COOLSAVINGS INC - 10-Q Quarterly Report

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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, 2004

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 000-30199

CoolSavings, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 36-4462895
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

360 N. Michigan Avenue 19th Floor
Chicago, Illinois 60601
----------------------------------------------------------
Address of principal executive offices, including zip code

Registrant's telephone number, including area code: (312) 224-5000

_________________________________________

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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ]

Number of shares of common stock, $0.001 par value per share, outstanding
as of July 31, 2004: 39,232,977. (This number represents the number of
shares that are required to be reported here. The accompanying report
describes additional shares of common stock that are issuable upon
conversion of outstanding shares of preferred stock and the exercise of
outstanding warrants and outstanding stock options.)

INDEX

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Balance Sheets
June 30, 2004 (Unaudited) and
December 31, 2003. . . . . . . . . . . . . . . . . 3

Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 2004
and 2003 . . . . . . . . . . . . . . . . . . . . . 6

Statement of Changes in Convertible Redeemable
Preferred Stock and Stockholders' Deficit
(Unaudited) Six Months Ended June 30, 2004 . . . . 7

Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2004 and 2003. . . . . . 8

Notes to Financial Statements (Unaudited). . . . . . 9

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

Item 3. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . . 41

Item 4. Controls and Procedures. . . . . . . . . . . . . . . 42

PART II OTHER INFORMATION

Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 42

Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities. . . . . . . . 42

Item 3. Defaults Upon Senior Securities. . . . . . . . . . . 43

Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . 43

Item 5. Other Information. . . . . . . . . . . . . . . . . . 44

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 45

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 46

COOLSAVINGS, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)

JUNE 30, DECEMBER 31,
2004 2003
------------ ------------

ASSETS
------

Current assets:
Cash and cash equivalents. . . . . . . . . $ 5,203 $ 7,347
Accounts receivable, net of
allowance of $931 and $676 at
June 30, 2004 and December 31, 2003,
respectively . . . . . . . . . . . . . . 5,548 4,786
Prepaid assets . . . . . . . . . . . . . . 351 392
Other assets . . . . . . . . . . . . . . . 1 27
---------- ----------
Total current assets . . . . . . . . 11,103 12,552
---------- ----------

Property and equipment . . . . . . . . . . . 9,433 9,112
Capitalized software costs . . . . . . . . . 1,490 1,490
Capitalized web site costs . . . . . . . . . 3,790 3,599
---------- ----------
Total. . . . . . . . . . . . . . . . 14,713 14,201

Less accumulated depreciation
and amortization . . . . . . . . . . . . . (11,924) (11,692)
---------- ----------
2,789 2,509

Intangible assets, patents and licenses,
net of accumulated amortization of
$511 and $500 at June 30, 2004 and
December 31, 2003, respectively. . . . . . 19 --

Goodwill . . . . . . . . . . . . . . . . . . 544 --
---------- ----------

Total assets . . . . . . . . . . . . . . . . $ 14,455 $ 15,061
========== ==========

The accompanying notes are an integral part of the financial statements.

COOLSAVINGS, INC.
BALANCE SHEETS - Continued
(in thousands, except share and per share data)
(Unaudited)

JUNE 30, DECEMBER 31,
2004 2003
------------ ------------

LIABILITIES
-----------

Current liabilities:
Accounts payable, including amounts
due to related parties of $38
and $0 at June 30, 2004 and
December 31, 2003, respectively. . . . . $ 771 $ 1,033
Accrued marketing expense, including
amount due to related parties of
$51 and $68 at June 30, 2004 and
December 31, 2003, respectively. . . . . . 1,696 1,402
Accrued compensation . . . . . . . . . . . 892 1,368
Accrued interest due to related party. . . 85 82
Accrued expenses, including amounts
due to related parties of $1,032
and $962 at June 30, 2004 and
December 31, 2003, respectively. . . . . 2,258 1,806
Lease exit cost liability. . . . . . . . . 228 206
Deferred revenue . . . . . . . . . . . . . 240 484
Senior secured note payable due to
related party. . . . . . . . . . . . . . 6,307 6,059
---------- ----------
Total current liabilities. . . . . . 12,477 12,440

Long-term liabilities:
Deferred revenue . . . . . . . . . . . . . 284 114
Lease exit cost liability. . . . . . . . . 1,038 1,069
Deferred income tax liability. . . . . . . 6 --
Other long-term liabilities. . . . . . . . 16 --
---------- ----------
Total long-term liabilities. . . . . 1,344 1,183
---------- ----------
Commitments and contingencies (Note 10)

Convertible redeemable cumulative
Series B Preferred Stock, $0.001
par value, 258,000,000 shares
authorized at June 30, 2004 and
December 31, 2003 and 166,078,777
and 159,629,737 issued and
outstanding at June 30, 2004 and
December 31, 2003, respectively
(liquidation preference of $0.1554
per share at June 30, 2004 and
December 31, 2003) . . . . . . . . . . . . 25,807 24,805
Convertible redeemable Series C
Preferred Stock, $0.001 par value,
13,000,000 shares authorized and
13,000,000 shares issued and
outstanding at June 30, 2004 and
December 31, 2003 (liquidation
preference of $0.1665 per share at
June 30, 2004 and December 31, 2003) . . . 1,950 1,950

The accompanying notes are an integral part of the financial statements.

COOLSAVINGS, INC.
BALANCE SHEETS - Continued
(in thousands, except share and per share data)
(Unaudited)

JUNE 30, DECEMBER 31,
2004 2003
------------ ------------

STOCKHOLDERS' DEFICIT
---------------------

Common stock, $0.001 par value per
share, 379,000,000 shares authorized
at June 30, 2004 and December 31,
2003, 39,232,977 and 39,169,270 shares
issued and outstanding at June 30, 2004
and December 31, 2003, respectively. . . . 39 39

Additional paid-in capital . . . . . . . . . 70,683 71,855

Accumulated deficit. . . . . . . . . . . . . (97,845) (97,211)
---------- ----------

Total stockholders' deficit. . . . . . . . . (27,123) (25,317)
---------- ----------

Total liabilities, convertible
redeemable preferred stock and
stockholders' deficit. . . . . . . . . . . $ 14,455 $ 15,061
========== ==========

The accompanying notes are an integral part of the financial statements.

COOLSAVINGS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenues:
e-marketing services . . $ 9,179 $ 8,580 $ 17,116 $ 16,129
License royalties. . . . 12 66 56 141
---------- ---------- ---------- ----------
Net revenues . . . . . . . 9,191 8,646 17,172 16,270
Cost of revenues . . . . . 1,193 601 1,816 1,389
---------- ---------- ---------- ----------

Gross profit . . . . . . . 7,998 8,045 15,356 14,881
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing. . . 4,962 4,560 10,355 8,955
Product development. . . 940 723 1,952 1,477
General and
administrative . . . . 1,548 2,405 3,327 4,632
Lease exit costs . . . . 60 173 114 408
Loss on asset
impairment . . . . . . -- -- -- 81
---------- ---------- ---------- ----------
Total operating expenses . 7,510 7,861 15,748 15,553
---------- ---------- ---------- ----------

Income (loss) from
operations . . . . . . . 488 184 (392) (672)

Other income (expense):
Interest and
other income . . . . . 7 6 15 25
Interest expense . . . . (127) (117) (251) (230)
---------- ---------- ---------- ----------
Total other income
(expense). . . . . . . . (120) (111) (236) (205)
---------- ---------- ---------- ----------

Income (loss) before
income taxes . . . . . . 368 73 (628) (877)
Income taxes . . . . . . . 4 -- 6 --
---------- ---------- ---------- ----------
Net income (loss). . . . . 364 73 (634) (877)

Cumulative dividend on
Series B Preferred
Stock. . . . . . . . . . (516) (476) (1,022) (944)
---------- ---------- ---------- ----------
Loss applicable to
common stockholders. . . $ (152) $ (403) $ (1,656) $ (1,821)
========== ========== ========== ==========

Basic and diluted
net loss per share . . . $ 0.00 $ (0.01) $ (0.04) $ (0.05)
========== ========== ========== ==========
Weighted average shares
used in the calculation
of basic and diluted
net loss per share . . . 39,232,977 39,101,022 39,225,888 39,097,362
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.

COOLSAVINGS, INC.
STATEMENT OF CHANGES IN CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
(in thousands, except share and per share data)

COOLSAVINGS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)

2004 2003
---------- ----------
Cash flows provided by (used in)
operating activities:
Net loss . . . . . . . . . . . . . . . . . $ (634) $ (877)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation and amortization. . . . . . 620 1,145
Provision for doubtful accounts. . . . . 409 734
Stock option (credit) expense. . . . . . (160) 340
Interest payment in kind . . . . . . . . 251 230
Write off of website development costs . 2 --
Increase in deferred tax provision . . . 6 --
Loss on asset impairment . . . . . . . . -- 81
Changes in assets and liabilities:
Decrease in restricted certificates
of deposit . . . . . . . . . . . . . . -- 231
(Increase) in accounts receivable. . . . (1,172) (964)
Decrease in prepaid and other
current assets . . . . . . . . . . . . 67 309
(Decrease) in accounts payable . . . . . (262) (311)
(Decrease) increase in deferred revenue. (74) 162
Increase in accrued and other
liabilities. . . . . . . . . . . . . . 251 137
Increase in other long-term
liabilities. . . . . . . . . . . . . . 16 --
(Decrease) increase in lease exit
cost liability . . . . . . . . . . . . (9) 41
---------- ----------
Net cash flows (used in) provided by
operating activities . . . . . . . . . . . (689) 1,258
---------- ----------

Cash flows used in investing activities:
Purchases of property and equipment. . . . (482) (20)
Acquisition of the business assets
of TMS . . . . . . . . . . . . . . . . . (574) --
Capitalized web site development costs . . (409) (252)
Proceeds from sale of property and
equipment. . . . . . . . . . . . . . . . -- 3
---------- ----------
Net cash used in investing activities. . . . (1,465) (269)
---------- ----------

Cash flows provided by financing activities:
Stock options exercised. . . . . . . . . . 10 1
---------- ----------
Net cash provided by financing activities. . 10 1
---------- ----------

Net (decrease) increase in cash. . . . . . . (2,144) 990
Cash and cash equivalents,
beginning of period. . . . . . . . . . . . 7,347 4,867
---------- ----------
Cash and cash equivalents,
end of period. . . . . . . . . . . . . . . $ 5,203 $ 5,857
========== ==========

The accompanying notes are an integral part of the financial statements.

COOLSAVINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(UNAUDITED)

1. BASIS OF PRESENTATION:

CoolSavings, Inc. ("CoolSavings" or the "Company") is an online
direct marketing and media company that provides smarter solutions to
connect marketers to their target consumers by leveraging the Company's
marketing network, analytic services and proprietary technology. Under the
Company's established brand, advertisers can deliver, target and track a
wide array of promotional programs, including printed and electronic
coupons, personalized e-mails, rebates, samples, trial offers, sales
notices, and gift certificates to promote sales of products or services in
stores or online.

Landmark Communications, Inc. and Landmark Ventures VII, LLC
(together, "Landmark") have the right to at any time require the Company to
redeem any or all of the shares of Convertible Redeemable Series B
Preferred Stock held by Landmark and to accelerate payment of obligations
under a senior secured note payable due to Landmark. If Landmark chose to
exercise these rights, the Company's ability to continue to operate the
business would be jeopardized.

The Company's independent auditors have issued their report on the
Company's financial statements for 2003 with an explanatory paragraph. The
explanatory paragraph describes the uncertainty as to the Company's ability
to continue as a going concern.

These financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all the
disclosures required in the financial statements included in the Company's
most recently filed Annual Report on Form 10-K. These financial statements
should be read in conjunction with the financial statements and related
notes in the Form 10-K of the Company for the year ended December 31, 2003.

In the opinion of the Company, the accompanying unaudited financial
statements reflect all normal recurring adjustments necessary for a fair
statement of the Company's financial position as of June 30, 2004, its
results of operations for the three and six months ended June 30, 2004 and
2003 and its cash flows for the six months ended June 30, 2004 and 2003.
These quarterly results of operations are not necessarily indicative of
those expected for the full year. Certain prior period amounts have been
reclassified to conform to the current period's presentation.

2. ACQUISITION OF ASSETS OF TARGETED MARKETING SERVICES

On February 6, 2004, the Company acquired certain assets related to
the Targeted Marketing Services ("TMS") business line of ADS Alliance Data
Systems, Inc. ("ADS"). TMS was acquired to provide the Company with new
and expanded strategic capabilities in the areas of frequent shopper data
access and paperless coupon solutions to grocery retailers for consumer
packaged goods (CPG) manufacturers. In addition to the assets acquired,
the Company contracted for certain data center services, and assumed
certain existing customer contracts and service obligations related to the
operation of the TMS business line. Among the assets acquired were certain
intangible property related to CPG contracts, retail relationships, patent
rights, copyrights, trademarks and domain names and an information
technology capability necessary to meet existing service obligations. The
purchase price was approximately $584, which included $100 paid in cash to
the seller and transaction costs of approximately $484. The funds used for
the purchase price were provided by the Company's existing working capital.

