION>
                                                                      Three Months Ended March 31,
                                                                    --------------------------------
                                                                         2002              2001
                                                                    --------------    --------------
<S>                                                                 <C>               <C>
 Revenues:
       Continuing operations:
           NCI Marketing                                            $          973    $          977
           NCI Hosting                                                         645               233
                                                                    --------------    --------------
                                                                             1,618             1,210
       Operations shutdown or sold during 2001                                   -             8,898
                                                                    --------------    --------------
                                                                             1,618            10,108
                                                                    --------------    --------------
 Cost of revenues:
       Continuing operations:
           NCI Marketing                                                       262                45
           NCI Hosting                                                         186                82
                                                                    --------------    --------------
                                                                               448               127
       Operations shutdown or sold during 2001                                  58             2,189
                                                                    --------------    --------------
                                                                               506             2,316
                                                                    --------------    --------------
 Gross Profit:
       Continuing operations:
           NCI Marketing                                                       711               932
           NCI Hosting                                                         459               151
                                                                    --------------    --------------
                                                                             1,170             1,083
       Operations shutdown or sold during 2001                                 (58)            6,709
                                                                    --------------    --------------
                                                                    $        1,112    $        7,792
                                                                    ==============    ==============
</TABLE>


                                       11
<PAGE>

Note 11. Litigation:

The Company and Mr. Walker, the Company's chief executive officer, president,
and chairman of the board, were named as defendants in multiple putative class
actions pending in the United States District Court for the Western District of
Washington in Seattle. Those actions are Jan Sherman, et al v. Dwayne M. Walker
and Network Commerce Inc., C01-0675L (filed May 10, 2001); Joseph Carreiro v.
Network Commerce, Inc. and Dwayne M. Walker, C01-0767L (filed May 25, 2001);
Steven Leong v. Network Commerce, Inc. and Dwayne M. Walker, C01-0770L (filed
May 25, 2001); Alan Danse, et al. v. Dwayne M. Walker and Network Commerce,
Inc., C01-852L (filed June 7, 2001); James Lindsay v. Dwayne M. Walker and
Network Commerce, Inc., C01-0918R (filed June 20, 2001); and Kelly Christianson
v. Dwayne M. Walker and Network Commerce, Inc., C01-1063L (filed July 11, 2001).
The judge in the class actions, the Honorable Robert Lasnik, entered an order
consolidating the class actions. On September 26, 2001, prior to the date the
consolidated complaint was due in the consolidated class actions, certain of the
plaintiffs filed another putative class action in the United States District
Court for the Western District of Washington in Seattle, titled Jan Sherman;
James Michaelson; and Jason Elkin v. Dwayne M. Walker; Network Commerce Inc.;
Jacob I. Friesel; Alan D. Koslow; David M. Lonsdale; Bret R. Maxwell; Mark C.
McClure; John R. Snedegar; Mark H. Terbeek; Dain Rauscher Inc.; U.S. Bancorp
Piper Jaffray; SoundView Technology Group, Inc.; J.P. Morgan Chase & Co.; CIBC
World Markets Corp.; and PaineWebber Inc., C01-0675L. This last action was filed
under the consolidated cause number for the other consolidated class actions
pending in Seattle. On November 13, 2001, plaintiffs filed the Court-ordered
consolidated complaint. The consolidated complaint named as defendants all the
institutions (including the Company) named in the prior complaints, but named
only Mr. Walker as an individual defendant, and not the other individual
defendants named in the September 26, 2001 complaint. The consolidated complaint
purports to allege claims on behalf of all persons who purchased the Company's
common stock during the period that begins on September 28, 1999 and ends on
April 16, 2001. The consolidated complaint alleges violations of the federal
securities laws based on alleged misrepresentations and omissions made by
defendants to the market. The suits seek unspecified damages. On January 28,
2002, the Company and Mr. Walker filed a motion to dismiss the consolidated
class action complaint for failure to state a claim on which legal relief can be
granted. Decision on that motion is pending. The Company and Mr. Walker intend
to vigorously defend the suits, but unfavorable resolution of these suits could
have a material adverse effect on the Company in one or more future periods. In
addition to the class actions described above, a class action lawsuit was filed
on July 16, 2001 in the United States District Court for the Southern District
of California, David Breidenbach v. Dwayne M. Walker and Network Commerce, Inc.,
01 CV 1270 JM (NLS). The allegations and class period were similar to those in
the consolidated complaint. The court dismissed that action on January 28, 2002
for lack of prosecution.

On May 22, 2001, Capital Ventures International ("CVI") filed suit against the
Company and Mr. Walker, the Company's chairman, chief executive officer and
president and other past and current members of the Company's board of directors
alleging, among other things, a breach of the Securities Purchase Agreement
dated September 28, 2000 entered into between CVI and Network Commerce Inc.,
fraudulent inducement and violations of certain federal securities laws. The
lawsuit seeks unspecified damages and rescission. On July 25, 2001, the Company
entered into a settlement agreement with CVI (the "Settlement Agreement") with
respect to certain claims arising out of the Securities Purchase Agreement. As a
result of the Settlement Agreement, the Company paid $2.2 million and delivered
a $1.5 million promissory note ("the Settlement Note"). CVI agreed that, upon
the payment of the $2.2 million and the delivery of the Settlement Note, the
Company satisfied all of its past, present and future obligations to CVI under
the Securities Purchase Agreement and all documents related to such Agreement
other than the Registration Rights Agreement dated September 28, 2000. If the
Company is found to be in default of the Settlement Note and if the default is
not cured, or waived by CVI, CVI could seek remedies against the Company, which
may include penalty rates of interest, immediate repayment of the debt and the
filing of an involuntary petition in bankruptcy. Under such circumstances, the
Company may have no alternative but to file a petition in bankruptcy.
Notwithstanding the settlement, CVI did not release its claim against the
Company, certain current and former officers and directors for the alleged
security violations and for fraudulent inducement.

The Company cannot predict the outcome of the litigation matters described above
or the extent to which the costs of defense and any settlement or award will be
covered by the Company's insurance policies. The Company is vigorously defending
against these claims. However, an adverse determination on one or more of these
matters could result in a material adverse effect on the Company's financial
condition and results of operations.

                                       12
<PAGE>

From time to time the Company has been named in other claims arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.







