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, 2003

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, 6TH FLOOR, BETHESDA, MD 20817
(Address of principal executive offices)

(240) 333-6100
(Registrant's telephone number, including area code)
---------------

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. [ X ]

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

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 Swiss Exchange as of June 30, 2003 was $7,589,233.06 (1).

(1) Assumes an exchange rate of 1.34862 Swiss Francs per one U.S.
Dollar as of June 30, 2003.

As of June 15, 2004, there were 57,762,859 shares of the registrant's
common stock outstanding.
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1

E-CENTIVES, INC.
FORM 10-K

TABLE OF CONTENTS

Page
PART I
Item 1. Business................................................. 3
Item 2. Properties............................................... 12
Item 3. Legal Proceedings........................................ 12
Item 4. Submission of Matters to a Vote of Security Holders...... 13
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters...................................... 14
Item 6. Selected Financial Data.................................. 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 17
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk........................................ 39
Item 8. Financial Statements and Supplementary Data.............. 39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................... 39
Item 9A. Controls And Procedures.................................. 39
PART III
Item 10. Directors and Executive Officers of the Registrant....... 41
Item 11. Executive Compensation................................... 43
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters........... 46
Item 13. Certain Relationships and Related Transactions........... 48
Item 14. Principal Accounting Fees and Services................... 49
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.................................. 50
SIGNATURES............................................................... 51

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E-CENTIVES, INC.

PART I

ITEM 1- BUSINESS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Except for any historical information, the matters we discuss in this Annual
Report on Form 10-K concerning our company contain forward-looking statements.
Any statements in this Annual Report on 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
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Risk Factors", 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 Annual Report on 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.

AVAILABLE INFORMATION

Our Internet website address is www.e-centives.com. We make available, free
of charge, on or through our website our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these
reports, as soon as reasonably practicable after we electronically file such
material with, or furnish such material to, the Securities and Exchange
Commission.

OVERVIEW

We provide interactive direct marketing technologies and services for
marketers. We offer a suite of technologies, including several patented
components, which enable businesses to acquire and retain relationships with
their audiences. During 2003, our principal products included the Interactive
Database Marketing System, the Promotions System, the E-mail Marketing System
and advertising and e-commerce related services provided through the
ConsumerREVIEW.com division.

o Our Interactive Database Marketing System is a comprehensive solution
that offers a suite of e-marketing technologies including e-mail
marketing, online promotions and data warehousing. Our system provides
solutions for creating, targeting, publishing, managing and tracking
e-mails, coupons and promotional incentives, and track individual
consumer's responses to such activities.

o Our Promotions System enables companies to create, manage, deliver and
track promotional vehicles, such as print-at-home online coupons. The
system's printable coupons can be individually tailored with relevant
content and different incentive values based on the respective
recipients, enabling manufacturers to target coupons much more
efficiently and cost-effectively than traditional methods. The
technology can also be used to build knowledge about consumers, such as
their prior product purchases and loyalty data, and to get a more
accurate measure of the actual impact of online marketing expenditures
on sales.

o Our E-mail Marketing System enables companies to build ongoing,
personalized dialogs with their audiences through e-mail. Our system
can improve effectiveness of e-mail marketing campaigns through
segmentation and targeting and can raise response rates, enabling our
clients to boost sales, strengthen brands and build loyalty with their
customers.

o ConsumerREVIEW.com manages web communities around common product
interests. The web properties are dedicated to meeting the needs of
consumers who are researching products on the Web. We focus on creating
an online environment that fosters communication and consumer-generated
reviews of products, by providing an interface to a large database of
product information, forums, and other useful content.

Of our total net revenue of $6.1 million for the year ended December 31,
2003, one of our Interactive Database Marketing System customers, Reckitt
Benckiser PLC, contributed $2.7 million, or 45%, of our net revenue. This
customer's initial contract expired in October 2002; however, the customer
subsequently signed two annual renewal agreements, with the most recent renewal
expiring on December 31, 2004. Although each renewal agreement has been at a
lower rate than the previous agreement, loss of this customer could have a
material adverse effect on our business, financial condition, results of
operations and cash flow.

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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, we believe 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 PRODUCTS AND SERVICES

We launched our direct marketing services in November 1998 by delivering
e-centives (promotions including such items as digital coupons, sales notices,
free shipping offers, minimum purchase discounts and repeat purchase incentives)
through our PerformOne Network (previously called Promotions Network). While we
were introducing our Promotions Network between November 1998 and June 1999, we
allowed marketers to use the system at no charge. We then began generating
revenue in the third quarter of 1999. In conjunction with the acquisition of the
Commerce Division, from Inktomi Corporation in March 2001, the Commerce Engine
and Commerce Network began generating revenue in late March 2001. In July 2001,
we started producing revenue from our E-mail Marketing System. With the
acquisition of the Promotions System from BrightStreet.com in December 2001, we
began generating revenue by providing services from the Interactive Database
Marketing System. During 2002, we decided to suspend offering our Commerce
Division's products and services, as well as the offerings of our PerformOne
Network. With the acquisition of substantially all of the assets of Consumer
Review, Inc. in December 2002, we began generating revenue from advertising fees
and e-commerce transaction fees from our ConsumerREVIEW.com division.

Currently, our principal products and services include the Interactive
Database Marketing System, the Promotions System, the E-mail Marketing System
and advertising and e-commerce related services provided through our
ConsumerREVIEW.com division.

INTERACTIVE DATABASE MARKETING SYSTEM

In December 2001, we combined the Promotions System, our E-mail Marketing
System, our data warehousing system and our online reporting system, and began
offering the services of our Interactive Database Marketing System. This
technology and infrastructure, which, to date, has been primarily targeted at
consumer packaged goods companies, allows companies to establish direct consumer
relationships through a set of integrated tools that include targeted e-mail
marketing, a consumer transaction database, a data warehouse, a micro site and
survey generator and our patented coupon promotion system. This system enables
companies to acquire consumers, collect consumers' brand preference and usage
information, segment consumers within loyalty categories, communicate with
consumers via e-mail marketing, deliver coupons, track individual usage of each
coupon, as well as track and report every consumer interaction with the system.
For the years ended December 31, 2003, 2002 and 2001, we generated 53%, 67% and
1%, respectively, of our revenue from our Interactive Database Marketing System.
Approximately 86%, 93% and 100% of our aggregate Interactive Database Marketing
System revenue for the years ended December 31, 2003, 2002 and 2001,
respectively, was generated from our contract with Reckitt Benckiser PLC.

PROMOTIONS SYSTEM

Our Promotions System, which we acquired in December 2001 as part of the
acquisition of substantially all of the assets of BrightStreet.com, enables
companies to create, manage, deliver and track promotional vehicles, such as
print-at-home online coupons. Our system's printable coupons can be individually
tailored with relevant content and different incentive values based on the
respective recipients, enabling manufacturers to target coupons much more
efficiently and cost-effectively than traditional methods. In addition, our
system has high tracking capabilities, including individually coded offers that
can be cross-referenced against specific consumer profiles. Our technology can
also be used to build knowledge about consumers, such as their prior product
purchases and loyalty data, and to get a more accurate measure of the actual
impact of online marketing expenditures on sales. For the years ended December
31, 2003, 2002 and 2001, revenues from our Promotions System has been included
in the revenues generated from our Interactive Database Marketing System.

4

E-MAIL MARKETING SYSTEM

Our E-mail Marketing System allows companies to build ongoing, personalized
dialogs with their audiences by outsourcing their e-mail marketing needs to us.
It lets businesses cost-effectively conduct e-mail marketing without having to
acquire or develop their own e-mail infrastructure and manage the process. This
solution consists of list management and hosting, strategy and creative
services, e-mail delivery and management, as well as tracking and analytical
services. It is designed to help build an ongoing, personalized communication
with the client's intended audience and maximize effectiveness through
segmentation and targeting. For the years ended December 31, 2003, 2002 and 2001
we generated 3%, 5% and 2% of our revenue, respectively, from our E-mail
Marketing System.

CONSUMERREVIEW.COM

Our ConsumerREVIEW.com division is a leading source of user-generated buying
advice for outdoor sporting goods and consumer electronics. Consumers visit to
learn, interact, and buy or sell the products showcased within our network of
web communities, including sites like AudioREVIEW.com and MtbREVIEW.com. Users
find the products they are interested in, read and write reviews, participate in
discussions, compare prices, and shop online. Our ConsumerREVIEW.com division's
services primarily include advertising and e-commerce referrals. For the years
ended December 31, 2003 and 2002, we generated 44% and 3%, respectively, of our
revenue from our ConsumerREVIEW.com division. As we acquired the
ConsumerREVIEW.com division during December 2002, there was no revenue for the
year ended December 31, 2001.

PERFORMONE NETWORK

Our direct marketing system was designed to enable marketers to access a
database of consumers across the websites of our network partners and by e-mail.
Our PerformOne Network included a web-based application that enabled consumers
to register to receive promotional offers at our network partners' websites or
through our website. Our members provided demographic information and product
category interests in return for targeted offers. Our system then delivered
offers for products and services directly to the member's account or through
e-mail. PromoMail, the primary service we provided our marketers, consisted of
targeted e-mails highlighting a marketer's specific promotion. Our application
provided 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. Due to the closure of the PerformOne Network during
2002, no revenue was generated during the year ended December 31, 2003; however,
for the years ended December 31, 2002 and 2001, we generated 4% and 62%,
respectively, of our revenue from the PerformOne Network.

COMMERCE DIVISION PRODUCTS AND SERVICES

Through the acquisition of the Commerce Division in March 2001, we acquired
a system that provided product search, price comparison and merchandising
services. However, as part of our second quarter 2002 restructuring plan, we
discontinued offering our commerce products and services, the Commerce Engine
and the Commerce Network. As a result, no revenue was generated during 2003, but
for the years ended December 31, 2002 and 2001 we generated 21% and 35%,
respectively, of our total revenue from the Commerce Division.