The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations for the period
subsequent to the acquisition are included in the Company's financial
statements. The Company allocated the purchase price of $584 on a
preliminary basis to the assets acquired, based on a fair value assessment
performed by an independent appraiser. This allocation is subject to
change in future periods as more information becomes available. Based on
the preliminary assessment of fair values, the allocation of the purchase
price of $584 to the proportionate amount of assets acquired was as
follows:

Customer relationship. . . . . . . . . $ 20
Proprietary technology . . . . . . . . 10
Computer hardware. . . . . . . . . . . 10
Goodwill . . . . . . . . . . . . . . . 544
----
Total assets acquired. . . . . . . . . $584
====

The customer relationship, proprietary technology, and computer
hardware have been assigned useful lives of ten years, six months, and two
years, respectively. All identifiable assets are amortized on a straight-
line basis. Goodwill will be tested at least annually or more frequently
if circumstances indicate that an impairment may have occurred in
accordance with Statement of Accounting Standards (SFAS) No. 142 "Goodwill
and Other Intangible Assets."

The Company also paid $93 pursuant to a certain Transition Services
Agreement dated February 6, 2004 between the Company and ADS which
represented the fair value of certain data hosting and facility services to
be provided by ADS to support uninterrupted service during the transition
of the TMS business from ADS to the Company. The term of the Transition
Services Agreement was for up to six months. Transition expenses totaling
$47 and $93 have been expensed in cost of sales in the statement of
operations of the Company for the three-month and six-month periods ended
June 30, 2004, respectively, as the transition was completed by May 31,
2004.

In addition, in connection with the acquisition, the Company released
ADS from the future royalty payments due to the Company under a pre-
existing cross license agreement. The cross license agreement remains in
place between ADS and the Company. As of February 6, 2004, the Company had
recorded a deferred revenue liability of $351 related to these royalty
obligations. This deferred revenue liability is being amortized over the
remaining life of the cross license agreement, which expires in 2011. As
of June 30, 2004, the deferred revenue liability relating to this agreement
was $331.

The following unaudited pro forma combined financial information
combines the historical financial information of CoolSavings and TMS for
the three and six months ended June 30, 2004 and June 30, 2003 as if the
acquisition had occurred on January 1, 2003. The unaudited pro forma
combined financial information is presented for illustrative purposes only
and does not indicate the financial results of the combined business had
the entities actually been combined at the beginning of each period
presented and had the impact of possible revenue enhancements and expense
efficiencies, among other potential positive and negative factors, been
considered, nor does it purport to indicate the results which may be
obtained in the future.

For the For the
Three Months Ended Six Month Period Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Pro forma net
revenues . . . . . . $ 9,191 $ 8,859 $ 17,156 $ 16,776

Pro forma net
income (loss). . . . 364 (1,251) (1,140) (3,073)

Cumulative dividend
on Series B
Preferred Stock. . . (516) (476) (1,022) (944)

Pro forma loss
applicable to
common stock-
holders. . . . . . . $ (152) $ (1,727) $ (2,162) $ (4,017)

Pro forma diluted
net loss per share . $ 0.00 $ (0.04) $ (0.06) $ (0.10)

Weighted average
shares used in the
calculation of
pro forma diluted
net loss per share . 39,232,977 39,101,022 39,225,888 39,097,362

3. STOCK-BASED COMPENSATION:

Financial Accounting Standards Board ("FASB") Statement of Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
encourages, but does not require, companies to record compensation cost for
stock-based compensation at fair value. As permitted by SFAS 123,
"Accounting for Stock Based Compensation," the Company continues to apply
the accounting provisions of APB Opinion Number 25, "Accounting for Stock
Issued to Employees" with regard to the measurement of compensation cost
for options granted. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market value of a share of the
Company's stock at the date of the grant over the amount that must be paid
to acquire the stock.

The Company recognized credits of $86 and $160 to compensation
expense in the three and six months ended June 30, 2004, respectively, in
conjunction with grants made under its employee stock option plans. Stock
option compensation expense of $340 and $340 was recognized in the three
and six months ended June 30, 2003, respectively. The compensation credits
and charges were recorded in general and administrative expense and related
to stock options previously issued to Steven Golden, a former Chief
Executive Officer of the Company. Effective July 30, 2001, the Company
entered into a severance agreement with Mr. Golden which changed the terms
of his options, requiring that they be accounted for as variable options
under APB Opinion Number 25. The compensation expense credits and charges
recognized for the three and six months ended June 30, 2004 and 2003 are
based upon the difference between the closing price of the Company's stock
at the beginning and end of each period. This charge will continue to be
adjusted in future periods for increases and decreases in the Company's
stock price above the exercise price of $0.50 until the options are
exercised, expire, or are forfeited.

The Company has adopted the disclosure requirements of SFAS No. 148,
"Accounting for Stock Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123." No stock options were issued during
the three and six months ended June 30, 2004. Had expense been recognized
using the fair value method described in SFAS 123, the Company would have
reported the following results of operations using the Black-Scholes option
pricing model:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net loss applicable to
common stockholders,
as reported. . . . . . . $ (152) $ (403) $ (1,656) $ (1,821)

(Deduct) Add: Stock option
compensation (credit)
expense. . . . . . . . . (86) 340 (160) 340

Deduct: Stock-based
employee compensation
expense determined
under fair value
based method for all
awards, net of
related tax effects. . . (53) (371) (106) (743)
---------- ---------- ---------- ----------
Pro forma net loss
applicable to
common stockholders. . . $ (291) $ (434) $ (1,922) $ (2,224)
========== ========== ========== ==========

Weighted average shares
outstanding. . . . . . . 39,232,977 39,101,022 39,225,888 39,097,362

Earnings per share:
Basic and diluted
- as reported. . . . . . $ 0.00 $ (0.01) $ (0.04) $ (0.05)

Basic and diluted
- pro forma. . . . . . . $ (0.01) $ (0.01) $ (0.05) $ (0.06)

These costs may not be representative of the total effects on pro
forma reported income for future years. Factors that may also impact
disclosures in future years include the attribution of the awards to the
service period, the vesting period of stock options, the timing of
additional grants of stock option awards and the number of shares
underlying future awards.

There were no stock options granted during the three and six months
ended June 30, 2004 or 2003.

4. RECENT ACCOUNTING PRONOUNCEMENTS:

In March 2004, Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 03-6, "Participating Securities and the Two-
Class Method under FASB Statement No. 128, Earnings per Share." EITF 03-6
clarifies what constitutes a participating security and provides further
guidance in applying the two-class method of calculating earnings per
share. The consensus reached by the Task Force in this Issue are effective
for reporting periods beginning after March 31, 2004. The Company does not
have any participating securities as defined under EITF 03-6. Therefore,
this statement did not have any impact on the Company's financial position
or results of operations for the three months ended June 30, 2004.

5. SENIOR SECURED LOAN:

In 2001, Landmark loaned the Company $5,000 pursuant to a senior
secured note, which loan is due on June 30, 2006 (the "Senior Secured
Loan"). The Senior Secured Loan is governed by the terms of an Amended and
Restated Senior Secured Loan and Security Agreement dated July 30, 2001, as
amended (the "Amended and Restated Loan Agreement"). The Senior Secured
Loan is secured by a lien on all of the Company's assets and bears interest
at 8.0% per annum. The interest is paid quarterly in arrears in the form
of additional notes and additional shares of common stock exercisable under
a warrant (described below). The Company has the right to prepay the
Senior Secured Loan on or after the third anniversary thereof if certain
conditions are met. The Amended and Restated Loan Agreement also contains
financial covenants and negative and affirmative covenants that, among
other things, restrict the Company's ability to incur additional
indebtedness and take other actions without the consent of Landmark. At
June 30, 2004, the Company was not in compliance with certain financial
covenants of the Senior Secured Loan. Defaults under the Senior Secured
Loan and the Amended and Restated Loan Agreement, which defaults cannot be
cured as the Senior Secured Loan have cross-default provisions and are
cross-collateralized, include:

.. The Company's failure to achieve a prescribed amount of billings
during 2001 (a requirement of the Amended and Restated Loan
Agreement);

.. The Company's failure to maintain a minimum level of working capital
and a ratio of cash, cash equivalents and certain receivables over
current liabilities (requirements of the Amended and Restated Loan
Agreement); and

.. The Company's failure to maintain a minimum ratio of total
indebtedness over tangible net worth (a requirement of the Amended
and Restated Loan Agreement).

These failures constitute events of default. Consequently, the
Senior Secured Loan and all accrued interest thereon are immediately due
and payable at the option of Landmark. Accordingly, the Company has
classified as currently payable as of June 30, 2004 amounts owed pursuant
to the Senior Secured Loan which, including principal and the paid-in-kind
interest which has been compounded and accrued on the principal balance,
totalled $6,392.

In connection with the Senior Secured Loan, on November 12, 2001, the
Company issued to Landmark a warrant to purchase 10,000,000 shares of the
Company's common stock (the "Landmark Warrant"). The Landmark Warrant has
a term of eight years (expiring July 30, 2009) and may be exercised in
whole or in part immediately. The Landmark Warrant contains a net exercise
feature and is exercisable at an exercise price of $0.50 per share
(increasing to $0.75 per share on July 30, 2005, if not previously
exercised). The number of shares of the Company's common stock that
Landmark is entitled to purchase under the Landmark Warrant increases by
two shares of common stock for each dollar of interest accrued and paid-in-
kind by the Company on a quarterly basis (January 31, April 30, July 31 and
October 31) on the Senior Secured Loan as paid-in-kind interest. As of
June 30, 2004, the Landmark Warrant was exercisable for 12,189,907 shares
of the Company's common stock at an exercise price of $0.50 per share.

6. REDEEMABLE PREFERRED STOCK:

a. Series B Preferred Stock:

On November 12, 2001, pursuant to a securities purchase agreement
between Landmark and the Company, dated July 30, 2001, as amended (the
"Securities Purchase Agreement"), the Company issued to Landmark 65,057,936
shares of $0.001 par value Series B preferred stock (the "Series B
Preferred Stock") in exchange for cancellation of $10,108 of outstanding
indebtedness from the Company to Landmark under the Grid Note (defined
below). The Series B Preferred Stock has certain conversion rights (see
"c. Conversion of Series B and C Preferred Stock") and bears an 8% annual
dividend, payable quarterly in additional shares of Series B Preferred
Stock. The holders of the Series B Preferred Stock (Landmark) also have
the right to elect not less than a majority of the Company's board of
directors.

Under the terms of the Securities Purchase Agreement, the Company
agreed that, if certain events occurred prior to December 31, 2002 (the
"Shortfall Events"), Landmark would have the right to acquire additional
shares of Series B Preferred Stock at a price of $0.1554 per share (the
"Shortfall Rights"). The number of shares that Landmark could acquire with
the Shortfall Rights was the quotient determined by dividing the "Shortfall
Amount" (generally the cash needed by the Company in connection with a
Shortfall Event) by $0.1554. Under a letter dated November 12, 2001, the
Company agreed that, when Shortfall Events occurred, Landmark could elect
to loan the Company the Shortfall Amount under a grid note, as amended (the
"Grid Note"), and Landmark could later elect to apply such loaned funds to
the purchase price of additional shares of Series B Preferred Stock under
its Shortfall Rights arising in connection with such Shortfall Events.

On October 24, 2002, in connection with a Shortfall Event which
occurred on June 30, 2002 (related to the amount of current assets compared
to current liabilities at such date), Landmark exercised its right to
purchase 17,825,212 shares of Series B Preferred Stock and paid the Company
$2,770 for such shares ($0.1554 per share). On December 20, 2002,
Landmark, at the Company's request, applied the $8,770 of principal and
$705 of accrued interest then outstanding under the Grid Note toward the
purchase of 60,967,777 shares of Series B Preferred Stock. As of June 30,
2004, Landmark held 166,078,777 shares (including dividends paid "in-kind")
of Series B Preferred Stock (and has rights with respect to accrued
dividends thereon), and 10,889,636 shares of common stock, in addition to
the warrant to purchase 12,189,907 shares of the Company's common stock
described above. At June 30, 2004, dividends in the amount of 3,321,575
shares of Series B Preferred Stock had accrued. For the three months and
six months ended June 30, 2004, dividends in the amount of 3,256,446 and
6,449,040 shares of Series B Preferred Stock, respectively, were declared
to the holders of Series B Preferred Stock. The Series B Preferred Stock is
subject to certain redemption requirements outside the control of the
Company. As a result of the defaults under the Amended and Restated Loan
Agreement, Landmark may, at its option, require the Company to redeem all
of the issued and outstanding Series B Preferred Stock, which had an
aggregate redemption value of $25,807 as of June 30, 2004, at any time.

Landmark's ownership will continue to increase due to the issuance of
additional shares of Series B Preferred Stock for dividends accruing on
outstanding Series B Preferred Stock. Landmark's ownership also will
increase if it exercises the Landmark Warrant. The number of shares of the
Company's stock that Landmark is entitled to purchase under the Landmark
Warrant will continue to increase as "in-kind" payments are made for
interest accruing on the Senior Secured Loan.