                                       13
<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 "Factors That May Affect Our Operating
Results, Business and Stock Price" as well as those discussed in this section
and elsewhere in this report, and the risks discussed in our December 31, 2001
Form 10-K filed on April 1, 2002 with the Securities and Exchange Commission.

Overview

Established in 1994, we are a technology infrastructure and online services
company that offers technology and online business services through our two
operating groups, NCI Hosting and NCI Marketing. Currently, NCI Hosting includes
domain registration, hosting and other online business services, and NCI
Marketing includes online database marketing services. Additionally, we are
pursuing licenses of certain software patents. We are headquartered in Seattle,
Washington.

We established NCI Hosting and NCI Marketing in January 2001 out of a
restructuring of our two then-existing commerce networks, known as the Network
Commerce Consumer Network, which aggregated businesses and shoppers over a
distributed network of Web sites, and the Network Commerce Business Network,
which enabled businesses to engage in online activities and transactions with
other businesses. We also previously operated an eBusiness Services division
that provided consulting, custom commerce solutions, and integrated marketing
services for businesses conducting commerce online, which we shutdown in January
2001 as part of the restructuring. In addition, as a result of the restructuring
efforts in 2001, certain of our previous business units and offerings were sold
or shut down, including SpeedyClick.com, GO Software, Ubarter, Internet Domain
Registrars and FreeMerchant.com.

Our condensed consolidated financial statements for the three months ended March
31, 2002 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. We have incurred a net loss of $2.6 million for the three months ended
March 31, 2002 and have accumulated deficits of $572.0 million as of March 31,
2002. The Company has continuously incurred net losses from operations and as of
March 31, 2002 has a working capital deficit of $2.2 million. These factors
raise substantial doubt about our ability to continue as a going concern.

Although we believe that our cash reserves and cash flows from operations may be
adequate to fund our operations through September 2002, we will require
substantial additional funds to continue to operate the business beyond that
period, see "Liquidity and Capital Resources" below.

Critical Accounting Policies And Estimates

Our critical accounting policies and estimates are as follows:

Revenue recognition. Since restructuring in January 2001, we derive our revenues
primarily from the sale of online database marketing services within our NCI
Marketing group and domain registration, hosting and other online business
services within our NCI Hosting group. Revenues from online database marketing
services are recognized as the services are delivered to the businesses over the
term of the agreement, which typically ranges from one to

                                       14

<PAGE>

three months. Revenues from domain registrations are recognized over the
registration term, which typically range from one to three years. Revenues from
hosting and online business services are recognized over the term of the
agreements, which are generally twelve months. Unearned revenues are classified
as either current or long-term deferred revenues depending on the future
recognition of those revenues.

Revenues were also generated from fees paid to us by businesses that licensed
our technology and patents; transaction processing, fraud prevention, and online
payment business system, as well as other e-commerce enabling technologies.
Revenues included licensing fees, per-transaction fees and, in certain cases,
monthly hosting and maintenance fees, which were recognized in the period
earned. Revenues generated from technology licensing were recognized in
accordance with American Institute of Certified Public Accountants, Statement of
Position 97-2, "Software Revenue Recognition."

We recognized revenues from barter transactions when earned. We valued the
barter transactions based on the value of the consideration received from the
customer or from the value of the services provided to the customer, whichever
was more readily determinable. We recognized approximately $0 and $1.4 million
in revenues on such transactions during the three-month periods ended March 31,
2002 and 2001, respectively.

We recognized revenues from the sale of online database marketing services,
leads and orders, advertising and merchandising in which we received equity in
the customer. We valued the equity received from these transactions as
cost-basis investments based on the value of the consideration received from the
customer or from the value of the services provided to the customer, whichever
was more readily determinable. We monitor these cost-basis investments for
impairment. When cost-basis investments are deemed to be permanently impaired,
the difference between cost and market value is charged to operations. There can
be no assurance that our investments in these early-stage technology companies
will be realized. We recognized approximately $0 and $205,000 in revenues on
such equity transactions during the three-month periods ended March 31, 2002 and
2001, respectively. Many of these investments were written down in 2001.

Impairment of cost-basis investments. We periodically evaluate whether any
permanent declines in the fair value of our cost-basis investments has occurred.
Significant judgments and estimates must be made to assess whether a permanent
decline in fair value of investments has occurred and to estimate the fair value
of investments in privately held companies. We determined permanent impairment
in privately held companies by examining the business results and prospects of
each company, and when possible by reviewing recent private-placement valuations
for comparable companies and by obtaining professional business valuations. We
recognized permanent impairments of cost-basis investments of $75,000 and $18.8
million in the three-month periods ended March 31, 2002 and 2001, respectively.

Impairment of long-lived assets and goodwill. We assess the impairment of
long-lived assets and goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors we consider
important which could trigger an impairment review include the following: poor
economic performance relative to expected historical or projected future
operating results; significant negative industry, economic or company specific
trends; and changes in the manner of our use of the assets or the plans for our
business. Where we determine that the carrying value of long-lived assets or
goodwill may not be recoverable based upon the existence of one or more of the
above indicators of impairment, we measure impairment based on a comparison of
the carrying amount of an asset to discounted cash flows expected to be
generated by the asset. If such analysis indicates assets are impaired, an
impairment is recognized equal to the amount by which the carrying amount of the
assets exceeds the discounted cash flows expected to be received. We recognized
impairments of long-lived assets and goodwill of $0 and $43.1 million in the
three-month periods ended March 31, 2002 and 2001, respectively.

Restructuring and related impairments. As part of our restructuring efforts in
2001, we made significant estimates in determining the appropriate amount of
loss that resulted from the shutdown of business units. The loss included
write-off of impaired goodwill, intangible assets, tenant improvements, fixed
assets, software and supporting technologies and infrastructure. We recognized
restructuring and related impairments of $0 and $71.0 million in the three-month
periods ended March 31, 2002 and 2001, respectively.


                                       15
<PAGE>

Results of Operations

Overview. In light of the recent instability within the technology and Internet
infrastructure sectors and our current position within those sectors, we lack
visibility to our future revenues and related costs of revenues. Our best
estimate for 2002, is that our revenues, cost of revenues and operating expenses
will be less than our 2001 levels.

