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APTIMUS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS

1.         BASIS OF PRESENTATION

2.          REVENUE RECOGNITION

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3.          NET LOSS PER SHARE

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4.          NEW ACCOUNTING PRONOUNCEMENTS

5.           RESTRUCTURING COSTS

6.          NOTES RECEIVABLE FROM SHAREHOLDERS

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7.          SUBSEQUENT EVENT

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

      The following discussion of the financial condition and results of operations of the Company contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify forward-looking statements by our use of words such as "may," "will," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential" or "continue" or the negative or other variations of these words, or other comparable words or phrases. The Company's actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, fluctuation of the Company's operating results, the ability to compete successfully, and the ability of the Company to maintain current client and distribution partner relationships and attract new ones, as well as those risks described in connection with the forward looking statement and the factors listed on Exhibit 99.1 to this report, which factors are hereby incorporated by reference in this report.

      Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of forward-looking statements. We are under no duty to update any of our forward-looking statements after the date of this filing. You should not place undue reliance on forward-looking statements.

OVERVIEW

      We began our direct marketing business in 1994 as the FreeShop division of Online Interactive, Inc. In addition to operating the FreeShop division, Online Interactive was also engaged in the business of selling software over the Internet. In July 1997, Online Interactive transferred the FreeShop division to FreeShop International, Inc., a newly formed, wholly owned subsidiary, and spun off FreeShop International through a distribution to its shareholders. On February 19, 1999, FreeShop International changed its name to FreeShop.com, Inc. On October 16, 2000 FreeShop.com, Inc. changed its name to Aptimus, Inc.

      Today, Aptimus' mission is to provide the most powerful and effective ways to acquire new customers via the Internet. This is the same mission we had in 1994 when we launched our business. We continue to believe that the Internet is the most important new medium for customer acquisition in recent history.

      We are positioning ourselves to be the leading online direct response network. Our focus is creating high volume performance-based customer acquisition solutions for major consumer marketers. To achieve these objectives, we leverage our proprietary technology platform to dynamically present offers to large volumes of transacting consumers at the point of transaction, when they are most likely to respond, across a broad variety of web sites. We focus our efforts around three primary offer presentation formats:

      During the six months ended June 30, 2002 we derived our revenues primarily from lead generation contracts related to the Aptimus network, including email deliveries. We receive lead generation revenues when we deliver

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customer information to a marketer in connection with an offer distributed through our network of partners, including email list partners. Approximately 28% of our revenue was derived from advertising contracts where we receive advertising revenues from delivery of advertisements to opt-in email lists. Lead generation pricing is based on cost per lead and varies depending on the type of offer. Generally, pricing of advertising is based on cost per thousand impressions basis. We recognize revenues in the period in which we deliver the service, provided we have no further performance obligation. During the six months ended June 30, 2001 we derived our revenues primarily from online lead generation and advertising contracts related to the FreeShop Web site and Club FreeShop email Newsletters. The services we deliver are primarily sold under short-term agreements that are subject to cancellation.

     In the quarters ended June 30, 2001 and 2002 our ten largest clients accounted for 57.9% and 50.2% of our revenues, respectively. During the quarter ended June 30, 2001, Caribbean Tourism Organization accounted for 13.5% of our revenues. No other client accounted for more than 10% of our revenues in the quarter ended June 30, 2001. During the quarter ended June 30, 2002 MyPoints.com, Inc. was our largest client accounting for 14.1% of our revenues. MyPoints.com, Inc. is still a client, however, the volume of activity with them significantly declined in the middle of May 2002 and is expected to remain at this lower level of activity in the future. No other client accounted for more than 10% of our revenues in the quarter ended June 30, 2002. In the six months ended June 30, 2001 and 2002 our ten largest clients accounted for 39.0% and 46.2% of our revenues, respectively. No single client accounted for more than 10% of revenues in the six months ended June 30, 2001. During the six months ended June 30, 2002 MyPoints.com, Inc. was our largest client accounting for 15.0% of our revenues. No other client accounted for more than 10% of our revenues in the six months ended June 30, 2002.

