COOLSAVINGS INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2005

OR

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

For the transition period from _____ to _____

Commission file number 000-30199

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

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

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

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

_________________________________________

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

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

Number of shares of common stock, $0.001 par value per share, outstanding
as of April 30, 2005: 39,687,472. (This number represents the number of
shares that are required to be reported here. The accompanying report
describes additional shares of common stock that are issuable upon
conversion of outstanding shares of preferred stock and the exercise of
outstanding warrants and outstanding stock options.)

INDEX

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Balance Sheets
March 31, 2005 (Unaudited) and
December 31, 2004 . . . . . . . . . . . . . . . . 3

Statements of Operations (Unaudited)
Three Months Ended March 31, 2005 and 2004. . . . 6

Statement of Changes in Convertible Redeemable
Preferred Stock and Stockholders' Deficit
(Unaudited) Three Months Ended
March 31, 2005. . . . . . . . . . . . . . . . . . 7

Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2005 and 2004. . . . 8

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

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 21

Item 3. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . 42

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

PART II OTHER INFORMATION

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 43

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

Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . 43

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 44

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

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

March 31, December 31,
2005 2004
---------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents . . . . . . . . . $ 6,856 $ 7,162
Accounts receivable, net of allowance of
$625 and $424 at March 31, 2005 and
December 31, 2004, respectively . . . . . 9,730 6,681
Prepaid and other assets, including
amounts due from related parties of $0
and $4, at March 31, 2005 and
December 31, 2004, respectively . . . . . 338 258
---------- ----------
Total current assets. . . . . . . . . 16,924 14,101
---------- ----------

Property and equipment. . . . . . . . . . . . 9,266 9,434
Capitalized software costs. . . . . . . . . . 1,490 1,490
Capitalized web site costs. . . . . . . . . . 4,014 3,957
---------- ----------

Total . . . . . . . . . . . . . . . . 14,770 14,881

Less accumulated depreciation and
amortization. . . . . . . . . . . . . . . . (12,306) (12,247)
---------- ----------
2,464 2,634
Intangible assets, patents and licenses,
net of accumulated amortization of $513
and $512 at March 31, 2005 and December 31,
2004, respectively. . . . . . . . . . . . . 17 18

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

Total assets. . . . . . . . . . . . . . . . . $ 19,974 $ 17,322
========== ==========

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

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

March 31, December 31,
2005 2004
---------- ------------
LIABILITIES
-----------
Current liabilities:
Accounts payable, including amounts due
to related parties of $0 and $20 at
March 31, 2005 and December 31, 2004,
respectively. . . . . . . . . . . . . . . $ 479 $ 655
Accrued marketing network partner fees,
including amounts due to related parties
of $73 and $100 at March 31, 2005 and
December 31, 2004, respectively . . . . . 2,288 1,288
Accrued marketing expense, including
amount due to related parties of $48
and $7 at March 31, 2005 and December 31,
2004, respectively. . . . . . . . . . . . 2,654 1,609
Accrued compensation. . . . . . . . . . . . 1,218 1,849
Accrued interest due to related party . . . 88 89
Accrued expenses, including amounts due
to related parties of $913 and $843 at
March 31, 2005 and December 31, 2004,
respectively. . . . . . . . . . . . . . . 1,524 1,530
Lease exit cost liability . . . . . . . . . 187 210
Deferred revenue. . . . . . . . . . . . . . 313 312
Senior secured note payable due to
related party . . . . . . . . . . . . . . 6,701 6,567
---------- ----------
Total current liabilities . . . . . . 15,452 14,109
---------- ----------
Long-term liabilities:
Deferred revenue. . . . . . . . . . . . . . 248 260
Lease exit cost liability . . . . . . . . . 942 980
Deferred income tax liability . . . . . . . . 17 13
Other long-term liabilities . . . . . . . . . -- 4
---------- ----------
Total long-term liabilities . . . . . 1,207 1,257
---------- ----------
Commitments and contingencies (Note 9)

Convertible redeemable cumulative Series B
Preferred Stock, $0.001 par value,
258,000,000 shares authorized at March 31,
2005 and December 31, 2004, and
176,244,126 and 172,788,359 issued and
outstanding at March 31, 2005 and
December 31, 2004, respectively (liquida-
tion preference of $0.1554 per share at
March 31, 2005 and December 31, 2004) . . . 27,387 26,850
Convertible redeemable Series C Preferred
Stock, $0.001 par value, 13,000,000
shares authorized, 12,752,024 and
13,000,000 shares issued and outstanding
at March 31, 2005 and December 31, 2004,
respectively (liquidation preference
of $0.1665 per share at March 31, 2005
and December 31, 2004). . . . . . . . . . . 1,913 1,950

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

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

March 31, December 31,
2005 2004
---------- ------------

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

Common stock, $0.001 par value per share,
379,000,000 shares authorized at
March 31, 2005 and December 31, 2004,
and 39,687,472 and 39,409,298 shares
issued and outstanding at March 31,
2005 and December 31, 2004. . . . . . . . . 40 39

Additional paid-in capital. . . . . . . . . . 69,470 69,655

Accumulated deficit . . . . . . . . . . . . . (95,495) (96,538)
---------- ----------

Total stockholders' deficit . . . . . (25,985) (26,844)
---------- ----------

Total liabilities, convertible
redeemable preferred stock
and stockholders' deficit . . . . . $ 19,974 $ 17,322
========== ==========

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

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

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)

2005 2004
----------- ----------
Revenue:
e-marketing services. . . . . . . . . . . . $ 15,256 $ 7,937
License royalties . . . . . . . . . . . . . 22 44
----------- ----------
Net revenues. . . . . . . . . . . . . . . . . 15,278 7,981

Operating costs and expenses:
Cost of revenues. . . . . . . . . . . . . . 5,055 662
Sales and marketing . . . . . . . . . . . . 5,798 5,393
Product development . . . . . . . . . . . . 935 973
General and administrative. . . . . . . . . 2,298 1,779
Lease exit costs. . . . . . . . . . . . . . 23 54
----------- ----------
Total operating expenses. . . . . . . . . . . 14,109 8,861
----------- ----------

Income (loss) from operations . . . . . . . . 1,169 (880)

Other income (expense):
Interest and other income . . . . . . . . . 23 8
Interest expense. . . . . . . . . . . . . . (133) (124)
----------- ----------
Total other (expense) . . . . . . . . . . . . (110) (116)
----------- ----------

Income (loss) before income taxes . . . . . . 1,059 (996)
Income taxes. . . . . . . . . . . . . . . . . (16) (2)
----------- ----------
Net income (loss) . . . . . . . . . . . . . . 1,043 (998)

Cumulative dividend on Series B
Preferred Stock . . . . . . . . . . . . . . (547) (506)
----------- ----------

Income (loss) applicable to
common stockholders . . . . . . . . . . . . $ 496 (1,504)
=========== ==========

Basic net income (loss) per share . . . . . . $ 0.01 $ (0.04)
=========== ==========

Weighted average shares used in the
calculation of basic net income (loss)
per share . . . . . . . . . . . . . . . . . 39,479,795 39,218,799
=========== ==========

Diluted net income (loss) per share . . . . . $ 0.00 $ (0.04)
=========== ==========

Weighted average shares used in the
calculation of diluted net income (loss)
per share . . . . . . . . . . . . . . . . . 244,422,405 39,218,799
=========== ==========

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

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

FOR THE THREE MONTHS ENDED MARCH 31, 2005
(UNAUDITED)
(in thousands, except share and per share data)

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

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)

