COOLSAVINGS INC - 10-K Annual Report

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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

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

Commission File No. 000-30199

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

State of Delaware 36-4462895
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State of Incorporation I.R.S. Employer I.D. No.

360 N. Michigan Avenue, 19th Floor, Chicago, Illinois 60601
(312) 224-5000
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(Address of principal executive offices and telephone number)

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Former name, former address and former fiscal year,
if changed since last report

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001

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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]

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

As of June 30, 2004 (the end of the Registrant's most recently
completed second fiscal quarter), the aggregate market value of the
Registrant's voting stock held by non-affiliates of the Registrant
(assuming for this purpose that executive officers, directors and 10%
stockholders are affiliates) was approximately $5,344,146 based on the
closing sales price of $0.40 on such date. As of March 1, 2005, there were
39,412,639 shares of the Registrant's common stock issued and outstanding.
(This number represents the number of shares that are required to be
reported here. This 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.)

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement to be filed
pursuant to Regulation 14A under the Securities and Exchange Act of 1934,
in connection with the Registrant's 2005 Annual Meeting of Stockholders,
are incorporated by reference into Part III of this report.

COOLSAVINGS, INC.
Form 10-K Annual Report
Fiscal Year Ended December 31, 2004

TABLE OF CONTENTS

Page
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PART I

Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 5

Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 22

Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 22

Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . 23

PART II

Item 5. Market for the Company's Common Equity,
Related Stockholder Matters and
Issuer Purchases of Equity Securities. . . . . . . . . 23

Item 6. Selected Financial Data. . . . . . . . . . . . . . . . 24

Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . 27

Item 7A. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . . . 47

Item 8. Financial Statements and Supplementary Data. . . . . . 48

Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . 85

Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . 85

Item 9B. Other Information. . . . . . . . . . . . . . . . . . . 86

PART III

Item 10. Directors and Executive Officers
of the Registrant. . . . . . . . . . . . . . . . . . . 86

Item 11. Executive Compensation . . . . . . . . . . . . . . . . 86

Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters . . . . 86

Item 13. Certain Relationships and Related Transactions . . . . 86

Item 14. Principal Accounting Fees and Expenses . . . . . . . . 86

PART IV

Item 15. Exhibits, Financial Statement Schedules. . . . . . . . 87

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
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", "intend," "believe," "plan," "will," "expect," and similar
expressions, but such words are not the exclusive means of identifying
these statements. Known and unknown risks, uncertainties and other
factors, both general and specific to the matters discussed in this annual
report, 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 secure long-term contracts with
existing advertisers and attract new advertisers, our ability to add new
consumers, our ability to successfully introduce new services and features,
our ability to compete successfully against current and future competitors,
our ability to protect our patents, trademarks and proprietary rights, our
ability to continue to attract, assimilate and retain highly skilled
personnel, general industry, economic and market conditions and growth
rates, and the potential for higher actual media costs and other costs and
expenses, when compared to our estimated costs and projections. For a
discussion of these and other risks, uncertainties and factors which could
cause actual results to differ materially from those expressed in, or
implied by, the forward-looking statements, see "Item 1. Business - Risk
Factors".

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 such forward-looking
statements.

* * *

We own United States service mark registrations for the mark
COOLSAVINGS, as well as several other service marks, including, among
others, SAVINGSCENTER, SQUEALS OF THE DAY, COOLCAMPUS, COOLCOLLEGES,
COOLDINING, COOLEVENTS, COOLGROCERS, COOLNEIGHBORHOODS, COOLSUPERMARKETS,
REWARDS WHEREVER YOU SHOP, and our stylized piggy-bank logo. We also own
common law rights in these and other marks. In addition, we have applied
for United States federal registrations of several service marks, including
our SAVE. THEN SHOP., REWARDS WHENEVER YOU SHOP, DOLLAROBIS, BUY ANYWHERE
and FREESTYLE REWARDS. We have also obtained trademark registrations in
Australia, Canada, and the United Kingdom for COOLSAVINGS.

* * *

ALL DOLLAR AMOUNTS INCLUDED IN THIS REPORT, EXCEPT PER SHARE AMOUNTS,
ARE EXPRESSED IN THOUSANDS UNLESS OTHERWISE INDICATED.

PART I

ITEM 1. BUSINESS

OVERVIEW

CoolSavings provides interactive marketing services to advertisers,
their agencies, and publishers. Through the CoolSavings Marketing Network,
we reached approximately 20 million unique consumers in 2004 across our
network of partner sites and our web property, coolsavings.com. The
CoolSavings Marketing Network provides convenient and personalized offers
from a broad range of advertisers. On an annual basis, CoolSavings helps
more than 1,000 companies in the retail, consumer packaged goods (CPG),
education, financial, and media and publishing industries generate
qualified leads, send targeted e-mail, distribute printable and
electronic/paperless coupons and build customer loyalty. In addition, we
uniquely combine transactional data with self-reported demographic and
online behavioral data in a proprietary system that enables advertisers to
target their best customers and improve advertising results across our
network. For participating CoolSavings Marketing Network partners,
CoolSavings provides additional sources of revenue, as well as valuable
content to increase visitation and activation at their web properties.

We were incorporated as Interactive Coupon Marketing Group, Inc. in
Michigan in December 1994. In November 1998, we changed our corporate name
to coolsavings.com inc. In September 2001, coolsavings.com inc. merged
with and into CoolSavings, Inc., a Delaware corporation which was then its
wholly-owned subsidiary.

Beginning in 2001, we entered into a series of transactions with
Landmark Communications, Inc. and Landmark Ventures VII, LLC (together,
"Landmark") whereby Landmark made loans to and equity investments in our
company. This series of transactions (collectively, the "Landmark
Transaction") resulted in Landmark having control over our company. For a
more detailed discussion of Landmark's investment, please see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Investment by Landmark in CoolSavings, Inc." and Note 3 of our
Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data." Landmark's principal business interests are in the
media industry, and it owns and operates entities engaged in newspaper and
other print publishing, television broadcasting and cable television
programming services. Landmark has experience in building value and
improving operating, marketing and financial performance in companies that
it owns or controls.

In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131), we report segment
information consistent with our method of internal reporting. SFAS 131
defines operating segments as components of an enterprise for which
separate financial information is available that is regularly evaluated by
the chief operating decision maker in deciding how to allocate resources
and in assessing performance. During 2004, we acquired certain assets
related to the Targeted Marketing Services ("TMS") business line of ADS
Alliance Data Systems, Inc. ("ADS"). In the fourth quarter of 2004, we
began to internally report the results of the resultant new business line,
Grocery Solutions. As a result of this internal reporting, we determined
that our Grocery Solutions business line qualifies as a reportable
operating segment under SFAS 131 as of December 31, 2004. Therefore, we
are reporting our results for 2004 under two reportable operating segments:

the CoolSavings service and Grocery Solutions. The CoolSavings service
derives its revenues primarily from the sale of online advertising to
advertisers on our web site or on the web sites of our partners in our
Marketing Network. The Grocery Solutions segment derives its revenues
primarily from grocery retailers and CPG companies by providing
distribution channels for coupons and other promotions to the registered

consumers of the grocery retailers' customer loyalty programs. Both
reportable operating segments generally share the same sales and marketing,
analytic and research, and operations and technology resources. For
segment financial information, see Note 15 in the Notes to the Financial
Statements.

THE COOLSAVINGS SOLUTION

The CoolSavings Marketing Network provides convenient and
personalized offers from a broad range of advertisers, including national
retailers, CPG manufacturers, media and publishing, financial service
providers, and educational service providers, among others. We offer a
wide array of highly targeted promotional services for advertisers
including lead generation, couponing, targeted e-mail, and loyalty
programs.

BENEFITS TO COOLSAVINGS ADVERTISERS

The benefits to advertisers of using CoolSavings include:

. Consumer reach. Access to approximately 20 million
consumers, comprised of consumers of the participants in our
Marketing Network, participants in the Grocery Solutions
services, and our own registered consumers. Advertisers are
able to reach millions of active consumers who visit our own
web site and the web sites of our partners in our Marketing
Network looking for valuable offers. Interested consumers
provide demographic data about themselves and others in their
households in order to receive the offers. Advertisers are able
to target the database of consumers through our web site, the
CoolSavings Marketing Network, email, and traditional direct
mail programs.

. Cost-effective performance. We believe we provide advertisers
with a cost-effective solution for customer acquisition and
activation. We test creative elements of a campaign for
effectiveness, with results available in days. We can quickly
learn from each campaign how to make future campaigns more
effective. We can efficiently re-target consumers with
continuity offers to convert new customers into valuable
customers. Our advertisers are able to target information
about promotions and events to the right customers at the
appropriate times and make rapid changes to improve those
efforts on an on-going basis.

. Consumer insights. Most media properties have limited means of
tracking their customers' shopping preferences and behavior.
With a consumer's permission, we acquire information from their
initial registration, from each of their subsequent visits to
the CoolSavings Marketing Network partner sites, and from a
registered consumer's response to e-mail offers. We also
incorporate appended third party data from traditional direct
marketing sources. As a result, we have data that we can
analyze to provide insight into the interests and preferences
of an advertiser's customers. We can leverage our consolidated
database to develop predictive models that can lead to more
effective targeting, regardless of the types of promotions
used. This information can be used by our advertisers to
acquire new customers with appropriate offers, refine follow-on
promotions and identify co-promotion opportunities.

. Single source for interactive marketing solutions. We offer
advertisers a full range of online marketing solutions that can
be highly targeted to specific consumer segments based on a
multitude of demographic, behavioral and transactional data
points. These services include lead generation for trial
subscriptions and samples, printable and electronic/paperless
coupons, online coupons, targeted e-mails, and loyalty
services.

. Ability to track purchases by the consumer. We can track,
through the use of unique bar codes, the redemption of grocery
coupons by our consumers. We can also target prospective
customers for our advertisers and track their individual online
purchases. With the cooperation of advertisers and retailers,
we can also track certain offline purchases of our consumers.
These capabilities result in highly accountable campaigns that
can be improved over time.

. Lower set-up costs and improved time to market. Our
investments in infrastructure, technology and production
systems allow our advertisers to deploy their promotional
campaigns without the upfront expense in production and
technical development associated with other media. We enable
our advertisers to deploy their online marketing campaigns
quickly and with a high degree of reliability, thus
improving their return on investment.

. Multiple distribution vehicles. Advertisers can reach millions
of consumers via promotions through the CoolSavings Marketing
Network. Additionally, advertisers may license our proprietary
technology for use on their own web sites to distribute
promotions directly to their own customers.

THE COOLSAVINGS MISSION AND SERVICES

Our mission is to provide best-in-class interactive marketing
solutions to our clients and partners that deliver value to consumers,
protect their privacy and earn their trust. In pursuit of that mission,
the key elements of our strategy are to:

. Grow the CoolSavings Marketing Network. We intend to continue
to pursue additional partnerships with strategic online
partners who will help distribute our brand and offer
content to consumers.

. Optimize the coolsavings.com web site. Specifically, we intend
to continually add features to improve the experience of our
registered consumers and to invest in online advertising to
increase the number of registered consumers, return visits,
transactions, and the total lifetime value of our registered
consumers.

. Enhance analytics infrastructure. We intend to continue to
grow and refine our targeting, optimization and predictive
modeling capabilities and technologies for advertisers. We
plan to continue to improve our yield management methodology
and processes to provide greater profitability for our
CoolSavings Marketing Network partners.

. Scale FreeStyle Reward program. We plan to continue to enhance
our consumer rewards program, FreeStyle Rewards, which we
introduced in the third quarter of 2004. FreeStyle Rewards
permits registered consumers to earn points by making purchases
at participating merchant web sites. Registered consumers can
redeem their earned points for FreeStyle Rewards-branded, pre-
funded debit MasterCards that can be
used as cash at millions of locations across the United States
and online. In 2005, we launched a new web property,
FreeStyleRewards.com, and began marketing the property in an
effort to increase consumer registrations and merchant
participation, and we continue to improve the program
infrastructure.

DELIVERY OF OFFERS

On behalf of our advertisers, we deliver a variety of offers to
targeted segments of consumers. The cost of our services generally rises
with the degree of targeting or customization that we provide because, in
our experience, these efforts generally result in higher response rates for
the advertiser. In addition, we charge some of our advertisers based on
the performance of the promotional offers that we deliver for them.

The promotional services that we provide our advertisers include:

. Lead Generation. We provide advertisers a method of generating
permission-based leads by providing consumers with access to
free samples or trial offers of their products or services
across our Lead Generation Network, which is our distribution
network for lead generation offers and is part of our
CoolSavings Marketing Network. These offers can be targeted to
consumers by demographic profile, shopping preferences and
aggregate transactional data. Consumers voluntarily provide
the advertiser with contact information, such as name, e-mail
and mailing address, as well as other data about their
households in order to be contacted by the advertiser with more
information or for a special promotion.

. E-Mail. Registered consumers across our E-mail Network, a part
of our CoolSavings Marketing Network, may elect to receive
periodic e-mails notifying them of offers from our advertisers
that may be of personal interest. This allows us to send
targeted e-mails to these registered consumers on the basis of
their demographic profiles and shopping preferences. The e-
mails are targeted through pre-selected criteria, customized
survey questions, and/or customized models we develop for
particular campaigns. Consumer permission is at the heart of
our e-mail solution. Therefore, promotional e-mails are only
sent to registered consumers who have consented to receive
them.

. Coupons. Using our patented technology, manufacturers and
retailers can distribute secure printable coupons and
paperless/electronic coupons to a targeted group of consumers
for in-store or on-line redemption (using unique coupon codes
for online purchases) to consumers across our Coupon Network, a
part of our CoolSavings Marketing Network. Companies also
license our technology to deliver coupons to consumers visiting
their own web properties.

. Loyalty. CoolSavings' FreeStyle Rewards program is designed to
provide online merchants with a consistent source of valuable,
motivated shoppers to drive incremental sales. The program
provides registered consumers with points for making purchases
at participating merchant's online stores, and these points may
be redeemed for FreeStyle Rewards branded, pre-funded debit
Mastercards .

ANALYTIC AND RESEARCH SERVICES

We use sophisticated data mining tools to help our advertisers
execute effective promotional campaigns. These tools permit us to analyze
individual and demographic information in our database and provide our
advertisers with insight into our consumers' preferences. We use the tools
to analyze collected consumer information and create predictive models to
make future targeted advertising even more effective. Using e-mail, we can
also contact and survey Coolsavings registered consumers who have responded
to a specific offer. We also use our sophisticated analytics to manage and
optimize the performance of our collective offer set for our benefit and
the benefit of our consumers. We can also apply our analytic infra-
structure to analyze the databases of our advertisers upon their request.

SALES AND MARKETING

We have built a sales organization dedicated to developing and
maintaining close relationships with advertisers and advertising agencies.
Our sales force is organized into three regional groups along geographic
distinctions to effectively manage the breadth and diversity of our key
strategic accounts. We intend to continue to build these relationships and
expand our reach into key vertical industry segments, including retail,
CPG, media and publishing, financial services, education and other direct
marketing services.

Our marketing department is dedicated to expanding our CoolSavings
Marketing Network partnerships, promoting the CoolSavings and FreeStyle
Rewards brands, acquiring registered consumers for our coolsavings.com and
freestylerewards.com web sites, and initiating product and service
improvements that meet the needs of our consumers and advertisers.
Currently and historically, we have made heavy use of online advertising
consisting of online banner advertisements on high-traffic web sites such
as portals and search engines. We also have developed network affiliate
programs, in which other companies send consumers to the coolsavings.com
web site and receive a fee for each resulting consumer registration. In
addition, some of our advertisers provide links from their own web sites
that click through to offers on the coolsavings.com web site.

OPERATIONS AND TECHNOLOGY

We have developed a proprietary system to target and personalize
promotional offers from our advertisers to our consumers. There are seven
main components of our system:

. our web server technology, which allows us to display offers of
interest to each consumer;

. our database, which processes the offers and stores the
information about our consumers and their activity across the
CoolSavings Marketing Network;

. our data mining and targeting modules, which we use to
determine the consumers to whom we will deliver offers and the
most appropriate offers for each consumer;

. CoolSavings Coupon Manager, our software program that produces
high-quality coupons and other secure certificates on a
consumer's personal computer printer for in-store or mail-in
use;

. our proprietary technology that provides the integration of
electronic/paperless coupons into grocery retail point-of-sale
systems and delivery through frequent shopper cards;

. our campaign manager software, SavingsCenter, which we use
to create, target and report on the effectiveness of our
advertisers' offers; and

. our email system that allows us to deliver targeted e-mail,
e-mail based on specific survey questions and category
newsletters (e-mails related to specific topics such as
groceries, babies, etc.) on a highly targeted basis to our
registered consumers across our network who have specifically
requested the contact from our advertisers.

Our system has been designed around industry-standard architecture
and is designed to provide availability 24 hours-a-day, seven days-a-week.
Occasionally in the past, we have taken our servers off-line to make
upgrades or maintenance checks on our system. However, our system has been
available to the public approximately 99.8% of the time since our launch in
1997.

Our web servers and the database behind our system, as well as our
data mining servers, are located at Exodus, a Savvis Communications
Corporation data center in suburban Chicago, Illinois. Currently, all site
traffic is directed from the systems located at Exodus, and we maintain a
redundant version of our critical systems at our Chicago headquarters.

INTELLECTUAL PROPERTY

We currently hold all right, title and interest in and to two United
States Patents, No. 5,761,648, entitled "Interactive Marketing Network and
Process Using Electronic Certificates" (the "'648 Patent"), and No.
5,855,007, entitled "Electronic Coupon Communication System" (the "'007
Patent"). Due to a prior lawsuit filed by a competitor, which has been
settled (see "Item 3. Legal Proceedings" for further discussion), our '648
Patent is currently in re-examination with the United States Patent and
Trademark Office and has been so since 2000.

In addition, we hold all right, title and interest in and to two
United States Patent Applications, including Series Nos. 60/416,981 (filed
October 8, 2002) and 10/677,555 (filed October 2, 2003) entitled "Secure
Promotions", and Serial No. 10/760,701 (filed January 20, 2004) entitled
"System and Method of Generating Sales by Way of a Computer Network," as
well as two provisional United States Patent Applications entitled
"Automated Segmentation and Yield Management" filed on December 29, 2004,
and a "System and Method of Using Web Beacons to Determine Browsing
Behavior Based on Demographic and/or Psychographic Make Up" filed on
March 12, 2004.

In addition to our patents and pending applications, we have
registered trademarks, service marks and copyrights in the United States
and other countries. We also own common law rights in several other marks,
and have registration applications pending in the United States and other
countries.

We regard the protection of our intellectual property, including our
patents, copyrights, service marks, trademarks, trade dress and trade
secrets, as important to our future success. We rely on a combination of
these intellectual property rights and contracts to protect the services we
have created and our competitive position in the marketplace. We have
entered into confidentiality and invention assignment agreements with our
employees and contractors. Where we have considered it necessary, we have
required nondisclosure agreements with our suppliers and advertisers to
protect confidential information about our business plans and technology.
However, these arrangements and the other steps which we have taken may not
protect our trade secrets or prevent another company from copying important
parts of our service. While we have registered our trademarks and service
marks in the U.S. and certain other countries, protection of these marks
may not be available in every country where we may do business.

COMPETITION

The market for interactive marketing services is rapidly evolving and
intensely competitive. Barriers to entry for companies in our market are
low, and current and potential competitors can launch new web sites and/or
services at a relatively low cost.

Our ability to compete depends on many factors, both within and
beyond our control. These factors include:

. advertiser identification and retention;

. brand recognition and credibility;

. pricing of our services;

. breadth of our service offerings for advertisers and consumers;

. reliability of service and quality of advertiser support;

. advertiser and consumer acquisition costs;

. consumer database size and demographics;

. ability to source and activate consumers;

. ability to maintain and add new partners to the CoolSavings
Marketing Network;

. frequency of use and consumer response rates;

. technological expertise; and

. general demand for online marketing services.

We believe we are well-positioned to compete in our market as a
result of the breadth and sophistication of our services, the size and
demographics of our consumer audience, our experienced workforce, our
proprietary technology, our analytical capabilities, and our established
brand recognition.

We face competition from traditional direct marketers, including
leading distributors of traditional coupons by mail or newspaper inserts,
and from companies offering affinity rewards tied to responses to
advertisements. A leading distributor of traditional newspaper-insert
coupons, which has significant existing relationships with advertisers such
as CPG companies, competes against us directly by delivering their
promotions over the Internet. We compete with other web sites, portals and
advertising networks, as well as traditional offline media such as
television, radio and print, for a share of advertisers' total advertising
budgets and for consumers' attention.

We also encounter competition from a number of other sources,
including other online direct marketers, online publishers, companies
engaged in advertising sales networks, advertising agencies and other
companies that facilitate Internet advertising.

EMPLOYEES

As of March 1, 2005, we had 133 full-time employees. We have never
had a work stoppage and our employees are not covered by any collective
bargaining agreement. We consider our relations with our employees to be
good.

AVAILABLE INFORMATION

We maintain an Internet web site at www.coolsavings.com that includes
a hypertext link to the SEC web site (www.sec.gov), where our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and all amendments to those reports are available without charge,
as soon as reasonably practicable following the time that they are filed
with or furnished to the SEC. Alternatively, all materials that we file
with or furnish to the SEC may be read and copied at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Information related to the operation of the Public Reference Room can be
obtained by calling the SEC at 1-800-SEC-0330.

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 operating cash flows in all years
prior to 2003, although we earned net income and positive operating cash
flows in 2004 and 2003. We may not be able to achieve or sustain
profitability or positive operating cash flows in the future. As of
December 31, 2004, our accumulated deficit was $96,538.