Commerce Engine. The Commerce Engine was an application designed to handle
the challenges of bringing consumers and merchants together and
promoting transactions between them. It was a platform to collect and
organize vast amounts of electronic product information from online
merchants and publishers of comparative product information. We made
the Commerce Engine available to Internet portals and other website
customers who, in turn, provided commerce services through their sites
to end users. We provided and managed all hardware, software and
operational aspects of the Commerce Engine and the associated databases
of product libraries and purchasing locations.

Commerce Network. This system enabled merchants to distribute and promote
their products to the end users of our Commerce Engine customers. It
collected product data from merchants, normalized it into appropriate
categories, indexed it and made it available for search through our
Commerce Engine customers.

INFORMATION ON OUR OPERATING SEGMENTS

Basis of Reportable Segments

In accordance with FAS 131, Disclosures about Segments of an Enterprise and
Related Information, starting in 2002, with the acquisition of substantially all
of the assets of Consumer Review, Inc., we report our segment information in two
reportable segments: E-centives and ConsumerREVIEW.com.

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o E-centives includes the services of the Interactive Database Marketing
System, the Promotions System and the E-mail Marketing System. For
2002, E-centives also included the PerformOne Network, the Commerce
Engine and the Commerce Network, all of which we discontinued offering
during 2002.

o ConsumerREVIEW.com sells advertising and e-commerce services that are
provided through a network of web communities.

FAS 131 requires an enterprise to report segment information in the same way
that management internally organizes its business for assessing performance and
making decisions regarding allocation of resources.

The chief operating decision maker evaluates the performance of the
Operating Segments and allocates resources based on operating profit or loss and
cash generated from operations. The accounting policies of the reportable
segments are the same as those described in Note 2 of the Notes to Consolidated
Financial Statements, which notes begin on page F-7.

Segment Financial Information

For financial information regarding our reportable segments, including
operating revenue, operating profit/loss, identifiable assets and other
information by segment, see Note 13 of the Notes to Consolidated Financial
Statements, which notes begin on page F-7.

OUR BACKLOG

We include in our backlog only those customer orders for which we have a
signed agreement with a defined term for the customer relationship. At December
31, 2003, the quantity of backlog orders was not significant, because the
majority of our agreements have a short period of time between the signing of
the agreement and the providing of the service.

Our backlog was approximately $1.4 million and $2.4 million at December 31,
2003 and 2002, respectively. Backorders for both years included contracts for
sales of our Interactive Database Marketing System and our E-mail Marketing
System. The decrease is primarily due to the renewal of a significant
Interactive Database Marketing System agreement at a lower rate than the
previous agreement, as well as a reduction in the number of agreements with
defined terms.

ACQUISITION

On December 4, 2002, we acquired substantially all of Consumer Review Inc.'s
assets and certain of its liabilities through an Asset Purchase Agreement. The
cost of the acquisition was approximately $2.6 million, consisting of 400,000
shares of Series B convertible preferred stock valued at approximately $2.1
million, $290,000 in cash and about $216,000 in acquisition costs. At closing,
the Series B convertible preferred stock was placed into escrow. Upon the one
year anniversary of the closing date, the conversion rate for each share of the
Series B convertible preferred stock was determined based upon the achievement
of contractually defined revenue during the calculation period and was adjusted
pursuant to a defined schedule. Based upon the revenue generated by our
ConsumerREVIEW.com division during the calculation period, the conversion rate
for each share of the Series B convertible preferred stock will be adjusted to 8
to 1. The stock consideration will then be disbursed in accordance with the
terms of the Escrow Agreement.

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. We engaged an
independent third-party appraiser to perform a valuation of the Series B
convertible preferred stock and intangible assets associated with the
acquisition.

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 2003, we maintained sales personnel in the
Washington, D.C. and San Francisco metropolitan areas, New York, Connecticut and
Florida.

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 on-line marketing 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.

6

We primarily market our products and services through conferences and
tradeshows.

TECHNOLOGY

We monitor and test our system and software, and from time to time have
identified minor defects. We 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 new
software may result in greater than expected expense and may cause disruptions
to our business. We spent approximately $2.5 million, $4.1 million, and $7.9
million in 2003, 2002 and 2001, respectively, on research and development
activities.

CONSUMERREVIEW.COM

To meet the demands of its network of growing web communities and product
research sites, Consumer Review, Inc. developed a proprietary web architecture
based on Microsoft .NET(R) enterprise server technology. We acquired this
technology when we purchased substantially all the assets of Consumer Review,
Inc. in December 2002. The system was built for scalability, reliability, and
interoperability with web-enabled enterprise partners. It was developed for
simplified manageability, using open web standards, such as XML. The web
architecture was envisioned in 2000 and developed and launched in 2001.

Functions:
o Provides product research and drives purchasing decisions
based on the experience of other consumers.
o Creates enthusiast communities with communication on message
boards, marketplaces, and photo galleries.
o Delivers advertising, merchandising, content syndication,
e-commerce partnerships, and other valuable services.

Components:
o User profiling - registration and login for various site
services.
o Workflow, content, account, service and syndication
management.
o Network operations on an array of load balanced, dynamic
servers.

PROMOTIONS SYSTEM

This system enables companies to create, manage, deliver and track
promotional vehicles, such as print-at-home online coupons. This technology was
built to meet the stringent requirements of consumer packaged goods
manufacturers, including standardized bar codes and integration with existing
coupon clearinghouses, but has benefits that cross many other industries. Our
system's printable coupons can be individually tailored with relevant content
and different incentive values based on the respective recipients, enabling
manufacturers to target coupons much more efficiently and cost-effectively than
traditional methods. In addition, our system has high tracking capabilities,
including individually coded offers that can be cross-referenced against
specific consumer profiles. Our technology can also be used to build knowledge
about consumers, such as their prior product purchases and loyalty data, and to
get a more accurate measure of the actual impact of marketing expenditures on
sales. The promotions system consists of the following:

o database servers for storing promotions, subscribers, content and
promotion activity data;
o data collection and transformation servers for importing and
exporting both subscriber and promotion data;
o application servers for promotion content management and
promotions serving;
o web servers to support campaign management, subscription
management, and promotion activity tracking; and
o client-side plug-in software that manages the subscribers'
identification and printable coupon assembly and printing.

All promotions are built and managed using our proprietary web-based Maestro
campaign management software, which was designed and built to be used either by
our account management team or by our customers directly, based upon the service
level model selected by our customers. Once promotions are launched, our
application servers, which are clustered for load balancing and fault tolerance,
serve the promotions to the users for viewing and printing. This architecture
allows us to scale the system, simply by adding hardware as required.

7

All of our customers' subscribers and content for promotions are stored in
relational databases. These databases are replicated to a stand-by database for
fail-over purposes, and all data is regularly copied to tape for disaster
recovery purposes. We host our promotions system 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.

E-MAIL MARKETING SYSTEM

We have developed a proprietary e-mail marketing system that is built to
scale with our customers. This system enables companies to communicate and build
relationships with their audience via e-mail. This correspondence can be single
messages or a series of messages that can be used to form a conversation and
facilitate building relationships. 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, subscription
management, viral marketing and activity tracking; 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 of the e-mail campaigns. This
database is constantly being replicated to a stand-by database for fail over
purposes and all data is 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 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. After 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 reporting.

All e-mail campaigns are built and managed using our proprietary e-mail
Content Manager, which was built to be used both by 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.

DATA WAREHOUSING AND REPORTING SYSTEM

We have developed a data warehousing and reporting system that was designed
to scale with our needs. This system enables us to collect user level activity
data from our various marketing applications, including our E-mail Marketing
System and our Promotions System, and provide online reporting and analysis.
This system provides our customers with the results of their marketing
campaigns, and enables optimizing decision-making to improve their strategies
and tactics. The data warehousing and reporting system consists of the
following:

o database servers for storing subscribers, marketing campaigns and
activity data;
o data collection and transformation servers for collecting
subscriber activity data and importing subscribers;
o reporting servers for aggregating subscriber level data into
standard and custom reports;
o web servers for online report delivery; and
o client-side plug-in software for browsers that manages the display
of reports in both numerical and graphical formats with the
ability to export data into various formats, such as Excel and
HTML, for further distribution and analysis.

All of our customers' data are stored in a relational database. This
database is constantly being replicated to a stand-by database for fail-over
purposes and all data is regularly copied to tape for disaster recovery
purposes. Our reporting servers are fed aggregated data and are load balanced
and fault tolerant. Our architecture allows us to scale the system, simply by
adding hardware to the required components.

COMPETITION

We believe that the market for our solutions to be rapidly evolving and

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intensely competitive. As a provider of online direct-marketing technologies and
services, we generally compete with other marketing programs for a portion of a
marketer's total marketing budget. 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.

Current or potential competitors include vendors that provide:
o database marketing solutions;
o e-mail marketing solutions;
o rewards programs; and
o coupon and promotion programs.

We believe the market for our ConsumerREVIEW.com division to also be rapidly
evolving and competitive. In this area, some of our current and potential
competitors include:

o other providers of product reviews
o publishers of content and information on special interest product
categories
o shopping comparison or price search web sites
o providers of community forums, message boards, and photo galleries

The failure to compete successfully would impair our ability to generate
revenues and become profitable. Our ability to compete depends on many factors.

Factors over which we have some level of control include:

o ability to enter into relationships with 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;
o ability of marketers to provide simple, cost-effective and
reliable promotions; and
o market economy impacts on our clients' marketing budgets.

We expect competition to intensify as more competitors enter our markets;
however, as referenced below, one of our most important assets is our
intellectual property, which we believe will thwart competitive pressures for
certain of our offerings. 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.

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, results of operations
and cash flow could be seriously harmed.

We have developed and acquired proprietary technology, including database
and interface servers, offer creation and presentation software, and software to
enable communication between marketers' systems and our system. All of our
marketer clients who desire to use our software enter into a license agreement
with us. In addition, we generally 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.

9

We have several issued U.S. patents and a number of pending U.S. and foreign
patent applications. Many of 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 several pending foreign patent applications. It is possible that no
patents will be issued from the currently pending U.S. or foreign patent
applications. It is also possible that our patents or any potential future
patents may be found not infringed, 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 or prevent our ability to do business. Some of our
acquired patent rights are subject to reversion if certain payments are not made
(see below regarding the acquisition of substantially all of BrightStreet.com's
assets including patent rights for further details).