Revenues. Total revenues for the three-month period ended March 31, 2002 were
$1.6 million compared to $10.1 million for the comparable period in 2001. The
decrease in revenue was due primarily to the shutdown of ShopNow.com and
SpeedyClick.com during first quarter 2001, the elimination of product sales and
the sale of Ubarter, Internet Domain Registrars, GO Software and Free Merchant
during 2001. In addition, revenues for the first quarter of fiscal 2001 included
$1.4 million in barter transactions and $205,000 in revenues on equity
transactions (See "Note 2. Summary of Significant Accounting Policies: Revenue
Recognition"), for which no such revenues were recognized in the first quarter
of fiscal 2002.

Cost of Revenues. The cost of revenues for the three-month period ended March
31, 2002 was $506,000 compared to $2.3 million for the comparable period in
2001. The decrease in cost of revenues was directly attributable to the decrease
in revenues during the same period and due to the shutdown of ShopNow.com and
SpeedyClick.com during first quarter 2001, and the sale of Ubarter, Internet
Domain Registrars, GO Software and Free Merchant during 2001.

Gross Profit. Gross profit for the three-month period ended March 31, 2002, was
$1.1 million compared to $7.8 million for the comparable period in 2001.

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, 2002 were $1.7 million compared to $17.3
million for the comparable period in 2001. The decrease was due primarily to a
decrease in sales and marketing personnel resulting from the restructuring in
early 2001 and related costs. We anticipate that sales and marketing expenses
will be less for future periods in 2002 when compared to comparable periods in
2001.

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, 2002 were $429,000 compared
to $5.3 million for the comparable period in 2001. The decrease was primarily
due to a decrease in personnel and related costs and to a decreased emphasis on
development activities. We anticipate that research and development expenses
will be less for future periods in 2002 when compared to comparable periods in
2001.

General and Administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs for executive,
financial, human resources, information services and other administrative
personnel, as well as legal, accounting and insurance costs. General and
administrative expenses for the three-month period ended March 31, 2002 were
$1.3 million compared to $4.3 million for the comparable period in 2001. The
decrease was primarily due to a decrease in personnel and related costs. We are
in the process of evaluating and implementing other cost-saving measures in an
effort to try to further reduce our general and administrative expense. With
respect to our legal expenses for defense of the litigation proceedings
currently pending, as of May 2001 we had accrued our full deductible of $350,000
under our insurance policies and do not anticipate having to make payment of
further legal costs for those current proceedings. We anticipate that general
and administrative expenses will be less for future periods in 2002 when
compared to comparable periods in 2001.

Amortization of Intangible Assets. Amortization of intangible assets resulting
from our prior acquisitions primarily relate 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, 2002 was $96,000 compared to $18.3 million
for the comparable period in 2001. This decrease was due primarily to the

                                       16
<PAGE>

decrease in intangible assets and related amortization expenses from the sale of
businesses and the write-down of intangible assets. Intangible assets acquired
in business combinations were being 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. The amount of deferred compensation
resulting from these grants is generally amortized over a one to three-year
vesting period. Additionally, in April and July 2001, we offered two voluntary
stock option exchange programs to our employees. Under the programs, the
employees, if they so chose, could exchange a certain number of highly priced
options for one option priced at the then fair market value. These stock option
repricing and voluntary stock option exchange programs resulted in variable
accounting treatment for these stock options. Additionally, certain stock option
grants made within six months of the re-pricing and voluntary exchange programs
resulted in variable accounting treatment for those options. Variable accounting
treatment results in unpredictable stock-based compensation dependent on
fluctuations in quoted prices for our common stock. Stock-based compensation
expense for the three-month period ended March 31, 2002 was $569,000 compared to
$260,000 for the comparable period in 2001. As of March 31, 2002, we had $2.5
million of deferred compensation to be amortized over future periods.

Restructuring and Other Impairment Charges. We had no restructuring charges in
the first quarter of fiscal 2002 compared to charges of approximately $71.0
million in the first quarter of fiscal 2001. During the first quarter 2001, we
continued our restructuring efforts, which commenced in fourth quarter 2000, and
included the shutdown of SpeedyClick, the sale of Ubarter Canada and the lay off
of 245 employees. The restructuring charges in first quarter 2001 consisted
primarily of severance and related payroll charges of $580,000, the write-off of
impaired goodwill and intangible assets of $55.2 million, and of tenant
improvements, fixed assets, software and supporting technologies and
infrastructure related to businesses that were shut down of $13.0 million. If we
are unable to obtain additional financing in fiscal 2002 to fund operations, we
may be required to undertake further restructuring efforts and incur additional
restructuring charges.

Impairment of Certain Long-Lived Assets. As part of the restructuring in 2001,
we determined that goodwill and intangible assets associated with acquired
businesses had a carrying value in excess of the discounted cash flow receipts
of the business units. As a result, we recognized an impairment charge of $43.1
million during the three-month period ended March 31, 2001. We had no such
impairment charges in the first quarter of fiscal 2002. If we are unable to
obtain additional financing in fiscal 2002 to fund operations, we may be
required to take further charges for impairment of assets.

Unusual Item - Settlement of Claim. During the first quarter 2001, we recorded a
charge resulting from a settlement of potential claims held by Dwayne Walker,
the Company's Chairman, Chief Executive Officer and President, against us
arising from the withdrawal of Mr. Walker's shares of our common stock from our
secondary public offering completed in February 2000.

Loss on Sale of Investments. Gain or loss on sale of investments occurs when we
sell certain of our investments in marketable equity securities and/or our
cost-basis investments for cash proceeds in excess or below our cost-basis in
these investments at the time of sale. Loss on sale of investments for the
three-month period ended March 31, 2002 was $388,000 compared to $150,000 in the
comparable period in 2001.

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, 2002 was $6,000 compared to $557,000 in the comparable period in 2001.
Interest income decreased due to a decrease in our cash and cash equivalents and
short-term investments. We expect that interest income will be less in 2002
compared to comparable periods in 2001 due to the decreased cash and investment
balances.

Interest Expense. Interest expense is incurred on our outstanding debt
obligations and the accretion of our convertible promissory note. Interest
expense for the three-month period ended March 31, 2002 was $56,000 compared to
$2.9 million for the comparable period in 2001. Interest expense decreased due
to reduced outstanding

                                       17
<PAGE>

debt obligations. We expect that interest expense will be less in 2002 compared
to comparable periods in 2001 due to reduced outstanding debt obligations as
compared to 2001.

