E CENTIVES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001

Commission File Number:

e-CENTIVES, INC.
(Exact name of registrant as specified in its charter)

Delaware 52-1988332
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

6901 ROCKLEDGE DRIVE, 7TH FLOOR, BETHESDA, MD 20817
(Address of principal executive offices)

(240) 333-6100
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: Not Applicable

Securities registered pursuant to Section 12(g) of the Act: Not Applicable

COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)

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 and (2) has been subject to such filing
requirements for the past 90 days. [ ]Yes [X ] No

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

The aggregate market value of common stock held by non-affiliates of the
registrant, based upon the closing price of the registrant's common stock on the
SWX New Market of the SWX Swiss Exchange as of April 1, 2002 is $25,527,830 (1).

(1) Assumes an exchange rate of 1.68501 Swiss Francs per one U.S. Dollar as of
April 1, 2002.

As of April 1, 2002, there were 37,732,039 shares of the registrant's
common stock outstanding.
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e-CENTIVES, INC.
FORM 10-K

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Except for any historical information, the matters we discuss in this Form
10-K concerning our company contain forward-looking statements. Any statements
in this Form 10-K that are not statements of historical fact, are intended to
be, and are, "forward-looking statements" under the safe harbor provided by
Section 27(a) of the Securities Act of 1933. Without limitation, the words
"anticipates," "believes," "estimates," "expects," "intends," "plans" and
similar expressions are intended to identify forward-looking statements. The
important factors we discuss below and under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as other factors identified in our filings with the SEC and those presented
elsewhere by its management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this Form 10-K. The Company assumes no obligation to update any forward-looking
information to reflect actual results or changes in the factors affecting such
forward-looking information.

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e-CENTIVES, INC.

PART I

ITEM 1- BUSINESS

OVERVIEW

We provide interactive marketing technologies and services. Businesses rely
on our broad range of solutions to acquire and retain customers. We provide
online marketing and commerce capabilities and solutions for companies across a
range of industries including the Internet (portals and destination sites),
retail, banking, insurance, and telecommunications. With our proprietary
technology, we power acquisition and retention solutions for companies that do
business with millions of Internet users every day. Our suite of solutions
includes promotions network, member services, commerce network, commerce engine,
outsourced e-mail marketing and online promotions system.

o Our promotions network provides marketers with the ability to deliver
targeted, personalized offers to millions of consumers across our
network of partner sites and via e-mail.

o Our member services solutions enable leading Internet sites to provide
their site visitors with easy and convenient access to personalized
promotional offers. By delivering added value to their consumers, our
member services solutions have proven to be valuable tools that
increase registration and encourage return site visits.

o Our commerce network allows merchants to reach millions of online
consumers by integrating their entire product catalog into leading
search and shopping services used by top Internet sites. Our
technology and network of sites enable merchants to reach consumers
where they actively search for products and when they are most likely
to buy.

o Our commerce engine provides Internet sites with leading product
search and comparison shopping tools. From dynamic e-marketplaces to
customized product search applications, these solutions help
businesses provide their users with the support tools they need to
make smarter purchase decisions.

o Our outsourced e-mail marketing solutions enable companies to build
ongoing, personalized dialogs with their audiences. Our systems can
maximize effectiveness of e-mail marketing campaigns through testing
and targeting and are proven to raise response and conversion rates,
enabling our clients to boost sales, strengthen brands and build
loyalty with their customers.

o Our online promotions system offers solutions for creating, targeting,
publishing and tracking coupons and promotional incentives. Our system
can deploy and manage promotions, and track individual consumer's
responses to offers for manufacturers, retailers, and websites.

On March 28, 2001, we acquired the Commerce Division from the Inktomi
Corporation in a purchase business combination for approximately $12.9 million,
consisting of 2,168,945 shares of our common stock valued at approximately $11.8
million and about $1.1 million in acquisition costs. A total of 2,551,700 shares
of our common stock were issued with 40% placed into escrow. Thirty eight
percent of the escrow shares, or 382,755, are to be released based upon the
achievement of contractually defined revenue and performance targets for the
Commerce Division. The remaining 637,925 of escrow shares are held in
satisfaction of any potential indemnity claims and will be released within
contractually agreed upon time frames. As part of the purchase price, we also
issued to Inktomi Corporation a warrant to purchase an additional 1,860,577
shares of our common stock upon the achievement of additional revenue targets
for the Commerce Division at the end of 12 months following the closing of this
acquisition. Based upon the revenue through December 31, 2001, we do not
anticipate that Inktomi will be eligible to receive the shares of common stock
and warrants that are contingent upon the achievement of revenue targets for the
Commerce Division. In connection with the acquisition, we entered into a license
agreement and reseller agreement with Inktomi Corporation. Under the terms of
the license agreement, Inktomi Corporation perpetually licensed certain software
and technology to us to be used in the acquired business. Pursuant to the
reseller agreement, Inktomi Corporation will resell certain products of the
acquired business for a period of twelve months from the closing. In addition,
commensurate with the acquisition, we hired 70 of Inktomi's Commerce Division
employees and entered into a sublease agreement with Inktomi Corporation for
approximately 31,000 square feet of office space in Redwood Shores, California.

On December 3, 2001, we entered into an Asset Purchase Agreement (the
"Agreement") with BrightStreet.com, Inc.

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("BrightStreet.com") whereby we acquired substantially all of BrightStreet.com's
assets and certain liabilities. We acquired BrightStreet.com for approximately
$2.2 million, consisting of approximately $1.7 million in cash, a guaranteed
warrant to purchase 500,000 shares of our common stock valued at approximately
$185,000, a contingent performance-based warrant to purchase up to 250,000
shares of our common stock and about $335,000 in acquisition costs. The cash
payments consisted of an $825,000 payment at closing and approximately $843,000
in cash advances to fund BrightStreet.com's working capital under the terms of a
Management Services Agreement. The guaranteed warrant is exercisable from
June 3, 2002 through December 3, 2005 at an exercise price of $0.5696 per share.
The performance-based warrant is exercisable, in whole or in part, until
December 3, 2005 based upon the achievement of certain performance targets at
an exercise price of $2.44 per share.

In conjunction with the Agreement, we entered into a Patent Assignment
Agreement (the "Assignment") with BrightStreet.com. Pursuant to the
Assignment, BrightStreet.com has agreed to assign to us all right, title and
interest in and to all the issued and pending BrightStreet.com patents (the
"Patents"), subject to certain pre-existing rights granted by
BrightStreet.com to third parties ("Pre-existing Rights"), provided we make
certain payments to BrightStreet.com by December 3, 2005 (the "Payments"). If
we make such Payments by that date, we shall own all right, title and
interest in and to the Patents, subject to the Pre-existing Rights. Until
such Payments are made, we have, subject to the Pre-existing Rights, an
exclusive, worldwide, irrevocable, perpetual, transferable, and sublicensable
right and license under the Patents. Until we take title to the Patents, we
may not grant an exclusive sublicense to the Patents to any unaffiliated
third party. In the event we do not make the Payments by December 3, 2005, we
shall retain a license to the Patents, but the license shall then convert to
a non-exclusive license.

In exchange for the rights granted under the Assignment, beginning
December 2002, we are obligated to pay BrightStreet.com ten percent of
revenues received that are directly attributable to (a) the licensing or sale
of products or functionality acquired from BrightStreet.com, (b) licensing or
royalty fees received from enforcement or license of the Patents covered by
the Assignment, and (c) licensing or royalty fees received under existing
licenses granted by BrightStreet.com to certain third parties. If the total
transaction compensation paid, as defined by the Agreement, at any time prior
to December 3, 2005 exceeds $4,000,000, the Payments will be deemed to have
been made. We also have the right, at any time prior to December 3, 2005, to
satisfy the Payments by paying to BrightStreet.com the difference between the
$4,000,000 and the total compensation already paid.

INDUSTRY BACKGROUND

The Internet has emerged as a powerful marketing medium that allows
millions of consumers and marketers to conduct business and interact with each
other in unprecedented ways. Early online marketing strategies were heavily
focused on customer acquisition, optimizing the emerging medium's inherent
capacity to build brand awareness, advertise products and services, and promote
purchases. With the exponential increases in the volume of sites and the ease
with which consumers could navigate between them, online marketers turned to
customer retention and loyalty-building efforts to differentiate themselves from
the competition.

The Internet is particularly well suited to direct marketers because of its
ability to access both broad audiences, as well as precisely defined groups. As
a result, the Internet provides marketers with opportunities to identify and
attract customers, as well as target specific types of users and collect data on
their preferences. At the same time, the Internet appeals to consumers because
it offers more individual control over marketing messages. The growth of the
Internet has encouraged both e-commerce and traditional brick and mortar
companies to spend more of their marketing budgets via the Internet. We believe
there is a need for a marketing infrastructure that could satisfy the objectives
of both marketers and consumers, which would enable businesses to acquire and
retain customers, yet operate from a consumer-centric approach that would
provide relevance and meaningful value to the individual user.

OUR SOLUTIONS

Our PROMOTIONS NETWORK solution makes it easy for merchants to reach
millions of online shoppers and build profitable relationships with them.
It allows merchants to deliver promotions to their target audience from our
database of pre-qualified consumers across our network of Internet sites or
via opt-in e-mail. Our database is composed of millions of online consumers
who have specified their shopping interests and demographics when they
registered at one of our network partner sites. These consumers then receive
and access the merchants' offers right at that network site or via email, so
offers are always ready to redeem when they are ready to shop.

Our MEMBER SERVICES solution is a sophisticated online promotional
infrastructure that Internet sites can use as a membership benefit to attract
and retain their users. Our web-based application is integrated with Internet
sites in order to give site visitors easy and convenient access to personalized
promotional offers from top merchants. When visitors register at these network
partner sites, they can opt-in for special offers and fill out a personal
profile indicating their shopping preferences and interests. Every person who
signs up for the e-centives service gets their own online organizer, where their
personalized offers are stored and ready to redeem when they are ready to shop.
Our solution can be customized to the site's individual requirements, including
categories, e-mail, and content.

Our COMMERCE NETWORK keeps merchants' products in front of millions of
online shoppers on some of the Web's well-known sites, including AT&T and
WashingtonPost.com. Using keywords or brand names, consumers can search for
products and immediately receive the most relevant matches that include key
product information, images and the applicable store name. When they are ready
to buy, shoppers click through directly to the merchant's site to complete the
transaction. Our services can also motivate shoppers to buy

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products with our built-in product merchandising capabilities, which can be used
to drive impulse purchases by showcasing featured products across commerce
network sites.

Our COMMERCE ENGINE is a scalable, outsourced infrastructure that enhances
Internet sites' content offering with a full-service product search and shopping
experience. Users have access to millions of products from hundreds of
merchants, plus helpful information to make more informed purchase decisions.
The COMMERCE ENGINE can be provided a Web-based or wireless commerce application
and is deployed as a private-label hosted solution with fully configurable
functions and features to meet specific needs.

Our outsourced E-MAIL MARKETING solutions enable businesses to engage
customers and prospects with highly relevant messages that elicit the responses
that they are after. Our system provides a comprehensive technology platform
that leverages consumer data to create campaigns that resonate with the
audiences on an individual level. Our personalization and dynamic messaging
capabilities allow for targeting of content and creates unique messages based
on various selected variables. Our real-time, Web-based activity reports reveal
key details to help measure and evaluate all aspects of campaigns, capturing
activity data down to the user level, enabling the creation of effective
follow-up campaigns based on consumer behavior.

Our online PROMOTIONS MANAGEMENT is a patented technology for companies to
identify, build and manage consumer databases with precise consumer purchase
profiles. This technology and infrastructure is used for powering a variety of
promotional offerings, including coupons, rebates, sales circulars, surveys,
trial offers and loyalty programs. Our system can deliver secure, customized,
fully trackable marketing programs and promotions that drive offline sales and
help identify various consumer segments and analyze their purchase behavior. Our
system enables businesses to gain insights about their consumer preferences and
motivations, and enhance consumer relationships with rich data modeling and
sophisticated targeting.

OUR PRODUCTS AND SERVICES

We launched our direct marketing services in November 1998 by delivering
e-centives through our PROMOMAIL, PROMOCAST and PROMOCOMMERCE services. Between
November 1998 and June 1999, while we were introducing our PROMOTIONS NETWORK
system, we allowed marketers to use our direct marketing system at no charge. We
began generating revenue in the third quarter of 1999, with 100% of the revenue
in 1999 generated from the delivery of e-centives. In conjunction with the
acquisition of the Commerce Division, the COMMERCE ENGINE and COMMERCE NETWORK
began generating revenue in late March 2001. In August 2001, we started
producing revenue from our E-MAIL MARKETING technology services, and through the
acquisition of BrightStreet.com in December 2001, we began generating revenue by
providing online PROMOTIONS MANAGEMENT solutions.

OUR PROMOTIONS NETWORK SYSTEM

We maintain a comprehensive direct marketing system designed to enable
marketers to access a database of consumers across the web sites of our network
partners and by e-mail. Our system includes a web-based application that enables
consumers to register to receive promotional offers at our network partners' web
sites or through our web site. Our members provide demographic information and
product category interests in return for targeted offers. Our system then
delivers offers for products and services directly to the member's account or
through e-mail. Our direct marketing system is designed to provide a
comprehensive solution for each of three constituencies: marketers, network
partners and members. We provide proprietary products and services to meet the
needs of each constituency in order to effectively deliver promotions to a
targeted audience.

SERVICES. Through our PROMOTIONS NETWORK, we offer marketers the following
direct marketing services: PROMOMAIL, PROMOCAST and PROMOCOMMERCE. When
marketers purchase any of these services, we assist them in launching
their promotional campaigns quickly and easily. Marketers typically use
our client services team to create and distribute their offers. Over the
past few years, e-mail has become the predominant Internet application
as measured by the percentage of users and total message volume online.
Due to its targeting and personalization capabilities, and relatively
low cost of implementation, the use of e-mail as a marketing vehicle has
significantly increased as a percentage to total online marketing
dollars. E-mail marketing is also flexible for both customer acquisition
and retention. Because of the increased interest in e-mail marketing,
sales of our PROMOMAIL services has become a much higher percentage of
our direct marketing services revenue, a trend that we expect to
continue.

o Our PROMOMAIL service consists of targeted e-mails highlighting a
marketer's specific promotions. Marketers who contract to use the
PROMOMAIL service participate in mailings to a group of members
based upon those members' preferences. Marketers can purchase
this service on a fixed fee basis or on a performance basis. For
the fixed fee contracts, participating marketers are charged a
fixed fee for each member to whom the e-mail is sent and revenue

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related to the service is recognized upon transmission of the
e-mail. When marketers purchase the PROMOMAIL service on a
performance basis, revenue is based solely on the actions of our
members. We earn a contractually specified amount based on the
number of members who click on the offer or other specified link,
the number of purchases by our members, or the amount of sales
generated by our members. Revenue is recognized upon the
click-through or upon notification by the marketer of the number
or amount of applicable sales.

o Marketers who subscribe to the PROMOCAST service enter into
fixed-fee contracts for our delivery of either a specified or
unlimited number of e-centives to the accounts of a targeted
group of members over the contractual period. Once a member
receives and clicks on the offer, our system links the member
directly to the appropriate page within the marketer's site. The
term of these contracts is typically one year or less. Each
e-centive has an expiration date, typically 30 days from the date
the e-centive is placed in a member's account. An e-centive is
considered delivered when a member visits his or her account.
Because we have an obligation to maintain the e-centive on our
system until it expires, we recognize revenue upon expiration of
the delivered e-centive. Revenue related to delivery of an
unlimited quantity of e-centives is recognized ratably over the
expected term of the customer relationship. We currently do not
guarantee the delivery of the specific number of e-centives that
the marketer purchases under these contracts. Under these
contracts, if there are any remaining e-centives not used by the
marketer at the end of the contract period, those unused
e-centives are forfeited.

o Our PROMOCOMMERCE service consists of several components
including a PROMOCAST package, a perpetual software license and
maintenance on such software. Revenue related to the incorporated
PROMOCAST package is recognized ratably over the expected term of
the customer relationship. The software components enable the
subscribing merchant's site to recognize our members when they
enter into the merchant's web site and automatically detect,
highlight and apply relevant e-centives during the shopping and
purchase process. The maintenance component provides subscribing
merchants with product updates and telephone support services.
Our customer support contracts typically have a one-year term,
and revenue is recognized ratably over the expected term of the
customer relationship.

MARKETERS. During the year ended December 31, 2001, we delivered e-centives
for over 60 marketers generating approximately $1.7 million in revenue.
Below is a list of some of our clients for whom we delivered e-centives
during the year ended December 31, 2001, none of whom accounted for more
than 5% of our revenue.

2nd Story Software Dell Computer E*Trade
eVineyard Franklin Covey Gateway
Hallmark Flowers Marshalls Northwest Airlines
Office Depot OfficeMax Overstock.com
Rogaine Sears Sprint
Staples Tupperware Walmart

NETWORK PARTNERS. We maintain relationships with network partners that
operate high-traffic portal, content and community web sites. Our
application provides network partners with the ability to present offers
to their users without the costs and challenges of building and
maintaining their own online direct marketing system. We provide and
maintain the underlying technology, host and serve co-branded pages,
create and deliver offers and provide consulting services and member
support.

Our network partners' users can become e-centives members during the
registration process of some of our network partners' web sites.
Alternatively, members can join our system through various other access
points throughout the network partner's web site. In either case, our
service is delivered on a co-branded basis maintaining the look and feel
of the network partner's web site.

During 2001, we provided services through the following network
partners:

AllCommunity Ask Jeeves Care2
Chase Manhattan Bank Classmates Online CoVia
DesktopDollars Excite Intuit
IVillage LifeMinders Prodigy Internet
ThirdAge Media Uproar USATODAY.com
ZDNet

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MEMBERS. As of December 31, 2001, we maintained over 12.2 million e-centives
accounts. We provide our members with control over many aspects of our
system, including what categories of offers they receive and when those
offers are redeemed. To join our system, consumers sign-up for and
personalize their e-centives account through any of our network partner
web sites or our web site. When creating or updating their account, our
members provide demographic information and select categories in which
they have an interest. These categories currently include:

Automotive Groceries Pets
Baby Stuff Health & Beauty Services
Books & Magazines Hobbies Sports & Fitness
Computers Home & Gardening Toys & Games
Electronics Special Events Travel
Fashion Music & Video Luxury & Designer
Gifts & Gourmet Office

Based on this information, we place promotions in the accounts of our
members. Members may also elect to receive e-mails that highlight
specific promotions and which are automatically placed in the member's
account for their convenience.

Our system then allows members to easily store, review, delete or
redeem their e-centives. Member accounts are accessible at the web sites
of the network partners through which the member joined or through our
web site. Members may also opt to have their e-centives e-mailed to them
on a periodic basis, the frequency of which is determined by the member.
Unless they are redeemed or deleted, e-centives are automatically saved
in the member account until they expire. Members can browse their
personal account organizer by category or search for specific e-centives
by marketer name or keyword. Each e-centive includes the marketer's
logo, a description of the promotion being offered and an expiration
date. Members click on the e-centive to redeem it and are automatically
linked to the marketer's web site. If the marketer uses our
PROMOCOMMERCE solution, the promotion may be automatically applied to
the purchase.

We place a high degree of value on maintaining the privacy of our
members and believe that this commitment is critical to becoming a
trusted source of promotions online. We do not share any individual
member information with marketers or other third parties. Marketers only
receive aggregate information about our membership for purposes of
targeting promotions to members with certain demographic or purchase
preference criteria. For example, we may disclose the total number of
males in the "Computers" interest category to a marketer in connection
with a promotion. Our members' personal information is digitally encoded
on our database and remains private, anonymous and secure. In addition,
we have a license from TRUSTe, an independent, non-profit privacy
organization dedicated to building users' trust and confidence in the
Internet. Under TRUSTe's program, we have agreed to adhere to
established privacy principles and to comply with ongoing oversight and
consumer resolution procedures.

MARKETING PARTNERS. During the first two quarters of 2001, we entered into
several barter transactions (marketing partner transactions) that
consist of the sale of large quantities of outbound e-mail to marketing
partners, and the purchase of banner advertisements and outbound e-mail
services by e-centives from these same partners. We generally enter into
a contractual relationship with a marketing partner for delivery of a
specified quantity of targeted e-mails to our membership database or
other databases, offering promotions and special offers on behalf of the
marketing partners. In addition, we place orders with the marketing
partner to purchase a specified volume of banner advertisements, web
site click-throughs or outbound e-mail. This marketing activity is
designed to drive the marketing partners' viewers and members to our
registration page to register for the e-centives service. Revenue and
expenses from these marketing partner transactions are recorded based
upon the fair value of the promotional e-mails delivered at a similar
quantity or volume of e-mails delivered in a qualifying past cash
transaction. Fair value of promotional e-mails delivered is based upon
the Company's recent historical experience of cash received for e-mail
deliveries. Such revenues are recognized when the promotional e-mails
are delivered. Corresponding expenses are recognized for the
advertisements received when the Company's advertisements are displayed
on the reciprocal web sites or properties, which is typically in the
same period as the delivery of the promotional e-mails and are included
as part of sales and marketing expense.

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OUR COMMERCE PRODUCTS AND SERVICES

Through the acquisition of the Commerce Division, we acquired a
comprehensive system that provides product search, price comparison and
merchandising services. Our commerce products and services include the COMMERCE
ENGINE and the COMMERCE NETWORK.

The COMMERCE ENGINE provides portals and other Web site customers, as well
as wireless carriers, with an infrastructure to enable their end users to make
purchase decisions for goods and services. The COMMERCE ENGINE is a
high-performance commerce application designed to handle the challenges of
bringing consumers and merchants together and promoting transactions between
them. The COMMERCE ENGINE is a platform to collect and organize vast amounts of
electronic product information from online merchants and publishers of
comparative product information.

The COMMERCE ENGINE provides a complete commerce experience for online
consumers, enabling them to search for products, compare features and prices
among products, and locate and purchase these products through participating
online merchants. It is designed to function the way consumers already shop by
integrating all aspects of the online commerce process, from expert advice and
word of mouth comparisons, to bargain hunting and comparison shopping. For
shoppers who generally know what product they want but not the brand or model,
the COMMERCE ENGINE enables end users to evaluate several alternatives.

Similar to our direct marketing application we provide to our network
partners through our promotions network, we make the COMMERCE ENGINE available
to Internet portals and other Web site customers who can, in turn, provide
commerce services through their sites to end users. We provide and manage all
hardware, software and operational aspects of the COMMERCE ENGINE and the
associated databases of product libraries and purchasing locations. This
includes collecting, organizing, storing and updating vast quantities of
electronic product information, and presenting this information for display to
end users. We also provide our customers with a programming interface and
software tools to enable them to maintain and customize the look and feel of
their commerce service user interface.

The COMMERCE ENGINE is also designed to track and, in the cases where
merchants have installed our Affiliate Tracking System, confirm purchases made
by end-users of our customers' services and to generate invoices for our
merchants to support performance-based marketing arrangements among multiple
parties.

Our COMMERCE NETWORK enables merchants to distribute and promote their
products to the end users of our COMMERCE ENGINE customers. Our system collects
product data from merchants, normalizes it into appropriate categories, indexes
it and makes it available for access through our COMMERCE ENGINE customers, and
refreshes it regularly to reflect pricing changes and availability. Our account
managers work closely with merchants to coordinate their involvement within the
network, including product data management, merchandising, analysis and
recommendations. We also provide merchants with detailed performance reports
broken down by site and category, in order to track activity which may range
from click-through to point of purchase.

Revenue from our commerce technologies and services is generated
primarily through license, support and maintenance fees from Internet portal
and other web site destination customers, as well as fees from the
participating online merchants. Our contracts currently consist of
implementation and information service fees from Internet sites and service
and monthly transaction fees from merchants. Revenue generated from the
merchant transaction fees is recognized when a transaction occurs, revenue
from implementation services is recognized ratably over the expected term of
the customer relationship and revenue from service fees is recognized ratably
over the contract period.

OUR OUTSOURCED E-MAIL MARKETING TECHNOLOGY SERVICES

In August 2001, we began offering outsourced E-MAIL MARKETING technology
services to businesses. These services allow companies to outsource their e-mail
marketing campaigns to us. This solution lets businesses cost-effectively
conduct e-mail marketing without having to acquire or develop their own e-mail
infrastructure and manage the process. Our outsourced e-mail marketing solution
consists of list management and hosting, strategy and creative services, e-mail
delivery and management, and tracking and analysis services. Our e-mail
marketing system is designed to help build an ongoing, personalized dialogue
with the client's intended audience and maximize effectiveness through targeting
and testing. Revenue is generated by charging fees for list management and
hosting services, strategy and creative services, e-mail delivery and management
services, as well as tracking and analysis services. Revenue related to the
one-time service charges for setting up the customer is recognized ratably over
the expected term of the customer relationship, while all other revenue is
recognized when the services occur.

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OUR ONLINE PROMOTIONS SYSTEM

With the acquisition of BrightStreet.com in December 2001, we started
offering online promotions technology and infrastructure that is used for
powering a variety of promotional offerings, including coupons, rebates, sales
circulars, surveys, trial offers and loyalty programs. This system designs,
deploys, and manages promotions and tracks individual consumer response to
offers for manufacturers, retailers, and websites. It also enables businesses to
gain insights about their consumer preferences and motivations, and enhance
consumer relationships with rich data modeling and sophisticated targeting.
Revenue consists of fees from the sale of licenses and related services, which
are recognized ratably over the contractual period.

SALES AND MARKETING

We seek to establish relationships with clients principally through our
direct sales force, as well as working with advertising or promotional agencies
to reach their clients. During 2001, we maintained sales personnel in major
metropolitan areas of Washington, D.C., San Francisco and New York, as well as
in the United Kingdom.

In order to strengthen our existing relationships with clients, we offer
account management, technology integration and consulting services. We assign
account managers with knowledge of direct marketing and commerce to clients with
the goal of increasing the performance of their marketing efforts and overall
satisfaction with our services. Our account managers also provide periodic
reports to clients and help formulate strategies to more effectively market
their products and services.

Our sales force also focuses on establishing relationships with operators of
portals, content, community and other high-traffic web sites to sell our
commerce engine and to build our partner network for our direct marketing
system. Once the relationship is established, we assign relationship managers to
assist with the day-to-day operation of our systems and enhance our service
offerings.

We market our products and services primarily through advertising,
tradeshows and public relations. We have marketed our services to potential
clients through a variety of offline and online media including magazines,
newspapers, radio, outdoor and Internet advertisements. We market to consumers
primarily through the relationships with our partners and marketers. Our portal
clients and network partners feature the e-centives brand and logo on their web
sites.

TECHNOLOGY

PROMOTION NETWORK

We have developed a proprietary and scalable technology infrastructure
that enables marketers to create, deliver, redeem and track targeted
e-centives. The e-centives system consists of:

o database and user interface servers;
o software components for PROMOCOMMERCE; and
o CAMPAIGN MANAGER software.