As of June 30, 2004, the Company had reserved approximately
182,000,000 shares of common stock for the conversion of all the
outstanding shares of Series B Preferred Stock and accrued dividends
thereon, and the exercise of the outstanding Landmark Warrant.

b. Series C Preferred Stock:

As a condition to the consummation of the Landmark purchase of
Series B Preferred Stock on November 12, 2001, the Company issued to three
individuals (two of whom are directors of the Company) an aggregate of
13,000,000 shares of $0.001 par value, redeemable Series C preferred stock
(the "Series C Preferred Stock)". The Series C Preferred Stock has certain
conversion rights (see "c. Conversion of Series B and C Preferred Stock").
The Series C Preferred Stock was issued in exchange for certain notes held
by those individuals, the related accrued interest, and the accompanying
warrants to purchase 1,050,000 shares of common stock previously issued to
those individuals. As of June 30, 2004, the Company had reserved
13,000,000 shares of common stock for the conversion of all the outstanding
shares of Series C Preferred Stock.

c. Conversion of Series B and C Preferred Stock

As of June 30, 2004, the Company had outstanding 39,232,977 shares of
common stock, 166,078,777 shares of Series B Preferred Stock, and
13,000,000 shares of Series C Preferred Stock. The shares of both series of
preferred stock of the Company are convertible at the option of the holders
into shares of common stock on a one-for-one basis, subject to anti-
dilution provisions set forth in the Company's Certificate of
Incorporation. If all the outstanding shares of preferred stock of the
Company had been converted into shares of common stock, a total of
218,311,754 shares of common stock would have been outstanding as of June
30, 2004.

7. IMPAIRMENT OF LONG-LIVED ASSETS AND COSTS ASSOCIATED WITH EXIT
ACTIVITIES:

During 2003, following an ongoing assessment of its future expected
space requirements, the Company determined that a portion of its unoccupied
leased office space and the assets associated with that office space were
unnecessary for its future operations. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the
Company determined that the estimated undiscounted cash flows expected to
be generated by the assets were less than their net book value. Therefore,
the Company recorded an operating expense of $81 in the six months ended
June 30, 2003 to write down the assets to their estimated fair value.

In addition, in accordance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," the Company recorded an
operating expense of $173 and $408 in the three and six months ended
June 30, 2003, respectively, representing the estimated future lease
obligations related to the office space and estimated costs associated with
subleasing the space, net of estimated cash flows from future sublease
arrangements.

During the three and six months ended June 30, 2004, due to changing
sublease market conditions and future outlook, the Company revised its
estimates of the future net costs associated with office space determined
to be unnecessary for it future operations. As a result of these
revisions, the Company recorded an operating expense of $60 and $114 in the
three and six months ended June 30, 2004, respectively, representing
adjustments to the estimated future lease obligations related to the office
space and estimated costs associated with subleasing and disposing of the
space, net of estimated cash flows from future sublease arrangements.

For the three and six months ended June 30, 2004 and 2003, lease exit
costs consisted of the following:

Three Months Ended Six Months Ended
June 30, June 30,
(unaudited) (unaudited)
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Lease obligation, net of
estimated sub-lease
income . . . . . . . . . . . . $ 35 $ 199 $ 64 $ 364
Broker commissions and
other miscellaneous costs. . . -- (51) -- (7)
Accretion expense. . . . . . . . 25 25 50 51
-------- -------- -------- --------
Lease exit costs . . . . . . . . $ 60 $ 173 $ 114 $ 408
======== ======== ======== ========

At June 30, 2004, the liability associated with the lease exit costs
consisted of the following:

Balance at Subsequent Balance at
December 31, Accruals, June 30,
2003 Net Payments 2004
----------- ---------- -------- ----------
Lease obligation,
net of estimated
sub-lease income. . . . $ 1,182 $ 120 $ (123) $ 1,179
Broker commissions
and other trans-
action costs. . . . . . 93 (6) 87
-------- -------- -------- --------

Total lease exit
liability. . . . . . . 1,275 114 (123) 1,266

Less: current portion
of lease exit
liability . . . . . . . (206) (228)
-------- -------- -------- --------

Long-term lease exit
liability. . . . . . . $ 1,069 $ 1,038
======== ========

Any change in this estimate, based on the availability of new or
updated information, will be recorded in the period that it occurs.

8. EARNINGS PER SHARE:

FASB SFAS No. 128 requires companies to provide a reconciliation of
the numerator and denominator of the basic and diluted earnings per share
computations. The calculation below provides net loss, weighted average
common shares outstanding and the resultant net loss per share on both a
basic and diluted basis for the three and six months ended June 30, 2004
and 2003. The calculation of diluted net loss per share for the Company
excludes shares of common stock issuable upon the exercise of employee
stock options and an investor warrant and the conversion of the outstanding
preferred stock, as the effect of such exercises and conversions would be
anti-dilutive. As of June 30, 2004, there were outstanding options to
purchase 7,771,390 shares of common stock, an outstanding investor warrant
to purchase 12,189,907 shares of common stock and outstanding preferred
stock convertible into 179,078,777 shares of common stock.

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Unaudited) (Unaudited)
--------------------- ---------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Numerator:
Net income (loss). . . . $ 364 $ 73 $ (634) $ (877)
Cumulative dividend on
Series B Preferred
Stock. . . . . . . . . (516) (476) (1,022) (944)
---------- ---------- ---------- ----------
Loss applicable to
common stockholders. . $ (152) $ (403) $ (1,656) $ (1,821)
========== ========== ========== ==========

Basic and diluted loss
per share. . . . . . . . $ 0.00 $ (0.01) $ (0.04) $ (0.05)
========== ========== ========== ==========

Denominator:
Weighted average
shares used in the
calculation of
basic and diluted
loss per share . . . . 39,232,977 39,101,022 39,225,888 39,097,362
========== ========== ========== ==========

9. STOCK OPTION COMPENSATION:

During the three and six months ended June 30, 2004, the Company did
not grant any options to purchase shares of common stock.

10. COMMITMENTS AND CONTINGENCIES:

a. LETTERS OF CREDIT

On August 31, 2002, the Company entered into an Amended and Restated
Reimbursement and Security Agreement (the "Reimbursement Agreement") with
Landmark. On behalf of the Company, Landmark applied for and received
letters of credit in the aggregate amount of $1,599 from Wachovia Bank
("Wachovia") to collateralize lease deposits required with respect to the
Company's office facilities (the "Landmark Letters of Credit"). Under the
Reimbursement Agreement, the Company has agreed, among other things, to
reimburse Landmark for all amounts that Landmark is required to pay
Wachovia under the bank agreement related to the Landmark Letters of
Credit, including all fees, penalties, interest and amounts in connection
with draws on the Landmark Letters of Credit. The aggregate amount of
letters of credit required to collateralize lease deposits on the Company's
office facilities declined to $1,194 as of June 30, 2004, due to the
termination of its lease in New York City, and scheduled reductions
contained in its lease agreement for the Company's Chicago, Illinois and
San Francisco, California facilities. The Landmark Letter of Credit for
the Company's Chicago facility was renewed in 2004 for a one-year period
ending April 2005. The Landmark Letter of Credit for the Company's San
Francisco facility was renewed in 2004 for the period ending July 31, 2004,
at which time the letter of credit is no longer required according to the
terms of the Company's lease agreement. Landmark may, in its sole
discretion, cancel any or all of the Landmark Letters of Credit upon 90
days' written notice to the Company. If the Landmark Letters of Credit
expire or are so cancelled, the Company would need to enter into an
alternate credit arrangement.

b. LONG TERM INCENTIVE PLAN

Effective January 1, 2003, the Company established the CoolSavings,
Inc. Long Term Incentive Plan (the "LTIP"). Employee participation in the
LTIP is at the sole discretion of the Company's Board of Directors. LTIP
participants are eligible to receive units which may increase in value if
the Company achieves certain long term profitability objectives. After
vesting, units which have increased in value above the grant price since
the date of grant can be redeemed with the Company for cash payments equal
to their increase in value. The Company will record an expense during
periods in which the value of the outstanding units increases above the
grant price. No expense was recorded during the three and six months ended
June 30, 2004 or 2003 related to the LTIP.

c. LITIGATION

On November 15, 1999, Catalina Marketing International, Inc.
("Catalina Marketing") filed a lawsuit against the Company in the United
States District Court for the Middle District of Florida. The complaint
alleged that the Company's systems and methods infringed Catalina
Marketing's United States Patent No. 4,674,041 (the "'041 Patent"), and
sought to enjoin the Company from further infringing its '041 Patent. The
case was transferred to the Northern District, which ruled that the Company
did not infringe the '041 patent. On May 8, 2002, the United States Court
of Appeals for the Federal Circuit (the "Federal Circuit") affirmed-in-
part, reversed-in-part, and vacated-in-part the non-infringement ruling of
the Northern District. The case was remanded to the Northern District for
further proceedings to determine whether the Company had any liability for
infringement of the '041 Patent. On June 25, 2003, the Northern District
issued a claim construction ruling construing claim terms in dispute
between the parties. As Catalina Marketing agreed with the Company that,
based upon the Northern District's construction of several claim terms of
the '041 Patent, Catalina Marketing could not establish infringement of the
'041 Patent by the Company, on July 10, 2003 the parties asked the Northern
District to enter a final judgment of non-infringement in favor of the
Company. On September 4, 2003, Catalina Marketing appealed the final
judgment of the Northern District to the Federal Circuit; that appeal is
currently pending. An unfavorable outcome for the Company is considered
neither probable nor remote by the Company's management at this time, and
an estimate of possible loss or range of possible losses currently cannot
be made.

On February 12, 2000, Supermarkets Online, Inc. ("Supermarkets
Online"), an affiliate of Catalina Marketing, filed a lawsuit against the
Company in the United States District Court for the Central District of
California. The complaint alleges that the Company's systems and methods
infringe Supermarkets Online's United States Patent No. 6,014,634 (the
"'634 Patent"), and seeks unspecified damages and injunctive relief. On
March 13, 2003, the Court removed the case from its active caseload until
further application by the parties or Order of the Court. The Company has
filed with the Patent and Trademark Office a request for re-examination of
the '634 patent, which request for re-examination was granted in March
2001.

The pending lawsuit with Supermarkets Online, while pending for over
four years, is nevertheless in the pre-trial discovery stage and may not be
resolved favorably to the Company. An unfavorable outcome for the Company
is considered neither probable nor remote by the Company's management at
this time, and an estimate of possible loss or range of possible losses
cannot currently be made.

The Company may be involved in additional litigation, investigations
or other proceedings in the future. Separate lawsuits or other proceedings
may be brought against the Company to invalidate its patents or force the
Company to change its services or business methods. Any litigation,
investigation or proceeding, with or without merit, could be costly and
time-consuming and could divert management's attention and resources, which
in turn could harm the Company's business and financial results.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (dollar amounts are shown in thousands)

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

You should read the following discussion of our financial condition
and results of operations along with the financial statements and the
related notes included elsewhere in this report. This discussion contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements regarding our
expectations of revenue growth, expense growth, service capability
improvements, and the expected impact of strategic investments and other
statements regarding our expectations, beliefs, hopes, intentions or
strategies. Where possible, these forward-looking statements have been
identified by use of words such as "project," "target," "forecast,"
"anticipate," "believe," "will," "expect," and similar expressions. Known
and unknown risks, uncertainties and other factors, both general and
specific to the matters discussed in this Quarterly Report on Form 10-Q,
may cause our actual results and performance to differ materially from the
future results and performance expressed in, or implied by, these forward-
looking statements. These risks, uncertainties, and other factors include,
without limitation, our ability to secure financing to meet our long-term
capital needs, our ability to protect our patents, trademarks and
proprietary rights, our successful introduction of new services and
features, our ability to add new members, our ability to continue to
attract, assimilate and retain highly skilled personnel, our ability to
secure long-term contracts with existing advertisers and attract new
advertisers, our ability to add new members, our ability to successfully
integrate Targeted Marketing Services ("TMS") with our existing business,
and our ability to compete successfully against current and future
competitors. For a discussion of these and other risks, uncertainties and
other factors which could cause actual results to differ materially from
those expressed in or implied by the forward-looking statements, see "Risk
Factors" below.

We undertake no obligation to update any of the forward-looking
statements after the date of this report to conform these statements to
actual results or otherwise to reflect new developments or changed
circumstances, unless expressly required by applicable federal securities
laws. You should not place undue reliance on any such forward-looking
statements.

OVERVIEW AND RECENT DEVELOPMENTS

We are an online direct marketing and media company with a database
of approximately 10.2 million active consumers who have taken at least one
action on our web site in the last 12 months. We help marketers reach
their target consumers by leveraging our broad marketing network,
sophisticated analytics and proprietary technology. Our mission is to be
the leading provider of promotional offers to consumers, while most
effectively connecting marketers to their best customers. Using our
services, marketers drive sales and customer traffic to their stores, web
sites, catalogues or call centers by taking advantage of a wide variety of
highly targeted marketing services, including lead generation, couponing,
targeted e-mail, category newsletters, direct mail, product sampling and
banner advertisements. In addition, our proprietary database technology
and analytical tools track consumer response, shopping preferences and site
behavior at the household and shopper level to provide our clients with a
wide range of sophisticated consumer data which they may use to make
smarter marketing decisions.

Our web site, coolsavings.com, and our Marketing Network offer
consumers convenient and personalized incentives for goods and services
from a broad range of advertisers, including national retailers, consumer
packaged goods manufacturers, media and publishing companies, and travel
and financial service providers.

