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, 2002

                                       OR

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

             FOR THE TRANSITION PERIOD FROM __________ TO __________


                         Commission File Number 0-26707


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


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

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


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




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


As of July 26, 2002, there were 5,893,110 shares outstanding of the Registrant's
common stock.


<PAGE>


                              Network Commerce Inc.

                                    Form 10-Q

                                      Index

<TABLE>
<CAPTION>

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

ITEM 1:           Financial Statements

                  Condensed Consolidated Balance Sheets as of June 30, 2002
                     and December 31, 2001..............................................................     3
                  Condensed Consolidated Statements of Operations for the three- and six-month
                     periods ended June 30, 2002 and 2001 ..............................................     4
                  Condensed Consolidated Statements of Cash Flows for the six-month
                     periods ended June 30, 2002 and 2001...............................................     5
                  Notes to Interim Condensed Consolidated Financial Statements..........................     6

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

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


PART II           OTHER INFORMATION

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

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

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

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

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

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


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

</TABLE>




                                       2
<PAGE>


PART I.  FINANCIAL INFORMATION

ITEM 1.
                              Network Commerce Inc.
                      Condensed Consolidated Balance Sheets
                      (in thousands, except share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                        June 30,       December 31,
                                                                                       ----------      -----------
                                                                                          2002             2001
                                                                                       ----------      -----------

                                          ASSETS
<S>                                                                                    <C>             <C>
Current assets:
   Cash and cash equivalents ....................................................      $   1,456       $   1,879
   Restricted cash ..............................................................             57             164
   Short-term investments .......................................................             50               5
   Marketable equity securities .................................................             15           2,547
   Accounts receivable, net of allowance for bad debts of $1,292 and $1,468  ....            557           1,366
   Prepaid expenses and other current assets ....................................          1,121           1,275
                                                                                       ---------       ---------
        Total current assets ....................................................          3,256           7,236
Property and equipment, net .....................................................          1,215           1,705
Other intangible assets, net ....................................................              8             168
Cost-basis investments ..........................................................            645             720
Other assets, net ...............................................................            616             561
                                                                                       ---------       ---------
        Total assets ............................................................      $   5,740       $  10,390
                                                                                       =========       =========

                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable .............................................................      $   1,464       $   2,200
   Accrued liabilities ..........................................................          2,525           2,860
   Current portion of notes and leases payable ..................................          1,744             723
   Deferred revenues ............................................................            859             750
                                                                                       ---------       ---------
        Total current liabilities ...............................................          6,592           6,533
Notes and leases payable, less current portion ..................................            173           1,630
Deferred revenues ...............................................................            275             155
                                                                                       ---------       ---------
        Total liabilities .......................................................          7,040           8,318
                                                                                       ---------       ---------
Commitments and contingencies (Note 13)
Shareholders' equity:
   Convertible preferred stock, $0.001 par value:  authorized shares - 5,000,000;
       none issued and outstanding ..............................................             --              --
   Common stock, $0.001 par value:  authorized shares - 200,000,000; issued
        and outstanding shares - 5,893,110 at June 30, 2002 and 5,878,030
        at December 31, 2001 ....................................................        556,537         556,574
   Subscriptions receivable......................................................            (41)            (41)
   Common stock warrants ........................................................         18,248          18,248
   Deferred compensation ........................................................         (1,927)         (3,193)
   Accumulated other comprehensive loss .........................................            (15)            (85)
   Accumulated deficit ..........................................................       (574,102)       (569,431)
                                                                                       ---------       ---------
        Total shareholders' equity ..............................................         (1,300)          2,072
                                                                                       ---------       ---------
        Total liabilities and shareholders' equity ..............................      $   5,740       $  10,390
                                                                                       =========       =========
</TABLE>

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

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                         For the Three Months Ended         For the Six Months Ended
                                                                  June 30,                          June 30,
                                                        -----------------------------      ------------------------------
                                                            2002              2001            2002              2001
                                                        -----------       -----------       -----------       -----------

<S>                                                     <C>               <C>               <C>               <C>
Revenues .........................................      $     1,675       $     6,280       $     3,293       $    16,388
Cost of revenues .................................              517             1,932             1,023             4,248
                                                        -----------       -----------       -----------       -----------
     Gross profit ................................            1,158             4,348             2,270            12,140
                                                        -----------       -----------       -----------       -----------
Operating expenses:
     Sales and marketing .........................            1,340             6,788             3,001            24,079
     Research and development ....................              203             2,126               632             7,394
     General and administrative ..................            1,254             2,874             2,557             7,157
     Amortization of intangible assets ...........               64             5,042               160            23,339
     Stock-based compensation ....................              659             1,007             1,228             1,267
     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 ...............            3,520             8,922             7,578           173,004
                                                        -----------       -----------       -----------       -----------
          Loss from operations ...................           (2,362)           (4,574)           (5,308)         (160,864)
                                                        -----------       -----------       -----------       -----------
Nonoperating income (expense):
     Loss on sale of investments .................             (196)               --              (584)             (150)
     Interest income .............................               22                66                28               623
     Interest expense ............................              (49)           (2,658)             (105)           (5,540)
     Other .......................................              211               (15)              808               (39)
     Impairment of cost-basis investments ........               --                --               (75)          (18,820)
                                                        -----------       -----------       -----------       -----------
          Total nonoperating income (expense), net              (12)           (2,607)               72           (23,926)
                                                        -----------       -----------       -----------       -----------
          Loss before extraordinary gains ........           (2,374)           (7,181)           (5,236)         (184,790)
Extraordinary gains ..............................              304             8,974               565             8,974
                                                        -----------       -----------       -----------       -----------
          Net income (loss).......................      $    (2,070)      $     1,793       $    (4,671)      $  (175,816)
                                                        ===========       ===========       ===========       ===========

Basic income (loss) per share:
Loss before extraordinary gains ..................      $     (0.42)      $     (1.45)      $     (0.94)      $    (37.63)
Extraordinary gains ..............................             0.05              1.81              0.10              1.83
                                                        -----------       -----------       -----------       -----------
Basic income (loss) per share.....................      $     (0.37)      $      0.36       $     (0.84)      $    (35.80)
                                                        ===========       ===========       ===========       ===========

Weighted average shares outstanding used to
     compute basic income (loss) per share........        5,560,760         4,937,404         5,558,463         4,910,967
                                                        ===========       ===========       ===========       ===========