     Our business has been operating at a loss and generating negative cash flows from operations since inception. As of June 30, 2002, we had accumulated losses of approximately $58.8 million. Even with anticipated growth in revenues, we expect our losses and negative cash flows are likely to continue during the fiscal year ending December 31, 2002. Our accountants have noted that these conditions raise substantial doubt about our ability to continue as a going concern, as emphasized in their report included in our Annual Report on Form 10-K, filed March 29, 2002.

     If the Company is unable to increase revenues or contain operating expenses as planned it may not have sufficient funds to satisfy its cash requirements. The Company may be forced to curtail operations further, dispose of assets or seek additional funding. Such events would materially and adversely affect the value of the Company's equity securities. There can be no assurance that the Company will be able to successfully complete the steps necessary to continue as a going concern.

     Our common stock has been quoted on the Nasdaq National Market since our September 1999 initial public offering. By letter dated February 15, 2002, we were advised by Nasdaq Listing Qualifications that we were then out of compliance with the Nasdaq National Market rule that requires a National Market-listed company to maintain a $5.0 million minimum market value for its publicly held shares. As of May 16, 2002, the Company had not regained compliance with this rule and, accordingly, Nasdaq notified the Company that its securities would be delisted from the Nasdaq National Market, effective, May 28, 2002. By letter dated May 23, 2002, we appealed the staff determination to delist the Company's securities from the National Market. The appeal had the effect of staying the delisting pending a decision on the appeal by the hearings panel. The Company presented its appeal of the delisting to the hearings panel on July 12, 2002, requesting, in the alternative, that its securities remain listed on the Nasdaq National Market, or that its application for listing on the Nasdaq SmallCap Market be accepted and its securities listed on that Market as promptly as practicable. By letter dated August 12, 2002, Nasdaq notified the Company of the panel's decision to transfer the listing of the Company's securities to the Nasdaq SmallCap Market, effective with the open of business on Thursday, August 15, 2002. The panel has conditioned the transfer on the fact that if the Company's shares continue to close below the SmallCap Market's $1.00 per share minimum bid price requirement for the thirty-trading day period ending August 30 2002, the Company will be notified of such noncompliance and will be granted a period of 180 calendar days within which to demonstrate compliance with the $1.00 minimum bid and all other minimum listing requirements. Failure to meet all of the minimum listing requirements in the prescribed period will be cause for delisting of the Company's shares from the Nasdaq SmallCap Market.

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RESULTS OF OPERATIONS

Revenues

     We currently derive our revenues primarily from network activities, which include both lead generation activities through a network of partners and e-mail mailings. In the prior year our revenues also included online lead generation and advertising contracts related to the FreeShop, Catalogsite, and Desteo websites. Our revenues increased by $401,000, or 105%, to $782,000 in the quarter ended June 30, 2002 from $381,000 in the same quarter of 2001. For the six months ended June 30, 2002, net revenues have increased by $248,000 or 19% to $1.6 million, from $1.3 million in the first six months of 2001. During 2001 we refocused our efforts to a network lead generation model from a site centric lead generation model. Revenue in the six months ended June 30, 2001 was primarily derived from the FreeShop site, which was discontinued in the second quarter of 2001. This refocusing resulted in a significant decline in revenues through the third quarter of 2001. Net revenue has increased since then. Network revenue growth in the current quarter was only 12.5% compared to over 100% in each of the preceding two quarters. The level of revenue growth experienced in the first six months of the year may not be sustainable and a slower rate of growth may be experienced in the third quarter of 2002. The table below provides detail of the composition of our net revenue, in thousands:

Sales and Marketing

     Sales and marketing expenses consist primarily of marketing and operational personnel costs, bad debts, and outside sales costs in 2002. During the beginning of 2001, sales and marketing costs included significant amounts of marketing and promotional costs related to developing our brands and generating visits to our Web sites. Sales and marketing expenses decreased by $1.0 million to $596,000, or 76% of revenues, in the quarter ended June 30, 2002 from $1.6 million, or 427% of revenues, in the same quarter of 2001. For the six months ended June 30, 2002, sales and marketing expenses have decreased by $4.5 million to $1.1 million, or 73% of revenues, from $5.6 million, or 430% of revenues, in the first six months of 2001. The decrease in sales and marketing expenses is primarily related to reductions in advertising spending and payroll related costs. For the six months ended June 30, 2002, reductions in spending for advertising accounted for 37% of the decrease and reductions in payroll costs accounted for 40% of the decrease. Sales and marketing expenses are expected to increase slightly in the remaining quarters of 2002 as it is expected that additional sales people and supporting staff will be hired.

Connectivity and Network Costs

     Connectivity and network costs consist of expenses associated with the maintenance and usage of our network as well as email delivery costs. Such costs include email delivery costs, Internet connection charges, hosting facility costs, banner ad serving fees and personnel costs. Connectivity and network costs decreased by $27,000 to

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$417,000, or 53% of revenues, in the quarter ended June 30, 2002 from $444,000, or 117% of revenues, in the same quarter of 2001. For the six months ended June 30, 2002, Internet and network connectivity expenses have decreased by $336,000 to $739,000, or 48% of revenues, from $1.1 million, or 82% of revenues, in the first six months of 2001. During the first quarter of 2001 costs were incurred to support both the network and the FreeShop site. The decrease in connectivity and network costs is primarily related to reductions in connectivity spending and payroll related costs. For the six months ended June 30, 2002 reductions in connectivity spending accounted for 57% of the decrease and reductions in payroll costs accounted for 41% of the decrease.

Partner fees

     Partner fees consist of fees owed to network distribution partners and opt-in email list owners based on revenue generating activities created in conjunction with these partners. Partner fees increased by $245,000 to $315,000, or 40% of network revenues, in the quarter ended June 30, 2002 from $70,000, or 55% of network revenues, in the same quarter of 2001. For the six months ended June 30, 2002, partner fees have increased by $475,000 to $570,000, or 39% of network revenues, from $95,000, or 57% of revenues, in the first six months of 2001. Network revenue is used instead of total revenues for partner fees as this is considered a more meaningful statistic since partner fees only relate to network revenues. These fees have increased on an absolute basis as a result of the increases in network revenue. As a percentage of network revenues such fees have decreased as a result of implementation of e-mail based campaigns in the third quarter of 2001. Email based campaigns that are sent to Company-owned lists do not have any partner fees associated with them. Also the cost of delivering the emails and certain third-party costs are deducted before calculating the fees due partners for email based campaigns not sent to Company-owned lists.

Research and Development

     Research and development expenses primarily consist of personnel costs related to maintaining and enhancing the features, content and functionality of our Web sites, network and related systems. Research and development expenses decreased by $231,000 to $149,000, or 19% of revenues, in the quarter ended June 30, 2002 from $380,000, or 100% of revenues, in the same quarter of 2001. For the six months ended June 30, 2002, research and development expenses have decreased by $1.0 million to $299,000, or 19% of revenues, from $1.3 million, or 100% of revenues, in the first six months of 2001. The decrease in research and development expense is primarily related to reductions in payroll costs and contractor expenses resulting from repositioning the company in early 2001. For the six months ended June 30, 2002 reductions in staff accounted for 47% of the decrease and reductions in contractor expenses accounted for 45% of the decrease. Research and development expenses in the third quarter of 2002 are expected to remain relatively consistent with the second quarter of 2002.