2005 2004
---------- ----------
Cash flows provided by (used in)
operating activities:
Net income (loss) . . . . . . . . . . . . $ 1,043 $ (998)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization . . . . . 349 297
Provision for doubtful accounts,
net of write-offs . . . . . . . . . . 296 125
Stock option (credit) expense . . . . . 319 (74)
Interest payment in kind. . . . . . . . 133 124
Write-off related to website
project costs . . . . . . . . . . . . 19 2
Increase in deferred tax provision. . . 4 2
(Decrease) in other long-term
liabilities . . . . . . . . . . . . . (4) --
Changes in assets and liabilities:
(Increase) in accounts receivable . . . (3,347) (345)
(Increase) decrease in prepaid and
other current assets. . . . . . . . . (80) 44
(Decrease) increase in accounts payable (176) 159
(Decrease) increase in deferred revenue (11) 84
Increase in accrued and
other liabilities . . . . . . . . . . 1,397 669
(Decrease) in lease exit cost
liability . . . . . . . . . . . . . . (61) (7)
---------- ----------
Net cash flows (used in) provided by
operating activities. . . . . . . . . . . (119) 82
---------- ----------
Cash flows used in investing activities:
Purchases of property and equipment . . . (49) (133)
Acquisition of the business assets
of TMS. . . . . . . . . . . . . . . . . -- (390)
Capitalized web site development costs. . (149) (196)
Proceeds from sale of property and
equipment . . . . . . . . . . . . . . . 4 --
---------- ----------
Net cash used in investing activities . . . (194) (719)
---------- ----------
Cash flows provided by financing activities:
Stock options exercised . . . . . . . . . 7 10
---------- ----------
Net cash provided by provided by
financing activities. . . . . . . . . . . 7 10
---------- ----------
Net (decrease) in cash. . . . . . . . . . . (306) (627)
Cash and cash equivalents,
beginning of period . . . . . . . . . . . 7,162 7,347
---------- ----------
Cash and cash equivalents,
end of period . . . . . . . . . . . . . . $ 6,856 $ 6,720
========== ==========

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

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

1. BASIS OF PRESENTATION:

CoolSavings, Inc. ("CoolSavings" or the "Company") 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 goods ("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 their results across the Company's network.

As further described below, Landmark Communications, Inc. and
Landmark Ventures VII, LLC (together, "Landmark") have the right to at any
time demand payment in full of obligations due to Landmark under a senior
secured loan agreement and require the Company to redeem the Convertible
Redeemable Cumulative Series B Preferred Stock (the "Series B Preferred
Stock") held by Landmark. See Note 5 for a discussion of Landmark's
agreement, dated March 29, 2005, that until April 1, 2006, it will not
demand repayment of amounts due under the senior secured 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
(the "Forbearance Accommodation Agreement"). If Landmark exercises its
demand and/or redemption rights, the Company's ability to meet its
obligations to Landmark in the ordinary course of business is dependent
upon management's ability to maintain profitable operations and to either
obtain a continuation of the Forbearance Accommodation Agreement, or obtain
financing from sources with acceptable terms and conditions after April 1,
2006.

These financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all the
disclosures required in the financial statements included in the Company's
most recently filed Annual Report on Form 10-K. These financial statements
should be read in conjunction with the financial statements and related
notes in the Form 10-K of the Company for the year ended December 31, 2004.

In the opinion of the Company, the accompanying unaudited financial
statements reflect all normal recurring adjustments necessary for a fair
statement of the Company's financial position as of March 31, 2005, its
results of operations for the three months ended March 31, 2005 and 2004
and its cash flows for the three months ended March 31, 2005 and 2004.
These quarterly results of operations are not necessarily indicative of
those expected for the full year. Certain prior period amounts related
primarily to the amortization of certain capitalized web site costs have
been reclassified to conform to the current period's presentation. The
impact of these reclassifications resulted in an increase to cost of
revenues of $39 in the three month period ended March 31, 2004 and a
decrease to product development expense of $39 for the same period.

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 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
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, 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 Financial Accounting Standards (SFAS) No. 142 "Goodwill
and Other Intangible Assets."

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

In addition, in connection with the TMS 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 March 31, 2005, the deferred revenue liability relating to this
agreement was $295.

The following unaudited pro forma combined financial information
combines the historical financial information of CoolSavings and TMS for
the quarter ended March 31, 2004 as if the acquisition had occurred on
January 1, 2004. 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 the period presented and had the impact of
possible revenue enhancements and expense efficiencies, among other
potential positive and negative factors, been considered, nor does it
purport to indicate the results which may be obtained in the future.

For the
Three Months
Ended
March 31,
2004
(Unaudited)
------------

Pro forma net revenues. . . . . . . . . . . . . . . . . . $ 7,965

Pro forma net loss. . . . . . . . . . . . . . . . . . . . (1,504)

Cumulative dividend on Series B Preferred Stock . . . . . (506)

Pro forma loss applicable to common stockholders. . . . . $ (2,010)

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

Weighted average shares used in the calculation of
pro forma diluted net loss per share. . . . . . . . . . 38,218,799

3. STOCK-BASED COMPENSATION:

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

In December 2004, FASB issued 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 requires companies to expense the fair
value of employee stock options and similar awards. In April, 2005 the
Securities and Exchange Commission announced the adoption of a rule that
amends the compliance dates for FAS 123R. The new rule allows companies to
implement FAS 123R at the beginning of their next fiscal year that begins
after June 15, 2005, which for the Company is the first quarter of 2006.
FAS 123R applies to all outstanding and unvested share-based payment awards
at the Company's adoption date.

Once FAS 123R is adopted in 2006, 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 March 2005, the SEC
issued Staff Accounting Bulletin No. 107 (SAB 107) on FAS 123R to assist
reporting companies by simplifying some of the implementation challenges of
FAS 123R. In SAB 107, the SEC staff acknowledges that there exists a range
of potential conduct, conclusions, or methodologies that reasonably could
be applied in estimating fair values of share-based arrangements; thus, if
a registrant makes a good-faith estimate in accordance with the provisions
of FAS 123R, future events that affect an instrument's fair value will not
cast doubt on the reasonableness of the original estimate. For the year
ended December 31, 2006, the Company expects to expense approximately $30
in additional stock option expense upon application of the modified
prospective method of this new accounting standard.

The Company recognized $319 in stock option compensation expense in
the three months ended March 31, 2005, in conjunction with grants made
under its employee stock option plans. Stock option compensation credits
of $74 were recognized in the three months ended March 31, 2004. The
compensation credits and charges were recorded in general and
administrative expense and related to stock options previously issued to
Steven Golden, a former Chief Executive Officer of the Company. Effective
July 30, 2001, the Company entered into a severance agreement with Mr.
Golden which changed the terms of his options, requiring that they be
accounted for as variable options under Accounting Principles Board Opinion
Number 25, "Accounting for Stock Issued to Employees." The compensation
expense charges and credits recognized for the three months ended March 31,
2005 and 2004 are based upon the difference between the closing price of
the Company's stock at the beginning and end of each period. This charge
will continue to be adjusted in future periods for increases and decreases
in the Company's stock price above the exercise price of $0.50 until the
options are exercised, expire or are forfeited.

The Company has adopted the disclosure requirements of SFAS No. 148,
"Accounting for Stock Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123." Had expense been recognized using
the fair value method described in SFAS 123, the Company would have
reported the following results of operations using the Black-Scholes option
pricing model:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2005 2004
----------- ----------
Net income (loss) applicable to common
stockholders, as reported. . . . . . . . $ 496 $ (1,504)

Add (Deduct): Stock option compensation
expense (credit). . . . . . . . . . . . . 319 (74)

Deduct: Stock based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects . . . . . . . . . . . (40) (53)
----------- ----------
Pro forma net income (loss) applicable
to common stockholders. . . . . . . . . . $ 775 $ (1,631)
=========== ==========

Weighted average shares outstanding
(basic) . . . . . . . . . . . . . . . . . 39,479,795 39,218,799
Weighted average shares outstanding
(diluted) . . . . . . . . . . . . . . . . 244,422,405 39,218,799

Earnings per share:
Basic - as reported . . . . . . . . . . . $ 0.01 $ (0.04)
Diluted - as reported . . . . . . . . . . $ 0.00 $ (0.04)

Basic - pro forma . . . . . . . . . . . . $ 0.02 $ (0.04)
Diluted - pro forma . . . . . . . . . . . $ 0.00 $ (0.04)

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

There were no stock options granted during the three months ended
March 31, 2005 or 2004.

