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 JUNE 30, 2001,

                                       OR

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

             FOR THE TRANSITION PERIOD FROM __________ TO __________


                         Commission File Number 0-26707


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


        WASHINGTON                                             91-1628103
  (State or other jurisdiction of                            (IRS Employer
   incorporation or organization)                        Identification Number)

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


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




Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __


As of July 27, 2001, there were 5,447,012 shares outstanding of the Registrant's
common stock.

                                       1
<PAGE>


                              Network Commerce Inc.

                                    Form 10-Q

                                      Index

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

ITEM 1:           Financial Statements

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

ITEM 2:           Management's Discussion and Analysis of Financial
                     Condition and Results of Operations................................................    19

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


PART II           OTHER INFORMATION

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

ITEM 2:           Changes in Securities and Use of Proceeds.............................................    41

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

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

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

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


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

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

</Table>

                                       2
<PAGE>


                         PART I. FINANCIAL INFORMATION

ITEM 1.



                                       3
<PAGE>


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

<Table>
<Caption>
                                                                                              June 30          December 31
                                                                                                2001             2000
                                          ASSETS
    <S>                                                                                       <C>               <C>

    Current assets:
       Cash and cash equivalents                                                                 $5,535         $11,715
       Restricted cash                                                                              442          16,599
       Short-term investments                                                                     2,755          21,592
       Marketable equity securities                                                               3,839             431
       Accounts receivable, less allowance for bad debts of $3,112 and $1,195                     2,611          19,658
                               Notes receivable from employees                                        -           2,900
       Prepaid expenses and other current assets                                                  3,158          11,363
                                                                                               --------       ---------
        Total current assets                                                                     18,340          84,258
    Property and equipment, net                                                                  10,145          22,580
    Goodwill and intangible assets, net                                                           6,428         135,628
    Cost-basis investments                                                                       10,826          29,481
    Other assets, net                                                                             1,105           5,773
                                                                                               --------       ---------
        Total assets                                                                            $46,844        $277,720
                                                                                               ========       =========
                           LIABILITIES AND SHAREHOLDERS' EQUITY

    Current liabilities:
       Accounts payable                                                                          $2,058         $18,933
       Accrued liabilities and other liabilities                                                  4,269          21,502
       Current portion of notes and leases payable and line of credit                            11,830          24,797
       Deferred revenues                                                                            584          11,338
                                                                                               --------       ---------
        Total current liabilities                                                                18,741          76,570
    Notes and leases payable, less current portion                                                  410           1,741
    Deferred revenues                                                                                 -           3,703
                                                                                               --------       ---------
        Total liabilities                                                                        19,151          82,014
                                                                                               ========       =========
    Commitments
    Shareholders' equity:
       Convertible preferred stock, $0001 par value:authorized shares - 5,000,000;
       none issued and outstanding                                                                    -               -
       Common stock, $0001 par value:authorized shares - 13,333,334; issued
        and outstanding shares - 5,436,432 at June 30, 2001 and 5,214,838
        at December 31, 2000                                                                    557,212         555,175
                                  Subscriptions receivable                                         (63)         (2,421)
       Common stock warrants                                                                     18,172          18,172
       Deferred compensation                                                                    (5,187)         (7,758)
       Accumulated other comprehensive loss                                                         707           (130)
       Accumulated deficit                                                                    (543,148)       (367,332)
                                                                                               --------       ---------
        Total shareholders' equity                                                               27,693         195,706
                                                                                               --------       ---------
        Total liabilities and shareholders' equity                                              $46,844        $277,720
                                                                                               ========       =========

</Table>
              The accompanying notes are an integral part of these
                     condensed consolidated balance sheets.

                                       4
<PAGE>


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

<Table>
<Caption>
                                                                  For the Three Months Ended           For the Six Months Ended
                                                                           June 30,                            June 30,
                                                                  ---------------------------          -------------------------
                                                                    2001              2000              2001              2000
                                                                  ---------       -----------          ----------      ---------
<S>                                                               <C>             <C>                  <C>             <C>

Revenues                                                           $   6,280         $  26,921         $  16,388     $ 45,603
Cost of revenues                                                       1,932            12,839             4,248       23,232
                                                                   -----------       -----------       -----------   ----------
     Gross profit                                                      4,348            14,082            12,140       22,371
                                                                   -----------       -----------       -----------   ----------
Operating expenses:
     Sales and marketing                                               6,788            24,032            24,079       46,132
     Research and development                                          2,126             5,195             7,394        9,410
     General and administrative                                        2,874             3,361             7,157        6,594
     Amortization of intangible assets                                 5,042            18,300            23,339       31,792
     Stock-based compensation                                          1,007             1,286             1,267        3,142
     Restructuring and other impairment charges                       (8,915)                -            62,073            -
     Impairment of certain long-lived assets                               -                 -            43,136            -
     Unusual item - settlement of claim                                    -                 -             4,559            -
                                                                  -----------       -----------       -----------   ----------
      Total operating expenses                                         8,922            52,174           173,004       97,070
                                                                  -----------       -----------       -----------   ----------
      Income (Loss) from operations                                   (4,574)          (38,092)         (160,864)     (74,699)
                                                                  -----------       -----------       -----------   ----------
Nonoperating (expense) income:
     (Loss) gain on sale of marketable equity securities                   -               293               (150)       1,379
     Interest income                                                      66             1,570                623        2,865
     Interest expense                                                 (2,658)             (460)            (5,540)        (901)
     Other                                                               (15)              (28)               (39)         (49)
     Impairment of cost-basis investments                                  -                 -           (18,820)            -
                                                                  -----------       -----------       -----------   ----------
     Total nonoperating (expense) income, net                         (2,607)             1,375           (23,926)       3,294
                                                                  -----------       -----------       -----------   ----------
     Income (Loss) before income tax benefit and
     extraordinary gain                                               (7,181)          (36,717)          (184,790)     (71,405)
Income tax benefit                                                         -            11,634                 -        23,550
                                                                  -----------       -----------       -----------   ----------
     Loss before extraordinary gain                                   (7,181)          (25,083)          (184,790)     (47,855)
Extraordinary gain                                                     8,974                 -             8,974            -
                                                                  -----------       -----------       -----------   ----------
      Net income (loss)                                           $    1,793        $   (25,083)      $  (175,816)  $  (47,855)
                                                                  ===========       ===========       ===========   ==========

Basic income (loss) per share:
      Income (Loss) before extraordinary gain                     $    (1.45)       $     (6.69)      $    (37.63)  $   (12.94)
      Extraordinary gain                                                1.82                 -               1.83            -
                                                                  -----------       -----------       -----------   ----------
      Basic income (loss) per share                               $     0.36        $     (6.69)      $   (3580)    $   (12.94)
                                                                  ===========       ===========       ===========   ==========

Weighted average shares outstanding used to
     compute basic net income (loss) per share                    $4,937,404        $3,748,087        $4,910,967    $3,699,168
                                                                  ===========       ===========       ===========   ==========