Other Nonoperating Income (Expense). Other non-operating income for the
three-month period ended March 31, 2002 was $597,000 compared to an expense of
$24,000 for the comparable period in 2001. The first quarter 2002 included an
additional gain $622,000 from the sale of FreeMerchant and other expenses, net
of $17,000.

Impairment of Cost-Basis Investments. We determined that certain of our
cost-basis investments were permanently impaired based on our analysis of
changes in investees business operations and prospects. As a result, we
recognized an impairment charge of $75,000 during the three-month period ended
March 31, 2002 compared to a charge of $18.8 million in the comparable period in
2001.

Extraordinary Gain. During the first quarter 2002, we negotiated with various
creditors to settle liabilities for less than the recorded invoices. These
settlements resulted in a gain of approximately $261,000. There were no such
extraordinary gains for the first quarter 2001.

Net Loss. Net loss for the three-month period ended March 31, 2002 was $2.6
million compared to a net loss of $177.6 million for the comparable period in
2001. The net loss for the period ended March 31, 2002 was due primarily to
operating expenses.

Liquidity and Capital Resources

Since inception, we have experienced net losses and negative cash flows from
operations. As of March 31, 2002, we had an accumulated deficit of $572.0
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, 2002, our aggregate net proceeds have been $272.2 million from
issuing equity securities and $52.4 million from issuing debt securities.

As of March 31, 2002, we had $2.6 million in cash, cash equivalents and
short-term investments compared to approximately $2.0 million as of December 31,
2001, of which $135,000 of such amounts is characterized as restricted cash to
secure our obligations under certain letters of credit. As of March 31, 2002, we
had $391,000 in marketable equity securities, compared to $2.5 million in
marketable equity securities as of December 31, 2001. The increase in our cash
position is primarily attributable to the sale of a substantial portion of our
marketable equity securities portfolio during the first quarter of 2002, offset
by losses from operations and payments on our debt obligations.

Net cash used in operating activities was $877,000 for the three-month period
ended March 31, 2002, compared to $21.7 million for the same period in 2001. The
decrease was due primarily to the decrease in our net loss for the three-month
period ended March 31, 2002 of $2.6 million compared to $177.6 million for the
same period in 2001. In the first quarter 2002, the cash used by our $2.6
million loss was also significantly impacted by depreciation and amortization of
$383,000 (compared to $21.2 million for the same period in 2001), by the
impairment and restructuring charges of $0 (compared to $71.0 million in the
same period in 2001), by the impairment of certain long-lived assets of $0
(compared to $43.1 million for the same period in 2001) and by the impairment of
investments of $75,000 (compared to $18.8 million for the same period in 2001).

Net cash provided by investing activities was $1.7 million for the three-month
period ended March 31, 2002, compared to $32.8 million for the same period in
2001. Amounts from investing activities for the first quarter 2002 consisted of
$1.7 million in proceeds from sales of investments and $26,000 from sales of
short-term investments. In contrast, amounts for the first quarter 2001
consisted of only $148,000 in proceeds from sales of investments, but $1.7
million from sales of short-term investments.

Net cash used in financing activities was $284,000 for the three-month period
ended March 31, 2002 (consisting primarily of $286,000 for repayment of
long-term debt obligations), compared to $2.2 million for the same period in

                                       18
<PAGE>

2001 (consisting primarily of $1.0 million for repayment of line of credit and
$1.2 million for repayment of long-term debt obligations).

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, a $4.0 million bridge loan and a line of
credit of up to $2.5 million. In May 2001, we repaid our obligation under the
loan and security agreement with the cash that had been restricted for this
purpose. This credit facility is no longer available to us.

In May 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. In April 2001, we repaid the obligation under
this credit agreement with the cash that had been restricted for this purpose.
This credit facility is no longer available to us.

In September 2000, we sold $20.0 million of convertible notes and warrants to
CVI, a private institution, pursuant to a securities purchase agreement. The
notes had a one-year term. In April 2001, we received a notice of default from
CVI for an alleged violation of certain covenants. Subsequently, in July 2001,
we restructured the convertible notes with CVI, with a face value of $11 million
and all warrants, with a payment of $2.2 million and issuance of a $1.5 million
non-interest bearing convertible promissory note, which is due January 2003 and
is convertible, at any time at the option of CVI, into common stock at an
exercise price of $2.00 per share. CVI did not release its claim against us,
certain current and former officers and directors for the alleged security
violations and for fraudulent inducement. We are vigorously defending against
these claims. Nevertheless, an unfavorable resolution of these claims could have
a material adverse effect on us in one or more future periods.

In July 2001, we entered into an agreement with Cody Holdings Inc. to provide us
with up to $18 million in equity financing ("Equity Line"). Under the terms of
the agreement, we have the right, but not the obligation during the 18-month
term of the Agreement, to obtain equity financing from Cody Holdings through
draw downs under this Equity Line, and the issuance of common stock to Cody
Holdings at a discount to the market price at the time of the draw down. The
shares of common stock may be sold to Cody Holdings during this period at times
and in amounts, subject to certain minimum and maximum volumes, determined at
our discretion. The agreement restricts our ability to make draw downs based on
a formula calculated on our stock trading volume and stock price. Accordingly,
if our stock price and trading volume fall below established levels, we will not
be able to draw down funds from the Equity Line. During the first quarter of
2002, our stock price ranged from a high of $0.18 to a low of $0.09 per share
and our average daily trading volume was 15,400 shares. Based on these numbers,
we are currently unable to draw down any funds from the Equity Line. If we are
able to and choose to draw down on the Equity Line, we will use the proceeds of
the financing for general corporate purposes. In October 2001, we completed a
draw down of $25,000. Until and unless our average trading volume and our stock
price increase, we will be unable to draw upon this Equity Line. There are no
assurances that we will be able to make a draw down on this Equity Line during
2002.

We believe that our cash reserves and cash flows from operations may be adequate
to fund our operations through September 2002. 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,
shareholders or the party from whom we secured our equity line of credit, which
we may not be able to obtain. If additional financing is not available, we may
need to change our business plan, sell or merge our business, or file a petition
in bankruptcy. In addition, our issuance of equity or equity-related securities
will dilute the ownership interest of existing shareholders and our issuance of
debt securities could increase the risk or perceived risk of our company.