We have registered the trademarks E-centives, PromoMail, PromoMail
Spotlight, PromoMail Event, and PromoCast in the U.S, and have registered the
trademark E-centives in the European Union and Switzerland. We have filed intent
to use U.S. trademark applications for BrightStreet and BrightStreet.com, both
of which have been allowed by the U.S. Trademark Office. Once we have filed
proof of use of these trademarks, the registrations will issue. We have also
filed two applications for registration of the trademark MAESTRO, which are both
currently pending. One of the applications was opposed by MasterCard
International. We have negotiated a settlement with MasterCard International of
the opposition proceeding it filed against one of these MAESTRO applications and
a potential opposition it could file against the other application. In
accordance with the settlement terms, we have filed proposed amendments to the
description of services in each application and are waiting for the U.S.
Trademark Office to respond to the proposed amendments. Through our acquisition
of substantially all of the assets of Consumer Review, Inc., we obtained several
additional registered U.S. trademarks, including but not limited to Car Review,
MTB Review, PC Photo Review, Golf Review, Garden Review, Computing Review,
Videogame Review and Photography Review. We currently own several additional
U.S. registered trademarks related to the ConsumerREVIEW.com business line, and
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,
BrightStreet.com, and ConsumerREVIEW.com, as well as several other
review-related domains. 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.

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, in 2000, we settled litigation
with one of our competitors regarding our intellectual property (see Item 3 -
"Legal Proceedings" for further details). 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, require us to
enter into royalty or licensing agreements or subject us to an injunction. These
agreements, if required, may not be available on terms acceptable to us or at
all, which could materially adversely affect our business, financial condition,
results of operations and cash flow. We have filed a patent infringement action
against Coupons, Inc., pending in the United States District Court for District
of Maryland and Consumer Networks, LLC in the United States District Court for
the Southern District of California. Other patent infringement enforcement
actions may be necessary to protect our intellectual property. See Item 3 -
"Legal Proceedings" for further details.

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, results of operations and
cash flow could be materially adversely affected.

10

EMPLOYEES

As of December 31, 2003, we had a total of 50 employees, all of whom were
based in the United States. Of these, 12 were sales and marketing, 13 were
product development, 16 were general and administrative personnel and 9 were
involved in providing our services. 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 our employee headcount at
December 31 for each of the years below:

1997 16
1998 31
1999 74
2000 110
2001 153
2002 85
2003 50

RECENT DEVELOPMENTS

(a) Credit Facility

During March 2004, the credit facility available to us under Friedli
Corporate Finance's and InVenture, Inc.'s initial commitment was increased from
$6 million to $12 million. See below and Item 5 - "Market For Registrant's
Common Stock And Related Stockholder Matters - Recent Sale/Issuance of
Unregistered Securities" for further details.

(b) Convertible Promissory Notes

As part of our syndication process, from January 2004 through June 2004, we
issued six convertible promissory notes with principal amounts of $100,000,
$400,000, $200,000, $600,000, $1,000,000 and $1,000,000. The terms of the notes
include, among other things:

o an 8% interest rate;
o a maturity date three years from the date of issuance;
o a conversion feature, which provides that under certain circumstances
that the note will automatically convert to our common stock;
o a one-time final payment charge of 10% of the principal for each year
that the principal is not paid on or before each annual anniversary of
the date the note was issued (with a maximum of 30%); and
o a security interest in substantially all of our assets.

(c) Options

From January 2004 through June 2004, 99,250 options that were previously
granted to employees were exercised.

(d) Late Filings and Investigation

On March 31, 2004, we announced that we would require additional time to
finalize and file our Annual Report on Form 10-k for the fiscal year ended
December 31, 2003 ("Annual Report"). In a Form 8-K filed with the SEC on May 13,
2004, we disclosed that at a May 12, 2004 semi-annual New Venturetec investor
conference in Zurich, Switzerland, we had announced that we would require
additional time to finalize and file the Annual Report and our Quarterly Report
on Form 10-Q for the quarter ended March 31, 2004 ("Quarterly Report").

In our May 13, 2004 Form 8-K, we disclosed that, in connection with the
finalizing of our Annual Report, we had encountered a recent non-financial
representation by a senior Company official that we deemed to be inaccurate. Our
Board of Directors determined that it was appropriate to undertake an
independent investigation to review this and other matters. The Board of
Directors established a separate Committee of the Board to lead the
investigation, such Committee consisting of Sean Deson (a non-management
director) serving as Chairman of the Committee, and Messrs. Akhavan and Friedli.
The Committee retained an independent law firm to conduct the investigation. The
independent investigation has now been completed. For a discussion of the
results, see Item 9A - "Controls and Procedures."

As of the date of this filing, we have not filed the Quarterly Report. We
expect to file the Quarterly Report after filing this Annual Report.

11

(E) ACQUISITION

Pursuant to an Asset Purchase Agreement dated as of june 25, 2004, we
acquired substantially all of the assets and certain of the liabilities of
Collabrys, Inc. ("Collabrys"). Collabrys is a provider of interactive marketing
technologies and services to enable customer acquisition and retention. Clients
include well-known companies in the Consumer Products, Healthcare, and Financial
Services industries. Consideration consists of a $15,000 cash payment and a 7%
royalty payment on revenue, as defined in the purchase agreement. We believe
that the Collabrys acquisition will enable us to both grow our client base and
penetrate into new vertical industries, as well as add new products and services
to our existing portfolio of solutions.

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
leased office space in Bethesda, Maryland, a suburb of Washington, D.C. This
lease, which was renegotiated during 2002, is for approximately 23,500 square
feet and is for a term of five years, expiring in September 2005. Our current
monthly rent payment under this lease is approximately $72,000, with increases
of 3% per year. In March 2002, we subleased approximately 10,000 square feet of
the office space, with a monthly base rent of approximately $22,000 that
increases 4% annually. This sublease commenced in March 2002 and expires in
September 2005. In addition, in February 2004, we signed another sublease
agreement with a monthly base rent of approximately $2,500 that commenced in
February 2004 and expires in September 2005.

During 2003, we also maintained an office of approximately 11,000 square
feet in Foster City, California. The monthly rent payments were approximately
$14,000 through November 2003 and increased to approximately $20,000 in December
2003. This lease expires on November 2004.

Our ConsumerREVIEW.com operating segment is primarily located in the Foster
City, California office, while the E-centives operating segment is located in
both of our offices.

ITEM 3 - LEGAL PROCEEDINGS

On or about September 24, 2003, Trifocal, LLC ("Trifocal") filed suit
against us in California Superior Court, County of Santa Clara, alleging (inter
alia) breach of contract and intentional and negligent misrepresentation.
Trifocal initially claimed approximately $126,819 in specified money damages, as
well as additional unspecified money damages, interest, punitive damages and
attorneys' fees and costs. Trifocal explicitly stated that it intended to amend
its complaint with respect to damages. In December 2003, we removed the case to
the United States District Court for the Northern District of California (San
Jose Division), denied any liability, and filed counterclaims seeking money
damages in excess of $1.8 million for Trifocal's breach of contract, breach of
the implied covenant of good faith and fair dealing, intentional interference
with contract, negligent interference with contract, and breach of fiduciary
duty. Pursuant to local court rules regarding alternative dispute resolution,
the parties are participating in mediation. The initial mediation was held on
June 28, 2004.

On or about November 14, 2002, we filed a joint patent infringement action
with Black Diamond CCT Holding, LLC against Coupons, Inc. in the Federal
District Court of Maryland. In this suit, we alleged infringement of two U.S.
patents relating to online coupons, rights of which we acquired from
BrightStreet.com. Coupons, Inc. has answered our complaint by denying
infringement and has raised affirmative defenses including non-infringement,
invalidity, unenforceability, laches and/or estoppels, defenses under 35 U.S.C.
section 273 and other defenses. No counter claims were filed against us by
Coupons, Inc. The case has been proceeding through discovery, although no trial
date has yet been set. We and Black Diamond have filed a motion to add Consumer
Networks, LLC and News America Incorporated as defendants based on their
partnerships with Coupons, Inc. We also have filed a motion to add another one
of our patents that relates to infringement by Coupons, Inc.'s email services.
The court has not yet ruled on these motions.

On January 21, 2004, we and Black Diamond CCT Holding, LLC filed (but have
not yet served) a patent infringement action against Consumer Networks, LLC in
California. In this suit, we alleged infringement of two U.S. patents relating
to online coupons, rights of which we acquired from BrightStreet.com, Inc. If
the Maryland court grants the motion to add Consumer Networks, LLC to that
action, the California suit will not be separately pursued. To date, no answer
has been filed by Consumer Networks, LLC.

12

On or about October 10, 2002, we received a demand letter from Orrick,
Herrington & Sutcliffe, LLP, ("Orrick") a law firm representing Bowne of New
York City ("Bowne") demanding payment of $91,527 for financial printing services
allegedly rendered by Bowne. The letter also indicated that if the matter was
not amicably resolved, then Bowne would commence legal proceedings. The parties
have now settled this dispute and entered into a formal settlement agreement
whereby we had agreed to pay $71,734 in equal installments over six months
commencing on or about February 4, 2003. Our records reflect two payments remain
outstanding. Orrick has indicated to us that it believes that we are in default
of the settlement agreement.

There were no other material additions to, or changes in status of, any
ongoing, threatened or pending legal proceedings during the fiscal year ended
December 31, 2003, including no changes in the status of the settlement with
coolsavings.com, Inc. ("coolsavings). The terms of the settlement with
coolsavings provide for a cross-license between coolsavings and us 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:

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 during 2001, was due if, within
one year from the date of entry of the Stipulated Order of
Dismissal filed on or about March 3, 2000, 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. However, a dispute has
arisen between the parties regarding whether this portion of the
license fee is actually due, despite Catalina Marketing
Corporation not prevailing in its motion. This dispute is based in
part on the fact that we may be entitled to a license under the
coolsavings' patent at issue as a result of our acquisition of the
assets of BrightStreet.com, which acquisition included the
settlement of infringement litigation between coolsavings and
BrightStreet.com regarding the same coolsavings patent at issue in
our settled litigation. Coolsavings previously filed a lawsuit to
collect such $250,000 amount, but we understand that it later
voluntarily dismissed the lawsuit without prejudice.