General and Administrative

     General and administrative expenses primarily consist of management, financial and administrative personnel expenses and related costs and professional service fees. General and administrative expenses decreased by $202,000 to $439,000, or 56% of revenues, in the quarter ended June 30, 2002 from $641,000, or 168% of revenues, in the same quarter of 2001. For the six months ended June 30, 2002, general and administrative expenses have decreased by $609,000 to $907,000, or 58% of revenues, from $1.5 million, or 116% of revenues, in the first six months of 2001. The largest factor in this decrease was a one-time expense incurred in the first quarter of 2001. The one-time expense related to the termination of a contract assumed with the purchase of XMarkstheSpot and was approximately $171,000 or 28% of the decrease. In addition to this the decrease in general administrative expense is primarily related to reductions in payroll costs and audit and accounting fees. For the six months ended June 30, 2002, reductions in payroll costs accounted for 25% of the decrease and reductions in audit and accounting fees accounted for 15% of the decrease. General and administrative expenses in the third quarter of 2002 are expected to remain relatively consistent with the second quarter of 2002.

Depreciation and Amortization

     Depreciation and amortization expenses consist of depreciation on leased and owned computer equipment, software, office equipment and furniture and amortization on intellectual property, non-compete agreements and

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goodwill from acquisitions. Depreciation and amortization expenses decreased by $270,000 to $363,000, or 46% of revenues, in the quarter ended June 30, 2002 compared to $633,000, or 166% of revenues, in the same quarter of 2001. For the six months ended June 30, 2002, depreciation and amortization expenses have decreased by $678,000 to $726,000, or 47% of revenues, compared to $1.4 million, or 107% of revenues, in the first six months of 2001. The majority of the decrease results from the impairment of goodwill and other acquired intangibles as a result of the repositioning of the business in 2001. Depreciation and amortization in the third quarter of 2002 is expected to remain relatively consistent with the second quarter of 2002.

Equity-Based Compensation

     Equity-based compensation expenses consist of amortization of unearned compensation recognized in connection with stock options and stock grants granted to employees and directors at prices below the fair market value of our common stock. Unearned compensation is recorded based on the intrinsic value when we issue stock options to employees and directors at an exercise price below the estimated fair market value of our common stock at the date of grant. Unearned compensation is also recorded based on the fair value of the options granted as calculated using the Black-Scholes option pricing model when options or warrants are issued to advisors and other service providers. Unearned compensation is amortized over the vesting period of the option or warrant. Equity-based compensation expenses decreased by $12,000 to $3,000, or less than 1% of revenues, in the quarter ended June 30, 2002 compared to $15,000, or 4% of revenues, in the same quarter of 2001. For the six months ended June 30, 2002, equity-based compensation expenses decreased by $47,000 to $7,000, or less than 1% of revenues, compared to $54,000, or 4% of revenues, in the first six months of 2001. The decrease resulted from the forfeiture of options held by terminated employees and the continued decline in the unearned compensation balance resulting from the continued amortization of the balance.

Restructuring costs

     Restructuring costs consist of severance costs and losses on fixed and intangible assets disposed or abandoned as a result of restructuring activities. On February 20, 2001, the Company announced its intention to reposition itself as a direct marketing infrastructure provider, focusing all its resources on building its direct marketing network. As part of this repositioning, activities related to our consumer-direct Web sites, including FreeShop.com, Desteo.com, and CatalogSite.com were discontinued. Severance costs were approximately $503,000 and $2.0 million in the quarter and six months ended June 30, 2001, respectively. In addition to severance costs, the repositioning resulted in the disposal and abandonment $953,000 of capitalized software and fixed assets. In conjunction with the disposal of these assets, the Company received approximately $51,000 of proceeds, which is included as an offset in the restructuring costs. Additionally, during 2001 we recorded a restructuring charge related to the impairment of intangible assets related to the repositioning activities. Approximately $1.0 million of intangible assets related to the acquisitions of Commonsite, LLC and Travel Companions International, Inc. were impaired in the first quarter of 2001 as they related to our consumer direct Web site business for which a plan of exit was implemented in the first quarter of 2001. Approximatley $1.2 million of intangible assets related to the business acquisition of XMarkstheSpot, Inc. were impaired in the second quarter of 2001 as the majority of the acquired workforce was terminated and the acquired technology was replaced. The final payments related to the 2001 restructuring were made in January 2002. Amounts paid as part of the restructuring were the same as amounts accrued in the first and second quarter of 2001. We do not expect to incur additional restructuring costs in the near term.