4. RECENT ACCOUNTING 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 fair value of employee stock options and
similar awards. In April, 2005 the Securities and Exchange Commission
announced the adoption of a rule that amends the compliance dates for FAS
123R. The new rule allows companies to implement FAS 123R at the beginning
of their next fiscal year that begins after June 15, 2005, which for the
Company is the first quarter of 2006. FAS 123R applies to all outstanding
and unvested share-based payment awards at the Company's adoption date.

Once FAS 123R is adopted in 2006, 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 March 2005, the SEC
issued Staff Accounting Bulletin No. 107 (SAB 107) on FAS 123R to assist
preparers by simplifying some of the implementation challenges of FAS 123R.

In SAB 107, the SEC staff acknowledges that there exists a range of
potential conduct, conclusions, or methodologies that reasonably could be
applied in estimating fair values of share-based arrangements; thus, if a
registrant makes a good-faith estimate in accordance with the provisions of
FAS 123R, future events that affect an instrument's fair value will not
cast doubt on the reasonableness of the original estimate. For the twelve-
month period ended December 31, 2006, the Company expects to expense
approximately $30 in additional stock option expense upon application of
the modified prospective method of this new accounting standard.

In December 2004, the FASB issued Statement No. 153, "Exchanges of
Nonmonetary Assets" (FAS 153). This pronouncement amends APB No. 29,
"Accounting for Nonmonetary Transactions" (APB 29). FAS 153 eliminates the
exception for nonmonetary exchanges of similar productive assets present in
APB 29 and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance (i.e.,
transactions that are not expected to result in significant changes in the
cash flows of the reporting entity). We do not expect the provisions of
FAS 153 to have a material impact on our financial position or results of
operations.

In March 2005, the FASB issued Interpretation No. 47 (FIN 47),
"Accounting for Conditional Asset Retirement Obligations." FIN 47 is an
interpretation of certain terms and concepts in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations" (FAS 143). FIN 47 clarifies
that conditional obligations meet the definition of an asset retirement
obligation as used in FAS 143, and therefore should be recognized if the
fair value of the contractual obligation is reasonably estimable.
Clarification of when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation is
also contained in FIN 47, as well as identification of certain disclosures
required about unrecognized asset retirement obligations. The provisions
of FIN 47 are effective no later than the end of fiscal years ending after
December 15, 2005. The Company does not expect adoption of FIN 47 to have
a material effect on its results of operations or financial position.

5. SENIOR SECURED LOAN:

In 2001, Landmark loaned the Company $5,000 pursuant to a senior
secured note, which loan is due on June 30, 2006 (the "Senior Secured
Loan"). The Senior Secured Loan is governed by the terms of an Amended and
Restated Senior Secured Loan and Security Agreement dated July 30, 2001, as
amended (the "Amended and Restated Loan Agreement"). The Senior Secured
Loan is secured by a lien on all of the Company's assets and bears interest
at 8.0% per annum. The interest is paid quarterly in arrears in the form
of additional notes and additional shares of common stock that may be
purchased under a warrant (described below). The Company has the right to
prepay the Senior Secured Loan on or after the third anniversary thereof if
certain conditions are met. The Amended and Restated Loan Agreement also
contains financial covenants and negative and affirmative covenants that,
among other things, restrict the Company's ability to incur additional
indebtedness and take other actions without the consent of Landmark. At
March 31, 2005, the Company was not in compliance with certain financial
covenants of the Senior Secured Loan, including:

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

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

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

These failures constitute events of default that cannot be cured
under the Amended and Restated Loan Agreement. Consequently, the Senior
Secured Loan, including all accrued interest thereon, is immediately due
and payable at the option of Landmark, subject to the Forbearance
Accommodation Agreement. Accordingly, the Company has classified as
currently payable as of March 31, 2005 amounts owed pursuant to the Senior
Secured Loan which, including principal and the paid-in-kind interest which
has been compounded and accrued on the principal balance, totaled $6,789.

Pursuant to the Forbearance Accommodation Agreement, 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.

In connection with the Senior Secured Loan, on November 12, 2001, the
Company issued to Landmark a warrant to purchase 10,000,000 shares of the
Company's common stock (the "Landmark Warrant"). The Landmark Warrant has
a term of eight years (expiring July 30, 2009) and may be exercised in
whole or in part at any time. The Landmark Warrant contains a net exercise
feature and is exercisable at an exercise price of $0.50 per share
(increasing to $0.75 per share on July 30, 2005, if not previously
exercised). The number of shares of the Company's common stock that
Landmark is entitled to purchase under the Landmark Warrant increases by
two shares of common stock for each dollar of interest accrued on the
Senior Secured Loan and paid-in-kind by the Company on a quarterly basis
(January 31, April 30, July 31 and October 31). As of March 31, 2005, the
Landmark Warrant was exercisable for 13,122,772 shares of the Company's
common stock at an exercise price of $0.50 per share. See Note 11 for a
discussion of Landmark's expected election to exercise the Landmark
Warrant, in part, on May 16, 2005 to purchase 13,255,091 shares of the
Company's common stock at an exercise price of $0.50 per share. The
exercise of this Warrant is expected to result in proceeds to the Company
of approximately $6,628.

6. REDEEMABLE PREFERRED STOCK:

a. Series B Preferred Stock:

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

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

On October 24, 2002, in connection with a Shortfall Event which
occurred on June 30, 2002 (related to the amount of current assets compared
to current liabilities at such date), Landmark exercised its right to
purchase 17,825,212 shares of Series B Preferred Stock and paid the Company
$2,770 for such shares ($0.1554 per share). On December 20, 2002,
Landmark, at the Company's request, applied the $8,770 of principal and
$705 of accrued interest then outstanding under the Grid Note toward the
purchase of 60,967,777 shares of Series B Preferred Stock. As of March 31,
2005, Landmark held 176,244,126 shares (including dividends paid "in-kind")
of Series B Preferred Stock (and has rights with respect to accrued
dividends thereon), and 10,889,636 shares of common stock, in addition to
the warrant to purchase 13,122,772 shares of the Company's common stock
described above. At March 31, 2005, dividends in the amount of 3,524,882
shares of Series B Preferred Stock had accrued but had not been declared.
For the three months ended March 31, 2005, dividends in the amount of
3,455,767 shares of Series B Preferred Stock were declared to the holders
of Series B Preferred Stock. The Series B Preferred Stock is subject to
certain redemption rights and requirements outside the control of the
Company. For example, if the Company wants to redeem the Series B Preferred
Stock, the Company's common stock must trade at or above a price of $3.00
per share for a period of 20 consecutive trading days or 60 out of 80
trading days; or, given the existing defaults under the Senior Secured
Loan, Landmark may require the Company to redeem its Series B Preferred
Stock at any time, subject to the Forbearance Accommodation Agreement. As
a result of the defaults under the Amended and Restated Loan Agreement,
Landmark may, at its option and subject to the Forbearance Accommodation
Agreement, require the Company to redeem, at any time, all of the issued
and outstanding Series B Preferred Stock, which had an aggregate redemption
value of $27,387 as of March 31, 2005.

Landmark's ownership will continue to increase due to the issuance of
additional shares of Series B Preferred Stock for dividends accruing on
outstanding Series B Preferred Stock. Landmark's ownership also will
increase if it exercises the Landmark Warrant on May 16, 2005, as discussed
in Note 11. The number of shares of the Company's stock that Landmark is
entitled to purchase under the Landmark Warrant will continue to increase
as "in-kind" payments are made for interest accruing on the Senior Secured
Loan.