For the year ended December 31, 2003, and for the first time in our
history, we recorded net income rather than a net loss. In addition, we
recorded net income in the second quarter of 2004. The second quarter of
2004 also represented our strongest revenue quarter since the fourth
quarter of 2000. Despite this performance, we recorded a net loss for the
first half of 2004 due primarily to the impact of seasonality on our
revenues in the first quarter, the increased cost of online advertising,
the increase in payroll and payroll-related expenses associated with the
TMS acquisition as described below, and the costs of investments we are
making in new service offerings. In the second quarter of 2004, we
experienced negative cash flows from operations due primarily to the
increase in the cost of online advertising and an increase in our trade
receivables. We recorded positive cash flows from operations for the seven
consecutive quarters prior to the second quarter of 2004. We expect to
generate sufficient cash flow from operations to meet our ongoing operating
cash needs for the foreseeable future, excluding any potential acquisitions
that may require significant cash outlays, or any accelerated payments
under our obligations to Landmark that Landmark has the right to demand.

On February 6, 2004, we acquired certain assets of TMS business line
of ADS Alliance Data Systems, Inc. ("ADS"). This acquisition provides our
company with new and expanded strategic capabilities in the area of
frequent shopper card and paperless coupon solutions to grocery retailers
and consumer package goods ("CPG") manufacturers. We are expanding the
capabilities of this business into a new service offering, Grocery
Solutions, and have invested and plan to continue to invest capital and
work-force related costs to operate this business and integrate it into our
existing business. In the first half of 2004, we incurred an estimated
$475 in expenses in excess of revenues related to this acquisition.

In late March 2004, we enhanced our Marketing Network with the
addition of a new Lead Generation Service offering, a distribution network
of other web properties for lead generation offers. This Lead Generation
Service became fully operational in the second quarter of 2004. This new
Lead Generation Service enables us to deliver targeted, highly qualified
permission-based leads to marketers. In addition to our expectation that
this service will provide additional revenue, we have incurred and paid and
expect to incur and pay expenses related to network partner fees in
conjunction with this new service. These fees are recorded in cost of
revenues in our statement of operations. We are continuing to develop new
technology and business relationships to support this new service offering.

On April 1, 2004, we declared and paid a dividend in the amount of
3,256,446 shares of Series B Preferred Stock to the holders of our Series B
Preferred Stock. As of June 30, 2004, dividends in the amount of 3,321,575
shares of Series B Preferred Stock had accrued "in-kind" on the outstanding
shares of Series B Preferred Stock. We declared and paid those dividends on
July 1, 2004. The Series B Preferred Stock issued is redeemable at
Landmark's option at any time. The Series B Preferred Stock also is
convertible into common stock at any time. As of June 30, 2004, Landmark
held 166,078,777 shares of Series B Preferred Stock (and has rights with
respect to accrued dividends thereon), convertible into an equal number of
shares of common stock, and held a Landmark Warrant to purchase 12,189,907
shares of our common stock.

CRITICAL ACCOUNTING POLICIES

The financial statements have been prepared in accordance with
generally accepted accounting principles of the United States of America.
However, certain of our accounting policies, which we refer to as our
"critical accounting policies," are particularly important to the portrayal
of our financial position and results of operations and require application
of management's judgments, often as a result of the need to make estimates
about matters that are inherently uncertain and may change in future
periods. Management bases its estimates and judgments on historical
experience and various other factors that it believes to be reasonable
under the circumstances. Management considers the following to be our
critical accounting policies:

. revenue recognition

. estimation of sales credits and the allowance of doubtful
accounts

. capitalization of web site development costs

. valuation of long-lived and intangible assets

. measurement of lease exit liability

. valuation of deferred tax assets

. valuation of stock-based compensation

For a discussion of these critical accounting policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies and Estimates" in our Annual
Report on Form 10-K for the year ended December 31, 2003, as filed with the
SEC.

REVENUE

ONLINE DIRECT MARKETING SERVICES REVENUE

We generate substantially all of our revenues by providing online
marketing services to our advertisers.

We charge our advertisers on a variety of bases, the most common of
which include:

. the number of offers delivered to members, commonly sold on
a cost per response basis (coupon prints, samples or trial
offers requested);

. the number of times members click on an incentive linking
the member to the advertiser's web site (known as a click-
through response);

. the number of leads generated;

. the number of emails delivered; and

. promotion set-up fees.

Our pricing depends upon a variety of factors, including the degree
of targeting, the duration of the advertising contract and the number of
offers delivered. The degree of targeting refers to the number of
identified household or member attributes, such as gender, age, or product
or service preferences used to select the audience for an offer.
Generally, the rates we charge our advertisers increase as the degree of
targeting and customization increases. Revenues subject to time-based
contracts are recognized ratably over the duration of the contract. For
contracts based on certain performance or delivery criteria, revenues are
recognized in the month performance is delivered to the customer. Most of
our advertising contracts have stated terms of less than one year and
permit either party to terminate the contract upon 30 days' advance written
notice. In the three-month period ended June 30, 2004, our largest
advertiser accounted for approximately 3.9% of our revenues and our top
five advertisers together accounted for approximately 16.9% of our
revenues, as compared to 4.6% and 18.3%, respectively, in the same periods
of 2003. In the six-month period ended June 30, 2004, our largest
advertiser accounted for approximately 3.9% of our revenues and our top
five advertisers together accounted for approximately 16.7% of our
revenues, as compared to 4.5% and 15.5%, respectively, in the same periods
of 2003.

Our revenues for each period depend on a number of factors, including
the number of advertisers sending promotional offers to our members, the
size of our membership base and the responsiveness of our members to each
promotion. We believe that our revenues will continue to be subject to
seasonal fluctuations in accordance with general patterns of retail
advertising spending, which is typically highest during the last half of
the third quarter and first half of the fourth quarter. In addition,
expenditures by advertisers tend to be cyclical, reflecting overall general
economic conditions and consumer buying patterns. If purchasing patterns
or timing of purchasing by advertisers were to change, our results of
operations and quarter-to-quarter comparisons could be materially affected.

LICENSING REVENUE

We license portions of our intellectual property, including our
issued patents, to third parties. Approximately 0% and 1% of our revenue
was generated from royalty and license fees and other miscellaneous sources
during the three-month periods ended June 30, 2004 and 2003, respectively.
We expect to generate substantially lower licensing revenue in 2004 as
compared to prior years as a result of our acquisition of the assets of TMS
and our related release of payment obligations by ADS to us (See Note 2 in
the Notes to the Financial Statements).

EXPENSES

COST OF REVENUES

Our cost of revenues consists primarily of Internet connection
charges, web site equipment depreciation, salaries and related benefits of
operations personnel, fulfillment costs related to member loyalty
incentives, partner fees related to our distribution network for lead
generation offers, transition fees related to the TMS acquisition, and
other operations costs directly related to revenue generation.

SALES AND MARKETING

Sales and marketing expenses include salaries, sales commissions,
employee benefits, travel and related expenses of our direct sales force,
advertising and promotional expenses, marketing, and sales support
functions. Marketing costs associated with increasing our member base and
other marketing expenses related to our products and services are expensed
in the period incurred.

PRODUCT DEVELOPMENT

Product development costs include expenses for the development of new
or improved technologies designed to enhance the performance of our
service, including employee salaries, employee benefits, amortization of
capitalized website development costs, and related expenses for our
technology department, as well as costs for contracted services and
equipment.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include salaries, employee
benefits and expenses for our executive, finance, legal and human resources
personnel. In addition, general and administrative expenses include fees
for legal and other professional services, occupancy costs, insurance
expenses, and stock-based compensation expense.

LEASE EXIT COSTS AND LOSS ON ASSET IMPAIRMENT

Lease exit costs and loss on asset impairment charges reflect costs
associated with our determination that a significant portion of our leased
office space was unnecessary for our future operations. During 2003 and the
first half of 2004, we recorded lease exit costs representing the present
value of estimated future lease obligations related to the unnecessary
leased office space, and estimated costs associated with subleasing the
space, net of estimated cash flows from future sublease arrangements.
These estimates are revised as market conditions and future outlooks
change.

In 2003, we also determined that the estimated undiscounted cash
flows expected to be generated by the assets in the unnecessary, unoccupied
office space were less than the net book value of the assets. Therefore,
we recorded a loss on asset impairment to write-down the assets to their
estimated fair value.

Significant assumptions about the timing of a sale or inclusion of
these assets in a future sublease were required in making the estimate of
fair value for these assets. As provided under SFAS No. 144, we primarily
used discounted cash flow analysis to estimate the fair values.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED
JUNE 30, 2003

NET REVENUES

Net revenues increased 6% to $9,191 in the three-month period ended
June 30, 2004 from $8,646 in the three-month period ended June 30, 2003.
The revenue increase was attributable to a 28% increase in the amount of
revenue per action taken by our members, partially offset by a 22% decline
in the number of actions taken by our members primarily as a result of a
36% decrease in new member registrations. We believe the increase in
revenue per action taken resulted from higher quality content from leading
brands, improvements in pricing and yield through enhanced inventory
management, and enhanced site usability for our members.

COST OF REVENUES AND GROSS PROFIT

Cost of revenues increased to $1,193 in the three-month period ended
June 30, 2004, from $601 in the three-month period ended June 30, 2003.
Gross profit decreased as a percentage of net revenues to 87% in the three-
month period ended June 30, 2004, from 93% in the three-month period ended
June 30, 2003. The decrease in gross profit was primarily due to $470 in
partner fee expenses related to our new distribution network for lead
generation offers incurred in the second quarter of 2004, as compared to $0
in the same period of 2003. Our new distribution network for lead
generation offers became fully operational during the second quarter of
2004. With the growth of this network, we expect cost of revenues, as a
percentage of net revenues, to increase due to payments to be made to the
partners in our network. We also incurred $84 related to the transitioning
of certain data hosting and facility services of TMS. No similar expenses
were incurred in the same period of 2003.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses increased to
$4,962, or 54% of net revenues in the three-month period ended June 30,
2004, from $4,560, or 53% of net revenues, in the three-month period ended
June 30, 2003. The $402 increase in sales and marketing expenses was
primarily due to higher workforce related expenses of $221, due primarily
to an increase in the number of employees, and higher marketing promotions
expenses of $101, along with higher public relations expenses of $28
compared to the same period of the prior year.

PRODUCT DEVELOPMENT. Product development expenses increased to $940,
or 10% of net revenues, in the three-month period ended June 30, 2004, from
$723, or 8% of net revenues, in the three-month period ended June 30, 2003.
The $217 increase in product development expenses was primarily due to an
increase in workforce related expenses of $239 related mostly to increases
in the number of employees. This increase was partially offset by a $21
decrease in amortization of web site development costs.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $1,548, or 17% of net revenues, in the three-month period
ended June 30, 2004, from $2,405, or 28% of net revenues, in the three-
month period ended June 30, 2003. The $857 decrease in general and
administrative expenses was primarily due to an $85 credit recorded in
stock option compensation expense in the three month period ended June 30,
2004, compared to an expense of $340 recorded during the same period of
2003 related to options granted to a former CEO. (see note 3 to the
Financial Statements). Also, legal fees were $248 lower in the second
quarter of 2004 as compared to the same period of 2003 primarily due to
lower costs to defend lawsuits filed against us by Catalina Marketing and
Supermarkets Online (See note 10 to the Financial Statements). Also
contributing to the $857 decrease were lower workforce related expenses of
$200, which were due mainly to a decrease in a management bonus accrual.
We also experienced a decrease in depreciation and amortization of
approximately $141 due to a significant portion of assets having been fully
depreciated by March 31, 2004. Partially offsetting these decreases was an
increase in bad debt expense of $135 due to an increase in our estimate of
uncollectible receivables, an increase in revenue, and a decrease in the
collection of receivables in the first six months of 2003 which had been
previously written off, and which were recorded as a reduction to bad debt
expense in the first half of 2003. We expect general and administrative
expenses, as a percentage of net revenues, to decline during the remainder
of 2004 compared to the prior year due to lower legal fees related to
intellectual property matters, lower insurance expense and lower
depreciation and amortization.

LEASE EXIT COSTS. During the three months ended June 30, 2004 and
2003, we re-evaluated our future expected space requirements given current
market conditions and future outlook and determined that an additional
portion of our leased office space and the assets associated with that
office space were unnecessary for our future operations. In accordance
with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," we recorded an operating expense of $60 and $173 in the three
months ended June 30, 2004 and 2003, respectively, representing an
adjustment to the estimated future lease obligations related to the
unnecessary office space and estimated costs associated with subleasing and
disposing of the space, net of estimated cash flows from future sublease
arrangements. These estimates are revised quarterly, or as market
conditions and future outlook change.

INCOME FROM OPERATIONS. Our income from operations was $488 for the
three-month period ended June 30, 2004, compared to $184 for the same
period of 2003. The $304 increase was primarily due to the increase in
revenue of $545 reflecting the improvement of revenue per member action
taken, a decrease in legal fees of $248, and a decrease in lease exit
expense of $113. In addition, we recorded a credit of $85 to stock option
compensation expense in the three month period ended June 30, 2004,
compared to an expense of $340 recorded during the same period of 2003,
related to options granted to a former CEO. Partially offsetting these
favorable variances were increases in workforce-related expenses of $305
due to an increase in the number of employees and wage increases, partner
fees related to our new distribution network for lead generation offers of
$470, bad debt expense of $135, and expenses related to the integration of
TMS of $84.

INTEREST INCOME (EXPENSE), NET. During the three-month period ended
June 30, 2004, we incurred net interest expense of $120, as compared to net
interest expense of $111 for the three-month period ended June 30, 2003.
The difference was attributable to increased interest expense associated
with the higher outstanding balance of our Senior Secured Loan.