Interest Expense

     Interest expense results from capital equipment leases and notes payable to Comerica Bank, f/k/a Imperial Bank, Fingerhut Companies and AFCO. Interest expense totaled $7,000 in the quarter ended June 30, 2002 and $52,000 in the same quarter of 2001. For the six months ended June 30, 2002, interest expense totals $15,000 and $98,000 in the first six months of 2002, and 2001, respectively. The decrease in interest expense is a result of the Comerica Bank note and Fingerhut Companies notes payable being paid off in August 2001 and November 2001, respectively. Interest expense is expected to continue to decrease as remaining amounts owed are paid down.

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Other Income, Net

     Other income, net, consists primarily of interest income and gains and losses on disposals of assets. Other income, net, decreased by $177,000 to $21,000, or 3% of revenues, in the quarter ended June 30, 2002 compared to $198,000, or 52% of revenues, in the same quarter of 2001. For the six months ended June 30, 2002, other income, net has decreased by $459,000 to $64,000, or 4% of revenues, compared to $523,000, or 40% of revenues, in the first six months of 2001.The decrease is due to lower cash balances resulting primarily from the use of cash in operations and the Company's issuer tender offer in the fourth quarter of 2001. Other income, net will continue to decrease as cash used in operations will decrease the amount available for investment.

Income Taxes

     No provision for federal income taxes has been recorded for any of the periods presented due to the Company's current loss position.

LIQUIDITY AND CAPITAL RESOURCES

     Since we began operating as an independent company in July 1997, we have financed our operations primarily through the issuance of equity securities. Gross proceeds from the issuance of stock through June 30, 2002 totaled $65.7 million, including $21.5 million raised from Fingerhut Companies. As of June 30, 2002, we had approximately $2.6 million in cash, cash equivalents and short-term securities, providing working capital of $2.2 million. No off-balance sheet assets or liabilities existed at June 30, 2002.

     Net cash used in operating activities was $2.0 million and $10.0 million in the six months ended June 30, 2002 and 2001, respectively. Cash used in operating activities in the six months ended June 30, 2002 resulted primarily from $2.8 million of net loss. Net cash outflows from operations were increased by $15,000 of restructuring costs paid in the period, $31,000 of gains on equipment sales, $4,000 in amortization of discount on short-term investments, and a $164,000 increase in accounts receivable. Net cash outflows were offset by $734,000 of non-cash expenses, a $93,000 decrease in prepaid expenses and other assets, a $115,000 increase in accounts payable and a $57,000 increase in accrued and other liabilities. Cash used in operating activities in the six months ended June 30, 2001 resulted primarily from $14.3 million of net losses. Net cash outflows from operations were increased by $1.7 million of restructuring costs paid in the six-month period, $36,000 in amortization of discount on short-term investments, a $2.0 million decrease in accounts payable and a $261,000 decrease in accrued liabilities. Net cash outflows were offset by $6.5 million of non-cash expenses, a $82,000 decrease in prepaid expenses and other assets and a $1.8 million decrease in accounts receivable.

     Net cash provided by investing activities was $1.0 million and $6.7 million in the six months ended June 30, 2002 and 2001, respectively. In the six months ended June 30, 2002, $1.0 million was received from the maturity of commercial paper purchased in 2001. In addition to the maturity of commercial paper, $23,000 was received from the disposal of fixed assets and $14,000 was used for the purchase of additional equipment. In the six months ended June 30, 2001, $9.0 million was received from the maturity of commercial paper purchased in 2000, $2.0 million was used for the purchase of commercial paper and $366,000 was used to purchase equipment and furniture.