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

At December 31, 2004, we had $7,162 in cash and cash equivalents.
Since 2001 we have been 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 $6,656 at December 31, 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 $26,850 as of December 31, 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 to meet our long-term capital needs,
we may be unable to operate our business. If Landmark exercises its right
to payment under our obligations to Landmark, we will be unable to continue
to operate our business, unless approval is obtained from Landmark to
obtain additional financing and we are able to obtain such financing on
acceptable terms. We may not be able to obtain such financing.

OUR CONTRACTS WITH OUR ADVERTISERS AND COOLSAVINGS MARKETING NETWORK
PARTNERS MAY BE CANCELLED ON SHORT TERM NOTICE

A majority of our current advertising contracts and CoolSavings
Marketing Network partner contracts permit either party to terminate the
contract upon advance written notice ranging from 2 to 60 days. 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. We may not be able
to renew our existing contracts or attract new advertisers or CoolSavings
Marketing Network partners.

WE MUST BE ABLE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH
OPERATORS OF OTHER WEB SITES AND PARTNERS IN OUR COOLSAVINGS MARKETING
NETWORK TO ATTRACT NEW CONSUMERS

We advertise on third-party web sites using banner advertisements to
attract potential new registered consumers to our coolsavings.com web site.

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.

Most of our contracts with CoolSavings Marketing Network partners may
be cancelled on short term notice. If we are unable to renew contracts
with existing CoolSavings Marketing Network partners, our services will
reach a smaller number of consumers, thereby possibly producing a decrease
in revenue for us and potentially affecting our ability to adequately
service our advertisers.

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

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

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 registered
consumers 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 white lists, or e-mail sender password
verifications, may not respect the choices made by our registered
consumers. At various times during 2004 and 2003, we, like others in the
industry who send e-mail, experienced an ISP's failure to deliver e-mails
to their customers who are also consumers in our opt-in e-mail database.

Many of our registered e-mail consumers 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 registered consumers 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 the prior examples, we may not be able to send
the volume of e-mail requested by an advertiser. Furthermore, our
inability to communicate with those registered consumers who have consented
to receive e-mail 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 services or may only be willing to pay lower prices
for our services.

WE DEPEND ON THE SUCCESSFUL INTRODUCTION OF NEW SERVICES AND FEATURES

To retain and attract consumers and advertisers, we believe that we
will need to continue to introduce additional services and new features
across the CoolSavings 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 consumers' goodwill
and damage to our reputation. In addition, our successful introduction of
new technologies will depend on our advertisers' abilities 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 consumers may use
these services less frequently, our existing advertisers may not renew
their contracts, and we may be unable to attract new consumers and
advertisers.

WE DEPEND ON COMPELLING OFFERS FROM ADVERTISERS

Consumers' usage of our services, and the resulting attractiveness of
our service to advertisers, depends upon the quality of the offers we
deliver and our consumers' interest in them. In addition, under some of
our advertising contracts, our revenues depend on consumers' 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' offers are not attractive to our consumers, we will not be
able to generate adequate revenues from those consumers or on the responses
we produce. Moreover, if our consumers 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 new consumers and advertisers.

WE MAY BE HARMED IF RETAILERS REFUSE TO ACCEPT PRINTABLE AND
ELECTRONIC/PAPERLESS COUPONS OR IF OUR ADVERTISERS FAIL TO HONOR THEIR
OFFERS ON OUR WEB SITE OR TO COMPLY WITH APPLICABLE LAWS

Our success depends largely upon retailers honoring electronic and
printed coupons, including ours, and upon advertisers reliably delivering
and accurately representing the listed goods and services. Some
traditional retailers may not readily accept computer-generated 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 consumers about
retailers' failure to honor our coupons. If such complaints become more
common and/or costly to our consumers, 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. If
advertisers or retailers fail to honor our coupons, consumers could be less
inclined to select future offers. 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, the CoolSavings Marketing Network or business processes,
discontinue some of our services or otherwise spend resources to limit our
liability.

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

The market for interactive 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
interactive 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.

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

Third parties may seek to invalidate our '648 Patent entitled
"Interactive Marketing Network and Process Using Electronic Certificates"
and our '007 Patent, entitled "Electronic Coupon Communication System."
Previously, we have had to defend lawsuits filed by competitors alleging
that our technology or business methods infringe on the competitors'
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 unanticipated or 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. See "Item 3 - Legal
Proceedings."

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

Some consumers who receive offers from us may register complaints or
initiate legal action against us. In addition, we provide advertisers with
aggregate information regarding consumer 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 consumers. 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 sites must be able to handle a high volume of traffic and
transactions. Our database must also handle a large volume of consumer
data and information about consumers usage across our branded web sites and
the CoolSavings Marketing Network. The satisfactory performance,
reliability and availability of our web sites, database systems and network
infrastructure are critical to our reputation and our ability to attract
and retain large numbers of consumers. Our revenues depend on promotional
offers being readily available for consumers and our ability to process
their coupon downloads, e-mail responses and other transactions across our
network. Any system interruptions that result in the unavailability of our
service or reduced consumer activity would impair the effectiveness of our
service to advertisers. Interruptions of service may also inhibit our
ability to attract and retain consumers, which in turn could hinder our
sales and marketing efforts. We have experienced periodic system
interruptions, which 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 denial of
service attacks.

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
branded web sites and the CoolSavings Marketing Network and to support
their operation. Our network infrastructure is 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.

Our success and our ability to attract new consumers and motivate
those consumers 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 web site and CoolSavings Marketing Network
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 sites and the CoolSavings Marketing Network,
sending e-mail notifications of new offers to our registered consumers or
delivering coupons or other certificates to our consumers.

OUR BUSINESS WILL BE HARMED IF OUR ONLINE SECURITY MEASURES FAIL

Because our efforts to attract and retain consumers depend, in part,
on potential consumers' expectations of privacy in using our services, our
business could be damaged by any security breach of our database or the
CoolSavings Marketing Network. 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
registered consumers' 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 consumers. Our security measures may fail to
prevent security breaches. Any failure to prevent security breaches could
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 can 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 have four
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 successfully challenged 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," "Secure
Promotions" and "Automated Segmentation and Yield Management"
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
may require us to pay license fees.

We cannot predict how United States laws and court decisions may
impact our 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. In the event that we are sued for patent
infringement, such lawsuits may seek damages against us and/or seek to
prevent us from using features of our system or business. Competitors also
may take steps in the United States Patent and Trademark Office to contest
our patent rights. Our '648 Patent is currently with the United States
Patent and Trademark Office and 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

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 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 services, the
CoolSavings Marketing Network and database systems. We may be unable to
retain our 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 online 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 consumers.

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 federal government 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 trivia quizzes and other contests and sweepstakes on our web
site and the CoolSavings Marketing Network, which may be subject to gaming
and sweepstakes laws. Our attempts to comply with these laws may be
inadequate, in part because the effect of these laws on our activities is
often unclear. In addition, because our branded web sites and the
CoolSavings Marketing Network can be accessed from foreign countries, 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, which could harm our business. Due to the proliferation of
unsolicited e-mail, the United States' Congress passed the Controlling the
Assault of Non-Solicited Pornography and Marketing Act of 2003 ("CAN-
SPAM"). 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 federal moratorium on new taxes on Internet access expires
on November 1, 2007. 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.

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 use data from our consumers,
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 $1,000 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 pursuant to our stock option plans, and shares
issuable upon conversion and exercise of securities outstanding
on the date of issuance of the Series B Preferred Stock.

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 March 1, 2005, we had a total of 189,244,126 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
holder's option. In addition, as of March 1, 2005, we had outstanding
warrants exercisable for 12,952,945 shares of our common stock and
outstanding stock options exercisable for 7,041,125 shares of our common
stock. As described under "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," 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 Senior Secured Note (as
defined in Note 3 of our Notes to the Financial Statements in this Form 10-
K). 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 INVESTOR LOSSES 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. During the past three fiscal years, the per
share closing price of our common stock has fluctuated from a high of $1.05
per share to a low of $0.03 per share. Factors that might cause the market
price of our common stock to fluctuate include, without limitation:

. 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;

. 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 acquired 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 wider
fluctuations that may 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 2. PROPERTIES

Our executive and operating offices are currently located in Chicago,
Illinois, in a 48,373 square foot leased facility. We occupy 32,226 square
feet, have sublet 12,487 square feet, and are attempting to sublet the
remaining unoccupied space. The lease expires in 2010. We also lease
3,251 square feet of office space in San Francisco, California, pursuant to
a lease that expires on July 31, 2005.

ITEM 3. LEGAL PROCEEDINGS

On November 15, 1999, Catalina Marketing International, Inc.
("Catalina Marketing") filed a lawsuit against us alleging that our systems
and methods infringed Catalina Marketing's United States Patent No.
4,674,041 (the "'041 Patent"), and sought to enjoin us from further
infringing its '041 patent (the "Catalina Litigation").

On February 12, 2000, Supermarkets Online, Inc. ("Supermarkets
Online"), an affiliate of Catalina Marketing, filed a separate lawsuit
against us alleging that our systems and methods infringe Supermarket
Online's United States Patent No. 6,014,634 (the "'634 Patent") (the
"Supermarkets Online Litigation").

On October 19, 2004, we, Catalina Marketing and Supermarkets Online
settled the Catalina Litigation and the Supermarkets Online Litigation on
mutually agreeable terms. The full financial impact of the settlement is
reflected in our results for the year ended December 31, 2004 and was not
material to our operating results for that year. The settlement will allow
us to continue to operate our systems and methods without threat of
infringement of the Catalina and Supermarkets online patents that were the
subject of the Catalina Litigation and the Supermarkets Online Litigation.

In November 2004, a former employee of ours filed a lawsuit against
us in the Supreme Court of the State of New York for Suffolk County,
alleging that we improperly terminated her employment. The former employee
is seeking at least $10,000 plus punitive damages. We believe the former
employee's allegations to be without any merit and we intend to vigorously
defend this lawsuit.

We may be involved in additional litigation, investigations or other
proceedings in the future. Any litigation, investigation or proceeding,
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during
the fourth quarter of 2004.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION.

Our common stock is traded on the OTC Bulletin Board under the symbol
"CSAV.OB." The following table presents the per share high and low bid
prices of our common stock for the periods indicated as reported by the OTC
Bulletin Board.

High Low
----- -----
Fiscal Year Ended December 31, 2004
First Quarter 2004 . . . . . . . . . . . . . . . . $0.80 $0.51
Second Quarter 2004. . . . . . . . . . . . . . . . 0.62 0.36
Third Quarter 2004 . . . . . . . . . . . . . . . . 0.51 0.34
Fourth Quarter 2004. . . . . . . . . . . . . . . . 0.75 0.28

Fiscal Year Ended December 31, 2003
First Quarter 2003 . . . . . . . . . . . . . . . . $0.25 $0.09
Second Quarter 2003. . . . . . . . . . . . . . . . 1.15 0.21
Third Quarter 2003 . . . . . . . . . . . . . . . . 0.90 0.56
Fourth Quarter 2003. . . . . . . . . . . . . . . . 0.90 0.51

On March 1, 2005, the closing sales price of our common stock was
$0.72, and our common stock was held by approximately 1,800 holders of
record.

We have never declared nor paid any cash dividends on our common
stock. In order to pay a dividend on our common stock, holders of a
majority of both our outstanding Series B Preferred Stock and our
outstanding Series C Preferred Stock must consent to such dividend payment.

We currently anticipate that we will retain any future earnings for the
development and operation of our business.

The holders of the Series B Preferred Stock are entitled to receive
8% per annum "in-kind" stock dividends. As of December 31, 2004, 3,455,767
shares of Series B Preferred Stock were issuable with respect to accrued,
but not declared, dividends. Dividends are declared quarterly on each
January 1, April 1, July 1, and October 1.

RECENT SALES OF UNREGISTERED SECURITIES

We did not sell any unregistered securities during 2004.

RECENT PURCHASES OF OUR EQUITY SECURITIES

We did not purchase any of our equity securities during the fourth
quarter of 2004.

ITEM 6. SELECTED FINANCIAL DATA

The statement of operations data set forth below for the years ended
December 31, 2004, 2003 and 2002 and the balance sheet data as of
December 31, 2004 and 2003 have been derived from audited financial
statements included elsewhere in this annual report. The statement of
operations data for the years ended December 31, 2001 and 2000 and the
balance sheet data as of December 31, 2002, 2001 and 2000 are derived from
audited financial statements that do not appear in this report.

You should read the selected financial data set forth below along
with the financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
which are included elsewhere in this report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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, beliefs, hopes, intentions or strategies. Where possible,
these forward-looking statements have been identified by use of words such
as "project," "target," "forecast," "anticipate", "intend," "believe,"
"plan," "will," "expect," and similar expressions, but such words are not
the exclusive means of identifying these statements. Known and unknown
risks, uncertainties and other factors, both general and specific to the
matters discussed in this annual report, 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 secure long-term contracts with existing advertisers and attract
new advertisers, our ability to add new consumers, our ability to
successfully introduce new services and features, our ability to compete
successfully against current and future competitors, our ability to protect
our patents, trademarks and proprietary rights, our ability to continue to
attract, assimilate and retain highly skilled personnel, general industry,
economic and market conditions and growth rates, and the potential of
higher actual media costs, and other costs and expenses, when compared to
our estimated costs and projections. For a discussion of these and other
risks, uncertainties and factors which could cause actual results to differ
materially from those expressed in, or implied by, the forward-looking
statements, see "Item 1. Business - Risk Factors".

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 such forward-looking
statements.

OVERVIEW

For the year ended December 31, 2004, for the second consecutive
year, we recorded net income. In addition, we recorded net revenues of
$38,347 in 2004, which were our highest since 2000, and we experienced
positive cash flows from operations for the second year in a row. Based on
our current plans, we expect to generate sufficient cash flow from
operations to meet our ongoing operating obligations for the foreseeable
future, excluding any potential acquisitions that may require large cash
outlays, or any payments under our obligations to Landmark that Landmark
has the right to demand.

During 2004, we experienced a significant amount of growth in net
revenues and product offerings. We believe that the investments in
additional staff and product capabilities made in 2003 and during 2004
resulted in higher net revenues, continued positive operating cash flows,
and continued profitability in 2004. Net revenues grew 18% in 2004
compared to the prior year and grew 51% in the fourth quarter alone, as
compared to the fourth quarter of 2003. Net revenues increased mainly due
to the launch of a new distribution network, the Lead Generation Network,
part of the CoolSavings Marketing Network as described below. We
experienced positive operating cash flows due to the increase in net
revenues and improved cash collections.

Investments in our work-force in 2003, along with our acquisition of
the Targeted Marketing Services ("TMS") business line of ADS Alliance Data
Systems, Inc. ("ADS") in February 2004, have enabled us to enhance existing
products and develop new technology and business relationships. During
2004, we successfully launched the Lead Generation Network, FreeStyle
Rewards (a points-based rewards program for registered consumers), and
Grocery Solutions, an addition to our coupon service featuring
electronic/paperless coupons. The Grocery Solutions capability was
acquired through our purchase of the TMS business in 2004.

In the fourth quarter of 2004, we began to internally report the
results of the resultant new business line, Grocery Solutions. As a result
of this internal reporting, we determined that our Grocery Solutions
business qualifies as a reportable operating segment under SFAS 131 as of
December 31, 2004. Therefore, we are reporting our results for 2004 under
two reportable operating segments: the CoolSavings service and Grocery
Solutions. The CoolSavings service derives its revenues primarily from the
sale of online advertising to advertisers across the CoolSavings Marketing
Network and our partners' web sites. The Grocery Solutions segment derives
its revenues primarily from grocery retailers by providing distribution of
printable coupons and coupons posted electronically to frequent shopping
cards of members of the customer loyalty programs of a growing list of
leading grocery retailers. The Grocery Solutions segment now manages the
electronic customer loyalty program for one of the nation's largest grocery
retailers. In our discussion of our two reportable operating segments,
revenue is organized between the CoolSavings service and Grocery Solutions.

However, operating costs and expenses are discussed on a combined basis
because we believe that a separate discussion of each expense
classification for our two segments does not enhance an understanding of
our consolidated results.

During 2005, much of our efforts will be focused on improving
consumer reach and consumer retention for the CoolSavings service. We plan
to further expand the CoolSavings Marketing Network, in particular the Lead
Generation Network, with technological enhancements and business partner
development, and enhance our FreeStyle Rewards program through the addition
of retailers and online marketing programs by building on our network
partnership relationships with grocery retailers.

RECENT DEVELOPMENTS

BUSINESS ACQUISITION

On February 6, 2004, we acquired certain assets of the TMS business
line of ADS. In addition, we contracted for certain data center services,
and assumed a short term lease obligation and certain existing customer
contracts and service obligations related to the operations of the TMS
business line. Among the assets acquired were certain intangible property
related to consumer packaged goods ("CPG") company contracts, retail
relationships, patent application rights, copyrights, trademarks and domain
names and an information technology capability necessary to meet existing
TMS service obligations. We made a cash payment of $100 for the purchase
of these assets and a cash payment of $93 for the data center services
provided by ADS. The funds used for the purchase price were provided by
our existing working capital. In addition, in connection with the
acquisition, we released ADS from its obligations under a license agreement
with us under which we recorded revenue of $273 in 2003.

This acquisition provided us with new and expanded strategic
capabilities in the area of frequent shopper card and paperless coupon
solutions to grocery retailers and CPG manufacturers. We have expanded the
capabilities of this business into a new service offering, Grocery
Solutions, and have invested capital and work-force related costs to
operate this business and integrate it into our existing business. In
connection with this acquisition, we added a total of 13 new employees,
representing the TMS assembled workforce.

NEW DISTRIBUTION NETWORK AND SERVICE OFFERING

In late March 2004, we enhanced the CoolSavings Marketing Network
with the addition of the new Lead Generation Network, a distribution
network of other web properties for lead generation offers. The Lead
Generation Network became fully operational in the second quarter of 2004.
The Lead Generation Network enables us to deliver targeted, highly
qualified permission-based leads to advertisers. While this network
provides additional revenue, we have incurred and paid and expect to incur
and pay expenses related to Lead Generation Network partner fees. These
fees are recorded in cost of revenues in our statement of operations. With
the continued growth of the Lead Generation Network, we expect our gross
profit margin percentages to continue to decrease as a more significant
portion of our revenue is derived from the Lead Generation Network which
will lead to an increase in partner fee expense. We are continuing to
develop new technology and business relationships to support the Lead
Generation Network.

In the third quarter of 2004, we expanded our marketing services with
the launch of our FreeStyle Rewards program, our first new brand since
1997. FreeStyle Rewards is a point-based rewards program for registered
consumers, under which registered consumers earn points for each dollar
spent on qualified purchases at participating online merchant web sites.
We receive a portion of the purchase price from the merchants and record it
as revenue. FreeStyle Rewards' registered consumers can redeem the earned
points for a FreeStyle Rewards branded, pre-funded debit Mastercard
that can be used as cash at millions of locations
and online. With this program, we have added hundreds of merchants and
online shopping offers to our existing program of online savings. As of
December 31, 2004, this program was available on the coolsavings.com web
site. In the first quarter of 2005, we extended this new program by adding
additional online merchants and launching a stand-alone web site located at
www.freestylerewards.com. During 2004, the revenue and expenses of this
program were insignificant.

INVESTMENT BY LANDMARK IN COOLSAVINGS, INC.

Landmark acquired shares of Series B Preferred Stock pursuant to a
Securities Purchase Agreement dated July 30, 2001. The holders of the
Series B Preferred Stock are entitled to receive 8% per annum "in-kind"
stock dividends. In 2004, dividends in the amount of 13,158,622 shares of
Series B Preferred Stock were declared "in-kind" on the outstanding shares
of Series B Preferred Stock. In addition, 3,455,767 shares of Series B
Preferred Stock were accrued as "in-kind" dividends as of December 31,
2004. The Series B Preferred Stock is redeemable at its stated value of
$0.1554 per share plus accrued but unpaid dividends at Landmark's option at
any time. The Series B Preferred Stock also is convertible into common
stock at Landmark's option at any time. As of December 31, 2004, Landmark
held 172,788,359 shares of Series B Preferred Stock (and rights with
respect to accrued dividends thereon), convertible into 172,788,359 shares
of our common stock, as well as warrants to purchase 12,693,435 shares of
our common stock. Landmark also earns additional warrants to purchase two
shares of our common stock for each dollar of interest that accrues on
amounts loaned to us under a senior secured note (the "Senior Secured
Note"). In 2004, Landmark earned additional warrants to purchase 981,979
shares of our common stock.

HOW WE GENERATE REVENUE

INTERACTIVE MARKETING SERVICES REVENUE

We generate substantially all of our revenues for both of our
operating segments by providing online marketing services to our
advertisers. Grocery Solutions also generates additional revenue from
grocery retailers by providing distribution channels for coupons and other
promotions to the members of the grocery retailers' customer loyalty
programs.

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

. the number of offers delivered to registered consumers of
coolsavings.com and to our partner's consumers on the
CoolSavings Marketing Network and participants in the Grocery
Solutions services, commonly sold on a cost per response basis
(coupon prints, samples or trial offers requested);

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

. the number of leads generated; and

. the number of emails sent.

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 consumer 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. For contracts based on performance
or delivery criteria, revenues are recognized in the month performance is
delivered and/or confirmation of delivery is obtained from the customer.
Most of our contracts with advertisers have stated terms of less than one
year and permit either party to terminate the contract upon advance written
notice ranging from 2 to 60 days. In the event of a cancellation, the
customer is contractually obligated to pay for the services delivered up to
the effective date of termination and revenue is recognized based on
services delivered up to the point of cancellation. We have no contracts
with refund provisions for services already delivered. In 2004, our
largest advertiser accounted for approximately 3.6% of our revenues and our
top five advertisers together accounted for approximately 14.4% of our
revenues. In 2003, our largest advertiser accounted for approximately 3.3%
of our revenues and our top five advertisers together accounted for
approximately 14.4% of our revenues. In 2002, our largest advertiser
accounted for approximately 4.2% of our revenues and our top five
advertisers together accounted for approximately 16.0% of our revenues.