</Table>

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


                                       5
<PAGE>

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

<Table>
<Caption>
                                                                                               For the months ended
                                                                                                       June 30
                                                                                             ---------------------------
                                                                                               2001             2000
                                                                                             ----------        ----------
<S>                                                                                          <C>              <C>
Operating activities:
      Net loss                                                                               $(175,816)        $(47,855)
      Adjustments to reconcile net loss to net cash used in operating activities-
         Depreciation and amortization                                                           28,285           36,910
         Accretion of promissory note payable                                                     4,296                -
         Provision for bad debts                                                                  2,282                -
         Amortization of deferred compensation                                                    1,267            3,142
         Restructuring and impairment charges                                                    67,238                -
         Impairment of certain long-lived assets                                                 43,136                -
         Impairment of marketable equity securities and investments                              18,820                -
         Extraordinary gain on settlements with vendors                                         (8,974)                -
         Unusual item - settlement of claim                                                       4,559                -
         Non-cash consideration received                                                              -          (2,141)
         Realized loss from sale of marketable equity securities                                    150                -
         Deferred income tax benefit                                                                  -         (23,550)
         Changes in operating assets and liabilities, excluding effects
         of acquired businesses-
          Accounts receivable                                                                    11,591          (9,799)
          Prepaid expenses and other current assets                                               1,494          (4,978)
          Other assets                                                                             (85)                -
          Accounts payable and accrued liabilities                                             (24,175)            3,537
          Deferred revenue                                                                      (2,126)            1,004
                                                                                              ---------        ---------
          Net cash used in operating activities                                                (28,058)         (43,730)
                                                                                              ---------        ---------
Investing activities:
      Purchases of short-term investments                                                             -        (109,317)
      Sales of short-term investments                                                            35,567           84,871
      Proceeds from sale of investments                                                             848              103
      Purchases of property and equipment                                                          (35)         (12,846)
      Investments in equity and debt securities and other assets                                    (3)         (14,327)
      Acquisition of businesses, net of cash acquired of $- in 2001 and $392 in 2000                  -         (17,691)
                                                                                              ---------        ---------
          Net cash provided by (used in) investing activities                                    36,377         (69,207)
                                                                                              ---------        ---------
Financing activities:
      Borrowings on line of credit, net of loan fees paid                                             -            6,011
      Payments on line of credit                                                               (10,147)                -
      Payments on long-term debt                                                                (3,918)          (5,953)
      Proceeds from sale of common stock and exercise of stock options                                5          110,424
      Proceeds from collection of subscription receivable                                             3                -
                                                                                              ---------        ---------
          Net cash (used in) provided by financing activities                                  (14,057)          110,482
                                                                                              ---------        ---------
Net decrease in cash and cash equivalents                                                       (5,738)          (2,455)
Cash and cash equivalents at beginning of period                                                 11,715           10,660
                                                                                              ---------        ---------
Cash and cash equivalents at end of period                                                    $   5,977        $   8,205
                                                                                              =========        =========
Supplementary disclosure of cash flow information:
      Cash paid during the period for interest                                                $     644        $     799
                                                                                              =========        =========
      Cash paid during the period for income taxes                                            $       -        $       -
                                                                                              =========        =========
      Non-cash investing and financing activities:
         Common stock, options and warrants issued and liabilities assumed
           as part of business and technology acquisitions                                    $       -        $ 118,255
                                                                                              =========        =========
         Assets acquired under capital leases                                                 $     160        $     214
                                                                                              =========        =========


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

</Table>
                                       6
<PAGE>


                              Network Commerce Inc.

              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

Note 1. Organization and Background:

The Company

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

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

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

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

Going Concern

The Company's  condensed  consolidated  financial  statements for the six months
ended  June  30,  2001  have  been  prepared  on a going  concern  basis,  which
contemplates  the realization of assets and the settlement of liabilities in the
normal course of business. The Company has incurred net losses of $175.8 million
for the  six-month  period ended June 30, 2001 and has  accumulated  deficits of
$543.1  million as of June 30, 2001. The Company has  continuously  incurred net
losses from  operations  and, as of June 30, 2001, has a working capital deficit
of $401,000.  These factors raise  substantial doubt about the Company's ability
to continue as a going concern.  The  consolidated  financial  statements do not
include any adjustments that might result from the outcome of this uncertainty.

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



                                       7
<PAGE>


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

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

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

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

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

Public Offerings

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

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

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

Note 2. Summary of Significant Accounting Policies:

Unaudited Interim Financial Data

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

Principles of Consolidation

The Company's condensed  consolidated  financial  statements include 100% of the
assets,  liabilities and results of operations of all  subsidiaries in which the
Company  has a  controlling  ownership  interest  of  greater  than 50%.  Equity
investments  in which the Company holds less than a 20%  ownership  interest and
does not exercise significant influence are recorded at cost and are included in
cost-basis  investments  in  the  accompanying  condensed  consolidated  balance
sheets.  All  significant  intercompany  transactions  and  balances  have  been
eliminated.

Use of Estimates

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


                                       8
<PAGE>


Revenue Recognition

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

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

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

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

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


                                       9
<PAGE>


in accordance with American Institute of Certified Public Accountants, Statement
of Position  97-2,  "Software  Revenue  Recognition."  Where  billings  exceeded
revenues  earned  on  these   contracts,   the  amounts  were  included  in  the
accompanying  consolidated  balance sheets as deferred  revenue.  Businesses and
merchants who utilized the Company's payment  processing  technologies  acted as
the merchant-of-record and bore the full credit risk on those sales of goods and
services. The Company sold this business unit during the second quarter 2001.

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

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

Cash, Restricted Cash and Cash Equivalents

For the purposes of consolidated statements of cash flows, the Company considers
investment  instruments with an original  maturity of three months or less to be
cash equivalents.  Cash equivalents are comprised of investments in money market
funds, government  mortgage-backed bonds, and highly rated corporate securities.
Approximately  $442,000  and  $16.6  million  of cash as of June  30,  2001  and
December 31, 2000,  respectively,  is  characterized  as  restricted in order to
secure certain  facilities  leasing and debt obligations under letters of credit
and  another  security  arrangement.  The  Company's  restricted  cash  and cash
equivalents are stated at cost, which approximates fair market value.

Short-Term Investments and Marketable Equity Securities

The Company  classifies  these  securities  as  available-for-sale  and they are
stated at fair value in accordance with the Financial Accounting Standards Board
(FASB) Statement of Financial  Accounting  Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." This statement specifies
that  available-for-sale  securities  are reported at fair value with changes in
unrealized gains and losses recorded directly to shareholders' equity, which are
also  reflected in  accumulated  other  comprehensive  loss in the  accompanying
consolidated  statement  of changes in  shareholders'  equity and  comprehensive
loss.  Fair value is based on quoted market  prices.  The  Company's  short-term
investments  consist of corporate notes and bonds,  commercial paper,  municipal
notes and bonds, auction preferreds and US government  securities and are stated
at cost, which  approximates  fair value as of June 30, 2001.  Marketable equity
securities  consist solely of investments in the common stock of publicly traded
companies  and are  recorded at fair value.  Realized  gains and losses from the
sale  of   available-for-sale   securities   are   determined   on  a   specific
identification basis. Dividend and interest income are recognized as earned. Any
changes in market values that are  considered  other than temporary are recorded
as realized gains or losses in current operations.

Stock Compensation

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

Income Taxes

Income taxes are accounted for under the asset and  liability  method.  Deferred
tax assets  and  liabilities  are  recognized  for the  future tax  consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and  liabilities  and their  respective tax bases and operating
loss and tax credit  carryforwards.  Deferred  tax assets  and  liabilities  are
measured  using  enacted tax rates  expected  to apply to taxable  income in the
years in which those  temporary  differences  are  expected to be  recovered  or



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<PAGE>


settled.  The effect on deferred tax assets and  liabilities  of a change in tax
rates is recognized as income in the period that includes the enactment date.

Recent Accounting Pronouncements

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

In June 2001, the FASB issued SFAS No. 141,  "Business  Combinations."  SFAS No.
141 establishes  accounting and reporting standards for business combinations to
use the purchase  method.  The effective  date of SFAS No. 141 is June 30, 2001.
The Company  impact of adopting  SFAS No. 141 is not  material on the  financial
statements.  Additionally,  all  acquisitions by the Company have been accounted
for using the purchase method.

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.

Reclassifications and Reverse Stock Split Adjustments

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

Note 3. Acquisitions:

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

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.



                                       11
<PAGE>

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

On December 3, 1999, the Company  acquired  Cortix,  Inc.  (Cortix),  an Arizona
corporation doing business as  20-20Consumer.com,  for $14.4 million of cash and
common stock.  Cortix, a privately held company,  provided  comparison  shopping
services including online reviews and ratings for commerce-oriented  businesses,
merchants and products. Upon effectiveness of the acquisition,  47,429 shares of
common  stock  valued at $282.15  per share were issued to the owners of Cortix.
The  Company  also paid cash  consideration  of $1.0  million  to the  owners of
Cortix.  The Company accounted for this transaction as a purchase.  Of the $14.4
million in  consideration  paid,  approximately  $11.3  million was allocated to
acquired  technology,  $1.6  million  to  customer  lists  and $1.3  million  to
goodwill.  These intangible  assets were being amortized over a three-year life.
However,  in December 2000, the Company  decided to shut down the operations and
wrote-off the remaining intangible assets of $9.1 million.