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, in the opinion of management, the
possibility of us having to make this payment continues to remain
remote.

Depending on the amount and timing, an unfavorable resolution of some or all
of these matters could materially adversely affect our business, financial
condition, results of operations and cash flow in a particular period.

In addition, 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

During the quarter ended December 31, 2003, there were no matters submitted
to a vote of security holders.

13

PART II

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

MARKET INFORMATION

Since our initial public offering on October 3, 2000, our common stock has
traded on 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 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.

PERIOD SWISS FRANCS US DOLLARS EXCHANGE RATES
- --------------------------------- -------------------- ------------------- ---------------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
2002
------

Quarter ended March 31, 2002 CHF 1.14 CHF 1.00 $0.68 $0.60 0.59531 0.59577
Quarter ended June 30, 2002 CHF 1.14 CHF 0.38 $0.68 $0.25 0.59347 0.66796
Quarter ended September 30, 2002 CHF 0.46 CHF 0.22 $0.32 $0.15 0.69032 0.66538
Quarter ended December 31, 2002 CHF 1.58 CHF 0.19 $1.07 $0.13 0.67912 0.67195

2003
------
Quarter ended March 31, 2003 CHF 0.85 CHF 0.30 $0.61 $0.22 0.71979 0.72296
Quarter ended June 30, 2003 CHF 0.64 CHF 0.32 $0.48 $0.23 0.75470 0.72443
Quarter ended September 30, 2003 CHF 0.98 CHF 0.46 $0.71 $0.34 0.72230 0.74010
Quarter ended December 31, 2003 CHF 1.04 CHF 0.60 $0.79 $0.48 0.76080 0.80100

HOLDERS

As of February 17, 2004, the number of holders of our common stock was in
excess of 85 record and beneficial owners.

DIVIDENDS

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 Item 7 -- "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Liquidity and Capital Resources" for
further details.

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.

RECENT SALE/ISSUANCE OF UNREGISTERED SECURITIES

Options

During the year ended December 31, 2003, we granted options to purchase a
total of 8,594,897 shares of common stock under our stock incentive plan to
certain of our employees and directors. During that period, 314,325 options were
exercised and 689,150 options were cancelled due to the forfeiture of options
resulting from employees leaving the company and unearned performance based
options.

Convertible Promissory Notes

In March 2003, we executed convertible promissory notes in favor of Friedli
Corporate Finance, financial advisor to us, and InVenture, Inc., one of our
stockholders, for an aggregate sum of up to $6 million. The notes allowed us to
draw down against the available principal of up to $6 million at any time and in
any amount during the first two years of the notes. The terms of each of the
notes include, among other things:

o an 8% interest rate;

o a maturity date three years from the date of issuance;

o a conversion feature, which provides that under certain circumstances
each note will automatically convert to our common stock;

14

o a one-time final payment charge of 10% of the principal for each year
that the principal is not paid on or before each annual anniversary of
the date the notes were issued (with a maximum of 30%); and

o a security interest in substantially all of our assets.

Subsequent to the issuance of the promissory notes in March 2003, we,
Friedli Corporate Finance and InVenture, Inc. agreed to assemble a syndicate of
third parties to whom we would issue convertible promissory notes on terms
similar to the March 2003 $6 million convertible promissory notes that we issued
to Friedli Corporate Finance and InVenture, Inc. The aggregate dollar amount of
the convertible promissory notes that we issue to third parties through
syndication will reduce, on a dollar-for-dollar basis, the $6 million
convertible promissory notes of Friedli Corporate Finance and InVenture, Inc.
and the balance, if any, will continue to be available to us under Friedli
Corporate Finance's and InVenture, Inc.'s initial $6 million commitment. During
2003, we received an aggregate of $3,450,000 in connection with the issuance of
nine convertible promissory notes and through June 28, 2004 we received
$3,300,000 in connection with the issuance of six convertible promissory notes.
The terms of each of the promissory notes are substantially similar to the
promissory notes issued in March 2003, as noted above. We intend to use the
funds for working capital and general corporate purposes. During March 2004, the
credit facility available to us under Friedli Corporate Finance's and InVenture,
Inc.'s initial commitment was increased from $6 million to $12 million pursuant
to amended notes. The general terms of the amended notes remain the same as the
terms of the $6 million notes described above.

Warrants

On October 8, 2002, our Board of Directors approved the issuance of
6,000,000 warrants to four investors as consideration for a $20 million
financing commitment, which was memorialized in a letter to us, by Friedli
Corporate Finance, dated September 12, 2002. In the commitment letter, Friedli
Corporate Finance agreed to provide us with the $20 million financing
commitment. The warrants were issued, as directed by Friedli Corporate Finance,
to the four investors in connection with Friedli Corporate Finance agreeing to
provide the financing commitment. The warrants entitle each investor to purchase
one share of our common stock, $0.01 par value per share, for an initial
exercise price of Swiss francs (CHF) 0.19 per share during the exercise period.
Pursuant to an amendment to the warrants, the exercise period began three months
from January 6, 2003 and ends on April 7, 2008. Two of the warrant holder
investors, Peter Friedli and Venturetec, are current stockholders. Pursuant to
the terms of the private placement, Peter Friedli and Venturetec each received
1,000,000 warrants. As disclosed in our filings under the Securities Exchange
Act of 1934, Peter Friedli beneficially owns 3% of New Venturetec AG, the parent
of Venturetec, and is the President of both New Venturetec AG and Venturetec.
Mr. Friedli has also been one of our directors since 1996. In September 2003,
390,000 of the 1,000,000 warrants issued to Peter Friedli were transferred to
twelve other unrelated entities.

For his continued support of the business and his assistance with
fundraising, on December 8, 2003, Peter Friedli was issued 345,000 warrants with
an exercise price of $0.50 and an expiration date of December 8, 2007.

Series B Convertible Preferred Stock

In connection with our purchase of substantially all of the assets of
Consumer Review, Inc., we issued into escrow 400,000 shares of our Series B
convertible preferred stock as part of the consideration for the acquisition.
Following the one year anniversary of the closing date, the conversion rate for
each share of the Series B convertible preferred stock was determined to be 8 to
1, based upon the achievement of contractually defined revenue during the
calculation period. It is our current intention to register the Series B
convertible preferred stock as soon as reasonably practicable, although in no
event later than the end of the third quarter 2004.

Venturetec and Pine Inc. (an entity controlled by Peter Friedli, one of our
stockholders and directors) were debentureholders in Consumer Review, Inc;
therefore, as a result of such acquisition Venturetec and Pine received 240,315
shares and 4,500 shares, respectively, of our Series B convertible preferred
stock. Mr. Friedli serves as the investment advisor to both Venturetec and Pine.

Series A Convertible Preferred Stock

On October 19, 2001, we closed a rights offering of common stock 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 the number of shares of common stock purchased by such
subscriber in the rights offering, a pro-rata portion of 2,000,000 shares of the
our Series A convertible preferred stock (convertible on a 10-for-1 basis into
20,000,000 shares of common stock under certain circumstances). During 2003, all
of the shares of the Series A convertible preferred stock that had not been
previously voluntarily converted were automatically converted into shares of our
common stock. Such shares of common stock have been listed on the SWX Swiss
Exchange since February 21, 2002.

15

ITEM 6 - SELECTED FINANCIAL INFORMATION

SELECTED CONSOLIDATED FINANCIAL DATA
(in U.S. Dollars in thousands, except share data)

You should read the selected consolidated financial data shown below
together with our consolidated financial statements and related notes and with
Item 7 - "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, 2003, 2002 and 2001 and the consolidated balance sheet
data as of December 31, 2003 and 2002, 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, 2000 and 1999 and the balance
sheet data as of December 31, 2001, 2000 and 1999 have been derived from our
audited financial statements not included in this annual report. The results are
not necessarily indicative of the results that may be expected in future periods
and are not comparable between prior periods as a result of business
combinations consummated and the discontinuation of certain products and
services in applicable years. Results of acquired businesses are included for
the period subsequent to their respective dates of acquisition.

Year Ended December 31,
2003 2002 2001 2000 1999
----------------------------------------------------------

Consolidated Statement of Operations Data:

Revenue $ 6,059 $ 7,221 $ 5,054 $10,230 $ 740
Cost of revenue 2,866 4,416 8,395 2,208 1,028
Product development,
exclusive of stock-based compensation 2,519 4,069 7,933 2,873 2,427
General and administrative,
exclusive of stock-based compensation 7,632 10,763 12,592 8,765 4,083
Sales and marketing,
exclusive of stock-based compensation 2,312 3,886 9,997 19,006 7,889
Network partner fees - 2 986 6,354 730
Restructuring and impairment charge - 1,128 9,876 - -
Stock-based compensation:
Product development 156 60 201 822 283
General and administrative 2,203 106 362 333 297
Sales and marketing 248 193 300 558 475
----------------------------------------------------------
Loss from operations (11,877) (17,402) (45,588) (30,689) (16,472)
Interest expense (479) (58) (4) - -
Interest income, net 11 296 608 694 268
Other income 3 - - 50 34
----------------------------------------------------------
Loss before income taxes (12,342) (17,164) (44,984) (29,945) (16,170)
Income taxes - 19 (19) - -
----------------------------------------------------------
Net loss (12,342) (17,145) (45,003) (29,945) (16,170)
Preferred stock dividend requirements
and accretion of convertible
redeemable preferred stock - - - (552) (383)
----------------------------------------------------------
Net loss applicable to common shareholders $(12,342) $(17,145) $(45,003) $ (30,497) $ (16,553)
==========================================================

Basic and diluted loss per common share $ (0.29) $ (0.46) $ (2.68) $ (4.09) $ (3.40)
Shares used to compute basic and diluted
net loss per common share 42,521,083 37,349,270 16,810,366 7,460,272 4,869,601

2003 2002 2001 2000 1999
----------------------------------------------------------
Consolidated Balance Sheet Data:
Cash and cash equivalents 285 2,317 8,902 27,062 427
Working capital (2,671) 1,039 2,177 26,094 872
Total assets 5,833 12,691 27,829 36,377 5,490
Deferred revenue 654 1,096 2,524 904 791
Long term obligations 3,606 246 7,369 - 2,000
Stockholders' equity (2,437) 7,105 10,533 30,834 995

16

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 consolidated
financial statements elsewhere in this Annual Report on Form 10-K beginning on
page F-1. 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, as well as
commerce capabilities and solutions for companies across a range of industries.
Businesses rely on our broad range of solutions to acquire and retain customers.
With our proprietary technology, we provide acquisition and retention solutions
for companies that do business with millions of Internet users every day. During
2003, our principal products included the Interactive Database Marketing System,
the Promotions System, the E-mail Marketing System and advertising and
e-commerce related services provided through the ConsumerREVIEW.com division.