</TABLE>

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

                                       4
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                        For the Six Months Ended
                                                                                                 June 30,
                                                                                       --------------------------
                                                                                          2002             2001
                                                                                       ----------      ----------
<S>                                                                                    <C>             <C>
Operating activities:
      Net loss ..................................................................      $  (4,671)      $(175,816)
      Adjustments to reconcile net loss to net cash used in operating activities-
         Depreciation and amortization ..........................................            712          28,285
         Accretion of promissory note payable ...................................             59           4,296
         Provision for bad debts ................................................             66           2,282
         Amortization of deferred compensation ..................................          1,228           1,267
         Restructuring and impairment charges ...................................             --          67,238
         Impairment of certain long-lived assets ................................             --          43,136
         Impairment of investments ..............................................             75          18,820
         Extraordinary gains ....................................................           (565)         (8,974)
         Unusual item - settlement of claim .....................................             --           4,559
         Realized loss from sale of marketable equity securities ................            584             150
         Changes in operating assets and liabilities -
              Accounts receivable ...............................................            742          11,591
              Prepaid expenses and other current assets .........................            154           1,494
              Other assets ......................................................            (45)            (85)
              Accounts payable and accrued liabilities ..........................           (506)        (24,175)
              Deferred revenue ..................................................            229          (2,126)
                                                                                       ---------       ---------
Net cash used in operating activities ...........................................         (1,938)        (28,058)
                                                                                       ---------       ---------
Investing activities:
      Sales of short-term investments ...........................................             62          35,567
      Proceeds from sale of investments .........................................          2,018             848
      Purchases of property and equipment .......................................            (62)            (35)
      Investments in other assets ...............................................             --              (3)
                                                                                       ---------       ---------
Net cash provided by investing activities .......................................          2,018          36,377
                                                                                       ---------       ---------
Financing activities:
      Payments on line of credit ................................................             --         (10,147)
      Payments on long-term debt ................................................           (505)         (3,918)
      Proceeds from sale of common stock and exercise of stock options ..........              2               5
      Proceeds from collection of subscription receivable .......................             --               3
                                                                                       ---------       ---------
Net cash used in financing activities ...........................................           (503)        (14,057)
                                                                                       ---------       ---------
Net decrease in cash and cash equivalents .......................................           (423)         (5,738)
Cash and cash equivalents at beginning of period ................................          1,879          11,715
                                                                                       ---------       ---------
Cash and cash equivalents at end of period ......................................      $   1,456       $   5,977
                                                                                       =========       =========
Supplementary disclosure of cash flow information:
      Cash paid during the period for interest ..................................      $      46       $     644
                                                                                       =========       =========
      Cash paid during the period for income taxes ..............................      $      91       $      --
                                                                                       =========       =========
      Non-cash investing and financing activities:
         Assets acquired under capital leases ...................................      $      --       $     160
                                                                                       =========       =========
</TABLE>

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

                                       5

<PAGE>


                              Network Commerce Inc.

              Notes To Condensed Consolidated Financial Statements
                                   (unaudited)

Note 1. Organization and Background:

The Company

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

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

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

Going Concern

The Company's  condensed  consolidated  financial  statements for the six months
ended  June  30,  2002  have  been  prepared  on a going  concern  basis,  which
contemplates  the realization of assets and the settlement of liabilities in the
normal  course of business.  The Company has incurred a net loss of $4.7 million
for the  six-month  period ended June 30, 2002 and has  accumulated  deficits of
$574.1  million as of June 30, 2002. The Company has  continuously  incurred net
losses from  operations and as of June 30, 2002 had a working capital deficit of
$3.3 million.  These factors raise substantial doubt about the Company's ability
to continue as a going concern. The condensed  consolidated financial statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.

The Company  believes that its cash reserves and cash flows from  operations may
be adequate to fund its  operations  through  December 2002.  Consequently,  the
Company will  require  substantial  additional  funds to continue to operate its
business  beyond that  period.  Many  companies in the  Internet  industry  have
experienced difficulty raising additional financing in recent months. Additional
financing may not be available to the Company on favorable terms or at all. Even
if additional financing is available,  the Company may be required to obtain the
consent  of its  existing  lenders,  shareholders,  or the  party  from whom the
Company  secured the equity  credit  line,  which the Company may not be able to
obtain.  If  additional  financing  is not  available,  the  Company may need to
dramatically  change its business  plan,  shut down or reduce  business units or
production lines, sell or merge its business,  or face bankruptcy.  In addition,
the issuance of equity or  equity-related  securities  will dilute the ownership
interest of existing  shareholders  and the  issuance of debt  securities  could
increase the risk or perceived risk of the Company.



                                       6
<PAGE>



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

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

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

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

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

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

Note 2. Summary of Significant Accounting Policies:

Unaudited Interim Financial Data

The  condensed  consolidated  financial  statements  are unaudited and have been
prepared  pursuant to the rules and  regulations  of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in  financial   statements   prepared  in  accordance  with  generally  accepted
accounting  principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the  Company's  December 31, 2001 Form 10-K as filed with the SEC on
April  1,  2002.  The  financial   information   included  herein  reflects  all
adjustments (consisting only of normal recurring adjustments), which are, in the
opinion of  management,  necessary  for a fair  presentation  of the results for
interim periods.  The results of operations for the three- and six-month periods
ended June 30, 2002 and 2001 are not necessarily indicative of the results to be
expected for the full year.

Principles of Consolidation

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


Use of Estimates

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

Revenue Recognition

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


                                       7
<PAGE>

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

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

The Company  recognized  revenues  from barter  transactions  when  earned.  The
Company valued the barter  transactions  based on the value of the consideration
received  from the  customer or from the value of the  services  provided to the
customer,  whichever  was more  readily  determinable.  The  Company  recognized
approximately  $0 and $1.4 million in revenues on such  transactions  during the
six-months ended June 30, 2002 and 2001, respectively.

The Company recognized revenues from the sale of online database marketing
services, leads and orders, advertising and merchandising in which the Company
received equity in the customer. The Company valued the equity received from
these transactions as cost-basis investments based on the value of the
consideration received from the customer or from the value of the services
provided to the customer, whichever was more readily determinable. The Company
monitors these cost-basis investments for impairment. When cost-basis
investments are deemed to be permanently impaired, the difference between cost
and market value is charged to operations. There can be no assurance that the
Company's investments in these early-stage technology companies will be
realized. The Company recognized approximately $0 and $205,000 in revenues on
such equity transactions during the six-month period ended June 30, 2002 and
2001, respectively.

Recent Accounting Pronouncements

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

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

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

Reclassifications and Reverse Stock Split Adjustments

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




                                       8
<PAGE>


Note 3. Acquisitions and Dispositions:

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

In June 1999, the Company  acquired GO Software,  Inc.  ("GO").  GO develops and
markets transaction  processing software. In May 2001, the Company completed the
sale of GO to Return on Investment  Corporation ("ROI") for $1.0 million in cash
and $3.0 million in ROI common stock.

Also in June 1999, the Company acquired  CardSecure,  Inc.  ("CardSecure") for a
purchase  price of  approximately  $3.5  million.  CardSecure  is a developer of
e-commerce  enabled Web sites. The excess purchase price of  approximately  $3.5
million  was  allocated  to  acquired  technology  and was  amortized  over  the
three-year period ending May 2002.

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

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

In April 2000, the Company acquired FreeMerchant.com,  Inc. ("FreeMerchant"),  a
Delaware  corporation,   that  developed  online  store-builder  technology  and
provides  hosting  services to those  businesses.  In December 2001, the Company
sold substantially all of the assets of FreeMerchant.

In  June  2000,  the  Company   acquired   Ubarter.com   Inc.   ("Ubarter"),   a
business-to-business  e-commerce  enterprise,  which  utilizes  its  proprietary
barter exchange  system.  In February 2001, the Company sold the  Canadian-based
operations  of  Ubarter  and  in  June  2001,  the  Company  sold  the  US-based
operations.

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

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

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

Note 4. Restructuring, Impairment and Extraordinary Gains:

Restructurings and related impairments

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

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
$3.0 million of marketable equity securities, which were subject to lockup until
November 2001. The Company recorded a gain in the second quarter of $5.8 million
related to these sales.  The


                                       9
<PAGE>

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.