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

o    the level of revenues in 2002, which we expect to decline from 2001 levels;

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

                                       19
<PAGE>

o    the rate at which our overall losses improve or deteriorate;

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

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

o    the shut down or other disposition of one or more divisions or assets;

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

o    the scope of any reduction of our business activities;

o    the scope and degree of market recovery and performance;

o    the scope and degree of acceptance of our products and services by our
     target customers; and

o    other business and economic factors that may occur from time to time.

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

o    engaging a financial advisor to explore strategic alternatives, which may
     include a merger, asset sales, the shut down of assets or divisions, joint
     ventures or another comparable transaction;

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

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

o    loans from management or employees, salary deferrals or other cost cutting
     measures.

Additional cost-cutting measures could include additional lay-offs and/or the
closure of additional business units and facilities. The results of any of these
measures could materially affect our business, results of operations and
financial position. Currently, we do not have any commitment for any of the
foregoing. Absent any such restructuring or financial transaction that provides
significant additional funding to the Company, our ability to continue business
as a going concern beyond the third quarter of fiscal 2002 will be severely
challenged.





                                       20
<PAGE>


FACTORS THAT MAY AFFECT OUR OPERATING RESULTS, BUSINESS AND STOCK PRICE

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. Our business may be adversely affected, and 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 Condensed 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
Form 10-K filed on April 1, 2002 with the Securities and Exchange Commission.

RISKS RELATED TO OUR BUSINESS

OUR FUTURE CAPITAL REQUIREMENTS ARE LIKELY TO BE SUBSTANTIAL AND WE MAY NOT BE
ABLE TO OBTAIN FINANCING ON FAVORABLE TERMS, IF AT ALL, AND WE HAVE RECEIVED A
"GOING CONCERN" OPINION FROM OUR ACCOUNTANTS.

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

o    the level of revenues in 2002, which we expect to decline from 2001 levels;

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

o    the rate at which our overall losses improve or deteriorate;

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

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

o    the shut down or other disposition of one or more divisions or assets;

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

o    the scope of any reduction of our business activities;

o    the scope and degree of market recovery and performance;

o    the scope and degree of acceptance of our products and services by our
     target customers; and

o    other business and economic factors that may occur from time to time.


We believe that our cash reserves and cash flows from operations may be adequate
to fund our present operations through September 2002. However, we will require
substantial additional funds in the future. Our plans, which may or may not
occur, for financing may include, but are not limited to, the following:

o    engaging a financial advisor to explore strategic alternatives, which may
     include a merger, asset sale, the shut down of assets or divisions, joint
     ventures or another comparable transaction;

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

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

o    loans from management or employees, salary deferrals or other cost cutting
     mechanisms.

We secured an $18 million equity line of credit, under which we have the right,
but not the obligation, during the eighteen-month term of the agreement to
obtain equity financing through the issuance of common stock in a series of
periodic draw downs at a discount to the market price at the time of sale. The
amount, if any, of capital draw

                                       21

<PAGE>

down from this equity line may not be adequate to fund our operation.
Furthermore, we may not have adequate trading volume or stock price to draw down
from our equity line. Through March 31, 2002, we have only drawn $25,000 from
the $18 million equity line. While we attempt to secure financing, many
companies in the Internet industry, including us, have experienced difficulty
raising additional financing over the last 18 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, shareholders or the party from whom we secured our equity line of
credit, which we may not be able to obtain. If additional financing is not
available to us we may need to dramatically change our business plan, sell or
merge our business, close business units, sell assets or face bankruptcy. In
addition, our issuance of equity or equity-related securities will dilute the
ownership interest of existing shareholders and our issuance of debt securities
could increase the risk or perceived risk of our Company. As of March 31, 2002,
our stock price and trading volume of our common shares had fallen below the
established minimum levels at which we can initiate a draw down.

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, 2001, citing recurring
operating losses and reduced working capital. Accordingly, those conditions
raise substantial doubt about our ability to continue as a going concern.

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

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

WE HAVE A HISTORY OF LOSSES.

We have incurred significant losses since our inception. As of March 31, 2002,
we had an accumulated deficit of $572.0 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
profitability. There can be no assurance that we will ever become profitable on
a quarterly or an annual basis. We expect that our sales and marketing, research
and development and general and administrative expenses will decrease in
absolute dollars from 2001 to 2002 but may increase as a percentage of revenues.

OUR BUSINESS MODEL IS UNPROVEN AND CHANGING.

We provide technology infrastructure and online business services. We have
limited experience as a company, particularly with these businesses.
Additionally, the Internet, on which our business model relies, is still
unproven as a business medium and has experienced significant industry slow down
during the last year. 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 our
ability to secure additional capital and restructure our debts.


                                       22
<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. If our revenues in a
particular period fall short of our expectations, we will likely be unable to
quickly adjust our spending in order to compensate for that revenue shortfall.

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

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

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

o    the mix of products and services that we sell;

o    the shutting down or paring back one or more business units or product
     lines; and

o    the ability to maintain our telecommunications infrastructure.

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

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

o    the failure or lack of access to our telecommunications infrastructure or
     technical staff;

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

o    a decrease in the growth of Internet usage; and

o    the pricing policies of our competitors.

Period-to-period comparisons of our operating results are not a good indicator
of our future performance, particularly in light of changes in our business
focus.

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

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

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

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

o    enhance existing products and services;

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

o    complete projects on time;

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

o    continue to increase the attractiveness of our Web site and services; and


                                       23
<PAGE>

o    retain key business, technical, customer service and financial personnel.

WE FACE SIGNIFICANT COMPETITION.

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

o    fewer businesses using our technology infrastructure products and services;

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

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

The number of companies providing technology infrastructure services, hosting
services and marketing services is large and increasing at a rapid rate. Many of
our competitors and potential competitors have substantial competitive
advantages as compared to us, including:

o    larger customer or user bases;

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

o    greater name recognition and larger marketing budgets and resources;

o    substantially greater financial, technical and other resources;

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

o    larger production and technical staffs.