Our revenues for each period depend on a number of factors including
the number of advertisers offering promotional offers to our consumers, the
size of our consumer database and the responsiveness of our consumers to
each promotion. Our revenues are generally subject to seasonal
fluctuations in accordance with general patterns of retail advertising
spending, which is typically highest during 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 operations and quarter-to-quarter comparisons could be materially
affected.

LICENSING REVENUE

We have licensed portions of our intellectual property, including our
issued patents, to third parties. Approximately 0%, 1% and 1% of our
revenues were generated from royalties and license fees and other
miscellaneous sources during the years ended December 31, 2004, 2003 and
2002, respectively. We do not expect to generate any more licensing
revenue in 2005 than we generated in prior years.

EXPENSES

COST OF REVENUES

Our cost of revenues consists primarily of Internet connection
charges, salaries and related benefits of operations personnel, fulfillment
costs related to registered consumer loyalty incentives, partner fees
related to the Lead Generation Network, transition fees related to the TMS
acquisition, revenue-related web site equipment depreciation and web site
software amortization, 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 costs, and sales support
function expenses. Marketing costs associated with increasing our
registered consumer 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
services, including employee salaries, employee benefits, amortization of
non-revenue-related web site software amortization and web site equipment
depreciation, 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 relating to options granted
to a former CEO.

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 2004, 2003
and 2002, 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 we enter into subleases and as market conditions and future
outlooks change, and as lease obligations are terminated.

In 2003 and 2002, 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 losses 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
Financial Accounting Standards Board ("FASB") Statement of Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we used discounted cash flow analysis to estimate the
fair values.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are more fully described in
Note 1 of our Notes to Financial Statements. The financial statements have
been prepared in accordance with generally accepted accounting principles.
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 most difficult, subjective or complex judgments, often as a
result of the need to make estimates about matters that are inherently
uncertain and may change in future periods. Our 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

. estimation of the allowance for doubtful accounts

. capitalization of web site development costs

. valuation of long-lived and intangible assets, including
goodwill

. measurement of lease exit liability

. valuation of deferred tax assets

. valuation of stock-based compensation

REVENUE RECOGNITION

We recognize revenue in accordance with Staff Accounting Bulletin No.
104 "Revenue Recognition in the Financial Statements." Revenue is
recognized when all of the following criteria are met:

- An order is executed.

- The price of the service is fixed and determinable.

- Delivery has occurred or services have been rendered.

- Collection is reasonably assured.

We assess whether the fee is fixed and determinable based on contract
terms for particular products and services. We assess whether delivery of
the product or rendering of the service has occurred based on either the
receipt of a delivery confirmation from our customer, or on our internal
records, depending on the type of product or service delivered and the
contract terms. For our lead generation service, we generally rely on the
customer to confirm the quantity of leads delivered which are valid under
the terms of the contract. For products such as email and coupons, we
generally rely on our internal web site tracking system to determine the
quantity delivered. Deferred revenue represents amounts which have been
prepaid under contracts for services which are not yet rendered.

ESTIMATION OF SALES CREDITS

Sales credits arise in the ordinary course of business. Adjustments
to the actual billing may arise due to variances in the systems tracking
devices between us and our customers. The primary factors we consider in
estimating our sales credit reserve are the historical rate of sales
credits issued as a percentage of revenue and the impact of changes in the
services we offer. We apply the sales credits issued percentages to gross
receivables to estimate the total sales credit reserve necessary at each
balance sheet date. We then consider the impact of changes in our service
offerings and adjust the credit reserve as necessary. Eighty-five percent
of sales credits are generally issued within 90 days of delivery of the
service. For the years ended December 31, 2004, 2003, and 2002, we reduced
revenues for estimated sales credits by $272, $725, and $385, respectively.

For those same three years, we issued sales credits of $305, $694, and
$435, respectively.

Sales credit memos issued as a percentage of revenues approximated
0.8%, 2.1%, and 1.7% in the years ended December 31, 2004, 2003, and 2002,
respectively. Sales credit reserve balances as a percentage of gross
accounts receivable approximated 1.3%, 2.3%, and 1.6%, respectively, as of
the end of the same periods. We expect that sales credit memos issued as a
percentage of revenues will likely fluctuate between 0.8% and 2.3% in the
foreseeable future as we add or eliminate products and services and make
changes in our contract terms and conditions which may impact the amount of
sales credit memos issued.

ESTIMATION OF THE ALLOWANCE FOR DOUBTFUL ACCOUNTS

Our allowance for doubtful accounts is based on several factors,
including overall customer credit quality, historical write-off experience
and specific account analysis that projects the ultimate collectibility of
the account. As such, these factors may change over time, causing the
reserve level to adjust accordingly.

When it is determined that a customer is unlikely to pay, a charge is
recorded to bad debt expense in the income statement and the allowance for
doubtful accounts is increased. When it becomes certain the customer
cannot pay, the receivable is written off by removing the accounts
receivable amount and reducing the allowance for doubtful accounts
accordingly.

Bad debt write-offs as a percentage of revenues approximated 1.0%,
1.1%, and 1.2% in the years ended December 31, 2004, 2003, and 2002,
respectively. Allowances for doubtful accounts as a percentage of gross
accounts receivable approximated 4.7%, 10.1%, and 11.7%, respectively, as
of the end of the same periods.

CAPITALIZATION OF WEB SITE DEVELOPMENT COSTS

The costs of developing and enhancing the functionality of our web
site and the CoolSavings Marketing Network are capitalized and amortized
over 24 months. Management performs periodic reviews of the expected
continued use of the developed functionality in future periods and the
related development costs that are being or have been capitalized. Write-
offs of current and previously capitalized costs and the related
amortization are recognized in the period management decides there is no
future need for the functionality. Any large write-off could have a
negative impact on our earnings. Web site write-offs as a percentage of
net revenues were approximately 0%, 0%, and 1% for the years ended
December 31, 2004, 2003, and 2002, respectively.

VALUATION OF GOODWILL AND OTHER LONG-LIVED AND INTANGIBLE ASSETS

Our long-lived assets include goodwill and other intangible assets.
We assess the impairment of other identifiable intangibles and long-lived
assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. If the future cash flows
(undiscounted and without interest) expected to result from the use of the
related assets are less than the carrying value of such assets, an
impairment has occurred and a loss is recognized to reduce the carrying
value of the long-lived assets to fair value, which is determined by
discounting estimated future cash flows.

Statement of Financial Accounting Standards No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142)) requires that goodwill be tested for
impairment at the reporting unit level (operating segment or one level
below an operating segment) on an annual basis and between annual tests in
certain circumstances. Application of the goodwill impairment test
requires judgment, including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting
units include estimating cash flows, determining appropriate discount rates
and other assumptions. Changes in these estimates and assumptions could
materially affect the determination of fair value for each reporting unit.
In December 2004, we performed our annual test of goodwill related to the
acquisition of TMS and determined that there was no impairment. Goodwill
and other intangibles totaled $587 at December 31, 2004, all of which
related to the acquisition of TMS in February 2004.

The estimates of future cash flows involve considerable management
judgment and are based upon assumptions about future operating performance.
The actual cash flows could differ from management's estimates due to
changes in business conditions, operating performance, economic conditions
and other factors.

MEASUREMENT OF LEASE EXIT LIABILITY

We continually assess our future leased office space requirements to
determine whether currently leased office space is necessary for our future
operations. We have recorded a liability representing the present value of
the 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 on this space.
Changes in our estimates of future leased office space requirements, the
cost of subleasing the unnecessary space, or the future cash flows from
subleasing the space result in an adjustment to the liability and an impact
on our earnings.

The estimates of future cash flows involve considerable management
judgment and are based upon assumptions about future events. The actual
cash flows could differ from management's estimates due to changes in
business conditions, economic conditions and other factors.

VALUATION OF DEFERRED TAX ASSETS

We assess the likelihood that we will realize the value of our
deferred tax assets, which result from differences between the carrying
amount of assets and liabilities and their respective tax bases and for tax
carry forward items. Based on our history of net losses through 2002, we
have offset the entire amount of deferred tax assets with a valuation
allowance due to the uncertainty regarding the realization of the assets.
The income tax expense of $13 in 2004 relates to book/tax differences
arising from the amortization of goodwill for tax purposes, but not for
book. Under generally accepted accounting principles, deferred tax assets
cannot be offset against deferred tax liabilities related to indefinite
lived assets that cannot be scheduled to reverse in the same period. The
goodwill was recorded as a result of the TMS asset acquisition during the
first quarter of 2004.

VALUATION OF STOCK-BASED COMPENSATION

We account for our stock option plan using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," which
results in no charge to earnings when options are issued at fair market
value. SFAS No. 123, "Accounting for Stock-Based Compensation," which was
issued subsequent to APB No. 25 and amended by SFAS NO. 148 "Accounting for
Stock Based Compensation - Transition and Disclosure," defines a fair value
based method of accounting for employee stock options but allows companies
to continue to measure compensation cost for employee stock options using
the intrinsic value based method described in APB No. 25.

In December 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123(R), "Share-Based Payment" (FAS 123R), which
addresses the accounting for transactions in which an enterprise receives
employee services in exchange for equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprise's equity
that may be settled by the issuance of such equity instruments. FAS 123R
requires companies to expense the value of employee stock options and
similar awards. FAS 123R is effective for public companies in interim and
annual periods beginning after June 15, 2005 and applies to all outstanding
and unvested share-based payment awards at the company's adoption date.
Beginning in the interim period commencing after June 15, 2005, we will
begin to expense the value of employee stock options in our results of
operations. We currently plan to continue to measure employee stock
options at fair value using the Black-Scholes option pricing model. For
all previously issued options, we expect to record approximately $80 in
stock option expense due to this new accounting treatment, beginning in the
third quarter of 2005.

In 2004 and prior, and in accordance with SFAS No. 148, we have
disclosed in the notes to our consolidated financial statements the impact
on net income and earnings per share had the fair value based method been
adopted. We used the Black-Scholes option pricing model to measure stock-
based compensation expense under the fair value based method. The
assumptions used in the Black-Scholes option pricing model include dividend
yield, risk free rate of return, expected option term and expected
volatility. If the fair value method had been adopted, net income (loss)
for 2004, 2003, and 2002 would have been $375, $1,397, and $2,439 lower
than reported, respectively, and loss/earnings per share would have been
approximately $0.01, $0.04 and $0.06 per diluted share lower than reported,
respectively.

LEGAL PROCEEDINGS

On October 19, 2004, Catalina Marketing, Supermarkets Online and we
settled the Catalina Litigation and the Supermarkets Online Litigation on
mutually agreeable terms that were not material to our financial statements
for the year ended December 31, 2004. The settlement will allow us to
continue to operate our systems and methods without threat of infringement
of the Catalina patents that were the subject of the Catalina Litigation
and the Supermarkets Online Litigation. The financial impact of this
settlement is included in our 2004 results of operations.

In March 2003, a customer claimed that we failed to deliver certain
services pursuant to the terms of a 2002 agreement with the customer. We
believe the services were delivered in accordance with the terms of the
agreement. In January 2004, we reached final agreement with the customer
to resolve this matter. The agreement involved our delivery of certain
additional services at no charge, and our receipt from the customer of a
complete release from any future legal actions related to this matter. We
recorded an expense of $184 and $70 in 2003 and 2002, respectively, in
general and administrative expenses to reflect the cost of these services.
In 2004, we recorded $229 in revenue and a $25 expense credit for services
previously accrued which were not required to be delivered. All make-good
services required to be delivered were delivered to the customer.

RESULTS OF OPERATIONS

The following table presents statements of operations data as a
percentage of net revenues.
For the Year Ended December 31,
----------------------------------
2004 2003 2002
-------- -------- --------

Net revenues . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of revenues . . . . . . . . . 17.1% 8.8% 13.5%
-------- -------- --------
Gross profit . . . . . . . . . . . 82.9% 91.2% 86.5%
-------- -------- --------
Operating expenses:
Sales and marketing. . . . . . . 53.8% 52.6% 54.2%
Product development. . . . . . . 9.5% 8.8% 13.2%
General and administrative . . . 16.1% 24.6% 33.5%
Lease exit costs . . . . . . . . 0.5% 1.6% 8.1%
Loss on asset impairment . . . . 0.0% 0.2% 4.7%
-------- -------- --------
Total operating expenses . . . . . 79.9% 87.8% 113.7%
-------- -------- --------
Income (loss) from operations. . . 3.0% 3.4% (27.2%)

Other income (expense):
Interest and other income. . . . 0.1% 0.1% 0.1%
Interest expense . . . . . . . . (1.3%) (1.5%) (4.3%)
-------- -------- --------
Total other income (expense) . . . (1.2%) (1.4%) (4.2%)
-------- -------- --------
Income (loss) before
income taxes . . . . . . . . . . 1.8% 2.0% (31.4%)

Income taxes . . . . . . . . . . . 0.0% 0.0% 0.0%
-------- -------- --------
Net income (loss). . . . . . . . . 1.8% 2.0% (31.4%)

Cumulative dividend on Series B
Preferred Stock. . . . . . . . . (5.5%) (5.9%) (3.5%)
-------- -------- --------
Loss applicable to common
stockholders . . . . . . . . . . (3.7%) (3.9%) (34.9%)
======== ======== ========

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

NET REVENUES

Net revenues for our CoolSavings service segment increased 18% to
$38,050 in 2004 from $32,392 in 2003. We believe that the increase was
attributable to the launch of the Lead Generation Network and an increase
in our spending on online advertising, along with the addition of more
well-known brands making compelling offers as advertisers, and our ability
to better apply our data analytics to more effectively target these offers.

We reported 14,268 new consumer registrations across our CoolSavings
Marketing Network, as compared to 7,042 in 2003. Partially offsetting this
increase was an 11% decrease in 2004 as compared to 2003 in the number of
revenue-producing actions taken by consumers across the CoolSavings
Marketing Network.

Net revenues for our Grocery Solutions segment were $297 in 2004, as
compared to $0 in 2003. Grocery Solutions began in February, 2004 with our
acquisition of the TMS business line from ADS.

COST OF REVENUES AND GROSS PROFIT

Cost of revenues for our CoolSavings services increased by 130% to
$6,560 in 2004 from $2,854 in 2003. Gross profit decreased as a percentage
of net revenues to 83% in 2004 from 91% in 2003. The decrease in gross
profit was due mainly to $3,576 in partner fee expenses related to our Lead
Generation Network that launched in March 2004. Also contributing to this
decrease in gross profit was an increase of $258 in work-force related
expenses. We also incurred $227 in site-hosting fees related to our
purchase of TMS in February of 2004. Partially offsetting these increases
were $253 in fees in 2003 related to a direct mail campaign; there were no
direct mail campaigns in 2004. Also, we incurred $154 in expenses in 2003
associated with a gift certificate program that was discontinued at the end
of that year. We expect gross profit, as a percentage of net revenues, to
continue to decrease as the Lead Generation Network grows and becomes a
more significant part of our business and as payments owed to Lead
Generation partners grow leading to an increase in future cost of revenues.

OPERATING EXPENSES

Sales and Marketing. Sales and marketing expenses increased to
$20,625, or 54% of net revenues, in 2004, from $17,054, or 53% of net
revenues, in 2003. The $3,571 increase was primarily due to a $1,651
increase in personnel and personnel-related costs, a $1,718 increase in
online advertising expense due to an increase in the cost of online
advertising and a non-recurring 2003 credit to online advertising related
to bonus media received at no expense to us from a vendor. We estimated
the fair value of this bonus media to be approximately $443. In addition,
we experienced an increase of $177 in promotion expenses.

Product Development. Product development expenses increased to
$3,648, or 10% of net revenues, in 2004, from $2,833, or 9% of net
revenues, in 2003. The $815 increase was primarily due to a $782 increase
in personnel and personnel-related costs, and a $165 increase in software
and hardware repairs and maintenance expense. Partially offsetting these
increases was a decrease of $143 in the amortization of capitalized web
site costs as compared to 2003. A significant portion of our capitalized
web site costs are fully amortized.

General and Administrative. General and administrative expenses
decreased to $6,183, or 16% of net revenues, in 2004 from $7,962, or 25% of
net revenues, in 2003. This decrease was primarily due to a decrease in
legal fees of $416 driven by lower costs associated with intellectual
property matters, a decrease of $348 in depreciation and amortization (as a
significant portion of our fixed assets were fully depreciated as of the
end of 2003), and lower personnel and personnel-related costs of $333 due
to decreased headcount. In addition, we incurred stock option compensation
expense in 2003 of $159 related to options granted to a former CEO (see
Note 4 to the Financial Statements), as compared to a credit of $159 in
2004. Further, insurance expense decreased by $219 in 2004 as compared to
2003 due to a reduction in the level of coverage purchased for directors
and officers liability insurance and the resulting lower premium. Further,
we recorded a non-recurring $184 expense in 2003 and a $25 credit in 2004
related to the resolution of a customer matter.

Lease Exit Costs. In accordance with SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," we recorded an
operating expense of $177 in 2004, which included $99 in accretion expense,
and $519 in 2003, which included $103 in accretion expense, representing an
adjustment to the estimated future lease obligations related to unnecessary
office space and estimated costs associated with subleasing and disposing
of the space, net of estimated cash flows from future sublease
arrangements. The adjustments in 2004 and 2003 were recorded to reflect
changes in estimates in current and projected sublease market conditions.

Loss on Asset Impairment. In 2003, following ongoing assessments of
our future space requirements, we determined that a significant portion of
our unoccupied leased office space and the assets associated with that
office space were unnecessary for our future operations. 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 the assets were less than their net book value.
Therefore, we recorded an operating expense of $81 in 2003 to write down
the assets to their estimated fair value. No such expense was incurred in
2004.

OTHER INCOME (EXPENSES), NET

Net Interest Expense. During 2004, we incurred net interest expense
of $468 as compared to $434 in 2003. The increase in net interest expense
was due to a higher principal balance on the Senior Secured Note.

INCOME TAXES

On November 12, 2001, our issuance of Series B Preferred Stock to
Landmark triggered provisions under Section 382 of the Internal Revenue
Code that limit our ability to offset taxable income earned subsequent to
this date with our pre-November 12, 2001 net operating losses. As of the
period ended December 31, 2004 and 2003, we had cumulative tax net
operating losses of $8,609 and $6,295, respectively. The income tax
expense of $13 in 2004 relates to book/tax differences arising from the
amortization of goodwill for tax purposes, but not for book. Under
generally accepted accounting principles, deferred tax assets cannot be
offset against deferred tax liabilities related to indefinite lived assets
that cannot be scheduled to reverse in the same period. The goodwill was
recorded as a result of our TMS asset acquisition during the first quarter
of 2004. For financial reporting purposes, the entire amount of deferred
tax assets has been offset by a valuation allowance due to uncertainty
regarding realization of the asset.

On July 1, 2003, Landmark's ownership percentage of our company
exceeded 80%, creating an Affiliated Group as defined in Section 1504(a) of
the Internal Revenue Code. As such, effective July 1, 2003, we entered
into a Tax Allocation Agreement with Landmark whereby we joined with the
affiliated group of corporations controlled by Landmark in filing a
consolidated federal income tax return. Generally, the Tax Allocation
Agreement provides that Landmark pays all consolidated federal income taxes
on behalf of the consolidated group that includes our company, and we make
payments to Landmark in an amount equal to the tax liability, if any, that
we would have had if we were to file separate and apart from Landmark.

NON-CASH CHARGES IMPACTING LOSS APPLICABLE TO COMMON STOCKHOLDERS

During 2004, we incurred $2,086 in charges related to the accrual of
in-kind dividends on the Series B Preferred Stock. During 2003, we
incurred $1,926 in charges related to the accrual of in-kind dividends on
the Series B Preferred Stock. The increase was due to dividends accruing
during 2004 on the additional shares of Series B Preferred Stock that were
issued to Landmark when Landmark exercised its "Shortfall Purchase Option"
in December 2002, as described below under "Liquidity and Capital
Resources."

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

NET REVENUES

Net revenues increased 23% to $32,392 in 2003 from $26,360 in 2002.
We believe that the increase was attributable to an increase in our
spending on online advertising, along with the addition of more well-known
brands making compelling offers as advertisers, and our ability to better
apply our data analytics to more effectively target these offers. Revenue
producing actions initiated by our consumers increased 11.2% in 2003
compared to 2002, despite a decrease in the number of new consumer
registrations to 7,042 in 2003, from 7,568 in 2002. We earned revenues
from only one operating segment in 2003 and 2002.

COST OF REVENUES AND GROSS PROFIT

Cost of revenues decreased by 20% to $2,854 in 2003 from $3,547 in
2002. Gross profit increased as a percentage of net revenues to 91% in
2003 from 87% in 2002. The increase in gross profit reflects a $1,240
decrease in amortization and depreciation expense in 2003 as compared to
2002 caused by a decrease in capital spending since mid-2001 and certain
computer hardware and software assets being fully amortized as of
December 31, 2002. Also, we experienced a $337 decrease in the costs of
gift certificates used as registered consumer incentives. Partially
offsetting these decreases was a gain of $581 in 2002 associated with a
discontinued registered consumer incentive and loyalty program. Also,
expenses associated with our direct mail advertising campaigns increased
$191 from 2002 to 2003.