Impairment of Certain Long-Lived Assets

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

Impairment of cost-basis investments

During the first  quarter  2002,  the  Company  determined  that  certain of its
cost-basis  investments were permanently  impaired  relative to their historical
values.  As a result,  the Company  recognized an impairment  charge of $75,000,
which is  included  as a  component  of  nonoperating  (expense)  income  in the
accompanying  June 30, 2002  condensed  consolidated  statements of  operations.
Permanent impairments in the Company's cost-basis investments were determined by
examining the operations of each company, and when possible, by reviewing recent
private-placement   valuations  for   comparable   companies  and  by  obtaining
professional  business  valuations.  During the first quarter 2001,  the Company
recognized an impairment charge of $18.8 million.

Extraordinary gains

The Company has negotiated with various creditors to settle liabilities for less
than the recorded invoices.  These settlements resulted in an extraordinary gain
of  approximately  $565,000  and $9.0  million for the six months ended June 30,
2002 and 2001, respectively.

Note 5. Unusual Item:

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

Note 6. Marketable Equity Securities:

In February  2002, the Company sold 700,000 shares of ROI at $2.50 per share and
recognized a loss of $371,000 on the sale.  During the second  quarter 2002, the
Company returned 3,333 shares to ROI in payment of certain expenses and sold the
remaining  130,000  shares  of ROI at $1.85  per  share,  recognizing  a loss of
$156,000   on  the  sale.   Realized   gains  and   losses   from  the  sale  of
available-for-sale securities are determined on a specific identification basis.
Dividend and interest  income are  recognized  as earned.  Any changes in market
values that are  considered  other than temporary are recorded as realized gains
or losses in current operations.

Note 7. Deferred Revenues:

Unearned revenues related to domain  registrations  represent the unexpired term
of  registration  fees  and  are  recognized   ratably  over  the  term  of  the
registration.  Revenues from online database  marketing  services are recognized
when services are delivered,  and licensing fees are recognized over the term of
agreement.

Note 8. Debt Obligations:

In September  2000,  the Company  sold $20.0  million of  convertible  notes and
warrants to Capital  Ventures  International  ("CVI")  pursuant to a  securities
purchase  agreement.  The notes had a one-year  term. In April 2001, the Company
received  a notice of  default  from CVI for an  alleged  violation  of  certain
covenants.  CVI filed suit against the

                                       10

<PAGE>

Company  in May  2001 in the  United  States  District  Court  for the  Southern
District of New York under Civil Action No. 01CV-4390.

In July 2001,  the Company  entered  into a settlement  agreement  with CVI with
respect to certain claims arising out of the securities purchase agreement. As a
result, convertible notes with a face value of $11 million and all warrants were
retired. The Company paid $2.2 million and delivered a $1.5 million non-interest
bearing  convertible   promissory  note,  which  is  due  January  2003  and  is
convertible,  at any time at the option of CVI, into common stock at an exercise
price of $2.00 per share.  CVI agreed that, upon payment of the $2.2 million and
delivery of the promissory note, the Company satisfied all of past,  present and
future  obligations  to CVI  under the  securities  purchase  agreement  and all
related documents other than the Registration Rights Agreement. However, CVI did
not release its claim against the Company,  certain  current and former officers
and directors for the alleged security violations and for fraudulent inducement.
The Company is  vigorously  defending  against these  claims.  Nevertheless,  an
unfavorable  resolution of these claims could have a material  adverse effect on
the Company in one or more future periods.

Note 9. Income Taxes:

The Company is subject to tax laws of the United States, various state and local
jurisdictions within the United States and in foreign jurisdictions. The Company
has recorded no provision for taxes in any of these  jurisdictions,  however the
Company may be subject to claims by these taxing  jurisdictions,  which would be
material to the financial  position of the Company.  The Company believes it has
reasonable and defendable positions in all of its taxing jurisdictions and would
vigorously defend itself against any such claim.

Note 10. Equity Financing:

In July 2001,  the Company  entered into an agreement  with Cody  Holdings  Inc.
(Investor)  to provide  the Company  with up to $18 million in equity  financing
(Equity  Line).  Under the terms of the  agreement,  the  Company  will have the
right,  but not the  obligation  during the 18-month term of the  agreement,  to
obtain equity financing  through the issuance of common stock to the Investor in
a series of periodic draw downs at a discount to the market price at the time of
sale to the Investor.  The maximum available amount for draw down each period is
determined  using a formula  that  utilizes a weighted  average  stock price and
stock volume over a sixty-day period.  The shares of common stock may be sold to
the  Investor  during this  period at times and in  amounts,  subject to certain
minimum and maximum volumes, determined at the discretion of the Company. If the
Company chooses to draw down on the Equity Line, it will use the proceeds of the
financing for general corporate purposes. In October 2001, the Company completed
a draw down of $25,000.  Based on the Company's  stock price and average trading
volume as of June 30, 2002, it would be unable to make a draw down.






                                       11
<PAGE>


Note 11. Segment Information:

The Company's segment information for each of the six-months ended June 30, 2002
and 2001, as follows (in thousands):

<TABLE>
<CAPTION>
                                                                        Six Months Ended June 30,
                                                                    ---------------------------------
                                                                         2002              2001
                                                                    ---------------   ---------------
<S>                                                                 <C>               <C>
 Revenues:
       Continuing operations:
           NCI Marketing                                                   $ 1,887           $ 2,047
           NCI Hosting                                                       1,331               397
           Other                                                                75                 -
                                                                    ---------------   ---------------
                                                                             3,293             2,444
       Operations shutdown or sold during 2001                                   -            13,944
                                                                    ---------------   ---------------
                                                                             3,293            16,388
                                                                    ---------------   ---------------
 Cost of revenues:
       Continuing operations:
           NCI Marketing                                                       594                53
           NCI Hosting                                                         372               114
           Other                                                                 -                 -
                                                                    ---------------   ---------------
                                                                               966               167
       Operations shutdown or sold during 2001                                  57             4,081
                                                                    ---------------   ---------------
                                                                             1,023             4,248
                                                                    ---------------   ---------------
 Gross Profit:
       Continuing operations:
           NCI Marketing                                                     1,293             1,994
           NCI Hosting                                                         959               283
           Other                                                                75                 -
                                                                    ---------------   ---------------
                                                                             2,327             2,277
       Operations shutdown or sold during 2001                                 (57)            9,863
                                                                    ---------------   ---------------
                                                                           $ 2,270          $ 12,140
                                                                    ===============   ===============
</TABLE>



Note 12. Option Repricing and Grants:

In June 2002, the Company  repriced  2,139,686  options to purchase  shares to a
price of $0.10. 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 June 2002, the Company granted 4,595,000 stock options with an exercise price
of $0.05 to its  employees.  The options  vest  ratably  from April 2002 through
December  2002.  The stock  options  covered  under this  grant  will  result in
variable  accounting  treatment.  Variable  accounting  treatment will result in
unpredictable  stock-based  compensation  charges  dependent on  fluctuations in
quoted prices for the Company's common stock.