     Net cash used in financing activities was $142,000 and $930,000 in the six months ended June 30, 2002 and 2001, respectively. In the six months ended June 30, 2002, net cash used in financing activities resulted from $76,000 in principal payments made on a note payable, $44,000 in principle payments on capital leases, $27,000 loaned to officers for the purchase of company stock. These uses of cash were offset by $5,000 received for the issuance of common stock resulting from exercise of stock options. In the six months ended June 30, 2001, net cash used in financing activities resulted from $487,000 in principal payments made on notes payable, $114,000 in principle payments on capital leases and $334,000 used to repurchase the Company's common stock. These uses of cash were offset by $5,000 received for the issuance of common stock resulting from exercise of stock options.

     We believe our current cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next six months. Thereafter, we may need to raise additional capital to meet our long-term operating requirements. Although cost reduction measures were implemented in the second

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quarter of 2001 and revenues have increased over the past three quarter there is no assurance these trends can be maintained.

     Cash commitments under non-cancelable agreements over the next five years consist of payments for rent, connectivity and capital leases. Such commitments total $763,000 for the remainder of 2002, $1.6 million during the year ended December 31, 2003 and $546,000 through May of 2004. No cash commitments currently extend beyond May of 2004.

     Our cash requirements depend on several factors, including the level of expenditures on advertising and brand awareness, the rate of market acceptance of our services and the extent to which we use cash for acquisitions and strategic investments. Unanticipated expenses, poor financial results or unanticipated opportunities requiring financial commitments could give rise to earlier financing requirements. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders would be reduced, and these securities might have rights, preferences or privileges senior to those of our common stock. Additional financing may not be available on terms favorable to us, or at all. The notification of noncompliance and possible delisting from Nasdaq and the going concern contingency contained in our audit report may make raising additional capital more difficult. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of business opportunities, develop or enhance services or products or otherwise respond to competitive pressures would be significantly limited, and we might need to significantly restrict our operations. Our accountants have noted that these conditions raise substantial doubt about our ability to continue as a going concern, as emphasized in their report included in our Annual Report on Form 10-K, filed March 29, 2002.

CRITICAL ACCOUNTING POLICIES

     Our significant accounting policies are described in Note 2 to the financial statements included in Item 8 of the Annual Report on Form 10-K, filed with the SEC on March 29, 2002. We believe our most critical accounting policies include revenue recognition, allowance for doubtful accounts and fixed assets.

     The Company currently derives revenue from providing lead generation activities through a network of partners and e-mail mailings. Revenue earned for lead generation though the Aptimus network is based on a fee per lead and is recognized when the lead information is delivered to the client. Revenue earned for e-mail mailings can be based on a fee per lead, a percentage of revenue earned from the mailing, or a cost per thousand e-mails sent. Revenue from e-mail mailings sent on a cost per thousand basis is recognized when the e-mail is delivered. Revenue from e-mail mailings sent on a fee per lead or a percentage of revenue earned from the mailing basis is recognized when amounts are determinable, generally when the customer receives the leads.

     Revenues generated through network partners and opt-in email list owners are recorded on a gross basis in accordance with Emerging Issues Task Force consensus 99-17 (EITF 99-19). Fees paid to network partners and opt-in email list owners related to these revenues were $570,000 and $95,000 for the six months ended June 30, 2002 and 2001, respectively. These fees are shown as Partner fees on the Statement of Operations. Email based campaigns that are sent to Company owned lists do not have partner fees associated with them.

     The company has evaluated the guidance provided by Emerging Issues Task Force consensus 99-17 (EITF 99-19) as it relates to determining whether revenue should be recorded gross or net of the payments made to network partners and opt-in email list owners. The Company has determined the recording of revenues gross is appropriate based upon the following factors:

      The estimate of allowance for doubtful accounts is comprised of two parts, a specific account analysis and a general reserve. Accounts where specific information indicates a potential loss may exist are reviewed and a specific reserve against amounts due is recorded. As additional information becomes available such specific account reserves are updated. Additionally, a general reserve is applied to the aging categories based on historical

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collection and write-off experience. As trends in historical collection and write-offs change, the percentages applied against the aging categories are updated.