OPERATING EXPENSES

Sales and Marketing. Sales and marketing expenses increased to
$17,054, or 53% of net revenues, in 2003 from $14,281, or 54% of net
revenues, in 2002. The $2,773 increase was primarily due to a $1,301
increase in personnel and personnel-related costs, a $1,071 increase in
online advertising, a $352 offline advertising credit received in 2002 as
compared to no such credit in 2003, and an increase of $242 in expenditures
for promotions and public relations. Partially offsetting these increases
was a $193 decrease in expenses associated with a decrease in barter
revenue. In addition, we received bonus online advertising at no expense
to us in 2003. We estimated the fair value of this bonus media to be
approximately $443.

Product Development. Product development expenses decreased to
$2,833, or 9% of net revenues, in 2003 from $3,485, or 13% of net revenues,
in 2002. The $652 decrease was primarily due to a $478 decrease in the
amortization of capitalized web site costs as compared to 2002. Also
contributing to this decrease were $11 in write-offs of previously
capitalized web site in 2003 as compared to $177 in 2002.

General and Administrative. General and administrative expenses
decreased to $7,962, or 25% of net revenues, in 2003 from $8,846, or 34% of
net revenues, in 2002. In 2003, we incurred $779 in depreciation and
amortization expense as compared to $1,604 in 2002. Also in 2003, office
rent decreased by $709, and we had no legal settlement costs in 2003
compared to $150 in such costs in 2002. Partially offsetting these
decreases was $267 in settlement gains made with vendors in 2002 compared
to no such gains in 2003, a $240 increase in personnel and personnel-
related expenses, a $242 increase in legal fees (primarily for legal fees
associated with intellectual property-related proceedings), a $114 increase
in expenses related to the resolution of a customer matter, and a $159
stock option expense in 2003 associated with options granted to a former
CEO compared to no such expense in 2002.

Lease Exit Costs. In accordance with SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," we recorded an
operating expense of $519 in 2003 and $2,148 in 2002, representing an
adjustment to the estimated future lease obligations related to unnecessary
office space and estimated costs associated with subleasing and disposing
of the space, net of estimated cash flows from future sublease
arrangements. The adjustment in 2003 was recorded to reflect changes in
estimates in current and projected sublease market conditions.

Loss on Asset Impairment. Following ongoing assessments of our
future space requirements, we determined in March 2003 and August 2002 that
a significant portion of our unoccupied leased office space and the assets
associated with that office space were unnecessary for our future
operations. 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 the assets
were less than their net book value. Therefore, we recorded an operating
expense of $81 in 2003 and $1,233 in 2002 to write down the assets to their
estimated fair value.

OTHER INCOME (EXPENSES), NET

Net Interest Expense. During 2003, we incurred net interest expense
of $434 as compared to $1,107 in 2002. In 2002, we incurred interest
expense of $668 on amounts funded to us by Landmark under an Amended and
Restated Commercial Demand Note (the "Grid Note") in connection with a
transaction with Landmark in 2001 (the "Landmark Transaction"). In
December 2002, Landmark applied the principal and interest owed to it to
the purchase price payable in connection with Landmark's exercise of a
"Shortfall Purchase Option" to acquire 60,967,777 additional shares of
Series B Preferred Stock. Accordingly, there was no interest expense
related to the Grid Note in 2003.

INCOME TAXES

On November 12, 2001, our issuance of Series B Preferred Stock to
Landmark triggered provisions under Section 382 of the Internal Revenue
Code that limit our ability to offset taxable income earned subsequent to
this date with our pre-November 12, 2001 net operating losses. As of the
period ended December 31, 2003, we had cumulative tax net operating losses
of $6,295. For financial reporting purposes, the entire amount of deferred
tax assets has been offset by a valuation allowance due to uncertainty
regarding realization of the asset. Accordingly, there was no net
provision for income taxes for the years ended December 31, 2003 and 2002.

NON-CASH CHARGES - IMPACTING LOSS APPLICABLE TO COMMON STOCKHOLDERS

During 2003, we incurred $1,926 in charges related to the accrual of
in-kind dividends on the Series B Preferred Stock. During 2002, we
incurred $909 in charges related to the accrual of in-kind dividends on the
Series B Preferred Stock. The increase was due to dividends accruing during
2003 on the additional shares of Series B Preferred Stock that were issued
to Landmark when Landmark exercised its "Shortfall Purchase Option" in
December 2002, as described below under "Liquidity and Capital Resources."

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2004, we had $7,162 in cash and cash equivalents, as
compared to $7,347 at December 31, 2003. We had negative working capital
of $8 and positive working capital of $112 at December 31, 2004 and 2003,
respectively.

We expect our current liquidity position to meet our anticipated cash
needs for working capital and capital expenditures, excluding potential
acquisitions that may require large cash outlays 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, and the terms of any debt financing may contain
restrictive covenants that limit our ability to pursue certain courses of
action. 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. As a result of certain existing
defaults, Landmark has the right to demand immediate payment of its Senior
Secured Loan and the redemption of its Series B Preferred Stock. If
Landmark exercises its right to require payment, we will be unable to
continue to operate our business unless approval is obtained from Landmark
to obtain additional financing and we are able to obtain such financing on
acceptable terms. We may not be able to obtain such financing.

Landmark has agreed that, until April 1, 2006, it will not demand
repayment of the Senior Secured Loan or require us to redeem any or all of
the shares of Series B Preferred Stock as a result of the existing
defaults.

Net cash provided by operating activities was $1,814 in 2004 and net
cash provided by operating activities was $3,440 in 2003. The $1,814 in
net cash provided by operating activities in 2004 was primarily due to
increased net revenues during the year of $38,347. Net cash provided by
operations was lower in 2004 as compared to 2003 primarily due to a surge
in fourth quarter revenues in 2004 causing a sharp increase in accounts
receivable at the end of 2004. Partially offsetting this was an increase
in accrued expenses in 2004, related mostly to our Lead Generation Network
partner fee accruals. We generally paid our Lead Generation Network
partners after collecting from our Lead Generation Network advertisers.
Net cash provided by operating activities of $3,440 in 2003 was primarily a
result of increased revenues, improved cash collections, ongoing control of
cash outlays, and the return of restricted certificate of deposit of $231
associated with our Letters of Credit.

Net cash used in investing activities was $2,044 in 2004 and $974 in
2003. In both periods, net cash used in investing activities resulted from
purchases of property and equipment and amounts used in developing our web
site and the CoolSavings Marketing Network. In addition in 2004, we used
$609 in connection with the purchase of the business assets of TMS and
related transaction costs. We expect to invest approximately $1,400 during
2005 in development of our web site, the CoolSavings Marketing Network and
the purchase of computer hardware and software to maintain our operations.
We expect these investments to be funded from cash provided by operations.

Net cash provided by financing activities was $45 in 2004 and $14 in
2003. Net cash provided by financing activities in both years was
attributable to the exercise of employee stock options.

Since our inception, we have financed our operations primarily
through the sale of equity and debt securities (and other borrowings from
Landmark). In May 2000, we completed an initial public offering of 3.3
million shares of our common stock, resulting in net proceeds to us of
approximately $19,625. In March 2001, we received proceeds from the
issuance of our convertible subordinated promissory notes and warrants in
the amount of $2,100. In June and July 2001, we received proceeds of
$5,000 from Landmark under the Senior Secured Loan. The Senior Secured Loan
is payable on June 30, 2006 and bore interest at 12.0% per annum until
November 12, 2001, at which time the interest rate was reduced to 8.0% per
annum. 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 the third anniversary thereof 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, merge or consolidate
with any other company, make acquisitions of substantially all the assets
of any other company, and take other actions without the consent of
Landmark. At December 31, 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 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 on the principal balance,
totaling $6,656, as currently payable as of December 31, 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
warrant contains a net exercise feature and was exercisable for 10.0
million shares of our common stock at an exercise price of $0.50 per share
at November 12, 2001 (the exercise price automatically increases to $0.75
per share on July 30, 2005 if the Landmark Warrant has not previously been
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
March 1, 2005, Landmark held a warrant to purchase 12,952,945 shares of our
common stock. Under APB 14 "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants," we assigned a $2,400 value to the
Landmark Warrant and recorded it as additional paid-in-capital. The entire
discount of $3,017 (including loan issuance costs of $617) from the Senior
Secured Loan was amortized immediately to interest expense in 2001. This
was due to our covenant violations, including our failure to achieve a
prescribed amount of billings during 2001, 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
maximum ratio of total indebtedness over tangible net worth. These
covenant violations caused the entire loan to be immediately due and
payable at the option of Landmark.

In addition, through October 31, 2001, Landmark funded an additional
$10,000 to us under the Grid Note, which amount plus accumulated interest
was applied to the purchase price for 65,057,936 shares of Series B
Preferred Stock on November 12, 2001. This stock purchase resulted in
Landmark having voting control of our company. As a result of various
events that occurred prior to December 31, 2002 ("Shortfall Events")
Landmark made additional loans of $4,000 and $2,500 under the Grid Note on
November 30, 2001 and December 24, 2001, respectively, in lieu of
exercising its options that arose in connection with such Shortfall Events
(each, a "Shortfall Purchase Option") to acquire additional shares of
Series B Preferred Stock at a price of $0.1554 per share. In addition, the
Grid Note reflected a loan related to our obligation to reimburse
Landmark's legal expenses incurred in 2001 in connection with the Landmark
Transaction.

On February 28, 2002, Landmark loaned us an additional $1,500 under
the Grid Note in connection with another Shortfall Event, bringing the
outstanding principal balance under the Grid Note to $8,770. On
October 24, 2002, we received proceeds of $2,770 from the issuance to
Landmark of 17,825,212 shares Series B Preferred Stock in connection with
Landmark's exercise of an existing Shortfall Purchase Option. On
December 20, 2002, at our request, Landmark applied the $8,770 of principal
and $704 of accrued interest then outstanding under the Grid Note (as
described above) toward the purchase of 60,967,777 shares of Series B
Preferred Stock (at the purchase price of $0.1554 per share) in connection
with the exercise of additional existing Shortfall Purchase Options. The
Series B Preferred Stock issued to Landmark is redeemable at Landmark's
option at any time as a result of defaults under the Senior Secured Loan.
As of March 1, 2005, Landmark held 176,244,126 shares of Series B Preferred
Stock (and rights with respect to accrued dividends thereon). Landmark's
ownership will continue to grow through the issuance of 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 Senior
Secured Note, respectively. Our business plans have not been modified to
prepare for any exercise by Landmark of its rights to require payment of
obligations due to Landmark under the Senior Secured Note or to redeem the
Series B Preferred Stock. However, as discussed above, in March 2005,
Landmark agreed that, until April 1, 2006, it will not demand repayment of
the Senior Secured Loan or require us to redeem any or all of the shares of
Series B Preferred Stock as a result of existing defaults. (See Note 16 in
the Notes to Financial Statements.)

Effective August 31, 2002, we entered into a 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 $1,599 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 such Letters of Credit; our obligations to Landmark under the
Reimbursement Agreement are secured by 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 $747 as of December 31, 2004, due to the termination
of our lease in New York City, and scheduled reductions contained in our
lease agreements for our Chicago, Illinois facility and San Francisco,
California facilities. We reimbursed Landmark $0, $6 and $4 for fees
related to the Landmark Letters of Credit in 2004, 2003 and 2002,
respectively. The Landmark Letter of Credit for our Chicago facility was
renewed in 2004 for a one-year period ending April 2005. The Landmark
Letter of Credit for our San Francisco facility was renewed in 2004 for the
period ending July 31, 2004, at which time the letter of credit was no
longer required. Landmark may, in its sole discretion, cancel the Landmark

Letters of Credit upon 90-days' written notice to us. If the Landmark
Letters of Credit expire or are cancelled, we would need to enter into an
alternate credit arrangement. We believe that upon our request, Landmark
will, for our benefit, apply for and receive a new Letter of Credit on our
Chicago facility.

CONTRACTUAL OBLIGATIONS

The following summarizes our contractual obligations at December 31,
2004, and the effect such obligations are expected to have on our liquidity
and cash flows in future periods.
Payment Due by Period
-------------------------------------------
Less More
Contractual than 1 1-3 3-5 than 5
Obligations Total year years years years
- ----------- ------- ------ ------ ------ ------
Senior Secured
Loan (1) . . . . . . . . . 6,567 6,567 -- -- --
Operating Lease
Obligations (2). . . . . . 7,731 1,698 2,761 2,799 473
License Royalty
Agreement (3). . . . . . . 330 175 155 -- --
Other Liabilities
Reflected on the
Registrant's Balance
Sheet under GAAP (4) . . . 37 37 -- -- --
------- ------ ------ ------ ------
Total. . . . . . . . . . . . 14,665 8,477 2,916 2,799 473
====== ====== ====== ====== ======

(1) This obligation relates to the Landmark Transaction. It is
categorized as currently due as a result of our defaults
under the Senior Secured Loan and the Amended and Restated Loan
and Security Agreement, as described above.

(2) These obligations relate to operating leases associated with our
office space, data center and data lines.

(3) This obligation represents the minimum obligation under a patent
license agreement that is cancellable at any time.

(4) This obligation relates to the remaining obligation of $19 on a
severance agreement of a former employee and commission payment
obligations of $18 relating to a sublease of a part of our unused
office space.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123(R), "Share-Based Payment" (FAS 123R), which
addresses the accounting for transactions in which an enterprise receives
employee services in exchange for equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprise's equity
that may be settled by the issuance of such equity instruments. FAS 123R
required companies to expense the value of employee stock options and
similar awards. FAS 123R is effective for public companies in interim and
annual periods beginning after June 15, 2005 and applies to all outstanding
and unvested share-based payment awards at the company's adoption date.

Beginning in the third quarter of 2005, we will expense the value of
employee stock options in our results of operations. We expect that
employee stock options will continue to be measured at fair value using the
Black-Scholes option pricing model. For all previously issued options, we
expect to record approximately $80 in stock option expense upon application
of the modified prospective method of this new accounting treatment.

QUARTERLY FINANCIAL DATA

The following are our unaudited quarterly results, for the years
ended December 31, 2004 and December 31, 2003:

For the three months ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
2004 2004 2004 2004
----------- ----------- ------------- ------------
(in thousands, except share and per share data)

Net revenues . . . $ 7,981 $ 9,191 $ 8,964 $ 12,211
Gross profit
(b) . . . . . . . 7,319 7,925 7,340 9,203
Operating
expenses (b). . . 8,199 7,437 7,411 7,586
(Loss) income
from opera-
tions . . . . . . (880) 488 (71) 1,617
Net (loss)
income. . . . . . (998) 364 (192) 1,499
(Loss) income
applicable to
common stock-
holders (a) . . . (1,504) (152) (718) 961
Weighted average
shares out-
standing (basic) 39,218,799 39,232,977 39,239,689 39,305,935
Weighted average
shares out-
standing
(diluted) . . . . 39,218,799 39,232,977 39,239,689 227,446,357
Basic earnings
per share . . . . $ (0.04) $ -- $ (0.02) $ 0.02
Diluted earnings
per share . . . . $ (0.04) $ -- $ (0.02) $ 0.01

For the three months ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
2003 2003 2003 2003
----------- ----------- ------------- ------------
(in thousands, except share and per share data)

Net revenues . . . $ 7,624 $ 8,646 $ 8,043 $ 8,079
Gross profit
(b) . . . . . . . 6,767 8,003 7,232 7,536
Operating
expenses (b). . . 7,623 7,819 7,096 5,911
(Loss) income
from opera-
tions . . . . . . (856) 184 136 1,625
Net loss . . . . . (950) 73 21 1,511
Loss applicable
to common stock-
holders (c) . . . (1,418) (403) (465) 1,015
Weighted average
shares out-
standing
(basic) . . . . . 39,093,660 39,101,022 39,101,636 39,132,073
Weighted average
shares out-
standing
(diluted) . . . . 39,093,660 39,101,022 39,101,636 227,687,202
Basic earnings
per share . . . . $ (0.04) $ (0.01) $ (0.01) $ 0.03
Diluted earnings
per share . . . . $ (0.04) $ (0.01) $ (0.01) $ 0.01

(a) Loss applicable to common stockholders includes $2,086 related to
accrued cumulative dividend on the Series B Preferred Stock.

(b) Previously reported gross profit and operating expenses have been
adjusted to reflect certain reclassification made in order to
conform to the current year's presentation. For the three months
ended March 31, 2004, June 30, 2004, September 30, 2004 and
December 31, 2004, $39, $73, $99 and $0, respectively, were
reclassified from operating expenses to cost of revenues. For the
three months ended March 31, 2003, June 30, 2003, September 30, 2003
and December 31, 2003, $69, $42, $39, and $50, respectively, were
reclassified from operating expenses to cost of revenues. These
adjustments relate primarily to the amortization of certain
capitalized web site costs that has been reclassified from operating
expenses to cost of revenues.

(c) Loss applicable to common stockholders includes $1,926 related to
accrued cumulative dividend on the Series B Preferred Stock.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We had no holdings of derivative financial or commodity instruments
at December 31, 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 1 percent from levels on December 31, 2004, the
fair value of our investment portfolio would not change by a material
amount. A sharp decline in interest rates could reduce future interest
earnings of our investment portfolio. If market rates were to decrease
immediately by 1 percent from levels on December 31, 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 December 31, 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, but not the obligation,
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 do not have any right to
call any other shares of our capital stock held by Landmark. 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. The $1,200 value represents the fair
value of the option, which was determined using the Black-Scholes option
pricing model.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

Page
----

Report of Independent Registered Public Accounting Firm. . . . 49

Financial Statements:

Balance Sheets as of December 31, 2004 and 2003. . . . . . . 50

Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 . . . . . . . . . . . . . 53

Statements of Changes in Convertible Redeemable
Preferred Stock and Stockholders' (Deficit) Equity
for the years ended December 31, 2004, 2003 and 2002 . . . 54

Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 . . . . . . . . . . . . . 57

Notes to Financial Statements. . . . . . . . . . . . . . . . 59

The supplementary financial data is provided under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Quarterly Financial Data."

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of CoolSavings, Inc.:

In our opinion, the accompanying balance sheets and the related
statements of operations, changes in convertible redeemable preferred stock
and stockholders' (deficit) equity and of cash flows present fairly, in all
material respects, the financial position of CoolSavings, Inc. (the
"Company") at December 31, 2004 and 2003, and the results of its operations
and its cash flows for each of the three years in the period ended
December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Chicago, Illinois
March 29, 2005

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

December 31, December 31,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . $ 7,162 $ 7,347
Accounts receivable, net of allowance
of $424 and $676 at December 31,
2004 and December 31, 2003,
respectively . . . . . . . . . . . . . . 6,681 4,786
Prepaid assets . . . . . . . . . . . . . . 254 392
Other assets, including amounts due
from related parties of $4 and $0
at December 31, 2004 and December 31,
2003, respectively . . . . . . . . . . . 4 27
----------- -----------
Total current assets . . . . . . . . 14,101 12,552
----------- -----------

Property and equipment . . . . . . . . . . . 9,434 9,112
Capitalized software costs . . . . . . . . . 1,490 1,490
Capitalized web site costs . . . . . . . . . 3,957 3,599
----------- -----------
Total. . . . . . . . . . . . . . . . 14,881 14,201

Less accumulated depreciation and
amortization . . . . . . . . . . . . . . . (12,247) (11,692)
----------- -----------

2,634 2,509
Intangible assets, patents and licenses,
net of accumulated amortization of
$512 and $500 at December 31, 2004
and December 31, 2003, respectively. . . . 18 --

Goodwill - TMS . . . . . . . . . . . . . . . 569 --
----------- -----------

Total assets . . . . . . . . . . . . . . . . $ 17,322 $ 15,061
=========== ===========

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

December 31, December 31,
2004 2003
------------ ------------
LIABILITIES
Current liabilities:
Accounts payable, including amounts
due to related parties of $20 and
$0 at December 31, 2004 and
December 31, 2003, respectively. . . . . $ 655 $ 1,033
Accrued marketing expense, including
amounts due to related parties
of $7 and $68 at December 31, 2004
and December 31, 2003, respectively. . . 1,609 1,402
Accrued compensation . . . . . . . . . . . 1,849 1,368
Accrued interest due to related party. . . 89 82
Accrued expenses, including amounts
due to related parties of $943
and $962 at December 31, 2004 and
December 31, 2003, respectively. . . . . 2,818 1,806
Lease exit cost liability. . . . . . . . . 210 206
Deferred revenue . . . . . . . . . . . . . 312 484
Senior secured note payable due to
related party. . . . . . . . . . . . . . 6,567 6,059
----------- -----------
Total current liabilities. . . . . . 14,109 12,440
----------- -----------

Long-term liabilities:
Deferred revenue . . . . . . . . . . . . . 260 114
Other long-term liabilities. . . . . . . . 4 --
Deferred income tax liability. . . . . . . . 13 --
Lease exit cost liability. . . . . . . . . . 980 1,069
----------- -----------
Total long-term liabilities. . . . . 1,257 1,183
----------- -----------

Commitments and contingencies (Note 9)

Convertible redeemable cumulative Series B
Preferred Stock, $0.001 par value,
258,000,000 shares authorized,
and 172,788,359 and 159,629,737 issued
and outstanding at December 31, 2004
and December 31, 2003, respectively
(liquidation preference of $0.1554 per
share at December 31, 2004 and
December 31, 2003) . . . . . . . . . . . . 26,850 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 December 31,
2004 and December 31, 2003 (liquidation
preference of $0.1665 per share at
December 31, 2004 and December 31,
2003). . . . . . . . . . . . . . . . . . . 1,950 1,950