Note 13. Litigation:

The Company and Mr. Walker,  the Company's  chairman of the board, were named as
defendants  in multiple  putative  class  actions  pending in the United  States
District Court for the Western District of Washington in Seattle.  Those actions
are Jan Sherman, et al v. Dwayne M. Walker and Network Commerce Inc.,  C01-0675L
(filed May 10, 2001);  Joseph Carreiro v. Network  Commerce,  Inc. and Dwayne M.
Walker,  C01-0767L (filed May 25, 2001); Steven Leong v. Network Commerce,  Inc.
and Dwayne M. Walker,  C01-0770L  (filed May 25,  2001);  Alan Danse,

                                      12
<PAGE>

et al. v. Dwayne M. Walker and Network Commerce,  Inc.,  C01-852L (filed June 7,
2001); James Lindsay v. Dwayne M. Walker and Network Commerce,  Inc.,  C01-0918R
(filed June 20, 2001);  and Kelly  Christianson  v. Dwayne M. Walker and Network
Commerce, Inc., C01-1063L (filed July 11, 2001). The judge in the class actions,
the Honorable Robert Lasnik,  entered an order  consolidating the class actions.
On September 26, 2001, prior to the date the  consolidated  complaint was due in
the consolidated class actions, certain of the plaintiffs filed another putative
class action in the United  States  District  Court for the Western  District of
Washington in Seattle, titled Jan Sherman; James Michaelson;  and Jason Elkin v.
Dwayne M. Walker; Network Commerce Inc.; Jacob I. Friesel; Alan D. Koslow; David
M.  Lonsdale;  Bret R.  Maxwell;  Mark C.  McClure;  John R.  Snedegar;  Mark H.
Terbeek;  Dain Rauscher Inc.; U.S. Bancorp Piper Jaffray;  SoundView  Technology
Group,  Inc.; J.P. Morgan Chase & Co.; CIBC World Markets Corp.; and PaineWebber
Inc., C01-0675L.  This last action was filed under the consolidated cause number
for the other  consolidated  class actions  pending in Seattle.  On November 13,
2001,   plaintiffs  filed  the   Court-ordered   consolidated   complaint.   The
consolidated  complaint named as defendants all the institutions  (including the
Company)  named  in the  prior  complaints,  but  named  only Mr.  Walker  as an
individual  defendant,  and not the  other  individual  defendants  named in the
September 26, 2001  complaint.  The  consolidated  complaint  purports to allege
claims on behalf of all persons who purchased the Company's  common stock during
the period that begins on  September  28, 1999 and ends on April 16,  2001.  The
consolidated  complaint alleges  violations of the federal securities laws based
on alleged  misrepresentations  and omissions  made by defendants to the market.
The suits seek  unspecified  damages.  On January 28, 2002,  the Company and Mr.
Walker filed a motion to dismiss the  consolidated  class action  complaint  for
failure to state a claim on which legal relief can be granted.  Oral argument on
this motion is  scheduled  for  September  4, 2002.  The Company and Mr.  Walker
intend to vigorously defend the suits, but unfavorable resolution of these suits
could  have a  material  adverse  effect on the  Company  in one or more  future
periods.

On May 22, 2001, Capital Ventures  International  ("CVI") filed suit against the
Company and Mr. Walker,  the Company's  chairman of the board and other past and
current  members of the  Company's  board of  directors  alleging,  among  other
things, a breach of the securities  purchase  agreement dated September 28, 2000
entered into between CVI and Network  Commerce Inc.,  fraudulent  inducement and
violations of certain  federal  securities  laws. The lawsuit seeks  unspecified
damages and rescission.  On July 25, 2001, the Company entered into a settlement
agreement  with CVI with respect to certain claims arising out of the securities
purchase  agreement.  As a result the Company paid $2.2 million and  delivered a
$1.5 million  promissory  note.  CVI agreed  that,  upon the payment of the $2.2
million and delivery of the settlement note,  the Company  satisfied all of its
past,  present  and  future  obligations  to CVI under the  securities  purchase
agreement  and  all  documents   related  to  such  agreement   other  than  the
Registration  Rights  Agreement  dated September 28, 2000.  Notwithstanding  the
settlement,  CVI did not release its claim against the Company,  certain current
and former  officers and directors for the alleged  security  violations and for
fraudulent inducement.

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

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

Note 14. Subsequent Events:

Effective July 12, 2002,  Dwayne Walker resigned as Chief Executive  Officer and
President.  Dwayne  Walker will  continue  as  Chairman  of the Board.  N. Scott
Dickson was appointed as acting Chief Executive Officer.



                                       13

<PAGE>



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

The matters  discussed in this report contain  forward-looking  statements  that
involve  known and unknown  risks and  uncertainties,  such as statements of our
plans,  objectives,  expectations and intentions.  Words such as "may," "could,"
"would," "expect,"  "anticipate,"  "intend," "plan," "believe,"  "estimate," and
variations of such words and similar  expressions  are intended to identify such
forward-looking  statements.  You  should  not  place  undue  reliance  on these
forward-looking  statements,  which are based on our  current  expectations  and
projections about future events, are not guarantees of future  performance,  are
subject to risks,  uncertainties  and  assumptions  (including  those  described
below) and apply only as of the date of this report.  Our actual  results  could
differ  materially  from those  anticipated in the  forward-looking  statements.
Factors that could cause or contribute to such differences  include, but are not
limited to,  those  discussed  below in "Factors  That May Affect Our  Operating
Results,  Business and Stock Price" and elsewhere in this report,  and the risks
discussed  in our  December  31,  2001 Form 10-K filed on April 1, 2002 with the
Securities and Exchange Commission.

Overview

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

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

Our condensed  consolidated  financial  statements for the six months ended June
30, 2002 have been prepared on a going concern  basis,  which  contemplates  the
realization  of assets and the settlement of liabilities in the normal course of
business.  We have  incurred a net loss of $4.7 million for the six months ended
June 30, 2002 and have  accumulated  deficits  of $574.1  million as of June 30,
2002. The Company has continuously incurred net losses from operations and as of
June 30, 2002 has a working capital deficit of $3.3 million. These factors raise
substantial doubt about our ability to continue as a going concern.

As reflected on our balance sheet,  our current  liabilities  exceed our current
assets.  Although  we  believe  that  our cash  reserves  and  cash  flows  from
operations may be adequate to fund our operations through December 2002, we will
require substantial  additional funds to continue to operate the business beyond
that period, see "Liquidity and Capital Resources" below.

Effective July 12, 2002,  Dwayne Walker resigned as Chief Executive  Officer and
President.  Dwayne  Walker will  continue  as  Chairman  of the Board.  N. Scott
Dickson was appointed as acting Chief Executive Officer.

Critical Accounting Policies And Estimates

Our critical accounting policies and estimates are as follows:



                                      14
<PAGE>

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

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

We  recognized  revenues  from barter  transactions  when earned.  We valued the
barter  transactions  based on the value of the consideration  received from the
customer or from the value of the services  provided to the customer,  whichever
was more readily determinable.  We recognized  approximately $0 and $1.4 million
in revenues on such  transactions  during the  six-month  periods ended June 30,
2002 and 2001, respectively.

We recognized  revenues  from the sale of online  database  marketing  services,
leads and orders,  advertising and  merchandising in which we received equity in
the  customer.  We  valued  the  equity  received  from  these  transactions  as
cost-basis investments based on the value of the consideration received from the
customer or from the value of the services  provided to the customer,  whichever
was more readily  determinable.  We monitor  these  cost-basis  investments  for
impairment.  When cost-basis  investments are deemed to be permanently impaired,
the difference between cost and market value is charged to operations. There can
be no assurance that our investments in these early-stage  technology  companies
will be realized.  We  recognized  approximately  $0 and $205,000 in revenues on
such equity  transactions  during the six-month  periods ended June 30, 2002 and
2001, respectively. Many of these investments were written down in 2001.