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

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

On January 18, 2000, the Company  acquired AXC  Corporation  (AXC), a Washington
corporation,  for approximately $17.9 million, of which $2.2 million was paid in
cash,  $4.1  million in  non-cash  deferred  tax  liabilities  assumed and $11.6
million in common stock and common  stock  options  issued to AXC  shareholders.
AXC, a  privately  held  company,  provided  e-commerce  consulting  services to
businesses.  Upon effectiveness of the acquisition,  a total of 36,020 shares of
common  stock  valued at $264.00  per share were issued to the owners of AXC. In
addition,  the Company issued replacement stock options to purchase an aggregate
of 4,806 shares of the Company's common stock to certain employees and owners of
AXC. The Company  accounted  for this  transaction  as a purchase.  Of the $17.9


                                       12
<PAGE>


million in  consideration  paid,  approximately  $7.2  million was  allocated to
assembled  workforce,  $4.9 million to customer lists,  $5.0 million to goodwill
and $800,000 to working capital.  These  intangible  assets were being amortized
over a three-year life.  However,  in December 2000, the Company decided to shut
down the  operations  and  wrote-off the  remaining  intangible  assets of $14.2
million.

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

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

On August 24,  2000,  the Company  acquired  Ivebeengood.com,  d.b.a.  UberWorks
(UberWorks),   a  wholly  owned  subsidiary  of  Trilogy,  Inc.  (Trilogy),  for
approximately  $22.8  million,  of which $2.4  million  was  accrued as non-cash
deferred compensation, $5.9 million in non-cash deferred tax liabilities assumed
and $14.5 million in common stock and common stock  options  issued to UberWorks
shareholders  and  employees.   UberWorks  was  a  developer  of  multi-merchant
e-commerce  purchasing  tools  and  universal  shopping  cart  technology.  Upon
effectiveness  of the  acquisition,  a total of 173,438  shares of common  stock
valued  at  approximately  $91.95  per share  were  issued  to  shareholders  of
UberWorks, of which 28,217 are being held back by the Company to be subsequently
released  based on time  vesting and on certain  performance  criteria yet to be
achieved  (these  shares  have been  excluded  from  determining  the  Company's
weighted average shares outstanding used to calculate basic and diluted earnings
per share).  The maximum term of the retention is three years from the effective
date of the acquisition.  In addition,  the Company issued a warrant to Trilogy,
with an exercise price of $0.000015 per share, to purchase  additional shares of
the  Company's  common  stock  if,  on  the  one-year  anniversary  date  of the
acquisition, the shares currently held by Trilogy (Trilogy Shares) are not worth
at least $13.1 million. The maximum number of additional shares that Trilogy can
purchase  under the terms of the  warrant is  173,334.  To the  extent  that the
Trilogy  Shares  have a fair  market  value that  exceeds  $13.1  million on the
one-year anniversary date, the warrant is cancelled and Trilogy must forfeit the
number of Trilogy  Shares  that would be required to bring their fair value down
to $13.1  million,  limited to a maximum of 86,667 shares to be forfeited  under
this  scenario.  The Company also issued  options to purchase  16,545  shares of
common stock to certain  UberWorks  employees.  The Company  accounted  for this


                                       13
<PAGE>


transaction  as  a  purchase.  Of  the  $22.8  million  of  consideration  paid,
approximately $12.3 million was allocated to acquired  technology,  $2.4 million
to deferred  compensation,  $726,000 to assembled  workforce and $7.3 million to
goodwill.  These intangible  assets were being amortized over a three-year life.
However,  in March 2001,  the  Company  decided to abandon  the  technology  and
wrote-off the remaining intangible assets of $16.6 million.

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

On  December  22,  2000,  the  Company  acquired   Internet  Domain   Registrars
Corporation  (IDR), for approximately  $23.6 million,  consisting of $750,000 in
cash, $6.1 million in non-cash deferred tax liabilities assumed, $5.7 million in
common stock and $11.1 million in net liabilities  assumed. IDR is a domain name
infrastructure company. In connection with this acquisition,  the Company issued
to the  shareholders  of IDR a total of 510,000 shares of common stock, of which
66,667 were placed in escrow for indemnification purposes. In addition,  218,734
shares  were  issued  and  placed  in  escrow  to  be  released  to  the  former
shareholders  and certain  employees of IDR upon the  achievement of established
future  revenue  targets over an eighteen  month period,  and 14,600 shares were
issued  to  employees  of IDR who  continued  to be  employed  by IDR  after the
acquisition. Finally, 40,000 shares of common stock was issued at the closing to
certain  other  persons in connection  with the  settlement of potential  claims
against IDR and as consideration of services  rendered to IDR in connection with
the acquisition. The closing price of the Company's common stock on December 22,
2000 was $10.35 per share.  The  Company  accounted  for this  transaction  as a
purchase.  Of the $23.6  million  of  consideration  paid,  approximately  $10.5
million was  allocated to  proprietary  concept,  $874,000 to domain name,  $3.5
million to customer lists,  $874,000 to assembled  workforce and $7.8 million to
goodwill.  These intangible  assets were being amortized over a three-year life.
In March 2001, the Company  recognized an impairment  charge of $17.6 million to
write-down the remaining carrying value to the approximate net realizable value.
In June 2001, the Company sold  substantially  all of the assets and liabilities
of IDR and recognized a gain of $6.9 million on the sale.

Note 4. Restructuring, Impairment Charges and Extraordinary Gains:

Impairment of Certain Long-Lived Assets

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

Restructurings and related impairments

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

During the second quarter 2001, the Company further  restructured its operations
by selling Ubarter USA, IDR and GO for total proceeds of $6.0 million cash and 1
million shares of Return on Investment  Corporation  stock,  which is subject to
lockup until November 2001. The Company recorded a gain in the second quarter of
$5.8  million  related to these  sales.  The gains on these  sales in the second
quarter  resulted from the fact that the Company wrote down these business units
by $23.6 million in first quarter 2001, based on the best available  evidence of
fair market  value.  On an  aggregate  basis,  for the six months ended June 30,
2001, the Company  recognized losses totaling $17.8 million on the sale of these
business units.

Additionally, the Company recognized gains totaling $3.1 million, primarily from
revising   estimates  on  unused   operating  leases  and  adjustment  of  other
liabilities related to businesses shut down in the first quarter 2001.



                                       14
<PAGE>


Extraordinary gain

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

Impairment of cost-basis investments

During the first  quarter  2001,  the  Company  determined  that  certain of its
cost-basis  investments were permanently  impaired  relative to their historical
values.  As a result,  the  Company  recognized  an  impairment  charge of $18.8
million,  which is included as a component of nonoperating  income  (expense) in
the accompanying June 30, 2001 consolidated statements of operations.  Permanent
impairments in the Company's cost-basis investments were determined by examining
the  operations  of  each  company,  and  when  possible,  by  reviewing  recent
private-placement   valuations  for   comparable   companies  and  by  obtaining
professional business valuations.

Note 5. Unusual Item:

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

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

Note 6. Deferred Revenues:

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

Note 7. Debt Obligations:

In March 1999,  the Company  entered into a loan and security  agreement  with a
financial  institution  for a term loan and line of  credit.  In May  1999,  the
agreement  was  amended  and  restated to allow the Company to borrow up to $8.5
million at any one time,  consisting of a $3.5 million term loan (term loan),  a
$4.0  million  bridge  loan  (bridge  loan)  and a line of  credit of up to $2.5
million.  On May 10, 2001, the Company repaid its obligation  under the loan and
security  agreement.  The  obligation  was  repaid  with the cash  that had been
restricted  for  this  purpose.  In  conjunction  with  the  loan  and  security
agreement,  the Company issued  warrants to acquire 4,800 shares of common stock
at an  exercise  price  of  $93.75  per  share.  The  warrants  are  exercisable
immediately  and expire in March 2006.  In May 1999,  the Company  issued to the
financial  institution  additional  warrants to acquire  4,667  shares of common
stock at an exercise  price of $105.00 per share.  The warrants are  exercisable
immediately and expire in June 2006.