All e-centives are stored in and accessed from our database servers.
These databases are developed using standard, high-performance technology
and are designed for rapid identification of target members. Our database
server architecture is hardware scalable, which means that we can add new
hardware servers to increase capacity or improve access times as our
membership and number of e-centives grow. We have implemented the following
initiatives to improve performance and decrease system failures:

o a backup of membership and application data is completed
daily;
o individual server failures have been mitigated through the
deployment of redundant servers and storage devices;
o all database servers have been upgraded to maximize both
processor speed and available memory; and
o periodic in-house scalability testing and performance tuning
of the whole system.

However, there can be no assurance that these initiatives will be
successful in preventing future system failures or performance bottlenecks.

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The user interface servers search our databases and display the
individual member's e-centives accounts as web pages. These servers control
the co-branded web pages of our marketers and partners. The user interface
servers are deployed in a way to permit uninterrupted service in the event
of a failure of one server. The servers also gather information used for
member behavior analysis and tracking.

The software components of PROMOCOMMERCE enable communication between
a marketer's e-commerce server and our system. This real-time communication
enables the marketer to recognize our members when they enter the
marketer's web site and display offers on the site. These components run on
Sun Solaris and Windows NT and are compatible with most major electronic
commerce software platforms, such as Microsoft's electronic commerce
software.

Our CAMPAIGN MANAGER software manages the creation and presentation of
e-centives. This software can also manage the dynamic display of offers on
the web sites of marketers that use our PROMOCOMMERCE solution.

We monitor and test our system and software, and from time to time
have identified minor defects. We currently address such defects by
rewriting software code and, if possible, replacing small portions of our
proprietary software with commercially available software components. Any
difficulties in implementing this new software may result in greater than
expected expense and may cause disruptions to our business.

COMMERCE ENGINE AND COMMERCE NETWORK

We have developed proprietary and scalable technology infrastructure
to provide turnkey commerce capabilities for companies in a broad range of
markets including portals, destination sites, retailers, banks, credit card
services, insurance providers, telecommunications providers, and wireless
portals.

Our flexible platform enables sites to seamlessly blend commerce into
their user experience, embedding relevant products and content within a
range of applications including Web search, online banking, and editorial
content.

Our core products that make up the Commerce Engine technology include
PRODUCT FINDER, PRODUCT MERCHANDISER, MARKETPLACE, OMEGA, and PRODUCT
SPOTLIGHT. All of these systems use a combination of databases, application
servers, and network equipment which provide a robust infrastructure for
delivering fast, reliable, and scalable access to our content and services.

Our content includes product listings, offers, and 3rd party related
content.

o PRODUCT FINDER includes proprietary technology that allows
our partners to search through the content of our database
returning highly relevant results based on the provided
search criteria. A portion of this technology is a result of
patented and patent pending technology.

o PRODUCT MERCHANDISER uses proprietary technology to target a
subset of our content to individuals based on the
individuals profiles, portal specifications, merchant
specifications, and observed aggregated browsing and buying
behavior of users of the system.

o MARKETPLACE provides a robust, flexible web site building
and hosting solution that allows our partners to customize
their consumers shopping experience. This technology is
accessible to the consumer as a set of web pages that
dynamically serve up a shopping experience. Another portion
of the technology is a set of web tools that are used to
manage and configure that shopping experience.

o OMEGA provides the ability to integrate our product listing
content into other companies' standard web search
experience.

o The PRODUCT SPOTLIGHT service provides for e-mail delivery
of our content personalized to an individual.

In addition to these systems described above, there are additional
applications and web tools that we provide to our partners to manage and
interact without the system.

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o The SELLING SYSTEM is a web-based tool that interacts
with our systems and databases to enable our merchant
partners to selectively publish and promote product
offers. This content published by each merchant is then
accessible via Product Merchandiser and Marketplace to
each of our portal partners.

o The CONTROL PANEL is a web-based tool that interacts
with our systems and databases. The tool enables the
portal partner to configure aspects of the various
commerce engine systems.

o The TAXONOMY MAPPING TOOL is a downloadable application
that interacts with our databases and servers, which
allows a portal partner to create a custom view on how
to navigate through all of our product content.

All e-centives content is stored in and accessed from our database
servers. Our database server architecture is hardware scalable, which means
that we can add new hardware servers to increase capacity or improve access
times as our membership and traffic grows.

We monitor and test our system and software, and from time to time have
identified minor defects. We currently address such defects by rewriting
software code and, if possible, replacing small portions of our proprietary
software with commercially available software components. Any difficulties
in implementing this new software may result in greater than expected
expense and may cause disruptions to our business.

E-MAIL MARKETING SYSTEM

We have developed a proprietary and scalable e-mail marketing system.
This system enables companies to communicate and build relationships with
their users via e-mail. This correspondence can be single messages or a
series of messages that are sequenced to form a conversation to facilitate
building a one to one relationship.

The e-mail marketing system consists of the following:

o database servers for storing e-mail lists, content and
e-mail activity data;
o data collection and transformation servers for
importing and exporting both subscriber and e-mail
activity data;
o application servers for content management,
personalization engine and inbound mail handling;
o web servers to support campaign management and
real-time reporting; and
o mail servers for sending and receiving e-mail.

All of our clients' e-mail lists and content for e-mail campaigns are
stored in a relational database prior to the sending e-mail campaigns. This
database is constantly being replicated to a stand-by database for fail over
purposes and all data are copied to tape nightly for disaster recovery
purposes.

Once an e-mail campaign is run the e-mails are assembled using our
applications servers, which are clustered for load balancing and fault
tolerance. Each e-mail stream can be individually personalized with relevant
content and targeted offers for the respective recipients. As each message
is assembled it is sent to a farm of outbound mail servers using a
load-balancing appliance, which is also fault tolerant. This architecture
allows us to scale horizontally, simply by adding hardware to the required
components.

Once an e-mail campaign has been sent, our data collection component
collects and aggregates all e-mail activity and provides this to our clients
via web based real-time reporting.

All e-mail campaigns are built and managed using our proprietary e-mail
Content Manager, which has been built to be used by both our account
management team to provide a full service model to our clients, as well as
by our clients for a self-service model.

We host our systems in a data center that provides redundant network
connectivity and diesel generated backup power. In addition we monitor and
test our system and as defects are identified they are addressed with
version and process controlled upgrades.

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We spent approximately $2.4 million, $2.9 million, and $7.9 million in 1999,
2000 and 2001, respectively, on research, design and development activities.

COMPETITION

As a provider of online direct-marketing solutions, we generally compete
with marketing and other promotion programs for a portion of a marketer's total
marketing budget. In addition, within the promotions market, we compete with a
variety of businesses.

Our primary competition can be categorized as follows:

o both online and offline direct marketing and promotion companies;
o Internet-based marketing technology and services firms; and
o other companies that facilitate the marketing of products and
services on the Internet.

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Current or potential competitors include vendors that provide:

o e-mail marketing solutions;
o rewards programs; and
o coupon and promotion programs.

Our ability to compete depends on many factors.

Factors over which we have some level of control:

o success in developing and expanding our membership base;
o ability to enter into relationships with network partners and
marketers;
o ability to provide simple, cost-effective and reliable solutions;
o timely development and marketing of new services; and
o ability to manage rapidly changing technologies, frequent new
service introductions and evolving industry standards.

Factors outside our control include:

o development, introduction and market acceptance of new or
enhanced services by our competitors;
o changes in pricing policies of our competitors;
o entry of new competitors in the market; and
o the ability of marketers to provide simple, cost-effective and
reliable promotions.

The failure to compete successfully would impair our ability to generate
revenues and become profitable.

We believe the market for our recently acquired commerce technologies and
services to be rapidly evolving and intensely competitive. In this area, we
mainly compete with comparison-shopping services on the Internet. Some of our
current and potential competitors include:

o other providers of commerce technologies and services;
o commerce destination sites;
o commerce wallet providers;
o affiliate services; and
o shopping channels of Internet portals and other captive
marketplace Web sites.

We believe the principal factors that will draw end-users to an online
commerce application include brand availability, selection, personalized
services, convenience, price, accessibility, customer service, quality of
content, and reliability and speed of fulfillment for products ordered. Because
we serve primarily as a technology and infrastructure provider and not as a
retailer or operator of a search engine, our customers and partners are
responsible for many of these factors, and we have little or no control over
them.

We believe the market for our recently acquired promotions system to be
rapidly evolving and intensely competitive. In this area, we mainly compete with
providers of promotions and data tracking technologies and services on the
Internet. Some of our current and potential competitors include:

o other providers of marketing technologies and services;
o coupon providers; and
o promotions destination sites.

We expect competition to intensify as more competitors enter our markets.
Many of our existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical, marketing and
managerial resources than we do. Many of our competitors also generate greater
revenue and are better known than we are. They may compete more effectively and
be more responsive to industry and technological change.

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RISK FACTORS

We caution you that our performance is subject to risks and uncertainties.
There are a variety of important factors like those that follow that may cause
our future results to differ materially from those projected in any of our
forward-looking statements made in this Annual Report on Form 10-K or otherwise.

RISKS RELATED TO OUR BUSINESS

WE HAVE INCURRED NET LOSSES SINCE INCEPTION, EXPECT CONTINUING LOSSES AND MAY
NEVER ACHIEVE PROFITABILITY IN THE FUTURE.

To date, we have not been profitable. We did not begin to generate revenues
until the third quarter of 1999. As of December 31, 2001, we had an accumulated
deficit of approximately $99.6 million. We incurred net losses in 2001, 2000,
and 1999 of $45.0 million, $29.9 million and $16.2 million, respectively. We
expect to continue to incur significant net losses and negative cash flow for
the foreseeable future. We expect to spend significant financial resources to
expand our business. We have not yet determined the specific amounts of
operating expenses and capital expenditures we expect to incur, although we
currently anticipate spending over the next 12 months approximately $3.5 million
on capital expenditures and expenses associated with expanding our system
capacity. We do not know when or if we will become profitable. If we cannot
achieve operating profitability or positive cash flows from operating
activities, our stock price may decline and we may be unable to continue our
operations.

A GENERAL NATIONAL ECONOMIC DOWNTURN WILL MATERIALLY ADVERSELY AFFECT OUR
BUSINESS AND RESULTS OF OPERATIONS.

Economic indicators suggest that the U.S. economy has experienced a general
national economic downturn during 2001 and into early 2002. Such downturns
typically result in adverse affects upon advertising and marketing expenditures
and retail sales. The repercussions from any such downturn are likely to have a
direct negative affect on our business and results of operations by reducing the
demand for our services and the amount of any fees we are able to obtain. The
businesses of our clients are likely to be affected by any downturn in such a
manner as to reduce their willingness to make advertising and marketing
expenditures. Consumer demand for goods and services offered by our clients may
similarly weaken as a result of such downturn. Numerous companies engaged in the
provision of goods and services online have recently encountered significantly
reduced revenues, lay-offs of personnel and often bankruptcy and/or liquidation.
The occurrence or continuation of such a general national economic downturn and
any of the resulting effects, including those above, is likely to materially
adversely affect our business and results of operations.

OUR ACQUISITION OF THE COMMERCE DIVISION HAS RESULTED IN A SIGNIFICANT INCREASE
IN OUR RECURRING COSTS AND WE MAY NOT REALIZE THE INTENDED BENEFITS OF THE
ACQUISITION.

In March 2001, we completed the acquisition of the Commerce Division of
Inktomi Corporation. Through this acquisition, we originally added approximately
70 new employees and our monthly expenses increased by approximately $1.5
million per month. As of December 31, 2001, the Commerce Division had 52
employees and incurred approximately $1.1 million in monthly expenses. Although
we knew that the business of the Commerce Division as operated by Inktomi was
slowing, the business deteriorated more rapidly prior to the closing than we
expected, due to the termination of several major contracts that we would have
acquired. Therefore, this acquisition has resulted in a significant increase in
our expenses without the corresponding increase in our revenues that we had
expected. We may spend significant time and resources trying to increase the
base of large customers and to realize the intended benefits of the acquisition.
We cannot assure you that these efforts will be successful.

WE MAY NOT SUCCESSFULLY INTEGRATE AND MANAGE THE COMMERCE DIVISION AND
BRIGHTSTREET.COM, AND THE INTENDED BENEFITS OF THE ACQUISITIONS MAY NOT BE
REALIZED, WHICH COULD HAVE A NEGATIVE IMPACT ON THE MARKET PRICE OF SHARES OF
OUR COMMON STOCK.

The acquisitions of the Commerce Division and BrightStreet.com pose risks
for our ongoing operations and the value of shares of our common stock,
including that:

o we may fail to successfully integrate the acquired products and
services into our business operations;
o we may incur expenses related to the integration of theses
businesses into our existing business operations;
o we may experience difficulties and incur expenses related to the
assimilation and retention of employees; and
o whether or not successfully integrated, the acquired assets may
not perform as well as we expect.

If we fail to successfully integrate the acquired assets and/or fail to
realize intended benefits of the acquisition due to any of the foregoing
reasons, the market price of shares of our common stock could decline.

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OUR FUTURE RESULTS AND THE DEMAND FOR OUR SERVICES ARE UNCERTAIN, AND WE WILL
NOT BECOME PROFITABLE IF OUR SERVICES DO NOT ACHIEVE MARKET ACCEPTANCE.

We were incorporated in August 1996 and launched our e-centives online
direct marketing system in November 1998. We did not charge for our services and
did not begin to generate revenues until the third quarter of 1999. Since then,
we have started offering additional services, some through acquisitions and
others through the launching of internally developed services. Accordingly, our
future results are uncertain and our results to date may not be representative
of our future results.

Since some of our services are new, we cannot predict their demand. Demand
for our services is dependent upon many factors.

Factors over which we have some level of control include:

o the number of consumers, network partners, portals and marketers
we can attract to our systems;
o our ability to compete successfully in our market; and
o our success in promoting our products and services through our
sales, marketing and business development personnel.

Factors outside our control include:

o uncertainty about the value and effectiveness of our on-line
direct marketing personalized services;
o our merchants' ability to sell their products and services to the
consumers who participate in our systems; and
o the quality, accuracy and utility of the information provided to
us that we provide to marketers regarding member demographics,
member activity and promotional success.

If our products and services do not achieve market acceptance, our business
will not become profitable.

OUR FINANCIAL RESULTS WILL SUFFER IF OUR DIRECT MARKETING MEMBERS DO NOT
REGULARLY USE OUR SYSTEM.

Our ability to generate revenue from our direct marketing system depends, in
part, on frequent and regular member activity. During the year ended December
31, 2001, we recognized 33% of our revenue from the delivery of e-centives to
members on behalf of marketers and network partners. Delivering e-centives to
members by e-mail accounted for approximately 30% of our revenue and delivering
e-centives to members' online accounts accounted for approximately 3% of our
revenue during this period. In the case of delivering e-centives to members'
online accounts, we do not recognize revenue from the sale of e-centives unless
our members access their online accounts. If we are unable to increase the
frequency with which our members use our system, our ability to generate
revenues by the delivery of e-centives to member accounts will be adversely
affected and our business will suffer. In addition, if our members do not visit
the web sites of our marketers in response to e-centives, marketers may not
continue to use our system.

OUR INABILITY TO MAINTAIN EXISTING AND ESTABLISH NEW RELATIONSHIPS WITH NETWORK
PARTNERS OPERATING HIGH-TRAFFIC PORTAL, COMMUNITY AND CONTENT WEB SITES WOULD
CAUSE OUR FINANCIAL RESULTS TO SUFFER.

Our success depends on our ability to establish relationships with and
deliver our direct marketing service through high-traffic portal, community and
content web sites. We rely on these relationships to increase our membership
base and to provide members entry points into our direct marketing system.
Traditionally, we have compensated our network partners for members we acquire
through their web sites either by paying a fee, typically ranging from $0.50 to
$1.00, for new members ("bounty"), by paying a percentage, typically ranging
between 20% and 50%, of the revenue we generate from the delivery of e-centives
to such new members ("revenue share"), by paying both or by paying the higher of
the two methods. For the year ended December 31, 2001, we paid two of our
network partners based on a bounty, eight of our network partners based on a
revenue share, two of our network partners based upon a combination of both and
two of our network partners based upon the higher of the two methods.

We have no long-term arrangements with our existing network partners, and
none of our agreements with our network partners are for longer than a year. We
cannot assure you that we will be able to maintain our existing relationships or
enter into additional relationships with new network partners, on favorable
terms, if at all. If we are unable to maintain our existing relationship with
our other network partners, or if we fail to establish successful relationships
with new network partners, our membership base may not continue to grow in a
timely manner, or at all, and our business and financial condition would be
adversely affected.

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

The market to provide our services is intensely competitive and rapidly
changing. We expect competition in this market to continue to increase as a
result of:

o our market's increasing size;
o our market opportunity becoming more visible;
o minimal barriers to entry; and
o industry consolidation.

We compete with companies for the dollars that marketers allocate to their
marketing budgets. We compete for these marketing dollars with many online
direct marketers in several fields, principally vendors that provide:

o e-mail marketing solutions;
o rewards programs; and
o coupon and promotions programs.

We believe the market for our recently acquired COMMERCE ENGINE application
to be rapidly evolving and intensely competitive. Some of our current and
potential competitors include:

o other providers of commerce technologies and services;
o commerce destination sites;
o commerce wallet providers;
o affiliate services; and
o Internet portals and other captive marketplace Web sites.

We believe the principal factors that will draw end-users to an online
commerce application include brand availability, selection, personalized
services, convenience, price, accessibility, customer service, quality of search
tools, quality of content, and reliability and speed of fulfillment for products
ordered. Because we serve primarily as a technology and infrastructure provider,
our customers and partners determine many of these factors, and we have little
or no control over them.

We believe the market for our recently acquired promotions system to be
rapidly evolving and intensely competitive. In this area, we mainly compete with
providers of promotions and data tracking technologies and services on the
Internet. Some of our current and potential competitors include:

o other providers of marketing technologies and services;
o coupon providers; and
o promotions destination sites.

Many of our other existing and potential competitors have significantly
greater financial, technical, marketing and managerial resources than we do.
Many competitors also generate greater revenue and are better known than we are.
As a result, they may compete more effectively than we do and be more responsive
to industry and technological change than we are. We also compete for marketing
dollars with other online marketing and advertising companies as well as offline
direct marketing and promotion companies. We operate in an intensely competitive
environment with a significant number of existing and potential competitors.

Our ability to successfully compete depends on many factors.

Factors over which we have some level of control include:

o success in developing and expanding a membership base;
o ability to enter into relationships with network partners and
marketers;
o ability to provide simple, cost-effective and reliable solutions;
o timely development and marketing of new services; and
o ability to manage rapidly changing technologies, frequent new
service introductions and evolving industry standards.

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Factors outside our control include:

o development, introduction and market acceptance of new or
enhanced services by our competitors;
o changes in pricing policies of our competitors;
o entry of new competitors in the market; and
o the ability of marketers to provide simple, cost-effective and
reliable promotions.

The failure to compete successfully would impair our ability to generate
revenues and become profitable.

OUR E-CENTIVES BRAND MAY NOT ACHIEVE THE LEVEL OF RECOGNITION NECESSARY TO
ATTRACT ADDITIONAL MARKETING CLIENTS, WHICH COULD CAUSE OUR FINANCIAL RESULTS TO
SUFFER.

To be successful, we must continue to build and increase market recognition
of our corporate brand because our market is competitive with low barriers to
entry. We do not advertise to attract visitors to our web site, but rather are
attempting to build a brand that businesses identify with online marketing. We
believe that the recognition of the e-centives brand is critical to our success
and the importance of this will increase as more companies enter our market and
competition for marketers', network partners' and members' attention increases.
Building recognition of the e-centives brand will require us to expend
significant funds on marketing. The outcome of our marketing efforts is hard to
predict. If we are not successful in our marketing efforts to increase our brand
awareness, our ability to attract marketing clients could be harmed which would
cause our financial results to suffer.

WE ARE DEPENDENT ON MERCHANTS FOR A PORTION OF OUR REVENUE AND OUR INABILITY TO
MAINTAIN EXISTING AND ESTABLISH NEW RELATIONSHIPS WITH MARKETERS WOULD CAUSE OUR
FINANCIAL RESULTS TO SUFFER.

For the year ended December 31, 2001, 35% of our revenue came from
promotions network merchants and 9% of our revenue came from our commerce
network merchants. Our success in those products and services depends on our
ability to enter into and maintain agreements with merchants. If we do not
continue to enter into new agreements with merchants, we may not be able to
increase our revenues for those products and services, which would materially
affect our financial condition and results of operations.

OUR INABILITY TO PROVIDE OUR MEMBERS WITH ATTRACTIVE PROMOTIONAL OFFERS FROM
MARKETERS COULD HARM OUR FINANCIAL RESULTS.

We need to continue to attract new marketers to our system in order to
continue to provide our members with new offers on products and services. Member
loyalty and activity, and the resulting attractiveness of our system to
marketers and network partners, depends upon the desirability of the promotions
we deliver. We cannot control the quality or attractiveness of promotions our
marketers offer. If our marketers choose unpopular or unattractive promotions or
we are unable to attract new marketers to our system, we may not be able to
maintain or expand our member base. Moreover, if our members are not satisfied
with the offers, or with the products or services purchased, their negative
experiences might result in decreased usage of our system, which would adversely
affect our financial results.

WE MAY REQUIRE ADDITIONAL CAPITAL TO FINANCE GROWTH OF OUR OPERATIONS, AND IF
SUCH FUNDS ARE NOT AVAILABLE, WE MAY NOT BE ABLE TO FUND OUR PLANNED EXPANSION
OR CONTINUE OPERATIONS.

We currently anticipate that our existing capital, together with our
funds from operations and the proceeds from the promissory notes associated
with the rights offering, will be sufficient to meet our need for working
capital, capital expenditures and business expansion into the first quarter
of 2003. Friedli Corporate Finance has executed a letter to us confirming its
ability to fund us in the amount of $10.7 million for the outstanding
promissory notes from Pine, Inc. and Venturetec, Inc., entities under its
control. Funds from these promissory notes will be provided to us from April
2002 through June 2002, based on our lack of immediate need for these funds.
As of April 16, 2002, more than 70% of these funds have been received by us.
To the extent that these funds, accompanied by our operating resources, are
not sufficient to enable us to operate through December 31, 2002, Friedli
Corporate Finance is committed to providing the necessary funding to enable
us to continue to operate through December 31, 2002. See also "Related Party
Transactions" on page 34 for a further discussion of such promissory notes.
Further, we may need to raise additional funds sooner than we expect. For
example, we may need additional financing if we:

o are unable to increase our revenues as anticipated;
o decide to expand faster than planned;
o develop new or enhanced services or products ahead of schedule;
o need to respond to competitive pressures; or
o need to acquire complementary products, businesses or
technologies.

We cannot be certain that additional financing will be available on
acceptable terms, or at all. Numerous companies engaged in the provision of
goods or services online have recently encountered significant difficulty
obtaining funding from the public capital markets as well as through private
transactions. If we raise additional capital through the issuance of equity
securities, the common

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stock interest of investors holding shares prior to such issuance would be
diluted. In addition, we may raise any necessary additional capital through the
issuance of preferred stock, with rights superior to those of the common stock
purchased by investors prior to such issuance. If adequate funds are not
available on acceptable terms, we may not be able to fund our expansion, develop
or enhance our products or services or respond to competitive pressures.

OUR NETWORK INFRASTRUCTURE, COMPUTING SYSTEMS OR SOFTWARE MAY FAIL OR BE
COMPROMISED OR DAMAGED, WHICH COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND
REPUTATION.

The performance of our hardware and software is critical to our business and
our ability to attract consumer members, marketers and high-traffic portal,
community and content web sites. System failures that cause an interruption in
service or a decrease in responsiveness of our transaction processing or data
storage capabilities could impair our reputation and the attractiveness of our
brand. We have experienced periodic system interruptions, which may occur from
time to time in the future. All disruptions were caused by unique errors in our
software code that were all subsequently corrected and did not have a material
effect on our business. Any significant increase in the frequency or severity of
future disruptions could have an adverse effect on our business.

The software for our systems is complex and may contain undetected errors or
defects, especially when we implement upgrades to our system. Any errors or
defects that are discovered after our software is released for use could damage
our reputation or result in lost revenues.

We monitor and test our system and software, and from time to time have
identified minor defects. We currently address such defects by rewriting
software code and, if possible, replacing portions of our proprietary software
with commercially available software components. Any difficulties in
implementing this new software may result in greater than expected expense and
may cause disruptions to our business.

Exodus Communications and Metromedia Fiber Network host our systems and
provide us with communications links. The delivery of our services is
substantially dependent on our ability and the ability of the providers to
protect our computer hardware and network infrastructure against damage from,
among others:

o human error;
o fire and flooding;
o power loss;
o telecommunications failure; and
o online or physical sabotage.

We rely on Exodus for a significant portion of our Internet access as well
as monitoring and managing the power and operating environment for our server
and networking equipment. Any interruption in these services, or any failure of
Exodus to handle higher volumes of Internet use, could result in financial
losses or impair our reputation. In September 2001, Exodus filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code and in
February 2002 Cable and Wireless plc acquired selected assets and a majority of
the business activities of Exodus. There can be no assurance that we will be
able to continue our relationship with Exodus or obtain comparable services on
acceptable terms, if at all.

OUR SYSTEM CAPACITY NEEDS ARE UNTESTED AND OUR FAILURE TO HANDLE THE GROWTH OF
OUR DATABASE MAY DAMAGE OUR BUSINESS OR REQUIRE US TO EXPEND SUBSTANTIAL
CAPITAL.

The capacity of our system has not been tested and we do not yet know the
ability of our system to manage substantially larger numbers of users and
transactions. A substantial increase in our membership base and a corresponding
increase in the number of data records could strain our servers and storage
capacity, which could lead to slower response time or system failures. We may
not be able to handle our expected user and transaction levels while maintaining
satisfactory performance. System failures or slowdowns adversely affect the
speed and responsiveness of our transaction processing. These would have a
negative impact on the experience for our consumer members and reduce our
system's effectiveness. Such an increase could require us to expand and upgrade
our technology, processing systems and network infrastructure. Any unexpected
upgrades could be disruptive and costly. Our failure to handle the growth of our
databases could lead to system failures, inadequate response times or corruption
of our data, and could negatively affect our business, results of operations and
financial condition. We believe, that on average, our various systems' hardware,
at peak traffic levels, run at approximately 50% of capacity. We may be unable
to expand and upgrade our systems and infrastructure to accommodate this growth
in a timely manner. Any failure to expand or upgrade our systems could damage
our reputation and our business.

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In addition, if our usage of telecommunications capacity increases, we will
need to purchase additional networking equipment and rely more heavily on our
web hosting providers to maintain adequate data transmission speeds. The
availability of these products or services may be limited or their cost may be
significant.

OUR BUSINESS COULD SUFFER IF INTERNET USERS REDUCE OR BLOCK OUR ACCESS TO THEIR
PERSONAL DATA.

We collect consumer demographic and purchase preference information from our
members and also collect data regarding the categories of offers viewed and
offers clicked-on by members. Privacy concerns may cause users to resist signing
up for our system, providing us with personal information and allowing us to
monitor their usage. If users were to reduce the information voluntarily
supplied to us or block our access to their data, our ability to improve our
database of consumer information and the value of our service would diminish.