Impairment of  cost-basis  investments.  We  periodically  evaluate  whether any
permanent declines in the fair value of our cost-basis investments has occurred.
Significant  judgments and estimates  must be made to assess whether a permanent
decline in fair value of investments has occurred and to estimate the fair value
of investments in privately held companies.  We determined  permanent impairment
in privately held  companies by examining the business  results and prospects of
each company, and when possible by reviewing recent private-placement valuations
for comparable companies and by obtaining  professional business valuations.  We
recognized permanent impairments of cost-basis  investments of $75,000 and $18.8
million in the six-month periods ended June 30, 2002 and 2001, respectively.

Impairment  of  long-lived  assets and  goodwill.  We assess the  impairment  of
long-lived  assets and  goodwill  whenever  events or  changes in  circumstances
indicate  that the carrying  value may not be  recoverable.  Factors we consider
important which could trigger an impairment  review include the following:  poor
economic  performance  relative  to  expected  historical  or  projected  future
operating results;  significant negative industry,  economic or company specific
trends;  and changes in the manner of our use of the assets or the plans for our
business.  Where we determine  that the carrying  value of long-lived  assets or
goodwill may not be  recoverable  based upon the existence of one or more of the
above indicators of impairment,  we measure  impairment based on a comparison of
the  carrying  amount  of an asset  to  discounted  cash  flows  expected  to be
generated by the asset.  If such  analysis  indicates  assets are  impaired,  an
impairment is recognized equal to the amount by which the carrying amount of the
assets exceeds the discounted cash flows expected to be received.  We recognized
impairments  of  long-lived  assets and goodwill of $0 and $43.1  million in the
six-month periods ended June 30, 2002 and 2001, respectively.

Restructuring and related impairments.  As part of our restructuring  efforts in
2001, we made  significant  estimates in determining the  appropriate  amount of
loss that  resulted  from the  shutdown of  business  units.  The loss  included


                                      15
<PAGE>

write-off of impaired goodwill,  intangible assets,  tenant improvements,  fixed
assets, software and supporting  technologies and infrastructure.  We recognized
restructuring  and related  impairments of $0 and $62.1 million in the six-month
periods ended June 30, 2002 and 2001, respectively.

Results of Operations

Overview.  In light of the recent instability within the technology and Internet
infrastructure  sectors and our current  position within those sectors,  we lack
visibility  to our future  revenues  and  related  costs of  revenues.  Our best
estimate for 2002, is that our revenues, cost of revenues and operating expenses
will be less  than our 2001  levels.  We expect  that our  sales and  marketing,
research and development and general and  administrative  expenses will decrease
in  absolute  dollars  from 2001 to 2002 but may  increase  as a  percentage  of
revenues.

Revenues.  Total  revenues for the three- and  six-month  periods ended June 30,
2002 were $1.7  million  and $3.3  million  compared  to $6.3  million and $16.4
million  for the  comparable  periods in 2001.  The  decrease in revenue was due
primarily  to the  shutdown of  ShopNow.com  and  SpeedyClick.com  during  first
quarter 2001, the elimination of product sales and the sale of Ubarter, Internet
Domain  Registrars,  GO Software and Free  Merchant  during  2001.  In addition,
revenues for first quarter 2001 included $1.4 million in barter transactions and
$205,000 in revenues on equity transactions (See "Note 2. Summary of Significant
Accounting  Policies:  Revenue  Recognition"),  for which no such  revenues were
recognized  in the first and second  quarters  of 2002 or second  quarter  2001.
However,  revenues from continuing  operations  (which excludes results from the
businesses  and  divisions  shut down or sold during 2001) were $1.7 million and
$3.3 million for the three- and  six-month  periods ended June 30, 2002 compared
to $1.2 million and $2.4 million for the comparable periods in 2001.

Cost of  Revenues.  The cost of revenues  for the three- and  six-month  periods
ended June 30, 2002 was $517,000  and $1.0 million  compared to $1.9 million and
$4.2  million  for the  comparable  periods  in 2001.  The  decrease  in cost of
revenues was directly  attributable  to the decrease in revenues during the same
period and due to the shutdown of ShopNow.com and  SpeedyClick.com  during first
quarter 2001, and the sale of Ubarter,  Internet Domain Registrars,  GO Software
and Free  Merchant  during  2001.  However,  cost of  revenues  from  continuing
operations were $519,000 and $967,000 for the three- and six-month periods ended
June 30, 2002  compared to $40,000 and  $167,000 for the  comparable  periods in
2001.

Gross Profit.  Gross profit for the three- and six-month  periods ended June 30,
2002,  was $1.2  million and $2.3  million  compared  to $4.3  million and $12.1
million for the comparable periods in 2001.

Sales and Marketing.  Sales and marketing  expenses  consist  primarily of costs
associated with marketing programs such as advertising and public relations,  as
well as salaries and  commissions.  Sales and marketing  expenses for the three-
and  six-month  periods  ended June 30, 2002 were $1.3  million and $3.0 million
compared to $6.8 million and $24.1 million for the  comparable  periods in 2001.
The decrease was due  primarily to a decrease in sales and  marketing  personnel
resulting from the  restructuring in early 2001 and related costs. We anticipate
that sales and marketing  expenses will be less for future  periods in 2002 when
compared to comparable periods in 2001.

Research and Development. Research and development expenses consist primarily of
salaries and related costs  associated  with the development of new products and
services, the enhancement of existing products and services, and the performance
of quality  assurance and  documentation  activities.  Research and  development
expenses for the three- and six-month  periods ended June 30, 2002 were $203,000
and  $632,000  compared  to $2.1  million and $7.4  million  for the  comparable
periods in 2001.  The decrease was  primarily due to a decrease in personnel and
related  costs  and  to a  decreased  emphasis  on  development  activities.  We
anticipate  that  research  and  development  expenses  will be less for  future
periods in 2002 when compared to comparable periods in 2001.

General  and  Administrative.   General  and  administrative   expenses  consist
primarily of salaries and other personnel-related costs, including benefits, 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, 2002 were $1.3  million and $2.6  million  compared to $2.9 million and
$7.2 million for the comparable  periods in 2001. The decrease was primarily due
to a decrease in personnel and related


                                      16
<PAGE>

costs,  including  benefits,  offset by an increase in legal fees. During second
quarter  2002 we reduced the accrual for self  insurance  by $300,000 due to the
reduction  in  employees  during  the last  twelve  months and the  decrease  in
estimated  outstanding  claims.  We currently have  approximately  50 employees,
compared to  approximately  110 at the end of the second quarter 2001. We are in
the process of evaluating and implementing  cost-saving measures in an effort to
further reduce our general and administrative expense. With respect to our legal
expenses for defense of the litigation  proceedings currently pending, as of May
2001 we had  accrued  our  full  deductible  of  $350,000  under  our  insurance
policies.  We anticipate that general and  administrative  expenses will be less
for future periods in 2002 when compared to comparable periods in 2001.