INCOME TAXES. During the three-month period ended June 30, 2004, we
incurred $4 in income tax expense, as compared to $0 in the three months
ended June 30, 2003. The income tax expense in 2004 relates to book/tax
differences arising from the amortization of goodwill for tax purposes, but
not for book. The goodwill was recorded as a result of the TMS asset
acquisition during the first quarter of 2004 (See Note 2 to the Financial
Statements). We expect to record income tax expense of approximately $13
for the year 2004 related to the amortization of goodwill for tax purposes.

We do not expect to record income tax expense associated with projected
taxable income for 2004 due to existing net operating loss carryforwards.

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

NET REVENUES

Net revenues increased 6% to $17,172 in the six-month period ended
June 30, 2004 from $16,270 in the six-month period ended June 30, 2003. The
revenue increase was attributable to a 31% increase in the amount of
revenue per action taken by our members, partially offset by a 20% decline
in the number of actions taken by our members primarily as a result of a
30% decrease in new member registrations. We believe the increase in
revenue per action taken resulted from higher quality content from leading
brands, improved site management and enhanced usability for our members.

COST OF REVENUES AND GROSS PROFIT

Cost of revenues increased to $1,816 in the six-month period ended
June 30, 2004, from $1,389 in the six-month period ended June 30, 2003.
Gross profit decreased as a percentage of net revenues to 89% in the six-
month period ended June 30, 2004, from 91% in the six-month period ended
June 30, 2003, despite the increase in net revenues of $902. The decrease
in gross profit was due mainly to $490 in partner fee expenses related to
our new distribution network for lead generation offers in the first half
of 2004 and $155 in expenses related to the transitioning of certain data
hosting and facility services of TMS in 2004. No similar expenses were
incurred in the first half of 2003. Partially offsetting these increases
was a decrease of $82 related to a direct mail campaign incurred in the
first half of 2003. There was no direct mail campaign in the first half of
2004. Also, we experienced a $100 decrease in amortization and
depreciation in the first half of 2004 as compared to the first half of
2003 caused by a decrease in capital spending since mid-2001 and certain
assets being fully depreciated or amortized as of December 31, 2003. Also,
a decrease of $80 in expenses associated with a gift certificate program
helped offset the increases in cost of revenues in the first half of 2004.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses increased to
$10,355, or 60% of net revenues, in the six-month period ended June 30,
2004, from $8,955, or 55% of net revenues, in the six-month period ended
June 30, 2003. The $1,400 increase in sales and marketing expenses was
primarily due to higher online advertising expense of $551, higher
workforce related expenses of $433, due primarily to an increase in the
number of employees, and higher promotions expense of $189 along with
higher general other expenses compared to the same period of the prior
year. The increase in online advertising expense during the first six
months of 2004 occurred despite a 30% decline in the number of new members
registered, as compared to the first half of 2003. The increase in online
advertising expense was primarily caused by a 57% increase in the cost of
acquiring new members due to the increased competition for effective online
advertising.

PRODUCT DEVELOPMENT. Product development expenses increased to
$1,952, or 11% of net revenues, in the six-month period ended June 30,
2004, from $1,477, or 9% of net revenues, in the six-month period ended
June 30, 2003. The $475 increase in product development expenses was
primarily due to an increase in workforce related expenses of $597.
Partially offsetting this increase was a decrease in the amount of website
amortization of $122 in the first half of 2004, compared to the first half
of 2003. A significant portion of our capitalized web site costs are fully
amortized.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $3,327, or 19% of net revenues, in the six-month period ended
June 30, 2004, from $4,632, or 28% of net revenues, in the six-month period
ended June 30, 2003. The $1,305 decrease in general and administrative
expenses was primarily due to a credit of $159 to stock option compensation
expense in the six month period ended June 30, 2004, compared to an expense
of $340 recorded during the same period of 2003, related to options granted
to a former CEO (see note 3 to the Financial Statements). Also, legal fees
were $440 lower in the second half of 2004 as compared to the same period
of 2003 primarily due to lower costs to defend lawsuits filed against us by
Catalina Marketing and Supermarkets Online (See note 10 to the Financial
Statements). Also contributing to the $1,305 decrease were lower workforce
related expenses of $299, which were due mainly to a decrease in a
management bonus accrual. We also experienced a decrease in depreciation
and amortization of approximately $303 due to the write down and disposal
of assets in our office facilities. Partially offsetting these decreases
was in increase in bad debt expense of $141.

LEASE EXIT COSTS AND LOSS ON ASSET IMPAIRMENT. During the six months
ended June 30, 2004 and 2003, we re-evaluated our future expected space
requirements given current market conditions and future outlook and
determined that an additional portion of our leased office space and the
assets associated with that office space were unnecessary for our future
operations. In accordance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," we recorded an operating
expense of $114 and $408 in the six months ended June 30, 2004 and 2003,
respectively, representing an adjustment to the estimated future lease
obligations related to the unnecessary office space and estimated costs
associated with subleasing and disposing of the space, net of estimated
cash flows from future sublease arrangements. These estimates are revised
quarterly, or as market conditions and future outlook change.

In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," we determined that the estimated
undiscounted cash flows expected to be generated by these assets were less
than their net book value. As a result, we recorded an operating expense of
$81 in the six months ended June 30, 2003 to write down the assets to their
estimated fair value. Significant assumptions about the timing of a sale
or inclusion of these assets in a future sublease were required in making
the estimate of fair value for these assets. As provided under SFAS No.
144, we primarily used discounted cash flow analysis, together with other
available information, to estimate fair values. These estimates are
revised quarterly, or as market conditions and future outlook change.

LOSS FROM OPERATIONS. Our loss from operations was $392 for the
three-month period ended June 30, 2004, compared to a loss of $672 for the
same period of 2003. The $280 reduction in the loss was primarily due to
the increase in revenue of $902 reflecting the improvement of revenue per
member action taken, and credits to stock option compensation expense of
$159 recorded during the six months ended June 30, 2004, compared to an
expense of $340 recorded during the same period of 2003. Partially
offsetting these favorable variances were increases in partner fees related
to our new distribution network for lead generation offers of $470 and an
increase of $553 in online advertising in the first half of 2004 as
compared to the first half of 2003.

INTEREST INCOME (EXPENSE), NET. During the six-month period ended
June 30, 2004, we incurred net interest expense of $236, as compared to net
interest expense of $205 for the six-month period ended June 30, 2003. The
difference was attributable to interest income earned of $20 in the first
quarter of 2003 as our certificates of deposit matured. No such interest
was earned in 2004.

INCOME TAXES. During the six-month period ended June 30, 2004, we
incurred $6 in income tax expense, as compared to $0 in the six months
ended June 30, 2003. The income tax expense in 2004 relates to book/tax
differences arising from the amortization of goodwill for tax purposes, but
not for book. The goodwill was recorded as a result of the TMS asset
acquisition during the first quarter of 2004 (See Note 2 to the Financial
Statements).

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2004, we had approximately $5,203 in cash and cash
equivalents compared to $7,347 at December 31, 2003. Accounts receivable,
net of allowances for doubtful accounts, were $5,548 at June 30, 2004
compared to $4,786 at the end of 2003. At the end of the first quarter of
2004, our current liabilities totaled $12,477 compared to $12,440 at the
end of 2003.

Our independent auditors have issued their report on our financial
statements for 2003 with an explanatory paragraph. The explanatory
paragraph describes the uncertainty as to our ability to continue as a
going concern. If Landmark elects to exercise some or all of its rights to
accelerate payment under our obligations to Landmark, our ability to
operate our business will be jeopardized.

We occasionally enter into contracts where we commit to make
guaranteed minimum payments in exchange for certain services. In the first
quarter of 2004, we signed such an agreement related to partner fees for
our new distribution network for lead generation offers and online
advertising fees. The agreement requires that we make total minimum
payments of $1,040 through April 2005. As of June 30, 2004, total
remaining payments under this agreement were $1,000. Other contractual
obligations have not materially changed from those reported in our annual
report filed on Form 10-K for the year ended December 31, 2003.

We expect our current liquidity position to meet our anticipated cash
needs for working capital and capital expenditures, excluding potential
acquisitions that may require significant cash outlays, or any accelerated
payments that Landmark may require, for the foreseeable future. However,
if cash generated from our operations is insufficient to satisfy our cash
needs, we may be required to raise additional capital or issue additional
debt. If we raise additional funds through the issuance of equity or
equity-linked securities, our stockholders may experience significant
dilution. Furthermore, additional financing may not be available when we
need it, or if available may not be on terms favorable to us or to our
stockholders. If financing is not available when needed or is not
available on acceptable terms, we may be unable to take advantage of
business opportunities or respond to competitive pressures. Any of these
events could have a material adverse effect on our business, results of
operations and financial condition.

For the six-month period ended June 30, 2004, net cash used in
operating activities was $689 due mainly the increase in our trade accounts
receivable, driven by higher revenue compared to cash collections. Net
cash provided by operating activities in the six-month period ended 2003
was $1,258 resulting primarily from increased revenues, improved cash
collections, ongoing control or cash outlays, and the return of restricted
certificates of deposit of $231 associated with the collateral on our
Letters of Credit.

Net cash used in investing activities was $1,465 in the six-month
period ended June 30, 2004 as compared to $269 for the same period of 2003.
Net cash used in investing activities in the first quarter of 2004 resulted
primarily from amounts used in the acquisition of TMS, the purchase of
computer equipment, and amounts used in developing our web site. Net cash
used in investing activities in the first half of 2003 resulted from
amounts used in developing our web site.

Net cash provided by financing activities was $10 in the six months
ended June 30, 2004 as compared to $1 for the same period of 2003. Net
cash provided by financing activities in both periods resulted from the
exercise of employee stock options.

Since our inception, we have financed our operations primarily
through the sale of our stock and the issuance of notes payable. In June
and July 2001, we received proceeds of $5,000 from loans to us by Landmark
(the "Senior Secured Loan"). The Senior Secured Loan is payable on June 30,
2006 and bears interest at the rate of 8.0% per annum and is secured by a
lien on all of our assets. The interest is paid quarterly in arrears in
the form of additional notes and warrants (described below). We have the
right to prepay the Senior Secured Loan on or after its third anniversary
if certain conditions are met. The Senior Secured Loan also contains
financial covenants and negative and affirmative covenants that, among
other things, restrict our ability to incur additional indebtedness and
take other actions without the consent of Landmark. At June 30, 2004, we
were not in compliance with certain financial covenants of the Senior
Secured Loan. This failure to comply constitutes an event of default.
Consequently, the Senior Secured Loan including accrued interest is
immediately due and payable at the option of Landmark. Accordingly, we
have classified the Senior Secured Loan, including the paid-in-kind
interest which has been compounded and accrued on the principal balance,
totaling $6,392, as currently payable as of June 30, 2004.

In connection with the Senior Secured Loan, we issued a warrant to
Landmark (the "Landmark Warrant"). The Landmark Warrant has a term of
eight years and may be exercised in whole or in part immediately. The
Landmark Warrant contains a net exercise feature and was exercisable for
10,000,000 shares of our common stock at an exercise price of $0.50 per
share at November 12, 2001 (increasing to $0.75 per share on July 30, 2005
if not previously exercised). The number of shares exercisable under the
Landmark Warrant automatically increases by two shares of common stock for
each dollar of interest accrued on the Senior Secured Loan as paid-in-kind
interest. As of June 30, 2004, the Landmark Warrant was exercisable for
12,189,907 shares of our common stock.

The Series B Preferred Stock issued is redeemable at Landmark's
option at any time. As of June 30, 2004, Landmark held 166,078,777 shares
(including dividends paid "in-kind") of Series B Preferred Stock at an
aggregate redemption value of $25,807 (and has rights with respect to
accrued dividends thereon), 10,889,636 shares of common stock, and a
Landmark Warrant to purchase 12,189,907 shares of our common stock.
Landmark's ownership will continue to increase due to the issuance of
additional shares of Series B Preferred Stock for dividends accruing on
issued Series B Preferred Stock. Landmark's ownership also will increase
if it exercises the Landmark Warrant. The number of shares subject to the
Landmark Warrant will continue to increase as "in-kind" payments are made
for interest accruing on the Senior Secured Loan.

Effective August 31, 2002, we entered into an Amended and Restated
Reimbursement and Security Agreement (the "Reimbursement Agreement") with
Landmark. On our behalf, Landmark has applied for and received letters of
credit (the "Landmark Letters of Credit") in the aggregate amount of $1,559
from Wachovia Bank to collateralize lease deposits on our office
facilities. Under the Reimbursement Agreement, we have agreed, among other
things, to reimburse Landmark for all amounts that Landmark is required to
pay Wachovia under the bank agreement related to the Landmark Letters of
Credit, including all fees, penalties, interest and amounts in connection
with draws on the Letters of Credit. We have secured these obligations
with a lien on all of our assets. If we fail to pay Landmark any amount
when due, interest will accrue and compound on all such amounts at the rate
of 7% per annum until such time as Landmark demands payment. Upon
Landmark's demand for payment, interest will accrue and compound on all
such amounts at the rate of 10% per annum from the date of the demand,
increasing monthly at a rate of 1%. The aggregate amount of letters of
credit required to collateralize lease deposits on our office facilities
declined to $1,194 as of June 30, 2004, due to the termination of our lease
in New York City, and scheduled reductions contained in our lease agreement
for our Chicago, Illinois and San Francisco, California facilities. The
Landmark Letter of Credit for our Chicago facility was renewed in 2004
through April 2005. The Landmark Letter of Credit for our San Francisco
facility was renewed in 2004 through July 2004, at which time the letter of
credit was no longer required according to the terms of our lease
agreement. Landmark may, at its sole discretion, cancel the Landmark
Letters of Credit on 90 days written notice to us. If the Landmark Letters
of Credit expire or are cancelled, we will need to enter into an alternate
credit arrangement. If an alternate arrangement is not available when
required or is not available on acceptable terms, our business, results of
operations and financial condition may be materially adversely affected.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 2004, Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 03-6, "Participating Securities and the Two-
Class Method under FASB Statement No. 128, Earnings per Share." EITF 03-6
clarifies what constitutes a participating security and provides further
guidance in applying the two-class method of calculating earnings per
share. The consensus reached by the Task Force in this Issue are effective
for reporting periods beginning after March 31, 2004. The Company does not
have any participating securities as defined under EITF 03-6. Therefore,
this statement did not have any impact on the Company's financial position
or results of operations for the three-month period ended June 30, 2004.