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

December 31, December 31,
2004 2003
------------ ------------
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value per share,
379,000,000 shares authorized,
39,409,298 and 39,169,270 shares
issued and outstanding at December 31,
2004 and December 31, 2003 . . . . . . . 39 39
Additional paid-in capital . . . . . . . . . 69,655 71,855
Accumulated deficit . . . . . . . . . . . . (96,538) (97,211)
----------- -----------
Total stockholders' deficit. . . . . (26,844) (25,317)
----------- -----------
Total liabilities, convertible
redeemable preferred stock and
stockholders' deficit. . . . . . . $ 17,322 $ 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 Year Ended December 31,
-------------------------------------
2004 2003 2002
---------- ---------- ----------
Revenue:
e-marketing services . . . $ 38,267 $ 32,119 $ 26,088
License royalties. . . . . 80 273 272
---------- ---------- ----------
Net revenues . . . . . . . . 38,347 32,392 26,360
Cost of revenues . . . . . . 6,560 2,854 3,547
---------- ---------- ----------
Gross profit . . . . . . . . 31,787 29,538 22,813

Operating expenses:
Sales and marketing. . . . 20,625 17,054 14,281
Product development. . . . 3,648 2,833 3,485
General and
administrative . . . . . 6,183 7,962 8,846
Lease exit costs . . . . . 177 519 2,148
Loss on asset impairment . -- 81 1,233
---------- ---------- ----------
Total operating
expenses . . . . . 30,633 28,449 29,993

Income (loss) from
operations . . . . . . . . 1,154 1,089 (7,180)

Other income (expense):
Interest and other
income . . . . . . . . . 47 40 38
Interest expense . . . . . (515) (474) (1,145)
---------- ---------- ----------
Total other
income (expense) . (468) (434) (1,107)
---------- ---------- ----------
Income (loss) before
income taxes . . . . . . . 686 655 (8,287)

Income taxes . . . . . . . . 13 -- --
---------- ---------- ----------

Net income (loss). . . . . . 673 655 (8,287)

Cumulative dividends on
Series B Preferred
Stock. . . . . . . . . . . (2,086) (1,926) (909)
---------- ---------- ----------
Loss applicable to common
stockholders . . . . . . . $ (1,413) $ (1,271) $ (9,196)
========== ========== ==========

Basic and diluted net
loss per share . . . . . . $ (0.04) $ (0.03) $ (0.24)
========== ========== ==========

Weighted average shares
used in the calculation
of basic and diluted net
loss per share . . . . . . 39,249,478 39,107,203 39,093,660
========== ========== ==========

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

COOLSAVINGS, INC.
STATEMENTS OF CHANGES IN CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands, except share data)

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

For the Year Ended December 31,
--------------------------------
2004 2003 2002
-------- -------- --------
Cash flows used in operating
activities:
Net income (loss). . . . . . . . . $ 673 $ 655 $ (8,287)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization . 1,311 1,757 4,392
Loss (gain) on disposal of
property and equipment. . . . 15 16 (8)
Write-off related to website
project costs . . . . . . . . 6 11 177
Write-off related to intangible
asset . . . . . . . . . . . . -- 4 38
Provision for doubtful accounts
and credit allowances,
net of write-offs . . . . . . 451 965 623
Interest payment in kind. . . . 515 474 1,143
Landmark reimbursed transaction
costs (Note 8(b)). . . . . . -- -- 21
Increase in deferred tax
provision . . . . . . . . . . 13 -- --
Loss on asset impairment. . . . -- 81 1,233
Stock option (benefit)
expense . . . . . . . . . . . (159) 159 --

Changes in assets and liabilities:
Decrease in restricted certi-
ficates of deposit. . . . . . -- 231 --
(Increase) in accounts
receivable. . . . . . . . . . (2,346) (851) (1,913)
Decrease (increase) in prepaid
and other current assets. . . 161 185 (140)
(Decrease) increase in
accounts payable. . . . . . . (378) (58) (1,811)
(Decrease) increase in
deferred revenue (26) (95) 101
(Decrease) increase in
lease exit cost liability . . (85) (50) 1,325
Increase (decrease) in accrued
and other liabilities . . . . 1,659 (44) 1,293
Increase in other long-term
liabilities . . . . . . . . . 4 -- --
-------- -------- --------
Net cash flows provided by (used in)
operating activities . . . . . . 1,814 3,440 (1,813)
-------- -------- --------
Cash flows used in investing
activities:
Purchases of property and
equipment. . . . . . . . . . . (620) (419) (388)
Sale of property and
equipment. . . . . . . . . . . 10 3 54
Acquisition of the business
assets of TMS. . . . . . . . . (609) -- --
Capitalized web site
development costs. . . . . . . (825) (558) (438)
-------- -------- --------
Net cash used in investing
activities . . . . . . . . . . . . (2,044) (974) (772)
-------- -------- --------

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

For the Year Ended December 31,
--------------------------------
2004 2003 2002
-------- -------- --------

Cash flows from financing activities:
Repayment of debt obligations. . -- -- (1,962)
Advances on notes payable. . . . -- -- 1,500
Proceeds from exercise of
stock options. . . . . . . . . 45 14 --
Proceeds from issuance of
preferred stock. . . . . . . . -- -- 2,770
-------- -------- --------
Net cash provided by financing
activities . . . . . . . . . . . . 45 14 2,308
-------- -------- --------

Net (decrease) increase in cash. . . (185) 2,480 (277)
Cash and cash equivalents,
beginning of period. . . . . . . . 7,347 4,867 5,144
-------- -------- --------
Cash and cash equivalents,
end of period. . . . . . . . . . . $ 7,162 $ 7,347 $ 4,867
======== ======== ========

Supplemental schedule of cash flow
information:
Cash paid for interest. . . . . . $ -- $ -- $ 52
Noncash Investing and
Financing Activity:
Conversion of Grid Note to
Series B Preferred Stock. . . . -- -- 9,475

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)

1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:

a. THE COMPANY: CoolSavings, Inc. ("CoolSavings" or the
"Company") provides interactive marketing services to advertisers, their
agencies and publishers. The Company, through its extensive distribution
network, the CoolSavings Marketing Network, helps clients in the retail,
consumer packaged good ("CPG"), financial, education, media and publishing,
and other marketing services industries to generate qualified leads, send
targeted e-mail, distribute printable and electronic/paperless coupons and
build customer loyalty. In addition, CoolSavings uniquely combines
transactional data with self-reported demographics and online behavioral
data in a proprietary system that enables advertisers to target their best
customers and improve results across the Company's network.

These financial statements are prepared on a going-concern basis in
accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Estimates are used for, but not
limited to, depreciation, amortization, sales credits, allowance for
doubtful accounts, unearned revenue, taxes, contingencies, lease exit
costs, and asset impairments. Actual results could differ from those
estimates.

Beginning in 2001, the Company entered into a series of transactions
with Landmark Communications, Inc. and Landmark Ventures VII, LLC
(together, "Landmark"), whereby Landmark made loans to and equity
investments in CoolSavings. This series of transactions resulted in a
change in control of the Company; Landmark has voting control of the
Company. Landmark's principal business interests are in the media
industry, and it owns and operates entities engaged in newspaper and other
print publishing, television broadcasting and cable television programming
services.

In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131), the Company reports segment
information consistent with its method of internal reporting. SFAS 131
defines operating segments as components of an enterprise for which
separate financial information is available that is regularly evaluated by
the chief operating decision maker in deciding how to allocate resources
and in assessing performance. During 2004, the Company acquired certain
assets related to the Targeted Marketing Services ("TMS") business line of
ADS Alliance Data Systems, Inc. ("ADS"). Subsequently, the Company began
to internally report the results of the resultant new business line,
Grocery Solutions. As a result of this internal reporting, the Company
determined that its Grocery Solutions business qualifies as a reportable
operating segment under SFAS 131 as of December 31, 2004. Therefore, the
Company is reporting its results for 2004 under two reportable operating
segments: the CoolSavings service and Grocery Solutions. The CoolSavings
service derives its revenues primarily from the sale of online advertising
and lead generation to advertisers across the CoolSavings Marketing Network
and its partners' web sites. The Grocery Solutions segment derives it
revenues primarily from grocery retailers by providing distribution of
ycoupons and promotions to the registered consumers of the grocery
retailers' customer loyalty programs. For segment financial information,
see Note 15.

b. CAPITAL AND LIQUIDITY CONSTRAINTS. The Company has achieved
net income for the years ended December 31, 2004 and 2003. In addition,
the Company has achieved positive cash flow from operations and has funded
the capital requirements of the current operations for the two most recent
years. However, the Company is not in compliance with certain covenants of
its loan agreement with Landmark. As a result, Landmark has the right to,
at any time, demand payment of obligations due to Landmark under a senior
secured loan agreement and require redemption of the Convertible Redeemable
Cumulative Series B Preferred Stock (the "Series B Preferred Stock") held
by Landmark. See Note 16 for a discussion of Landmark's agreement, made in
March 2005, that until April 1, 2006, it will not demand repayment of its
loan or require the Company to redeem any or all of its shares of Series B
Preferred Stock as a result of existing defaults.

The Company's ability to meet these obligations in the ordinary
course of business is dependent upon management's ability to maintain
profitable operations and to either obtain a continuation of the agreement
discussed in Note 16, or to obtain continuing financing from sources with
acceptable terms and conditions after April 1, 2006.

c. CASH AND CASH EQUIVALENTS: The Company considers all highly
liquid investments with an original maturity of three months or less to be
cash equivalents. Cash equivalents consist primarily of deposits in money
market funds and certificates of deposit.

d. CONCENTRATION OF CREDIT RISK: Financial instruments that
potentially subject the Company to a concentration of credit risk consist
of cash and cash equivalents and accounts receivable. Cash and cash
equivalents are deposited with high credit quality financial institutions.
The Company's accounts receivable are derived from revenue earned from
customers located primarily in the U.S. and are denominated in U.S.
dollars. The Company had no individual customer that represented more than
10% of net revenues for any of the years ended December 31, 2004, 2003 or
2002. The Company's largest five customers together represented 14.4%,
14.4% and 16.0% of net revenues for the years ended December 31, 2004, 2003
and 2002, respectively. The Company had no individual customer that
represented more than 10% of outstanding receivables at December 31, 2004
or 2003. The Company's largest five customers together represented 19.2%
and 15.5% of the outstanding receivables at December 31, 2004 and 2003,
respectively.

e. FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's financial
instruments, including cash and cash equivalents, accounts receivable,
accounts payable and notes payable, are carried at cost, which approximates
their fair value because of the short-term maturity of these instruments.

f. PROPERTY AND EQUIPMENT: Property and equipment are recorded at
cost. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets. Useful lives for
computer hardware and software are 3 to 5 years, and are 5 to 7 years for
furniture and fixtures. Leasehold improvements are amortized over the term
of the lease or the estimated useful life, whichever is shorter. Upon sale
or retirement of property and equipment, the cost and related accumulated
depreciation or amortization are eliminated from the respective accounts,
and the resulting gain or loss is included in the determination of
operating income or loss. Maintenance and repair costs are expensed as
incurred.

h. GOODWILL AND OTHER INTANGIBLE ASSETS: Intangible assets are
comprised of goodwill related to the TMS acquisition, various licenses, and
a patent application that are recorded at cost. Amortization of other
intangibles is computed using the straight-line method over the estimated
useful life of the asset or the license period, whichever is shorter.
Amortization periods for the other intangible assets range from 2 to 10
years.

Statement of Financial Accounting Standards No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142") requires that goodwill be tested for
impairment at the reporting unit level (operating segment or one level
below an operating segment) on an annual basis and between annual tests in
certain circumstances. Application of the goodwill impairment test
requires judgment, including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting
units include estimating cash flows, determining appropriate discount rates
and other assumptions. Changes in these estimates and assumptions could
materially affect the determination of fair value for each reporting unit.
In December 2004, the Company performed an annual test of goodwill related
to the acquisition of TMS and determined that there was no impairment.

i. LONG-LIVED ASSETS: The Company assesses the recoverability of
long-lived assets at the asset group level, whenever adverse events or
changes in circumstances or business climate indicate that an impairment
may have occurred. If the future cash flows (undiscounted and without
interest) expected to result from the use of the related assets are less
than the carrying value of such assets, an impairment has incurred and a
loss is recognized to reduce the carrying value of the long-lived assets to
fair value, which is determined by discounting estimated future cash flows.

j. REDEEMABLE PREFERRED STOCK: Preferred stock whose redemption
is not within the control of the Company is classified outside of permanent
equity within the financial statements. As a result of existing defaults
under the Senior Secured Loan (see Note 3 "Landmark Transaction-Related
Party") the Company's Series B Preferred Stock is carried at its redemption
value because Landmark may, at any time, require the Company to redeem the
Series B Preferred Stock. The accretion to redemption value is recorded as
a dividend to the holders of the Series B Preferred Stock and is charged
against additional paid-in-capital, to the extent available, and then the
accumulated deficit. See Note 16 for a discussion of Landmark's agreement,
made in March 2005, that, until April 1, 2006, it will not require the
Company to redeem any or all of the shares of Series B Preferred Stock as a
result of existing defaults.

The Company's Convertible Redeemable Cumulative Series C Preferred
Stock (the "Series C Preferred Stock") is carried at its fair value at the
time of issuance and is redeemable at CoolSavings' election at any time
after the shares of Series B Preferred Stock have been redeemed or after
the third anniversary of the date of issuance, if the holders of a majority
of the shares of Series B Preferred Stock consent. The holders of the
Series C Preferred Stock can deem certain change in control events to be
liquidating events if the holders of the Series B Preferred Stock have
deemed these events to be liquidating events. The Series C Preferred Stock
is classified outside of permanent equity because these events are not
considered to be within the Company's control. Because the Company does not
deem the occurrence of a change in control to be probable as of
December 31, 2004, the Series C Preferred Stock is not accreted to its
liquidation value.

k. REVENUE RECOGNITION: The Company recognizes revenue in
accordance with Staff Accounting Bulletin No. 104 "Revenue Recognition in
the Financial Statements." Revenue is recognized when all of the following
criteria are met:

- An order is executed.

- The price of the service is fixed and determinable.

- Delivery has occurred or services have been rendered.

- Collection is reasonably assured.

The Company assesses whether the fee is fixed and determinable based
on contract terms for particular products and services. The Company
assesses whether delivery of the product or rendering of the service has
occurred based on either the receipt of a delivery confirmation from its
customer, or on its internal records, depending on the type of product or
service delivered and the contract terms. For the Company's lead
generation service, the Company generally relies on the customer to confirm
the quantity of leads delivered which are valid under the terms of the
contract. For products such as email and coupons, the Company generally
relies on its internal web site tracking system to determine the quantity
delivered. Deferred revenue represents amounts which have been prepaid
under contracts for services which are not yet rendered.

l. ADVERTISING: Advertising costs are expensed as incurred.
Advertising expense was $11,789, $9,944, $8,488 during the years ended
December 31, 2004, 2003 and 2002, respectively.

m. INCOME TAXES: Income taxes are accounted for using an asset
and liability approach, which requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and assets for
the future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. The measurement of current
and deferred tax liabilities and assets are based on provisions of the
enacted tax law; the effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available
evidence, are not expected to be realized.

n. CAPITALIZED SOFTWARE COSTS: The Company accounts for
capitalized software development costs in accordance with the American
Institute of Certified Public Accountants Statement of Position 98-1
("SOP 98-1"), "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use," which requires capitalization of certain costs,
including the cost of outside consultants. These costs are amortized using
the straight-line method over three years, beginning when individual
modules are placed into service. These costs were fully amortized as of
December 31, 2002. The Company recognized $0, $0 and $406 in capitalized
software amortization expense for the years ended December 31, 2004, 2003
and 2002, respectively. No software development costs were capitalized in
the years ended December 31, 2004, 2003 and 2002.

o. CAPITALIZED WEB SITE DEVELOPMENT COSTS: Effective July 1,
2000, the Company adopted the standards of EITF Issue No. 00-2 "Accounting
for Web Site Development Costs," which requires capitalization of certain
web site development costs. The Company capitalized costs of $825, $558 and
$438 related to web site development in the years ended December 31, 2004,
2003 and 2002, respectively. The Company recognized $536, $577 and $1,433
of amortization expense for the years ended December 31, 2004, 2003 and
2002, respectively, related to capitalized web site development costs.
Additionally, the Company wrote off web site development costs with net
book values of $6, $11 and $177 during 2004, 2003 and 2002, respectively.

p. STOCK-BASED COMPENSATION: The Company accounts for its stock
option plan using Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," whereby 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. SFAS No. 123, "Accounting for Stock-Based
Compensation" issued subsequent to APB No. 25 and amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure"
defines a fair value based method of accounting for employees stock options
but allows companies to continue to measure compensation cost for employee
stock options using the intrinsic value based method described in APB No.
25. See also Note 12 "Stockholders' (Deficit) Equity" for more information
on the Company's stock-based compensation.

The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions
of FASB Statement No. 123, "Accounting for Stock-Based Compensation," as
amended by FASB Statement No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure," to stock-based employee compensation.

Years Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Net loss applicable to common
stockholders, as reported. . . . . $ (1,413) $ (1,271) $ (9,196)

Employee stock option compensation
(benefit) expense included
in reported net loss applicable
to the common stockholder. . . . . (159) 159 --

Deduct: Stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects. . . . . . . . . . . . (216) (1,556) (2,439)
---------- ---------- ----------

Pro forma net loss applicable to
common stockholders. . . . . . . . $ (1,788) $ (2,668) $ (11,635)
========== ========== ==========

Weighted average shares
outstanding. . . . . . . . . . . . 39,249,478 39,107,203 39,093,660

Earnings per share:
Basic and diluted
- as reported. . . . . . . . . . $ (0.04) $ (0.03) $ (0.24)

Basic and diluted
- pro forma. . . . . . . . . . . $ (0.05) $ (0.07) $ (0.30)

The assumptions used for valuations of option grants calculated in
accordance with SFAS 148 are as follows:

2004* 2003 2002
---------- ---------- ----------

Annualized dividend yield. . . . . . N/A 0.00% 0.00%
Risk-free rate of return . . . . . . N/A 3.10% 4.21%
Expected option term (in years). . . N/A 5.00 5.00
Expected volatility. . . . . . . . . N/A 261.10% 247.63%

* The Company did not grant any stock options in 2004.

q. BASIC AND DILUTED NET LOSS PER SHARE: The Company computes net
loss per share in accordance with the provisions of SFAS 128 "Earnings per
Share" ("SFAS 128") and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS 128 and SAB 98, basic and diluted net loss per
share applicable to common stockholders is computed by dividing the net
loss applicable to common stockholders for the period by the weighted
average number of common shares outstanding for the period. The calculation
of diluted net loss per share excludes shares of common stock issuable upon
the exercise of employee stock options (see Note 12) and warrants (See
Note 8b), and the conversion of shares of preferred stock (See Note 11),
because the effect of such exercises would be anti-dilutive. Refer to
Note 13 -- Earnings Per Share for the reconciliation of the numerator and
denominator of the basic and diluted EPS calculation.

r. COMPREHENSIVE EARNINGS: The Company reports comprehensive
earnings in accordance with SFAS Statement No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and
display of comprehensive earnings and its components in general-purpose
financial statements. There were no components of other comprehensive
income during any of the periods presented.

s. SEGMENT INFORMATION: SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" requires that management identify
operating segments based on the way that management manages the entity for
making internal operating decisions. The Company currently operates in two
separate reportable operating segments: the CoolSavings service and
Grocery Solutions. In accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," (SFAS 131), segment
information is being reported consistent with our method of internal
reporting. See Note 15 for further information on the Company's segment
reporting.

t. ESTIMATION OF SALES CREDITS: The Company primarily uses the
historical rate of sales credits issued as a percentage of revenue and
applies these percentages to gross receivables to estimate the total sales
credit reserve necessary at each balance sheet date. The Company then
considers the impact of changes in its service offerings and adjusts the
credit reserve as necessary. Sales credits issued are applied against the
sales credit reserve.

u. ESTIMATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company
bases its allowance for doubtful accounts primarily on overall customer
credit quality, historical write-off experience and specific account
analysis that projects the ultimate collectibility of the account. When it
is determined that a customer is unlikely to pay, a charge is recorded to
bad debt expense in the income statement and the allowance for doubtful
accounts is increased. When it becomes certain the customer cannot pay,
the receivable is written off by removing the accounts receivable amount
and reducing the allowance for doubtful accounts accordingly.

v. RECENT PRONOUNCEMENTS: In December 2004, the Financial
Accounting Standards Board (FASB) issued FASB Statement No. 123R, "Share-
Based Payment" (FAS 123R), which addresses the accounting for transactions
in which an enterprise receives employee services in exchange for equity
instruments of the enterprise or liabilities that are based on the fair
value of the enterprise's equity that may be settled by the issuance of
such equity instruments. FAS 123R required companies to expense the value
of employee stock options and similar awards. FAS 123R is effective for
public companies in interim and annual periods beginning after June 15,
2005 and applies to all outstanding and unvested share-based payment awards
at the company's adoption date.

Beginning in the third quarter of 2005, the Company will begin to
expense the value of employee stock options in its results of operations.
the Company expects that employee stock options will be measured at fair
value using the Black-Scholes option pricing model. In 2005, the Company
expects to expense approximately $80 in stock option expense upon
application of the modified prospective method of this new accounting
treatment.

w. RECLASSIFIED PRIOR-YEAR AMOUNTS: Certain prior-year amounts
related primarily to the amortization of certain capitalized web site costs
have been reclassified to conform to the current year's presentation. The
impact of these reclassifications resulted in an increase to cost of
revenues of $200 and $518 in 2003 and 2002, respectively, and a decrease to
product development expense of $200 and $518 in 2003 and 2002,
respectively.