Amortization of Intangible  Assets.  Amortization of intangible assets resulting
from our  acquisitions  primarily  relate to the amortization of customer lists,
domain names, acquired technology, proprietary concepts, assembled workforce and
goodwill. Amortization of intangible assets expense for the three- and six-month
periods  ended June 30, 2002 was $64,000 and  $160,000  compared to $5.0 million
and $23.3  million for the  comparable  periods in 2001.  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 were being amortized over a three-year
period, which were fully amortized as of May 2002.

Stock-Based  Compensation.  Stock-based  compensation  expense is related to the
amortization  of deferred  compensation  resulting  from stock option  grants to
employees with an option exercise price below the estimated fair market value of
our common  stock as of the date of grant.  The amount of deferred  compensation
resulting  from these grants is  generally  amortized  over a one to  three-year
vesting period.  Additionally,  in April and July 2001, we offered two voluntary
stock  option  exchange  programs  to our  employees.  Under the  programs,  the
employees,  if they so chose,  could  exchange a certain number of highly priced
options for one option  priced at the then fair market  value.  In June 2002, we
initiated  a stock  option  exchange  program in which  2,139,686  options  were
exchanged for options  priced at $0.10 per share.  These stock option  repricing
and voluntary stock option  exchange  programs  resulted in variable  accounting
treatment for the new priced stock options.  Additionally,  certain stock option
grants made within six months of the re-pricing and voluntary  exchange programs
resulted in variable accounting treatment for those options. Also, in June 2002,
4,595,000  stock  options were  granted to  employees at $0.05 per share,  which
resulted in variable accounting  treatment.  Variable  accounting  treatment can
result in unpredictable  stock-based  compensation  dependent on fluctuations in
quoted prices for our common  stock.  Stock-based  compensation  expense for the
three- and  six-month  periods ended June 30, 2002 was $659,000 and $1.2 million
compared to $1.0 million and $1.3 million for the comparable periods in 2001. As
of June 30, 2002, we had $1.9 million of deferred  compensation  to be amortized
over future periods.

Restructuring and Other Impairment Charges.  We had no restructuring  charges in
the three- and six-month  periods ended June 30, 2002 compared to a gain of $8.9
million and a charge of approximately  $62.1 million in the three- and six-month
periods  ended June 30, 2001.  During the first  quarter  2001, we continued our
restructuring  efforts, which commenced in fourth quarter 2000, and included the
shutdown  of  SpeedyClick,  the sale of  Ubarter  Canada  and the lay off of 245
employees.  The restructuring  charges in first quarter 2001 consisted primarily
of severance and related payroll charges of $580,000,  the write-off of impaired
goodwill and  intangible  assets of $55.2 million,  and of tenant  improvements,
fixed assets, software and supporting technologies and infrastructure related to
businesses that were shut down of $13.1 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 $3.0  million of  marketable  equity
securities  which were subject to lockup until November 2001. We recorded a gain
in second  quarter  2001 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 $1.3
million,  primarily  from  revising  estimates  on unused  operating  leases and
adjustment of other  liabilities  related to businesses  previously shut down in
first quarter 2001. If we are unable to obtain additional  financing during 2002
to fund  operations,  we may be  required  to  undertake  further  restructuring
efforts and incur additional  restructuring  charges. See "Liquidity and Capital
Resources" below.

Impairment of Certain  Long-Lived  Assets. As part of the restructuring in 2001,
we  determined  that goodwill and  intangible  assets  associated  with acquired
businesses had a carrying  value in excess of the discounted  cash flow


                                      17
<PAGE>

receipts of the business units. As a result,  we recognized an impairment charge
of $43.1 million during the  three-month  period ended March 31, 2001. We had no
such  impairment  charges in second  quarter  2001 or in the first six months of
fiscal 2002. If we are unable to obtain  additional  financing in fiscal 2002 to
fund  operations,  we may be required to take further  charges for impairment of
assets. See "Liquidity and Capital Resources" below.

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

Loss on Sale of Investments.  Gain or loss on sale of investments occurs when we
sell certain of our  investments  in  marketable  equity  securities  and/or our
cost-basis  investments  for cash proceeds in excess or below our  cost-basis in
these  investments  at the time of  sale.  Loss on sale of  investments  for the
three- and  six-month  periods  ended June 30, 2002 was  $196,000  and  $584,000
compared to $0 and $150,000 in the comparable periods in 2001.

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, 2002 was $22,000 and $28,000  compared to $66,000 and $623,000 in
the comparable  periods in 2001.  Interest income decreased due to a decrease in
our cash  and cash  equivalents  and  short-term  investments.  We  expect  that
interest income will be less in 2002 compared to comparable  periods in 2001 due
to the decreased cash and investment balances.

Interest  Expense.   Interest  expense  is  incurred  on  our  outstanding  debt
obligations  and the  accretion of our  convertible  promissory  note.  Interest
expense for the three- and six-month periods ended June 30, 2002 was $49,000 and
$105,000 compared to $2.7 million and $5.5 million for the comparable periods in
2001. Interest expense decreased due to reduced outstanding debt obligations. We
expect that interest expense will be less in 2002 compared to comparable periods
in 2001 due to reduced outstanding debt obligations as compared to 2001.

Other Nonoperating Income (Expense).  Other non-operating  income for the three-
and six-month  periods ended June 30, 2002 was $211,000 and $808,000 compared to
an  expense of $15,000  and  $39,000  for the  comparable  periods in 2001.  The
increase  between the periods was  primarily  due to a gain of $824,000 from the
sale of  FreeMerchant,  which sale  occurred in December 2001 but which gain was
recognized in the first and second quarters of 2002.

Impairment  of  Cost-Basis  Investments.  We  determined  that  certain  of  our
cost-basis  investments  were  permanently  impaired  based on our  analysis  of
changes  in  investees  business  operations  and  prospects.  As a  result,  we
recognized  an  impairment  charge  of $0 and  $75,000  during  the  three-  and
six-month  periods  ended  June 30,  2002  compared  to a charge of $0 and $18.8
million in the comparable periods in 2001.

Extraordinary  Gains.  We have  negotiated  with  various  creditors  to  settle
liabilities for less than the recorded invoices.  These settlements  resulted in
gains of  approximately  $304,000  and  $565,000  for the three-  and  six-month
periods ended June 30, 2002 and $9.0 million for each of the comparable  periods
in 2001.

Net Income (Loss).  Net loss for the three- and six-month periods ended June 30,
2002 was $2.1 million and $4.7 million  compared to net gain of $1.8 million and
net loss of $175.8 million for the  comparable  periods in 2001. The net loss in
the three-  and  six-month  periods  ended June 30,  2002 was due  primarily  to
operating  expenses.  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.

Liquidity and Capital Resources

Since  inception,  we have  experienced  net losses and negative cash flows from
operations.  For the six months  ended June 30,  2002,  we used net cash of $1.9
million in operating activities and funded the shortfall in cash flow needed


                                      18
<PAGE>

for operations  primarily  through the sale of investments.  As reflected on our
balance sheet, our current  liabilities  exceed our current assets, and as those
liabilities  come due,  we will  need to  increase  our cash flow to fund  those
obligations.  In addition,  a promissory note in the amount of $1.5 million that
we issued to CVI in July 2001  matures  in  January  2003.  If we are  unable to
increase cash flow from operations, we will need to seek additional financing or
take  other  drastic  action.  Set  forth at the end of this  section  is a more
detailed description of steps we may take to obtain any necessary financing.  As
of June 30,  2002,  we had an  accumulated  deficit of $574.1  million.  We have
financed our activities  largely through issuances of common stock and preferred
stock,  from the issuance of short- and long-term  obligations  and from capital
leasing transactions for certain of our fixed asset purchases.  Through June 30,
2002,  our aggregate net proceeds have been $272.2  million from issuing  equity
securities and $52.4 million from issuing debt securities.