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

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

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 changing the scope of our operations. In recent
months, we have focused on developing and providing technology infrastructure
and online business services. Due to the shift in our business focus, our
historical results are likely not indicative of our future performance and you
may have difficulty evaluating our business and prospects. While our operations
have been changing, we have reduced our overall number of employees from 620 in
January 2001 to 52 as of March 15, 2002. These changes in our business plan and
reduction in personnel have placed, and will continue to place, a significant
strain on our management systems, infrastructure and resources. Simultaneously,
the reduction in our workforce or future reductions in workforce may make it
more difficult to execute and implement our business plan. We will need to


                                       24
<PAGE>

continue to monitor our financial and managerial controls and reporting systems
and procedures, and will need to continue to train and manage our workforce. Any
failure to adapt to any of the foregoing areas or other areas efficiently and
effectively could cause our business to suffer.

WE TRADE ON THE OVER THE COUNTER MARKET, WHICH COULD MAKE IT MORE DIFFICULT FOR
US TO RAISE CAPITAL.

Our common stock is presently listed on the over the counter market. Our common
stock has been delisted from the Nasdaq National Market effective as of August
29, 2001. The over the counter market is viewed by most investors as a less
desirable and less liquid marketplace than the Nasdaq National Market. Our
common stock constitutes "penny stock," which places increased regulatory burden
upon brokers, making them less likely to make a market in our stock. The loss of
our Nasdaq National Market status will make it more difficult for us to raise
capital or complete acquisitions and also complicate compliance with state blue
sky laws.

OUR COMMON STOCK PURCHASE AGREEMENT WITH CODY HOLDINGS AND THE ISSUANCE OF
SHARES TO CODY HOLDINGS UNDER THAT AGREEMENT MAY CAUSE SIGNIFICANT DILUTION TO
OUR SHAREHOLDERS AND MAY HAVE AN ADVERSE IMPACT ON THE MARKET PRICE OF OUR
COMMON STOCK.

The resale by Cody Holdings of the common stock that it purchases from us will
increase the number of our publicly traded shares, which could depress the
market price of our common stock. Moreover, as all the shares we sell to Cody
Holdings will be available for immediate resale, the mere prospect of our sales
to Cody Holdings could depress the market price for our common stock. The shares
of our common stock issuable to Cody Holdings under the equity line facility
will be sold at a 10% discount to the volume-weighted average daily price of our
common stock during the applicable drawdown period and the proceeds paid to us
upon each drawdown will be net of a 6% placement fee to our placement agent, GKN
Securities Corp., and an escrow agent fee of $1,000. If we were to require Cody
Holdings to purchase our common stock at a time when our stock price is low, our
existing common shareholders will experience substantial dilution. The issuance
of shares to Cody Holdings will therefore dilute the equity interest of existing
shareholders and could result in a change in control of the Company and have an
adverse effect on the market price of our common stock. Also, if we draw down
funds under our equity line facility at a time or times when our share price is
relatively low, it would result in a significant issuance of stock by us, and a
change in control of the Company could be effected.

The perceived risk of dilution may cause our shareholders to sell their shares,
which would contribute to a downward movement in the stock price of our common
stock. Moreover, the perceived risk of dilution and the resulting downward
pressure on our stock price could encourage investors to engage in short sales
of our common stock. By increasing the number of shares offered for sale,
material amounts of short selling could further contribute to progressive price
declines in our common stock.

WE MAY BE UNABLE TO ACCESS ALL OR PART OF OUR EQUITY LINE FACILITY.

The maximum draw down amount every 22 trading days is the lesser of $2,000,000
or 6% of the weighted average price of our stock for the 60-day period prior to
the draw down multiplied by the total trading volume for that 60 day period. If
our stock price and trading volume fall below established levels, then we will
not be able to draw down additional funds pursuant to the equity line facility
with Cody Holdings. During the first quarter 2002, our stock price ranged from a
high of $0.18 to a low of $0.09 per share and our average daily trading volume
was 15,400 shares. Based on our stock price and average trading volume, as of
March 31, 2002, we are unable to make a draw down. In addition, business and
economic conditions may not make it feasible to draw down pursuant to this
facility. Furthermore, if we are unable to keep a registration statement
effective for those shares of common stock subject to the equity line, or if we
experience a material adverse change to our business that is not cured within 30
days, the common stock purchase agreement may terminate, or we may not be able
to draw down any funds.


                                       25
<PAGE>


WE ARE SUBJECT TO CERTAIN LIMITATIONS ON THE DRAW DOWNS WE CAN EXERCISE UNDER
OUR EQUITY LINE OF CREDIT.

We may exercise draw downs under our equity line of credit at our sole
discretion subject to certain limitations. We are permitted to exercise one draw
down in the twenty-two day period from the date of our notice (indicating that
we intend to exercise a draw down). We also have limitations as to the dollar
amount we can draw down under the equity line of credit as follows:

o    the minimum amount is $100,000;

o    the maximum amount is the lesser amount of (i) $2,000,000 and (ii) 6% of
     the EQY weighted average price field (as reported on Bloomberg Financial
     L.P. using the BLPH function) for our common stock for the 60 calendar days
     immediately prior to the first day of the draw down period (during which
     the price per share is being determined); and

o    if the maximum amount is less than the minimum amount, the minimum amount
     that can be drawn down cannot be less than $50,000.


OUR BUSINESS MAY BE SERIOUSLY HARMED BY LITIGATION ALLEGING VIOLATIONS OF LOCAL,
STATE OR FEDERAL SECURITIES LAWS.

Some of our current and former officers and directors, and some of the
underwriters of our initial public offering of common stock in September 1999
are defendants in pending class action lawsuits that allege violations of
federal securities laws in connection with our initial and secondary public
offerings. Class action litigation is often expensive and time-consuming, and
the outcome of such litigation is often uncertain. Such lawsuits, regardless of
their outcome, may cause us to incur significant expenses and divert the
attention of our management and key personnel from our business operations. In
addition, such lawsuits may result in the payment by us of substantial damages
and the rescission of the sale of shares in the initial public offering, and may
otherwise seriously harm our business. See "Legal Proceedings." We are also
party to numerous other lawsuits and legal matters in which we may be harmed or
may receive benefit.

WE CANNOT PREDICT WITH ANY CERTAINTY THE EFFECT THAT NEW GOVERNMENT AND
REGULATORY POLICIES, OR INDUSTRY REACTIONS TO THESE 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:

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

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

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


                                       26
<PAGE>


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

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

WE MAY NOT DERIVE SUBSTANTIAL BENEFITS FROM OUR STRATEGIC RELATIONSHIPS.