As of March 31, 2005, the Company had reserved approximately 193
million shares of common stock for the conversion of all the outstanding
shares of Series B Preferred Stock and accrued dividends thereon, and the
exercise of the outstanding Landmark Warrant.

b. Series C Preferred Stock:

As a condition to the consummation of the Landmark purchase of
Series B Preferred Stock on November 12, 2001, the Company issued to three
individuals (including Richard Rogel and Hugh Lamle, who are directors of
the Company) an aggregate of 13,000,000 shares of $0.001 par value,
redeemable Series C preferred stock (the "Series C Preferred Stock"). The
Series C Preferred Stock has certain conversion rights (see "c. Conversion
of Series B and C Preferred Stock"). The Series C Preferred Stock was
issued in exchange for certain notes held by those individuals, the related
accrued interest, and warrants to purchase 1,050,000 shares of common stock
previously issued to those individuals. On March 11, 2005, one of the
Company's directors and holders of the Series C Preferred Stock converted
247,976 shares of Series C Preferred Stock into the same number of the
Company's common stock, reducing the total number of shares of Series C
Preferred Stock outstanding to 12,752,024 as of March 31, 2005.

c. Conversion of Series B and C Preferred Stock

As of March 31, 2005, the Company had outstanding 39,687,472 shares
of common stock, 176,244,126 shares of Series B Preferred Stock, and
12,752,024 shares of Series C Preferred Stock. The shares of both series of
preferred stock of the Company are convertible at the option of the holders
into shares of common stock on a one-for-one basis, subject to anti-
dilution provisions set forth in the Company's Certificate of
Incorporation. If all the outstanding shares of preferred stock of the
Company had been converted into shares of common stock, a total of
228,683,622 shares of common stock would have been outstanding as of
March 31, 2005.

7. COSTS ASSOCIATED WITH LEASE EXIT ACTIVITIES:

In accordance with FASB Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," the Company continually
assesses its future office space requirements and sublease market
conditions to estimate its future net costs associated with unoccupied
leased office space. For the three months ended March 31, 2005 and 2004,
the Company recorded operating expenses of $23 and $54, respectively.
These expenses represent accretion expense associated with this liability
as well as the net impact of revisions made to its estimate of future net
costs based on its current assessment of its space requirements and
sublease market conditions.

For the three months ended March 31, 2005 and 2004, lease exit costs
consisted of the following:
Three Months Ended
March 31,
(unaudited)
--------------------
2005 2004
-------- --------
Lease obligation, net of estimated
sub-lease income. . . . . . . . . . . . . . $ -- $ 29
Accretion expense . . . . . . . . . . . . . . 23 25
-------- --------
Lease exit costs. . . . . . . . . . . . . . . $ 23 $ 54
======== ========

At March 31, 2005, the liability associated with the lease exit costs
consisted of the following:

Balance at Subsequent Balance at
December 31, Accruals, March 31,
2004 Net Payments 2005
----------- ---------- -------- ----------
Lease obligation,
net of estimated
sub-lease income . . . $ 1,103 $ 26 $ (70) $ 1,059
Broker commissions
and other trans-
action costs . . . . . 87 (3) (14) 70
-------- -------- -------- --------
Total lease exit
liability. . . . . . . 1,190 23 (84) 1,129

Less: current
portion of lease
exit liability . . . . (210) (187)
-------- --------
Long-term lease
exit liability . . . . $ 980 $ 942
======== ========

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

8. EARNINGS PER SHARE:

FASB Statement No. 128 requires companies to provide a reconciliation
of the numerator and denominator of the basic and diluted earnings per
share computations. The calculation below provides net loss, weighted
average common shares outstanding and the resultant net loss per share on
both a basic and diluted basis for the three months ended March 31, 2005
and March 31, 2004. As of March 31, 2005, there were outstanding options
to purchase 7,033,625 shares of the Company's common stock, an outstanding
investor warrant to purchase 13,122,772 shares of common stock and
outstanding preferred stock convertible into 188,996,150 shares of common
stock.

THREE MONTHS ENDED
MARCH 31,
(Unaudited)
-----------------------
2005 2004
----------- ----------
Numerator:
Net income (loss) . . . . . . . . . . . . .$ 1,043 $ (998)
Cumulative dividend on Series B
Preferred Stock . . . . . . . . . . . . . (547) (506)
----------- ----------
Income (loss) applicable to
common stockholders . . . . . . . . . . .$ 496 $ (1,504)
=========== ==========

Basic income (loss) per share . . . . . . . .$ 0.01 $ (0.04)
=========== ==========
Denominator:
Weighted average shares used in
the calculation of basic income
(loss) per share. . . . . . . . . . . . . 39,479,795 39,218,799
=========== ==========

Diluted income (loss) per share . . . . . . .$ 0.00 $ (0.04)
=========== ==========
Denominator:
Weighted average shares used in
the calculation of diluted income
(loss) per share. . . . . . . . . . . . .244,422,405 39,218,799
=========== ==========

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
("Wachovia") to collateralize lease deposits required with respect to the
Company's office facilities (the "Landmark Letters of Credit"). Under the
Reimbursement Agreement, the Company has agreed, among other things, to
reimburse Landmark for all amounts that Landmark is required to pay
Wachovia under the bank agreement related to the Landmark Letters of
Credit, including all fees, penalties, interest and amounts in connection
with draws on the Landmark Letters of Credit. The reimbursement
obligations are secured by a lien on all of the Company's assets pursuant
to the Amended and Restated Loan Agreement. The aggregate amount of
letters of credit required to collateralize lease deposits on the Company's
office facilities declined to $747 as of March 31, 2005, due to the
scheduled reductions contained in the lease agreements for the Company's
Chicago, Illinois and San Francisco, California facilities. The Landmark
Letter of Credit for the Company's Chicago facility was renewed in 2005 for
a one-year period ending April 2006. Landmark may, in its sole discretion,
cancel any or all of the Landmark Letters of Credit upon 90 days' written
notice to the Company. If the Landmark Letters of Credit expire or are so
cancelled, the Company would need to enter into an alternate credit
arrangement.

b. LONG TERM INCENTIVE PLAN

Effective January 1, 2003, the Company established the CoolSavings,
Inc. Long Term Incentive Plan (the "LTIP"). Employee participation in the
LTIP is at the sole discretion of the Company's Board of Directors. LTIP
participants are eligible to receive units which may increase in value if
the Company achieves certain long term profitability objectives. After
vesting, units which have increased in value above the grant price since
the date of grant can be redeemed with the Company for cash payments equal
to their increase in value. The Company will record an expense during
periods in which the value of the outstanding units increases above the
grant price. During the three months ended March 31, 2005 and March 31,
2004, the value of the outstanding units was below the grant price.
Therefore, no expense was recorded during those periods.

10. SEGMENT DISCLOSURES:

In accordance with FASB Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (FAS 131), segment
information is reported consistent with the Company's method of internal
reporting. FAS 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. The Company's ongoing
evaluation of its business and its desire to measure the progress of its
new initiatives will likely result in future changes in the nature and
number of its reportable operating segments.

For 2004, the Company reported results in two operating segments: the
CoolSavings service and Grocery Solutions. Grocery Solutions was a business
line acquired from ADS in early 2004. Beginning in 2005, due to changes in
its internal reporting, the Company determined that it operates in three
segments, representing the distribution channels for its services: the
CoolSavings Web Site Business, the Lead Generation Network, and FreeStyle
Rewards. The CoolSavings Web Site Business segment includes all revenues
generated from consumer activity occurring on coolsavings.com, the
Company's web site, including revenue from lead generation, e-mail, and
coupon services, as well as coupon services generated on the sites of the
Company's partners in its distribution network. The CoolSavings Web Site
Business segment also includes revenues for electronic coupons generated
from activity occurring on the web sites of the Company's grocery retailer
partners. The Lead Generation Network segment includes revenue generated
from consumer activity occurring on the Company's Lead Generation Network,
a distribution network of its partners' web properties for its advertisers'
lead generation offers, which became fully operational in the second
quarter of 2004. The FreeStyle Rewards segment includes online shopping
and lead generation revenue generated from activity occurring on the
Company's freestylerewards.com web site. The FreeStyle Rewards business
line was launched in the fourth quarter of 2004.