PRIVACY LAWS MAY BE ENACTED OR APPLIED TO US, WHICH COULD RESTRICT OUR ABILITY
TO DISCLOSE CONSUMER DATA WITH THIRD PARTIES, WHICH COULD ADVERSELY AFFECT OUR
BUSINESS.

We currently report aggregate, but not individual, consumer demographic
information and purchase preference information to network partners about the
members that joined through their service. Marketers only receive aggregate
information about our membership for purposes of targeting promotions to members
with certain demographic or purchase preference criteria. Growing concern about
privacy and the collection, distribution and use of personal information, even
in the aggregate, may lead to the enactment and application of federal or state
laws or regulations that would restrict our ability to provide customer data to
third parties. In addition, several states have proposed legislation that would
limit the uses of customer information gathered online. Consequently, any future
regulation that would restrict our ability to provide information regarding our
members would have a negative impact on our business by restricting our methods
of operation or imposing additional costs.

IF WE ARE NOT SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY OUR BUSINESS
WILL SUFFER.

We depend heavily on technology to operate our business. Our success depends
on protecting our intellectual property, which is one of our most important
assets.

PROPRIETARY TECHNOLOGY

We have developed proprietary technology including database and interface
servers, offer creation and presentation software, and software to enable
communication between marketers' e-commerce systems and our system.

PATENTS: We have four issued U.S. patents and twenty pending U.S. patent
applications. Our first issued patent is entitled "ELECTRONIC COUPONING
METHOD AND APPARATUS" and relates to the method and apparatus for
distributing, generating, and redeeming discount coupons, rebate or gift
certificates or the like that tracks each coupon using a consumer ID number
printed on the coupon. Our second issued patent, which is a
continuation-in-part to our first patent, is entitled "ELECTRONIC DISCOUNT
COUPONING METHOD AND APPARATUS FOR GENERATING AN ELECTRONIC LIST OF
COUPONS". Our third issued patent is entitled "METHOD AND SYSTEM FOR
ELECTRONIC DISTRIBUTION OF PRODUCT REDEMPTION COUPONS" and relates to a
method and system for the electronic distribution of product redemption
coupons to remote personal computers. Our fourth issued patent, of the same
title, is a continuation to our third patent. Our pending patent
applications seek to protect technology we use or may use in our business.
We have no issued foreign patents, but we have ten pending foreign patent
applications in the European Union. It is possible that no patent will
issue from the currently pending patent applications.

TRADEMARKS: We have registered the e-centives trademark in the U.S. We have
filed U.S. trademark registrations for the e-centives logo, PROMOCAST,
PROMOCOMMERCE, PROMOMAIL, PROMOMAIL EVENT, PROMOMAIL SPOTLIGHT,
BRIGHTSTREET and BRIGHTSTREET.COM, all of which are pending. We have also
filed for trademark registration of e-centives, the e-centives logo,
PROMOCAST, PROMOCOMMERCE and PROMOMAIL in Switzerland and with the European
Union. We also claim rights in a number of additional tradenames associated
with our business activities.

INTERNET DOMAIN NAMES: We hold rights to various web domain names including
e-CENTIVES.COM and BRIGHTSTREET.COM. Regulatory bodies in the United States
and abroad could establish additional top-level domains, appoint additional
domain name registrars or modify the requirements for holding domain names.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. We may be
unable to prevent third parties from acquiring

19

domain names that are similar to or diminish the value of our trademarks
and other proprietary rights.

We have not registered any copyrights in the U.S. or elsewhere related to
our software or other technology.

If we do not adequately protect our intellectual property, our business,
financial condition and results of operations would be harmed. Our means of
protecting our intellectual property may not be adequate. Unauthorized parties
may attempt to copy aspects of our service or to obtain and use information that
we regard as proprietary. It is also possible that our patents or any potential
future patents may be found invalid or unenforceable, or otherwise be
successfully challenged. If any of our current or future patents are
successfully challenged by a third party, we could be deprived of our right to
prevent others from using the methods covered by such patents. In addition,
competitors may be able to devise methods of competing with our business that
are not covered by our patents or other intellectual property. Although, members
can access our service over the Internet from anywhere in the world, we
currently only have operations in the U.S. The laws of some foreign countries do
not protect our intellectual property rights to as great an extent as do the
laws of the United States. Our competitors may independently develop similar
technology, duplicate our technology or design around any patents that we may
obtain or our other intellectual property.

IF WE INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS OUR BUSINESS AND
FINANCIAL RESULTS COULD BE HARMED.

There has been a substantial amount of litigation in the software and
Internet industry regarding intellectual property rights. It is possible that,
in the future, third parties may claim that our current or potential future
technologies infringe upon their intellectual property. We expect that software
developers will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows. Any such claims, with or
without merit, could be time-consuming, result in costly litigation and
diversion of management resources, or require us to enter into royalty or
licensing agreements. Royalty or licensing agreements, if required, may not be
available on terms acceptable to us or at all, which could seriously harm our
ability to operate our business and our financial condition may suffer.

WE ARE, AND WILL CONTINUE TO BE, CONTROLLED BY OUR CO-FOUNDERS AND BOARD
MEMBERS, WHO MAY APPROVE CORPORATE ACTIONS WITH WHICH YOU MAY DISAGREE.

We are, and will continue to be, controlled by our co-founders and board
members, who may approve corporate actions with which you may disagree. As of
December 31, 2001, our co-founders, Messrs. Amjadi, Akhavan and Friedli, owned
approximately 63.5% of our outstanding common stock. As a result, they continue
to be able to control most matters requiring stockholder approval. Among other
things, they are able to elect a majority of the directors and approve
significant corporate matters, such as a merger or sale of the business.

WE MAY BE SUBJECT TO CLAIMS BASED ON THE CONTENT OF OUR PROMOTIONS AND OUR WEB
SITE.

The online promotions developed by our marketers may not comply with
federal, state or local laws governing the content of advertisements and the
sale of products and services. We do not control the content of the promotions
we deliver. Our role in facilitating these promotions may expose us to liability
based on the content of the promotions. We also may face liability if the
promotional information in the promotions is defamatory, inaccurate, or
infringes on proprietary rights of others. Marketers or our employees may make
errors or enter inaccurate information, and we do not proofread or otherwise
verify the information contained in the promotions. We may face civil or
criminal liability for unlawful advertising or other marketer activities. We
could also face claims based on the content that is accessible from our web site
through links to other web sites.

We may not be adequately insured to cover these claims. Any claims could
require us to spend significant time and money in litigation, even if we
ultimately prevail. In addition, negative publicity caused by these inaccuracies
could damage our reputation and diminish our brand.

OUR BUSINESS MAY BE AFFECTED BY SEASONAL FLUCTUATIONS IN DIRECT MARKETING
SPENDING AND INTERNET USE, WHICH COULD CAUSE OUR OPERATING RESULTS AND STOCK
PRICE TO FLUCTUATE WIDELY.

Our limited operating history and rapid growth make it difficult for us to
assess the impact of seasonal factors on our business. We expect seasonal
fluctuations will affect our business. We believe that online direct marketing
spending will be highest in the fourth quarter of each calendar year due to
increased consumer spending during the holiday period, and lowest during the
summer months of the third quarter. Because the market for Internet direct
marketing services is emerging, we cannot be certain of these seasonal patterns
and additional patterns may develop in the future as the market matures. This
could cause our operating results and stock price to fluctuate widely.

20

IF WE DO NOT MANAGE OUR GROWTH, OUR BUSINESS WILL BE HARMED.

We may not be successful in managing our rapid growth. We have grown from 60
employees on June 30, 1999 to 153 employees on December 31, 2001. Past growth
has placed, and future growth will continue to place, a significant strain on
our management and resources, related to the successful integration of
personnel. The acquisitions and integrations of the Commerce Division and
BrightStreet.com has and will continue to divert management's attention and
place an additional strain on our management and resources.

To manage the expected growth of our operations, we will need to improve our
existing and implement new operational and financial systems, procedures and
controls. We will also need to manage our finance, administrative, client
services and operations staff and train and manage our growing employee base
effectively. Our current and planned personnel, systems, procedures and controls
may not be adequate to support our future operations. Our business, results of
operations and financial condition will suffer if we do not effectively manage
our growth.

IF WE LOSE THE SERVICES OF ANY OF OUR KEY PERSONNEL, OUR BUSINESS AND STOCK
PRICE COULD SUFFER.

Our success depends in large part on the contributions of Kamran Amjadi, our
Chairman and Chief Executive Officer and Mehrdad Akhavan, our President and
Chief Operating Officer, whose understanding of our services, strategy and
relationships would be extremely difficult to duplicate from outside our
company. Although we maintain employment agreements with Messrs. Amjadi and
Akhavan, we do not have and do not currently plan to enter into employment
agreements with any of our other employees. The loss of the services of any of
these key personnel could have a material adverse effect on our business. We do
not maintain "key person" life insurance policies.

IF WE ARE UNABLE TO ATTRACT AND RETAIN HIGHLY SKILLED EMPLOYEES, OUR BUSINESS
MAY BE HARMED.

Our future success also depends on our ability to identify, attract, retain
and motivate highly skilled employees, particularly additional technical, sales
and marketing personnel. We face intense competition in hiring and retaining
personnel from a number of sectors, including technology and Internet companies.
Many of these companies have greater financial resources than we have to attract
and retain qualified personnel. We have occasionally encountered and expect to
continue to encounter difficulties in hiring and retaining highly skilled
employees, particularly qualified software developers and engineers. We seek
developers and engineers who have experience with the newest software
development tools and Internet technologies. We may be unable to retain our
highly skilled employees or identify, attract, assimilate or retain other highly
qualified employees in the future, which may in turn harm our business.

WE HAVE A SIGNIFICANT AMOUNT OF STOCK-BASED COMPENSATION EXPENSE RELATING TO
STOCK OPTION GRANTS, WHICH WILL DECREASE EARNINGS OVER THE NEXT FOUR YEARS.

Stock-based compensation represents an expense associated with the
recognition of the difference between the fair market value of common stock at
the time of an option grant and the option exercise price. Stock compensation is
amortized over the vesting period of the options, generally four years. For the
year ended December 31, 2001, the charge relating to stock option grants was
approximately $863,000. We estimate the charge relating to stock option grants
will be $553,000, $561,000 and $175,000 in 2002, 2003, and 2004 respectively.
These charges will dilute earnings for those years and may have a negative
impact on our stock price.

RISKS RELATED TO OUR INDUSTRY

THE DEMAND FOR INTERNET DIRECT MARKETING SERVICES IS UNCERTAIN.

The market for online direct marketing has only recently begun to develop.
Most businesses have little or no experience using the Internet for direct
marketing and promotion. As a result, many businesses have allocated only a
limited portion of their marketing budgets to online direct marketing. In
addition, companies that have invested a significant portion of their marketing
budgets in online marketing may decide after a time to return to more
traditional methods if they find that online marketing is a less effective
method of promoting their products and services than traditional marketing
methods. We cannot predict the amount of direct marketing spending on the
Internet in general, or demand for our targeted direct marketing services in
particular. The demand for online marketing may not develop to a level
sufficient to support our continued operations or may develop more slowly than
we expect.

21

MANY OF OUR CLIENTS ARE EMERGING INTERNET COMPANIES THAT REPRESENT CREDIT RISKS.

Most of our marketer clients are Internet companies, many of which have
significant losses, negative cash flow and limited access to capital. Many of
these companies represent credit risks and could fail. Any financial
difficulties of our clients may result in difficulties in our ability to collect
accounts receivable or lower than expected sales of our products and services.
If our Internet clients continue to have financial difficulties or if such
difficulties worsen, our financial results would suffer. In addition, we have
experienced decreased sales of our products due to the general economic
slowdown, which has particularly impacted the Internet and technology sector.

ADDITIONAL RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

ALTHOUGH OUR COMMON STOCK IS LISTED ON THE SWX NEW MARKET OF THE SWX SWISS
EXCHANGE, IT IS THINLY TRADED. THE MARKET PRICE OF OUR COMMON STOCK, LIKE THE
MARKET PRICES OF STOCKS OF OTHER INTERNET-RELATED COMPANIES, MAY FLUCTUATE
WIDELY AND RAPIDLY.

Prior to our rights offering, trading in our common stock has been low.
Although our common stock has been listed on the SWX New Market of the SWX Swiss
Exchange since October 3, 2000, there is no assurance that more trading activity
in the common stock will develop.

In addition, the market price of our common stock, like the market prices of
stocks of other Internet-related companies, may fluctuate widely and rapidly.
The market price and trading volume of our common stock, since our initial
public offering has been and may continue to be highly volatile. Factors such as
variations in our revenue, earnings and cash flow and announcements of new
service offerings, technological innovations, strategic alliances and/or
acquisitions involving competitors or price reductions by us, our competitors or
providers of alternative services could cause the market price of our common
stock to fluctuate substantially. Also, broad market fluctuations, including
fluctuations of the SWX New Market of the SWX Swiss Exchange, which result in
changes to the market prices of the stocks of many companies but are not
directly related to the operating performance of those companies, could also
adversely affect the market price of our common stock.

THE LISTING OF OUR SHARES ON THE SWX NEW MARKET OF THE SWX SWISS EXCHANGE MAY
LIMIT OUR ABILITY TO RAISE CAPITAL AND COULD ADVERSELY AFFECT OUR STOCK PRICE.

We are the first U.S. company to list solely on the SWX Swiss Exchange. We
are not listed on any U.S. exchange. Because we are the first U.S. company to do
this, we are uncertain what effect, if any, our listing on only the SWX New
Market of the SWX Exchange will have upon our ability to raise additional
financing in the U.S. capital markets. If the listing of our shares solely on
the SWX New Market of the SWX Swiss Exchange is received by investors with
uncertainty, the listing may discourage potential investors and could hinder our
ability to raise necessary financing on acceptable terms. In addition, after the
expiration of the various lock-up periods entered into by our current
stockholders in connection with our initial public offering, all of the shares
of our common stock will be eligible for trading on the SWX New Market. If a
significant amount of such shares are offered for sale on the SWX New Market
after the lock-up periods expire, it could decrease our stock price.

STOCKHOLDERS HAVE EXPERIENCED SUBSTANTIAL DILUTION IN THEIR EQUITY OWNERSHIP AND
VOTING POWER IN OUR COMPANY WHETHER OR NOT THEY EXERCISED THEIR BASIC
SUBSCRIPTION RIGHTS, AND THEY MAY EXPERIENCE FURTHER DILUTION IF WE OFFER SHARES
OF OUR COMMON STOCK FOR SALE IN FUTURE MONTHS.

Stockholders who did not exercise their basic subscription rights under the
rights offering will experience substantial dilution of their percentage of
equity ownership interest and voting power in our company. Even if our
stockholders exercised their basic subscription rights in full, they will
nevertheless still experience substantial dilution in their voting rights and in
their proportional interest in our future net earnings due to the purchase of
common stock by standby purchasers. In addition, it is possible that it may be
necessary or appropriate for us to seek to raise additional equity capital in
the future and shares of common stock may be offered for sale in the future. In
that event, the relative voting power and equity interests of persons who
purchased the common stock in the rights offering could be reduced. No assurance
can be given that such future sale will not occur, and, if it did, at what price
or other terms.

22

INTELLECTUAL PROPERTY RIGHTS

A large part of our success depends on protecting our intellectual property,
which is one of our most important assets. If we do not adequately protect our
intellectual property, our business, financial condition and results of
operations would be seriously harmed.

We have developed proprietary technology including database and interface
servers, offer creation and presentation software, and software to enable
communication between marketers' e-commerce systems and our system. All of our
marketer clients who desire to use our software sign our standard form license
agreement. In addition, we require employees, contractors and other persons with
access to our proprietary information to execute confidentiality and non-compete
agreements. We seek to protect our software, documentation and other written
materials under trade secret and other intellectual property laws, which afford
only limited protection. We have not registered any copyrights in the U.S. or
elsewhere related to our software or other technology.

We have four issued U.S. patents and twenty pending U.S. patent
applications. Our first issued patent is entitled "ELECTRONIC COUPONING METHOD
AND APPARATUS" and relates to the method and apparatus for distributing,
generating, and redeeming discount coupons, rebate or gift certificates or the
like that tracks each coupon using a consumer ID number printed on the coupon.
Our second issued patent, which is a continuation-in-part to our first patent,
is entitled "ELECTRONIC DISCOUNT COUPONING METHOD AND APPARATUS FOR GENERATING
AN ELECTRONIC LIST OF COUPONS". Our third issued patent is entitled "METHOD AND
SYSTEM FOR ELECTRONIC DISTRIBUTION OF PRODUCT REDEMPTION COUPONS" and relates to
a method and system for the electronic distribution of product redemption
coupons to remote personal computers. Our fourth issued patent, of the same
title, is a continuation to our third patent. Our pending patent applications
seek to protect technology we use or may use in our business. We have no issued
foreign patents, but we have ten pending foreign patent applications in the
European Union. It is possible that no patents will be issued from the currently
pending patent applications. It is also possible that our patents or any
potential future patents may be found invalid or unenforceable, or otherwise be
successfully challenged. Also, any patent we have currently or that is issued to
us may not provide us with any competitive advantages. We may not develop future
proprietary products or technologies that are patentable, and the patents of
others may seriously limit our ability to do business.

We have registered the e-centives trademark in the U.S. We have filed U.S.
trademark registrations for PROMOCAST, PROMOCOMMERCE, PROMOMAIL, PROMOMAIL
EVENT, PROMOMAIL SPOTLIGHT, BRIGHTSTREET and BRIGHTSTREET.COM, all of which are
pending. We have also filed for trademark registration of e-centives, the
e-centives logo, PROMOCAST, PROMOCOMMERCE, and PROMOMAIL in Switzerland and with
the European Union. We also claim rights in a number of additional tradenames
associated with our business activities.

We hold rights to various web domain names including e-CENTIVES.COM and
BRIGHTSTREET.COM. Regulatory bodies in the United States and abroad could
establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. The relationship
between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear. We may be unable to prevent third parties
from acquiring domain names that are similar to or diminish the value of our
trademarks and other proprietary rights.

We have not registered any copyrights in the United States or elsewhere
related to our software or other technology.

Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and, while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate, and our
competitors may independently develop similar technology, duplicate our products
or design around patents issued to us or our other intellectual property.

There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. In fact, we settled litigation with one
of our competitors regarding our intellectual property (see Item 3 -- Legal
Proceedings on page 25). It is possible that in the future, other third parties
may claim that our current or potential future products infringe upon their
intellectual property. We expect that software developers will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Any claims, with or without merit, could be time-consuming to
defend, result in costly litigation or require us to enter into royalty or
licensing agreements. These agreements, if required, may not be available on
terms acceptable to us or at all, which could seriously harm our business,
financial condition and results of operations.

23

We integrate third-party software from vendors such as Oracle Corporation
into the software we use in our business. The third-party software may not
continue to be available to us on commercially reasonable terms. We may not be
able to renew these agreements or develop alternative technology. If we cannot
maintain licenses to key third-party software, develop similar technology or
license similar technology from another source on a timely or commercially
feasible basis, our business, financial condition and results of operations
could be seriously harmed.

EMPLOYEES

As of December 31, 2001, we had a total of 153 employees, of whom 144 were
based in the United States and 9 were based internationally. Of these, 43 were
sales and marketing, 94 were product development, and 16 were general and
administrative personnel. None of our employees are represented by a labor
union, nor have we ever experienced a work stoppage. We believe our employee
relations are good. The table below reflects the growth in our employee
headcount at December 31 for each of the years below:

1997 16
1998 31
1999 74
2000 110
2001 153

RECENT DEVELOPMENTS

(a) NOTES RECEIVABLE FROM STOCKHOLDERS

On January 22, 2002, Pine, Venturetec and InVenture, all companies under
common control, reallocated their share purchases and/or related promissory
notes associated with the October 2001 rights offering. Please see our "Item 5
- -- Market for Registrant's Common Stock and Related Stockholder Matters --
Rights Offering" section on page 26. The CHF 2,500,000 (approximately
$1,538,462) in cash originally indicated as originating from Venturetec has been
reallocated as follows:

o InVenture purchased from Pine in a private sale 1,041,667 of the
shares of common stock originally purchased by Pine pursuant to the
rights offering for CHF 2,083,334, at CHF 2.00 a share. As part of
this transaction, Pine was credited with paying us CHF 2,083,334
(approximately $1,282,052) and delivered to us an amended and restated
secured promissory note dated as of October 19, 2001, in the principal
amount of CHF 6,604,196 (approximately $4,064,121), with 2% interest,
with an original March 31, 2002 maturity date that was subsequently
extended to May 15, 2002. We simultaneously returned Pine's original
CHF 8,687,530 promissory note.

o Venturetec paid us CHF 416,666 (approximately $256,410) and delivered
to us an amended and restated secured promissory note dated as of
October 19, 2001, in the principal amount of CHF 10,583,334
(approximately $6,512,821), with 2% interest, with an original March
31, 2002 maturity date that was subsequently extended to June 30,
2002. This CHF 10,583,334 reflects an increase in Venturetec's secured
promissory note to CHF 11,000,000 (approximately $6,769,231),
reflecting Venturetec's original subscription price for the shares of
our common stock for which it subscribed under the rights offering
minus the CHF 416,666 payment. We simultaneously returned Venturetec's
original CHF 8,500,000 promissory note.

(b) POTENTIAL ACQUISITION

We are currently in negotiations to acquire the assets of another company
and have executed an Asset Purchase Agreement regarding the proposed
acquisition, with an expected settlement date of April 30, 2002.

ITEM 2 - PROPERTIES

We do not currently own any real estate. Our headquarters and principal
administrative, finance, legal, sales and marketing operations are located in
approximately 47,000 square feet of leased office space in Bethesda, Maryland, a
suburb of Washington, D.C. This lease is for a term of five years and expires in
September 2005. Our monthly rent payment under this lease is approximately
$136,000, with increases of 3% per year.

During 2001, we also maintained offices in Redwood Shores, California, Santa
Monica, California, Denver, Colorado, New York,

24

New York and London, England. Our offices in Santa Monica and Denver were closed
prior to December 31, 2001. In association with the acquisition of the Commerce
Division, we sub-lease approximately 30,724 square feet of office space in
Redwood Shores, California. The monthly rent payments are approximately $137,000
and increase for each year of the nine year lease term by fixed dollar amounts
that approximates 3% per year. We do not expect to add any significant
additional office space in the foreseeable future.

ITEM 3 - LEGAL PROCEEDINGS

On October 8, 2001, we were notified by coolsavings.com that a payment of
$250,000 was due to coolsavings because a summary judgment motion, relating to a
separate litigation between coolsavings and Catalina Marketing Corporation, was
not granted within one year from the date of entry of the Stipulated Order of
Dismissal, which was October 3, 2000. Our settlement with coolsavings is
summarized below.

The terms of the settlement with coolsavings provide for a
cross-license between us and coolsavings, for each of the patents
currently in dispute. There are no royalties or other incremental payments
involved in the cross-license. Pursuant to this settlement, we may have to
make payments of up to $1.35 million to coolsavings as follows:

- $650,000, which was paid to coolsavings on September 29,
2000, was due at the signing of the settlement documents;

- $250,000, which was accrued for as of December 31, 2001, was
due if, within one year from the date of entry of the
Stipulated Order of Dismissal, Catalina Marketing
Corporation prevailed in a motion for summary judgment in a
separate litigation between it and coolsavings, involving
the coolsavings' patent currently in dispute; and

- up to $450,000 if and to the extent the coolsavings' patent
currently in dispute survives the pending reexamination
proceedings at the Patent and Trademark Office that were
initiated by a third party. This component of the settlement
arrangement has not been accrued for because our possibility
of having to make this payment continues to remain remote.

Other than the $250,000 payment due to coolsavings, there were no material
additions to, or changes in status of, any ongoing, threatened or pending legal
proceedings during the year ended December 31, 2001.

From time to time, we are a party to various legal proceedings incidental to
our business. None of these proceedings is considered by management to be
material to the conduct of our business, operations or financial condition.

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

On November 7, 2001, our board of directors unanimously approved, subject to
stockholder approval, (i) an amendment of our Restated Certificate of
Incorporation, as amended ("Restated Certificate of Incorporation"), to increase
our total authorized capital stock from 50,000,000 shares to 130,000,000 shares
in connection with an increase in our authorized common stock from 40,000,000
shares to 120,000,000 shares (this amendment will not effect a change to our
10,000,000 shares of authorized preferred stock); and (ii) an amendment to our
Amended and Restated Stock Option and Incentive Plan, as amended (the "Stock
Option Plan"), to increase the maximum number of shares available for issuance
from 5,000,000 to 21,000,000. On November 30, 2001, holders of a majority of the
outstanding shares of our common stock executed a written stockholder consent
approving the amendment of our Restated Certificate of Incorporation and the
amendment to our Stock Option Plan. Under applicable federal securities laws,
the amendments cannot be effective until at least 20 days after this information
statement is sent or given to our stockholders. This information statement was
to be mailed to stockholders on or about December 31, 2001.

25

PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

A. MARKET INFORMATION

Since our initial public offering on October 3, 2000, our common stock has
traded on the SWX New Market of the SWX Swiss Exchange under the symbol "ECEN."
The following table reflects the high and low sales prices, in Swiss Francs and
U.S. Dollars, reported on the SWX New Market of the SWX Swiss Exchange for each
quarter listed. The amounts listed in U.S. Dollars reflect the relevant exchange
rate as of the date of such high or low price.

B. RECENT SALE OF UNREGISTERED SECURITIES

During the year ended December 31, 2001, we granted options to purchase a
total of 1,596,250 shares of common stock under our stock incentive plan to
certain of our employees and directors. During that period, 4 optionees
exercised options to purchase 11,875 shares of common stock, and options to
purchase 1,236,895 shares of common stock were forfeited by employees leaving
the company.

C. HOLDERS

The number of holders of our common stock as of December 31, 2001 was in
excess of 90 record and beneficial owners.

D. DIVIDENDS

In December 2000, we declared dividends of $1,235,688 on our preferred
Series A convertible preferred stock, which was paid out in early 2001. We have
never declared or paid any cash dividends on our common stock. We intend to
retain future earnings, if any, to finance the expansion of our business, and do
not expect to pay any cash dividends in the foreseeable future. Please see our
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources" section on page 39.

The declaration of dividends is within the discretion of our board of
directors and subject to limitations set forth in the Delaware General
Corporation Law. Our certificate of incorporation provides that if dividends are
paid, they must be paid equally on each share of outstanding common stock.
Payment of any dividends on our common stock is subject to the rights of any
preferred stock then outstanding.

E. RIGHTS OFFERING

Based on a resolution of the board of directors dated August 31, 2001, we
granted each holder of our common stock as of August 31, 2001 the right to
purchase one share of our common stock for each share of common stock held of
record on that date, and offered any remaining shares to certain standby
purchasers. This rights offering consisted of 20,000,000 shares of our common
stock at a subscription price of CHF 2.00 ($1.23) per share. In October 2001, we
closed this CHF 40,000,000 (approximately $24,600,000) rights offering with
subscriptions for all 20,000,000 shares. Each subscriber in the rights offering
also received, for no additional

26

consideration, based upon such subscriber's participation in the rights
offering, a pro-rata portion of 2,000,000 shares of our Series A convertible
preferred stock (convertible on a 10-for-1 basis into 20,000,000 shares of
common stock under certain circumstances).