RISK FACTORS

You should carefully consider the risks, uncertainties and other
factors described below because they could materially and adversely affect
our business, financial condition, operating results, cash flow and
prospects, and/or the market price of our common stock.

WE HAVE A HISTORY OF NET LOSSES

We incurred net losses and negative cash flows in all years prior to
2003, and we incurred a net loss and negative cash flow in the first half
of 2004 of $634 and $689, respectively. As of June 30, 2004, our
accumulated deficit was $97,845. We may not be able to achieve or sustain
profitability or positive operating cash flows in the future.

WE MAY NOT BE ABLE TO SECURE FINANCING TO MEET OUR SHORT AND LONG
TERM CAPITAL NEEDS

At June 30, 2004, we had $5,203 of cash and cash equivalents. We are
in default under the terms of an Amended and Restated Senior Secured Loan
and Security Agreement dated July 30, 2001 (the "Amended and Restated Loan
Agreement") with Landmark. The entire loan plus accrued interest, totaling
$6,392 at June 30, 2004, is immediately due and payable at the option of
Landmark. Furthermore, Landmark could at any time require us to redeem any
or all of the shares of Series B Preferred Stock held by Landmark, which
had an aggregate redemption value of $25,807 as of June 30, 2004. Landmark
has reserved its rights with respect to all breaches and defaults, and
Landmark is under no obligation to advance us any additional funds. If we
are unable to generate sufficient cash flows from operations or obtain
continuing financing to meet our long-term capital needs, we may be unable
to operate our business.

We have received a report from our independent auditors for our
fiscal year ended December 31, 2003 containing an explanatory paragraph
that describes the uncertainty as to our ability to continue as a going
concern due to our historical negative cash flow and because, as of the
date they issued their report, we did not have access to sufficient
committed capital in the event Landmark exercises some or all of its rights
to accelerate payment under our obligations to Landmark. See "Liquidity
and Capital Resources."

WE DERIVE MOST OF OUR REVENUES FROM CONTRACTS WITH OUR ADVERTISERS
THAT MAY BE CANCELLED ON 30-DAYS NOTICE

A majority of our current advertising contracts permit either party
to terminate the contract upon 30-days advance written notice. We may be
unsuccessful in securing longer commitments. Some advertisers prefer short-
term contracts because they use our service to promote limited-time
promotional events or seasonal products and services. The possibility that
our advertising contracts can be terminated on 30-days advance written
notice makes it difficult for us to forecast our revenues. We may not be
able to renew our existing contracts or attract new advertisers.

INTELLECTUAL PROPERTY LITIGATION AGAINST US CONTINUES TO BE COSTLY
AND COULD RESULT IN THE LOSS OF SIGNIFICANT RIGHTS

We expect that, as the number of services and competitors in Internet
advertising and direct marketing grows, we will be increasingly subject to
intellectual property infringement, unfair competition and related claims
against us. Third parties may also seek to invalidate our United States
Patents, No. 5,761,648, entitled "Interactive Marketing Network and Process
Using Electronic Certificates," and No. 5,855,007, entitled "Electronic
Coupon Communication System." Currently, we are a defendant in two
lawsuits filed by a competitor, each of which alleges that our technology
or business methods infringe on the competitor's patent. The lawsuits
seek, among other things, to prevent us from using methods that allegedly

violate the competitor's patents. In addition, competitors have in the
past, and may in the future, name our customers as defendants in these
suits, which may cause these customers to terminate their relationships
with us. Our efforts to defend these actions may not be successful. Our
failure to prevail in this litigation could result in:

. our paying monetary damages, which could be tripled if the
infringement is found to have been willful;

. an injunction requiring us to stop offering our services in
their current form;

. our having to redesign our technology and business methods,
which could be costly and time-consuming, even where a redesign
is feasible; or

. our having to pay fees to license intellectual property rights,
which may result in higher operating costs.

Because of the ongoing technical efforts of others in our market and
the ongoing introduction of our technology, we may continue to be involved
with one or more of our competitors in legal proceedings to determine the
parties' rights to various intellectual property, including the right to
our continued ownership of our existing patents. Our failure to prevail in
these proceedings could harm our business. See "Part II. Item 1 - Legal
Proceedings"

We cannot predict whether other third parties will assert claims of
infringement or similar charges against us, or whether any past or future
claims will harm our business. We believe that participants in our market
increasingly are attempting to obtain patent protection for their business
methods. We cannot predict when or if patents will result from these
efforts, or whether any of these third parties' patents will cover aspects
of our business. The details of currently pending United States patent
applications are not publicly disclosed until either the patent is issued
or 18 months from filing, depending on the application filing date. Any
third-party claim, with or without merit, could be time-consuming, result
in costly litigation and damages, cause us to reduce or alter our services,
delay or prevent service enhancements or require us to enter into royalty
or licensing agreements.

In addition, legal standards regarding the validity, enforceability
and scope of intellectual property in Internet-related businesses are
unproven and continue to evolve. In this legal environment, we may be
required to license other parties' proprietary rights in an effort to
clarify our ability to conduct business or develop new services. Royalty
or licensing agreements, if required, might not be available on terms
acceptable to us, or at all. If there is a successful claim of
infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely
basis, our business could be substantially harmed.

WE MUST BE ABLE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH
OPERATORS OF OTHER WEB SITES TO ATTRACT NEW MEMBERS

We advertise on third-party web sites using banner advertisements to
attract potential new members. Competition for banner and sponsorship
placements on the highest traffic web sites is intense, and we may not be
able to enter into these relationships on commercially reasonable terms, or
at all. Even if we enter into or maintain our current relationships with
other web site operators, those sites may not attract significant numbers
of users or increase traffic to our web site.

During the second half of 2003 and the first half of 2004, we
experienced an increase in advertising rates that have resulted in lower
advertising activity. We face the potential risk of a diminished
difference between the price we pay for advertising and the price for which
we can sell advertising should advertising rates continue to increase over
the long term.

WE DEPEND ON INTERNET SERVICE PROVIDERS TO DELIVER OUR E-MAIL
TRANSMISSIONS

We send e-mail messages on behalf of advertisers to our members who
have requested to receive e-mail from us; we also assemble and transmit e-
mail newsletters to our members which contain promotions from multiple
advertisers. In order for our members to receive our e-mails, we depend on
Internet Service Providers (ISPs) to accept and deliver those messages to
our members.

Due to the proliferation of unsolicited e-mail, many ISPs are
developing technologies to limit or eliminate the delivery of unsolicited
e-mail to their members. Although we send e-mail only to those members who
specifically have requested we do so, the technologies currently in use or
those being developed, such as e-mail surcharges (electronic stamps, ISP-
approved lists of legitimate and recognized mailers ("white lists"), or e-
mail sender password verifications), may not respect the choice made by our
members. We, along with others in the industry that send e-mail, have at
various times during 2003 and 2004 experienced the failure of an ISP to
deliver e-mails to their customers who also are our members.

Many of our members use e-mail services provided by one of the
relatively small number of large ISPs. If one or more of those ISPs fails
to deliver our e-mail transmissions, our inability to communicate with
those members could harm our business. In addition, if one or more of
those ISP's adopt electronic stamp technology or a white list, our costs
related to e-mail delivery may increase substantially. In any of these
situations, we may not be able to send the volume of e-mail requested by an
advertiser. Additionally, our inability to communicate with those members
may cause them to stop visiting our web site. If our database of e-mail
addresses shrinks materially as a result of the failure of one or more ISPs
to deliver our e-mail, advertisers may be less willing to purchase our e-
mail products and services.

WE DEPEND ON THE SUCCESSFUL INTRODUCTION OF NEW SERVICES AND FEATURES

To retain and attract members and advertisers, we believe that we
will need to continue to introduce additional services and new features on
our web site and marketing network. These new features and services may
require us to spend significant funds on product development and on
educating our advertisers and consumers about our new service offerings.
New services and features may contain errors or defects that are discovered
only after introduction. Correcting these defects may result in significant
costs, service interruptions, loss of advertisers' and members' goodwill
and damage to our reputation. In addition, our successful introduction of
new technologies will depend on our advertisers' ability to adapt to using
these technologies, over which we have no control. If we introduce a
service or feature that is not favorably received, our current members may
use our web site and other services less frequently, our existing
advertisers may not renew their contracts, and we may be unable to attract
new members and advertisers.

WE DEPEND ON COMPELLING PROMOTIONAL OFFERS BY OUR ADVERTISERS

Our members' usage of our services, and the resulting attractiveness
of our service to advertisers, depends upon the quality of the promotional
offers we deliver and our members' interest in them. In addition, under
some of our advertising contracts, our revenues depend on members'
responsiveness to specific promotions. We currently consult with our
advertisers about the type and frequency of incentives they offer, but we
cannot control their choice of promotions or their fulfillment of
incentives. If our advertisers' promotional offers are not attractive to
our members, we will not be able to maintain or expand our membership or
generate adequate revenues based on the size of our membership or on the
responses we produce. Moreover, if our members are not satisfied with the
offers our advertisers make available to them or with the products or
services they receive upon redemption of offers, their negative experiences
might result in publicity that could damage our reputation, which would
harm our efforts to attract and retain members and advertisers.

WE MAY BE HARMED IF RETAILERS REFUSE TO ACCEPT ELECTRONIC PRINT-AT-
HOME COUPON OR IF OUR ADVERTISERS FAIL TO HONOR THEIR PROMOTIONS ON OUR WEB
SITE OR TO COMPLY WITH APPLICABLE LAWS

Our success depends largely upon retailers honoring our electronic
and printed coupons and upon advertisers reliably delivering and accurately
representing the listed goods and services. Some traditional retailers may
not readily accept computer-generate coupons as valid, in part because of
their cashiers' lack of familiarity with them and the risk that coupons can
be counterfeited. We have occasionally received, and expect to continue to
receive, complaints from our members about retailers' failure to honor our
coupons. If such complaints become more common and/or costly to our
members, these complaints may be accompanied by requests for reimbursement
or threats of legal action against us. Any resulting reimbursements or
related litigation could be costly for us, divert management attention, or
increase our costs of doing business. In addition, our advertisers'
promotion of their goods and services may not comply with federal, state
and local laws. Our role in facilitating advertisers' sales activities may
expose us to liability under these laws. If we are exposed to this kind of
liability, we could be required to pay substantial fines or penalties,
redesign our web site or business processes, discontinue some of our
services or otherwise spend resources to limit our liability.

OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS

Our operating results are subject to seasonal fluctuations that may
make our stock price more volatile. Advertising sales in traditional
media, such as television and radio, generally are lower in the first and
third calendar quarters of each year. Further, Internet traffic typically
decreases during the summer months, which in turn may reduce the amount of
advertising to sell and deliver. We anticipate that our future revenues
will continue to reflect these seasonal patterns.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS

The market for e-marketing services continues to evolve and is
intensely competitive. Barriers to entry for companies in our market are
low, and current and potential competitors can launch new web sites and e-
marketing services at relatively low cost.

Some of our competitors may be able to devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing policies
and devote substantially more resources to web site and systems
development. Increased competition may cause us to lose brand recognition
and market share and could otherwise harm our business.

WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE TMS INTO OUR EXISTING
BUSINESS

On February 6, 2004, we acquired the assets of the Targeted Marketing
Services ("TMS") business line from ADS Alliance Data Systems, Inc. with
the intention of expanding the paperless coupon and frequent shopper card
marketing capabilities of the business. As a result of this acquisition,
we have invested and will continue to invest capital in new technology and
additional workforce-related costs to operate and expand this business. We
may be unable to successfully integrate TMS into our existing business. In
addition, we may be unable to maintain or expand our existing relationships
with grocery retailers that provide a distribution network for our
services. If we are unable to successfully integrate the business or
capitalize on our relationships with grocery retailers, we may incur a loss
on our investment in TMS.

WE MAY BE SUBJECT TO CLAIMS OR REGULATORY INVESTIGATIONS AS A RESULT
OF OUR DATA ANALYSIS ACTIVITIES

The information in our database is an integral part of our business.
We do not sell member identifying information to third parties without the
specific and affirmative consent of the member. Furthermore, we send our
e-mail notices and newsletters to members who have elected to receive them.