The expenses presented below for each of these business segments
include costs directly associated with attracting consumers for each
segment such as online advertising costs, lead generation partner fees,
consumer rewards costs, and certain dedicated costs related to sales,
business development, and product development activities. No other
expenses of the Company or any assets and liabilities of the Company are
allocated to segments for internal reporting purposes. There is no inter-
segment revenue.

The table below contains segment financial data used by the chief
operating decision maker of the company for the three months ended
March 31, 2005. Results for the three month period ended March 31, 2004 are
presented to conform with the 2005 presentation:

11. SUBSEQUENT EVENT:

Landmark has notified the Company that on May 16, 2005, Landmark
intends to exercise the Landmark Warrant, in part, to purchase 13,255,091
shares of the Company's common stock at an exercise price of $0.50 per
share. This exercise, if it occurs, will result in proceeds to the Company
of approximately $6,628. The Company intends to use the proceeds, if any,
to repay indebtedness to Landmark or for working capital of the business.

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

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

You should read the following discussion of our financial condition
and results of operations along with the financial statements and the
related notes included elsewhere in this report. This discussion contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements regarding our
expectations, beliefs, hopes, intentions or strategies. Where possible,
these forward-looking statements have been identified by use of words such
as "project," "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 Quarterly Report on Form 10-Q, may cause our actual
results and performance to differ materially from the future results and
performance expressed in, or implied by, these forward-looking statements.
These risks, uncertainties, and other factors include, without limitation,
our ability to secure financing to meet our long-term capital needs, our
ability to 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 "Risk Factors" below.

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

OVERVIEW AND RECENT DEVELOPMENTS

CoolSavings provides interactive marketing services to advertisers,
their agencies, and publishers. Through the CoolSavings Marketing Network,
we reached 11.7 million new registering consumers in the first quarter of
2005 across our network of partner sites and our web properties:
coolsavings.com, freestylerewards.com, and freegiftcardsnow.com.
Registering consumers are defined as individuals presented with targeted
offers from a CoolSavings advertiser while registering on a CoolSavings
Marketing Network site. The CoolSavings Marketing Network provides
convenient and personalized offers from a broad range of advertisers.
During the first quarter of 2005, we provided marketing services to nearly

450 advertisers in the retail, consumer packaged goods (CPG), education,
financial, and media and publishing industries. Our services help our
advertisers 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 their advertising
results across our network. For participating CoolSavings Marketing
Network partners, we provide additional potential sources of revenue, as
well as valuable content to increase visitation and activation at their web
properties.

In accordance with FASB Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (FAS 131), we report
segment information consistent with our method of internal reporting. FAS
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. Our ongoing evaluation of our business and
our desire to measure the progress of our new initiatives will likely
result in future changes in the nature and number of our reportable
operating segments.

For 2004, we reported results in two operating segments: the
CoolSavings service and Grocery Solutions. Grocery Solutions was a business
line acquired from ADS in early 2004. Beginning in 2005, due to changes in
our internal reporting, we determined that we currently have three
reportable operating segments, representing the distribution channels for
our services: the CoolSavings Web Site Business, the Lead Generation
Network, and FreeStyle Rewards. Therefore, we are providing financial
information for the three month periods ended March 31, 2005 and March 31,
2004 for these three reportable segments based on our internal allocation
of revenues and expenses. The CoolSavings Web Site Business segment
includes all revenues generated from consumer activity occurring on the
coolsavings.com, our web site, including revenue for lead generation, e-
mail, and coupon services, as well as coupon services generated on the
sites of our partners in our distribution network. The CoolSavings Web
Site Business segment also includes revenues for electronic coupons
generated from activity occurring on the web sites of our grocery retailer
partners. The Lead Generation Network segment includes revenue generated
from consumer activity occurring on our Lead Generation Network, a
distribution network of our partners' web properties for our advertisers'
lead generation offers. The FreeStyle Rewards segment includes online
shopping and lead generation revenue generated from activity occurring on
our freestylerewards.com web site. For segment financial information, see
Note 10 to the Financial Statements included in this Form 10-Q.

For the three months ended March 31, 2005, we recorded quarterly
revenues of $15.3 million and net income of $1.0 million. We expect to
generate sufficient cash flow from operations to meet our anticipated
operating cash needs for the foreseeable future, excluding any potential
acquisitions that may require significant cash outlays, or any accelerated
payments under our obligations to Landmark that Landmark has the right to
demand.

In February 2005, we extended our FreeStyle Rewards program by adding
additional online merchants and launching a stand-alone web site located at
www.freestylerewards.com. This program was previously available to
registered consumers only through the coolsavings.com web site.

On January 1, 2005, we declared and paid a dividend in the amount of
3,455,767 shares of Series B Preferred Stock to the holders of our Series B
Preferred Stock. As of March 31, 2005, dividends in the amount of
3,524,882 shares of Series B Preferred Stock had accrued "in-kind" on the
outstanding shares of Series B Preferred Stock. We declared and paid those
dividends on April 1, 2005. The Series B Preferred Stock issued is
redeemable at Landmark's option at any time, subject to the Forbearance
Accommodation Agreement, as described in Note 5 to the financial
statements. The Series B Preferred Stock also is convertible into common
stock at any time. As of March 31, 2005, Landmark held 176,244,126 shares
of Series B Preferred Stock (and has rights with respect to accrued
dividends thereon), convertible into an equal number of shares of common
stock, and held a Landmark Warrant to purchase 13,122,772 shares of our
common stock. See Note 11 to the financial statements for a discussion of
Landmark's intent to exercise its warrant, in part, on May 16, 2005.

CRITICAL ACCOUNTING POLICIES

The financial statements have been prepared in accordance with
generally accepted accounting principles of the United States of America.
However, certain of our accounting policies, which we refer to as our
"critical accounting policies," are particularly important to the portrayal
of our financial position and results of operations and require application
of management's 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

For a discussion of these critical accounting policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies and Estimates" in our Annual
Report on Form 10-K for the year ended December 31, 2004, as filed with the
SEC.

REVENUE

ONLINE DIRECT MARKETING SERVICES REVENUE

We generate substantially all of our revenues by providing online
marketing services to our advertisers. We charge our advertisers on a
variety of bases, the most common of which include:

. the number of consumer leads generated for our advertisers;

. the number of emails sent;

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

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

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 point of cancellation. We have no contracts with refund provisions for
services already delivered. In the three-month period ended March 31,
2005, our largest advertiser accounted for approximately 6.4% of our
revenues and our top five advertisers together accounted for approximately
21.0% of our revenues, as compared to 4.2% and 18.1%, respectively, in the
same period of 2004.

Our revenues for each period depend on a number of factors including
the number of advertisers offering promotional offers to our consumers, the
number of consumers using our services 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 license portions of our intellectual property, including our
issued patents, to third parties. Approximately 0% and 1% of our revenue
was generated from royalty and license fees and other miscellaneous sources
during the three-month periods ended March 31, 2005 and March 31, 2004,
respectively. We expect to generate less licensing revenue in 2005 than we
generated in prior years.

EXPENSES

COST OF REVENUES

Our cost of revenues consists primarily of partner fees related to
revenues generated through the Lead Generation Network, Internet connection
charges, salaries and related benefits of operations personnel, fulfillment
costs related to registered consumer loyalty incentives, 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 costs 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

Lease exit costs reflect costs associated with our determination that
a significant portion of our leased office space was unnecessary for our
future operations. During the first three months of 2005 and 2004, we
recorded lease exit costs representing the present value of estimated
future lease obligations related to the unnecessary leased office space,
and estimated costs associated with subleasing the space, net of estimated
cash flows from future sublease arrangements. These estimates are revised
as we enter into subleases and as market conditions and future outlooks
change, and as lease obligations are terminated.