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


                                       15
<PAGE>


On September 28, 2000, the Company sold $20.0 million of  convertible  notes and
warrants to Capital Ventures  International  ("CVI").  The notes have a one-year
term. On October 26, 2000,  the Company filed a  registration  statement on Form
S-3 with the SEC,  which was declared  effective on December 4, 2000.  Also, the
Company issued warrants to purchase  270,043 shares of common stock to CVI at an
exercise price of $155.55 per share.  The warrants are  immediately  exercisable
and expire five years from closing.  These  warrants were valued at $9.4 million
and were recorded as common stock warrants in the accompanying December 31, 2000
consolidated balance sheets. The notes were valued at $10.6 million. Immediately
after the effective  date,  $5.0 million of the notes were converted into common
stock.  In May 2001, $4.0 million of the notes were converted into common stock.
As of June 30,  2001,  the notes were valued at $9.7  million.  The terms of the
notes provide for conversion to common stock at a conversion price of $25.23 per
share.  Under the terms of the agreement,  the notes can be called by the holder
if the Company were to be delisted from the NASDAQ stock exchange.

On April 3, 2001,  the  Company  received  a notice of  default  from CVI for an
alleged  violation  of  certain  covenants  of the  Convertible  Notes  and  the
Securities Purchase Agreement relating to the Convertible Notes (the "Securities
Purchase  Agreement").  The  notice  of  default  demanded  that we  redeem  the
Convertible  Notes on or  before  April 9,  2001 for an  amount  equal to $17.25
million.  We responded to the notice of default on April 4, 2001 and denied that
an event of default  occurred under the Convertible  Notes.  CVI then filed suit
against us on May 22, 2001 in the United States  District Court for the Southern
District of New York under Civil Action No.  01CV-4390  (the  "Complaint")  (See
Note 14. Subsequent Events).

Note 8. Segment Information:

The Company's  segment  information for each of the three- and six- months ended
June 30,  2001 and 2000,  and the year ended  December  31,  2000 as follows (in
thousands):


<Table>
<Caption>
                                                 Six months ended June 30,
                                                     2001             2000
                                                  --------       ----------
<S>                                               <C>            <C>
 Revenues:
       Continuing operations                     $   3,229         $    391
       Operations closed in 2001                    13,159           45,212
                                                 ---------         --------
                                                    16,388           45,603
                                                 ---------         --------
 Cost of revenues:
       Continuing operations                           130               29
       Operations closed in 2001                     4,118           23,203
                                                 ---------         --------
                                                     4,248           23,232
                                                 ---------         --------
 Gross Profit:
       Continuing operations                         3,099              362
       Operations closed in 2001                     9,041           22,009
                                                 ---------         --------
                                                 $  12,140         $ 22,371
                                                 =========         ========

</Table>

Note 10. Option Repricing and Exchange Program:

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

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



                                       16
<PAGE>


Note 11. Litigation:

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

On October 6, 2000, Mall.com,  Inc. filed suit against the Company. The suit was
based on a contract  between  Mall.com  and  IveBeenGood.com,  which the Company
acquired  in August  2000.  The suit  alleged  that  IveBeenGood.com  breached a
contract  with  Mall.com,  breached a warranty  given to Mall.com and  committed
fraud and negligent  misrepresentation.  Mall.com  sought the return of cash and
stock paid by Mall.com, attorneys' fees and costs, $1 million in direct damages,
$15 million in  compensatory  damages and $32 million in punitive  damages.  The
claims asserted by Mall.com, Inc. were acquired by Mall Acquisition Corp. On May
7, 2001,  the Company  entered into a Compromise  and  Settlement  Agreement and
Mutual General Release with Mall.com,  Inc. and Mall Acquisition Corp.  Pursuant
to the settlement agreement,  the Company paid Mall Acquisition Corp. the sum of
$67,500,  and Mall.com,  Inc. and Mall Acquisition Corp. assigned to the Company
any  claims  they may have  against  Trilogy,  Inc.,  a  former  shareholder  of
IveBeenGood.com,  Inc.  In June 2001,  the parties  entered a final  judgment of
dismissal  of the  lawsuit  that  referred  to  the  Compromise  and  Settlement
Agreement.

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

Note 12. 1 for 15 Reverse Stock Split:

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

Note 13. NASDAQ Hearing to Review Delisting Determination:

The  Company's  common  stock is presently  listed on The Nasdaq Stock  Market's
National Market under the symbol "NWKC." The Company  received notice dated June
15,  2001,  as to the  delisting of the  Company's  common stock from The Nasdaq
Stock Market's National Market. (See Note 14. Subsequent Events).

Note 14. Subsequent Events:

Litigation

On July 9, 2001,  the Company and  Futurist  Entertainment  Inc.  entered into a
Settlement  Agreement.  Under  the  terms of the  settlement,  Futurist  and the
Company  entered into a mutual  release of claims and the lawsuit was  dismissed
with prejudice.


                                       17
<PAGE>

Equity Line Financing

On July 10, 2001,  the Company  entered into a Common Stock  Purchase  Agreement
(the  "Agreement")  with Cody  Holdings  Inc.  (the  "Investor")  to provide the
Company with up to $18 million in equity  financing (the "Equity  Line").  Under
the  terms of the  Agreement,  the  Company  will  have the  right,  but not the
obligation during the 18-month term of the Agreement, to obtain equity financing
through  the  issuance of common  stock to the  Investor in a series of periodic
draw  downs  at a  discount  to the  market  price  at the  time  of sale to the
Investor.  The shares of common  stock may be sold to the  Investor  during this
period at times and in amounts,  subject to certain minimum and maximum volumes,
determined at the discretion of the Company. If the Company chooses to draw down
on the Equity  Line,  it will use the  proceeds  of the  financing  for  general
corporate purposes.  The Company is required to file with the SEC a registration
statement  to effect the  registration  of these shares prior to drawing on this
equity line. There can be no assurance that such registration  statement will be
declared effective.

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


Restructuring Convertible Notes

On July 25,  2001,  the Company  entered into a  settlement  agreement  with CVI
(Settlement  Agreement)  with  respect  to  certain  claims  arising  out of the
Securities  Purchase  Agreement  dated  September  28, 2000.  As a result of the
Settlement Agreement, the Company paid $2.2 million and delivered a $1.5 million
promissory note (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 the Agreement other than the Registration
Rights  Agreement  dated  September 28, 2000. If the Company were 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.  However,  CVI did not
release its claim against the Company,  certain  current and former officers and
directors for the alleged security violations and for fraudulent inducement. CVI
agreed not to assert a claim in excess of the  principal  amount of $20  million
less any value  received  pursuant to the Settlement  Agreement.  The Company is
vigorously  defending  against  these  claims.   Nevertheless,   an  unfavorable
resolution of these claims could have a material  adverse  effect on the Company
in one or more future periods.


Nasdaq Delisting Hearing


On July 26,  2001 the  Company  attended a hearing  before  the Nasdaq  Listings
Qualification Panel to appeal the Nasdaq Staff  Determination  Notice dated June
15, 2001 that  informed the Company that the  Company's  stock would be delisted
from the Nasdaq National  Market.  As yet, the Company does not know the outcome
of that  hearing.  There is no  assurance  that  the  Company's  appeal  will be
successful  and that the  Company's  common stock will not be delisted  from the
Nasdaq Stock Market's  National Market to trade on the Over The Counter Bulletin
Board Market.