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 electronic/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 $609, which included $100 paid in cash to
the seller and transaction costs of approximately $509. 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 $609 to the assets
acquired, based on a fair value assessment performed by the Company. Based
on the assessment of fair values, the allocation of the purchase price of
$609 to the proportionate amount of assets acquired was as follows:

Customer relationship. . . . . . . . . $ 20
Proprietary technology . . . . . . . . 10
Computer hardware. . . . . . . . . . . 10
Goodwill . . . . . . . . . . . . . . . 569
----
Total assets acquired. . . . . . . . . $609
====

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 Transition Services Agreement
dated February 6, 2004, between the Company and ADS, which represented the
fair value, as determined by the Company, 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 a period of no more than six
months. Transition expenses totaling $93 were recorded in cost of sales in
the statement of operations of the Company for the year ended December 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
December 31, 2004, the deferred revenue relating to this agreement was
$307.

The following unaudited pro forma combined financial information
combines the historical financial information of CoolSavings and TMS for
the years ended December 31, 2004 and December 31, 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.

Pro forma
Year Ended
December 31,
(unaudited)
---------------------------
2004 2003
----------- -----------
Pro forma net revenues . . . . . . . . . . $ 38,331 $ 33,083

Pro forma net income (loss). . . . . . . . 167 (3,131)

Cumulative dividend on Series B
Preferred Stock . . . . . . . . . . . . . (2,086) (1,926)

Pro forma income (loss) applicable
to common stockholders. . . . . . . . . . $ (1,919) $ (5,057)

Pro forma diluted net income
(loss) per share. . . . . . . . . . . . . $ (0.05) $ (0.13)

Weighted average shares used in the
calculation of pro forma diluted
net income (loss) per share . . . . . . . 39,249,478 39,107,203

3. LANDMARK TRANSACTION - RELATED PARTY

Beginning in 2001, the Company entered into a series of transactions
with Landmark (collectively, the "Landmark Transaction") whereby Landmark
made loans to and an equity investment in the Company.

SENIOR SECURED NOTE

During 2001, Landmark loaned the Company $5,000 pursuant to a senior
secured note (the "Senior Secured Note"), which loan is due on June 30,
2006 (the "Senior Secured Loan"). The Senior Secured Note and Senior
Secured Loan are 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"). In connection with the Senior
Secured Loan, the Company issued Landmark a warrant (the "Landmark
Warrant") to purchase shares of its common stock. The warrant was
exercisable for 10.0 million shares of common stock at an exercise price of
$0.50 per share at November 12, 2001. The exercise price of the warrant
will automatically increase to $0.75 per share on July 30, 2005 if not
previously exercised. The Senior Secured Loan bears interest at 8% per
annum, which accrues quarterly and is payable "in-kind." The Company
automatically issues to Landmark additional warrants to purchase two shares

of common stock for each dollar of interest accrued and paid-in-kind on a
quarterly basis (each January 31, April 30, July 31 and October 31) on the
Senior Secured Loan. As of December 31, 2004, the principal and interest
owed under the Senior Secured Loan totaled $6,656. As of December 31,
2004, the Landmark Warrant was exercisable for 12,693,435 shares of the
Company's common stock. The Senior Secured Note is secured by a lien on
all of the Company's assets. Due to defaults under the Securities Purchase
Agreement (defined below), Landmark may demand payment under the Senior
Secured Loan at any time. See Note 16 for a discussion of Landmark's
agreement, made in March 2005, that, until April 1, 2006, it will not
demand repayment of the Senior Secured Loan as a result of existing
defaults.

The Amended and Restated Loan Agreement contains financial covenants
and affirmative and negative covenants that, among other things, restrict
the Company's ability to incur additional indebtedness and take other
actions without the consent of the note holder.

GRID NOTE

Under the terms of that certain Securities Purchase Agreement dated
July 30, 2001, as amended (the "Securities Purchase Agreement"), the
Company agreed that if certain events occurred prior to December 31, 2002
(defined in the Securities Purchase Agreement as "Shortfall Events"),
Landmark would have the right to acquire additional shares of Series B
Preferred Stock (defined below) at a price of $0.1554 per share (each, a
"Shortfall Purchase Option"). Among other things, Shortfall Events would
occur if the Company failed to maintain an excess of current assets over
current liabilities at or above prescribed amounts. The number of shares
of Series B Preferred Stock that Landmark could acquire upon the occurrence
of a Shortfall Event 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 agreement dated November 12,
2001, the Company agreed that when Shortfall Events occurred, Landmark
could elect to loan the Company the Shortfall Amount under the Amended and
Restated Commercial Demand Grid Note dated September 25, 2001, as amended
(the "Grid Note"), and Landmark could later elect to apply the Shortfall
Amount to the purchase price of the Shortfall Purchase Option that arose in
connection with the Shortfall Events.

As Shortfall Events occurred during 2001, Landmark loaned the Company
an aggregate of $17,249 under the Grid Note. On November 12, 2001,
pursuant to the Securities Purchase Agreement, Landmark exercised its
rights to apply $10,000 of principal and $108 of accrued interest then
outstanding under the Grid Note to the purchase of 65,057,936 shares of the
Company's $0.001 par value Series B Preferred Stock at a price per share of
$0.1554. On January 29, 2002, Landmark loaned to the Company, under the
Grid Note, an additional $21 related to transaction costs reimbursable to
Landmark. On February 28, 2002, Landmark loaned the Company an additional
$1,500 under the Grid Note, bringing the outstanding principal balance
(including advances made in 2001) to $8,770. This balance included $8,000
related to Shortfall Events and $770 related to the Company's obligation to
reimburse Landmark for legal fees related to the Landmark Transaction.

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 against the purchase of 60,967,777 shares of Series B Preferred
Stock ($0.1554 per share). As of December 31, 2004, the Grid Note had no
outstanding principal or accrued interest. The Grid Note bears interest at
eight percent (8%) per annum and may evidence up to $20,000 in advances.

SALE OF SERIES B PREFERRED STOCK

On November 12, 2001, pursuant to the Securities Purchase Agreement,
Landmark exercised its rights to apply $10,000 of principal and $108 of
accrued interest then outstanding under the Grid Note to the purchase of
65,057,936 shares of the Company's Series B Preferred Stock at a price per
share of $0.1554.

On October 24, 2002, in connection with one Shortfall Event that
occurred on June 30, 2002 (related to the amount of current assets over
current liabilities at such date), Landmark exercised its related Shortfall
Purchase Option to purchase 17,825,212 shares of Series B Preferred Stock
and paid the Company $2,770 ($0.1554 per share) in connection with its
exercise of additional existing Shortfall Purchase Options.

As described above, on December 20, 2002, Landmark, at the Company's
request, applied the $8,770 of the principal and $705 of accrued interest
then outstanding under the Grid Note against the purchase of 60,967,777
shares of Series B Preferred Stock ($0.1554 per share) in connection with
its exercise of additional existing Shortfall Purchase Options.

The Series B Preferred Stock has certain conversion rights and has an
8% annual dividend, payable quarterly in additional shares of Series B
Preferred Stock. As a result of the defaults under the Amended and
Restated Loan Agreement, Landmark may at its option require the Company to
redeem for cash all of the issued and outstanding Series B Preferred Stock
at any time. See Note 16 for a discussion of Landmark's agreement, made in
March 2005, that, until April 1, 2006, it will not require the Company to
redeem any or all of its shares of Series B Preferred Stock as a result of
existing defaults.

As of December 31, 2004, Landmark holds 172,788,359 shares of
Series B Preferred Stock (and has rights with respect to accrued dividends
thereon) and holds a warrant to purchase 12,693,435 shares of the Company's
common stock. Landmark's ownership in the Company will continue to grow
through the issuance of 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 interest accruing on the Senior Secured Note,
respectively.

TERMS OF THE SERIES B PREFERRED STOCK

The terms of the Series B Preferred Stock are set forth in their
entirety in the Company's Certificate of Incorporation. The Series B
Preferred Stock ranks senior (with respect to, among other things,
dividends, redemption and liquidation payments) to the Series C Preferred
Stock (defined below), the common stock and any future preferred stock of
CoolSavings. The following discussion summarizes the rights of the
Series B Preferred Stock.

DIVIDENDS AND LIQUIDATION PREFERENCE

Dividends accrue on the shares of Series B Preferred Stock at the
rate of 8% per annum, payable quarterly in additional shares of Series B
Preferred Stock. Dividends are cumulative and will continue to accrue
whether or not declared. As of December 31, 2004, 3,455,767 shares of
Series B Preferred Stock were issuable with respect to accrued, but not
declared, dividends.

On liquidation, holders of Series B Preferred Stock are entitled to
be paid, before the holders of the Series C Preferred Stock and common
stock, the greater of: (1) the amount per share that would have been
payable if each share of Series B Preferred Stock had been converted to
common stock or (2) the stated value ($0.1554 at the time of issuance,
subject to anti-dilution adjustments) for each share of Series B Preferred
Stock plus the amount of any accrued but unpaid dividends thereon. At the
election of the holders of the Series B Preferred Stock, a merger or
consolidation that effects a change of control of CoolSavings, or a sale of
all or substantially all of the assets of CoolSavings, may be deemed to be
a liquidation.

CONVERSION RIGHTS

Each share of Series B Preferred Stock, plus any shares issuable as
accrued but unpaid dividends thereon, is convertible at the holder's option
into the number of shares of common stock obtained by dividing the stated
value of a share of Series B Preferred Stock ($0.1554) by the conversion
price ($0.1554 at the time of issuance, subject to anti-dilution
adjustments).

The conversion price and conversion ratio are subject to "full
ratchet" adjustment upon certain events. This means, for example (and
excluding exceptions), that if CoolSavings issues any shares of common
stock for less than the conversion price or issues convertible or
derivative securities with an exercise or conversion price less than the
conversion price of the Series B Preferred Stock, the conversion price and
conversion ratio are reduced to the price at which such new securities were
issued or the exercise or conversion price thereof, as applicable.

REDEMPTION

CoolSavings' Election. Shares of Series B Preferred Stock are
redeemable in whole, at CoolSavings' election, after the seventh
anniversary of the issuance of the Series B Preferred Stock, at their
stated value of $0.1554 per share plus accrued but unpaid dividends through
the redemption date. CoolSavings' ability to redeem the shares of Series B
Preferred Stock is subject to the following:

. the common stock must have traded at or above $3.00 per share
for 20 consecutive trading days (and during at least 60 of the
80 trading days immediately prior to the redemption date);

. CoolSavings must have on file, or agree to file and make
effective within 30 days of redemption, a registration
statement with the SEC registering for resale the shares of
common stock underlying the Series B Preferred Stock;

. CoolSavings shall have paid any outstanding debt to Landmark
in full; and

. there must be no securities outstanding that are junior in
ranking to the Series B Preferred Stock (except common stock).

Holders' Election. Due to default events under the Amended and
Restated Loan Agreement, as of December 31, 2004 and 2003, the Series B
Preferred Stock was redeemable in whole or in part at the holder's election
at the stated value of $0.1554 per share plus accrued but unpaid dividends.

See Note 8 of these financial statements for a discussion of the default
events.

VOTING RIGHTS AND BOARD OF DIRECTORS

Each share of Series B Preferred Stock is entitled to the number of
votes equal to the number of shares of common stock into which such share
of Series B Preferred Stock and accrued dividends thereon is convertible,
from time to time. The holders of the Series B Preferred Stock are entitled
to vote together with holders of common stock at any meeting of the
stockholders on any and all matters presented to the stockholders for
consideration. In addition to their right to vote in the general election
of members of the Company's Board on an as-converted basis, the holders of
Series B Preferred Stock are entitled to designate and vote separately as a
single class for the election of a majority of the Company's Board (and the
number of seats elected exclusively by the Series B Preferred Stock shall
be automatically increased to such greater number as may be proportionate
to the Series B Preferred Stock's percentage ownership interest in the
Company, calculated on an as-converted basis). The holders of Series B
Preferred Stock also have special voting rights whereby the Company is
prohibited from taking certain actions without the holders' consent,
including but not limited to, amending its charter documents, entering into

certain business transactions, authorizing or issuing securities (except in
certain limited circumstances), entering into related party transactions,
and hiring or terminating key executive officers.

SALE OF SERIES C PREFERRED STOCK

As a condition to the consummation of the Landmark Transaction, on
November 12, 2001 the Company issued to three individuals, two of whom are
directors of the Company, 13,000,000 shares of the Company's Series C
Preferred Stock in exchange for $2,100 of the Company's 8% Senior
Subordinated Convertible Notes ("Director Notes"), due March 1, 2006,
accrued interest, and warrants to purchase 1,050,000 shares of common stock
which were previously issued to such individuals with the Director Notes.

TERMS OF THE SERIES C PREFERRED STOCK

The Series C Preferred Stock ranks junior (with respect to dividends
and liquidation payments) to the Series B Preferred Stock but senior to the
common stock. The following discussion summarizes the rights of the
Series C Preferred Stock.

DIVIDENDS AND LIQUIDATION PREFERENCE

The Series C Preferred Stock will not accrue dividends. Dividends may
be declared and paid on the Series C Preferred Stock from funds lawfully
available as and when determined by the Board of Directors and subject to
any preferential dividend rights of any then outstanding preferred stock,
including the Series B Preferred Stock.

On liquidation, after the payment of the preferred distribution to
the holders of the Series B Preferred Stock, holders of Series C Preferred
Stock are entitled to be paid, before the holders of common stock, the
greater of: (1) the amount per share that would have been payable if each
share of Series C Preferred had been converted to common stock, or (2) the
stated value ($0.1665 at the time of issuance, subject to anti- dilution
adjustments) for each share of Series C Preferred Stock plus a cash amount
per share equal to eight percent (8%) per annum of the Series C Preferred
Stock stated value. At the election of the holders of the Series C
Preferred Stock, a change of control of CoolSavings, or a sale of all or
substantially all of the assets of CoolSavings, may be deemed to be a
liquidation, provided the holders of the Series B Preferred Stock have
elected to have such event constitute a liquidation.

CONVERSION RIGHTS

Each share of Series C Preferred Stock is convertible, at the
holder's option, into the number of shares of common stock obtained by
dividing the stated value of a share of Series C Preferred Stock ($0.1665)
by the conversion price ($0.1665 at the time of issuance, subject to anti-
dilution adjustments).

The conversion price and conversion ratio are subject to "weighted
average" adjustment upon certain events. This means, for example (and
excluding exceptions), that if CoolSavings issues common stock for less
than the conversion price or issues convertible or derivative securities
with an exercise or conversion price less than the conversion price of the
Series C Preferred Stock, the conversion price and conversion ratio are
reduced to the price derived from the weighted average of the price at
which all such securities were issued or deemed to be issued.

REDEMPTION

Shares of Series C Preferred Stock are redeemable in whole, at
CoolSavings' election, at any time after the shares of Series B Preferred
Stock have been redeemed or after the third anniversary of the date of
issuance, if the holders of a majority of the shares of Series B Preferred
Stock consent, at the stated value ($0.1665 at the time of issuance,
subject to anti-dilution adjustments) for each share of Series C Preferred
Stock plus a cash amount per share equal to eight percent (8%) per annum of
the Series C Preferred Stock stated value.

VOTING RIGHTS

Each share of Series C Preferred Stock is entitled to the number of
votes equal to the number of shares of common stock into which such share
of Series C Preferred Stock is convertible. The holders of Series C
Preferred Stock are entitled to vote together with holders of common stock
at any meeting of the stockholders of CoolSavings on any and all matters
presented to the stockholders for consideration.

4. OTHER RELATED PARTY TRANSACTIONS:

a. LEGAL SERVICES: One attorney with a law firm that provided
services to the Company was a member of the Company's Board of Directors
from September 2001 through July 2002. Several attorneys with this law
firm also are holders of the Company's stock. Total fees for services were
$0, $0 and $82, during the years ended December 31, 2004, 2003 and 2002,
respectively. These fees are included in general and administrative
expenses. Total fees payable were $0 and $0 at December 31, 2004 and 2003,
respectively.

b. SEVERANCE AGREEMENT: On April 1, 2001, the Company entered
into an employment agreement with Steven M. Golden, who was serving as the
Company's Chairman and Chief Executive Officer. The employment agreement
had a term of three years and provided for an annual base salary of $345
and the grant of an option to purchase 150,000 shares of the Company's
common stock. At the time of the execution of the employment agreement,
all of Mr. Golden's stock options previously issued and not vested were
made immediately vested and exercisable. On July 30, 2001, the Company
entered into a severance agreement with Mr. Golden which terminated Mr.
Golden's employment agreement. The severance agreement provided for three
years of severance pay in the amount of $345 per year and the continuation
of certain benefits. The severance agreement further provided that all
options held by Mr. Golden: (a) became immediately vested and fully
exercisable; (b) were adjusted to have an exercise price of $0.50; and (c)
were exercisable through the tenth anniversary of the grant of each such
options. These options are subject to variable accounting under FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation." A credit to compensation expense of $159 and a charge of
$159 was recorded in 2004 and 2003, respectively, to reflect the intrinsic
value of the modified options. No expense or credit was recorded in 2002
related to these options.

c. EMPLOYMENT AGREEMENT: On July 30, 2001, the Company entered
into an employment agreement with Matthew Moog, the Company's President and
Chief Executive Officer. The employment agreement has a term of three
years, provides for an annual minimum base salary of $345, and provides for
the grant of an option to purchase 750,000 shares of the Company's common
stock. The employment agreement further provides that Mr. Moog would be
granted options to purchase at least an additional 200,000 shares on each
of the first and second anniversary of the agreement if he is still
employed by the Company. In January of 2002, Mr. Moog was granted 328,571
stock options. These stock options were granted in lieu of the stock
option grant for not less than 200,000 shares that was due to Mr. Moog on
July 30, 2002, pursuant to terms of his employment agreement.
Additionally, the agreement provided for the immediate and full vesting on
January 1, 2002 of the stock options for 250,000 shares of common stock
that were originally issued on March 23, 2001.

Effective as of July 29, 2004, the Company entered into an agreement
with Mr. Moog to amend Mr. Moog's employment agreement. This amendment
extended the term of Mr. Moog's employment through July 29, 2007 and
provides that upon each anniversary of the effective date of the employment
agreement, the employment term automatically extends for a period of one
year unless previously terminated. This amendment provides for an annual
minimum base salary of $354 and deleted the prior agreement to grant Mr.
Moog options on the first and second anniversary of the employment
agreement.

On January 1, 2003, the Company established the CoolSavings, Inc.
Long Term Incentive Plan ("LTIP") (see Note 9). Pursuant to the July 29,
2004 amendment, Mr. Moog's employment agreement was amended to provide that
51,000 units in the LTIP be granted to Mr. Moog in November 2003 and
effective January 1, 2003. These units were granted in lieu of the stock
option grant for not less than 200,000 shares that were due to Mr. Moog on
July 30, 2003.

d. CEO PARTICIPATION IN LANDMARK STOCK PURCHASE PLAN: Since
December 2002, the Company's President and Chief Executive Officer, Matthew
Moog, has participated in Landmark's Executive Stock Purchase Plan. Under
this plan, through December 31, 2004, Mr. Moog purchased fully vested
shares of Landmark's Class B, non-voting common stock, at an aggregate
purchase price of $1,253. Landmark has the right to purchase Mr. Moog's
shares at the then fair value, upon his separation from the Company, or
before he can sell the shares to a third party. As of December 31, 2004,
Mr. Moog has not sold any of the shares. Dividends paid on the shares to
Mr. Moog totaled $38 and $21 during 2003 and 2004, respectively.

In connection with the share purchases, Landmark loaned to Mr. Moog
the funds required to purchase the shares. The loans are full recourse and
had an aggregate principal balance of $1,221 as of December 31, 2004. The
loans carry interest rates ranging from 4.5% to 5.1% and are payable in
monthly installments through 2029.

The Company is not a party to, nor did it arrange, these
transactions. The transactions under this plan are solely between Landmark
and Mr. Moog and were deemed to be at fair value by Landmark. Therefore,
the Company recorded no transactions in its financial statements related to
this arrangement.

e. CONSULTING CONTRACT: From November 1, 2002 through April 30,
2003, the Company engaged John Giuliani, a member of the Company's Board of
Directors, in a marketing services consulting agreement. The fees for such
consulting services are included in general and administrative expenses in
the Company's statement of operations, and totaled $0, $20, and $10 in
2004, 2003 and 2002, respectively. Total fees payable were $0 and $0 at
December 31, 2004 and 2003, respectively.

f. SERVICES PROVIDED: Landmark provides financial and payroll
system support to the Company for a fixed monthly fee. The Company
recorded general and administrative expenses for these services of $43, $42
and $41 in 2004, 2003 and 2002, respectively. In addition, the Company
purchased online advertising services from weather.com, a division of The
Weather Channel, Inc., a wholly owned subsidiary of Landmark, and paid The
Weather Channel, Inc. $422, $626 and $280 in 2004, 2003 and 2002,
respectively, for these services. In addition, The Weather Channel became
a partner in the Company's Lead Generation Network beginning in 2004. As
part of this partnership agreement, the Company paid $163 to The Weather
Channel, Inc. in 2004. The Company also purchased certain data services
from Alliant Cooperative Data Solutions, LLC, a majority-owned affiliate of
Landmark, which are designed to allow the Company to better target
consumers that are likely to choose soft offers provided by advertisers.
The Company paid Alliant Cooperative Data Solutions, LLC $10, $0 and $0 in
2004, 2003 and 2002, respectively, for these services. Additionally, one
of the Company's Directors, Gary S. Briggs, is a member of senior
management for eBay, Inc. The Company purchased online advertising
services from ebay, Inc. in the amount of $256, $0 and $0 in 2004, 2003,
and 2002, respectively. All these transactions were at arm's-length.

g. CALL OPTION AGREEMENT: In April 2002, Landmark acquired
10,889,636 shares of the Company's common stock from Lend Lease
International Pty. Limited of Australia. Contemporaneously with the
purchase, the Company entered into a call option agreement with Landmark,
whereby the Company has the right, but not the obligation, 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. The option can be exercised at any time
after April 5, 2003 and prior to March 31, 2008. The Company accounted for
this call option as permanent equity and a contribution from Landmark under
EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock." The Company
ascribed a value of $1,200 to the option at issuance. This value
represented the fair value of the option, which was determined using the
Black-Scholes option pricing model.

h. TAX ALLOCATION AGREEMENT: On July 1, 2003, Landmark's
ownership percentage of voting stock in the Company exceeded 80%, creating
an Affiliated Group as defined in Section 1504(a) of the Internal Revenue
Code. As a result, in March 2004, and effective July 1, 2003, the Company
entered into a Tax Allocation Agreement with Landmark whereby the Company
joined with the affiliated group of corporations controlled by Landmark in
filing a consolidated federal income tax return. The Tax Allocation
Agreement establishes the methodology for the calculation and payment of
income taxes in connection with the consolidation of the Company with
Landmark for income tax purposes. Generally, the Tax Allocation Agreement
provides that Landmark will pay all consolidated federal income taxes on
behalf of the consolidated group that includes the Company, and the Company
will make payments to Landmark in an amount equal to the tax liability, if
any, that the Company would have had if it were to file separate and apart
from Landmark.