As part of the rights offering, we sold shares of our common stock to
Venturetec, Inc. and Pine, Inc. Peter Friedli, one of our stockholders and
directors, serves as the investment advisor to both Venturetec and Pine, and
also serves as President of Venturetec and its parent corporation, New
Venturetec AG. Venturetec and Pine each delivered to us a promissory note dated
as of October 19, 2001, with a maturity date of March 31, 2002, as consideration
for the subscription price for the shares of common stock for which each company
subscribed under the rights offering. Venturetec's note (which was only partial
consideration for the purchase of the shares; the remainder was paid in cash)
was in the principal amount of CHF 8,500,000 ($5,230,769) and Pine's note was in
the principal amount of CHF 8,687,530 ($5,346,172). In January 2002, Pine,
Venturetec and InVenture, reallocated their share purchases and/or related
promissory notes associated with the rights offering. Please see our "Item 1 --
Business -- Recent Developments" section on page 24.

We issued a global share certificate representing all the shares purchased
in the rights offering after the closing, which shares shall be held in escrow
for a period of approximately three months from the date of closing, during
which time such shares shall not be tradable. No physical share certificates
will be issued by us or delivered to the subscribers in the rights offering.
Once such shares are registered with the U.S. Securities and Exchange Commission
and properly listed with the SWX New Market, such shares shall be released to
the respective subscribers. This process was completed in late February 2002.

We engaged Friedli Corporate Finance, Inc., a venture capital firm of which
one of our stockholders and directors, Peter Friedli, is the principal, to
support us in connection with the rights offering. In connection with this
support, we agreed to extend the consulting agreement with Friedli Corporate
Finance for three years and to reimburse Friedli Corporate Finance $100,000 in
expenses for rights offering support.

swissfirst Bank AG and certain affiliate entities ("swissfirst") acted as
our financial advisor and limited placement agent in connection with the rights
offering pursuant to a Mandate Agreement between us and swissfirst. For
effecting arrangements with purchasers under the rights offering, we agreed to
pay swissfirst a fee of 6.5% of the total sales under the offering made by them
to investors with whom swissfirst had directly and actively engaged in sales and
marketing efforts for the purpose of placing shares in the rights offering
("direct placement efforts"). For those sales, that swissfirst did not utilize
direct placement efforts, the commission rate was 2.0%. In addition, swissfirst
was paid a 0.5% handling fee based upon all funds raised in this rights offering
actually received by swissfirst and held for our benefit, provided that there
shall be no such handling fee paid on funds raised by our board of directors and
their affiliates. We also agreed to and paid a fee of 7% to other firms involved
in the rights offering.

27

ITEM 6 - SELECTED FINANCIAL INFORMATION

SELECTED CONSOLIDATED FINANCIAL DATA
(IN U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

You should read the selected financial data shown below together with our
consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data included elsewhere in this annual report. Our consolidated
statements of operations data for each of the years ended December 31, 1999,
2000 and 2001 and the consolidated balance sheet data as of December 31, 2000
and 2001, are derived from our consolidated financial statements that have been
audited by KPMG LLP, independent certified public accountants, included
elsewhere in this annual report. Our statement of operations data for the years
ended December 31, 1997 and 1998 and the balance sheet data as of December 31,
1997, 1998 and 1999 have been derived from our audited financial statements not
included in this annual report.

28

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

YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH "SELECTED CONSOLIDATED FINANCIAL DATA"
AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL
STATEMENTS ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO HISTORICAL
INFORMATION, THIS DISCUSSION CONTAINS FORWARD-LOOKING INFORMATION THAT
INVOLVES RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING INFORMATION DUE TO COMPETITIVE
FACTORS, RISKS ASSOCIATED WITH OUR EXPANSION PLANS AND OTHER FACTORS
DISCUSSED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS ANNUAL REPORT.

OVERVIEW

We provide interactive marketing technologies and services. Businesses rely
on our broad range of solutions to acquire and retain customers. We provide
online marketing and commerce capabilities and solutions for companies across a
range of industries including the Internet (portals and destination sites),
retail, banking, insurance, and telecommunications. With our proprietary
technology, we power acquisition and retention solutions for companies that do
business with millions of Internet users every day. Our suite of solutions
includes promotions network, member services, commerce network, commerce engine,
outsourced e-mail marketing, and online promotions system.

We were established on August 2, 1996 as Imaginex, Inc., through
incorporation in the State of Delaware. During October 1996, we amended our
articles of incorporation to change our name to Emaginet, Inc. and in March
1999, we again amended our articles of incorporation to change our name to
e-centives, Inc. From inception until June 1999, our principal activities
included:

o designing and developing our online direct marketing system,
including our infrastructure;
o developing and protecting our intellectual property;
o establishing relationships with marketers and high-traffic
Internet sites;
o expanding the number of consumer members and building our
database of consumer information; and
o securing financing for working capital and capital expenditures.

We launched our direct marketing service in November 1998 by delivering
e-centives through our PROMOMAIL, PROMOCAST and PROMOCOMMERCE services. Between
November 1998 and June 1999, while we were introducing our direct marketing
service, we allowed marketers to use our direct marketing system at no charge.
We began generating revenue in the third quarter of 1999. In conjunction with
the acquisition of the Commerce Division, our commerce products and services
began generating revenue in late March 2001. In August 2001, we started
producing revenue from our e-mail marketing technology services and through the
acquisition of BrightStreet.com in December 2001, we began generating revenue by
providing online promotions management solutions. For the year ended December
31, 2001, we generated 62% of our revenue from our direct marketing services,
35% from our commerce products and services, 2% from our outsourced e-mail
services and 1% from our online promotions management services. During the year
ended December 31, 2000, we generated 100% of our revenue from our direct
marketing services, with 13% from the delivery of e-mails for ZDNet and 9% from
the purchase of e-centives by Excite for the purpose of resale.

Our direct marketing system is designed to enable marketers to access a
database of consumers across the web sites of our network partners and by
e-mail. Our system includes a web-based application that enables consumers to
register to receive promotional offers ("e-centives") at our network partners'
web sites or through our web site. Our members provide demographic information
and product category interests in return for targeted offers. Our system then
delivers offers for products and services directly to the member's account or
through e-mail. We primarily deliver e-centives through our PROMOMAIL, PROMOCAST
and PROMOCOMMERCE services. Over the past few years, e-mail has become the
predominant Internet application as measured by the percentage of users and
total message volume online. Due to its targeting and personalization
capabilities, and relatively low cost of implementation, the use of e-mail as a
marketing vehicle has significantly increased as a percentage to total online
marketing dollars. E-mail marketing is also flexible for both customer
acquisition and retention. Because of the increased interest in e-mail
marketing, sales of our PROMOMAIL services has become a much higher percentage
of our direct marketing services revenue, a trend that we expect to continue.

o Our PROMOMAIL service consists of targeted e-mails highlighting a
marketer's specific promotions. Marketers who contract to use the
PROMOMAIL service participate in mailings to a group of members
based upon those members' preferences. Marketers can purchase
this service on a fixed fee basis or on a performance basis. For
the fixed fee contracts, participating marketers are charged a
fixed fee for each member to whom the e-mail is sent and revenue
related to the service is recognized upon transmission of the
e-mail. When marketers purchase the PROMOMAIL service on a
performance basis, revenue is based solely on the actions of our
members. We earn a contractually specified

29

amount based on the number of members who click on the offer or
other specified link, the number of purchases by our members, or
the amount of sales generated by our members. Revenue is
recognized upon the click-through or upon notification by the
marketer of the number or amount of applicable sales.

o Marketers who subscribe to the PROMOCAST service enter into
fixed-fee contracts for our delivery of either a specified or
unlimited number of e-centives to the accounts of a targeted
group of members over the contractual period. Once a member
receives and clicks on the offer, our system links the member
directly to the appropriate page within the marketer's site. Each
e-centive has an expiration date, typically 30 days from the date
the e-centive is placed in a member's account. An e-centive is
considered delivered when a member visits his or her account.
Because we have an obligation to maintain the e-centive on our
system until it expires, we recognize revenue upon expiration of
the delivered e-centive. Revenue related to delivery of an
unlimited quantity of e-centives is recognized ratably over the
expected term of the customer relationship.

o Our PROMOCOMMERCE service consists of several components
including a PROMOCAST package, a perpetual software license and
maintenance on such software. Revenue related to the incorporated
PROMOCAST package is recognized ratably over the expected term of
the customer relationship. The software components enable the
subscribing merchant's site to recognize our members when they
enter into the merchant's web site and automatically detect,
highlight and apply relevant e-centives during the shopping and
purchase process. The maintenance component provides subscribing
merchants with product updates and telephone support services.
Revenue is recognized ratably over the expected term of the
customer relationship.

o During the first two quarters of 2001, we entered into several
barter transactions (marketing partner transactions) that consist
of the sale of large quantities of outbound e-mail to marketing
partners, and the purchase of banner advertisements and outbound
e-mail services by e-centives from these same partners. We
generally enter into a contractual relationship with a marketing
partner for delivery of a specified quantity of targeted e-mails
to our membership database or other databases, offering
promotions and special offers on behalf of the marketing
partners. In addition, we place orders with the marketing partner
to purchase a specified volume of banner advertisements, web site
click-throughs or outbound e-mail. This marketing activity is
designed to drive the marketing partners' viewers and members to
our registration page to register for the e-centives service.
Revenue and expenses from these marketing partner transactions
are recorded based upon the fair value of the promotional e-mails
delivered at a similar quantity or volume of e-mails delivered in
a qualifying and comparable size past cash transaction. Fair
value of promotional e-mails delivered is based upon the
Company's recent historical experience of cash received for
e-mail deliveries. Such revenues are recognized when the
promotional e-mails are delivered. Corresponding expenses are
recognized for the advertisements received when the Company's
advertisements are displayed on the reciprocal web sites or
properties, which is typically in the same period as the delivery
of the promotional e-mails and are included as part of sales and
marketing expense.

On March 28, 2001, we acquired the Commerce Division from Inktomi
Corporation in a purchase business combination for approximately $12.9 million,
consisting of 2,168,945 shares of our common stock valued at approximately $11.8
million and about $1.1 million in acquisition costs. A total of 2,551,700 shares
of our common stock were issued with 40% placed into escrow. Thirty eight
percent of the escrow shares, or 382,755, are to be released based upon the
achievement of contractually defined revenue and performance targets for the
Commerce Division. The remaining 637,925 of escrow shares are held in
satisfaction of any potential indemnity claims and will be released within
contractually agreed upon time frames. As part of the purchase price, we also
issued to Inktomi Corporation a warrant to purchase an additional 1,860,577
shares of our common stock upon the achievement of additional revenue targets
for the Commerce Division at the end of 12 months following the closing of this
acquisition. Based upon the revenue through December 31, 2001, we do not
anticipate the Inktomi will be eligible to receive the shares of common stock
and warrants that are contingent upon the achievement of revenue targets for the
Commerce Division. In connection with the acquisition, we entered into a license
agreement and reseller agreement with Inktomi Corporation. Under the terms of
the license agreement, Inktomi Corporation will perpetually license certain
software and technology to us to be used in the acquired business. Pursuant to
the reseller agreement, Inktomi Corporation will resell certain products of the
acquired business for a period of twelve months from the closing. Subsequent to
December 31, 2001, certain of these reseller agreements were terminated.

Through the acquisition of the Commerce Division, we acquired a
comprehensive system that provides product search, price comparison and
merchandising services. Our commerce products and services include the COMMERCE
ENGINE and the COMMERCE NETWORK. Revenue from our commerce technologies and
services is generated primarily through license, support and maintenance fees
from Internet portal and other web site destination customers, as well as fees
from the participating online merchants. Our contracts

30

consist of implementation and annual information service fees from Internet
sites and annual service and monthly transaction fees from merchants. Revenue
generated from the merchant transaction fees is recognized when earned, while
revenue for all other services is recognized ratably over the expected term
of the customer relationship.

o Similar to our direct marketing application we provide to our
network partners through our promotions network, we make the
COMMERCE ENGINE available to Internet portals and other Web site
customers who can, in turn, provide commerce services through
their sites to end users. We provide and manage all hardware,
software and operational aspects of the COMMERCE ENGINE and the
associated databases of product libraries and purchasing
locations. The COMMERCE ENGINE is also designed to track and, in
the cases where merchants have installed our Affiliate Tracking
System, confirm purchases made by end-users of our customers'
services and to generate invoices for our merchants to support
performance-based marketing arrangements among multiple parties.

o Our COMMERCE NETWORK enables merchants to distribute and promote
their products to the end users of our COMMERCE ENGINE customers.
Our system collects product data from merchants, normalizes it
into appropriate categories, indexes it and makes it available
for access through our COMMERCE ENGINE customers, and refreshes
it regularly to reflect pricing changes and availability. Our
account managers work closely with merchants to coordinate their
involvement within the network, including product data
management, merchandising, analysis and recommendations. We also
provide merchants with detailed performance reports broken down
by site and category, in order to track activity which may range
from click-through to point of purchase.

In August 2001, we began offering outsourced e-mail marketing technology
services to businesses. These services allow companies to outsource their e-mail
marketing campaigns to us. This solution lets businesses cost-effectively
conduct e-mail marketing without having to acquire or develop their own e-mail
infrastructure and manage the process. Our outsourced e-mail marketing solution
consists of list management and hosting, strategy and creative services, e-mail
delivery and management, and tracking and analysis services. Our e-mail
marketing system is designed to help build an ongoing, personalized dialogue
with the client's intended audience and maximize effectiveness through targeting
and testing. Revenue is generated by charging fees for list management and
hosting services, strategy and creative services, e-mail delivery and management
services, as well as tracking and analysis services. Revenue related to the
one-time service charges for setting up the customer is recognized ratably over
the expected term of the customer relationship, while all other revenue is
recognized when the services occur.

On December 3, 2001, we entered into an Asset Purchase Agreement (the
"Agreement") with BrightStreet.com, Inc. whereby we acquired substantially all
of BrightStreet.com's assets and certain liabilities. We acquired
BrightStreet.com for approximately $2.2 million, consisting of approximately
$1.7 million in cash, a guaranteed warrant to purchase 500,000 shares of our
common stock valued at approximately $185,000, a contingent performance-based
warrant to purchase up to 250,000 shares of our common stock and about $335,000
in acquisition costs. The cash payments consisted of approximately $843,000 in
cash advances to fund BrightStreet.com's working capital under the terms of a
Management Services Agreement and an $825,000 payment at closing. The guaranteed
warrant is exercisable from June 3, 2002 through December 3, 2005 at an exercise
price of $0.5696 per share. The performance-based warrant is exercisable, in
whole or in part, beginning June 4, 2003 until December 3, 2005 based upon the
achievement of certain performance targets at an exercise price of $2.44 per
share.

In conjunction with the Agreement, we entered into a Patent Assignment
Agreement (the "Assignment") with BrightStreet.com. Pursuant to the Assignment,
BrightStreet.com has agreed to assign to us all right, title and interest in
and to all the issued and pending BrightStreet.com patents (the "Patents"),
subject to certain pre-existing rights granted by BrightStreet.com to third
parties ("Pre-existing Rights"), provided we make certain payments to
BrightStreet.com by December 3, 2005 (the "Payments"). If we make such
Payments by that date, we shall own all right, title and interest in and to
the Patents, subject to the Pre-existing Rights. Until such Payments are
made, we have, subject to the Pre-existing Rights, an exclusive, worldwide,
irrevocable, perpetual, transferable, and sublicensable right and license
under the Patents. Until we take title to the Patents, we may not grant an
exclusive sublicense to the Patents to any unaffiliated third party. In the
event we do not make the Payments by December 3, 2005, we shall retain a
license to the Patents, but the license shall then convert to a non-exclusive
license.

In exchange for the rights granted under the Assignment, beginning December
2002, we are obligated to pay BrightStreet.com ten percent of revenues
received that are directly attributable to (a) the licensing or sale of
products or functionality acquired from BrightStreet.com, (b) licensing or
royalty fees received from enforcement or license of the Patents covered by
the Assignment, and (c) licensing or royalty fees received under existing
licenses granted by BrightStreet.com to certain third parties. If the total
transaction compensation paid, as defined by the Agreement, at any time prior
to December 3, 2005 exceeds $4,000,000, the Payments will be deemed to have
been made. We also have the right, at any time prior to December 3, 2005, to
satisfy the Payments by paying to BrightStreet.com the difference between the
$4,000,000 and the total compensation already paid.

With the acquisition of BrightStreet.com, we started offering online
promotions technology and infrastructure that is used for powering a variety of
promotional offerings, including coupons, rebates, sales circulars, surveys,
trial offers and loyalty programs. This system designs, deploys, and manages
promotions and tracks individual consumer response to offers for manufacturers,
retailers, and websites. It also enables businesses to gain insights about their
consumer preferences and motivations, and enhance consumer

31

relationships with rich data modeling and sophisticated targeting. Revenue
consists of fees from the sale of licenses and related services, which are
recognized ratably over the contractual period.

To date we have not been profitable, incurring net losses in 2001, 2000, and
1999 of $45.0 million, $29.9 million and $16.2 million, respectively. We have
undertaken a series of cost-cutting measures to preserve cash and will continue
to examine ways to cut costs in the future. During 2001, management approved
restructuring actions to respond to the global economic downturn and to improve
our cost structure by streamlining operations and prioritizing resources in
strategic areas of our business. We recorded restructuring and impairment
charges of $9.9 million to reflect these actions. This charge consisted of
severance and other employee benefits related to the planned termination of
approximately 63 employees, costs related to the consolidation of excess
facilities in our Bethesda, Maryland and Redwood Shores, California locations,
as well as a revaluation of the intangible assets associated with the Commerce
Division. We have similarly undertaken efforts to reduce marketing and general
overhead expenses, and are continually looking prudently at all expenditures in
order to reduce our ongoing operating costs.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are as follows:

o Revenue recognition
o Estimating valuation allowance for doubtful accounts
o Valuation of long-lived intangible assets
o Restructuring charge

(a) REVENUE RECOGNITION

Revenue is generated by providing promotions marketing and outsourced
e-mail services, licensing our software products, as well as providing
other services, such as maintenance support, technical support and
consulting. Our products and services principally include PROMOMAIL,
PROMOCAST, PROMOCOMMERCE, COMMERCE ENGINE, e-mail Marketing, and the
licensing of our Promotions Management Systems software.

PROMOMAIL is a service that consists of targeted e-mails highlighting
specific e-centives. Marketers can purchase this service on a fixed fee
basis or on a performance basis. For the fixed fee contracts,
participating marketers are charged a fixed fee for each member to whom
the e-mail is sent and revenue related to the service is recognized upon
transmission of the e-mail. When marketers purchase the PROMOMAIL
service on a performance basis, revenue is based solely on the actions
of our members. We earn a contractually specified amount based on the
number of members who click on the offer or other specified link, the
number of purchases by our members, or the amount of sales generated by
our members. Revenue is recognized upon the click-through or upon
notification by the marketer of the number or amount of applicable
sales.

Marketers who subscribe to the PROMOCAST service enter into fixed-fee
contracts for delivery of either a specified or unlimited number of
e-centives to the accounts of a targeted group of members over the
contractual period, not to exceed one year. Each e-centive has an
expiration date, typically 30 days from the date the e-centive is placed
in a member's account. An e-centive is considered delivered when a
member visits their account. Because we have an obligation to maintain
the e-centive on our system until it expires, we recognize revenue upon
expiration of the delivered e-centive. Revenue related to delivery of an
unlimited quantity of e-centives is recognized ratably over the expected
term of the customer relationship.

The PROMOCOMMERCE service is a fixed-fee contract consisting of
several components, including a PROMOCAST package, a perpetual software
license and maintenance on the accompanying software. We have not sold
software or maintenance separately; therefore, vendor specific objective
evidence has not been established. The related revenue is recognized
ratably over the expected term of the customer relationship.

Revenue generated from the COMMERCE ENGINE is primarily through
license, support and maintenance fees from Internet portal and other web
site destination customers. We also generate revenue from participating
online merchants. The contracts related to the COMMERCE ENGINE typically
consist of implementation and information service fees from Internet
sites and service and monthly transaction fees from merchants. Revenue
generated from the merchant transaction fees is recognized when a
transaction occurs, revenue from implementation services is recognized
ratably over the expected term of the customer relationship and
revenue from service fees is recognized ratably over the contract
period.

32

Our outsourced e-mail marketing technology allows businesses to
conduct e-mail marketing without having to acquire or develop their own
e-mail infrastructure. Revenue is generated by charging fees for list
management and hosting services, strategy and creative services, e-mail
delivery and management services, as well as tracking and analysis
services. Revenue related to the one-time service charges for setting up
the customer is recognized ratably over the expected term of the
customer relationship, while all other revenue is recognized when the
services occur.

With the acquisition of BrightStreet.com in December 2001, we started
offering online promotions management solutions for creating, targeting,
publishing and tracking coupons and promotional incentives. This system
designs, deploys, and manages promotions and tracks individual consumer
response to offers for manufacturers, retailers, and websites. This
technology includes an operating system for delivering promotions and
promotion management tools. Revenue consists of fees from the sale of
licenses, which are recognized ratably over the contractual period.

Marketers may also contract for consulting services, such as
assistance with promotions planning. Revenue related to these consulting
services is recognized as the related services are provided.

Revenue for the first two quarters of 2001 also includes barter
revenues, which represent exchanges of promotional e-mail deliveries for
reciprocal advertising space or traffic on other web sites ("marketing
partner transactions"). Revenues and expenses from these marketing
partner transactions are recorded based upon the fair value of the
promotional e-mails delivered at a similar quantity or volume of e-mails
delivered in a qualifying past cash transaction. Fair value of
promotional e-mails delivered is based upon our recent historical
experience of cash received for similar e-mail deliveries. Such revenues
are recognized when the promotional e-mails are delivered. Corresponding
expenses are recognized for the advertisements received when our
advertisements are displayed on the reciprocal web sites or properties,
which is typically in the same period as delivery of the promotional
e-mails and are included in sales and marketing expense.

(b) ESTIMATING VALUATION ALLOWANCE FOR DOUBTFUL ACCOUNTS

The preparation of financial statements requires us to make estimates
and assumptions that affect the reported amount of assets and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. We analyze historical bad debts, customer
concentrations, customer credit-worthiness, and current economic trends
when evaluating the adequacy of the allowance for doubtful accounts.
Historically, a portion of our customer base included customers with a
limited operating history that are subject to many of the risks and
uncertainties that we are, including rapid changes in technology, no
established markets for their products, and intense competition, among
others. In addition, many of these companies required significant
infusions of capital to continue operations. The availability of such
capital has been curtailed during 2001 and some of these companies were
not able to raise sufficient funds to continue their operations. As a
result, we recorded bad debt expense of approximately $863,000 for the
year ended December 31, 2001. As of December 31, 2001, our accounts
receivable balance was $2.1 million, net of allowance for doubtful
accounts of approximately $148,000. One customer accounted for 69% of
the gross accounts receivable balance at December 31, 2001, and the
customer subsequently paid the amount in February 2002. We recorded bad
debt expense of approximately $490,000 during the year ended December
31, 2000. Bad debt expense in 1999 was not significant.

(c) VALUATION OF LONG-LIVED INTANGIBLE ASSETS

During 2001 we recorded approximately $3.8 million in intangible
assets related to our acquisitions. We perform an on-going analysis of
the recoverability of our goodwill and other intangibles in accordance
with FAS 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. Based on quantitative and
qualitative measures, we assess the need to record impairment losses on
long-lived assets used in operations when impairment indicators are
present. The impairment conditions evaluated by us may change from
period to period, given that we operate in a volatile business
environment.

During 2001, we took an impairment charge on our intangible assets,
associated with a revaluation of the Commerce Division, which we
acquired in March 2001. Although we knew that the business of the
Commerce Division as operated by Inktomi was slowing, the business
deteriorated more rapidly due to the termination of several major
contracts that we would have acquired. In addition, subsequent to
finalizing the acquisition, several of the clients that were up for
renewal did not renew their agreements. Therefore, the acquisition
resulted in a significant increase in our expenses without the
corresponding increase in our revenues that we had expected at the time
the original intangibles were valued. Due to the decline in the

33

customer base and the reduction in the workforce, we concluded that
the benefits derived from the related intangible assets that had been
acquired in connection with the purchase of the Commerce Division
would not generate sufficient cash flow to support its carrying value.
Accordingly, we wrote-down the acquired intangible assets to their
fair value, a reduction of approximately $469,000. In 2002, we will be
required to adopt FAS 142, GOODWILL AND OTHER INTANGIBLE ASSETS. See
our "Recently Enacted Accounting Pronouncements" section on page 41
for further discussion.

Because the conditions underlying the factors we use to evaluate our
acquisitions changes from time to time, we could determine that it is
necessary to take additional material impairment charges in future
periods.

(d) ESTIMATION OF RESTRUCTURING ACCRUALS

During 2001, we implemented an expense reduction plan as part of our
strategy focused on improving operational efficiencies and strengthening
the financial performance of our business. In addition, we implemented
other measures to reduce planned expenses. These efforts resulted in the
consolidation of excess facilities and elimination of redundant
positions. As a result of this restructuring plan, we recorded charges
during 2001 of approximately $9.4 million. These charges related mainly
to the consolidation of two facilities and workforce reductions of 63
positions. Facility consolidation costs of approximately $9.0 million
included expected losses on subleases, brokerage commissions and other
costs. Employee separation costs of approximately $431,000 included
severance and other benefits. As of December 31, 2001, the accrued
liability related to the restructuring was approximately $9.1 million.

Calculation of the restructuring accrual related to expected losses
on subleases required us to make estimates concerning: (1) the expected
length of time to sublease the facility; (2) the expected rental rates
on subleases; and (3) estimated brokerage expenses associated with
executing the sublease. We used the assistance of independent real
estate brokerage firms in the making these estimates and our estimates
may be impacted by future economic trends. If the actual results differ
from our estimates we may be required to adjust our restructuring
accrual related to expected losses on subleases, including recording
additional losses.

RELATED PARTY TRANSACTIONS

As part of our October 2001 rights offering, we sold 4,343,765 shares of our
common stock to Pine, Inc., 4,950,000 shares of our common stock to InVenture,
Inc., 5,500,000 shares of our common stock to Venturetec, Inc., and 2,050,000
shares of our common stock to Peter Friedli. Mr. Friedli is an existing
stockholder and one of our directors, and he serves as the President of Pine,
InVenture, Venturetec and its parent corporation, New Venturetec AG. Venturetec
and Pine each delivered to us a promissory note dated as of October 19, 2001,
each with maturity dates of March 31, 2002, in the principal amount of CHF
8,500,000 ($5,230,769) and CHF 8,687,530 ($5,346,172), respectively, as
consideration for certain or all, as the case may be, of the subscription price
for shares of our common stock for which they subscribed under the rights
offering. Subsequent to December 31, 2001, Pine, Venturetec and InVenture, all
companies under common control, reallocated their share purchases and/or related
promissory notes. See our "Recent Developments" section on page 36 for further
details.

Mr. Friedli also has relationships with several other of our other
stockholders. He serves as the investment advisor to Joyce, Ltd., Savetech,
Inc., Spring Technology Corp. and USVentech, Inc.