Some people who receive promotions from us may register complaints or
initiate legal action against us. In addition, we provide advertisers with
aggregate information regarding member demographics, shopping preferences
and past behavior. There has been substantial publicity, governmental
investigations and litigation regarding privacy issues involving the
Internet and Internet-based advertising. To the extent that our data mining
and/or other activities conflict with any privacy protection initiatives or
if any private or personally identifiable information is inadvertently made
public, we may become a defendant in lawsuits or the subject of regulatory
investigations relating to our practices in the collection, maintenance and
use of information about, and our disclosure of these information practices
to, our members. Litigation and regulatory inquiries of these types are
often expensive and time consuming, and their outcome is uncertain. We may
need to spend significant amounts on our legal defense, and senior
management may be required to divert its attention from other aspects of
our business. Furthermore, a judgment or decree may be entered against us,
which could require us to pay damages or to make changes to our present and
planned products or services.

OUR REPUTATION AND BUSINESS COULD BE DAMAGED IF WE ENCOUNTER SYSTEM
INTERRUPTIONS

Our web site must be able to handle a high volume of traffic and
transactions on our web site. Our database must also handle a large volume
of member data and information about members' usage of our web site and
marketing network. The satisfactory performance, reliability and
availability of our web site and marketing network, database systems and
network infrastructure are critical to our reputation and our ability to
attract and retain large numbers of members. Our revenues depend on
promotional offers being readily available for our members and our ability
to process their coupon downloads, e-mail responses and other transactions
on our web site. Any system interruptions that result in the
unavailability of our service or reduced member activity would impair the
effectiveness of our service to advertisers. Interruptions of service may
also inhibit our ability to attract and retain members, which in turn would
hinder our sales and marketing efforts. We have experienced periodic
system interruptions, and they may occur from time to time in the future.

Additionally, acts of sabotage, known as denial of service attacks,
on prominent, high traffic web sites have caused extended interruptions of
service on those web sites. Like other operators of web sites, we could
also face system interruptions or shutdowns as a result of a denial of
service attack.

A substantial increase in rate of traffic on our web site will
require us to expand and upgrade our technology, processing systems and
network infrastructure. Any unexpected upgrades could be disruptive and
costly. In addition, our existing systems may encounter unexpected problems
as our member base expands. Our failure to handle the growth of our
databases could lead to system failures, inadequate response times or
corruption of our data. We may be unable to expand and upgrade our systems
and infrastructure to accommodate this growth in a timely manner. Any
failure to expand or upgrade our systems could damage our reputation and
our business.

WE RELY ON THIRD PARTY SERVICE AND EQUIPMENT PROVIDERS, AND ANY
DISRUPTION OR FAILURE IN THE SERVICES OR THE COMPUTER HARDWARE THEY PROVIDE
WILL HARM OUR BUSINESS

We rely on a third-party service provider to provide access to our
web site and support its operation. Our web site infrastructure is co-
located at the suburban Chicago facility of Exodus, a Savvis Communications
Corporation data center. Our support arrangement with this provider is for
a term of two years and may be canceled on 30 days' notice in certain
circumstances. In the event this arrangement is terminated, we may not be
able to find alternative service providers on a timely basis, on terms
acceptable to us or at all. Our success and our ability to attract new
members and motivate our members to respond to our advertisers' offers
depends on the efficient and uninterrupted operation of our computer and
communications hardware systems. Our web servers and the database behind
our system, as well as the servers we use to perform data analysis, are
currently located at Exodus. Currently, all site traffic is directed to
the Exodus system, and we maintain a redundant version of our critical
systems at our Chicago headquarters. The computer systems at each of our
two hosting sites are vulnerable to damage or interruption from floods,
fires, power losses, telecommunication failures, and other natural
disasters or other unanticipated problems. In addition, the system in our
Chicago facility has only two hours of emergency back-up power. The
occurrence of a natural disaster or other unanticipated problems at our
facility or at the Exodus facility could result in interruptions in or
degradation of our services. Our business interruption insurance may not
adequately compensate us for resulting losses.

Furthermore, the computer servers running our system are vulnerable
to general mechanical breakdown or component failure, computer viruses,
physical or electronic break-ins, sabotage, vandalism and similar
disruptions, which could lead to loss or corruption of data or prevent us
from posting offers on our web site, sending e-mail notifications of new
offers or delivering coupons or other certificates to our members.

OUR BUSINESS WILL BE HARMED IF OUR ONLINE SECURITY MEASURES FAIL

Because our efforts to attract and retain members depend, in part, on
potential members' expectations of privacy in using our services, our
business could be damaged by any security breach of our database or web
site. We may be required to spend significant capital and other resources
to protect against security breaches or to alleviate problems caused by
these breaches. Someone circumventing our security measures could
misappropriate proprietary information, corrupt our database or otherwise
interrupt our operations. We could also be subject to liability as a result
of any security breach or misappropriation of our members' personal data.
This could include claims for unauthorized purchases with credit card
information, impersonation or other similar fraud claims, as well as claims
based upon other misuses of personal information, such as unauthorized
marketing. These claims could result in costly litigation and could limit
our ability to attract and retain advertisers and members. Our security
measures may fail to prevent security breaches. Any failure to prevent
security breaches may damage our reputation and harm our business.

PROTECTING OUR PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS MAY BE
COSTLY AND MAY DISTRACT OUR MANAGEMENT

We regard the protection of our patent rights, copyrights, service
marks, trademarks, trade dress and trade secrets as important to our future
success. However, the steps we take to protect these and other proprietary
rights will be costly, may require significant management resources and may
be inadequate. If the steps we take are not adequate, potential
competitors may be more inclined to offer similar products and services.

PATENTS

Although we have two issued United States patents and three pending
United States patent applications directed to different aspects of our
technology and business processes:

. our United States patents and any other patent we may obtain
could be challenged successfully by third parties, which could
limit or deprive us of the right to prevent others from
exploiting the electronic certificate issuing and processing
method or other inventions claimed in our current or future
patents;

. current and future competitors could devise new methods of
competing with our business that are not covered by our issued
patents or any other patents we may obtain, or against which
our issued patents and any other patents we may obtain may be
ineffective;

. our pending patent applications for a "System and Method of
Generating Sales Leads by Way of a Computer Network," a "System
and Method of Using Web Beacons to Determine Browsing Behavior
Based on Demographic and/or Psychographic Make up," and "Secure
Promotions" may not result in the issuance of any patents;

. our ability to receive royalties for use of our patents by
third parties may be limited; and

. a third party may have or obtain one or more patents that cause
specific aspects of our business to be restricted or that
require us to pay license fees.

We cannot predict how United States laws and court decisions may
impact our patents and other proprietary rights. Any such impact would
need to be assessed in the context of a particular situation. We are also
uncertain whether countries other than the United States will grant patents
for inventions pertaining to Internet-related businesses, or as to the
extent of protection those foreign patents would afford if issued. As in
the United States, the legal standards applied abroad for intellectual
property in Internet-related businesses are evolving and unproven. Any
ruling or legislation that reduces the validity or enforceability of our
patents may seriously harm our business.

We may not prevent others from infringing on our patents and using
our proprietary rights. Furthermore, one company we sued and an affiliate
of that company have filed lawsuits against us that are still pending, and
those lawsuits seek damages against us and further seek to prevent us from
using features of our system or business. The plaintiffs in those lawsuits
and another company we sued in the past are taking steps in the United
States Patent and Trademark Office to contest our patent rights. On May 2,
2000, the United States Patent and Trademark Office granted the request for
re-examination of our patent. Therefore, our United States Patent No.
5,761,648, "Interactive Marketing Network and Process Using Electronic
Certificates" (the "'648 Patent") will be re-examined. The re-examination
may result in the '648 Patent being narrowed in scope or declared invalid.
A decision by the United States Patent and Trademark Office to either
narrow the scope of the '648 Patent or declare the '648 Patent invalid may
seriously harm our business.

TRADEMARKS, COPYRIGHTS, TRADE SECRETS AND DOMAIN NAMES

In addition to patents, we rely on a combination of laws and
contractual restrictions to establish and protect our proprietary rights.
The contractual arrangements and other steps we have taken to protect our
intellectual property may not prevent misappropriation of our proprietary
rights or deter independent third-party development or use of similar
intellectual property.

WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL DEVELOPMENTS
AND EVOLVING INDUSTRY STANDARDS

The Internet is characterized by rapidly changing technology,
evolving industry standards, frequent new service and product
announcements, introductions and enhancements, and changing consumer and
advertiser demands. Our future success will depend on our ability to adapt
our services to rapidly changing technologies and evolving industry
standards and to continually improve the performance, features and
reliability of our services. For example, we may be required to adapt our
services to be compatible with Internet-connected devices other than
traditional personal computers, such as handheld and wireless devices. We
may also need to adapt to evolving standards resulting from the convergence
of the Internet, television and other media. The widespread adoption of new
Internet, networking or telecommunications technologies or other
technological changes could require us to incur substantial expenditures to
modify or adapt our services or infrastructure.

WE MAY NOT BE ABLE TO CONTINUE TO ATTRACT, ASSIMILATE AND RETAIN
HIGHLY SKILLED PERSONNEL

Our future success depends on the continued services of our senior
management and other key sales and technical personnel. Our future success
also depends on our ability to identify, attract, retain and motivate
highly skilled employees. Competition for the best employees in our
industry remains intense. We have occasionally encountered, and may
continue to encounter, difficulties in hiring and retaining highly skilled
employees, particularly qualified software developers for our web site and
database systems. We may be unable to retain our current key employees or
identify, attract, assimilate or retain other highly qualified employees in
the future.

FEDERAL, STATE AND LOCAL GOVERNMENTS MAY FURTHER REGULATE THE
INTERNET, INTERNET ADVERTISING AND PRIVACY, WHICH COULD SUBSTANTIALLY HARM
OUR BUSINESS

The adoption or modification of laws or regulations relating to the
Internet, Internet-based advertising and privacy, and the application of
traditional legal principles to on-line activities, could harm our
business. In particular, our business could be severely damaged by any
regulatory restrictions on our collection or use of information about our
members.

Laws and regulations that apply to Internet advertising and
communications and Internet users' privacy are becoming more prevalent. For
example, the United States Congress and Federal Trade Commission have
adopted laws and regulations regarding the online collection and use of
information from children and the content of Internet communications, and
the United States Congress as well as various states regulate e-mail
marketing and online privacy. However, even in areas where there has been
some legislative action, the laws governing the Internet remain largely
unsettled. There is no single government body overseeing our industry, and
some existing state laws have different and sometimes inconsistent
application to our business. It may take years to determine whether and how
existing laws, such as those governing intellectual property, privacy,
libel, taxation, determination of proper state jurisdiction taxation and
the need to qualify to do business in a particular state, apply to the
Internet, Internet advertising and online activities in general. Also, we
have conducted and expect to continue to conduct trivia quizzes and other
contests and sweepstakes on our web site, which may be subject to gaming
and sweepstakes laws, the effect of which is often unclear. In addition,
since our web site can be accessed from foreign counties, our business may
be subject to foreign laws and regulations. Activities that may be
acceptable in the United States may not be acceptable in foreign
jurisdictions.

We expect that regulation of the Internet and Internet advertising
will intensify. New laws could slow the growth in Internet use and
otherwise adversely affect the Internet as a commercial medium, which would
harm our business. Due to the proliferation of unsolicited email, the
United States Congress passed, and the President signed, the Controlling
the Assault of Non-Solicited Pornography and Marketing Act of 2003 ("CAN-
SPAM"), which has caused us to employ certain new procedures in the
deployment of our e-mail such as conducting a suppression against the
advertisers' e-mail opt out list and thereby causing longer production
cycles for sending e-mail for our advertisers. Additionally, a number of
proposals to restrict the collection of information about Internet users
and to tax Internet-based transactions are under consideration by federal,
state, local and foreign governmental organizations. A three-year federal
moratorium on new taxes on Internet access expired in October 2001, and was
extended in November 2001 for two years. This moratorium expired
November 1, 2003, although the United States Senate passed the "Internet
Tax Nondiscrimination Act" on April 29, 2004 which proposes to extend the
moratorium until November 1, 2007. Currently, the United States House of
Representatives is working on its version of an Internet tax moratorium
bill. The future status of taxes on Internet transactions is uncertain.
There is no federal law preempting state tax laws or the levy of state
sales taxes to online e-commerce activities. The taxation of online
transactions or other new regulations could increase our costs of doing
business or otherwise harm us by making the Internet less attractive for
consumers and businesses. The application of existing laws such as those
governing intellectual property and privacy to the Internet and Internet
advertising lends additional uncertainty to our business.

Any application of existing laws and regulations to the Internet; new
legislation or regulation that imposes stricter restrictions on privacy,
consumer protection or advertising practices; any government investigation
of our privacy practices or other business methods; or the application of
laws from jurisdictions whose laws do not currently apply to us could:

. create uncertainty in the marketplace that could reduce demand
for our services;

. limit our ability to collect and to use data from our members,
which could prevent us from attracting and retaining
advertisers;

. result in expensive litigation, costly and disruptive efforts
to respond to governmental investigations and burdensome fines
or penalties;

. increase the cost of delivering our services to advertisers;

. reduce the effectiveness of our targeted promotional services;
or

. in some other manner harm our business.