5. PROPERTY AND EQUIPMENT: Property and equipment at December 31, 2004
and 2003, respectively, were comprised of the following:

December 31,
----------------------
2004 2003
--------- ---------

Computer hardware/software. . . . . . $ 7,226 $ 6,823
Furniture and fixtures. . . . . . . . 1,508 1,589
Leasehold improvements. . . . . . . . 700 700
--------- ---------

Total . . . . . . . . . . . . . . . . 9,434 9,112
Less accumulated depreciation . . . . (7,752) (7,277)
--------- ---------

Net Property and Equipment. . . . . . $ 1,682 $ 1,835
========= =========

Depreciation expense recorded on property and equipment was $764,
$1,079 and $2,303 in 2004, 2003 and 2002, respectively.

6. GOODWILL AND OTHER INTANGIBLE ASSETS. Intangible assets are comprised
of various license agreements, patents and goodwill that are recorded at
cost. Intangible assets at December 31, 2004 and 2003, were comprised of
the following:
December 31,
----------------------
2004 2003
--------- ---------
Goodwill. . . . . . . . . . . . . . . $ 569 $ --
Other intangibles acquired through
purchase of TMS:
Customer Relationship. . . . . . . 20 --
Proprietary technology . . . . . . 10 --
Other - patents . . . . . . . . . . . 500 500
--------- ---------
Total . . . . . . . . . . . . . . . . 1,099 500
Less amortization . . . . . . . . . . (512) (500)
--------- ---------
Net intangible assets . . . . . . . . $ 587 $ --
========= =========

Amortization expense recorded on intangible assets was $11, $101 and
$251 in 2004, 2003 and 2002, respectively. The Company expects to record
amortization expense related to intangible assets of approximately $2 in
each of the next five years related to amortization of the customer
relationship acquired through the TMS purchase. This asset has a useful
life of 10 years. The proprietary technology of $10 acquired through the
TMS purchase was fully amortized by December 31, 2004. In 2002, the
Company wrote off $176 in license agreements for licenses it no longer
uses. The write-off resulted in a loss on intangible assets of $38.

In December 2004, the Company performed an annual test of goodwill
related to the acquisition of TMS and determined that there was no
impairment. Application of the goodwill impairment test requires
judgment, including the identification of reporting units, assigning assets
and liabilities to reporting units, assigning goodwill to reporting units,
and determining the fair value of each reporting unit. Significant
judgments required to estimate the fair value of reporting units include
estimating cash flows, determining appropriate discount rates and other
assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit.

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

During 2002, following an ongoing assessment of its future expected
space requirements, the Company determined that a significant 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 $1,233 in 2002 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 $2,148
in 2002, representing the estimated future lease obligations related to the
unoccupied office space, and estimated costs associated with subleasing the
space, net of estimated cash flows from future sublease arrangements.

In 2003, the Company re-evaluated its future expected space
requirements and determined that an additional portion of its leased office
space and the assets associated with that space were unnecessary for its
future operations. As a result of this re-evaluation, the Company recorded
an additional operating expense of $81 in 2003 to write down the assets
related to this office space to their estimated fair value. In addition,
the Company recorded an operating expense of $177 in 2004 and $519 in 2003,
representing an adjustment 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 year ended December 31, 2004 and 2003, the lease exit costs
were as follows:

Year Ended
December 31,
----------------------
2004 2003
--------- ---------
Lease obligation, net of
estimated sub-lease income. . . . . $ 84 $ 432
Broker commissions and
other miscellaneous costs . . . . . (6) (16)
Accretion expense . . . . . . . . . . 99 103
--------- ---------
Lease exit costs. . . . . . . . . . . $ 177 $ 519
========= =========

At December 31, 2004, the liability associated with lease exit costs
consisted of the following:

Balance at Subsequent Balance at
December 31, Accruals, December 31,
2003 Net Payments 2004
------------ ----------- ---------- ------------
Lease obliga-
tion, net of
estimated
sub-lease
income. . . . . $ 1,182 $ 183 $ (262) $ 1,103

Broker commis-
sions and
other trans-
action costs. . 93 (6) -- 87
---------- ----------

Total lease exit
liability . . . 1,275 1,190

Less: current
portion of
lease exit
liability . . . (206) (210)
---------- ----------
Long-term lease
exit liability. $ 1,069 $ 980
========== ==========

Significant assumptions were required concerning the estimated fair
value of the assets and estimates of sublease income. As provided under
SFAS No. 144, the Company primarily used discounted cash flow analysis,
together with other available information, to estimate fair values.

8. LONG AND SHORT TERM DEBT:

a. BANK LINES OF CREDIT:

As of December 31, 2004 and 2003, the Company had no credit
facilities.

b. LANDMARK LOANS:

In June 2001, Landmark loaned the Company a total of $650. Such loan
was evidenced by a Loan and Security Agreement, as amended, dated June 14,
2001 (the "Landmark Bridge Loan"). The Landmark Bridge Loan provided for
repayment on demand and the accrual of interest at a rate of 12% per annum
and granted a second lien on substantially all of the Company's assets.
The Landmark Bridge Loan was ultimately funded up to $5,000 before it was
cancelled on July 30, 2001 and replaced with the Senior Secured Loan, also
dated July 30, 2001. The Senior Secured Loan currently carries a first
lien on principally all of the Company's assets. Offering costs of $643
assigned to the debt were recorded in the transaction.

The Senior Secured Loan is payable on June 30, 2006 and bore interest
at 12.0% per annum until November 12, 2001, at which time the interest rate
was reduced to 8.0% per annum. The interest is paid quarterly in arrears
in the form of additional notes and warrants (described below). The
Company has the right to prepay the Senior Secured Loan on or after the
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 the Company's ability to incur
additional indebtedness and take other actions without the consent of
Landmark.

At December 31, 2004, the Company was not in compliance with certain
financial covenants of the Senior Secured Loan. The following is a list of
the significant defaults under the Senior Secured Loan, and therefore under
the Grid Note and the Amended and Restated Loan and Security Agreement, as
these notes are cross-collateralized:

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

. The Company's failure to maintain a minimum level of working
capital and 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).

The Company's failures to comply with such covenants constitute
events of default. Consequently, the Senior Secured Loan, including
accrued interest, is immediately due and payable at the option of Landmark.
See Note 16 for a discussion of Landmark's agreement, made in March 2005,
that, until April 1, 2006, it will not demand repayment of the Senior
Secured Loan as a result of existing defaults.

In connection with the Senior Secured Loan, the Company issued 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 was exercisable for
10,000,000 million shares of the Company's common stock at an exercise
price of $0.50 per share on November 12, 2001 (the exercise price
automatically increases to $0.75 per share on July 30, 2005 to the extent
the warrant has not previously been exercised). Pursuant to the Landmark

Warrant and the Amended and Restated Loan and Security Agreement, the
Company automatically issues to Landmark additional warrants to purchase
two shares of common stock for each dollar of interest accrued on the
Senior Secured Loan as paid-in-kind interest. Under APB 14, the Company
assigned a $2,400 value to the Landmark Warrant and recorded it as
additional paid-in-capital and debt discount. The debt discount of $3,017
resulting from the offering costs and warrant allocation from the Senior
Secured Loan was amortized immediately to interest expense in 2001. This
was due to covenant violations by the Company causing the entire loan to be
immediately due and payable at the option of Landmark.

During the second half of 2001, Landmark loaned to the Company under
the Grid Note an aggregate of $17,249, of which $16,500 related to cash
advances (in separate drawdowns, several of which were related to Shortfall
Events that occurred under the Securities Purchase Agreement) and $749
related to transaction costs reimbursable to Landmark. The principal
balance outstanding under the Grid Note bore interest at 8.0% per annum.
The Grid Note including accrued interest was immediately due and payable at
the option of Landmark. The Grid Note was cross-collateralized with the
Senior Secured Loan and maintained the exact same covenants as the Senior
Secured Loan. The entire $749 of offering costs reimbursable to Landmark
was expensed in 2001 and was included as general and administrative
expense.

On November 12, 2001, pursuant to the Securities Purchase Agreement,
Landmark exercised its right to apply $10,000 of principal and $108 of
accrued interest then outstanding under the Grid Note to the purchase of
65,057,936 shares of Series B Preferred Stock (see Note 11).

On January 29, 2002, Landmark loaned to the Company, under the Grid
Note, an additional $21 related to transaction costs reimbursable to
Landmark. On February 28, 2002, Landmark loaned the Company an additional
$1,500 under the Grid Note in connection with another Shortfall Event,
bringing the outstanding principal balance to $8,770. 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 to the
purchase of 60,967,777 shares of Series B Preferred Stock ($0.1554 per
share). Consequently, there was no balance due under the Grid Note at the
end of 2004, 2003 or 2002. The Grid Note bears interest at eight percent
(8%) per annum and may evidence up to $20,000 in advances.

9. 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 to collateralize lease deposits on 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 $747 as of December 31, 2004, due to the
termination of the Company's lease in New York City, and scheduled
reductions contained in the lease agreements for the Company's Chicago,
Illinois and San Francisco, California facilities. The Landmark Letters 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 was no longer required
according to the terms of the Company's lease agreement. Landmark may, in
its sole discretion, cancel the Landmark Letters of Credit upon 90-days'
written notice to the Company. If the Landmark Letters of Credit expire or
are cancelled, the Company would need to enter into an alternate credit
arrangement.

b. COOLSAVINGS, INC. LONG-TERM INCENTIVE PLAN ("LTIP"): Effective
January 1, 2003, the Company established the CoolSavings, Inc. Long Term
Incentive Plan ("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 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. No expense was recorded during 2004 or 2003
related to the LTIP.

c. LITIGATION: During 2000, the Company settled several patent
infringement suits. As a result of these settlements, the Company received
certain royalty payments through 2003. On February 6, 2004, the Company
acquired certain assets of the business that was the successor-in-interest
to the entity with whom this settlement was reached (the "Seller"). In
connection with the acquisition, the Company released the Seller from its
future obligations to pay the Company royalties. (See Note 2.)

Since 1999 and 2000, respectively, the Company has been the defendant
in two patent infringement lawsuits filed by Catalina Marketing
International, Inc. ("Catalina Marketing") and Supermarkets Online, Inc.
("Supermarkets Online"), an affiliate of Catalina Marketing. On
October 19, 2004, the Company entered into a settlement agreement with
Catalina Marketing for both of these lawsuits on mutually agreeable terms.
The financial impact of this settlement is included in the Company's
operating results for the year ended December 31, 2004 and was not material
to the Company's financial statements. The settlement allows the Company
to continue to operate its systems and methods without threat of
infringement of the Catalina patents that were the subject of the
litigation.

In 2003, the Company reached agreement (which was finalized in
January 2004) with a customer to resolve a disagreement regarding the
delivery of services. The agreement involved the delivery of additional
services at no charge. The Company recorded an expense of $184 and $70 in
2003 and 2002, respectively, and an expense credit of $25 in 2004, in
general and administrative expenses to reflect the cost of these services.
The Company recorded $229 in revenue in 2004 with the make-good services
were delivered to the customer. The Company received a complete release
from the customer against any future actions.

d. LEASES: The Company leases equipment and its office premises
under operating lease agreements. Rental expense under these agreements was
$1,138, $1,221 and $1,961 during 2004, 2003 and 2002, respectively.

At December 31, 2004, future minimum payments under noncancelable
operating leases were as follows:

For the years ended December 31:

2005 . . . . . . . . . . . . $ 1,698
2006 . . . . . . . . . . . . 1,398
2007 . . . . . . . . . . . . 1,363
2008 . . . . . . . . . . . . 1,387
2009 . . . . . . . . . . . . 1,412
and thereafter . . . . . . . 473
-------
Total. . . . . . . . . . . . $ 7,731
=======

10. INCOME TAXES: Under SFAS No. 109, "Accounting for Income Taxes"
deferred tax assets and liabilities are recognized for the future tax
consequences of differences between the carrying amounts of assets and
liabilities and their respective tax bases and for tax carry forward items
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets consist of the following:

December 31,
---------------------
2004 2003
-------- --------
Deferred tax assets:
Net operating loss carryforward . . . . $ 3,271 $ 2,392
Allowance for doubtful accounts . . . . . 161 257
Deferred revenue. . . . . . . . . . . . . 217 184
Property and equipment. . . . . . . . . . 88 386
Capitalized software. . . . . . . . . . . (356) (256)
Debt discount . . . . . . . . . . . . . . 344 573
Lease exit liability. . . . . . . . . . . 452 484
Asset impairment. . . . . . . . . . . . . 132 263
Landmark transaction fees . . . . . . . . 89 148
Other . . . . . . . . . . . . . . . . . . (6) 255
Valuation allowances. . . . . . . . . . . (4,392) (4,686)
-------- --------
$ -- $ --
======== ========
Deferred tax liabilities:
Goodwill amortization . . . . . . . . . $ 13 $ --
-------- --------
$ 13 $ --
======== ========

The difference between the amount of income tax provision/(benefit)
recorded and the amount of income tax provision/(benefit) calculated using
the U.S. federal statutory rate of 34%, as well as the state and local
rate, net of a federal benefit, of 4%, is primarily due to the use of
nonbenefited net operating losses in 2003 and 2004. The reconciliation of
statutory and effective income taxes is presented below:

Year Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Federal income tax (benefit)
at the statutory rate . . . . $ 233 $ 223 $ (2,818)
State income tax, net of
federal benefit . . . . . . . 32 8 (127)
Permanent differences and
other . . . . . . . . . . . . 40 (159) 1,733
Effect of change in
valuation allowance . . . . . (292) (72) 1,212
---------- ---------- ----------
$ 13 $ -- $ --
========== ========== ==========

The income tax expense of $13 in 2004 relates to book/tax differences
arising from the amortization of goodwill for tax purposes, but not for
book. Under generally accepted accounting principles, deferred tax assets
cannot be offset against deferred tax liabilities related to indefinite
lived assets that cannot be scheduled to reverse in the same period. The
goodwill was recorded as a result of the TMS asset acquisition during the
first quarter of 2004. For financial reporting purposes, the entire amount
of deferred tax assets has been offset by a valuation allowance due to
uncertainty regarding realization of the asset.

The Company has net operating loss carry forwards of approximately
$8,609, $6,295 and $7,436 at December 31, 2004, 2003 and 2002,
respectively. As a result of the issuance of Series B Preferred Stock to
Landmark, the Company triggered provisions under Section 382 of the
Internal Revenue Code, that limit the Company's ability to offset taxable
income earned subsequent to the initial issuance of the Series B Preferred
Stock on November 12, 2001 with the Company's net operating losses. The
Company's net operating loss carryforwards begin to expire in 2021.

11. REDEEMABLE PREFERRED STOCK

a. SERIES B PREFERRED STOCK: On November 12, 2001, under the
Securities Purchase Agreement, the Company issued to Landmark 65,057,936
shares of $0.001 par value Series B Preferred Stock for $10,108. This
transaction was approved at the annual stockholders meeting on
September 20, 2001. The Series B Preferred Stock has certain conversion
rights and has an 8% quarterly dividend payable in additional shares of
Series B Preferred Stock. On October 24, 2002, in connection with one
Shortfall Event which occurred on June 30, 2002 (related to the amount of
current assets over 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 ($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
December 31, 2004, Landmark holds 172,788,359 shares of Series B Preferred
Stock (and has rights with respect to accrued dividends thereon) and holds
a warrant to purchase 12,693,435 shares of the Company's common stock.
Under Section 382 of the Internal Revenue Code, this transaction with
Landmark resulted in a limitation on the amount of net operating loss carry
forwards that can be utilized in future years. See Note 10 for a further
discussion of income taxes related to the Company. The Series B Preferred
Stock is subject to certain redemption requirements outside the control of
the Company. As the holder of all of the Series B Preferred Stock,
Landmark has the right to elect not less than a majority of the Company's
board of directors. See Note 3 for further description of the terms of the
Series B Preferred Stock.

b. SERIES C PREFERRED STOCK: As a condition to the consummation
of the Landmark Transaction, on November 12, 2001 the Company issued to
three individuals (two of whom are directors of the Company) 13,000,000
shares of $0.001 par value Series C Preferred Stock. The Series C
Preferred Stock was given in exchange for the Director Notes (see Note 3),
the related accrued interest and the accompanying warrants to purchase
1,050,000 shares of common stock previously issued to such individuals. As
a result of the exchange, the Company recorded a gain of $327. As of
December 31, 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. See Note 3 for further description of the terms of the
Series C Preferred Stock.

c. RESERVED COMMON SHARES: As of December 31, 2004, the Company
had reserved 305 million shares of common stock for the conversion of
shares of Series B and Series C Preferred Stock, the exercise of Landmark
Warrants, and the exercise of options under the Company's stock option
plans. See Note 3 for further description of the terms of the Series B and
Series C Preferred Stock.

12. STOCKHOLDERS' (DEFICIT) EQUITY:

a. COMMON STOCK OPTIONS: On September 20, 2001, the Company's
stockholders, in conjunction with the annual meeting, ratified the adoption
of the 2001 Stock Option Plan (the "2001 Employee Plan") to replace the
1997 Employee Plan. Additionally, in conjunction with the Landmark
Transaction, the 1999 Non-Employee Plan was terminated.

Vesting under the 2001 Employee Plan is determined by the Board of
Directors on an individual grant basis and is typically incremental vesting
over a period of approximately four years. Options that were granted under
the 1997 Employee Plan vest over a period of approximately four years.
Options that were granted under the 1999 Non-Employee Plan became fully
vested one year from the date of the grant. The terms of the grants made
under each plan are established by the Board of Directors and may not
exceed ten years. The Company is authorized under the 2001 Employee Plan
to issue stock options to purchase up to 7,953,954 shares of common stock
plus an additional 1,800,000 shares related to cancellations of certain
stock options as defined in the plan.

The Company has reserved 4,318,200 and 23,000 shares of common stock
for option exercises under the 1997 Employee Plan and the 1999 Non-Employee
Plan, respectively. Additionally, the Company has reserved 7,953,954
shares of common stock under the 2001 Employee Plan, plus up to 1,800,000
shares issued in connection with the cancellation of options under the 1997
Employee Plan for the exercise of stock options issued or to be potentially
issued.

Outside of the above plans, the Company has granted options to the
Company's Chief Executive Officer in conjunction with the execution of a
Board-approved employment contract consistent with the 1997 Employee Plan.
These options are included in the disclosures that follow.

The following information relates to stock options whose exercise
price equaled the fair value of the underlying stock on the date of grant:

Year Ended December 31,
--------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------

Outstand-
ing at
beginning
of period 4,515,599 $1.54 4,929,440 $1.55 5,718,180 $1.68
Granted -- -- 100,000 0.90 101,000 0.11
Exercised (51,250) $0.14 -- -- -- --
Forfeited/
expired (677,856) $3.06 (513,841) 1.49 (889,740) 2.26
---------- ---------- ----------

Outstand-
ing at
end of
period 3,786,493 $1.29 4,515,599 $1.54 4,929,440 $1.55
========== ========== ==========

Exercis-
able at
end of
period 3,503,431 $1.35 3,912,417 $1.58 3,800,462 $1.37
========== ========== ==========

Weighted
average
fair
value of
options
granted
during the
period N/A $0.90 $0.10

The following information relates to options whose exercise price
exceeded the fair value of the underlying stock on the date of grant:

Year Ended December 31,
--------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------

Outstand-
ing at
beginning
of period 3,833,769 $0.36 4,336,753 $0.36 262,201 $3.28
Granted -- -- -- -- 4,465,241 0.20
Exercised (188,778) 0.20 (75,610) 0.20 -- --
Forfeited/
expired (342,886) 0.87 (427,374) 0.38 (390,689) 0.53
---------- ---------- ----------

Outstand-
ing at
end of
period 3,302,105 $0.31 3,833,769 $0.36 4,336,753 $0.36
========== ========== ==========

Exercis-
able at
end of
period 1,764,618 $0.41 1,152,342 $0.60 225,598 $1.92
========== ========== ==========

Weighted
average
fair
value of
options
granted
during the
period N/A N/A $0.09

The following table summarizes information about fixed stock options
outstanding at December 31, 2004:

December 31, 2004
---------------------------------------------------------
Outstanding Exercisable
--------------------------------- ----------------------
Weighted Weighted
Average Average Average
Exercise Price Life Exercise Exercise
Range Options (in years) Price Options Price
- -------------- --------- ----------- -------- ---------- --------

$0.07 - $0.20 3,344,136 7.07 $ 0.20 1,759,774 $ 0.19
$0.21 - $0.50 2,916,143 5.31 0.45 2,756,956 0.45
$0.84 - $2.73 421,300 5.13 1.83 344,300 2.04
$3.31 - $6.00 76,150 5.01 4.42 76,150 4.42
$7.00 - $11.00 330,869 5.06 8.56 330,869 8.56
--------- ---- ------- --------- -------
Totals 7,088,598 6.11 $ 0.83 5,268,049 $ 1.04
========= ==== ======= ========= =======

The Company adopted the disclosure requirements of SFAS 148,
"Accounting for Stock Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123." See Note 1 "Description of the
Company and Summary of Significant Accounting Policies: Stock-Based
Compensation."