In July 1996, we entered into a consulting agreement with Friedli Corporate
Finance, Inc. ("FCF"), whereby Mr. Friedli provides us with financial consulting
services and investor relations advice. Pursuant to this agreement, FCF is paid
$4,000 per month plus reimbursement of expenses related to Mr. Friedli's
services. In addition, the Company engaged FCF to support the Company in
connection with the 2001 rights offering and agreed to reimburse FCF up to
$100,000 in expenses for such rights offering support.

COMMERCE INTERNET PORTAL AGREEMENTS

Similar to our direct marketing application we provide to our network
partners through our promotions network, we make the COMMERCE ENGINE available
to Internet portals and other Web site customers who can, in turn, provide
commerce services through their sites to end users. We provide and manage all
hardware, software and operational aspects of the COMMERCE ENGINE and the
associated databases of product libraries and purchasing locations.

34

Effective June 27, 2001, we signed a Market Place Agreement with Vizzavi
Europe Limited ("Vizzavi") to provide Internet and mobile commerce and
merchandising services to Vizzavi's portals across Europe. Vizzavi is a joint
venture between Vodafone Group plc, a leading global mobile network operator,
and Vivendi Universal, one of the world's leading media companies. Vizzavi
operates portals across Europe delivering aggregated content and services
through a range of devices, including personal computers, mobile telephones,
personal digital assistants and interactive TV. Unless terminated earlier, based
upon defined criteria provided in the agreement, the agreement has an initial
term of two years, with an automatic extension for a third year. Pursuant to the
agreement, e-centives will deliver the Commerce Engine shopping system,
including customized product search and merchandising. The agreement entails
e-centives launching the shopping service on Vizzavi's portals across Europe.
The shopping service was launched in the United Kingdom, The Netherlands and
France in August 2001, November 2001, and February 2002 respectively, with a
targeted launch in the second quarter of 2002 for Germany. In addition, there is
the possibility of additional launches in other countries such as Spain, Italy,
Portugal and Greece. We anticipate that this agreement with Vizzavi will
generate revenue through annual license fees, consulting fees, merchant
transaction fees and various other commerce and merchandising service fees.

RIGHTS OFFERING

Based on a resolution of the board of directors dated August 31, 2001, we
granted each holder of our common stock as of August 31, 2001 the right to
purchase one share of our common stock for each share of common stock held of
record on that date, and offered any remaining shares to certain standby
purchasers. This rights offering consisted of 20,000,000 shares of our common
stock at a subscription price of CHF 2.00 ($1.23) per share. In October 2001, we
closed this CHF 40,000,000 (approximately $24,600,000) rights offering with
subscriptions for all 20,000,000 shares. Each subscriber in the rights offering
also received, for no additional consideration, based upon such subscriber's
participation in the rights offering, a pro-rata portion of 2,000,000 shares of
our Series A convertible preferred stock (convertible on a 10-for-1 basis into
20,000,000 shares of common stock under certain circumstances).

As part of the rights offering, we sold shares of our common stock to
Venturetec, Inc. and Pine, Inc. Peter Friedli, one of our stockholders and
directors, serves as the investment advisor to both Venturetec and Pine, and
also serves as President of Venturetec and its parent corporation, New
Venturetec AG. Venturetec and Pine each delivered to us a promissory note dated
as of October 19, 2001, with a maturity date of March 31, 2002, as consideration
for the subscription price for the shares of common stock for which each company
subscribed under the rights offering. Venturetec's note (which was only partial
consideration for the purchase of the shares; the remainder was paid in cash)
was in the principal amount of CHF 8,500,000 ($5,230,769) and Pine's note was in
the principal amount of CHF 8,687,530 ($5,346,172). In January 2002, Pine,
Venturetec and InVenture, reallocated their share purchases and/or related
promissory notes associated with the rights offering. Please see our "Recent
Developments" section below.

We issued a global share certificate representing all the shares purchased
in the rights offering after the closing, which shares shall be held in escrow
for a period of approximately three months from the date of closing, during
which time such shares shall not be tradable. No physical share certificates
will be issued by us or delivered to the subscribers in the rights offering.
Once such shares are registered with the U.S. Securities and Exchange Commission
and properly listed with the SWX New Market, such shares shall be released to
the respective subscribers. This process was completed in late February 2002.

In addition, we engaged Friedli Corporate Finance, Inc., a venture capital
firm of which one of our stockholders and directors, Peter Friedli, is the
principal, to support us in connection with the rights offering. In connection
with this support, we agreed to extend the consulting agreement with Friedli
Corporate Finance for three years and to reimburse Friedli Corporate Finance
$100,000 in expenses for rights offering support.

swissfirst Bank AG and certain affiliate entities ("swissfirst") acted as
our financial advisor and limited placement agent in connection with the rights
offering pursuant to a Mandate Agreement between us and swissfirst. For
effecting arrangements with purchasers under the rights offering, we agreed to
pay swissfirst a fee of 6.5% of the total sales under the offering made by them
to investors with whom swissfirst had directly and actively engaged in sales and
marketing efforts for the purpose of placing shares in the rights offering
("direct placement efforts"). For those sales, that swissfirst did not utilize
direct placement efforts, the commission rate was 2.0%. In addition, swissfirst
was paid a 0.5% handling fee based upon all funds raised in this rights offering
actually received by swissfirst and held for our benefit, provided that there
shall be no such handling fee paid on funds raised by our board of directors and
their affiliates. We also agreed to and paid a fee of 7% to other firms involved
in the rights offering.

35

RECENT DEVELOPMENTS

(a) Promissory notes from stockholders

As of January 22, 2002, Pine, Venturetec and InVenture, all companies under
common control, reallocated their share purchases and/or related promissory
notes associated with the October 2001 rights offering. Please see our "Item 5
- -- Market for Registrant's Common Stock and Related Stockholder Matters --
Rights Offering" section on page 26. The CHF 2,500,000 (approximately
$1,538,462) in cash originally indicated as originating from Venturetec has been
reallocated as follows:

o InVenture purchased from Pine in a private sale 1,041,667 of the
shares of common stock originally purchased by Pine pursuant to the
rights offering for CHF 2,083,334, at CHF 2.00 a share. As part of
this transaction, Pine was credited with paying us CHF 2,083,334
(approximately $1,282,052) and delivered to us an amended and restated
secured promissory note dated as of October 19, 2001, in the principal
amount of CHF 6,604,196 (approximately $4,064,121), with 2% interest,
with an original March 31, 2002 maturity date that was subsequently
extended to May 15 2002. We simultaneously returned Pine's original
CHF 8,687,530 promissory note.

o Venturetec paid us CHF 416,666 (approximately $256,410) and delivered
to us an amended and restated secured promissory note dated as of
October 19, 2001, in the principal amount of CHF 10,583,334
(approximately $6,512,821), with 2% interest, with an origianl March
31, 2002 maturity date that was subsequently extended to June 30,
2002. This CHF 10,583,334 reflects an increase in Venturetec's secured
promissory note to CHF 11,000,000 (approximately $6,769,231),
reflecting Venturetec's original subscription price for the shares of
our common stock for which it subscribed under the rights offering
minus the CHF 416,666 payment. We simultaneously returned Venturetec's
original CHF 8,500,000 promissory note.

As of April 16, 2002, 70% of the above-referenced note funds have been
received.

(b) Potential Acquisition

The Company is currently in negotiations to acquire certain assets and
liabilities of a U.S. based internet company in exchange for e-centives' stock.
The Company has executed an Asset Purchase Agreement regarding the proposed
acquisition, with an expected settlement date of April 30, 2002.

RESULTS OF OPERATIONS

The following presents our financial position and results of operation as of
and for the years ended December 31, 2001, 2000 and 1999.

YEARS ENDED DECEMBER 31, 2001 AND 2000.

REVENUE. Revenue decreased by $5,176,000 to $5,054,000 for the year
ended December 31, 2001, compared to $10,230,000 for the year ended December
31, 2000. While revenue for 2001 includes $1.4 million in marketing partner
transactions, as well as approximately $2.0 million in revenue from our
commerce related services and other new business lines, lower revenue from
our direct marketing services more than offset these additional sources of
revenue. Fixed fee PROMOMAIL revenue decreased by $4.5 million, PROMOCAST
and PROMOCOMMERCE related revenue decreased by $2.3 million, and the ZDNet
agreement to deliver monthly e-mails, which generated approximately $1.3
million in revenue in 2000, expired in late 2000 and therefore had no
revenue impact in 2001.

COST OF REVENUE. Cost of revenue consists primarily of expenses related
to providing our services, including related personnel costs, depreciation
of servers, network and hosting charges, and revenue share payments.
Although revenue declined from 2000 to 2001, cost of revenue increased
primarily due to the additional depreciation expense and network and hosting
charges associated with the acquisition of the Commerce Division. Cost of
revenue increased by $6,187,000 to $8,395,000 for the year ended December
31, 2001, compared to $2,208,000 for the year ended December 31, 2000.
Approximately $4.3 million or 69% of the increase can be attributed to the
acquisition of the Commerce Division. Also contributing to the increase is
the one-time purchase of $1.3 million of data and e-mail services from
Matchlogic, a wholly owned subsidiary of Excite, in connection with a
renegotiation of our network partner related agreement with Excite. In
addition, the year ended December 31, 2001 had higher depreciation charges
for fixed assets associated with providing our services. The increase in
cost of revenue can also be attributed to the shift from paying our Network
Partners a fixed fee per new member, to revenue share arrangements.

PRODUCT DEVELOPMENT. Product development consists primarily of expenses
related to the development and enhancement of our technology and services,
including payroll and related expenses for personnel, as well as other
associated expenses for our technology department. We expense product
development costs as we incur them. Product development expenses increased
by $5,060,000 to $7,933,000 for the year ended December 31, 2001, compared
to $2,873,000 for the year ended December 31,

36

2000. Approximately $3.5 million or 69% of the increase is the direct
result of the acquisition of the Commerce Division, with the remaining
portion of the increase due to increased product development personnel
costs associated with the development and improvement of our systems,
including its infrastructure and computer software.

GENERAL AND ADMINISTRATIVE. General and administrative expenses include
payroll and related expenses for accounting, finance, legal, human
resources, and administrative personnel, as well as selected executives. In
addition, general and administrative expenses include fees for professional
services, occupancy related costs, and all other corporate costs, including
depreciation and amortization. General and administrative expenses increased
by $3,827,000 to $12,592,000 for the year ended December 31, 2001, compared
to $8,765,000 for the year ended December 31, 2000. A large portion of the
increase, about $2.6 million, is due to higher rent expense, primarily
associated with the increased office space in Bethesda, Maryland and the new
office space in Redwood Shores, California. The acquisition of the Commerce
Division added approximately $1.4 million in depreciation and amortization
expense for 2001. Although general and administrative expenses have
increased, primarily due to the acquisition of the Commerce Division, we
have taken steps to reduce our ongoing expenditures.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
payroll, sales commissions and related expenses for personnel engaged in
sales, marketing and customer support, as well as advertising and
promotional expenditures. Sales and marketing expenses decreased by
$9,009,000 to $9,997,000 for the year ended December 31, 2001, compared to
$19,006,000 for the year ended December 31, 2000. Although the year ended
December 31, 2001 included approximately $1.6 million of expenses related
to the Commerce Division, there was an overall decrease in marketing and
sales expenditures when compared to the year ended December 31, 2000.
Broadcast media, on-line media, printed publication and out-of-home media,
expenditures were lower by $2.5 million, $2.4 million, $2.0 million and
$1.3 million, respectively. In addition, 2001 had lower salary related
costs, public relation expenditures and commissions than 2000. These
lower costs are primarily the result of our cost reduction efforts.

NETWORK PARTNER FEES. Network partner fees include the fees we pay our
network partners for members, advertising and exclusivity on the network
partners' site. Network partner fees decreased by $5,368,000 to $986,000 in
year ended December 31, 2001, compared to $6,354,000 in the year ended
December 31, 2000. This decrease is primarily the result of the termination
of the Co-Branding Agreement with Excite, which resulted in an approximate
$4.5 million decrease in expense, and a shift from paying our partners a
fixed fee per new member, to revenue share arrangements that are classified
as cost of revenue

RESTRUCTURING AND IMPAIRMENT CHARGES. During 2001, management took
certain actions to better align our costs with revenues and to position us
for profitable growth in the future. In April 2001 and July 2001 we
eliminated 21 and 25 positions, respectively, incurring a total charge of
approximately $344,000. During December 2001, we announced a restructuring
plan that involved scaling back the Commerce Division, which resulted in a
reduction of our workforce by 17, and an assessment of the carrying value of
the intangible assets associated with the Commerce Division. Due to the
decline in the Commerce Division's customer base and the reduction in the
Commerce Division's workforce, we concluded that the benefits derived from
the related intangible assets that had been acquired in connection with the
purchase of the Commerce Division would not generate sufficient cash flow to
support its carrying value. Accordingly, we wrote-down the acquired
intangible assets to their fair value, a reduction of approximately
$469,000. In addition, we decided to consolidate and more efficiently use
our facilities, leaving approximately 50% of the office space in both the
Bethesda, Maryland and the Redwood Shores, California locations unoccupied
and available for sub-lease. As a consequence of this plan, we recorded a
$9.0 million charge to operations during the fourth quarter of 2001.

STOCK-BASED COMPENSATION. Stock-based compensation expense consists of
the accrual of the difference between the fair value of our common stock and
the exercise price of certain performance-based options prior to the
measurement date and the accrual of the difference between the estimated
fair value of our common stock and the exercise price of stock options
issued to employees. Stock-based compensation expenses decreased by $851,000
to $863,000 for the year ended December 31, 2001, compared to $1,714,000 for
the year ended December 31, 2000. This decrease can be attributed to
performance-based options that fully vested in 2000 and therefore did not
impact 2001, as well as historical stock-based compensation expense incurred
for terminated employees in excess of the expense pertaining to options
vested through termination. We estimate the charge relating to stock option
grants will be $553,000, $561,000 and $175,000 in 2002, 2003, and 2004,
respectively.

INTEREST INCOME. Net interest income consists of income on our cash
balances. Net interest income decreased by $86,000 to $608,000 for the year
ended December 31, 2001, compared to $694,000 for the year ended December
31, 2000. The Company earned less interest in 2001 due to lower cash
balances and lower interest rates resulting from general economic
conditions.

NET LOSS. Net loss increased by $15,058,000 to $45,003,000 for the year
ended December 31, 2001, compared to $29,945,000 for the year ended December
31, 2000. This increase in net loss is the result of the decrease in revenue
of $5.2 million, the increase in cost of revenue of $6.2 million and the
restructuring and severance charges of $9.9 million, offset by lower
operating expenses of about $6.3 million.

37

YEARS ENDED DECEMBER 31, 2000 AND 1999.

REVENUE. Revenue for the years ended December 31, 2000 and 1999 was
$10,230,000 and $740,000, respectively. We attribute the increase primarily
to the expansion of our operations and to the fact that we did not begin to
charge for our services until the second half of 1999. We forged several new
strategic alliances with network partners during 2000. Contracts we entered
into with ZDNet, Excite, Uproar and LifeMinders, Inc. contributed
approximately 48% of the increase in revenue from 1999 to 2000.

COST OF REVENUE. Cost of revenue represents expenses related to
providing online promotions for our marketers, including a portion of the
salaries, benefits and related expenses of our client services, network
operations and technical services personnel as well as revenue sharing
payments to network partners. Cost of revenue increased by $1,180,000 to
$2,208,000 in the year ended December 31, 2000 compared to $1,028,000 in the
year ended December 31, 1999. We attribute this increase primarily to the
additional salaries resulting from an increase in the number of personnel.

PRODUCT DEVELOPMENT. Product development costs include expenses we incur
for research, design and development of our proprietary online promotion
technology. We expense product development costs as we incur them. Product
development expenses increased by $446,000 to $2,873,000 in the year ended
December 31, 2000, compared to $2,427,000 in the year ended December 31,
1999. The majority of this increase resulted from increased product
development personnel costs associated with the development of our online
direct marketing system, including its infrastructure and computer software.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
of salaries for executive and selected senior management, finance and
administrative personnel and associated employee benefits, facilities costs,
computer and office equipment operating leases, training, and all other
corporate costs, including depreciation and amortization. General and
administrative expenses increased by $4,682,000 to $8,765,000 in the year
ended December 31, 2000, compared to $4,083,000 in the year ended December
31, 1999. This increase resulted principally from an increase of $1,295,000
from the increase in the number of general and administrative personnel and
includes increases of $558,000 from increased legal costs and $598,000 from
increased rent for additional office space. In addition, we have experienced
increased depreciation of fixed assets of $631,000 for the year ended
December 31, 2000 in connection with our increased capital expenditures for
computer equipment. Further, the increase in general and administrative
expenses for the year ended December 31, 2000 includes a $650,000 payment to
coolsavings.com as part of the settlement of certain patent litigation.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, associated benefits and travel expenses for our sales and
marketing personnel and promotional expenses. Sales and marketing expenses
increased by $11,117,000 to $19,006,000 in the year ended December 31, 2000,
compared to $7,889,000 in the year ended December 31, 1999. We attribute
this increase mainly to increased marketing expenditures of $15.1 million
targeted at attracting more marketers and network partners to our direct
marketing system.

NETWORK PARTNER FEES. Network partner fees include the fees we pay our
network partners for members, advertising and exclusivity on the network
partners' site. Network partner fees increased by $5,623,000 to $6,354,000
in the year ended December 31, 2000, compared to $731,000 in the year ended
December 31, 1999. We attribute this increase mainly to the payments made to
Excite.

STOCK-BASED COMPENSATION. Stock-based compensation expenses consist of
the accrual of the difference between the fair value of our common stock and
the exercise price of certain performance-based options prior to the
measurement date and the accrual of the difference between the estimated
fair value of our common stock and the exercise price of stock options
issued to employees. Stock-based compensation expenses increased by $660,000
to $1,714,000 in the year ended December 31, 2000, compared to $1,054,000
for the year ended December 31, 1999. The increase resulted principally from
additional options granted to employees at exercise prices less than fair
market value.

INTEREST INCOME. Interest income, net consists of income on our cash
balances less interest expense on long-term debt. Net interest income
increased by $426,000 to $694,000 in the year ended December 31, 2000,
compared to $268,000 for the year ended December 31, 1999. This fluctuation
was due to an increase in interest income resulting from an increase in cash
balances from the Series C funding and the IPO.

38

NET LOSS. Net loss increased by $13,775,000 to $29,945,000 in the year
ended December 31, 2000, compared to $16,170,000 for the year ended December
31, 1999. The increase is primarily attributed to the increase in operating
costs of $22.5 million to $38.7 million in the year ended December 31, 2000,
compared to $16.2 million for the year ended December 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

Since inception through December 31, 2000, we funded our operations
primarily from the private sale of our convertible preferred stock and common
stock, as well as our initial public offering. Through these financing
activities, we raised net proceeds of approximately $82.5 million. During 2001,
we received approximately $12.6 million in net proceeds from our rights
offering, with additional net proceeds of $9.9 million due by the end of the
second quarter of 2002, relating to the promissory notes from Venturetec and
Pine, net of the associated commission fees.

o Initial public offering: On October 3, 2000, we completed an initial
public offering in Switzerland for shares of our common stock, which
are listed on the SWX New Market Segment of the SWX Swiss Exchange
(the "Swiss IPO"). After deducting expenses and underwriting
discounts, we received approximately $36.7 million in proceeds from
this transaction. Upon closing of the Swiss IPO, all of our shares of
preferred stock automatically converted to common stock.

o Rights offering: On October 19, 2001, we closed a CHF 40.0 million
(approximately $24.6 million) rights offering with subscriptions for
20,000,000 shares of common stock and a pro-rata portion of 2,000,000
shares of Series A convertible preferred stock. After deducting
expenses and underwriting discounts, the net proceeds from this
transaction were approximately $22.5 million, with $12.6 million
received by December 31, 2001 and the remainder due by the end of the
second quarter of 2002.

On December 31, 2000 and 2001, we had $27,176,531 and $8,902,259,
respectively, of cash, cash equivalents, and short-term investments. In
addition, as of December 31, 2000 and 2001, we had $542,984 and $1,456,861,
respectively, of restricted cash.

Our net cash used in operating activities improved by $2.8 million from
the $27,590,000 for the year ended December 31, 2000 to $24,769,000 for the year
ended December 31, 2001. While the net cash flows from operating activities for
each period directly reflect our net losses, the decrease year over year can be
partially attributed to our concerted efforts to decrease our expenditures and
increase our accounts receivables collection efforts.

Cash used in investing activities was $4,773,000 for the year ended December
31, 2001 and $3,081,000 for the year ended December 31, 2000, an increase of
$1,692,000. While our purchases of property and equipment decreased by about
$1.6 million, we spent $1.1 million and $1.9 million on the Commerce Division
and BrightStreet.com acquisitions, respectively, in 2001. In addition,
restricted cash increased by $914,000, primarily the result of the letter of
credit required for our office space in Redwood Shores, California.

Cash provided by financing activities was $11,382,000 for the year ended
December 31, 2001, while it was $57,306,000 for the year ended December 31,
2000. About $12.6 million of the cash provided by financing activities for the
year ended December 31, 2001 was the result of our October 2001 rights offering,
with net proceeds of $9.9 million due by the end of the second quarter of 2002,
in conjunction with the promissory notes issued by two of our stockholders.
Cash provided by financing activities for the year ended December 31, 2001 also
reflects the payment of $1.2 million in dividends declared on our preferred
Series A convertible preferred stock in December 2000. Cash provided by
financing activities for the year ended December 31, 2000 primarily reflects the
$36.7 million in proceeds from the Swiss IPO and the $20.5 million in proceeds
from private sales of our convertible preferred stock.

Friedli Corporate Finance has executed a letter to us confirming its ability
to fund us in the amount of $10.7 million for the outstanding promissory notes
from entities under its control (Pine and Venturetec). Funds from these
promissory notes will be provided to us from April 2002 through June 2002, based
on our lack of immediate need for these funds. To the extent that these funds,
accompanied by our operating resources, are not sufficient to enable us to
operate through December 31, 2002, Friedli Corporate Finance is committed to
providing the necessary funding to enable us to continue to operate through
December 31, 2002. Additionally, management has developed a series of
contingency plans for the purpose of conserving working capital should actual
revenues fall short of our internal projections. These contingency plans can be
enacted quickly and will eliminate significant amounts of variable costs, and
enhance our overall liquidity position. Variable costs account for approximately
70% of the our total operating expenses, and include payroll and related
benefits, bonuses and commissions, travel and entertainment, marketing, certain
professional service fees. Fixed costs consist of lease commitments for hosting
and office equipment, office space leases, certain insurance programs, software
maintenance and support fees, and royalty fee obligations, and represent the
remainder of our operating expenses.

39

We believe that the net proceeds from the October 2001 rights offering,
together with our existing cash resources and the proceeds from our promissory
notes, will be sufficient to meet our anticipated cash needs for working capital
and capital expenditures into the first quarter of 2003. However, we may need
to raise additional funds sooner to fund our planned expansion, to develop
new or enhanced products or services, to respond to competitive pressures or to
make acquisitions. We cannot be certain that additional financing will be
available to us on acceptable terms, or at all. If adequate funds are not
available, or not available on acceptable terms, we may not be able to expand
our business.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

We are obligated to make significant payments under a variety of contracts
and other commercial arrangements, including the following:

NETWORK PARTNER AGREEMENTS:

In connection with our direct marketing services, we maintain
relationships with network partners that operate high-traffic portals,
content and community web sites. Our application provides network
partners with the ability to present offers to their users without the
costs and challenges of building and maintaining their own online direct
marketing system. We provide and maintain the underlying technology,
host and serve co-branded pages, create and deliver offers and provide
consulting services and member support. Our network partners' users can
become e-centives members during the registration process of some of our
network partners' web sites. Alternatively, members can join our system
through various other access points throughout the network partner's web
site. In either case, our service is delivered on a co-branded basis
maintaining the look and feel of the network partner's web site.

On March 31, 2001, we terminated our Co-Branding Agreement with
Excite@Home ("Excite"), dated as of February 16, 2000 and as amended on
December 30, 2000. The termination agreement relieved us of all of our
future obligations, including payments of up to $13 million to Excite
over the next two years. In connection with the termination agreement,
we purchased $1.3 million worth of data and e-mail services from
Matchlogic, a wholly owned subsidiary of Excite. Effective April 1,
2001, we entered into a new one-year agreement with Excite, whereby
Excite provided us with access to e-mail and other subscriber
information, and in exchange for this information, we were to pay Excite
a percentage of the revenue generated from these subscribers. However,
this restructured agreement resulted in no revenue share payments to
Excite. As of November 5, 2001, this agreement was terminated, as Excite
filed for bankruptcy protection.

In June 2001, we entered into an Online Services Agreement with
Classmates.com, a dominant online reunion destination site with
approximately 20 million members. The strategic alliance allows
Classmates.com members to receive e-centives' targeted special offers
and promotions based upon their self-described interests and will
provide us with access to e-mail and other subscriber information. In
exchange for this information, we pay Classmates.com a percentage of the
revenue generated from these subscribers.

LEASE OBLIGATIONS:

In association with the acquisition of BrightStreet.com, effective
November 1, 2001, we entered into a Modification, Assignment and
Assumption Agreement with Pentech Financial Services, Inc. ("Pentech")
and BrightStreet.com regarding the Master Equipment Lease ("Lease") that
BrightStreet.com had entered into with Pentech in May 2000. Per the
agreement, with the consent of Pentech, BrightStreet.com assigned the
Lease to us with certain modifications to the terms and conditions of
the Lease. In addition, we agreed to defend, indemnify, save and hold
harmless BrightStreet.com from and against any and all claims, demands,
costs, and any other damages which BrightStreet.com may sustain as a
result of any failure or delay by the Company in performing the assumed
obligations.

We are obligated under non-cancelable capital leases, for certain
computer equipment, that expire during 2004. In addition, we are
obligated under non-cancelable operating leases, primarily for office
space, which expire on various dates through 2010.

40

As of December 31, 2001, future minimum lease payments under
non-cancelable leases are as follows:

Rent expense under operating leases was approximately $357,000, $955,000
and $3,541,000 for the years ended December 31, 1999, 2000 and 2001,
respectively.

RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued Statement No. (FAS) 141, BUSINESS
COMBINATIONS, and FAS 142, GOODWILL AND OTHER INTANGIBLE Assets. FAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, as well as all purchase method
business combinations completed after June 30, 2001. FAS 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet in order to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. FAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment, at least annually, in accordance with the provisions of
FAS 142. FAS 142 also requires that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with FAS 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF.

The Company adopted the provisions of FAS 141 as of July 1, 2001 and FAS 142
is effective January 1, 2002. Furthermore, any goodwill and any intangible asset
determined to have an indefinite useful life that are acquired in a purchase
business combination completed after June 30, 2001 will not be amortized, but
will continue to be evaluated for impairment in accordance with the appropriate
pre-FAS 142 accounting literature. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of FAS 142.