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 (promotions including such items as digital coupons, sales notices,
free shipping offers, minimum purchase discounts and repeat purchase incentives)
through our Promotions Network (subsequently called PerformOne Network)
offerings. 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 through
our Interactive Database Marketing System. During 2002 we suspended offerings of
the Commerce Network, the Commerce Engine and the PerformOne Network. With the
acquisition of substantially all of the assets of Consumer Review, Inc. in
December 2002, we began providing additional advertising and e-commerce services
from the ConsumerREVIEW.com division.

Our E-mail Marketing System, which we began offering in August 2001, allows
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
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.

On December 3, 2001, we entered into an Asset Purchase Agreement (the
"Agreement") with BrightStreet.com, Inc. ("BrightStreet.com") whereby we
acquired substantially all of BrightStreet.com's assets and certain of its
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 $369,000 in acquisition costs. 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

17

assign to us all rights, title and interest in and to all the issued and pending
BrightStreet.com patents (collectively, the "Patents"), subject to certain
pre-existing rights granted by BrightStreet.com to third parties ("Pre-existing
Rights"), provided we make a certain payment to BrightStreet.com by December 3,
2005 (the "Payment"). If we make such Payment by that date, we shall own all
rights title and interest in and to the Patents, subject to the Pre-existing
Rights. Until such Payment is made, we have, subject to the Pre-existing Rights,
an exclusive, worldwide, irrevocable, perpetual, transferable, and
sub-licensable right and license under the Patents, including the rights to
control prosecution of the Patents and Patent applications and the right to sue
for the infringement of the Patents. Until we take formal 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 Payment by December 3, 2005, we
shall retain a license to the Patents, but the license shall convert to a
non-exclusive license, and other rights to the Patents and Patent applications
shall revert to BrightStreet.com or its designee. In exchange for the rights
granted under the Assignment, beginning December 2002, we have been obligated to
pay BrightStreet.com 10% 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 Payment
will be deemed to have been made. Additionally, we have the right, at any time
prior to December 3, 2005, to satisfy the Payment by paying to BrightStreet.com
the difference between the $4,000,000 and the total compensation already paid.

With the acquisition of substantially all of BrightStreet.com's assets, 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.

On December 4, 2002, we acquired substantially all of Consumer Review,
Inc.'s assets and certain of its liabilities through an Asset Purchase
Agreement. The cost of the acquisition was approximately $2.6 million,
consisting of 400,000 shares of Series B convertible preferred stock valued at
approximately $2.1 million, $290,000 in cash and about $216,000 in acquisition
costs. At closing the Series B convertible preferred stock was placed into
escrow. Following the one year anniversary of the closing date, the conversion
rate for each share of the Series B convertible preferred stock was to be
determined based upon the achievement of contractually defined revenue during
the calculation period and was to be accordingly adjusted. Based upon the
revenue generated by our ConsumerREVIEW.com division during the calculation
period, the conversion rate for each share of the Series B convertible preferred
stock will be adjusted to 8 to 1. The stock consideration will then be disbursed
in accordance with the terms of the Escrow Agreement.

ConsumerREVIEW.com manages web communities around common product interests.
The web properties are dedicated to meeting the needs of consumers who are
researching products on the web. It provides an interface to a large database of
product information, forums, and other useful content. Consumers visit to learn,
interact, and buy or sell the products showcased within our network of web
communities, including sites like AudioREVIEW.com and MtbREVIEW.com. Users find
the products they are interested in, read and write reviews, participate in
discussions, compare prices, and shop online. ConsumerREVIEW.com business
services primarily include advertising and e-commerce referrals.

To date we have not been profitable, incurring net losses of $12.3 million,
$17.1 million and $45.0 million for the years ended December 31, 2003, 2002 and
2001, respectively. We have undertaken a series of cost-cutting measures to
preserve cash and we continue to examine ways to manage our human and capital
resources more efficiently. In addition to the restructuring plans noted below,
we have undertaken efforts to reduce marketing and general overhead expenses,
and continue to look prudently at all expenditures in order to reduce our
ongoing operating costs.

o In 2001, we implemented 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. As a result, we recorded
restructuring/impairment charges of $9.9 million to reflect these
actions. This charge consisted of costs related to the
consolidation of excess facilities in our Bethesda, Maryland and
Redwood Shores, California locations, severance and other employee
benefit costs related to the termination of 63 employees, as well
as a revaluation of the intangible assets associated with the
Commerce Division.

o In 2002 we recorded a net restructuring/impairment charge of $1.1
million. Approximately $1.3 million of the charge occurred during
the second quarter of 2002, in association with the termination of

18

our lease for the Redwood Shores facility and the closure of our
Commerce Division. The charge related to the Redwood Shores
facility was the net effect of the costs associated with

terminating the lease and the reversal of the remaining 2001
accrued restructuring/impairment balance related to this facility.
The Commerce Division related charge consisted of severance and
other employee benefit costs for the termination of 18 employees,
the cost of closing the operations of the United Kingdom
subsidiary, the disposal and write-down of related tangible and
intangible assets, as well as other costs associated with the
closure of the Commerce Division. During the last two quarters of
2002, we recorded a net restructuring/impairment credit of
approximately $181,000. This was the result of a $359,000 credit
related to the revised plan for the Bethesda facility, which was
partially offset by the costs of scaling back the PerformOne
Network and an increase in the reserve that was established for
the closure of the Commerce Division. The revised plan for the
Bethesda office was due to the execution of a partial lease
termination for one-half of the office space in this facility. As
a result, we reversed the remaining accrued
restructuring/impairment balance that was established in 2001 and
set up a new reserve for the costs associated with the new
agreement. The costs connected with scaling back the PerformOne
Network included severance and other employee benefits for the
termination of 19 employees.

CRITICAL ACCOUNTING POLICIES

E-centives consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. For a
comprehensive discussion of our accounting policies, see Note 2 of the Notes to
the Consolidated Financial Statements, which notes begin on page F-7.

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, intangible
assets, and investments, depreciation and amortization, goodwill, 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.

Our critical accounting policies are as follows:

(a) Revenue Recognition

Revenue is generated by providing promotions marketing services,
e-mail marketing services, advertising services and various other
consulting services, as well as licensing our software products. Our
current products and services principally include the Interactive
Database Marketing System, the Promotions System, the E-mail Marketing
System, and advertising and e-commerce services provided through
ConsumerREVIEW.com. Although we reduced the offerings of the PerformOne
Network and eliminated the Commerce Engine and the Commerce Network,
these systems contributed revenue into the third quarter of 2002.

For the year ended December 31, 2003, one of our Interactive
Database Marketing System customers, Reckitt Benckiser PLC, contributed
$2.7 million, or 45% of revenue. This customer's original agreement
expired in October 2002 and the customer subsequently entered into two
renewal agreements, with the most recent one expiring on December 31,
2004; however, each renewal agreement has been at a lower total value
than the previous agreement based on fewer services ordered. This
customer also represented approximately $874,000 of the $1,583,000 net
accounts receivable balance as of December 31, 2003. We do not believe
there is a significant risk of uncollectibility due to the customer's
payment history and credit-worthiness.

Interactive Database Marketing System: For the years ended December 31,
2003, 2002 and 2001, the Interactive Database Marketing System
represented 53%, 67% and 1%, respectively, of such year's revenue.
Revenue is generated by charging fees for system licensing, data
hosting, site hosting, database management, account management,
strategy and creative services, e-mail delivery and management
services, as well as tracking and analytical services. Revenue
related to licensing fees is recognized ratably over the license
period, one-time service fees for setting up the customer are
recognized ratably over the expected term of the customer
relationship and all other revenue is recognized when the service
is provided, assuming collection is reasonably assured. For

19

agreements that also include a performance-based incentive fee
component that is not finalized until the end of a period of time
specified in the agreement, we recognize the amount that would be
due under the formula at interim reporting dates as if the
contract was terminated at that date. This policy does not involve
a consideration of future performance, but does give rise to the
possibility that fees earned by exceeding performance targets
early in the measurement period may be reversed due to missing
performance targets later in the measurement period. Our only
client with a performance-based incentive fee contributed
approximately $96,000 and $1,064,000, respectively, in such
revenue for the years ended December 31, 2003 and 2002, from the
original contract that expired in October 2002. The first renewal
agreement, which began in November 2002, also includes
performance-based incentive fees that contributed $223,000 in
revenue for the year ended December 31, 2003. The second renewal

agreement, which began in November 2003 and ends in December 2004,
does not contain a performance-based incentive fee component.

E-mail Marketing System: 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
analytical services. Revenue related to one-time service fees for
setting up the customer is recognized ratably over the expected
term of the customer relationship, while all other revenue is
recognized when the service is provided. Revenue from our E-mail
Marketing System represented 3%, 5% and 2% of our total revenue
for 2003, 2002 and 2001, respectively.