As of June  30,  2002,  we had  $1.6  million  in  cash,  cash  equivalents  and
short-term investments compared to approximately $2.0 million as of December 31,
2001, of which $57,000 of such amounts is  characterized  as restricted  cash to
secure our obligation under a certain letter of credit.  As of June 30, 2002, we
had  $15,000  in  marketable  equity  securities,  compared  to $2.5  million in
marketable  equity  securities as of December 31, 2001. The decrease in our cash
position is primarily attributable to losses from operations and payments on our
debt  obligations  during the first six months of 2002,  offset by the sale of a
substantial portion of our marketable equity securities portfolio.

Net cash used in operating  activities was $1.9 million for the six-month period
ended June 30, 2002,  compared to $28.1 million for the same period in 2001. The
decrease was due  primarily  to the  decrease in our net loss for the  six-month
period  ended June 30, 2002 of $4.7 million  compared to $175.8  million for the
same period in 2001. The change in the amount of cash used in operations  during
the comparable  six-month periods was also significantly  impacted by a decrease
in depreciation and amortization of $712,000 in the six months of 2002 (compared
to  $28.3  million  for the  same  period  in  2001),  by $0 in  impairment  and
restructuring  charges in the six months of 2002  (compared to $67.2  million in
the same period in 2001),  by $0 in impairment  of long-lived  assets in the six
months of 2002  (compared to $43.1 million for the same period in 2001) and by a
decrease in the  impairment of  investments of $75,000 in the six months of 2002
(compared to $18.8 million for the same period in 2001).

Net cash  provided by investing  activities  was $2.0 million for the  six-month
period  ended June 30,  2002,  compared to $36.4  million for the same period in
2001.  Amounts  from  investing  activities  for the  first  six  months of 2002
consisted of $2.0 million in proceeds from sales of investments and $62,000 from
sales of  short-term  investments,  partially  offset by $62,000 in purchases of
certain  equipment.  In  contrast,  amounts  for the  first  six  months of 2001
consisted  primarily of $35.6 million from sales of short-term  investments  and
$848,000 in proceeds from sales of investments.

Net cash used in financing  activities  was $503,000  for the  six-month  period
ended June 30, 2002 (consisting primarily of $505,000 for repayment of long-term
debt  obligations),  compared  to  $14.1  million  for the same  period  in 2001
(consisting  primarily of $10.1 million for repayment of a line of credit,  $1.8
million for  repayment of a credit  agreement  and 2.1 million for  repayment of
long-term debt obligations). Neither of these credit facilities are available to
us.

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

In July 2001, we entered into an agreement with Cody Holdings Inc. to provide us
with up to $18 million in equity financing  ("Equity Line").  Under the terms of
the agreement,  we have the right,  but not the  obligation  during the 18-month
term of the Agreement,  to obtain equity  financing  from Cody Holdings  through
draw downs  under this Equity  Line,  and the  issuance of common  stock to Cody
Holdings  at a discount  to the market  price at the time of the

                                      19
<PAGE>

draw down.  The shares of common stock may be sold to Cody Holdings  during this
period at times and in amounts,  subject to certain minimum and maximum volumes,
determined at our discretion.  The agreement  restricts our ability to make draw
downs based on a formula calculated on our stock trading volume and stock price.
Accordingly,  if our stock  price and  trading  volume  fall  below  established
levels,  we will not be able to draw down funds from the Equity Line. During the
first six months of 2002,  our stock price  ranged from a high of $0.18 to a low
of $0.08 per share and our average daily trading volume was 12,400 shares. Based
on these numbers, we are currently unable to draw down any funds from the Equity
Line.  If we are able to and choose to draw down on the Equity Line, we will use
the proceeds of the financing for general corporate  purposes.  In October 2001,
we completed a draw down of $25,000. Until and unless our average trading volume
and our stock price  increase,  we will be unable to draw upon this Equity Line.
There are no assurances  that we will be able to make a draw down on this Equity
Line during 2002.

We believe that our cash reserves and cash flows from operations may be adequate
to fund our  operations  through  December 2002.  Consequently,  we will require
substantial  additional  funds to continue to operate our  business  beyond that
period.  Many  companies in the Internet  industry have  experienced  difficulty
raising additional  financing in recent months.  Additional financing may not be
available to us on favorable  terms or at all. Even if  additional  financing is
available,  we may be required to obtain the  consent of our  existing  lenders,
shareholders or the party from whom we secured our equity line of credit,  which
we may not be able to obtain. If additional  financing is not available,  we may
need to change our business plan, sell or merge our business, or file a petition
in bankruptcy.  In addition, our issuance of equity or equity-related securities
will dilute the ownership interest of existing  shareholders and our issuance of
debt securities could increase the risk or perceived risk of our company.

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

o    the level of revenues in 2002;

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

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

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

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

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

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

o    the scope of any reduction of our business activities;

o    the scope and degree of market recovery and performance;

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

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

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

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

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


                                       20
<PAGE>

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

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

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





















                                       21

<PAGE>


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

You  should  carefully   consider  the  risks  described  below  and  the  other
information  in this quarterly  report.  While we have attempted to identify the
primary known risks that are material to our business,  additional risks that we
have not yet  identified  or that we  currently  think are  immaterial  may also
impair our business operations.  Our business may be adversely affected, and the
trading  price of our common stock could  decline due to any of these risks.  In
assessing  these risks,  you should also refer to the other  information in this
quarterly report,  including the Condensed Consolidated Financial Statements and
related  Notes and the risks  discussed in the "Factors  Affecting Our Operating
Results,  Business  and Stock Price"  section  included in our December 31, 2001
Form 10-K filed on April 1, 2002 with the Securities and Exchange Commission.

RISKS RELATED TO OUR BUSINESS

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

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

o    the level of revenues in 2002;

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

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

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

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

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

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

o    the scope of any reduction of our business activities;

o    the scope and degree of market recovery and performance;

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

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


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

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

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

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

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

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

                                       22
<PAGE>

equity line may not be adequate to fund our operation.  Furthermore,  we may not
have adequate  trading  volume or stock price to draw down from our equity line.
Through June 30, 2002,  we have only drawn  $25,000 from the $18 million  equity
line.  As of June 30,  2002,  our stock price and  trading  volume of our common
shares had fallen below the established  minimum levels at which we can initiate
a draw down.

While we attempt to secure financing,  many companies in the Internet  industry,
including us, have experienced  difficulty raising additional financing over the
last 18 months.  Additional  financing  may not be  available to us on favorable
terms or at all. Even if additional  financing is available,  we may be required
to obtain the consent of our existing  lenders,  shareholders  or the party from
whom we secured our equity  line of credit,  which we may not be able to obtain.
If  additional  financing  is not  available  to us we may need to  dramatically
change our business plan, sell or merge our business, close business units, sell
assets or face bankruptcy. In addition, our issuance of equity or equity-related
securities will dilute the ownership  interest of existing  shareholders and our
issuance of debt  securities  could  increase the risk or perceived  risk of our
Company.