RESULTS OF OPERATIONS

The following discusses our results of operations for our entire
business. See Segment Information below for a discussion of segment
financial information.

THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2004

NET REVENUES

Net revenues increased 91% to $15,278 in the three-month period ended
March 31, 2005 from $7,981 in the three-month period ended March 31, 2004.
The increased revenue was attributable primarily to the growth of our Lead
Generation Network, which was launched late in the first quarter of 2004.
We reported 11.7 million new consumer registrations across our network for
the quarter, an increase of 587% compared to the first quarter of 2004,
driven primarily by the consumer registrations on the Lead Generation
Network. We also reported a 35% increase in the number of consumer
responses (previously referred to as revenue-producing actions or RPAs)
taken across our network during the first quarter, as compared to the same
period of the prior year.

COST OF REVENUES

Cost of revenues increased to $5,055, or 33% of revenues, in the
three-month period ended March 31, 2005, from $662, or 8% of revenues, in
the three-month period ended March 31, 2004. The increase in cost of
revenues was primarily due to $4,300 in partner fee expenses related to our
Lead Generation Network, as compared to $20 in the same period of 2004.
The Lead Generation Network became fully operational during the second
quarter of 2004. We expect cost of revenues, as a percentage of net
revenues, to continue to increase as the Lead Generation Network revenues
and related payments owed to Lead Generation Network partners become a more
significant part of our business.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses increased to
$5,798, or 38% of net revenues, in the three-month period ended March 31,
2005, from $5,393, or 68% of net revenues, in the three-month period ended
March 31, 2004. The $405 increase in sales and marketing expenses was
primarily due to an increase in online advertising expenses of $306 and an
increase in workforce related expenses of $297. These increases were
partially offset by a decrease in promotions and public relations expenses
of $136. The decrease in sales and marketing expenses as a percentage of
net revenue is primarily due to the growth in revenues generated from the
Lead Generation Network, which has not required substantial increases in
online advertising or in other sales and marketing expenses.

PRODUCT DEVELOPMENT. Product development expenses decreased to $935,
or 6% of net revenues, in the three-month period ended March 31, 2005, from
$973, or 12% of net revenues, in the three-month period ended March 31,
2004. The $38 decrease in product development expenses was primarily due to
a decrease in workforce related expenses. The decrease in product
development expenses as a percentage of net revenue is primarily due to the
growth in revenues generated from the Lead Generation Network, which has
not required substantial increases in product development expenses.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $2,298, or 15% of net revenues, in the three-month period
ended March 31, 2005, from $1,779, or 22% of net revenues, in the three-
month period ended March 31, 2004. The $519 increase in general and
administrative expenses was primarily due to an increase in stock options
expense of $393 related to options granted to a former CEO (see Note 2 to
the Financial Statements), an increase of $89 in bad debt expense due to
our increase in revenue in the first quarter of 2005 as compared to the
same quarter of 2004, and an increase in accounting fees of $88 related to
costs associated with compliance with Section 404 of the Sarbanes-Oxley Act
of 2002, and costs associated with our filings with the SEC. Partially
offsetting these increases was a decrease in insurance expense of $66 due
to a reduction in the level of coverage purchased for directors and
officers liability insurance and the resulting lower premium.

LEASE EXIT COSTS. During the three months ended March 31, 2005 and
March 31, 2004, we revised our estimates of the future net costs associated
with office space determined to be unnecessary for our future operations.
In accordance with FAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities," we recorded an operating expense of $23 and $54 in
the three months ended March 31, 2005 and March 31, 2004, respectively,
representing accretion expenses on the lease exit liability and adjustments
to the estimated future lease obligations related to the unnecessary office
space and estimated costs associated with subleasing and disposing of the
space, net of estimated cash flows from future sublease arrangements.
These estimates are revised quarterly, or as market conditions and future
outlook change.

INCOME FROM OPERATIONS. Our income from operations was $1,169 for
the three-month period ended March 31, 2005, compared to a loss from
operations of $880 for the same period of 2004. The $2,049 increase was
primarily due to increased revenues from the lead generation network, less
associated partner fee expenses and other allocated expenses, the net of
which increased income from operations by $2,414. Partially offsetting
this increase was an increase in workforce related expenses of $195 and an
increase in stock options expense of $393.

INTEREST INCOME (EXPENSE), NET. During the three-month period ended
March 31, 2005, we incurred net interest expense of $110, as compared to
net interest expense of $116 for the three-month period ended March 31,
2004. The difference was attributable to interest earned on higher cash
balances in the first quarter of 2005.

INCOME TAXES. During the three-month period ended March 31, 2005, we
incurred $16 in income tax expense, as compared to $2 in the three-month
period ended March 31, 2004. The increase in income tax expense in 2005
primarily relates to state income taxes incurred in 2005, resulting from
our inability to use net operating loss carryforwards in California.

SEGMENT INFORMATION

Beginning in 2005, we determined, due to changes in our internal
reporting, that our company operates in three segments which represent the
new distribution channels for our services: the CoolSavings Web Site
Business, the Lead Generation Network, and FreeStyle Rewards. We measure
the operating performance of our segments by allocating to them certain
expenses which are directly associated with attracting consumers, such as
online advertising costs, lead generation partner fees, consumer rewards
costs, and certain dedicated costs related to sales, business development,
and product development activities. We refer to the net of these allocated
expenses against segment revenues as "contribution margin". See Note 10 to
the Financial Statements for segment financial data.

COOLSAVINGS WEB SITE BUSINESS SEGMENT

The CoolSavings Web Site Business segment includes all revenues
generated from consumer activity occurring on our coolsavings.com web site,
including revenue from lead generation, e-mail, and coupon services, as
well as coupon services generated on the sites of our partners in our
distribution network. The CoolSavings Web Site Business segment also
includes revenues from electronic coupons generated from activity occurring
on the web sites of our grocery retailer partners.

Net revenues from our CoolSavings Web Site Business segment increased
4% to $8,307 in the three month period ended March 31, 2005 from $7,976 in
the three month period ended March 31, 2004. The increased revenue was
primarily due to growth in our e-mail business. We reported 1.7 million new
consumer registrations for the quarter, an increase of 4% compared to the
first quarter of 2004. We also experienced a 3% decrease in the number of
consumer responses taken during the first quarter, as compared to the same
period of the prior year. Expenses associated with online advertising
increased $288 in the three month period ended March 31, 2005, compared to
the three month period ended March 31, 2004. In the three month period
ended March 31, 2005, contribution margin for the CoolSavings Web Site
Business segment increased 1% to $4,863 from $4,821 in the three month
period ended March 31, 2004.

LEAD GENERATION NETWORK SEGMENT

The Lead Generation Network segment includes all revenues generated
from consumer activity occurring on our Lead Generation Network, a
distribution network of our partners' web properties for our advertisers'
lead generation offers. The Lead Generation Network was launched late in
the first quarter of 2004.

Net revenues for our Lead Generation Network segment increased to
$6,964 in the three month period ended March 31, 2005 from $6 in the three
month period ended March 31, 2004. We reported 9.8 million new consumer
registrations for the quarter, compared to an insignificant number of new
consumer registrations in the first quarter of 2004. Expenses allocated to
the Lead Generation Network to arrive at contribution margin include
partner fee, product development, and business development expenses, with
partner fee expenses accounting for the majority of the total allocated
costs. In the three month period ended March 31, 2005, expenses allocated
to the Lead Generation Network increased to $4,614 from $70 in the three
month period ended March 31, 2004. During the same periods, contribution
margin increased to $2,350 from a loss of $64.