ConsumerREVIEW.com: Revenue is predominantly generated through
advertising and e-commerce fees. Advertising revenue is derived
from the sale of advertisements on pages delivered to community
members of our websites. This revenue is recognized in the period
in which the advertisements are delivered. E-commerce fees are
derived from on-line performance-based programs and are earned on
either a lead referral basis or on an affiliate commission basis.
We earn revenue from performance-based programs when a user of our
websites responds to a commerce link by linking to a customer's
websites. For lead referral programs, we charge our customers on a
cost-per-click basis, and recognize the revenue in the month the
click occurs. For affiliate-commissions programs, we recognize our
revenue when the commission is earned, which is in the month that
the transactions occur. ConsumerREVIEW.com represented 44% and 3%
of our revenue for the years ended December 31, 2003 and 2002,
respectively.

PerformOne Network: Although the services of the PerformOne Network
were discontinued during 2002, the principal service, PromoMail,
which was purchased by marketers either on a fixed fee basis or on
a performance basis, represented approximately 4% and 30%
(excluding marketing partner transactions as defined below) of our
revenue for the years ended December 31, 2002 and 2001,
respectively. For the fixed fee contracts, participating marketers
were charged a fixed fee for each member to whom the e-mail is
sent, and revenue related to the service was recognized upon
transmission of the e-mail. When marketers purchased the service
on a performance basis, revenue was based solely on the actions of
our consumer members. We earned 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. Beginning January 1,
2002, revenue for performance related agreements was recognized
upon cash receipts from the marketers for the actions of our
members or upon notification of the actions for marketers that
prepay. Prior to January 1, 2002, revenue was recognized upon
notification of the actions of our members. This change in revenue
recognition policy was due to the uncertainty in estimating the
revenue and, therefore, the collectibility of the revenue. The
change in revenue recognition to a cash receipts basis did not
have a significant impact on revenue.

Commerce Engine: With the closure of the Commerce Division during 2002,
this product did not contribute any revenue during 2003, however
it did represent 16% and 26%, respectively, of our 2002 and 2001
revenue. Revenue was primarily generated through license, support
and maintenance fees from Internet portal and other website
customers. Revenue was recognized ratably over the expected term
of the contract.

Commerce Network: Due to the closure of the Commerce Division during
2002, this product did not contribute any revenue during 2003,

20

however it did represent 4% and 9%, respectively, of our 2002 and
2001 revenue. Through this system, we earned a contractually
specified amount from merchants based on the number of end users
who clicked on their specified product link or the amount of
merchant's sales generated by the end users. Beginning January 1,
2002, revenue was recognized upon cash receipts from the
merchants, and prior to January 1, 2002 revenue was recognized
when an action by an end user occurred. This change in revenue
recognition policy was due to the uncertainty in estimating the
revenue and, therefore, the collectibility of the revenue. The
change in revenue recognition to a cash receipts basis did not
have a significant impact on revenue.

Consulting Services: Customers may also contract for consulting
services, such as assistance with on-line marketing, promotions
planning, consumer acquisition and analytics. Revenue related to
these consulting services is recognized as the related services
are provided.

Marketing Partner Transactions: Revenue for the first two quarters of
2001 included approximately $1.4 million in barter revenue
("marketing partner transactions"), which represents exchanges of
promotional e-mail deliveries for reciprocal advertising space or
traffic on other websites. There were no marketing partner
transactions during the years ended December 31, 2002 and 2003.
Revenue and expenses from these marketing partner transactions
were 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 was based upon our recent historical experience
of cash received for similar e-mail deliveries. Such revenue was
recognized when the promotional e-mails were delivered.
Corresponding expenses were recognized for the advertisements
received when our advertisements were displayed on the reciprocal
websites or properties, which was typically in the same period as
delivery of the promotional e-mails and were 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. As
a result, we recorded bad debt expense of approximately $44,000 for the
year ended December 31, 2003. As of December 31, 2003, our accounts
receivable balance was approximately $1.6 million, net of allowance for
doubtful accounts of approximately $63,000. Although approximately
$874,000 of the balance relates to one customer, we do not believe there
is a significant risk of uncollectibility due to the customer's payment
history and credit-worthiness.

(c) Impairment of long-lived and amortizable intangible assets

We perform an on-going analysis of the recoverability of our
long-lived and amortizable intangible assets and, for the year ended
December 31, 2003, this was done in accordance with FAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which we adopted
on January 1, 2002. Based on quantitative and qualitative measures, we
assess the need to record impairment losses on long-lived and
amortizable intangible 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. However, such impairment conditions considered
are the ability to maintain financial performance objectives, access to
new markets and customers, overall market conditions, as well as the
value of new contracts. We recorded no impairment charges during 2003;
however, during the second quarter of 2002, in conjunction with our
plan to close the Commerce Division, we wrote-off approximately $4.7
million of tangible assets and recorded an impairment charge of
$694,000 for the full value of the intangible assets associated with
the Commerce Division. This was subsequent to the impairment charge of
$469,000 that we took during the fourth quarter of 2001 that resulted
from the revaluation of the Commerce Division.

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

21

periods, which could have a material adverse impact on our business,
financial condition, results of operations and cash flow.

(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. These efforts
resulted in the consolidation of excess facilities and the elimination
of redundant positions. As a result of this restructuring plan, we
recorded charges of approximately $9.4 million during 2001. These
charges related mainly to the consolidation of the Redwood Shores,
California and Bethesda, Maryland 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. During the second quarter of
2002, the remaining accrued reserve balance of approximately $6.5
million associated with the Redwood Shores facility was reversed
because a new reserve was established to reflect the termination of the
lease. In addition, during the third quarter of 2002, the remaining
accrued reserve balance of approximately $1.4 million associated with
the Bethesda facility was reversed as a new reserve was established to
reflect a partial lease termination. As of December 31, 2003, there was
no remaining accrued liability balance related to the 2001
restructuring charges.

During 2002, management approved plans to terminate the lease for
the Redwood Shores facility, close the Commerce Division, terminate
one-half of the Bethesda facility lease and scale back the offerings of
the PerformOne Network. A restructuring/impairment charge of
approximately $9.0 million was recorded to reflect these actions. The
charge included approximately $2.1 million in costs associated with
terminating the Redwood Shores facility lease, $5.7 million for the
disposal and write-down of tangible and intangible assets and other
related expenses associated with closing the Commerce Division, $1.0
million in costs associated with the partial lease termination of the
Bethesda facility and $215,000 in severance and other employee benefit
costs related to the termination of 37 employees. As of December 31,
2003, the balance of the accrued restructuring/impairment charges
recorded in 2003 was approximately $77,000.

The calculation of the 2001 restructuring accrual related to
consolidation of two of our offices 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) the estimated
brokerage and refurbishment expenses associated with executing the
subleases. Due to the early termination and partial termination of the
Redwood Shores and Bethesda office leases, respectively, that occurred
during 2002, we reversed the associated 2001 reserve balances and
established new reserves for the actual costs to be incurred in
terminating the leases. The calculation of the 2002 restructuring
accrual related to closure of the Commerce Division required us to make
estimates concerning the liquidation of tangible assets and the
expected costs of terminating the UK office lease. The expected cost to
terminate the UK office lease consists of monthly rental through
September 30, 2002 and forfeiture of our security deposit of
approximately $102,000. This is based on our best estimate; however,
the landlord of the UK office facility has not responded to our
requests to enter into a termination agreement. If the landlord of the
UK office facility does not agree to a termination agreement, we could
face a potential additional liability of approximately $364,000 for
rental payments through September 2004. If the actual results differ
from the our estimates, or as management's best estimates change from
quarter to quarter, based on the latest information, we are required to
adjust our restructuring accrual, including recording additional
expenses.

The policy regarding restructuring accruals changed effective
January 1, 2003, due to the adoption of FAS 146, Accounting for Costs
Associated with Exit or Disposal Activities. In July 2002, the FASB
issued FAS 146, which requires a liability for a cost associated with
an exit or disposal activity be recognized and measured initially at
its fair value in the period in which the liability is incurred. If
fair value cannot be reasonably estimated, the liability will be
recognized initially in the period in which fair value can be
reasonably estimated. The provisions of FAS 146 were effective
prospectively for exit or disposal activities initiated after December
31, 2002.

(e) Impairment of Goodwill and intangible assets with indefinite useful
lives

22

We adopted the provisions of FAS 142, Goodwill and Other
Intangible Assets, as of January 1, 2002. FAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer
be amortized, but instead be tested, at least annually, for impairment.
We continually evaluate whether events and circumstances that have
occurred that indicate that the remaining value of any goodwill and/or
intangible assets with indefinite useful lives may not be recoverable.
During the second quarter of 2002, due to the closure of the Commerce
Division, the associated goodwill was deemed impaired and the net value
of approximately $657,000 was written off. At December 31, 2003, we had
no goodwill or intangible assets with indefinite useful lives.

RELATED PARTY TRANSACTIONS

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. Mr. Friedli also has
relationships with several of our other stockholders; he serves as the
investment advisor to InVenture, Inc., Joyce, Ltd., Savetech, Inc., Spring
Technology Corp. and USVentech, Inc. Mr. Friedli also services as the President
of Friedli Corporate Finance, Inc., a company that provides us consulting
services.

On October 8, 2002, our Board of Directors approved the issuance of
6,000,000 warrants to four investors as consideration for a $20 million
financing commitment. Two of the investors were Peter Friedli and Venturetec,
and each received 1,000,000 warrants. As part of this financing, in March 2003,
we executed convertible promissory notes in favor of Friedli Corporate Finance
and InVenture, Inc. The notes allow us to draw down against the available
principal of up to $6 million at any time and in any amount during the first two
years of the notes. All principal drawn upon will be secured by substantially
all of our assets. Subsequent to the issuance of these promissory notes, we,
Friedli Corporate Finance and InVenture, Inc. agreed to assemble a syndicate of
third parties to whom we would issue convertible promissory notes on terms
similar to the March 2003 $6 million convertible promissory notes. The aggregate
dollar amount of the convertible promissory notes that we issue to third parties
through syndication will reduce, on a dollar-for-dollar basis, the $6 million
convertible promissory notes of Friedli Corporate Finance and InVenture, Inc.
and the balance, if any, will continue to be available to us under the initial
$6 million commitment. As part of the syndication process, during 2003, we
issued nine convertible promissory notes totaling $3,450,000, and through June
2004 we received $3,300,000 in connection with the issuance of six convertible
promissory notes. During March 2004, the credit facility available to us under
Friedli Corporate Finance's and InVenture, Inc.'s initial commitment was
increased from $6 million to $12 million, pursuant to amended notes. The general
terms of the amended notes remain the same as the terms of the $6 million notes
described above.