FAS 141 requires, upon adoption of FAS 142, that the Company evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in FAS 141 for recognition apart from goodwill.
Upon adoption of FAS 142, the Company will be required to reassess the useful
lives and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with
the provisions of FAS 142 within the first interim period. Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period. In
connection with the transitional goodwill impairment evaluation, FAS 142
requires the Company to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption. To accomplish this, the
Company must identify its reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with FAS 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
operations.

As of the date of adoption, the Company expects to have unamortized
identifiable intangible assets in the amount of approximately $3,103,000, which
will be subject to the transition provisions of FAS 141 and 142. Because of the
extensive effort needed to comply

41

with adopting FAS 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these statements on the Company's financial statements at the
date of this report, including whether any transitional impairment losses will
be required to be recognized as the cumulative effect of a change in accounting
principle.

In August 2001, the Financial Accounting Standards Board issued FAS 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supercedes
both FAS 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF and the accounting and reporting provisions
of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS-REPORTING THE EFFECTS
OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of
a business (as previously defined in that Opinion). FAS 144 retains the
fundamental provisions in FAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
FAS 121. For example, FAS 144 provides guidance on how a long-lived asset that
is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
FAS 144 retains the basic provisions of APB 30 on how to present discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). Unlike FAS 121, an
impairment assessment under FAS 144 will never result in a write-down of
goodwill. Rather, goodwill is evaluated for impairment under FAS 142, Goodwill
and Other Intangible Assets. The Company is required to adopt FAS 144 no later
than the year beginning after December 15, 2001, and plans to adopt its
provisions for the quarter ending March 31, 2002. Management does not expect the
adoption of FAS 144 for long-lived assets held for use to have a material impact
on the Company's financial statements because the impairment assessment under
FAS 144 is largely unchanged from FAS 121. The provisions of the Statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
FAS 144 will have on the Company's financial statements.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in forward-looking statements. We maintain instruments subject to
interest rate and foreign currency exchange rate risk. We categorize all of our
market risk sensitive instruments as non-trading or other instruments.

(a) INTEREST RATE SENSITIVITY

We maintain a portfolio of cash equivalents in a variety of securities.
Substantially all amounts are in money market and certificates of deposit,
the value of which is generally not subject to interest rate changes. We
believe that a 10% increase or decline in interest rates would not be
material to our interest income or cash flows.

(b) FOREIGN RATE SENSITIVITY

We primarily operate in the United States; however, we have expanded
operations including a sales office in London, United Kingdom. As a result, we
may have sales in foreign currencies exposing us to foreign currency rate
fluctuations. For the year ended December 31, 2001, we recorded insignificant
sales in a foreign currency. We are exposed to the impact of foreign currency
changes, associated with the British Pound, for our London subsidiary's
financial instruments, which are limited to cash and cash equivalents. It is the
policy of management to fund foreign operations on a monthly basis, thus
minimizing average cash and overnight investments in the Pound. At December 31,
2001, our London subsidiary maintained cash and cash equivalents of
approximately (pound)102,000 or approximately $148,000. We believe that a 10%
increase or decline in the Pound exchange ratio would not be material to cash
and cash equivalent balances, interest income, or cash flows from consolidated
operations.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data of the Company required by
this item are attached as pages F-1 to F-23 and are listed under Item 14(A)(1)
and (2).

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None.

42

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table presents information about each of our executive
officers, key employees and directors as of December 31, 2001.

KAMRAN AMJADI has served as our Chairman and Chief Executive Officer since
he co-founded our business in August 1996. From September 1990 until August
1996, Mr. Amjadi was the Executive Vice President and Director of United States
Operations for MP Technologies, a software company. From July 1986 until August
1990, Mr. Amjadi was a software engineer with the Hewlett-Packard Corporation.

MEHRDAD AKHAVAN has served as our President and Chief Operating Officer
since October 1999, having served as our Executive Vice President and Secretary
since he co-founded our business in August 1996. Mr. Akhavan was elected to our
board of directors in October 1996. From November 1994 until August 1996, Mr.
Akhavan was President of TechTreK, a children's computer entertainment and
education center. From January 1991 until November 1994, Mr. Akhavan was
President of Trident Software, a company he co-founded, which digitized works of
art.

DAVID SAMUELS joined us as Senior Vice President, Chief Financial Officer
and Treasurer in April of 2001. Prior to joining e-centives, Mr. Samuels served
as Vice President of Finance for Teligent International where, as a member of
the senior management team, he played a pivotal role orchestrating the financial
management and funding initiatives for multiple joint venture businesses in
Europe, Asia, and Latin America. He also spent more than a decade with Host
Marriott Services Corporation, serving most recently as Vice President of
Finance, Development and Operations for New Markets. He began his career as an
auditor with KPMG LLP.

LAWRENCE BRAND joined us in November 1997 as our Vice President of Sales. He
became our Senior Vice President of Sales and Business Development in November
1999. From September 1990 until April 1997, Mr. Brand was the Executive Vice
President and General Manager of InterBase Software, a division of Borland
International, a developer of application, tools and relational databases. From
July 1984 until February 1990, Mr. Brand held various positions with Oracle
Corporation, serving most recently as National Director of Financial Services.

SCOTT WILLS joined us as a Senior Vice President, when we acquired
BrightStreet.com in December 2001. At BrightStreet.com, Mr. Wills held the
position of Chief Executive Officer. Mr. Wills started his career in packaged
goods, working on some of the most publicized brand-battles for such companies
as Procter & Gamble and Pepsi-Cola Company. In early 1996, he joined Netcom
Online Communications, where he served as Senior Vice President of Business
Development and Strategic Planning until March 1998, when the company was sold.
Upon leaving Netcom, Mr. Wills was a founder and CEO of Wills and Evans, a New
York-based advertising agency that represented major media distributors and
networks. In May 1998, he joined NetValue, Inc., which was later renamed
BrightStreet.com.

JASON KARP was an e-centives' employee from March 2000 through October 2001,
serving as our Vice President, General Counsel and Assistant Secretary. Since
his termination of employment, he joined Kelley, Drye & Warren, LLP, however he
continues to serve as General Counsel and Assistant Secretary. From July 1998 to
March 2000, Mr. Karp held several positions with Net2000 Communications, Inc.,
an integrated provider of local, long distance, data and internet access
services, and served most recently as Assistant Vice President of Legal and
Regulatory Affairs. From October 1996 to June 1998, Mr. Karp held several
management positions with MCI Communications. From December 1994 to September
1996, Mr. Karp was a senior attorney in the Common Carrier Bureau of the FCC.

43

IRA BECKER joined us in September 1998 as Director of Business Development
and was promoted to Vice President of Strategic Alliances in May 1999. From
November 1997 until September 1998, Mr. Becker was Director of Sales Development
at PointCast, an Internet news and information company. From September 1995
until September 1997, Mr. Becker was Vice President of Sales of inquiry.com, an
Internet resource for information technology professionals. From September 1989
until September 1995, Mr. Becker was a manager with Ziff-Davis Publishing.

ALEX SUKHENKO, our Vice President of Engineering, Messaging & Data
Warehouse, joined us in March 1999. Before joining e-centives, Alex served as
District Manager of AT&T Solutions for Advanced Networking Solutions and prior
to AT&T Solutions, Alex served as a consulting manager for Noblestar Systems.
Alex has also served as a senior scientist for Vector Research Inc. He began his
career at Eastman Kodak, focusing on process re-engineering for Kodak's circuit
board manufacturing operations.

PETER FRIEDLI co-founded our business in August 1996. Mr. Friedli was
elected to our board of directors in October 1996. Mr. Friedli has been the
principal of Friedli Corporate Finance, Inc., a venture capital firm, since its
inception in 1986. Prior to joining Friedli Corporate Finance, Mr. Friedli
worked as an international management consultant for service and industrial
companies in Europe and the U.S. Mr. Friedli also serves as the President of New
Venturetec, Inc., a publicly traded Swiss venture capital investment company and
currently serves as a director of VantageMed Corporation, a publicly traded
provider of healthcare information services.

BOARD OF DIRECTORS

Our board of directors currently consists of Kamran Amjadi, Mehrdad Akhavan,
and Peter Friedli. Kamran Amjadi is the Chairman of our board of directors.

BOARD COMMITTEE: Our board of directors currently has a compensation
committee. The compensation committee determines the salaries and incentive
compensation of our officers and provides recommendations for the salaries and
incentive compensation of other employees and consultants. The compensation
committee also administers our various incentive compensation, stock and benefit
plans. The compensation committee consists of Mr. Friedli, the committee's
chairman, and Mr. Amjadi.

DIRECTOR COMPENSATION: We do not currently compensate our directors who are
also employees. Each non-employee director currently is reimbursed for
reasonable travel expenses for each board meeting attended. In addition, each
non-employee director receives 10,000 stock options per year of service, with
vesting one year from the date of grant.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION: None of our
executive officers serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving on our
board of directors or compensation committee.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

Our certificate of incorporation provides that our directors will not be
personally liable to us, or our stockholders, for monetary damages for breach of
their fiduciary duties as a director, except for liability:

o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
o under a provision of Delaware law relating to unlawful payment of
dividends or unlawful stock purchase or redemption of stock; or
o for any transaction from which the director derives an improper
personal benefit.

As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.

Our bylaws provide for the indemnification of our directors and officers and
any person who is or was serving at our request as a director, officer,
employee, partner or agent of another corporation or of a partnership, joint
venture, limited liability company, trust or other enterprise. This
indemnification is provided to the fullest extent authorized by, and subject to
the conditions set forth in, the Delaware General Corporation Law. This
indemnification will include the right to be paid the expenses by us in advance
of any

44

proceeding for which indemnification may be had in advance of its final
disposition.

ITEM 11 - EXECUTIVE COMPENSATION

The following table sets forth the compensation paid to our Chief Executive
Officer, our four other most highly compensated executive officers who were
serving as executive officers of the Company as of December 31, 2001, and the
two most highly compensated executive officers who served as executive officers
during the year ended December 31, 2001, but who were not serving as executive
officers at December 31, 2001 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

- ----------
(1) The potential realizable value is calculated based on the 10-year term
of the option at the time of grant. The 0% assumed annual rate of
stock price appreciation is indicative of the difference between the
exercise price per share and the estimated fair value of our common
stock on the date of grant.

FISCAL YEAR-END OPTION VALUES

The following table presents information with respect to stock options owned
by each of our named executive officers at December 31, 2001.

- ----------
(1) Michael Sullivan served as our Chief Financial Officer and Treasurer
from May 1999 until March 2001.
(2) Jason Karp was our employee until October 2001; he continues to serve
as our General Counsel and Assistant Secretary.
(3) Homayoon Tajalli served as our Senior Vice President of Products and
Engineering from October 1999 until June 2001.

STOCK INCENTIVE AND OPTION PLAN

Our Amended and Restated Stock Incentive and Option Plan provides for the
grant of options, restricted stock and other stock-based compensation to our
employees, consultants and advisors. As of December 31, 2001, there were
5,000,000 shares of common stock reserved for issuance and there where 3,162,330
options to purchase shares of common stock outstanding at a weighted average
exercise price of $5.34 per share. Options granted under the plan typically vest
over time, usually ratably over four years from the date of grant, subject to
acceleration in the event of a change of control of e-centives. Typically, an
option granted under the plan expires ten years after it is granted. In
addition, the plan allows for grants of options the vesting of which is tied to
the employee's performance. As of December 31, 2001, our board of directors has
issued only stock options under the plan. The plan provides for the granting of
both incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986 and non-statutory options.

Our compensation committee administers our plan. The compensation committee
is authorized to determine:

o which eligible individuals receive option grants or share issuances;
o the number of shares under each option grant or share issuance;
o the exercise price per share under each option;
o the term of each option; and
o the vesting schedule for individual option grants or share issuances.

401(k) PLAN

We have a tax-qualified employee savings plan, which covers all of our
employees. Eligible employees may defer up to 25% of their pre-tax earnings,
subject to the Internal Revenue Service's annual contribution limit. Our 401(k)
plan permits us to make additional discretionary matching contributions on
behalf of all participants in our 401(k) plan in an amount determined by us. Our

46

401(k) plan is intended to qualify under Section 401 of the Internal Revenue
Code of 1986 so that contributions by employees or by us to our 401(k) plan, and
income earned on plan contributions, are not taxable to employees until
withdrawn from the plan, and so that contributions by us, if any, will be
deductible by us when made.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table presents information regarding the beneficial ownership
of common stock as of March 15, 2002:

o each person, or group of affiliated persons, who is the beneficial
owner of more than five percent of our outstanding common stock;
o each of our named executive officers;
o each of our directors; and
o all of our executive officers and directors as a group.

Unless otherwise indicated, the address of each person identified is c/o
e-centives, Inc., 6901 Rockledge Drive, 7th Floor, Bethesda, Maryland 20817.

Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a stockholder vote. The persons named in this table
have sole voting power for all shares of our common stock shown as beneficially
owned by them, subject to community property laws where applicable and except as
indicated in the footnotes to this table. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock subject to options and warrants
held by that person that are currently exercisable or exercisable within 60 days
after the date of this annual report are deemed outstanding. These shares,
however, are not deemed outstanding for the purpose of computing the percentage
ownership of any other person.

- ----------

* Less than 1% of the outstanding shares of common stock.

(1) Includes 375,000 shares issuable upon exercise of vested stock options.

(2) Includes 375,000 shares issuable upon exercise of vested stock options.

(3) Includes 40,000 shares issuable upon exercise of vested stock options and
110,000 shares issuable upon exercise of warrants to purchase held by Mr.
Friedli

47

individually, as well as shares of common stock and common stock underlying
warrants held by entities over which Mr. Friedli has control, as follows:
Joyce, Ltd. -- 235,000 shares of common stock; Pine Inc. -- 3,577,098
shares of common stock and 20,000 warrant shares; Savetech, Inc. -- 165,383
shares of common stock; Spring Technology Corp. -- 177,520 shares of common
stock and 200,000 warrant shares; Venturetec, Inc. -- 9,168,080 shares of
common stock; InVenture, Inc. -- 5,991,667 shares of common stock; and
USVentech -- 145,750 shares of common stock. As investment advisor to these
entities, Mr. Friedli has voting and investment power with respect to these
shares. See "Related Party Transactions -- Stock Purchases and Related
Matters" for a description of Mr. Friedli's relationships with these
entities. New Venturetec AG may be deemed to control Venturetec by virtue
of its ownership of 100% of Venturetec's capital stock and its
corresponding right to elect Venturetec's directors, and, therefore, our
capital stock owned by Venturetec may also be deemed to be beneficially
owned by New Venturetec.

(4) Includes 20,000 shares issuable upon exercise of warrants.

(5) Includes 43,750 shares issuable upon exercise of vested stock options.

(6) Includes 180,673 shares issuable upon exercise of vested stock options.

(7) Jason Karp was our employee until October 2001; he continues to serve as our
Vice President, General Counsel and Assistant Secretary.

(8) Michael Sullivan served as our Chief Financial Officer and Treasurer from
May 1999 until March 2001.

(9) Homayoon Tajalli served as our Senior Vice President of Products and
Engineering from October 1999 until June 2001.

(10)Includes 1,014,423 shares issuable upon exercise of vested stock options
and 330,000 shares issuable upon exercise of warrants.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

STOCK PURCHASES AND RELATED MATTERS

As part of our October 2001 rights offering, we sold 4,343,765 shares of
our common stock to Pine, Inc., 4,950,000 shares of our common stock to
InVenture, Inc., 5,500,000 shares of our common stock to Venturetec, Inc., and
2,050,000 shares of our common stock to Peter Friedli. Mr. Friedli is an
existing stockholder and one of our directors, and he serves as the President of
Pine, InVenture, Venturetec and its parent corporation, New Venturetec AG.

Venturetec and Pine each delivered to us a promissory note dated as of
October 19, 2001, in the principal amount of CHF 8,500,000 ($5,230,769) and CHF
8,687,530 ($5,346,172), respectively, as consideration for certain or all, as
the case may be, of the subscription price for shares of our common stock for
which they subscribed under the rights offering. The notes' maturity dates are
March 31, 2002.

As of January 22, 2002, Pine, Venturetec and InVenture, all companies under
common control, reallocated their share purchases and/or related promissory
notes. The CHF 2,500,000 in cash originally indicated as originating from
Venturetec has been reallocated as follows:

o InVenture purchased from Pine in a private sale 1,041,667 of the
shares of common stock originally purchased by Pine pursuant to
the rights offering for CHF 2,083,334 (CHF 2.00 a share). As part
of this transaction, Pine was credited with paying us CHF
2,083,334 and delivered to us an amended and restated secured
promissory note dated as of October 19, 2001, in the principal
amount of CHF 6,604,196 (approximately $4,064,121), with 2%
interest, with an original March 31, 2002 maturity date that was
subsequently extended to May 15, 2002. We simultaneously returned
Pine's original CHF 8,687,530 promissory note.

o Venturetec paid us CHF 416,666 and delivered to us an amended and
restated secured promissory note dated as of October 19, 2001, in
the principal amount of CHF 10,583,334 (approximately
$6,512,821), with 2% interest, with an original March 31, 2002
maturity date that was subsequently extended to June 30, 2002.
This CHF 10,583,334 reflects an increase in Venturetec's secured
promissory note to CHF 11,000,000 (reflecting Venturetec's
original subscription price for the shares of our common stock
for which it subscribed under the rights offering) minus the CHF
416,666 payment. We simultaneously returned Venturetec's original
CHF 8,500,000 promissory note.

Mr. Friedli also has relationships with several other of our other
stockholders. He serves as the investment advisor to Joyce, Ltd., Savetech,
Inc., Spring Technology Corp. and USVentech, Inc. The information below
summarizes related party transactions through December 2000.

48

o In October 1996, we sold 235,000 shares of our common stock to Joyce,
35,000 shares of our common stock to Pine, 10,000 shares of our common
stock to Peter Friedli and 720,000 shares of our common stock to
Savetech, Inc. at a price of $0.25 per share. At the same time, we
granted to Peter Friedli warrants exercisable for 56,000 shares of our
common stock at an exercise price of $0.10 per share.

o In December 1996, we sold 200,000 shares of our common stock to Pine,
120,000 shares of our common stock to Spring Technology and 172,000
shares of our common stock to USVentech at a price of $1.00 per share.

o In February 1997, we sold 700,000 shares of our common stock to
Venturetec at a price of $2.50 per share.

o In June 1997, we sold 1,700,000 shares of our Series A convertible
preferred stock at a per share price of $4.50 for an aggregate
consideration of $7.7 million to raise capital to finance our
operations. Each share of Series A convertible preferred stock
automatically converted into one share of common stock upon the
completion of our initial public offering on October 3, 2000. The
following table summarizes purchases, valued in excess of $60,000, of
shares of our Series A convertible preferred stock by our directors,
executive officers and 5% stockholders, including the number of shares
of Series A convertible preferred stock bought, the aggregate
consideration paid for the shares and the aggregate value of the
shares at the time of our initial public offering based upon the
offering price of $11.03 per share. These affiliates purchased the
securities described below at the same price and on the same terms and
conditions as the unaffiliated investors in the private financing. In
connection with this offering, we granted warrants exercisable for
50,000 shares, 100,000 shares and 20,000 shares, respectively, of our
common stock to Mr. Friedli, Spring Technology and Pine at an exercise
price of $4.50 per share.

o In February 1999, we sold 2,500,000 shares of our Series B convertible
preferred stock at a per share price of $6.00 for an aggregate
consideration of $15.0 million. Each share of Series B convertible
preferred stock automatically converted into one share of common stock
upon the closing of our initial public offering on October 3, 2000.
The following table summarizes purchases, valued in excess of $60,000,
of shares of our Series B convertible preferred stock by our
directors, executive officers and 5% stockholders, including the
number of shares of Series B convertible preferred stock bought, the
aggregate consideration paid for the shares and the aggregate value of
the shares, assuming the conversion of the shares into our common
stock and the offering price of $11.03 per share. Venturetec purchased
the shares of our Series B convertible preferred stock in this
offering at the same price and on the same terms as the unaffiliated
investors in this private financing. In connection with this offering,
we granted warrants exercisable for 4,000 shares and 100,000 shares,
respectively, of our common stock to Peter Friedli and Spring
Technology at an exercise price of $6.00 per share.

o In February 2000, we sold 2,328,434 shares of our Series C convertible
redeemable preferred stock at a price of $10.20 per share for an
aggregate consideration of $23.8 million to raise capital to finance
our operations. Each share of Series C convertible redeemable
preferred stock automatically converted into one share of common stock
upon the completion of our initial public offering on October 3, 2000.
The following table summarizes purchases, valued in excess of $60,000,
of shares of our Series C convertible preferred stock by our
directors, executive officers and 5% stockholders, including the
number of shares of Series C convertible redeemable preferred stock
bought, the aggregate consideration paid for the shares and the
aggregate value of the shares at the time of our initial public
offering based upon the offering price of $11.03 per share. These
affiliates purchased the securities described above at the same price
and on the same terms and conditions as the unaffiliated investors in
the private financing. We also sold 367,648 shares at the same price
in this

49

offering to Excite, Inc., one of our Direct Marketing System
network partners.

Each of the warrants we have granted entitles its registered holder to
"piggyback" registration rights for the common stock underlying the warrants in
certain public offerings of our securities, subject to underwriter restrictions.

Our board of directors determined the respective per share purchase prices
for the above-listed transactions based on the respective prices of our
securities sold contemporaneously to third parties who were not affiliated with
us.

LOANS TO MEMBERS OF MANAGEMENT AND BOARD OF DIRECTORS

We do not have any outstanding loans to officers or the board of directors,
other than as set forth in the "Stock Purchases and Related Matters" section
above.

OTHER TRANSACTIONS

In July 1996, we entered into a consulting agreement with Friedli Corporate
Finance, Inc. ("FCF"), whereby Mr. Friedli provides us with financial consulting
services and investor relations advice. Pursuant to this agreement, FCF is paid
$4,000 per month plus reimbursement of expenses related to Mr. Friedli's
services. Consulting expense under the FCF agreement was approximately $87,000,
$63,000 and $63,000 for the years ended December 31, 1999, 2000 and 2001,
respectively. In addition, under this agreement, we granted:

o a preemptive right to purchase any debt or equity securities issued by
us in a financing transaction;
o a preemptive right to allocate 10% of the share offering in our
initial public offering;
o a veto right on a single capital expenditure of $500,000 or more
until our initial public offering; and
o a seat on our board of directors and its compensation committee.

In October 2000, FCF permanently waived its rights to purchase shares of
common stock in our initial public offering and our future offerings.

During 1999, the Company issued a convertible long-term debt instrument for
$1,000,000 to an investment group controlled by FCF. This instrument was
converted into common stock upon consummation of the IPO in October 2000.

In addition, the Company engaged FCF to support the Company in connection
with the 2001 rights offering. In association with this support, the Company
agreed to extend the consulting agreement with FCF for 3 years and to reimburse
FCF up to $100,000 in expenses for such rights offering support.

Friedli Corporate Finance executed a letter to the Company confirming its
ability to fund the Company in the amount of $10.7 million for the
outstanding promissory notes from Pine, Inc. and Venturetec, Inc., entities
under its control. Funds from these promissory notes will be provided to us
from April 2002 through June 2002, based on our lack of immediate need for
these funds. As of April 16, 2002, more than 70% of these funds have been
received by us. To the extent that these funds, accompanied by our operating
resources, are not sufficient to enable us to operate through December 31,
2002, Friedli Corporate Finance is committed to providing the necessary
funding to enable us to continue to operate through December 31, 2002.
See also "Related Party Transactions" on page 34 for a further discussion
of such promissory notes.

50

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

a) 1. FINANCIAL STATEMENTS

The following financial statements required by this item are
submitted in a separate section beginning on page F-1 of this
report.

INDEX TO FINANCIAL STATEMENTS

Independent Auditors' Report......................... F-1
Consolidated Balance Sheets.......................... F-2
Consolidated Statements of Operations................ F-3
Consolidated Statements of Stockholders' Equity...... F-4
Consolidated Statements of Cash Flows................ F-5
Notes to Consolidated Financial Statements........... F-6

2. FINANCIAL STATEMENT SCHEDULE

See Schedule II attached.

b) REPORTS ON FORM 8-K

On December 18, 2001 we filed a Current Report on Form 8-K
announcing that we had acquired certain assets of BrightStreet.com,
Inc. and assumed various liabilities associated with the acquired
assets.

On January 3, 2002 we filed an amended Current Report on Form
8-K/A, amending the Current Report on Form 8-K that was filed on
December 18, 2001, which reported that we had completed the
acquisition of BrightStreet.com, Inc. and did not include the
requisite financial statements with that report on Form 8-K.

On January 30, 2002 we filed an amended Current Report on Form
8-K/A, announcing a press release of the same date providing
guidance on our expected performance for the fourth quarter of
2001.

On February 26, 2002 we filed an amended Current Report on Form
8-K/A, amending the amended Current Report on Form 8-K/A that was
filed on January 3, 2002, which supplemented the earlier filings by
providing the required financial statements and the pro forma
financial information.

On March 28, 2002 we filed a Current Report on Form 8-K, announcing
that the maturity dates of promissory notes receivable from two of
our stockholders had been extended. See also Item 13 (Stock
Purchases and Related Matters) on page 48 for a further discussion.

c) EXHIBITS

See Exhibit Index attached.

51

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the city of Bethesda, State of
Maryland, on April 16, 2002.

e-CENTIVES, INC.

By: /s/ KAMRAN AMJADI
------------------------------------
Kamran Amjadi
CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Act of 1934, this annual
report has been signed by the following persons on April 15, 2002 in the
capacities and on the date indicated.

52

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
e-centives, Inc.:

We have audited the accompanying consolidated balance sheets of e-centives,
Inc. and subsidiary as of December 31, 2000 and 2001, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss and cash flows for each of the years in the three-year period ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of e-centives,
Inc. and subsidiary as of December 31, 2000 and 2001 and the results of their
operations and cash flows for each of the years in the three-year period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.

As discussed in Note 2 to the consolidated financial statements, effective
July 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. ("FAS") 141, "Business Combinations," and certain
provisions of FAS 142, "Goodwill and Other Intangible Assets," as required for
goodwill and intangible assets resulting from business combinations consummated
after June 30, 2001.

/s/ KPMG LLP
McLean, Virginia
February 1, 2002, except as to Note 15(a), which is as of April 16, 2002

F-1

e-CENTIVES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

F-2

e-CENTIVES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

F-3

e-CENTIVES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

See accompanying notes to consolidated financial statements.

F-4

Supplemental disclosure of non-cash investing and financing activities:

In conjunction with the acquisition of BrightStreet.com, Inc. in December
2001, the Company issued warrants, valued at $185,000, for the
purchase of 500,000 shares of common stock and a contingent
performance-based warrant to purchase up to 250,000 shares of the
Company's common stock.
In conjunction with the acquisition of the Commerce Division in March
2001, the Company issued 2,168,945 shares of common stock, valued at
$11,755,682, and a contingent performance-based warrant to purchase
1,860,577 shares of the Company's common stock.
In conjunction with the issuance of Series C convertible redeemable
preferred stock in 2000, the Company issued warrants, valued at
$773,068, for the purchase of 119,485 shares of common stock.
In September 2000, the Company declared dividends of $1,235,688 on Series
A convertible preferred stock.
Each share of Series A and Series B convertible preferred stock and Series
C convertible redeemable preferred stock automatically converted into
one share of common stock subsequent to closing of the Company's
initial public offering on October 10, 2000.
In February 2000, the long-term debt was converted into 196,078 shares of
Series C convertible redeemable preferred stock at $10.20 per share.
In conjunction with the issuance of Series B convertible preferred stock
in 1999, the Company issued warrants for the purchase of 250,000
shares of common stock.