     Property and equipment are stated at cost less accumulated depreciation and are depreciated using the straight-line method over their estimated useful lives. Leasehold improvements are amortized on a straight-line method over their estimated useful lives or the term of the related lease, whichever is shorter. Equipment under capital leases, which all contain bargain purchase options, is recorded at the present value of minimum lease payments and is amortized using the straight-line method over the estimated useful lives of the related assets. The estimated useful lives are as follows:

     The cost of normal maintenance and repairs are charged to expense as incurred and expenditures for major improvements are capitalized. Gains or losses on the disposition of assets in the normal course of business are reflected in other income, net as part of the results of operations at the time of disposal.

     Changes in circumstances such as technological advances or changes to the Company's business model can result in the actual useful lives differing from the Company's estimates. In the event the Company determines that the useful life of a capital asset should be shortened the Company would depreciate the net book value in excess of the estimated salvage value, over its remaining useful life thereby increasing depreciation expense. Long-lived assets, including fixed assets and intangible assets other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. A review for impairment involves developing an estimate of undiscounted cash flow and comparing this estimate to the carrying value of the asset. The estimate of cash flow is based on, among other things, certain assumptions about expected future operating performance. The Company's estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to our business model or changes in our operating performance.

RECENT ACCOUNTING PRONOUNCEMENTS

     We adopted SFAS No. 141 "Business Combinations", SFAS No. 142 "Goodwill and Other Intangible Assets", SFAS No. 143 "Accounting for Asset Retirement Obligations", and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" in the quarter ended March 31, 2002. The adoption of these standards did not have a material impact on our financial position, results of operations or cash flows.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     All of the Company's cash equivalents, short-term securities and capital lease obligations are at fixed interest rates and therefore the fair value of these instruments is affected by changes in market interest rates. As of June 30, 2002, however, the Company's cash equivalents and short-term securities mature within three months. As of June 30, 2002, the Company believes the reported amounts of cash equivalents, short-term securities, capital lease obligations and notes payable to be reasonable approximations of their fair values. As a result, the Company believes that the market risk and interest risk arising from its holding of financial instruments is minimal.

PART II -  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     As of the date hereof, there is no material litigation pending against the Company. From time to time, the Company is a party to litigation and claims incident to the ordinary course of business. While the results of litigation and claims cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

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ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

     None.

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

     The Company's 2002 Annual Meeting of Shareholders (the "Annual Meeting") was held at 2:00 p.m. on May 21, 2002 at the Company's offices, 657 Mission Street, Suite 200, San Francisco, California 94105. At the Annual Meeting, the shareholders were asked to:

     At the Annual Meeting, the shareholders elected each of the nominees for director and ratified the selection of Moss Adams LLP, as independent accountants for the Company.

     The number of votes cast for, against and withheld, as well as the number of abstentions and broker non-votes, as to each such matter, including a separate tabulation with respect to each nominee for office are as follows:

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ITEM 5.  OTHER EVENTS

      As noted elsewhere in this report, the Company received notice from Nasdaq Listing Qualifications that its securities were non-compliant with the $5,000,000 minimum value of publicly held shares requirement for continued listing on the Nasdaq National Market and would thus be delisted from that Market. The Company appealed that decision, which among other things had the effect of staying the delisting pending the outcome of the appeal. On its appeal, which was presented to the Hearings Panel on July 12, 2002, the Company asked, in the alternative, that its securities remain listed on the Nasdaq National Market, or that they be accepted for listing on the Nasdaq SmallCap Market. By letter dated August 12, 2002, the Company was notified by Nasdaq that its securities would be transferred to the Nasdaq SmallCap Market, effective with the open of business, August 15, 2002.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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SIGNATURES

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

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