Our  inability  to secure  additional  financing  would have a material  adverse
effect  on  whether  we would be able to  successfully  implement  our  proposed
business plan and our ability to continue as a going  concern.  Our  independent
accountants  have  issued a "going  concern"  opinion  in  their  report  to our
financial  statements  for the year ended  December 31, 2001,  citing  recurring
operating  losses and reduced working  capital.  Accordingly,  those  conditions
raise substantial doubt about our ability to continue as a going concern.

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

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

WE HAVE A HISTORY OF LOSSES.

We have incurred significant losses since our inception. As of June 30, 2002, we
had an accumulated  deficit of $574.1  million.  We have  historically  invested
heavily in sales and  marketing,  technology  infrastructure  and  research  and
development.  As a result,  we must  generate  significant  revenues  to achieve
profitability.  There can be no assurance that we will ever become profitable on
a quarterly or an annual basis. We expect that our sales and marketing, research
and  development  and  general  and  administrative  expenses  will  decrease in
absolute dollars from 2001 to 2002 but may increase as a percentage of revenues.

OUR BUSINESS MODEL IS UNPROVEN AND CHANGING.

We provide  technology  infrastructure  and online  business  services.  We have
limited   experience  as  a  company,   particularly   with  these   businesses.
Additionally,  the  Internet,  on which  our  business  model  relies,  is still
unproven as a business medium and has experienced significant industry slow down
during the last year.  Also,  our  disposition  and closure of several  business
units  during  2001  resulted  in  significant  changes to our  business  model.
Accordingly, our business model may not be successful, and we may need to change
it again. 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 and online business services
and our ability to restructure our debts.


                                       23
<PAGE>


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

Our business  model has been applied to the Internet  only since the  mid-1990's
and continues to evolve.  Therefore,  we have limited experience in planning the
financial needs and operating  expenses of our business.  It is difficult for us
to accurately  forecast our revenues in any given  period.  If our revenues in a
particular  period fall short of our  expectations,  we will likely be unable to
quickly adjust our spending in order to compensate for that revenue shortfall.

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

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

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

o    the mix of products and services that we sell;

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

o    the ability to maintain our telecommunications infrastructure.


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

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

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

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

o    a decrease in the growth of Internet usage; and

o    the pricing policies of our competitors.


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

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

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

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

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

o    enhance existing products and services;

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

o    complete projects on time;

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

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

                                       24
<PAGE>

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


WE FACE SIGNIFICANT COMPETITION.

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

o    fewer businesses using our technology infrastructure products and services;

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

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


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

o    larger customer or user bases;

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

o    greater name recognition and larger marketing budgets and resources;

o    substantially greater financial, technical and other resources;

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

o    larger production and technical staffs.


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

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

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

Our ability to  successfully  offer our products and services and  implement our
business plan in a rapidly  evolving market  requires an effective  planning and
management  process.  We are  changing  the scope of our  operations.  In recent
months,  we have focused on developing and providing  technology  infrastructure
and  online  business  services.  Due to the shift in our  business  focus,  our
historical  results are likely not indicative of our future  performance and you
may have difficulty evaluating our business and prospects.  While our operations
have been changing,  we have reduced our overall number of employees from 620 in
January 2001 to 50 as of June 30, 2002.  These  changes in our business plan and
reduction in personnel  have placed,  and will continue to place,  a significant
strain on our management systems, infrastructure and resources.  Simultaneously,
the  reduction in our  workforce or future  reductions  in workforce may make it
more  difficult  to execute and  implement  our business  plan.  We will need to
continue to monitor our financial and managerial  controls and reporting systems
and procedures, and will need to


                                       25
<PAGE>

continue to train and manage our  workforce.  Any failure to adapt to any of the
foregoing  areas or other  areas  efficiently  and  effectively  could cause our
business to suffer.

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

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

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

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

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

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

The maximum draw down amount  every 22 trading days is the lesser of  $2,000,000
or 6% of the weighted  average price of our stock for the 60-day period prior to
the draw down multiplied by the total trading volume for that 60 day period.  If
our stock price and trading volume fall below established  levels,  then we will
not be able to draw down  additional  funds pursuant to the equity line facility
with Cody Holdings.  During the first six months of 2002, our stock price ranged
from a high of $0.18 to a low of $0.08 per share and our average  daily  trading
volume was 12,400 shares.  Based on our stock price and average  trading volume,
as of June 30, 2002,  we are unable to make a draw down.  In addition,  business
and economic  conditions  may not make it feasible to draw down pursuant to this
facility.  Furthermore,  if we  are  unable  to  keep a  registration  statement
effective  for those shares of common stock subject to the equity line, or if we
experience a material adverse change to our business that is not cured within 30
days, the common stock purchase  agreement may terminate,  or we may not be able
to draw down any funds.

                                       26

<PAGE>


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

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

o    the minimum amount is $100,000;

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

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


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

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

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

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

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

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

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


                                       27
<PAGE>


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

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

WE MAY NOT DERIVE SUBSTANTIAL BENEFITS FROM OUR STRATEGIC RELATIONSHIPS.

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

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

Our success  depends on the skills,  experience  and  performance  of our senior
management and other key personnel, specifically including N. Scott Dickson, our
acting-Chief   Executive   Officer,   Chief  Financial  Officer  and  Secretary,
Anne-Marie K. Savage, our Executive Vice President and Joseph Shatara,  our Vice
President  and other senior  managers and the members of our board of directors.
If we fail to successfully  attract and retain a sufficient  number of qualified
executive, technical,  managerial, sales and marketing, business development and
administrative  personnel,  our ability to manage and expand our business  could
suffer.  Our current  financial  situation may make it more difficult to attract
and retain key employees. In addition,  recently effective July 12, 2002, Dwayne
Walker  resigned as our Chief  Executive  Officer and  President.  Although  Mr.
Walker will  continue as Chairman of the Board,  we cannot  evaluate  the impact
that his  resignation as an officer of the Company may have on us, our business,
our prospects or our employees.








                                       28
<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, 2002.









                                       29
<PAGE>



PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

Reference is made to "Item 3. Legal  Proceedings" in the Company's Annual Report
on Form 10-K for the year ended  December 31, 2001.  Through August 1, 2002, the
date of this report,  there have been no material  developments  with respect to
any of the legal proceedings previously disclosed.

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

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5: OTHER INFORMATION

Effective July 12, 2002,  Dwayne Walker resigned as Chief Executive  Officer and
President.  Dwayne  Walker will  continue  as  Chairman  of the Board.  N. Scott
Dickson was appointed as acting Chief Executive Officer.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

Number     Description

99.1       Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
           to Section 906 of the Sarbanes-Oxley Act of 2002.


(b)  Reports on Form 8-K

We filed a Form 8-K on April  11,  2002 to  report a change  in our  independent
auditors  from Arthur  Andersen LLP to Moss Adams LLP,  effective as of April 4,
2002. We filed an amended report on Form 8-K/A on April 16, 2002.





                                       30


<PAGE>




                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 14, 2002.

                          NETWORK COMMERCE INC.





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









                                       31





<PAGE>




                                 EXHIBIT INDEX



Number     Description

99.1       Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
           to Section 906 of the Sarbanes-Oxley Act of 2002.