OUR SERIES B PREFERRED STOCKHOLDER HAS THE ABILITY TO EXERCISE
SIGNIFICANT CONTROL OVER US

The holder of our Series B Preferred Stock has the ability to control
all matters requiring approval by our stockholders, including the election
and removal of directors and the approval of any merger, consolidation or
sale of all or substantially all of our assets. In addition, pursuant to
the terms of our Certificate of Incorporation, the Series B Preferred
stockholder is entitled to designate not less than a majority of the Board
of Directors of the Company. Among other limitations, without the approval
of the holders of at least a majority of the outstanding shares of Series B
Preferred Stock, we may not:

. amend our charter document or our bylaws;

. merge or consolidate with any other company or sell all or
substantially all of our assets;

. make acquisitions of other businesses or assets or enter into
joint ventures or partnerships with other entities that would
involve the payment of consideration of $1 million or more;

. pay dividends on, or purchase, redeem or otherwise acquire
for value any shares of our capital stock (with certain
exceptions); or

. authorize or issue equity securities or securities exercisable
for or convertible into equity securities other than shares
issued for cash, shares issuable upon conversion and exercise
of securities outstanding on the date of issuance of the
Series B Preferred Stock, and shares issuable under our 2001
Stock Option Plan.

These restrictions provide the holder of the Series B Preferred Stock
with significant control over us and may discourage others from initiating
potential merger or other change of control transactions.

OUR STOCKHOLDERS COULD SUFFER SUBSTANTIAL DILUTION AS A RESULT OF
OUTSTANDING PREFERRED STOCK, WARRANTS AND STOCK OPTIONS AND NEW ISSUANCES
OF PREFERRED STOCK AND WARRANTS, AND OUR STOCK PRICE MAY DECLINE IF A LARGE
NUMBER OF SHARES ARE SOLD OR THERE IS A PERCEPTION THAT SUCH SALES COULD
OCCUR

As of August 1, 2004, we had a total of 182,400,352 shares of
Series B and Series C Preferred Stock issued and outstanding. Under the
terms and conditions of the Series B and Series C Preferred Stock, these
shares are convertible into an equal number of shares of our common stock
at the holders' option. In addition, as of August 1, 2004, we had an
outstanding warrant exercisable for 12,439,123 shares of our common stock
(exercisable for 12,189,907 shares of our common stock as of June 30, 2004)
and outstanding stock options exercisable for 7,771,390 shares of our
common stock. Also, we continue to issue additional shares of Series B
Preferred Stock and warrants as "in-kind" payments for dividends and
interest accruing on the Series B Preferred Stock and the Senior Secured
Note. Our stockholders may suffer substantial additional dilution as a
result of the issuance of additional shares of preferred stock and
warrants. Furthermore, our stock price may decline as a result of sales of
a large number of the shares of common stock issuable upon conversion or
exercise of the preferred stock, warrants and/or stock options or the
perception that such sales could occur.

OUR COMMON STOCK IS VOLATILE, HAS LIMITED PUBLIC LIQUIDITY AND MAY
LEAD TO LOSSES BY INVESTORS AND RESULT IN SECURITIES LITIGATION

Our common stock currently trades on the OTC Bulletin Board (OTCBB).
Stockholders may have difficulty buying and selling our stock on the OTCBB.
Since the OTCBB is a broker driven marketplace, we are dependent on
professional market makers to facilitate trading of our stock on the OTCBB.
If market makers do not register to trade our stock on the OTCBB,
stockholders may not have a public market for the purchase and sale of our
securities.

The market price of our common stock has been volatile and may be
subject to wide fluctuations. Since our public offering in May 2000, the
per share price of our common stock has fluctuated from a high of $7.13 per
share to a low of $0.03 per share. Factors that might cause the market
price of our common stock to fluctuate include, but are not limited to:

. quarterly variations in our operating results;

. interpretation of the effect of our Series B Preferred Stock
and Series C Preferred Stock on our overall capital structure;

. the expiration, on November 12, 2003, of the covenant
restriction by which Landmark had agreed it would not take
action to cause us to become a privately-held company (such
covenant was contained in an agreement among certain of our
stockholders and Landmark);

. our ability to meet our earnings forecasts;

. interpretation of the effect of our outstanding stock options
and warrants on our overall capital structure;

. changes in governmental regulation of the Internet or Internet
advertising, including any governmental inquiry of another
Internet company;

. resolution of our pending or future patent litigation or other
changes in the status of our intellectual property rights;

. announcements of technological innovations or new services by
us or our competitors;

. changes in our liquidity position;

. changes in key personnel;

. future sales of our common stock, including sales of common
stock issued upon conversion of our Series B Preferred Stock,
Series C Preferred Stock, or exercise of outstanding warrants
or options;

. announcements of material events related to outstanding loans
to us; and

. volatility in the equity markets.

The market prices of the securities of Internet-related and
technology companies are often highly volatile and subject to wide
fluctuations that bear little relation to actual operating performance of
these companies. Also, some companies that have experienced volatility in
the market price of their stock have been subject to securities class
action litigation. Any securities class action litigation involving us
likely would result in substantial costs and a diversion of senior
management's attention and resources, and likely would harm our stock
price.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We had no holdings of derivative financial or commodity instruments
at June 30, 2004. However, we are exposed to financial market risks
associated with fluctuations in interest rates. Because all of the amounts
in our investment portfolio are cash or cash equivalents, the related
income would not be significantly impacted by increases or decreases in
interest rates due to the short-term nature of our investment portfolio and
we believe our portfolio is at fair value. If market rates were to
increase immediately by 10% from levels on June 30, 2004, the fair value of
this investment portfolio would increase by an immaterial amount. If market
rates were to decrease immediately by 10% from levels on June 30, 2004, the
resultant decrease in interest earnings of our investment portfolio would
not have a material impact on our earnings as a whole. As of June 30,
2004, we had only fixed rate debt.

On April 5, 2002, Landmark acquired 10,889,636 shares of our common
stock from Lend Lease International Pty. Limited of Australia.
Contemporaneously with the purchase, we entered into a call option
agreement with Landmark, whereby we have the right to call, subject to
certain terms and conditions, all 10,889,636 shares of common stock from
Landmark. The call price is $0.08 per share plus seven percent interest
thereon, compounded annually. We accounted for this call option as
permanent equity and a contribution from Landmark under EITF 00-19
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled In, a Company's Own Stock. We ascribed a value of $1,200 to the
option at issuance.

ITEM 4. CONTROLS AND PROCEDURES

Based upon an evaluation of our disclosure controls and procedures
performed by our management, with the participation of our chief executive
officer and chief financial officer, our chief executive officer and chief
financial officer have concluded that, as of June 30, 2004, our disclosure
controls and procedures were effective to provide reasonable assurance that
information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms.

A control system, no matter how well designed and operated, can
provide only reasonable (not absolute) assurance that its objectives will
be met. Furthermore, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been
detected.

There was not any change in our internal control over financial
reporting during the quarter ended June 30, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are currently a defendant in two patent infringement lawsuits.
For a further discussion of these legal proceedings, see "Part I. Item 3. -
Legal Proceedings" in our Annual Report on Form 10-K for the year ended
December 31, 2003, and "Part II. Item 1. - Legal Proceedings" in our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, both as
filed with the SEC.

Currently, we are also involved in other legal proceedings arising in
the ordinary course of business, none of which is expected to have a
material effect on our financial position or results of operations.

We may be involved in additional litigation, investigations or other
proceedings in the future. Separate lawsuits or other proceedings may be
brought against us to invalidate our patents or force us to change our
services or business methods. Any litigation, investigation or
proceedings, with or without merit, could be costly and time-consuming and
could divert our management's attention and resources, which in turn could
harm our business and financial results.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES

On April 1, 2004, a dividend in the amount of 3,256,446 shares of
Series B Preferred Stock was declared and paid to the holders of our
Series B Preferred Stock.

As of June 30, 2004, a dividend in the amount of 3,321,575 shares of
Series B Preferred Stock accrued, but had not been declared to the holders
of our Series B Preferred Stock. We declared and paid those dividends on
July 1, 2004.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

At June 30, 2004, we were not in compliance with certain financial
covenants of the Senior Secured Loan. Defaults under the Senior Secured
Loan and the Amended and Restated Loan Agreement which cannot be cured, as
the Senior Secured Loan and Grid Note have cross-default provisions and are
cross-collateralized include:

.. our failure to achieve a prescribed amount of billings during 2001;
and

.. our failure to maintain a minimum level of working capital and ratio
of cash, cash equivalents and certain receivables over current
liabilities; and

.. our failure to maintain a minimum ratio of total indebtedness over
tangible net worth.

Consequently, the Senior Secured Loan and all accrued interest
thereon are immediately due and payable at the option of Landmark.
Accordingly, we have classified the amounts owed pursuant to the Senior
Secured Loan, including principal and the paid-in-kind interest which has
been compounded and accrued on the principal balance, totaling $6,392, as
currently payable as of June 30, 2004.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our 2004 Annual Meeting of Stockholders on May 26, 2004.
Proxies for the annual meeting were solicited pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended. There was no solicitation
in opposition to management's nominees for directors as listed in the
definitive proxy statement of the Company dated as of May 10, 2004, and all
of such nominees were elected. At that meeting, the persons elected by the
stockholders and the results of the voting are as follows:

AUTHORITY
VOTES FOR: WITHHELD:

Richard H. Rogel 173,651,735 251
Gary S. Briggs 173,651,735 251
James S. Correll 173,650,585 1,401
John Giuliani 173,651,735 251
Hugh R. Lamle 173,651,735 251
Matthew Moog 173,646,785 5,201
Daniel Sherr 173,651,735 251
Bradley Schram 173,651,735 251

In addition, pursuant to Landmark's right under the Securities
Purchase Agreement, Landmark appointed the following people to serve as
directors contemporaneously with the 2004 Annual Meeting of Stockholders:
Michael W. Alston, Guy R. Friddell, III, Karl B. Quist and Debora J.
Wilson. Ms. Wilson subsequently resigned from our Board of Directors and
was replaced with Landmark's appointment of Joseph G. Fiveash, III. (See
"Part II-Item 5 - Other Information"). The terms of all of the above
mentioned directors will expire at the 2005 Annual Meeting or until their
successors are elected and qualified.

There were no other proposals which we submitted to our stockholders
for approval.

ITEM 5. OTHER INFORMATION

On April 12, 2004, R. Bruce Bradley resigned from our Board of
Directors. Mr. Bradley's resignation was not due to any disagreement with
us on any matter relating to our operations, policies or practices.
Michael W. Alston has replaced Mr. Bradley on the Board of Directors, as
one of Landmark's designees, as disclosed in our definitive proxy statement
filed on April 30, 2004.

On May 28, 2004, Debora J. Wilson resigned from our Board of
Directors. Ms. Wilson's resignation was not due to any disagreement with
us on any matter relating to our operations, policies or practices. Joseph
G. Fiveash, III has replaced Ms. Wilson on the Board of Directors, as one
of Landmark's designees. Mr. Fiveash serves as the Senior Vice President
and General Manager of The Weather Channel Interactive Inc., a wholly owned
subsidiary of Landmark Communication, Inc.

On July 27, 2004, Richard Rogel resigned as Chairman of the Audit
Committee of our Board of Directors, though Mr. Rogel is retaining his
position as Chairman of our Board of Directors. Mr. Rogel's resignation
was not due to any disagreement with us on any matter relating to our
operations, policies or practices. John Giuliani, currently a member of
our Board of Directors, has been appointed by our Board of Directors to
serve on the Audit Committee.

On August 10, 2004, Hugh R. Lamle resigned as a member of the Audit
Committee of our Board of Directors, though Mr. Lamle is retaining his
position as a member of our Board of Directors. Mr. Lamle's resignation
was not due to any disagreement with us on any matter relating to our
operations, policies or practices. Guy R. Friddell, III and Karl B. Quist,
both currently serving as members of our Board of Directors, have been
appointed by our Board of Directors to serve on the Audit Committee,
effective as of August 10, 2004. Mr. Friddell has also been appointed
Chairman of the Audit Committee by our Board of Directors.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of
2002).

31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of
2002).

32.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).

(b) Reports on Form 8-K:

On April 20, 2004, we filed with the SEC a Form 8-K/A,
amending a Current Report on Form 8-K we filed on February 20,
2004 under Items 2 and 7, to provide required financial
statements and pro forma financial information in connection
with our acquisition of the Targeted Marketing Services ("TMS")
business line of ADS Alliance Data Systems, Inc.:

(a) Financial Statements of Business Acquired

Audited financial statements of planetU, Inc. as of
December 3, 2002 and for the period January 1, 2002
through December 3, 2002.

Audited financial statements of TMS as of
December 31, 2002 and for the period December 4, 2002
through December 31, 2002, and as of and for the year
ended December 31, 2003.

(b) Pro Forma Financial Information

Our unaudited pro forma combined balance sheet as
of December 31, 2003 and unaudited pro forma combined
statement of operations for the year ended December 31,
2003, giving effect to our acquisition of TMS on
February 6, 2004 as if it occurred on January 1, 2003.

On May 5, 2004, we filed with the SEC a Current Report on
Form 8-K dated May 4, 2004, in which we furnished under Item 12
information regarding our results of operations for the three-
month period ended, and financial condition of, March 31, 2004.

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.

COOLSAVINGS, INC.

Dated: August 16, 2004 /s/ Matthew Moog
-----------------------------------
Matthew Moog
President and Chief Executive Officer
(duly authorized officer)

Dated: August 16, 2004 /s/ David B. Arney
-----------------------------------
David B. Arney
Senior Vice President of Operations
and Chief Financial Officer
(principal financial and
accounting officer)