See accompanying notes to consolidated financial statements.

F-5

e-CENTIVES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION

e-centives, Inc. ("e-centives" or the "Company") was established as
Imaginex, Inc. on August 2, 1996, through incorporation in the State of
Delaware. During October 1996, the Company amended its articles of incorporation
to change its name to Emaginet, Inc. In March 1999, the Company amended its
articles of incorporation to change its name to e-centives, Inc. In March 2001,
the company expanded its international operations by establishing a subsidiary,
e-centives Limited, in the United Kindom.

The Company provides interactive marketing technologies and services. The
Company's products and services are intended to assist its clients with customer
acquisitions and retention. The Company provides online marketing and commerce
capabilities and solutions for companies across a range of industries including
the Internet (portals and destination sites), retail, banking, insurance, and
telecommunications.

The Company operates in a highly competitive environment and inherent in
the Company's business are various risks and uncertainties including its limited
operating history and unproven business model. The Company's success may depend
in part upon the continuance of the Internet as a communications medium,
prospective product and service development efforts, and the acceptance of the
Company's offerings by the marketplace. The Company expects to expand its
operations through continued capital investment. The Company has been dependent
upon its stockholders to fund working capital deficiencies. Management
believes that the net proceeds from the October 2001 rights offering,
together with its existing cash resources and the proceeds from its
promissory notes, will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures through into the first quarter of
2003. Friedli Corporate Finance has executed a letter to the Company confirming
its ability to fund the Company in the amount of $10.7 million for the
outstanding promissory notes from Pine, Inc. and Venturetec, Inc., entities
under its control. Funds from these promissory notes will be provided to the
Company from April 2002 through June 2002, based on the Company's lack of
immediate need for these funds. To the extent that these funds, accompanied
by the Company's operating resources, are not sufficient to enable the
Company to operate through December 31, 2002, Friedli Corporate Finance is
committed to providing the necessary funding to enable the Company to
continue to operate through December 31, 2002. Additionally, management has
developed a series of contingency plans for the purpose of conserving working
capital should actual revenues fall short of the Company's internal
projections. These contingency plans can be enacted quickly and will
eliminate significant amounts of variable costs, and enhance the Company's
overall liquidity position. However, the Company may need to raise additional
funds sooner to fund its planned expansion, to develop new or enhanced products
or services, to respond to competitive pressures or to make acquisitions.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) BASIS OF PRESENTATION

The accompanying consolidated financial statements include the
accounts of the Company and its subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.

(b) USE OF ESTIMATES

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

Estimates are used in accounting for, among other things, allowances
for uncollectible receivables, recoverability of long-lived assets and
investments, depreciation and amortization, employee benefits,
restructuring accruals, taxes and contingencies. Estimates and assumptions
are reviewed periodically and the effects of revisions are reflected in the
consolidated financial statement in the period they are determined to be
necessary.

(c) RECLASSIFICATION

Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to the current year presentation.

(d) CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

All highly liquid investments with maturities of three months or less
when purchased are considered cash equivalents. Those investments with
maturities less than twelve months at the balance sheet date are considered
short-term investments. Cash and cash equivalents consist of cash on
deposit with banks and money market funds stated at cost, which
approximates fair value. In accordance with Statement of Financial
Accounting Standards No. ("FAS") 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES, the Company classifies all short-term
investments as available-for-sale. Accordingly, these investments are
carried at fair value. The fair value of such securities approximates cost
and there were no material unrealized gains or losses at December 31, 2000
or 2001. The Company's portfolio of short-term investments, which consisted
of certificates of deposits at December 31, 2000 matured during 2001.

F-6

(e) PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and equipment under capital
leases are stated at the present value of minimum lease payments.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, which range from three to seven
years. Equipment under capital leases and leasehold improvements are
capitalized and amortized using the straight-line method over the shorter
of their estimated useful life or the term of the respective lease.

Expenditures for maintenance and repairs are charged to expense as
incurred. Expenditures for major renewals and betterments that extend the
useful lives of property and equipment are capitalized and depreciated over
the remaining useful lives of the asset. When assets are retired or sold,
the cost and related accumulated depreciation are removed from the accounts
and any resulting gain or loss is recognized in the results of operations.

(f) INTANGIBLE ASSETS

Intangible assets consist of licensed technology, which was acquired
in connection with the BrightStreet.com acquisition, an assembled work
force and a customer list, which were acquired in connection with the
purchase of the Commerce Division, as well as a purchased patent.
Intangible assets are being amortized over the expected period of two
to three years. All intangible assets are reviewed for impairment whenever
the facts and circumstances indicate that the carrying amount may not be
recoverable.

(g) DEFERRED REVENUE

Deferred revenue represents billings or collections on contracts in
advance of performance of services and is amortized into revenue as the
related service is performed based upon the applicable revenue recognition
methodology.

(h) REVENUE RECOGNITION

Revenue is generated by providing promotions marketing and outsourced
e-mail services, licensing the Company's software products, as well as
providing other services such as maintenance support, technical support and
consulting. The Company's products and services principally include
PROMOMAIL, PROMOCAST, PROMOCOMMERCE, the COMMERCE ENGINE, outsourced
e-mail, and the licensing of online promotions management solutions
software.

PROMOMAIL is a service that consists of targeted e-mails highlighting
specific e-centives. Marketers can purchase this service on a fixed fee
basis or on a performance basis. For the fixed fee contracts, participating
marketers are charged a fixed fee for each member to whom the e-mail is
sent and revenue related to the service is recognized upon transmission of
the e-mail. When marketers purchase the PROMOMAIL service on a performance
basis, revenue is based solely on the actions of the Company's members. The
Company earns a contractually specified amount based on the number of
members who click on the offer or other specified link, the number of
purchases by the Company's members, or the amount of sales generated by the
Company's members. Revenue is recognized upon the click-through or upon
notification by the marketer of the number or amount of applicable sales.

Marketers who subscribe to the PROMOCAST service enter into fixed-fee
contracts for delivery of either a specified or unlimited number of
e-centives by the Company to the accounts of a targeted group of members
over the contractual period, not to exceed one year. Each e-centive has an
expiration date, typically 30 days from the date the e-centive is placed in
a member's account. An e-centive is considered delivered when a member
visits their account. Because the Company has an obligation to maintain the
e-centive on its system until it expires, the Company recognizes revenue
upon expiration of the delivered e-centive. Revenue related to delivery of
an unlimited quantity of e-centives is recognized ratably over the expected
term of the customer relationship.

The PROMOCOMMERCE service is a fixed-fee contract consisting of
several components, including a PROMOCAST package, a perpetual software
license and maintenance on the accompanying software. The Company has not
sold software or maintenance separately; therefore, vendor specific
objective evidence has not been established. The related revenue is
recognized ratably over the expected term of the customer relationship.

Revenue generated from the COMMERCE ENGINE is primarily through
license, support and maintenance fees from Internet portal and other web
site destination customers. The Company also generates revenue from
participating online merchants. The contracts related to the COMMERCE
ENGINE typically consist of implementation and information service
fees from Internet sites and service and monthly transaction fees
from merchants. Revenue generated from the merchant transaction fees is
recognized when earned, revenue from implementation services is recognized
ratably over the expected term of the customer relationship and revenue
from service fees is recognized over the contract period.

F-7

The Company's outsourced e-mail marketing technology allows businesses
to conduct e-mail marketing without having to acquire or develop their own
e-mail infrastructure. Revenue is generated by charging fees for list
management and hosting services, strategy and creative services, e-mail
delivery and management services, as well as tracking and analysis
services. Revenue related to the one-time service charges for setting up
the customer is recognized ratably over the expected term of the customer
relationship, while all other revenue is recognized when the services
occur.

With the acquisition of BrightStreet.com in December 2001, the Company
started offering online promotions management solutions for creating,
targeting, publishing and tracking coupons and promotional incentives. This
system designs, deploys, and manages promotions and tracks individual
consumer response to offers for manufacturers, retailers, and websites.
This technology includes an operating system for delivering promotions and
promotion management tools. Revenue consists of fees from the sale of
licenses, which are recognized ratably over the contractual period.

Marketers may also contract for consulting services, such as
assistance with promotions planning. Revenue related to these consulting
services is recognized as the related services are provided.

Revenue for the first two quarters of 2001 also includes barter
revenues, which represent exchanges by the Company of promotional e-mail
deliveries for reciprocal advertising space or traffic on other web sites
("marketing partner transactions"). Revenues and expenses from these
marketing partner transactions are recorded based upon the fair value of
the promotional e-mails delivered at a similar quantity or volume of
e-mails delivered in a qualifying past cash transaction. Fair value of
promotional e-mails delivered is based upon the Company's recent historical
experience of cash received for similar e-mail deliveries. Such revenues
are recognized when the promotional e-mails are delivered. Corresponding
expenses are recognized for the advertisements received when the Company's
advertisements are displayed on the reciprocal web sites or properties,
which is typically in the same period as delivery of the promotional
e-mails and are included in sales and marketing expense.

(i) COST OF REVENUE

Cost of revenue consists primarily of expenses related to providing
the Company's services, including personnel costs associated with providing
its services, depreciation of servers, network and hosting charges, and
network partner revenue share payments.

(j) PRODUCT DEVELOPMENT COSTS

Product development consists primarily of expenses related to the
development and enhancement of the Company's technology and services,
including payroll and related expenses for personnel, as well as other
associated expenses for the Company's technology department. The Company
expenses product development costs as we incur them.

Development costs related to the software product marketed by the
Company are accounted for in accordance with FAS 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. Under
this standard, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to net realizable value
considerations. To date, the period between achieving technological
feasibility and the general availability of such software has been short;
therefore, software development costs qualifying for capitalization have
been insignificant. Accordingly, the Company has not capitalized any
software development costs and has charged all such costs to product
development expense.

(k) SALES AND MARKETING COSTS

Sales and marketing expenses consist primarily of payroll, sales
commissions and related expenses for personnel engaged in sales, marketing
and customer support, as well as advertising and promotional expenditures.
Such costs are expensed as incurred.

(l) ADVERTISING COSTS

Advertising costs are expensed as incurred. Advertising expense was
approximately $3,739,000, $12,537,000 and $4,309,000 during 1999, 2000, and
2001, respectively.

(m) STOCK-BASED COMPENSATION

The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB")

F-8

Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations including FASB Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION AN INTERPRETATION OF APB
OPINION NO. 25, issued in March 2000, to account for its fixed plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. FAS 123, ACCOUNTING FOR STOCK-BASED Compensation,
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As
allowed by FAS 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has adopted
the disclosure requirements of FAS 123.

(n) INCOME TAXES

The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating and tax
loss carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The
Company records a valuation allowance to reduce the deferred tax assets to
the amount that is more likely than not to be recognized.

(o) NET INCOME (LOSS) PER SHARE

The Company computes net income (loss) applicable to common
stockholders in accordance with FAS 128, EARNINGS PER SHARE, and SEC Staff
Accounting Bulletin No. ("SAB") 98. Under the provisions of FAS 128 and SAB
98, basic net income (loss) available per share is computed by dividing the
net income (loss) available to common stockholders for the period by the
weighted average number of common shares outstanding during the period.
Diluted net income (loss) available per share is computed by dividing the
net income (loss) for the period by the weighted average number of common
and dilutive common equivalent shares outstanding during the period. As the
Company had a net loss in each of the periods presented, basic and diluted
net income (loss) available per share is the same.

(p) FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company considers the carrying value of the Company's financial
instruments, which include cash equivalents, short-term investments,
accounts receivable, accounts payable, and accrued expenses to approximate
fair value at December 31, 2000 and 2001 because of the relatively short
period of time between origination of the instruments and their expected
realization or settlement.

The Company also maintained letters of credit, which represent
off-balance sheet financial instruments. The approximate fair value, as
determined by the related commitment fees, is immaterial.

(q) CONCENTRATION OF CREDIT RISK

Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash equivalents,
short-term investments and accounts receivable. The Company maintains its
cash and cash equivalents and short-term investments with high quality
financial institutions. At times, these accounts may exceed federally
insured limits. The Company has not experienced any losses in such bank
accounts.

There has been a significant slowdown in the Internet sector in the
United States, particularly with respect to retail Internet companies. Many
retail Internet companies had difficulties raising capital, borrowing money
and otherwise funding their operating losses, and a some have gone out of
business. Some of the Company's marketer clients are retail Internet
companies, many of which have significant losses, negative cash flow and
limited access to capital. These clients are experiencing even greater cash
flow problems due to this slowdown. Therefore, many of the Company's
clients could fail. As a result of the difficulties of some of the
Company's clients, the Company has had to expend additional effort to
collect its accounts receivable, and in certain cases had to settle for
less than the total amount owed. In the year ended December 31, 2001, the
Company incurred charges related to bad debt of approximately $493,000.
While the Company believes that its allowance for doubtful accounts as of
December 31, 2001 is adequate to cover any difficulties with the collection
of its accounts receivable balance, there can be no assurance that the
allowance will be adequate to cover any receivables later deemed to be
uncollectible.

The Company believes it is not exposed to significant credit risk
related to cash and cash equivalents and short-term investments.

F-9

There was one customer that accounted for 69% of the Company's
accounts receivable at December 31, 2001 and two customers that accounted
for 15% and 18%, respectively, of the Company's accounts receivable at
December 31, 2000. For the years ended December 31, 1999, 2000 and 2001, no
one customer accounted for more than 10% of revenue. The accounts
receivable that accounted for 69% of the balance at December 31, 2001, was
subsequently received in February 2002.

(r) LONG-LIVED ASSETS

The Company assesses the recoverability of long-lived assets,
including identifiable intangible assets, whenever adverse events or
changes in circumstances or business climate indicate that the carrying
value of the asset may not be recoverable. If the future undiscounted cash
flows expected to result from the use of the related assets are less than
the carrying value of such assets, an impairment has been incurred and a
loss is recognized to reduce the carrying value of the long-lived assets to
fair value. In connection with the restructuring plans adopted during 2001,
certain assets were deemed to be impaired. Accordingly, the Company
recorded an impairment charge of approximately $469,000 during 2001 (Note
8).

(s) RETIREMENT PLAN

The Company sponsors a defined contribution retirement plan
established under the provisions of Internal Revenue Code 401(k). Eligible
employees may defer up to 25% of their pre-tax earnings, subject to the
Internal Revenue Service's annual contribution limit. The 401(k) plan
permits the Company to make additional discretionary matching contributions
on behalf of all participants in the 401(k) plan in an amount determined by
the Company; however, no contributions have been made for the years
presented.

(t) FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's international operation is
the local currency. Accordingly, all assets and liabilities of the
subsidiary are translated using exchange rates in effect at the end of the
period, and revenue and costs are translated using weighted average
exchange rates for the period. The related translation adjustments are
reported in accumulated other comprehensive income (loss) in stockholders'
equity (deficit). For the year ended December 31, 2001, the Company
recorded foreign currency translation losses of approximately $17,000.
There were no gains or losses resulting from foreign currency translations
in 1999 or 2000.

Transaction gains and losses arising from transactions denominated in
a currency other than the functional currency of the entity involved are
included in the consolidated statement of operations. For the year ended
December 31, 2001, the Company recorded foreign currency transaction losses
of approximately $43,000. There were no gains or losses resulting from
foreign currency transactions in 1999 or 2000.

(u) COMPREHENSIVE INCOME (LOSS)

Effective January 1, 1998, the Company adopted the provisions of FAS
130, REPORTING COMPREHENSIVE INCOME. FAS 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Other comprehensive income (loss) recorded by the Company is comprised of
accumulated currency translation adjustments.

(v) SEGMENT INFORMATION

The Company operates in a single reportable segment and will evaluate
additional segment disclosure requirements as it expands its operations.

(w) RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued FAS 141, BUSINESS COMBINATIONS, and FAS
142, GOODWILL AND OTHER INTANGIBLE ASSETS. FAS 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001, as well as all purchase method business
combinations completed after June 30, 2001. FAS 141 also specifies criteria
intangible assets acquired in a purchase method business combination must
meet in order to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be
accounted for separately. FAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment, at least annually, in accordance with the provisions
of FAS 142. FAS 142 also requires that intangible assets with definite
useful lives be amortized

F-10

over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with FAS 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF.

The Company adopted the provisions of FAS 141 as of July 1, 2001 and
FAS 142 is effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are
acquired in a purchase business combination completed after June 30, 2001
will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-FAS 142 accounting literature. Goodwill
and intangible assets acquired in business combinations completed before
July 1, 2001 will continue to be amortized prior to the adoption of FAS
142.

FAS 141 requires, upon adoption of FAS 142, that the Company evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in FAS 141 for recognition apart
from goodwill. Upon adoption of FAS 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets
acquired in purchase business combinations, and make any necessary
amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be
required to test the intangible asset for impairment in accordance with the
provisions of FAS 142 within the first interim period. Any impairment loss
will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period. In connection with the transitional goodwill impairment evaluation,
FAS 142 requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible assets, to
those reporting units as of the date of adoption. The Company will then
have up to six months from the date of adoption to determine the fair value
of each reporting unit and compare it to the reporting unit's carrying
amount. To the extent a reporting unit's carrying amount exceeds its fair
value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied
fair value of the reporting unit's goodwill, determined by allocating the
reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price
allocation in accordance with FAS 141, to its carrying amount, both of
which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of
the year of adoption. Any transitional impairment loss will be recognized
as the cumulative effect of a change in accounting principle in the
Company's statement of operations.

As of the date of adoption, the Company expects to have unamortized
identifiable intangible assets in the amount of approximately $3,103,000,
which will be subject to the transition provisions of FAS 141 and 142.
Because of the extensive effort needed to comply with adopting FAS 141 and
142, it is not practicable to reasonably estimate the impact of adopting
these statements on the Company's financial statements at the date of this
report, including whether any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in
accounting principle.

In August 2001, the Financial Accounting Standards Board issued FAS
144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which
supercedes both FAS 121 and the accounting and reporting provisions of APB
Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS-REPORTING THE EFFECTS
OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a
segment of a business (as previously defined in that Opinion). FAS 144
retains the fundamental provisions in FAS 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets
to be disposed of by sale, while also resolving significant implementation
issues associated with FAS 121. For example, FAS 144 provides guidance on
how a long-lived asset that is used as part of a group should be evaluated
for impairment, establishes criteria for when a long-lived asset is held
for sale, and prescribes the accounting for a long-lived asset that will be
disposed of other than by sale. FAS 144 retains the basic provisions of APB
30 on how to present discontinued operations in the income statement but
broadens that presentation to include a component of an entity (rather than
a segment of a business). Unlike FAS 121, an impairment assessment under
FAS 144 will never result in a write-down of goodwill. Rather, goodwill is
evaluated for impairment under FAS 142. The Company is required to adopt
FAS 144 no later than the year beginning after December 15, 2001, and plans
to adopt its provisions for the quarter ending March 31, 2002. Management
does not expect the adoption of FAS 144 for long-lived assets held for use
to have a material impact on the Company's financial statements because the
impairment assessment under FAS 144 is largely unchanged from FAS 121. The
provisions of the Statement for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date
to newly initiated disposal activities. Therefore, management cannot
determine the potential effects that adoption of FAS 144 will have on the
Company's financial statements.

(3) EQUITY OFFERINGS

(a) INITIAL PUBLIC OFFERING

F-11

On October 3, 2000, the Company completed its initial public offering
("IPO") in which it sold 3,700,000 shares of its common stock to investors
in Switzerland, resulting in proceeds to the Company of approximately $36.7
million, after deducting underwriters' commissions and other
offering-related expenses. In connection with the IPO, 1,700,000 shares of
Series A convertible preferred stock, 2,500,000 shares of Series B
convertible preferred stock, and 2,328,434 shares of Series C convertible
redeemable preferred stock were converted to common stock on a one-for-one
basis.

(b) RIGHTS OFFERING

On October 19, 2001, the Company closed a rights offering for
approximately $24.6 million with subscriptions for 20,000,000 shares. Each
subscriber in the rights offering also received, for no additional
consideration, based upon such subscriber's participation in the rights
offering, a pro-rata portion of 2,000,000 shares of the Company's Series A
convertible preferred stock (convertible on a 10-for-1 basis into
20,000,000 shares of common stock under certain circumstances). After
deducting expenses and underwriting discounts, the net proceeds from this
transaction will be approximately $22.5 million, with $12.6 million of the
net proceeds received by December 31, 2001 and the remaining $9.9 million
due by the end of the second quarter of 2002.

(4) ACQUISITIONS

(a) COMMERCE DIVISION

On March 28, 2001, the Company acquired the Commerce Division of
Inktomi Corporation ("Commerce Division") in a purchase business
combination for approximately $12.9 million, consisting of 2,168,945 shares
of the Company's common stock valued at approximately $11.8 million and
about $1.1 million in acquisition costs. A total of 2,551,700 shares of the
Company's common stock, or 14.4% of the Company's outstanding common stock,
were issued with 40% placed into escrow. Thirty eight percent of the escrow
shares, or 382,755, are to be released based upon the achievement of
contractually defined revenue and performance targets for the Commerce
Division. The remaining 637,925 of escrow shares are held in satisfaction
of any potential indemnity claims and will be released within contractually
agreed upon time frames. As part of the purchase price, the Company also
issued to Inktomi Corporation a warrant to purchase an additional 1,860,577
shares of the Company's common stock upon the achievement of additional
revenue targets for the Commerce Division at the end of 12 months following
the closing of this acquisition. Based upon the revenue through December
31, 2001, the Company does not anticipate that Inktomi will be eligible to
receive the shares of common stock and warrants that are contingent upon
the achievement of revenue targets for the Commerce Division.

In connection with the acquisition, the Company entered into a license
agreement and reseller agreement with Inktomi Corporation. Under the terms
of the license agreement, Inktomi Corporation will perpetually license
certain software and technology to the Company to be used in the acquired
business. Pursuant to the reseller agreement, Inktomi Corporation will
resell certain products of the acquired business for a period of twelve
months from the closing. Subsequent to December 31, 2001, the reseller
agreement was terminated.

In addition, commensurate with the acquisition, the Company hired 70
of Inktomi's Commerce Division employees and entered into a sublease
agreement with Inktomi Corporation for approximately 31,000 square feet of
office space in Redwood Shores, California. The term of the sublease is for
9 years and the base rent is $132,236 per month, which increases annually
in July of each year. Inktomi Corporation provided the Company with certain
transition services and support with respect to certain facilities and
functions for six months following the acquisition.

The acquisition was accounted for under the purchase method of
accounting and, accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values at
the acquisition date. The Company engaged an independent third-party
appraiser to perform a valuation of the tangible and intangible assets
associated with the acquisition. The Company is amortizing the identifiable
intangible assets on a straight-line basis over 2-3 years. Based upon the
valuation, the total purchase price of $12,893,326 was allocated as
follows:

(b) BRIGHTSTREET.COM
F-12

On December 3, 2001, the Company entered into an Asset Purchase
Agreement (the "Agreement") with BrightStreet.com, Inc.
("BrightStreet.com"), whereby the Company acquired substantially all of
BrightStreet.com's assets and certain liabilities. The Company acquired
BrightStreet.com for approximately $2.2 million, consisting of
approximately $1.7 million in cash, a guaranteed warrant to purchase
500,000 shares of its common stock valued at approximately $185,000, a
contingent performance-based warrant to purchase up to 250,000 shares of
its common stock and about $335,000 in acquisition costs. The cash payments
consisted of approximately $843,000 in cash advances to fund
BrightStreet.com's working capital under the terms of a Management Services
Agreement and an $825,000 payment at closing. The guaranteed warrant is
exercisable from June 3, 2002 through December 3, 2005 at an exercise price
of $0.5696 per share. The performance-based warrant is exercisable, in
whole or in part, beginning June 4, 2003 until December 3, 2005 based upon
the achievement of certain performance targets at an exercise price of
$2.44 per share.

In conjunction with the Agreement, the Company entered into a Patent
Assignment Agreement (the "Assignment") with BrightStreet.com. Pursuant
to the Assignment, BrightStreet.com has agreed to assign to the Company
all right, title and interest in and to all the issued and pending
BrightStreet.com patents (the "Patents"), subject to certain pre-existing
rights granted by BrightStreet.com to third parties ("Pre-existing
Rights"), provided the Company makes certain payments to BrightStreet.com
by December 3, 2005 (the "Payments"). If the Company makes such Payments
by that date, the Company shall own all right, title and interest in and
to the Patents, subject to the Pre-existing Rights. Until such Payments
are made, the Company has, subject to the Pre-existing Rights, an
exclusive, worldwide, irrevocable, perpetual, transferable, and
sublicensable right and license under the Patents. Until the Company
takes title to the Patents, the Company may not grant an exclusive
sublicense to the Patents to any unaffiliated third party. In the event
the Company does not make the Payments by December 3, 2005, the Company
shall retain a license to the Patents, but the license shall then convert
to a non-exclusive license.

In exchange for the rights granted under the Assignment, beginning
December 2002, the Company is obligated to pay BrightStreet.com ten percent
of revenues received that are directly attributable to (a) the licensing or
sale of products or functionality acquired from BrightStreet.com,
(b) licensing or royalty fees received from enforcement or license of the
Patents covered by the Assignment, and (c) licensing or royalty fees
received under existing licenses granted by BrightStreet.com to certain
third parties. If the total transaction compensation paid, as defined by
the Agreement, at any time prior to December 3, 2005 exceeds $4,000,000,
the Payments will be deemed to have been made. The Company also has the
right, at any time prior to December 3, 2005, to satisfy the Payments by
paying to BrightStreet.com the difference between the $4,000,000 and the
total compensation already paid.

The acquisition was accounted for under the purchase method of
accounting and, accordingly, the preliminary purchase price was allocated
to the assets acquired and liabilities assumed based on their estimated
fair values at the acquisition date. The Company is amortizing the
identifiable intangible assets on a straight-line basis over 3 years. The
preliminary total purchase price of $2,187,647 was allocated as follows:

(c) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

The following unaudited pro forma results of operations for the years
ended December 31, 2000 and 2001 are presented as though the Commerce
Division and BrightStreet.com had been acquired at the beginning of the
respective periods presented, after giving effect to purchase accounting
adjustments relating to amortization of intangible assets and other
acquisition related adjustments. The pro forma results of operations are
not necessarily indicative of the combined results that would have occurred
had the acquisitions been consummated at the beginning of the period, nor
are they necessarily indicative of future operating results.

(5) LETTERS OF CREDIT

As part of the amended and modified lease agreement, dated June 29, 2000,
for the Company's headquarters office space lease in

F-13

Bethesda, Maryland, the Company is required to have an irrevocable letter of
credit as a security deposit throughout the lease term. In the event that the
letter of credit is executed, the Company has established a certificate of
deposit, for an equivalent amount, which serves as collateral for the letter of
credit. The letter of credit for the first year was $542,984 and was reduced to
$449,579 on June 29, 2001, the first day of the second lease year and will
continue to be reduced by 20% on the anniversary of each subsequent lease year.