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

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

Our success depends on the skills, experience and performance of our senior
management and other key personnel, specifically including Dwayne Walker, our
Chairman and Chief Executive Officer and President; N. Scott Dickson, our Chief
Financial Officer and Secretary, Anne-Marie K. Savage, our Executive Vice
President and Joseph Shatara, our Vice President and other senior managers and
the members of our board of directors. If we fail to successfully attract and
retain a sufficient number of qualified executive, technical, managerial, sales
and marketing, business development and administrative personnel, our ability to
manage and expand our business could suffer. Our current financial situation may
make it more difficult to attract and retain key employees.

OUR ABILITY TO DEVELOP AND INTEGRATE INFRASTRUCTURE TECHNOLOGIES IS SUBJECT TO
UNCERTAINTIES.

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

OUR COMPUTER SYSTEMS AND TELECOMMUNICATIONS INFRASTRUCTURE MAY BE VULNERABLE TO
SYSTEM FAILURES.

Our success depends on the performance, reliability and availability of the
technology and telecommunications infrastructure supporting our products and
services. Our revenues depend, in large part, on the number of businesses and
consumers that use our products and services. This depends, in part, upon our
actual and perceived reliability and performance. Any inability to provide our
products and services could cause us to lose customers and therefore lose
revenue. Substantially all of our computer and communications hardware is
located at our facilities in Seattle, Washington. Our systems,
telecommunications and operations are vulnerable to damage or interruption from
fire, flood, power loss, telecommunications failure, break-in, earthquake and
similar events. Because we presently do not

                                       27

<PAGE>

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, TELECOMMUNICATIONS 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 may suffer business damages and financial losses if our
telecommunications infrastructure is not available at any time.

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

OUR OPERATIONS FROM FOREIGN MARKETS INVOLVE RISKS.

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

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

o    restrictions on the export of encryption technology; and

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


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

We regard our intellectual property rights as critical to our success, and we
rely on trademark and copyright law, trade secret protection and confidentiality
and license agreements with our employees, customers and others to protect our
proprietary rights. Despite our precautions, unauthorized third parties might
copy portions of or reverse engineer our software and use information that we
regard as proprietary. We currently have been granted three patents and have
other 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.

                                       28

<PAGE>


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 HOSTING OR MARKETING SERVICES IS BREACHED, WE
MAY BE LIABLE TO OUR CLIENTS AND OUR REPUTATION COULD BE HARMED.

A fundamental requirement for e-commerce is the secure transmission of
confidential information of businesses. Among the hosting and online database
marketing services we offer are security features such as:

o    secure online payment services;

o    secure order processing services; and

o    fraud prevention and management services.

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

                                       29
<PAGE>


will continue to develop or that a sufficiently broad base of businesses and
shoppers will adopt and continue to use the Internet and online products and
services as a medium of commerce.

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

RAPID TECHNOLOGICAL CHANGE COULD NEGATIVELY AFFECT OUR BUSINESS.

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

WE RELY ON THE INTERNET INFRASTRUCTURE PROVIDED BY OTHERS TO OPERATE OUR
BUSINESS.

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

FUTURE GOVERNMENTAL REGULATION AND PRIVACY CONCERNS COULD ADVERSELY AFFECT OUR
BUSINESS.

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

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


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<PAGE>

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. 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.

THE INTERNET ADVERTISING MARKET MAY DETERIORATE, OR DEVELOP MORE SLOWLY THAN
EXPECTED, WHICH COULD HARM OUR BUSINESS.

If the market for Internet advertising deteriorates, or develops more slowly
than we expect, our business could suffer. Our future success is highly
dependent on an increase in the use of the Internet, the commitment of
advertisers to the Internet as an advertising medium, on the willingness of our
potential clients to utilize the Internet for their advertising and marketing
needs, and on our ability to sell services to advertising agencies. The Internet
advertising market is relatively new and rapidly evolving. As a result, demand
and market acceptance for Internet advertising services is uncertain. Many of
our current or potential clients have little or no experience using the Internet
for advertising purposes and have allocated only a limited portion of their
advertising budgets to Internet advertising. Also, we must compete with other
companies who provide Internet advertising as well as traditional advertising
media, including television, radio, cable and print, for a share of our clients'
total advertising budgets. Our current and potential clients may find Internet
advertising to be less effective than traditional advertising media for
promoting their products and services, and therefore the market for Internet
advertising services may deteriorate or develop more slowly than expected. In
addition, "filter" software programs are available that limit or prevent
advertising from being delivered to an Internet user's computer. The widespread
adoption of such software could significantly undermine the commercial viability
of Internet advertising.

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<PAGE>


THE OCCURRENCE OF EXTRAORDINARY EVENTS, SUCH AS THE ATTACK ON THE WORLD TRADE
CENTER AND THE PENTAGON, MAY SUBSTANTIALLY DECREASE THE USE OF AND DEMAND FOR
ONLINE MARKETING AND HOSTING OVER THE INTERNET, WHICH MAY SIGNIFICANTLY DECREASE
OUR REVENUES.

The success of our business depends on the overall demand for our services and,
in part, the growth of the Internet hosting and marketing industry. Hosting and
marketing sales in general are sensitive to general economic conditions and
consumer confidence. The terrorist attacks against the United States on
September 11, 2001 and other recent terrorist activities have created
significant economic and political uncertainties in an already weakened national
economy. These increased uncertainties may have an adverse effect on the
advertising and marketing industry, which may result in the reduction of our
clients' advertising budgets, weaken demand for our hosting services and result
in a decrease in our revenues. Any additional occurrences of terrorist attacks,
war or other extraordinary events that capture significant attention worldwide
may result in similar reductions in the use of and demand for advertising on the
Internet and may significantly decrease our revenues for an indefinite period of
time.

LEGISLATION OR REGULATIONS MAY BE ADOPTED THAT COULD IMPAIR OUR ABILITY TO
PROVIDE OUR SERVICES TO CLIENTS.

Legislation or regulations may be adopted that could impair our ability to
provide our services to clients. The legal and regulatory environment governing
the Internet is uncertain and may change. Laws and regulations may be adopted
covering issues such as privacy, pricing, acceptable content, taxation, consumer
protection and quality of products and services on the Internet. These laws and
regulations could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as an advertising medium. In addition,
due to the global nature of the Internet, it is possible that multiple federal,
state or foreign jurisdictions might inconsistently regulate our activities or
the activities of advertising networks or Web sites. Any of these developments
could harm our business.