Venturetec and Pine were debentureholders in Consumer Review, Inc.
Therefore, as a result of our acquisition of substantially all the assets of
Consumer Review, Inc. in December 2002, Venturetec and Pine received 240,315
shares and 4,500 shares, respectively, of our Series B convertible preferred
stock.

As part of our October 2001 rights offering, we sold shares of our common
stock to Venturetec and Pine. Venturetec and Pine each delivered to us a
promissory note as consideration for the subscription price for the shares of

common stock for which each company subscribed. 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 $5.2
million) and Pine's note was in the principal amount of CHF 8,687,530
(approximately $5.3 million). However, on 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 (approximately $1.5 million)
in cash originally indicated as originating from Venturetec was reallocated as
follows:

o In a private sale, InVenture purchased from Pine 1,041,667 shares
of common stock, originally purchased by Pine pursuant to the
rights offering, for CHF 2,083,334. As part of this transaction,
Pine was credited with paying us CHF 2,083,334 (approximately $1.3
million) and delivered to us an amended and restated secured
promissory note, in the principal amount of CHF 6,604,196
(approximately $4.1 million), with 2% interest. We simultaneously
returned Pine's original CHF 8,687,530 promissory note. All of the
outstanding principal and interest under the promissory notes was
fully received in April 2002.

o Venturetec paid us CHF 416,666 (approximately $256,000) and
delivered to us an amended and restated secured promissory note,
in the principal amount of CHF 10,583,334 (approximately $6.5

23

million), with 2%. This CHF 10,583,334 reflects an increase in
Venturetec's secured promissory note to CHF 11,000,000
(approximately $6.8 million), 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. All of the outstanding principal and
interest under the promissory notes was fully received in April
2002.

In July 1996, we entered into a consulting agreement with Friedli Corporate
Finance, Inc., whereby Mr. Friedli provides us with financial consulting
services and investor relations advice. Pursuant to the most recent renewed
agreement, which is scheduled to expire in November 2006, Friedli Corporate
Finance, Inc. is paid $4,000 per month plus reimbursement of expenses related to
Mr. Friedli's services. In connection with his continued support of the business
and his assistance with fundraising, on December 8, 2003, Peter Friedli was
issued 345,000 warrants with an exercise price of $0.50 and an expiration date
of December 8, 2007. As a result of the help provided in securing the funds
associated with the convertible promissory notes, Peter Friedli was paid fees of
$360,000 during 2003. In conjunction with the $3.3 million of funds received
during the first and second quarters of 2004, Peter Friedli is to be provided
with an additional $330,000 in fees, which Mr. Friedli has indicated to us will
be distributed to a number of third party banks and individuals who assisted in
the financing effort. In addition, we engaged Friedli Corporate Finance, Inc. to
support us in connection with the 2001 rights offering and reimbursed Friedli
Corporate Finance, Inc. approximately $100,000 in expenses for such rights
offering support.

As a member of our Board of Directors, through December 31, 2003, Peter
Friedli has received 90,000 options as Director Compensation (see Item 10 -
"Directors And Executive Officers Of The Registrant" for further details).

On June 22, 2004, Mr. Sean Deson (who was named a director effective as of
April 19, 2004) was appointed as Chairman of the Board. For his agreement to
serve as Chairman of the Board, we agreed to award Mr. Deson 50,000 shares of
our common stock. Mr. Deson is the founder of Deson & Co., Deson Ventures, and
Treeline Capital, all technology-focused investment related firms. Prior to
founding his investment firms, Mr. Deson was a Senior Vice President at
Donaldson, Lufkin & Jenrette, now Credit Suisse First Boston. Messrs. Friedli
and Deson have co-invested in a number of operating companies.

RIGHTS OFFERING

On October 19, 2001, we closed a rights offering of common stock 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 the number of shares of common stock purchased by such
subscriber 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). After deducting
expenses, underwriting discounts and any foreign currency loss, the net proceeds
from this transaction were approximately $22.2 million, with $12.6 million of
the net proceeds received by December 31, 2001 and the remaining net proceeds of
$9.6 million, which related to promissory notes issued to us as part of the
consideration for the rights offering, was received during the second quarter of
2002. In connection with the proceeds of the promissory notes, we incurred a
foreign currency loss of approximately $258,000 in the second quarter of 2002
based upon the difference between the currency rates at the time the cash was
received and the closing of the rights offering. During 2003, all of the shares
of the Series A convertible preferred stock that had not been previously
voluntarily converted were automatically converted into shares of our common
stock. Such shares of common stock have been listed on the SWX Swiss Exchange
since February 21, 2002.

RECENT DEVELOPMENTS

(a) Credit Facility

During March 2004, the credit facility available to us under Friedli
Corporate Finance's and InVenture, Inc.'s initial commitment was increased from
$6 million to $12 million. See below and Item 5 - "Market For Registrant's
Common Stock And Related Stockholder Matters - Recent Sale/Issuance of
Unregistered Securities" for further details.

(b) Convertible Promissory Notes

As part of our syndication process, from January 2004 through June 2004, we
issued six convertible promissory notes with principal amounts of $100,000,

24

$400,000, $200,000, $600,000, $1,000,000 and $1,000,000. The terms of the notes
include, among other things:

o an 8% interest rate;
o a maturity date three years from the date of issuance;
o a conversion feature, which provides that under certain circumstances
that the note will automatically convert to our common stock;
o a one-time final payment charge of 10% of the principal for each year
that the principal is not paid on or before each annual anniversary of
the date the note was issued (with a maximum of 30%); and
o a security interest in substantially all of our assets.

(c) Options

From January 2004 through June 2004, 99,250 options that were previously
granted to employees were exercised.

(d) Late Filings and Investigation

On March 31, 2004, we announced that we would require additional time to
finalize and file our Annual Report on Form 10-k for the fiscal year ended
December 31, 2003 ("Annual Report"). In a Form 8-K filed with the SEC on May 13,
2004, we disclosed that at a May 12, 2004 semi-annual New Venturetec investor
conference in Zurich, Switzerland, we had announced that we would require
additional time to finalize and file our Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 ("Annual Report") and our Quarterly Report
on Form 10-Q for the quarter ended March 31, 2004 ("Quarterly Report").

In our May 13, 2004 Form 8-K, we disclosed that, in connection with the
finalizing of our Annual Report, we had encountered a recent non-financial
representation by a senior Company official that we deemed to be inaccurate. Our
Board of Directors determined that it was appropriate to undertake an
independent investigation to review this and other matters. The Board of
Directors established a separate Committee of the Board to lead the
investigation, such Committee consisting of Sean Deson (a non-management
director) serving as Chairman of the Committee, and Messrs. Akhavan and Friedli.
The Committee retained an independent law firm to conduct the investigation. The
independent investigation has now been completed. For a discussion of the
results, see Item 9A - "Controls and Procedures."

As of the date of this filing, we have not filed the Quarterly Report. We
expect to file the Quarterly Report after filing this Annual Report.

(E) ACQUISITION

Pursuant to an Asset Purchase Agreement dated as of june 25, 2004, we
acquired substantially all of the assets and certain of the liabilities of
Collabrys, Inc. ("Collabrys"). Collabrys is a provider of interactive marketing
technologies and services to enable customer acquisition and retention. Clients
include well-known companies in the Consumer Products, Healthcare, and Financial
Services industries. Consideration consists of a $15,000 cash payment and a 7%
royalty payment on revenue, as defined in the purchase agreement. We believe
that the Collabrys acquisition will enable us to both grow our client base and
penetrate into new vertical industries, as well as add new products and services
to our existing portfolio of solutions.

RESULTS OF OPERATIONS

The following presents our financial position and results of operation as of
and for the years ended December 31, 2003, 2002 and 2001.

Years ended December 31, 2003 and 2002.

REVENUE. Revenue decreased by $1,162,000 to $6,059,000 for the year ended
December 31, 2003, compared to $7,221,000 for the year ended December
31, 2002. Although the addition of the ConsumerREVIEW.com division
increased revenue by $2.5 million, the closure of the Commerce Division
and the PerformOne Network during 2002 caused revenue to decrease by
$1.8 million. Although we had more customers for our Interactive
Database Marketing System during 2003, revenue decreased by $1.6
million as a result of the reduced service fee for the Reckitt
Benckiser PLC renewal agreement. As each renewal agreement has been at
a lower rate than the previous agreement, we expect the revenue
generated by Reckitt Benckiser PLC will continue to decline; however,
any work orders for additional projects could offset this decline.

COST OF REVENUE. Cost of revenue consists primarily of expenses related to
providing our services, including related personnel costs, depreciation

25

of servers, network and hosting charges. For the year ended December
31, 2003, the cost of revenue of $2,866,000 was $1,550,000 lower than
the $4,416,000 for the year ended December 31, 2002. The decrease is
primarily the result of the 2002 closures of the Commerce Division and
the PerformOne Network, offset by the increased costs associated with
the acquisition of the ConsumerREVIEW.com division. The elimination of
the Commerce Division and the PerformOne Network products helped to
lower depreciation costs and network and hosting charges by $1.7
million.

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 incurred. Product development expenses
decreased by $1,549,000 to $2,519,000 for the year ended December 31,
2003, compared to $4,068,000 for the year ended December 31, 2002. The
addition of the ConsumerREVIEW.com division added approximately
$330,000 in product development costs, an amount that was more than
offset by the reduced costs from the closure of the Commerce Division
and the PerformOne Network. The Company expects that product
development costs will remain at the same level, with no current plans
to significantly increase the number of personnel related to this
group.

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. For the year
ended December 31, 2003, general and administrative expenses decreased
by $3,131,000 to $7,632,000 when compared to $10,763,000 for the year
ended December 31, 2002. Due to the 2002 restructuring plans,
depreciation was lower by $1,064,000, rent expense was lower by
$747,000 and the closure of the Commerce Division reduced other general
and administrative expenses by $936,000. These plans also helped to
lower telecom related expenses, as well as salary related expenses and
non-capitalized hardware/software costs not associated with the
Commerce Division.