Stock Option Exchange Program and Grants

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

Additionally, the Company offered 1,560,000 stock options with an exercise price
of $0.25 per share to its  employees.  The vesting  period will be monthly  over
three  quarters.  This stock  option grant  results in $281,000 of  compensation
expense that will recognized ratably over the next three quarters.


                                       18
<PAGE>


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

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

Overview

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

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

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

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

Our condensed  consolidated  financial  statements for the six months ended June
30,  2001  were  prepared  on a going  concern  basis,  which  contemplates  the
realization  of assets and the settlement of liabilities in the normal course of
business. We have incurred net losses of $175.8 million for the six-month period
ended June 30, 2001 and have  accumulated  deficits of $543.1 million as of June
30, 2001. We have  continuously  incurred net losses from  operations and, as of
June 30, 2001, have a working  capital deficit of $401,000.  These factors raise
substantial doubt about our ability to continue as a going concern.


                                       19
<PAGE>



The consolidated  financial statements do not include any adjustments that might
result from the outcome of this  uncertainty.  Our plans to mitigate the risk of
this uncertainty  include, but are not limited to, one or more of the following:


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

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

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

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

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

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

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

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

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



                                       20
<PAGE>


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

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

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

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

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

Acquisitions

In June 1999,  we acquired GO  Software,  Inc.  ("GO").  GO develops and markets
transaction  processing  software for personal  computers that can function on a
stand-alone basis or can interface with core corporate  accounting  systems.  We
paid GO shareholders $4.7 million in cash, issued a $1.0 million promissory note
bearing  interest at 10%, and issued 74,917  shares of common  stock,  valued at
$128.10 per share, for a total purchase price of $15.4 million.  The acquisition
was  accounted  for  using the  purchase  method of  accounting.  Of the  excess
purchase price of  approximately  $14.4 million,  $13.8 million was allocated to
acquired  technology  and  $556,000 was  allocated to goodwill,  which were both
being  amortized  over a three-year  life. The note bore interest at 10% and was
repaid in full upon  completion  of our initial  public  offering  completed  in


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<PAGE>


September  1999.  In March 2001,  we  recognized  an  impairment  charge of $1.8
million to  write-down  the carrying  value to the  approximate  net  realizable
value. On May 14, 2001, pursuant to an Agreement and Plan of Merger and Exchange
of Stock  dated as of May 11,  2001,  we  completed  the sale of GO to Return on
Investment  Corporation  ("ROI")  through its  wholly-owned  subsidiary for $1.0
million  in cash and $3.0  million in ROI  common  stock.  As part of the merger
transaction,  ROI is required to file with the Securities  Exchange Commission a
registration statement to effect a registration of the common stock.

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

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

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

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

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

On  January  18,  2000,  we  acquired  AXC  Corporation  ("AXC"),  a  Washington
corporation,  for  approximately  $17.9  million,  consisting of $2.2 million in
cash,  $4.1  million in  non-cash  deferred  tax  liabilities  assumed and $11.6



                                       22
<PAGE>


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

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

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

On August 24, 2000, we acquired Ivebeengood.com, d.b.a. UberWorks ("UberWorks"),
a wholly owned subsidiary of Trilogy, Inc. ("Trilogy"),  for approximately $22.8
million,  consisting of $2.4 million accrued as non-cash deferred  compensation,
$5.9 million in non-cash  deferred tax liabilities  assumed and $14.5 million in
common  stock and common stock  options  issued to  UberWorks  shareholders  and
employees.  UberWorks was a developer of  multi-merchant  e-commerce  purchasing
tools  and  universal   shopping  cart  technology.   In  connection  with  this
acquisition,  we issued to the  shareholders  of  UberWorks  a total of  173,438
shares of common stock valued at  approximately  $91.95 per share. Of the total,
60,898  are being  held  back by us to be  subsequently  released  based on time
vesting and on certain performance criteria yet to be achieved. The maximum term
of the retention is three years from the effective date of the  acquisition.  In
addition,  we issued a warrant to Trilogy,  with an exercise  price of $0.000015
per share, to purchase additional shares of our common stock if, on the one-year
anniversary date of the acquisition,  the shares currently held by Trilogy ("the
Trilogy  Shares") are not worth at least $13.1  million.  The maximum  number of
additional  shares that Trilogy can  purchase  under the terms of the warrant is
173,334.  To the extent  that the Trilogy  Shares have a fair market  value that
exceeds $13.1 million on the one-year anniversary date, the warrant is cancelled
and Trilogy must forfeit the number of Trilogy  Shares that would be required to


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<PAGE>


bring  their fair value  down to $13.1  million,  limited to a maximum of 86,667
shares.  We also issued  options to purchase  16,545  shares of common  stock to
certain UberWorks employees. We accounted for this transaction as a purchase. Of
the $22.8  million  of  consideration  paid,  approximately  $12.3  million  was
allocated  to  acquired  technology,  $2.4  million  to  deferred  compensation,
$726,000 to assembled  workforce and $7.3 million to goodwill.  These intangible
assets were being amortized over a three-year life.  However,  in March 2001, we
decided to abandon the technology and wrote-off the remaining  intangible assets
of $16.6 million.

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

On  December  22,  2000,  we acquired  Internet  Domain  Registrars  Corporation
("IDR"),  for approximately $23.6 million,  consisting of $750,000 in cash, $6.1
million in non-cash  deferred tax  liabilities  assumed,  $5.7 million in common
stock  and  $11.1  million  in net  liabilities  assumed.  IDR is a domain  name
infrastructure  company.  In connection with this acquisition,  we issued to the
shareholders  of IDR a total of 510,000 shares of common stock,  of which 66,667
were placed in escrow for indemnification purposes. In addition,  218,734 shares
were issued and placed in escrow to be released to the former  shareholders  and
certain  employees of IDR upon the  achievement  of  established  future revenue
targets  over an  eighteen  month  period,  and  14,600  shares  were  issued to
employees  of IDR who  continued  to be employed  by IDR after the  acquisition.
Finally, 40,000 shares of our common stock were issued at the closing to certain
other persons in connection with the settlement of potential  claims against IDR
and  as  consideration  of  services  rendered  to IDR in  connection  with  the
acquisition.  The closing  price of our common  stock on  December  22, 2000 was
$10.35 per share. We accounted for this transaction as a purchase.  Of the $23.6
million of  consideration  paid,  approximately  $10.5  million was allocated to
proprietary  concept,  $874,000 to domain name,  $3.5 million to customer lists,
$874,000 to assembled  workforce and $7.8 million to goodwill.  These intangible
assets were being amortized over a three-year life. In March 2001, we recognized
an impairment charge of $17.6 million to write-down the remaining carrying value
to the approximate net realizable value. In June 2001, we sold substantially all
of the assets and  liabilities  of IDR and  recognized a gain of $6.9 million on
the sale.

Results of Operations

Revenues.  Total  revenues for the three- and six- month  periods ended June 30,
2001 were $6.3  million and $16.4  million  compared to $26.9  million and $45.6
million for the  comparable  periods in 2000.  The decrease was due primarily to
the shutdown of ShopNow.com,  the elimination of product sales,  and the sale of
IDR, GO and Ubarter  Canada and USA.  Revenue  from  continuing  business  units
during the three- and six- month  periods  ending June 30, 2001 was $1.8 million
and $3.3 million compared to $208,000 and $391,000 during the comparable periods
in 2000.

Cost of  Revenues.  The cost of revenues  for the three- and six- month  periods
ended June 30,  2001,  were $1.9  million  and $4.2  million  compared  to $12.8
million and $23.2 million for the  comparable  periods in 2000.  The decrease in
our cost of  revenues  was  directly  attributable  to the  decrease in revenues
during the same period and due to the shutdown of  ShopNow.com,  the elimination
of product sales, and the sale of IDR, GO and Ubarter Canada and USA, which were
all low profit margin operations.

Gross Profit.  Gross profit for the three- and six- month periods ended June 30,
2001,  was $4.3 million and $12.1  million  compared to $14.1  million and $22.4
million for the comparable periods in 2000. As a percent of revenues,  our gross
margins  were  69.2% and 74.1%  compared  to 52.3% and 49.1% for the  comparable
periods in 2000.  This increase in gross profit  percentage was due primarily to
the shutdown of ShopNow.com,  the elimination of product sales,  and the sale of
IDR, GO and Ubarter Canada and USA, which were all low profit margin operations.