FREESTYLE REWARDS SEGMENT

The FreeStyle Rewards segment includes online shopping and lead
generation revenue generated from activity occurring on our
freestylerewards.com web site. The FreeStyle Rewards business line was
launched in the fourth quarter of 2004.

Net revenues from our FreeStyle Rewards segment were $7 for the three
month period ended March 31, 2005. Expenses allocated to FreeStyle Rewards
to arrive at contribution margin include online advertising, consumer
rewards, product development, and business development expenses. For the
three month period ended March 31, 2005, allocated expenses were $126 and
contribution margin was a loss of $119.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2005, we had approximately $6,856 in cash and cash
equivalents, compared to $7,162 at December 31, 2004. Accounts receivable,
net of allowances for doubtful accounts, were $9,730 at March 31, 2005
compared to $6,681 at the end of 2004. At the end of the first quarter of
2005, working capital was $1,472 as compared to negative working capital of
$8 at the end of 2004.

We expect to generate sufficient cash flows from operations to meet
our anticipated cash needs for working capital and capital expenditures for
the foreseeable future, excluding any potential acquisitions that may
require significant cash outlays, or any accelerated payments under our
obligations to Landmark. 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 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 existing defaults, Landmark has the right, subject to the
Forbearance Accommodation Agreement, to demand the immediate repayment of

the Senior Secured Loan and the redemption of its Series B Preferred Stock.

Under the Forbearance Accommodation Agreement, however, Landmark has agreed
that, until April 1, 2006, it will not demand repayment of amounts due
under the Senior Secured Loan or require us to redeem any or all shares of
Series B Preferred Stock as a result of existing defaults. If Landmark
exercises its right to require repayment or redemption, 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 notified us that on May 16, 2005, it intends to exercise
the Landmark Warrant, in part, to purchase 13,255,091 shares of our common
stock at an exercise price of $0.50 per share. This transaction, if it
occurs, will result in gross proceeds to us of approximately $6,628. We
plan to use the proceeds, if any, to repay the Senior Secured Loan, plus
accrued interest, or for working capital in the business. This
transaction, if it occurs, will have a dilutive effect on our common stock.

For the three-month period ended March 31, 2005, net cash used in
operating activities was $119 due mainly to an increase in accounts
receivable, which offset net income generated for the period. Net cash
provided by operating activities in the three-month period ended 2004 was
$82 resulting primarily from an increase in accrued expenses and other
liabilities.

Net cash used in investing activities was $194 in the three-month
period ended March 31, 2005, as compared to $719 for the same period of
2004. Net cash used in investing activities in the first three months of
2005 resulted primarily from costs incurred to develop our web site. Net
cash used in investing activities in the first three months of 2004
resulted from amounts used in our acquisition of TMS, the purchase of
computer equipment and in developing our web site.

Net cash provided by financing activities was $7 in the three months
ended March 31, 2005, as compared to $10 for the same period of 2004. Net
cash provided by financing activities in both periods resulted from the
exercise of employee stock options.

Since our inception, we have financed our operations primarily
through the sale of our stock and the issuance of notes payable. In June
and July 2001, we received proceeds of $5,000 from loans to us by Landmark
(the "Senior Secured Loan"). The Senior Secured Loan is payable on June 30,
2006 and bears interest at the rate of 8.0% per annum and is secured by a
lien on all of our assets. The interest is paid quarterly in arrears in
the form of additional notes and warrants (described below). We have the
right to prepay the Senior Secured Loan on or after its third anniversary
if certain conditions are met. The Senior Secured Loan also contains
financial covenants and negative and affirmative covenants that, among
other things, restrict our ability to incur additional indebtedness and
take other actions without the consent of Landmark. At March 31, 2005, we
were not in compliance with certain financial covenants of the Senior
Secured Loan. This failure to comply constitutes an event of default.
Consequently, the Senior Secured Loan including accrued interest is
immediately due and payable at the option of Landmark; however, Landmark,
pursuant to the Forbearance Accommodation Agreement, has agreed that, until
April 1, 2006, it will not demand repayment of amounts due under the Senior
Secured Loan, as a result of existing defaults. Accordingly, we have
classified the Senior Secured Loan, including the paid-in-kind interest
which has been compounded and accrued on the principal balance, totaling
$6,789, as currently payable as of March 31, 2005.

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 at any time. The
Landmark Warrant contains a net exercise feature and was exercisable for
10,000,000 shares of our common stock at an exercise price of $0.50 per
share at November 12, 2001 (increasing to $0.75 per share on July 30, 2005
if not previously exercised). The number of shares exercisable under the
Landmark Warrant automatically increases by two shares of common stock for
each dollar of interest accrued on the Senior Secured Loan as paid-in-kind
interest. As of March 31, 2005, the Landmark Warrant was exercisable for
13,122,772 shares of our common stock. As discussed above, Landmark has
notified us that on May 16, 2005, it intends to exercise the Landmark
Warrant, in part, to purchase 13,255,091 shares of our common stock at an
exercise price of $0.50 per share.

The Series B Preferred Stock issued is redeemable at Landmark's
option at any time, subject to the Forbearance Accommodation Agreement. As
of March 31, 2005, Landmark held 176,244,126 shares (including dividends
paid "in-kind") of Series B Preferred Stock at an aggregate redemption
value of $27,387 (and has rights with respect to accrued dividends
thereon), 10,889,636 shares of common stock, and the Landmark Warrant to
purchase 13,122,772 shares of our common stock. Landmark's ownership will
continue to increase due to the issuance of additional shares of Series B
Preferred Stock for dividends accruing on outstanding Series B Preferred
Stock. Landmark's ownership also will increase if it exercises the
Landmark Warrant. The number of shares subject to the Landmark Warrant
will continue to increase as "in-kind" payments are made for interest
accruing on the Senior Secured Loan.

Effective August 31, 2002, we entered into an Amended and Restated
Reimbursement and Security Agreement (the "Reimbursement Agreement") with
Landmark. On our behalf, Landmark applied for and received letters of
credit (the "Landmark Letters of Credit") in the aggregate amount of $1,559
from Wachovia Bank to collateralize lease deposits on our office
facilities. Under the Reimbursement Agreement, we have agreed, among other
things, to reimburse Landmark for all amounts that Landmark is required to
pay Wachovia under the bank agreement related to the Landmark Letters of
Credit, including all fees, penalties, interest and amounts in connection
with draws on the Letters of Credit. We have secured these obligations
with a lien on all of our assets. If we fail to pay Landmark any amount
when due, interest will accrue and compound on all such amounts at the rate
of 7% per annum until such time as Landmark demands payment. Upon
Landmark's demand for payment, interest will accrue and compound on all
such amounts at the rate of 10% per annum from the date of the demand,
increasing monthly at a rate of 1%. The aggregate amount of letters of
credit required to collateralize lease deposits on our office facilities
declined to $747 as of March 31, 2005, due to the scheduled reductions
contained in our lease agreements for our Chicago, Illinois and San
Francisco, California facilities. The Landmark Letter of Credit for our
Chicago facility was renewed in 2005 through April 2006. Landmark may, at
its sole discretion, cancel the Landmark Letters of Credit on 90 days
written notice to us. If the Landmark Letters of Credit expire or are
cancelled, we will need to enter into an alternate credit arrangement. If
an alternate arrangement is not available when required or is not available
on acceptable terms, our business, results of operations and financial
condition may be materially adversely affected.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB)
issued 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 fair value of employee stock options and
similar awards. In April, 2005 the Securities and Exchange Commission
announced the adoption of a rule that amends the compliance dates for FAS
123R. The new rule allows companies to implement FAS 123R at the beginning
of their next fiscal year that begins after June 15, 2005, which for us is
the first quarter of 2006. FAS 123R applies to all outstanding and
unvested share-based payment awards at our adoption date.