Our service offering includes email advertising and marketing services. The
market for email advertising and marketing in general is vulnerable to the
negative public perception associated with unsolicited email. Various states
have enacted legislation and several bills have been introduced in Congress that
limit or prohibit the use of unsolicited or solicited email. Government action,
public perception or press reports related to solicited or unsolicited email
could reduce the overall demand for email advertising and marketing in general
and our email services in particular.

Any legislation enacted or regulation issued could dampen the growth and
acceptance of the digital marketing industry in general and of our offering in
particular. In response to evolving legal requirements, we may be compelled to
change or discontinue an existing offering, business, or business model, or to
cancel a proposed offering or new business. Any of these circumstances could
have a material and adverse impact on our business, financial condition and
results of operations. These changes could also require us to incur significant
expenses, and we may not be able to replace the revenue lost as a consequence of
the changes.

RISKS RELATED TO AN INVESTMENT IN OUR STOCK

PROVISIONS OF OUR CHARTER DOCUMENTS AND WASHINGTON LAW COULD DISCOURAGE OUR
ACQUISITION BY A THIRD PARTY.

Specific provisions of our articles of incorporation and bylaws and Washington
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our shareholders.

Our articles of incorporation and bylaws establish a classified board of
directors, eliminate the ability of shareholders to call special meetings,
eliminate cumulative voting for directors and establish procedures for advance
notification of shareholder proposals. The presence of a classified board and
the elimination of cumulative voting may make it more difficult for an acquirer
to replace our board of directors. Further, the elimination of cumulative voting
substantially reduces the ability of minority shareholders to obtain
representation on the board of directors.

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<PAGE>

Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by our shareholders. The issuance of preferred stock could have the
effect of delaying, deferring or preventing a change of control of Network
Commerce and may adversely affect the market price of the common stock and the
voting and other rights of the holders of common stock.

Washington law imposes restrictions on some transactions between a corporation
and significant shareholders. Chapter 23B.19 of the Washington Business
Corporation Act prohibits a target corporation, with some exceptions, from
engaging in particular significant business transactions with an acquiring
person, which is defined as a person or group of persons that beneficially owns
10% or more of the voting securities of the target corporation, for a period of
five years after the acquisition, unless the transaction or acquisition of
shares is approved by a majority of the members of the target corporation's
board of directors prior to the acquisition. Prohibited transactions include,
among other things:

o    a merger or consolidation with, disposition of assets to, or issuance or
     redemption of stock to or from the acquiring person;

o    termination of 5% or more of the employees of the target corporation; or

o    allowing the acquiring person to receive any disproportionate benefit as a
     shareholder.


A corporation may not opt out of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of Network
Commerce. The foregoing provisions of our charter documents and Washington law
could have the effect of making it more difficult or more expensive for a third
party to acquire, or could discourage a third party from attempting to acquire,
control of Network Commerce. These provisions may therefore have the effect of
limiting the price that investors might be willing to pay in the future for our
common stock.

OUR STOCK PRICE IS VOLATILE AND WE MAY BE SUBJECT TO LITIGATION AS A RESULT OF
SUCH VOLATILITY.

The stock market in general, and the stock prices of Internet-related companies
in particular, has recently experienced volatility, which has often been
unrelated to the operating performance of any particular company or companies.
Our stock price has and could continue to be subject to wide fluctuations in
response to factors such as:

o    actual or anticipated variations in quarterly results of operations;

o    the addition or loss of businesses and individuals using our service;

o    announcements of technological innovations, new products or services by us
     or our competitors;

o    changes in financial estimates or recommendations by securities analysts;

o    conditions or trends in the Internet, e-commerce and marketing industries;

o    changes in the market valuations of other Internet or online service or
     software companies;

o    announcements by us or our competitors of significant acquisitions,
     strategic relationships, joint ventures or capital commitments or of
     significant new product developments or changes in business strategy;

o    additions or departures of key personnel;

o    legal, regulatory or political developments;

o    sales of our common stock;

o    general market conditions; and

o    other events or factors, many of which are beyond our control.

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<PAGE>

Because of the limited trading market for our common stock, and because of the
possible price volatility, you may not be able to sell your shares of common
stock when you desire to do so. In the 52-week period ending March 31, 2002, our
stock price ranged from a high of $5.55 to a low of $0.05 per share. The
inability to sell your shares in a rapidly declining market may substantially
increase your risk of loss because of such illiquidity and because the price for
our common stock may suffer greater declines because of its price volatility.

These broad market and industry factors may materially and adversely affect our
stock price, regardless of our operating performance.

In the past, securities class action litigation has often been brought against
companies following periods of volatility in their stock prices. We have been
subject to litigation filed by our shareholders claiming violations of the
securities laws and may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert our
management's time and resources, which could cause our business to suffer.

ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO INVESTORS.

Some investors favor companies that pay dividends, particularly in market
downturns. We intend to retain any future earnings for funding growth and,
therefore we do not currently anticipate paying cash dividends on our common
stock in the foreseeable future. Because we may not pay dividends, the return on
our shareholders' investments likely depends on their ability to sell our stock
for a profit.











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 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, 2002.










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PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

Reference is made to "Item 3. Legal Proceedings" in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001. Through May 10, 2002, there
have been no material developments with respect to any of the legal proceedings
previously disclosed.

From time to time we are and expect to continue to be, subject to legal
proceedings and claims in the ordinary course of business. If the Company
suffers an adverse judgment in any such legal proceeding or if we incur
significant expenses to defend against such proceedings, it will likely have a
material adverse effect on our results of operations and financial condition;
and could affect our ability to continue business on as a going concern.

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS

None.

ITEM 5: OTHER INFORMATION

None.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits


(b)  Reports on Form 8-K

Form 8-K filed January 14, 2002

Form 8-K filed April 11, 2002

Form 8-KA filed April 16, 2002






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                                   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 on May 10, 2002.

                             NETWORK COMMERCE INC.




                     By:     /s/ Dwayne M. Walker           .
                             -------------------------------------
                             Dwayne M. Walker
                             Chief Executive Officer

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










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