Sales and Marketing.  Sales and marketing  expenses  consist  primarily of costs
associated with marketing programs such as advertising and public relations,  as
well as salaries and  commissions.  Sales and marketing  expenses for the three-
and six- month  periods  ended June 30, 2001 were $6.8 million and $24.1 million
compared to $24.0 million and $46.1 million for the comparable  periods in 2000.
The decrease was due primarily to  elimination of nationwide  television,  radio
and  print  advertising  during  the  first  six  months  of  2001,  as  well as
eliminating the acquisitions of traffic for our Consumer Network.



                                       24
<PAGE>

Research and Development. Research and development expenses consist primarily of
salaries and related costs  associated  with the development of new products and
services, the enhancement of existing products and services, and the performance
of quality  assurance and  documentation  activities.  Research and  development
expenses  for the three- and six- month  periods  ended June 30,  2001 were $2.1
million  and $7.4  million  compared to $5.2  million  and $9.4  million for the
comparable periods in 2000.

General  and  Administrative.   General  and  administrative   expenses  consist
primarily  of  salaries  and  other   personnel-related   costs  for  executive,
financial,  human  resources,  information  services  and  other  administrative
personnel,  as well as  legal,  accounting  and  insurance  costs.  General  and
administrative  expenses  for the three- and six- month  periods  ended June 30,
2001 were $2.9  million  and $7.2  million  compared  to $3.4  million  and $6.6
million for the  comparable  periods in 2000.  The  decrease in the  three-month
period ended June 30, 2001 was due  primarily due to a decrease in personnel and
related costs during the second quarter 2001.

Amortization of Intangible  Assets.  Amortization of intangible assets resulting
from  acquisitions is primarily  related to the  amortization of customer lists,
domain names, acquired technology, proprietary concepts, assembled workforce and
goodwill.  Amortization  of  intangible  assets  expense for the three- and six-
month periods ended June 30, 2001 was $5.0 million and $23.3 million compared to
$18.3  million  and $31.8  million  for the  comparable  periods  in 2000.  This
decrease  was due  primarily to the  decrease in  intangible  assets and related
amortization  expenses  from  the  sale  of  businesses  and the  write-down  of
intangible  assets.  Intangible  assets  acquired in business  combinations  are
amortized over a three-year period.

Stock-Based  Compensation.  Stock-based  compensation  expense is related to the
amortization  of deferred  compensation  resulting  from stock option  grants to
employees with an option exercise price below the estimated fair market value of
our common stock as of the date of grant.  Stock-based  compensation expense for
the three- and six- month  periods ended June 30, 2001 was $1.0 million and $1.3
million compared to $1.3 million and $3.1 million for the comparable  periods in
2000.  The  amount of  deferred  compensation  resulting  from  these  grants is
generally  amortized over a one- to three-year  vesting  period.  As of June 30,
2001, we have $5.2 million of deferred  compensation to be amortized over future
periods.


Restructuring and Other Impairment Charges. Restructuring and impairment charges
in the  three- and  six-month  periods  ended June 30,  2001 were a gain of $8.9
million and a charge of $62.1  million,  respectively.  During the first quarter
2001, we continued our restructuring  efforts, which commenced in December 2000,
including  the  shutdown  of  SpeedyClick,  the sale of  Ubarter  Canada,  which
resulted in a loss of $2.3 million, the lay off of 245 employees, which resulted
in severance and related payroll charges of $580,000,  the write-off of impaired
goodwill and  intangible  assets of $55.0 million,  and of tenant  improvements,
fixed assets, software and supporting technologies and infrastructure related to
businesses that were shut down of $13.1 million. During the second quarter 2001,
we further  restructured  our operations by selling  Ubarter USA, IDR and GO for
total proceeds of $6.0 million cash and 1 million shares of Return on Investment
Corporation stock, which is subject to lockup until November 2001. We recorded a
gain in the second quarter of $5.8 million related to these sales.  The gains on
these  sales in the  second  quarter  resulted  from the fact that we wrote down
these business  units by $23.6 million in first quarter 2001,  based on the best
available  evidence of fair market  value.  On an aggregate  basis,  for the six
months ended June 30, 2001, we recognized  losses  totaling $17.8 million on the
sale of these business  units.  Additionally,  we recognized  gains totaling 3.1
million,  primarily  from  revising  estimates  on unused  operating  leases and
adjustment of other  liabilities  related to businesses  previously shut down in
first quarter 2001.

Impairment  of  Certain  Long-Lived  Assets.  As part of the  restructuring,  we
determined  that  goodwill  and  intangible   assets  associated  with  acquired
businesses  had a carrying  value in excess of the potential  sales value of the
business units. As a result, we recognized an impairment charge of $43.1 million
in the first quarter 2001. There were no such charges for the comparable periods
last year.

Unusual Item - Settlement of Claim. In April 2001, we settled  potential  claims
held by Mr. Dwayne Walker, 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.
There were not such settlements in the comparable periods of 2000.

(Loss) Gain on Sale of Marketable Equity Securities.  Loss on sale of marketable
equity  securities for the three- and six- month periods ended June 30, 2001 was
$0 and  $150,000  compared  to  gains  of  $293,000  and  $1.4  million  for the
comparable periods in 2000.




                                       25
<PAGE>

Interest Income.  Interest income is earned on our cash and cash equivalents and
short-term  investments.  Interest  income for the three- and six- month periods
ended June 30, 2001 was $66,000 and  $623,000  compared to $1.6 million and $2.9
million for the comparable periods in 2000.

Interest  Expense.   Interest  expense  is  incurred  on  our  outstanding  debt
obligations and the accretion of convertible  promissory note.  Interest expense
for the three- and six- month  periods  ended June 30, 2001 was $2.7 million and
$5.5 million  compared to $460,000 and  $901,000 for the  comparable  periods in
2000. Interest expense increased for the three- and six-month periods ended June
30, 2001 due to the accretion of the convertible promissory note.

Impairment  of  Cost-Basis  Investments.  During  the  first  quarter  2001,  we
determined that certain of our cost-basis  investments were permanently impaired
to between 50% and 100% of their historical  values.  As a result, we recognized
an impairment charge of $18.8 million during the three-month  period ended March
31, 2001. There were no such charges for the comparable periods in 2000.

Income Tax Benefit. The income tax benefit resulted principally from reductions
of deferred tax liabilities created as a result of business combinations. There
was no income tax benefit for the three- and six- month periods ended June 30,
2001 compared to benefits of $11.6 million and $23.6 million for the comparable
periods in 2000. We have not paid nor have we received refunds for federal
income taxes and we do not expect to pay income taxes in the foreseeable future.


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


Net Income (Loss). Net income for the three-month period ended June 30, 2001 was
$1.8 million, and the net loss for the six-month period ended June 30, 2001 was
$175.8 million compared to net losses of $25.1 million and $47.9 million for the
comparable periods in 2000. The net income in the three-months ended June 30,
2001 was due primarily to extraordinary gains associated with settlements with
various creditors and net gains on the sale of three business units that had
been written down in the three-month period ended March 31, 2001, and the loss
for the six-month period ended June 30, 2001 was due primarily to impairment
charges related to cost-basis investments and intangible assets and
restructuring charges related to closure of business units. We expect to incur
additional net losses in 2001.

Liquidity and Capital Resources

 Since inception, we have experienced net losses and negative cash flows from
operations. As of June 30, 2001, we had an accumulated deficit of $543.1
million. We have financed our activities largely through issuances of common and
preferred stock, from the issuance of short- and long-term obligations and from
capital leasing transactions for certain of our fixed asset purchases. Through
June 30, 2001, our aggregate net proceeds have been $272.2 million from issuing
equity securities and $52.3 million from issuing debt securities. As of June 30,
2001, we had $8.7 million in cash, cash equivalents and short-term investments,
of which $442,000 of such amounts is characterized as restricted cash to secure
our obligations under certain letters of credit. As of June 30, 2001, we had
$3.8 million in marketable equity securities.