Once FAS 123R is adopted in 2006, we will begin to expense the value
of employee stock options in our results of operations. We expect that
employee stock options will be measured at fair value using the Black-
Scholes option pricing model. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB 107) on FAS 123R to assist reporting
companies by simplifying some of the implementation challenges of FAS 123R.

In SAB 107, the SEC staff acknowledges that there exists a range of
potential conduct, conclusions, or methodologies that reasonably could be
applied in estimating fair values of share-based arrangements; thus, if a
registrant makes a good-faith estimate in accordance with the provisions of
FAS 123R, future events that affect an instrument's fair value will not
cast a doubt concerning the reasonableness of the original estimate. For
the twelve-month period ended December 31, 2006, we expect to expense
approximately $30 in stock option expense upon application of the modified
prospective method of this new accounting standard.

In December 2004, the FASB issued Statement No. 153, "Exchanges of
Nonmonetary Assets" (FAS 153). This pronouncement amends APB No. 29,
"Accounting for Nonmonetary Transactions" (APB 29). FAS 153 eliminates the
exception for nonmonetary exchanges of similar productive assets present in
APB 29 and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance (i.e.,
transactions that are not expected to result in significant changes in the
cash flows of the reporting entity). We do not expect the provisions of
FAS No. 153 to have a material impact on our financial position or results
of operations.

In March 2005, the FASB issued Interpretation No. 47 (FIN 47),
"Accounting for Conditional Asset Retirement Obligations." FIN 47 is an
interpretation of certain terms and concepts in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations" (FAS 143). FIN 47 clarifies
that conditional obligations meet the definition of an asset retirement
obligation as used in FAS No. 143, and therefore should be recognized if
the fair value of the contractual obligation is reasonably estimable.
Clarification of when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation is
also contained in FIN 47, as well as identification of certain disclosures
required about unrecognized asset retirement obligations. The provisions
of FIN 47 are effective no later than the end of fiscal years ending after
December 15. We do not expect adoption of FIN 47 to have a material effect
on its results of operations or financial position.

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

At March 31, 2005, we had $6,856 of 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, which governs the
Senior Secured Loan. The entire Senior Secured Loan plus accrued interest,
totaling $6,789 at March 31, 2005, is payable at any time at the option of
Landmark, subject to the Forbearance Accommodation Agreement. Furthermore,
subject to the Forbearance Accommodation Agreement, 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 $27,387
as of March 31, 2005. Landmark has reserved its rights with respect to all
breaches and defaults, and Landmark is under no obligation to advance us
any additional funds. If we are unable to generate sufficient cash flows
from operations or obtain financing to meet our long-term capital needs, we
may be unable to operate our business. If Landmark exercises its right to
require payment of 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 the first three months of 2005, and
prior periods, 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 our
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 services, advertisers may be less
willing to purchase our e-mail services, or may only be willing to pay
lower prices for our services.

WE HAVE A HISTORY OF NET LOSSES

We incurred net losses in all years prior to 2003, although we earned
net income in the first quarter of 2005 and in the years 2004 and 2003. As
of March 31, 2005, our accumulated deficit was $95,495. We may not be able
to sustain profitability or positive operating cash flows in the future.

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' ability to adapt to using
these technologies, over which we have no control. If we introduce a
service or feature that is not favorably received, our 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.

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 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 challenged successfully by third parties, which could
limit or deprive us of the right to prevent others from
exploiting the electronic certificate issuing and processing
method or other inventions claimed in our current or future
patents;

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

. our pending patent applications for a "System and Method of
Generating Sales Leads by Way of a Computer Network," a "System
and Method of Using Web Beacons to Determine Browsing Behavior
Based on Demographic and/or Psychographic Makeup," "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.

INTELLECTUAL PROPERTY LITIGATION AGAINST US COULD 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.

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 current key employees or identify, attract, assimilate or retain
other highly qualified employees in the future.

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

The adoption or modification of laws or regulations relating to the
Internet, Internet-based advertising and privacy, and the application of
traditional legal principles to 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, sweepstakes and other contests 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

Landmark, 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
limited 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.

As of March 31, 2005, Landmark controls approximately 82% of our
outstanding voting stock.

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 May 1, 2005, we had a total of 192,521,032 shares of Series B
and Series C Preferred Stock issued and outstanding. Under the terms and
conditions of the Series B and Series C Preferred Stock, these shares are
convertible into an equal number of shares of our common stock at the
holders' option. In addition, as of May 1, 2005, we had outstanding
warrants exercisable by Landmark to purchase 13,209,125 shares of our
common stock and outstanding stock options exercisable for 7,031,423 shares
of our common stock. Also, we continue to issue additional shares of
Series B Preferred Stock and warrants as "in-kind" payments for dividends
and interest accruing on the Series B Preferred Stock and Senior Secured
Note. Our stockholders may suffer substantial additional dilution as a
result of the issuance of additional shares of preferred stock and
warrants. Furthermore, our stock price may decline as a result of sales of
a large number of the shares of common stock issuable upon conversion or
exercise of the preferred stock, warrants and/or stock options or the
perception that such sales could occur.

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

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

The market price of our common stock has been volatile and may be
subject to wide fluctuations. During the past three fiscal years, and
through the first quarter of 2005, the per share closing price of our
common stock has fluctuated from a high of $1.15 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;

. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We had no holdings of derivative financial or commodity instruments
at March 31, 2005. However, we are exposed to financial market risks
associated with fluctuations in interest rates. Because all of the amounts
in our investment portfolio are cash or cash equivalents, the related
income would not be significantly impacted by increases or decreases in
interest rates due to the short-term nature of our investment portfolio and
we believe our portfolio is at fair value. If market rates were to
increase immediately by 10% from levels on March 31, 2005, the fair value
of this investment portfolio would increase by an immaterial amount. If
market rates were to decrease immediately by 10% from levels on March 31,
2005, the resultant decrease in interest earnings of our investment
portfolio would not have a material impact on our earnings as a whole. As
of March 31, 2005, we had only fixed rate debt.

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

ITEM 4. CONTROLS AND PROCEDURES

Based upon an evaluation of our disclosure controls and procedures
performed by 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 March 31, 2005, our disclosure
controls and procedures were effective to provide reasonable assurance that
information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934 (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 our Form 10-K, filed
March 29, 2005, 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 the 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.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are currently a defendant in a wrongful termination lawsuit filed
by one of our former employees. For a further discussion of this legal
proceeding, see "Part I. Item 3. - Legal Proceedings" in our Annual Report
on Form 10-K for the year ended December 31, 2004, as filed with the SEC.

We may be involved in additional litigation, investigations or other
proceedings in the future. Any litigation, investigation or proceedings,
with or without merit, could be costly and time-consuming and could divert
our management's attention and resources, which in turn could harm our
business and financial results.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

At March 31, 2005, we were not in compliance with certain financial
covenants of the Senior Secured Loan. Defaults under the Senior Secured
Loan and the Amended and Restated Loan Agreement which cannot be cured, as
the Senior Secured Loan and Grid Note have cross-default provisions and are
cross-collateralized include:

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

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

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

Consequently, the Senior Secured Loan and all accrued interest
thereon are immediately due and payable at the option of Landmark, subject
to the Forbearance Accommodation Agreement. Accordingly, we have
classified the amounts owed pursuant to the Senior Secured Loan, including
principal and the paid-in-kind interest which has been compounded and
accrued on the principal balance, totaling $6,789, as currently payable as
of March 31, 2005.

ITEM 6. EXHIBITS

Exhibits:

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

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

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

SIGNATURES

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

COOLSAVINGS, INC.

Dated: May 12, 2005 /s/ Matthew Moog
-----------------------------------
Matthew Moog
President and Chief Executive Officer
(duly authorized officer)

Dated: May 12, 2005 /s/ David B. Arney
-----------------------------------
David B. Arney
Senior Vice President of Operations
and Chief Financial Officer
(principal financial and
accounting officer)