Commensurate with the acquisition of the Commerce Division, the Company
entered into a sublease agreement with Inktomi Corporation for office space in
Redwood Shores, California. As part of the sublease agreement, the Company is
required to have an irrevocable letter of credit in the amount of $1,007,282 as
a security deposit throughout the lease term and has therefore established a
certificate of deposit for this amount.

(6) PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

(7) INTANGIBLE ASSETS

In association with the acquisition of BrightStreet.com in December 2001,
the Company acquired licensed technology. The intangible asset was recorded at
its estimated fair value on the date of the acquisition and is being amortized
on a straight-line basis over three years.

Intangible assets consisting of an assembled work force and a customer list,
were acquired in connection with the purchase of the Commerce Division in March
2001. The intangible assets were recorded at their estimated fair value on the
date of the acquisition and are being amortized on a straight-line basis over
three and two years, respectively.

The Company acquired a patent for "Electronic couponing method and
apparatus" in April 1999 from SellectSoft, a software developer, for $3,000,000.
The patent is being amortized on a straight-line basis over three years.

Intangible assets consist of the following:

(8) RESTRUCTURING AND IMPAIRMENT CHARGES

In 2001, the Company's management approved restructuring actions to respond
to the global economic downturn and to improve the Company's cost structure by
streamlining operations and prioritizing resources in strategic areas of the
Company's business. The Company recorded a restructuring charge of approximately
$9.9 million to reflect these actions. This charge consisted of severance and
other employee benefits related to the planned termination of approximately 63
employees, across many business functions and job classes, as well as costs
related to the consolidation of excess facilities and a revaluation of the
intangible assets associated with the Commerce Division. As of December 31,
2001, the Company had paid out approximately $344,000 of the accrued costs and
recorded non-cash charges of approximately $469,000. The Company expects to pay
out approximately $2.2 million of the accrual in 2002, with the remainder to be
paid out through 2010. As of December 31, 2001, the balance of the accrued
restructuring charges recorded in 2001 consisted of the following:

F-14

Calculation of the restructuring accrual related to expected losses on
subleases required the Company to make estimates concerning: (1) the expected
length of time to sublease the facility; (2) the expected rental rates on
subleases; and (3) estimated brokerage expenses associated with executing the
sublease. The Company used the assistance of independent real estate brokerage
firms in making these estimates and the estimates may be impacted by future
economic trends. If the actual results differ from the estimates the Company may
be required to adjust the restructuring accrual related to expected losses on
subleases, including recording additional losses.

(9) INCOME TAXES

The Company has incurred operating losses since its inception and has
recognized no current or deferred tax provision or benefit in the United States.

The components of income tax expense attributable to operations are as
follows:

The provision for income taxes is different from that which would be
obtained by applying the statutory federal income tax rate to loss before income
taxes. The items causing this difference are as follows:

Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:

F-15

The net change in the valuation allowance for the years ended December 31,
2000 and December 31, 2001 was an increase of $10,844,445 and $15,977,033,
respectively. The valuation allowances at December 31, 2000 and December 31,
2001 are results of the uncertainty regarding the ultimate realization of the
tax benefits related to the deferred tax assets. The federal net operating loss
is $76,696,000 as of December 31, 2001. The net operating loss carryforward
period expires commencing in 2011 through the year 2021. Further, as a result of
certain financing and capital transactions, an annual limitation on the future
utilization of a portion of the net operating loss carryforward may occur. As a
result, the net operating loss carryforward may not be fully utilized before
expiration.

No deferred taxes have been provided for the income tax liability, if any,
which would be incurred on repatriation of the undistributed earnings of the
Company's foreign subsidiary because the Company intends to reinvest these
earnings outside the United States.

(10) COMMITMENTS AND CONTINGENCIES

(a) LEASES

In association with the acquisition of BrightStreet.com, effective
November 1, 2001, the Company entered into a Modification, Assignment and
Assumption Agreement with Pentech Financial Services, Inc. ("Pentech") and
BrightStreet.com regarding the Master Equipment Lease ("Lease") that
BrightStreet.com had entered into with Pentech in May 2000. Per the
agreement, with the consent of Pentech, BrightStreet.com assigned the Lease
to the Company with certain modifications to the terms and conditions of
the Lease. In addition, the Company agreed to defend, indemnify, save and
hold harmless BrightStreet.com from and against any and all claims,
demands, costs, and any other damages which BrightStreet.com may sustain as
a result of any failure or delay by the Company in performing the assumed
obligations.

The Company is obligated under non-cancelable capital leases, for
certain computer equipment, that expire during 2004. In addition, the
Company is obligated under non-cancelable operating leases, primarily for
office space, which expire on various dates through 2010.

Amounts related to assets under non-cancelable capital leases that
have been capitalized as property and equipment as of December 31, 2001 are
as follows:

As of December 31, 2001, future minimum lease payments under
non-cancelable leases are as follows:

Rent expense under operating leases was approximately $357,000,
$955,000 and $3,541,000 for the years ended December 31, 1999, 2000 and
2001, respectively.

(b) PARTNER PAYMENTS

The Company compensates its network partners for members acquired
through their web sites by paying a fee for new

F-16

members, by paying a percentage of the revenue the Company generates from
the delivery of e-centives to such new members, by paying both or by paying
the higher of the two methods.

On March 31, 2001, the Company terminated its Co-Branding Agreement
with Excite@Home ("Excite"), dated as of February 16, 2000 and amended
December 30, 2000. The termination agreement relieved the Company of all of
its future obligations, including making payments of up to $13 million to
Excite over the next two years. In connection with the Termination
Agreement, the Company also purchased $1.3 million worth of data and e-mail
services from Matchlogic, a wholly owned subsidiary of Excite. Effective
April 1, 2001, the Company entered into a new one-year agreement with
Excite, whereby Excite provided the Company with access to e-mail and other
subscriber information, and in exchange for this information, the Company
was to pay Excite a percentage of the revenue generated from these
subscribers. However, this restructured agreement resulted in no revenue
share payments to Excite. As of November 5, 2001, this agreement was
terminated, as Excite filed for bankruptcy protection.

During June 2001, the Company entered into an Online Services
Agreement with Classmates.com, an online reunion destination site with 20
million members. The strategic alliance allows Classmates.com members to
receive e-centives' targeted special offers and promotions based upon their
self-described interests and will provide the Company with access to e-mail
and other subscriber information. In exchange for this information, the
Company pays Classmates.com a percentage of the revenue generated from
these subscribers.

As of December 31, 2001, the Company was party to agreements with
seven network partners and has no future fixed commitments relating to
these agreements related to these partner agreements.

(c) LITIGATION

On October 8, 2001, the Company was notified by coolsavings.com that a
payment of $250,000 was due to coolsavings because a summary judgment
motion, relating to a separate litigation between coolsavings and Catalina
Marketing Corporation, was not granted within one year from the date of
entry of the Stipulated Order of Dismissal, which was October 3, 2000. The
settlement with coolsavings is summarized below.

The terms of the settlement with coolsavings provide for a
cross-license between the Company and coolsavings, for each of the
patents currently in dispute. There are no royalties or other
incremental payments involved in the cross-license. Pursuant to this
settlement, the Company may have to make payments of up to $1.35
million to coolsavings as follows:

o $650,000, which was paid to coolsavings on September 29, 2000,
was due at the signing of the settlement documents;

o $250,000, which was accrued for as of December 31, 2001, was due
if, within one year from the date of entry of the Stipulated
Order of Dismissal, Catalina Marketing Corporation prevailed in a
motion for summary judgment in a separate litigation between it
and coolsavings, involving the coolsavings' patent currently in
dispute; and

o up to $450,000 if and to the extent the coolsavings' patent
currently in dispute survives the pending reexamination
proceedings at the Patent and Trademark Office that were
initiated by a third party. This component of the settlement
arrangement has not been accrued for because the possibility of
the Company having to make this payment continues to remain
remote.

From time to time, the Company is a party to various legal proceedings
incidental to its business. None of these proceedings is considered by
management to be material to the conduct of its business, operations or
financial condition.

(d) EMPLOYMENT AGREEMENTS

The Company has employment agreements with certain officers and
employees. The Company also has bonus agreements with

F-17

certain officers and employees as defined in the agreements.

(11) STOCKHOLDERS' EQUITY

(a) PREFERRED STOCK

On November 30, 2001, the Company's proposal to amend and restate its
Articles of Incorporation to authorize 10,000,000 shares of preferred stock
was approved by a majority of the stockholders. As of December 31, 2001,
there were 2,000,000 shares of Series A convertible preferred stock
authorized. As part of the Company's October 2001 rights offering of
20,000,000 shares of common stock, additional securities were issued to
each of the stockholders who purchased shares, in an amount proportional to
their participation in the rights offering. The additional securities
consisted of 2,000,000 shares of Series A convertible preferred stock,
convertible into 20,000,000 shares of common stock upon certain
circumstances. The Company did not receive any additional consideration for
such Series A convertible preferred stock beyond such consideration
received for the shares of common stock purchased in the rights offering.

VOTING:
The holders of Series A preferred stock shall vote with the
holders of common stock on all matters submitted to the stockholders.
Each share of Series A preferred stock shall entitle the holder
thereof to a number of votes equal to the number of shares of common
stock into which it is then convertible.

DIVIDENDS:
No dividends will be paid on the Series A preferred stock.

VOLUNTARY CONVERSION:
Each share of Series A preferred stock will be convertible into
the Company's common stock, beginning one year after issuance, at the
option of the holder. The number of shares calculated will be ten
common shares for one preferred share held at the time of conversion.

MANDATORY CONVERSION:
The Series A preferred stock shall automatically convert into
shares of the Company's common stock (at a ten for one basis) at the
conversion price then in effect upon the earlier to occur of: (1) the
date when the average trading price of the Company's common stock for
15 consecutive trading days is equal to or greater than CHF 6.00; (2)
the consummation by the Company of a public offering of equity
securities with proceeds in excess of CHF 40,000,000 million or
equivalent in USD; (3) change of control; or (4) two years from the
date of issuance.

LIQUIDATION:
Upon any liquidation, dissolution or winding up of the Company,
each holder of Series A preferred stock shall be entitled to receive,
prior to any distribution with respect to the Company's common stock,
an amount equal to: all cash available for distribution to all classes
of stockholders, calculated as if the Series A preferred stock had
been converted into common stock immediately prior to the liquidation,
up to but not to exceed CHF 25.00 per share of such common stock.
Seven percent of the total amount of cash available for distribution
to all classes of stockholders shall, however, be distributed to the
Company's management (pursuant to a formulation to be determined by
the board of the Company) prior to the calculation of the liquidation
preference in favor of the Series A preferred stockholders.

(b) NOTES RECEIVABLE FROM STOCKHOLDERS

As part of the October 2001 rights offering, the Company sold shares
of its common stock to Venturetec, Inc. and Pine, Inc. Peter Friedli, one
of the Company's stockholders and directors, serves as the investment
advisor to both Venturetec and Pine, and also serves as President of
Venturetec and its parent corporation, New Venturetec AG. Venturetec and
Pine each delivered to the Company a promissory note dated as of October
19, 2001, with a maturity date of March 31, 2002, as consideration for the
subscription price for the shares of common stock for which each company
subscribed under the rights offering. Venturetec's note (which was only
partial consideration for the purchase of the shares; the remainder was
paid in cash) was in the principal amount of CHF 8,500,000 (approximately
$5,230,769) and Pine's note was in the principal amount of CHF 8,687,530
(approximately $5,346,172).

In January 2002, Pine, Venturetec and InVenture, reallocated their share
purchases and/or related promissory notes associated with the rights
offering. Please see "Note 15 -- Subsequent Events" section on page F-22.

F-18

(c) STOCK INCENTIVE AND OPTION PLAN

The Company's Amended and Restated Stock Incentive and Option Plan
provides for the grant of options, restricted stock and other stock-based
compensation to its employees, consultants and advisors. As of December 31,
2001, there were 5,000,000 shares of common stock reserved for issuance and
there were 3,162,330 options to purchase shares of common stock outstanding
at a weighted average exercise price of $5.34 per share. Options granted
under the plan typically vest over time, usually ratably over four years
from the date of grant, with some subject to acceleration in the event of a
change of control of e-centives. Typically, an option granted under the
plan expires ten years after it is granted. In addition, the plan allows
for grants of options the vesting of which is tied to the employee's
performance. As of the December 31, 2001, the board of directors has issued
only stock options under the plan. The plan provides for the granting of
both incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 and non-statutory options.

During 1997 and 1998, 100,018 performance-based option grants were
made to certain key employees at an exercise price of $2.50. During 1999,
160,400 additional performance-based option grants were made to certain key
employees, with an exercise price of $2.50 for 50,000 of these options and
$3.50 for the remaining 110,400 options. No performance-based option grants
were made in 2000, while 25,000 performance-based options priced at $3.40
were granted in 2001. Compensation expense related to these options of
$733,137 and ($302,304) was recorded in 2000 and 2001, respectively. The
credit for 2001 reflects the reversal of historical stock-based
compensation expense, related to terminated employees, that was recorded in
excess of the expense pertaining to their options vested through
termination.

The Company has elected to follow APB 25 and related interpretations
in accounting for its employee stock options rather than the alternative
fair value accounting method allowed by FAS 123. APB 25 provides that
compensation expense relative to the Company's employee stock options is
measured based upon the intrinsic value of the stock option. FAS 123
requires companies that continue to follow APB 25 to provide pro forma
disclosure of the impact of applying the fair value method of FAS 123.

In 1999, 2000 and 2001, the Company recorded equity-based compensation
expense of $372,224, $980,512 and $1,165,423, respectively relating to
options to purchase 960,800 shares granted in 1999 and 1,517,564 shares
granted in 2000 equal to the difference between the fair value of the
Company's common stock on the grant date and the exercise price of the
options. Additionally, the Company expects to incur approximately $1.6
million of compensation expense during the period 2002 through 2004
relating to these options. The expense will be recognized ratably over the
vesting period of the options, which is generally 4 years.

Had compensation expense for the Company's stock option plan been
determined based upon the fair value methodology under FAS 123, the
Company's net loss would have increased to these pro forma amounts:

The fair value of these options was estimated at the date of grant
using the Black-Scholes option pricing model on the date of grant using the
following assumptions:

- ----------
(1) 0% expected volatility was used for all options granted prior to the
initial public offering on October 3, 2000.

The weighted-average fair value of stock options granted during 1999,
2000 and 2001 was $4.46, $5.78 and $3.02, respectively.

A summary of the Company's stock option activity and weighted average
exercise price is as follows:

F-19

The following table summarizes information concerning currently
outstanding and exercisable options at December 31, 2001:

(d) WARRANTS

The Company has issued warrants to purchase common shares in
connection with several equity issuances: the 1997 grant was in connection
with the issuance of Series A convertible preferred stock, the 1999 grant
was in connection with the issuance of Series B convertible preferred
stock, and the 2000 grant was in connection with the issuance of Series C
convertible redeemable preferred stock. The warrants granted in 2001 were
in conjunction with the acquisition of the Commerce Division and
BrightStreet.com, with rights to purchase common shares of 1,860,577 and
750,000, respectively.

The warrant issued to Inktomi Corporation as part of the Commerce
Division acquisition is a contingent performance-based warrant that Inktomi
is eligible to exercise based upon the achievement of revenue targets for
the Commerce Division at the end of 12 months following the closing of the
acquisition. Based upon the revenue through December 31, 2001, the Company
does not anticipate that Inktomi will be eligible to exercise this warrant.

The warrants issued in conjunction with the BrightStreet.com
acquisition consist of a guaranteed warrant to purchase 500,000 shares of
the Company's common stock and a contingent performance-based warrant to
purchase up to 250,000 shares of the Company's common stock. The
performance-based warrant is based upon the achievement of a revenue target
of $7 million for BrightStreet.com during the 18 months following the
closing of the acquisition.

The following table sets forth the warrants outstanding, their
underlying common shares and their weighted average exercise price per
share:

F-20

All warrants granted through December 31, 1999 expire on December 31,
2003, the warrant granted during the year ended December 31, 2000 expires
on February 18, 2005, the warrant granted to Inktomi expires on January 18,
2006 and the two warrants granted to BrightStreet.com expire on December 3,
2005.

(e) AUTHORIZED CAPITAL

On November 7, 2001, the Company's board of directors unanimously
approved, subject to stockholder approval, (i) an amendment of the
Company's Restated Certificate of Incorporation, as amended ("Restated
Certificate of Incorporation"), to increase the total authorized capital
stock from 50,000,000 shares to 130,000,000 shares in connection with an
increase in the authorized common stock from 40,000,000 shares to
120,000,000 shares (this amendment will not effect a change to the
10,000,000 shares of authorized preferred stock); and (ii) an amendment to
the Company's Amended and Restated Stock Option and Incentive Plan, as
amended (the "Stock Option Plan"), to increase the maximum number of shares
available for issuance from 5,000,000 to 21,000,000. On November 30, 2001,
holders of a majority of the outstanding shares of the Company's common
stock executed a written stockholder consent approving the amendment of the
Company's Restated Certificate of Incorporation and the amendment to the
Company's Stock Option Plan. Under applicable federal securities laws, the
amendments is not effective until at least 20 days after this information
statement is sent or given to the Company's stockholders. This information
statement was to be mailed to stockholders on or about December 31, 2001.

(12) RELATED PARTY TRANSACTION

In July 1996, the Company entered into a consulting agreement with Friedli
Corporate Finance, Inc. ("FCF"). Peter Friedli, President of FCF, is related to
the Company through his significant direct and indirect ownership of common
stock, options and warrants and is one of the Company's directors. Under the
agreement, FCF provides services to the Company in the form of consultation,
advice and other assistance upon the Company's request. Such services may
include, but are not limited to, (a) providing general business, financial and
investment advice to the Company during the term of the agreement, and (b)
serving as liaison between FCF clients/investors and the Company by
disseminating information to such investors on behalf of the Company. Consulting
expense under the FCF agreement was approximately $87,000, $63,000 and $63,000
for the years ended December 31, 1999, 2000 and 2001, respectively. In addition,
the Company engaged FCF to support the Company in connection with the October
2001 rights offering. In association with this support, the Company agreed to
extend the consulting agreement with FCF for 3 years and to reimburse FCF up to
$100,000 in expenses for such rights offering support.

During 1999, the Company issued a convertible long-term debt instrument for
$1,000,000 to an investment group controlled by FCF. This instrument was
converted into common stock upon consummation of the IPO in October 2000.

As part of the Company's October 2001 rights offering, the Company sold
4,343,765 shares of its common stock to Pine, Inc., 4,950,000 shares of its
common stock to InVenture, Inc., 5,500,000 shares of its common stock to
Venturetec, Inc., and 2,050,000 shares of its common stock to Peter Friedli.
Peter Friedli serves as the President of Pine, InVenture, Venturetec and its
parent corporation, New Venturetec AG. Venturetec and Pine each delivered to the
Company a promissory note dated as of October 19, 2001, with maturity dates of
March 31, 2002, in the principal amount of CHF 8,500,000 ($5,230,769) and CHF
8,687,530 ($5,346,172), respectively, as consideration for certain or all, as
the case may be, of the subscription price for shares of the Company's common
stock for which they subscribed under the rights offering. Subsequent to
December 31, 2001, Pine, Venturetec and InVenture, all companies under common
control, reallocated their share purchases and/or related promissory notes. See
"Note 15 -- Subsequent Events" on page F-22.

Mr. Friedli also has relationships with several other of the Company's
other stockholders. He serves as the investment advisor to Joyce, Ltd.,
Savetech, Inc., Spring Technology Corp. and USVentech, Inc.

(13) BASIC AND DILUTED NET LOSS PER SHARE

The Company computes net income (loss) per share in accordance FAS 128,
EARNINGS PER SHARE, which requires certain disclosures relating to the
calculation of earnings (loss) per common share. The following represents a
reconciliation of the numerators and denominators of the basic and diluted
earnings per common share computations for net income (loss).

F-21

Diluted net loss applicable to common stockholders for the year ended
December 31, 1999 excludes convertible preferred stock, stock options, and
warrants due to their antidilutive effect and diluted net loss applicable to
common stockholders for the years ended December 31, 2000 and 2001 excludes
stock options and warrants due to their antidilutive effect.

(14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables contain unaudited Statement of Operations information
for each quarter of 1999, 2000 and 2001. The Company believes that the following
information reflects all normal recurring adjustments necessary for a fair
presentation of the information for the periods presented. The operating results
for any quarter are not necessarily indicative of results for any future period.

(15) SUBSEQUENT EVENTS

(a) NOTES RECEIVABLE FROM STOCKHOLDERS

On January 22, 2002, Pine, Venturetec and InVenture, all companies
under common control, reallocated their share purchases and/or related
promissory notes associated with the October 2001 rights offering. The CHF
2,500,000 (approximately $1,538,462) in cash originally indicated as
originating from Venturetec has been reallocated as follows:

o InVenture purchased from Pine in a private sale 1,041,667 of the
shares of common stock originally purchased by Pine pursuant to
the rights offering for CHF 2,083,334, at CHF 2.00 a share. As
part of this transaction, Pine was credited with paying us CHF
2,083,334 (approximately $1,282,052) and delivered to the Company
an amended and restated secured promissory note dated as of
October 19, 2001, in the principal amount of CHF 6,604,196
(approximately $4,064,121), with 2% interest, with an original
March 31, 2002 maturity date that was subsequently extended to
May 15, 2002. The Company simultaneously returned Pine's original
CHF 8,687,530 promissory note.

F-22

o Venturetec paid the Company CHF 416,666 (approximately $256,410)
and delivered to the Company an amended and restated secured
promissory note dated as of October 19, 2001, in the principal
amount of CHF 10,583,334 (approximately $6,512,821), with 2%
interest, with an original March 31, 2002 maturity date that was
subsequently extended to June 30, 2002. This CHF 10,583,334
reflects an increase in Venturetec's secured promissory note to
CHF 11,000,000 (approximately $6,769,231), reflecting
Venturetec's original subscription price for the shares of the
Company's common stock for which it subscribed under the rights
offering minus the CHF 416,666 payment. The Company
simultaneously returned Venturetec's original CHF 8,500,000
promissory note.

(b) POTENTIAL ACQUISITION

The Company is currently in negotiations to acquire certain
assets and liabilities of a U.S. based internet company in
exchange for e-centives' stock. The Company has executed an Asset
Purchase Agreement regarding the proposed acquisition, with an
expected settlement date of April 30, 2002.

F-23

INDEPENDENT AUDITORS' REPORT

The Board of Directors
e-centives, Inc.:

Under date of February 1, 2002, except as to Note 15(a), of the
consolidated financial statements, which is as of April 16, 2002, we reported
on the consolidated balance sheets of e-centives, Inc. and subsidiary as of
December 31, 2000 and 2001 and the related consolidated statements of
operations, stockholders' equity and comprehensive loss and cash flows for
each of the years in the three-year period ended December 31, 2001 which are
included in this Annual Report on Form 10-K. In connection with our audits
of the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated financial
statement schedule based on our audits.

In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

As discussed in Note 2 to the consolidated financial statements, effective
July 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. ("FAS") 141, "Business Combinations," and certain
provisions of FAS 142, "Goodwill and Other Intangible Assets," as required for
goodwill and intangible assets resulting from business combinations consummated
after June 30, 2001.

/s/ KPMG LLP

McLean, Virginia
February 1, 2002, except as to Note 15(a), of
the consolidated financial statements, which
is as of April 16, 2002

SCHEDULE II

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(1) deferred revenue
(2) accrued expenses

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
-------- ---------------------------------------------------------

2.1 Asset Purchase Agreement, dated January 18, 2001, by and
between e-centives, Inc. and Inktomi Corporation
(incorporated herein by reference to Exhibit 2.1 to the
Current Report on Form 8-K filed by e-centives on April 11,
2001)
2.2 Asset Purchase Agreement, dated December 3, 2001, by and
between e-centives, Inc. and BrightStreet.com, Inc.
(incorporated herein by reference to Exhibit 2.1 to the
Current Report on Form 8-K filed by e-centives on December
18, 2001)
2.3 Amended and Restated Asset Purchase Agreement, dated
December 26, 2001, by and between e-centives, Inc. and
BrightStreet.com, Inc. (incorporated herein by reference to
Exhibit 2.1 to the Amended Current Report on Form 8-K/A
filed by e-centives on January 3, 2002)
3.1(1) Restated Certificate of Incorporation of e-centives, Inc.
3.3(1) Amended and Restated Bylaws of e-centives, Inc.
4.1(1) Specimen certificate representing the Common Stock.
4.2(1) Registration Rights Agreement, dated February 18, 2000, by
and among e-centives, Inc. and certain stockholders named
therein.
4.3(2) Common Stock Purchase Warrant, dated as of March 28, 2001,
between e-centives, Inc. and Inktomi Corporation.
4.4(2) Warrant to Purchase Common Stock, dated as of December 3,
2001, between e-centives, Inc. and BrightStreet.com, Inc.
4.5(2) Warrant to Purchase 500,000 Shares of Common Stock, dated
as of December 3, 2001, between e-centives, Inc. and
BrightStreet.com, Inc.
10.1(1) 1996 Stock Incentive Plan.
10.2(1) e-centives-- Excite@Home Co-Branding Agreement, dated
February 16, 2000, by and between e-centives, Inc. and At
Home Corporation.
10.3(1) Technology and Marketing Agreement, dated May 13, 1999, by
and between e-centives, Inc. and ZDNet, as amended.
10.4(1) Internet Data Center Services Agreement, dated March 23,
1998, by and between e-centives, Inc. and Exodus
Communications, Inc.
10.5(1) Employment Agreement for Kamran Amjadi, dated May 8, 1998,
as amended.
10.6(1) Employment Agreement for Mehrdad Akhavan, dated May 8, 1998,
as amended.
10.7(1) Lease Agreement, dated September 23, 1997, by and between
e-centives, Inc. and Democracy Associates Limited
Partnership, as amended and modified on June 29, 2000.
10.8 Amended and Restated Stock Option and Incentive Plan
(incorporated herein by reference to Exhibit 99.2 to the
e-centives' Registration Statement on Form S-8 (Registration
No. 333-58244))
10.9 Technology License Agreement, dated March 28, 20001, between
e-centives and Inktomi Corporation (incorporated herein by
reference to Exhibit 10.1 to the Current Report on Form 8-K
filed by e-centives on April 11, 2001)
10.10(2)Sublease Agreement, dated April 1, 2001, by and between
e-centives, Inc. and Inktomi Corporation, as amended on
August 28, 2001.
10.11(2)e-centives Marketplace Agreement, dated June 27, 2001, by
and between e-centives, Inc. and Vizzavi Europe Limited.
10.12(2)Modification, Assignment and Assumption Agreement, dated
November 1, 2001, by and among e-centives, Inc.,
BrightStreet.com, Inc. and Pentech Financial Services, Inc.
10.13(2)Internet Services Master Services Agreement, effective
as of December 14, 2001, between e-centives, Inc. and
SiteSmith, Inc.
23.1(2) Consent of KPMG LLP.

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(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-42574).
(2) Filed herewith.