In December 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123(R), "Share-Based Payment" (FAS 123R), which
addresses the accounting for transactions in which an enterprise receives
employee services in exchange equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprise's equity
that may be settled by the issuance of such equity instruments. FAS 123R
required companies to expense the value of employee stock options and
similar awards. FAS 123R is effective for public companies in interim and
annual periods beginning after June 15, 2005 and applies to all outstanding
and unvested share-based payment awards at the company's adoption date.

Beginning in the interim period commencing after June 15, 2005, the
Company will begin to expense the value of employee stock options in its
results of operations. The Company expects that employee stock options
will be measured at fair value using the Black-Scholes option pricing
model. In 2005, we expect to expense approximately $80 in stock option
expense due to this new accounting treatment.

b. COMMON STOCK COMPENSATION: Pursuant to the July 30, 2001
severance agreement between the Company and Steven Golden, all of the
options granted to Mr. Golden by the Company as of the date thereof became
immediately vested and fully exercisable. The options were also repriced
at a strike price of $0.50 per share. These options are subject to
variable accounting under FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation." The Company recognized
a credit of $159 and an expense of $159 in 2004 and 2003, respectively,
related to these options, which represents adjustments to their intrinsic
value.

Additionally, the Company granted options to purchase 750,000 shares
of common stock to Matthew Moog, the current President and Chief Executive
Officer, pursuant to his July 30, 2001 employment agreement. In January of
2002, Mr. Moog was granted options to purchase 328,571 shares of the
Company's common stock. These stock options were granted in lieu of the
first of the two stock option grants for not less than 200,000 shares that
was due to Mr. Moog on July 30, 2002, pursuant to terms of his employment
agreement. The agreement also provided for the immediate and full vesting
on January 1, 2002 of the stock options for 250,000 shares of common stock
that were originally issued on March 23, 2001.

Effective as of July 29, 2004, the Company entered into an agreement
with Mr. Moog to amend Mr. Moog's employment agreement. This amendment
deleted the prior agreement to grant Mr. Moog the second of his two stock
option grants on the second anniversary of the employment agreement and
replaced it with an LTIP grant as further disclosed herein.

13. EARNINGS PER SHARE: SFAS 128 requires companies to provide a
reconciliation of the numerator and denominator of the basic and diluted
EPS computations. The calculation below provides net loss, weighted
average common shares outstanding and the resultant net loss per share for
both basic and diluted EPS for the years ended December 31, 2004, 2003 and
2002.

Years Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Numerator:
Net income (loss). . . . . . . . $ 673 $ 655 $ (8,287)

Cumulative dividends on
Series B Preferred Stock . . . . (2,086) (1,926) (909)
---------- ---------- ----------
Loss applicable to
common stockholders. . . . . . . $ (1,413) $ (1,271) $ (9,196)
========== ========== ==========

Basic and diluted net loss
per share. . . . . . . . . . . . $ (0.04) $ (0.03) $ (0.24)
========== ========== ==========
Denominator:
Weighted average shares used in
the calculation of basic and
diluted net loss per share . . 39,249,478 39,107,203 39,093,660
========== ========== ==========

The calculation of diluted net loss per share excludes shares of
common stock issuable upon the conversion of unsecured convertible
subordinated notes, exercise of employee stock options and warrants, and
conversion of convertible preferred stock, as the effect of such exercises
would be anti-dilutive.

14. 401(k) PLAN: On February 11, 1997, the Company adopted a 401(k) plan
for employees. All employees who meet certain age requirements are
eligible to participate. Matching contributions are made at the discretion
of the Company. The Company made no matching contributions during 2004,
2003, or 2002.

15. SEGMENT DISCLOSURES: In accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131),
segment information is being reported consistent with the Company's method
of internal reporting. SFAS 131 defines operating segments as components
of an enterprise for which separate financial information is available that
is regularly evaluated by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. During 2004, the
Company acquired certain assets related to the TMS business line of ADS.
Subsequently, the Company began to internally report the results of the
resultant new business line, Grocery Solutions. As a result of this
internal reporting, the Company determined that its Grocery Solutions
business qualifies as an operating segment under SFAS 131 as of
December 31, 2004. Therefore, the Company is reporting its results for
2004 under two reportable operating segments: the CoolSavings service and
Grocery Solutions.

The table below contains information about 2004 segment financial
data used by the chief operating decision-maker of the Company. In 2003
and 2002, the Company operated in only one business segment.

For the Year Ended December 31, 2004
-----------------------------------------
Total
CoolSavings Grocery CoolSavings,
Service Solutions Inc.
----------- ----------- ------------
Operating revenue. . . . . . $ 38,050 $ 297 $ 38,347
Depreciation and
amortization . . . . . . . 1,270 41 1,311
Other operating costs
and expenses . . . . . . . 34,701 1,181 35,882
Operating income (loss). . . 2,079 (925) 1,154
Segment assets as of
December 31, 2004. . . . . 16,642 680 17,322

16. SUBSEQUENT EVENT: Pursuant to a letter dated March 29, 2005,
Landmark agreed that, until April 1, 2006, it will not demand repayment of
amounts due under the Amended and Restated Loan Agreement, including
accrued interest, or require the Company to redeem any or all of its shares
of Series B Preferred Stock as a result of existing defaults.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Based upon an evaluation of our disclosure controls and procedures
performed by 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 December 31, 2004, solely to
the extent described below, our disclosure controls and procedures were not
effective to provide reasonable assurance that information required to be
disclosed in the reports that we issue or submit under the Securities
Exchange Act of 1934 (1) is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities
and Exchange Commission and (2) is accumulated and communicated to our
management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.

During the course of our preparation of this Form 10-K, we determined
that, as of December 31, 2004, we had an ineffective process for the timely
communication of information regarding the compensation of our chief
executive officer by the compensation committee of our board of directors
to our disclosure committee. The ineffectiveness of this process did not,
however, have any impact on our results of operations or financial
condition. In the first quarter of 2005 and prior to the filing of this
Form 10-K, as a remedial measure, we instituted a procedure for the prompt
communication, by the compensation committee to the disclosure committee,
of any information relating to the compensation of our chief executive
officer that may be required to be disclosed in reports we file under the
Securities Exchange Act of 1934.

ITEM 9B. OTHER INFORMATION

We failed to file the First Amendment to Employment Agreement entered
into as of December 2004 and effective as of July 29, 2004 by and between
CoolSavings, Inc. and Matthew Moog as a material contract on a Current
Report on Form 8-K. The reason for our failure to file this Form 8-K is
described above in Item 9A. A copy of the First Amendment to Employment
Agreement is filed as exhibit 10.29 to this Form 10-K. The material items
of the First Amendment include that on each anniversary of Mr. Moog's
employment agreement, the agreement shall automatically be extended for one
additional year unless otherwise terminated. Also, the First Amendment
formalized Mr. Moog's LTIP grant in lieu of a stock option grant as
previously discussed herein.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information to be contained under the captions "Election of Directors
- - Nominees," "Executive Officers and Compensation," "Board Meetings and
Committees," "Section 16(a) Beneficial Ownership Reporting Compliance,"
"Report of the Audit Committee" and "Corporate Governance" in the
definitive Proxy Statement to be filed by us for our 2005 Annual Meeting of
Stockholders (the "2005 Proxy Statement") is incorporated herein by
reference in response to this item.

ITEM 11. EXECUTIVE COMPENSATION

Information to be contained under the captions "Compensation of
Directors," "Report of the Compensation Committee on Executive
Compensation," "Executive Officers and Compensation," "Compensation
Committee Interlocks and Insider Participation," and "Stockholder Return
Performance Presentation" in the 2005 Proxy Statement is incorporated
herein by reference in response to this item.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

The information to be contained under the captions "Security
Ownership of Certain Beneficial Owners and Management" and "Executive
Compensation" in the 2005 Proxy Statement is incorporated herein by
reference in response to this item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information to be contained under the captions "Certain
Relationships and Related Transactions" in the 2005 Proxy Statement is
incorporated herein by reference in response to this item.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information to be contained under the caption "Report of the
Audit Committee" in the 2005 Proxy Statement is incorporated by reference
in response to this item.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following documents are filed herewith as part of this Form 10-K:

(1) Financial statements: See "Item 8. Financial Statements and
Supplementary Data"

(2) Financial statement schedule: The following financial
statement schedule is filed as a part of this Form 10-K,
--Schedule II--Valuation and Qualifying Accounts on
pages S-1 and S-2.

(3) Exhibits: See "Exhibit Index" beginning on page E-1.

SIGNATURES
----------

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: March 29, 2005 CoolSavings, Inc.

By: /s/ Matthew Moog
-------------------------
Matthew Moog
Chief Executive Officer,
President and Director

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the
capacities and on the dates indicated.

Signature Title Date
- --------- ----- ----

/s/ Matthew Moog President, March 29, 2005
- ------------------------- Chief Executive Officer
Matthew Moog (principal executive
officer) and Director

/s/ David B. Arney Senior Vice President
- ------------------------- of Operations,
David B. Arney Chief Financial Officer
and Corporate Secretary March 29, 2005
(principal financial and
accounting officer)

/s/ Richard H. Rogel Chairman of the Board March 29, 2005
- ------------------------- of Directors
Richard H. Rogel

/s/ Michael W. Alston Director March 29, 2005
- -------------------------
Michael W. Alston

/s/ Gary S. Briggs Director March 29, 2005
- -------------------------
Gary S. Briggs

/s/ James S. Correll Director March 29, 2005
- -------------------------
James S. Correll

Director March 29, 2005
- -------------------------
Joseph G. Fiveash, III

/s/ Guy R. Friddell, III Director March 29, 2005
- -------------------------
Guy R. Friddell, III

Signature Title Date
- --------- ----- ----

/s/ John Giuliani Director March 29, 2005
- -------------------------
John Giuliani

Director March 29, 2005
- -------------------------
Hugh R. Lamle

/s/ Karl B. Quist Director March 29, 2005
- -------------------------
Karl B. Quist

/s/ Bradley Schram Director March 29, 2005
- -------------------------
Bradley Schram

/s/ Daniel Sherr Director March 29, 2005
- -------------------------
Daniel Sherr

Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule

To the Board of Directors and Stockholders
of CoolSavings, Inc.:

Our audits of the financial statements referred to in our report dated
March 29, 2005 appearing in this Form 10-K also included an audit of the
financial statement schedule listed in Item 15(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with
the related financial statements.

PricewaterhouseCoopers LLP

Chicago, Illinois
March 29, 2005

S-1

CoolSavings, Inc.

Schedule II -- Valuation and Qualifying Accounts

Additions (Reductions)
----------------------------------
Charged
Balance at Charged to to Other Balance at
Beginning of Costs and Accounts Deduction End of
Period Expenses (1) (2) Period
------------ ---------- ---------- ---------- ----------
YEAR ENDED
DECEMBER 31,
2004
- ------------

Allowance for
doubtful
accounts
receivables . . $ 551 $ 179 $ -- $ (398) $ 332
Credit memo
reserve . . . . $ 125 $ -- $ 272 $ (305) $ 92

YEAR ENDED
DECEMBER 31,
2003
- ------------

Allowance for
doubtful
accounts
receivable. . . $ 659 $ 240 $ -- $ (348) $ 551
Credit memo
reserve . . . . $ 94 $ -- $ 725 $ (694) $ 125

YEAR ENDED
DECEMBER 31,
2002
- ------------

Allowance for
doubtful
accounts
receivable. . . $ 737 $ 238 $ -- $ (316) $ 659
Credit memo
reserve . . . . $ 144 $ -- $ 385 $ (435) $ 94

(1) Sales credit memos are charged against revenues.

(2) Uncollectible accounts are written off against the allowance for
doubtful accounts receivable and sales credit memos are issued
against the credit memo reserve.

S-2

EXHIBIT INDEX

Exhibit
No. Description
- ------- -----------

2.1 Securities Purchase Agreement dated as of July 30, 2001 between
coolsavings.com, inc., CoolSavings, Inc., Landmark
Communications, Inc., and Landmark Ventures VII, LLC
(incorporated by reference to Exhibit 2.1 to CoolSavings'
Current Report on Form 8-K filed with the Securities and
Exchange Commission (the "Commission") on August 3, 2001
(the "August 2001 8-K"))

2.2 Amendment No. 1 to the Securities Purchase Agreement dated as
of August 16, 2001 between coolsavings.com, inc., CoolSavings,
Inc., Landmark Communications, Inc., and Landmark Ventures VII,
LLC (incorporated by reference to Exhibit 2.3 to CoolSavings'
Quarterly Report on Form 10-Q for the period ending
September 30, 2001)

2.3 Agreement and Plan of Merger dated as of July 30, 2001 by and
between coolsavings.com, inc. and CoolSavings, Inc.
(incorporated by reference to Exhibit 2.2 to the August 2001
8-K)

2.4 Asset Purchase Agreement, dated February 6, 2004 by and among
CoolSavings, Inc., ADS Alliance Data Systems, Inc. and
Alliance Data Systems Corporation (incorporated by reference
to Exhibit 2.1 to CoolSavings' Current Report on Form 8-K
filed with the Commission on February 20, 2004 (the "February
2004 8-K"))

2.5 Transition Services Agreement, dated as of February 6, 2004, by
and between CoolSavings, Inc. and ADS Alliance Data Systems,
Inc. (incorporated by reference to Exhibit 2.2 to the February
2004 8-K)

3.1 Certificate of Incorporation (incorporated by reference to
Appendix D to CoolSavings' Definitive Proxy Statement filed
with the Commission on August 22, 2001)

3.2 Bylaws (incorporated by reference to Appendix F to CoolSavings'
Definitive Proxy Statement filed with the Commission on
July 30, 2001).

4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to CoolSavings' Registration Statement on Form S-1;
file no. 333-94677 (the "S-1"))

4.2 Stockholders Agreement, dated as of June 1, 1998, among
CoolSavings and certain of its Stockholders (incorporated by
reference to Exhibit 4.2 to the S-1)

4.3 Registration Rights Agreement among CoolSavings and the holders
of the 1999 Unsecured, Convertible Subordinated Promissory
Notes (incorporated by reference to Exhibit 4.4 to the S-1)

4.4 Registration Rights Agreement among CoolSavings and the holders
of the Series A Convertible Preferred Stock (incorporated by
reference to Exhibit 4.5 to the Form S-1)

4.5 Warrant between coolsavings.com, inc. and Landmark
Communications, Inc. dated July 30, 2001 (incorporated by
reference to Exhibit 4.1 to the August 2001 8-K)

E-1

Exhibit
No. Description
- ------- -----------

4.6 Warrant between CoolSavings, Inc. and Landmark Communications,
Inc. dated November 12, 2001 (incorporated by reference to
Exhibit 4.6 to CoolSavings' Annual Report on Form 10-K for
the year ended December 31, 2001)

4.7 Registration Rights Agreement between coolsavings.com,inc.,
Landmark Ventures VII, LLC and certain coolsavings.com, inc.
Stockholders dated July 30, 2001 (incorporated by reference to
Exhibit 4.2 to the August 2001 8-K)

10.1* Form of Indemnification Agreement (incorporated by reference
to Exhibit 10.2 to the S-1)

10.2* 1997 Stock Option Plan (incorporated by reference to
Exhibit 10.3 to the S-1)

10.3* 1999 Director Option Plan (incorporated by reference to
Exhibit 10.4 to the S-1)

10.4 Loan and Security Agreement, dated January 18, 2000, between
CoolSavings and American National Bank and Trust Company of
Chicago (incorporated by reference to Exhibit 10.18 to
the S-1)

10.5 Forbearance and Reaffirmation Agreement, dated June 15, 2001,
between coolsavings.com, inc. and American National Bank and
Trust Company of Chicago (incorporated by reference to
Exhibit 10.5 to CoolSavings' Quarterly Report on Form 10-Q for
the period ended June 30, 2001 (the "June 2001 10-Q"))

10.6 Letter Agreement dated July 27, 2001 between coolsavings.com,
inc. and American National Bank and Trust Company of Chicago
(incorporated by reference to Exhibit 10.6 to the June
2001 10-Q)

10.7* Form of Promissory Note from current and former directors of
CoolSavings payable to CoolSavings in consideration for
exercise of stock options and/or warrants (incorporated by
reference to Exhibit 10.6 to the S-1)

10.8 Termination Agreement, dated December 30, 1999 between
CoolSavings and Hillel Levin (incorporated by reference to
Exhibit 10.7 to the S-1)

10.9 Consulting Agreement, dated as of January 1, 2000, between
CoolSavings and Hillel Levin (incorporated by reference to
Exhibit 10.8 to the S-1)

10.10 Lease Agreement, dated February 24, 1997, between Prentiss
Properties Acquisition Partners, L.P. and CoolSavings
(incorporated by reference to Exhibit 10.9 to the S-1)

10.11 Agreement of Sublease, dated June 30, 1998, between Insurance
Company of North America and CoolSavings (incorporated by
reference to Exhibit 10.10 to the S-1)

10.12 Lease Agreement, dated January 3, 2000, between 360 North
Michigan Trust and CoolSavings (incorporated by reference to
Exhibit 10.11 to the S-1)

10.13 Forbearance Letter Agreement dated June 14, 2001 between
coolsavings.com, inc. and 360 North Michigan Trust
(incorporated by reference to Exhibit 10.9 to the June 2001
10-Q)

E-2

Exhibit
No. Description
- ------- -----------

10.14 Form of 8% Senior Subordinated Convertible Notes due March 1,
2006 ("8% Notes") (incorporated by reference to Exhibit 10.1 to
CoolSavings' Quarterly Report on Form 10-Q for the period
ending March 31, 2001 (the "March 2001 10-Q"))

10.15 Form of Warrant issued in connection with 8% Notes ("Warrants")
(incorporated by reference to Exhibit 10.2 to the March 2001
10-Q)

10.16 Form of Letter confirming terms of investment in 8% Notes and
Warrants. (incorporated by reference to Exhibit 10.3 to
the March 2001 10-Q)

10.17 Amended and Restated Senior Secured Loan and Security
Agreement, dated July 30, 2001, between coolsavings.com, inc.
and Landmark Communications, Inc. (incorporated by reference to
Exhibit 10.1 to the August 2001 8-K)

10.18 First Amendment to Amended and Restated Senior Secured Loan and
Security Agreement, dated September 25, 2001, between
coolsavings.com, inc. and Landmark Communications, Inc.
(incorporated by reference to Exhibit 10.8 to CoolSavings'
Quarterly Report on Form 10-Q for the period ending
September 30, 2001 (the "September 2001 10-Q"))

10.19 Commercial Demand Grid Note, dated July 30, 2001, between
coolsavings.com, inc. and Landmark Communications, Inc.
(incorporated by reference to Exhibit 10.2 to the August
2001 8-K)

10.20 Voting Agreement between Landmark Communications, Inc.,
Landmark Ventures VII, LLC and certain coolsavings.com, inc.
Stockholders, dated July 30, 2001 (incorporated by reference to
Exhibit 9.1 to the August 2001 8-K)

10.21 Amended and Restated Commercial Demand Grid Note, dated
September 28, 2001, between CoolSavings, Inc. and Landmark
Communications, Inc. (incorporated by reference to
Exhibit 10.9 to the September 2001 10-Q)

10.22* 2001 Stock Option Plan (incorporated by reference to
Exhibit 10.3 to the August 2001 8-K)

10.23 Form of Stockholders Agreement between CoolSavings, Inc.,
Landmark Ventures VII, LLC and certain Stockholders of
coolsavings.com, inc. (incorporated by reference to
Exhibit 10.4 to the August 2001 8-K)

10.24 Severance Agreement dated July 29, 2001 between
coolsavings.com, inc. and Steven M. Golden (incorporated by
reference to Exhibit 10.12 to the June 2001 10-Q)

10.25* Employment Agreement dated July 29, 2001 between
coolsavings.com, inc. and Matthew M. Moog (incorporated by
reference to Exhibit 10.13 to the June 2001 10-Q)

10.26 Senior Secured Note dated July 30, 2001 between
coolsavings.com, inc. and Landmark Communications, Inc.
(incorporated by reference to Exhibit 10.36 to CoolSavings'
Annual Report on Form 10-K for the year ended December 31,
2001)

E-3

Exhibit
No. Description
- ------- -----------

10.27 Letter Agreement by and among Landmark Communications, Inc.,
Landmark Ventures VII, LLC and CoolSavings, Inc. dated
November 12, 2001 (incorporated by reference to Exhibit 10.27
to the CoolSavings' Annual Report on Form 10-K for the period
ended December 31, 2002)

10.28* CoolSavings, Inc. Long Term Incentive Plan effective as of
January 1, 2003 (incorporated by reference to Exhibit 10.28 to
CoolSavings' Annual Report on Form 10-K for the year ended
December 31, 2003)

10.29* First Amendment to Employment Agreement, effective as of
July 29, 2004, between CoolSavings, Inc. and Matthew M. Moog

10.30* Letter Agreement Regarding Loan Repayment Forbearance by and
between Landmark Communications, Inc. and CoolSavings, Inc.
dated March 29, 2005

23.1 Consent of Independent Registered Public Accounting Firm

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

- -------------

* Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Annual Report on
Form 10-K.

E-4