 Net cash used in operating activities was $28.1 million for the six-month
period ended June 30, 2001, compared to $43.7 million for the same period in
2000.

 Net cash provided by investing activities was $36.4 million for the six-month
period ended June 30, 2001, compared to net cash used in investing activities of
$69.2 million for the same period in 2000. The change was due primarily to no
purchases of short-term investments in the six-month period ended June 30, 2001,
compared to the purchases of $109.3 million for the same period in 2000, the
decrease in the sales of short-term investments for the six-month period ended
June 30, 2001 of $35.6 million, compared to $84.9 million for the same period in
2000, the decrease in purchases of property and equipment of $35,000 for the
six-month period ended June 30, 2001, compared to $12.8 million for the same
period in 2000, the decrease in investments in equity and debt securities and
other assets of $3,000 for the six-month period ended June 30, 2001, compared to
$14.3 million for the same period in 2000, and the decrease in acquisition of
businesses of nil for the six-month period ended June 30, 2001, compared to
$17.7 million for the same period in 2000.

 Net cash used in financing activities was $14.1 million for the six-month
period ended June 30, 2001, compared to cash provided by financing activities of
$110.5 million for the same period in 2000. The change was due primarily to the
closing of our public offering on February 18, 2000 of 527,574 shares of common
stock at $217.50 per share, which resulted in proceeds to us net of
underwriters' fees and commissions of $108.7 million and the repayment of debt
obligations for the period ended June 30, 2001.

                                       26
<PAGE>



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

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


On September 28, 2000, we sold $20.0 million of convertible notes and warrants
to Capital Ventures International ("CVI"), a private institution. The notes have
a one-year term. The original conversion price for the notes was 95% of the
average closing bid price of our common stock during a 20-day trading period
prior to the conversion date (which automatically occurs upon the effectiveness
of a registration statement filed with the Securities and Exchange Commission),
subject to a maximum conversion price of the lower of our common stock's closing
bid price the day prior to closing or $112.50 per share. On October 26, 2000, we
filed a registration statement on Form S-3 with the Securities and Exchange
Commission, which was declared effective on December 4, 2000. Also at closing,
we issued warrants to purchase 270,043 shares of our common stock to the private
institution at an exercise price of $155.55 per share. The warrants are
immediately exercisable and expire five years from closing. Immediately after
the effective date, $5.0 million of the notes were converted into common stock.
The terms of the notes were also amended such that the conversion price was set
at $25.20 per share. In May 2001, $4.0 million of the notes were converted into
common stock. As of June 30, 2001, the notes were valued at $9.7 million. Under
the terms of the agreement, the notes can be called by the holder if we were to
be delisted from the NASDAQ stock exchange.


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


On July 25, 2001, we restructured the $20 million convertible notes, with a face
 value of $11 million and all warrants, with a payment of $2.2 million and
 issuance of a $1.5 million non-interest bearing convertible promissory note
 (the "Settlement Note"). The Settlement Note will be due in 18 months and is
 convertible, at any time, into common stock at an exercise price of $2.00 per
 share at the option of the holder. Additionally, the restructuring eliminates
 any event of default under the prior convertible notes. However, if the Company
 were 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, we
 may have no alternative but to file a petition in bankruptcy. Additionally, CVI
 did not release its claim against the Company, certain current and former
 officers and directors for the alleged security violations and for fraudulent
 inducement. CVI agreed not to assert a claim in excess of the principal amount
 of $20 million less any value received pursuant to the Settlement Agreement.
 The Company is vigorously defending against these claims. Nevertheless, an
 unfavorable resolution of these claims could have a material adverse effect on
 the Company in one or more future periods.

On July 10, 2001, we entered into a Common Stock Purchase Agreement
("Agreement") with Cody Holdings Inc. ("Investor") to provide us with up to $18
million in equity financing ("Equity Line"). Under the Agreement, we will have
the right, but not the obligation during the 18-month term of the Agreement, to
obtain equity financing through the issuance of common stock to the Investor in
a series of periodic draw downs at a discount to the market price at the time of
sale to the Investor. The shares of common stock may be sold to the Investor
during this period at times and in amounts, subject to certain minimum and
maximum volumes, determined at our discretion. If we choose to draw down on the
Equity Line, we will use the proceeds of the financing for general corporate
purposes. We are required to file with the SEC a registration statement to
effect the registration of these shares prior to drawing on this equity line.
There can be no assurance that such registration statement will be declared
effective.

                                       27
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

Recent Accounting Pronouncements

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



                                       28
<PAGE>

In June 2001, the FASB issued SFAS No. 141,  "Business  Combinations."  SFAS No.
141 establishes  accounting and reporting standards for business combinations to
use the purchase  method.  The effective  date of SFAS No. 141 is June 30, 2001.
The Company  impact of adopting  SFAS No. 141 is not  material on the  financial
statements.  Additionally,  all  acquisitions by the Company have been accounted
for using the purchase method.

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.


                                       29
<PAGE>


Additional Factors That May Affect Future Results

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

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

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

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

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

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


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

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

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

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


     We have secured an $18 million  equity line of credit,  under which we have
the  right,  but  not the  obligation  during  the  eighteen  month  term of the
agreement to obtain equity  financing  through the issuance of common stock in a
series of periodic  draw downs at a discount to the market  price at the time of
sale.  We  cannot  begin  to draw  down on the  equity  line of  credit  until a
registration  statement  filed  with  respect  to the  equity  line of credit is
declared effective.  There can be no assurance that such registration  statement
will be declared effective.  While we have secured financing,  many companies in
the Internet industry have experienced  difficulty raising additional  financing
in recent months.  Additional  financing may not be available to us on favorable
terms or at all. Even if additional  financing is available,  we may be required
to obtain the consent of our existing  lenders or the party from whom we secured
our equity  line of credit,  which we may not be able to obtain.  If  additional
financing is not available to us we may need to dramatically change our business
plan, sell or merge our business, or face bankruptcy.  In addition, our issuance
of equity or  equity-related  securities  will dilute the ownership  interest of
existing  stockholders  and our issuance of debt  securities  could increase the
risk or perceived risk of our Company.


                                       30
<PAGE>


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

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

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

Our continued NASDAQ National Market Listing is not assured, which could make it
more difficult to raise capital

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

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

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

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

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

         Our common stock has been trading below the $1 minimum bid requirement.
By notice dated June 15, 2001, Nasdaq notified us of the delisting of our common
stock from the Nasdaq National Market. On July 26, 2001, we attended a hearing
before the Nasdaq Listings Qualification Panel to appeal the notice concerning
the potential delisting of our common stock from the Nasdaq National Market.
Pending outcome of the hearing, Nasdaq will defer the delisting of our common
stock but there is no guarantee as to how long we can defer the delisting of our
common stock. If we lose our Nasdaq National Market status, our common stock
would trade either on the Nasdaq Small Cap market or in the over-the-counter
market, both of which are viewed by most investors as less desirable, less
liquid marketplaces. Among other things, our common stock would then constitute
"penny stock," which would place increased regulatory burden upon brokers,
making them less likely to make a market in the stock. Loss of our Nasdaq
National Market status could make it more difficult for us to raise capital or
complete acquisitions and would also complicate compliance with state blue sky
laws.

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

We have a history of losses.

     We incurred  net losses of $24.7  million for the year ended  December  31,
1998, $75.9 million for the year ended December 31, 1999, $262.0 million for the
year ended December 31, 2000 and $175.8  million for the  six-months  ended June
30, 2001. At June 30, 2001, we had an accumulated  deficit of $543.1 million. We
have   historically   invested  heavily  in  sales  and  marketing,   technology
infrastructure  and  research and  development.  As a result,  we must  generate


                                       31
<PAGE>


significant  revenues to achieve  and  maintain  profitability.  There can be no
assurance that we will ever become profitable on an annual basis. We expect that
our sales and marketing  research and development and general and administrative
expenses will  decrease in absolute  dollars but may increase as a percentage of
revenues.

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

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

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

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

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

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

     the mix of products and services that we sell.

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

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

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

     a decrease in the growth of Internet usage; and

     the pricing policies of our competitors.

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

Our business model is unproven and changing.

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

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

     Our ability to  successfully  offer our products and services and implement
our business plan in a rapidly  evolving market  requires an effective  planning
and  management  process.  We are  diversifying  and  changing  the scope of our
operations.  In January 2001, we announced  plans to discontinue the ShopNow.com
marketplace  that we launched in August 1998. In March 2001, we announced  plans
to discontinue our gaming and  entertainment  site,  SpeedyClick.com.  In recent
months,  we have  increasingly  focused on developing  and providing  technology
infrastructure  and online  business  services.  Due to the recent shifts in our


                                       32
<PAGE>

business focus,  our historical  results are likely not indicative of our future
performance and you may have  difficulty  evaluating our business and prospects.
While our operations  have been changing,  we have reduced our overall number of
employees  from 620 in October 2000 to 95 as of July 31, 2001.  These changes in
our business plan and reduction in personnel  have placed,  and will continue to
place,  a  significant  strain on our  management  systems,  infrastructure  and
resources.  Simultaneously,  the  reduction  in our  workforce  may make it more
difficult to execute and implement  our business  plan. We will need to continue
to improve our  financial  and  managerial  controls and  reporting  systems and
procedures,  and will  need to  continue  to train  and  manage  our  workforce.
Furthermore,  we expect that we will be required to manage an increasing  number
of relationships with various customers and other third parties.  Any failure to
adapt to any of the foregoing areas  efficiently and effectively could cause our
business to suffer.

Any future growth may depend on our ability to successfully integrate the
businesses we have acquired through acquisitions.

     Our success  depends on our ability to  continually  enhance and expand our
technology   platforms  and  our  online  business  services   including  domain
registration and hosting services in response to changing technologies, customer
demands and  competitive  pressures.  Consequently,  we  acquired  complementary
technologies  or  businesses  in the past.  Our  integration  of these  acquired
businesses,  technologies  and  personnel,  has been  difficult  since they have
diverted management's attention from other business concerns and resulted in our
entry into  markets in which we had no direct prior  experience.  As a result we
have been forced to sell three of these acquired businesses. If we are unable to
grow our business or successfully  integrate the remaining acquired  businesses,
it could  cause us to lose  business  to our  competitors,  drain our  financial
resources and our operating results could suffer.

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

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

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

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

     add new products and services and increase  awareness of these products and
     services; o complete projects on time;

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

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

We face significant competition.

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

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

     the obsolescence of the technology underlying our products and services;

     a decrease in traffic on our Web sites; and

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



                                       33
<PAGE>


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

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

     larger customer or user bases;

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

     greater name recognition and larger marketing budgets and resources;

     substantially  greater  financial,  technical  and other  resources;  o the
     ability to offer additional content and other personalization features; and

     larger production and technical staffs.

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

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

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

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

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

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

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

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

     An  important  element of our  strategy  involves  entering  into  business
relationships with other companies.  Our success is dependent on maintaining our


                                       34
<PAGE>


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. Many of our executive officers have joined
us within the past three years. If we do not quickly and  efficiently  integrate
these new personnel into our management and culture,  our business could suffer.
If we fail to successfully  attract and retain a sufficient  number of qualified
executive, technical,  managerial, sales and marketing, business development and
administrative  personnel,  our ability to manage and expand our business  could
suffer. Our current financial situation may make it more difficult to retain 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 may be vulnerable to system failures.

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



                                       35
<PAGE>

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

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

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

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

Our international operations involve risks.

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

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

     restrictions on the export of encryption technology; and

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

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

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

Our technology may infringe the intellectual property rights of others.

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



                                       36
<PAGE>

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

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

     secure online payment services;

     secure order processing services; and

     fraud prevention and management services.

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

Risks Related to Our Industry

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

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

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

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

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

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



                                       37
<PAGE>

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 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.



                                       38
<PAGE>

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

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

We do not currently collect sales tax from all transactions.

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



                                       39
<PAGE>


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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















                                       40
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

On October 6, 2000, Mall.com,  Inc. filed suit against us. The suit was based on
a contract  between  Mall.com and  IveBeenGood.com,  which we acquired in August
2000. The suit alleged that  IveBeenGood.com  breached a contract with Mall.com,
breached  a  warranty  given to  Mall.com  and  committed  fraud  and  negligent
misrepresentation.  Mall.com  sought  the  return  of  cash  and  stock  paid by
Mall.com,  attorneys' fees and costs, $1 million in direct damages,  $15 million
in compensatory damages and $32 million in punitive damages. The claims asserted
by Mall.com,  Inc.  were acquired by Mall  Acquisition  Corp. On May 7, 2001, we
entered into a Compromise  and Settlement  Agreement and Mutual General  Release
with  Mall.com,  Inc.  and Mall  Acquisition  Corp.  Pursuant to the  settlement
agreement, we paid Mall Acquisition Corp. the sum of $67,500, and Mall.com, Inc.
and Mall  Acquisition  Corp.  assigned  to us any claims  they may have  against
Trilogy,  Inc., a former shareholder of IveBeenGood.com,  Inc. In June 2001, the
parties  entered a final  judgment of dismissal of the lawsuit that  referred to
the Compromise and Settlement Agreement.

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

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

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

Between  March  31,  2001 and June 30,  2001,  we issued  and sold  unregistered
securities as set forth below:

   None

No underwriters were engaged in connection with these issuances and sales. These
securities  were  issued in  transactions  exempt  from  registration  under the
Securities  Act of 1933 in reliance upon Section 4(2) of the  Securities Act and


                                       41
<PAGE>


Regulation D promulgated thereunder.  Between January 1, 2001 and June 30, 2001,
we issued  165,391  shares of common stock in  conjunction  with the exercise of
options  granted  under our stock option  plans.  The options  granted under the
stock option plan were issued to our  officers,  employees  and  consultants  at
exercise  prices ranging from $0.02 to $4.21. No options were granted outside of
our stock option plans. These securities were issued in transactions exempt from
registration  under  the  Securities  Act of  1933 in  reliance  upon  Rule  701
promulgated  under the Securities Act of 1933. Where Rule 701 was not available,
the securities were issued in transactions  exempt from  registration  under the
Securities  Act of 1933 in reliance upon Section 4(2) of the  Securities  Act of
1933.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5: OTHER INFORMATION

None.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

<TABLE>
<CAPTION>
Number         Description
<S>            <C>
3.1***          Amended and Restated Articles of Incorporation of the registrant.
3.2***          Amended and Restated Bylaws of the registrant.
4.1***          Second Amended and Restated Registration Rights Agreement dated as of November 30, 1998
4.2***          Amendment No. 1 to Second Amended and Restated Registration Rights Agreement dated as of June 15, 1999.
4.3***          Amendment No. 2 to Second Amended and Restated Registration Rights Agreement dated as of June 16, 1999.
10.7***         Amended and Restated 1999 Employee Stock Purchase Plan and form of agreement thereunder.
10.8***         Amended and Restated 1996 Combined Incentive and Nonqualified Stock Option Plan and form of agreements thereunder.
10.10***        Employment Agreement effective as of July 1, 1999, between Dwayne M. Walker and the registrant.

-----------
   ***   Incorporated by reference to the Registration Statement on Form S-1
          (No. 333-80981) filed by the registrant on September 28, 1999, as
           amended.

</TABLE>

(b)      Reports on Form 8-K

                FORM 8-K dated April 4, 2001

                FORM 8-K dated June 25, 2001


                                   SIGNATURES


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

                              NETWORK COMMERCE INC.



Date: August 8, 2001
                               By:   /s/ Dwayne M. Walker
                                   ------------------------------
                                   Dwayne M. Walker
                                   Chief Executive Officer

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