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 of $2,312,000
for the year ended December 31, 2003 were lower by $1,574,000, a
decrease from $3,886,000 over the year ended December 31, 2002.
Although sales and marketing for the year ended December 31, 2003
included a full year's worth of expenses related to the addition of
ConsumerREVIEW.com, the elimination of the Commerce Division and
PerformOne Networkmore than offset these additional costs. Salary
related expenses, as well as travel and entertainment related expenses,
were lower due to the elimination of eleven positions. In addition,
direct marketing and tradeshow related expenses were lower by $158,000.

RESTRUCTURING AND IMPAIRMENT CHARGES. For the year ended December 31, 2002,
we recorded a restructuring/impairment charge of $1,128,000, while for
the year ended December 31, 2003 we incurred no restructuring/impairment
charge.

STOCK-BASED COMPENSATION. Stock-based compensation expense consists 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 difference between the estimated fair value of our common
stock and the exercise price of stock options issued to employees
recognized ratably over the vesting period. Stock-based compensation
expenses increased by $2,248,000 to $2,608,000 for the year ended
December 31, 2003, compared to $360,000 for the year ended December 31,
2002. This increase was primarily attributable to the 7.9 million
options issued during the fourth quarter of 2003, at a price below the
fair value of our common stock on the measurement date. We estimate the
future stock option grant charges of $574,000 and $320,000 for 2004 and
2005, respectively.

INTEREST EXPENSE. Interest expense of $479,000 for the year ended December
31, 2003 was $421,000 higher than interest expense for the year ended
December 31, 2002, primarily due to the $224,000 in interest related to
the convertible promissory notes issued during 2003 and the $222,000 in
amortization of deferred financing fees.

26

INTEREST INCOME. Interest income for 2003 consisted only of income on our
cash balances, while interest income for 2002 also included interest
from promissory notes associated with the October 2001 rights offering.

NET LOSS. Net loss decreased by $4.8 million to $12.3 million for the year
ended December 31, 2003, compared to $17.1 million for the year ended
December 31, 2002. This is the combined effect of lower revenue of $1.2
million and decreased operating costs of $6.7 million.

Years ended December 31, 2002 and 2001.

REVENUE. Revenue increased by $2,167,000 to $7,221,000 for the year ended
December 31, 2002, compared to $5,054,000 for the year ended December
31, 2001. The majority of the increase can be attributed to the addition
of new products and services. The Interactive Database Marketing System,
which began generating revenue in late 2001, added $4,820,000 to our
2002 revenue, versus $58,000 for 2001. Our E-mail Marketing System,
which began generating revenue in July 2001, generated $350,000 in
revenue, an increase of $236,000 when compared to the prior year.
ConsumerREVIEW.com, which we acquired in December 2002, contributed
$214,000 in revenue for 2002.

The Commerce Division, which was acquired in March 2001 and closed by
the third quarter of 2002, generated $1.5 million in revenue, which was
lower by $300,000 when compared to 2001. Our PerformOne Network
experienced a $1,374,000 decrease in revenue, from $1,728,000 to
$354,000, that stemmed from a decline in the number of sales, a
decrease in the dollar amount of the average sale, as well as our third
quarter 2002 plan to suspend the system's services and focus on our
newer product offerings. Additionally, $1,371,000 or 27% of the revenue
for 2001 was generated through marketing partner transactions that
occurred during the first two quarters of 2001. We did not engage in
any marketing partner transaction activity during 2002.

COST OF REVENUE. Cost of revenue decreased by $3,979,000 to $4,416,000 for
the year ended December 31, 2002, compared to $8,395,000 for the year
ended December 31, 2001. The decrease is primarily the result of the
one-time purchase of $1,300,000 of data and outbound e-mail services
during the first half of 2001, lower revenue share expense of $566,000
associated with the lower PerformOne Network revenue, $334,000 in lower
network and hosting charges due to consolidation of space and
equipment, as well as the 2002 reversal of $174,000 in expenses due to
favorable settlements of liabilities for hosting charges recorded
during 2001. In addition, the closure of the Commerce Division resulted
in lower depreciation and personnel related expenses for 2002 of
approximately $1,000,000, while the acquisition of BrightStreet.com in
late 2001 did not add a significant amount of expense to 2002.

PRODUCT DEVELOPMENT. We expense product development costs as incurred.
Product development expenses decreased by $3,865,000 to $4,068,000 for
the year ended December 31, 2002, compared to $7,933,000 for the year
ended December 31, 2001. Product development costs for 2002 included
the products and services from the BrightStreet.com acquisition, while
2001 did not include them for the corresponding period; however, costs
still decreased year over year. This was the effect of the reduction in
product development personnel and overall lower costs due to suspending
the services of the PerformOne Network, closing down the Commerce
Division, and other organizational efficiency initiatives.

GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$1,829,000 to $10,763,000 for the year ended December 31, 2002,
compared to $12,592,000 for the year ended December 31, 2001. The
primary reason for the decrease was lower rent expense of $1,992,000
due to restructuring plans associated with the Redwood Shores and the
Bethesda offices. Although the acquisitions of the Commerce Division,
BrightStreet.com and ConsumerREVIEW.com added expenses to 2002, lower
amortization and professional fees offset these additional expenses.

SALES AND MARKETING. As a result of our cost-cutting efforts, sales and
marketing expenses were lower by $6,111,000, decreasing from $9,997,000
for the year ended December 31, 2001 to $3,886,000 for the year ended
December 31, 2002. Although sales and marketing for the year ended
December 31, 2002 included a full year's worth of expenses related to
the addition of the BrightStreet.com products and services, an overall
decrease in advertising and promotional expenditures during 2002 led to
the reduction in costs. Our efforts resulted in a decrease in printed
publications, on-line media, out-of-home media and broadcast media
expenditures of approximately $1,739,000, $1,463,000, $920,000 and
$170,000, respectively. In addition, the reduction in the number of

27

sales and marketing personnel, along with the closure of the Commerce
Division, contributed to the decrease in costs.

NETWORK PARTNER FEES. Network partner fees decreased by $984,000 to $2,000
in the year ended December 31, 2002, compared to $986,000 in the year
ended December 31, 2001. This decrease is primarily the result of the
termination of Network Partner and Affiliate agreements associated with
the PerformOne Network. Such agreements included the Co-Branding
Agreement with Excite, the Website Affiliation agreement with
USATODAY.com and the Affiliate Marketing Agreement with BeFree, which
accounted for approximately $433,000, $225,000 and $197,000,
respectively, of the decrease. We do not expect to incur network
partner fees in the future.

RESTRUCTURING AND IMPAIRMENT CHARGES. For the year ended December 31, 2002,
we recorded a restructuring/impairment charge of $1,128,000, while for
the year ended December 31, 2001 we recorded a charge of $9,876,000.

In 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 associates, 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
estimated 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.

During 2002, plans were approved to terminate the lease for the Redwood
Shores facility, close the Commerce Division, terminate a portion of
the Bethesda facility lease and suspend the services of the PerformOne
Network. A charge of approximately $9.0 million was recorded to reflect
these actions. The charge included approximately $2.1 million in costs
associated with terminating the Redwood Shores facility lease, $5.7
million for the disposal and write-down of tangible and intangible
assets and other related expenses associated with closing the Commerce
Division, $1.0 million in costs associated with the partial lease
termination of the Bethesda facility and $215,000 in severance and
other employee benefit costs related to the termination of 37
employees. However, the costs of the 2002 restructuring plans were
offset by a $6.5 million reversal and a $1.4 million reversal of the
balances of the accrued restructuring charges that were established in
December 2001 in conjunction with our effort to consolidate our Redwood
Shores and Bethesda facilities, respectively. We had originally planned
to leave approximately 50% of both facilities unoccupied and available
for sub-lease, but subsequently decided that, due to the lack of viable
sub-lease alternatives, it was more cost effective to terminate the
entire Redwood Shores lease and do a partial termination of the
Bethesda lease.

STOCK-BASED COMPENSATION. Stock-based compensation expenses decreased
by $504,000 to $359,000 for the year ended December 31, 2002,
compared to $863,000 for the year ended December 31, 2001. This
decrease was attributable to the reversal of 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 $234,000 and $54,000 in 2003 and 2004,
respectively.

INTEREST INCOME. Interest income for 2001 consisted only of income on
our cash balances, while interest income for 2002 also included
interest from our promissory notes. However, interest income
decreased by $312,000 to $296,000 for the year ended December 31,
2002, compared to $608,000 for the year ended December 31, 2001.
The lower interest income was primarily the result of earning less
interest on our investments due to lower cash balances, in

28

addition to lower interest rates resulting from general economic
conditions.

NET LOSS. Net loss decreased by $27.9 million to $17.1 million for the
year ended December 31, 2002, compared to $45.0 million for the
year ended December 31, 2001. Although revenue only increased by
$2.2 million, our efforts to reduce costs resulted in a decrease
in operating costs of $26.0 million.

LIQUIDITY AND CAPITAL RESOURCES

Since our 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 on the SWX Swiss Exchange. Through
these financing activities, we raised net proceeds of approximately $82.5
million. In late 2001, we closed a rights offering in which we received
approximately $12.6 million in net proceeds during 2001, with the remaining net
proceeds, associated with promissory notes delivered as part of the rights
offering purchase price consideration, of $9.6 million received during the
second quarter of 2002.

In March 2003, we executed convertible promissory notes for an aggregate sum
of up to $6 million, from which we could draw down against at any time and in
any amount during the first two years of the notes. Subsequent to the issuance
of the promissory notes, we agreed to assemble a syndicate of third parties to
whom we would issue convertible promissory notes on terms similar to the March
2003 convertible promissory notes. The aggregate dollar amount of the
convertible promissory notes that we issue to third parties through the
syndication process will reduce, on a dollar-for-dollar basis, the $6 million
convertible promissory notes and the balance, if any, will continue to be
available to us under the initial $6 million commitment. During 2003 we received
an aggregate of $3,450,000 in connection with the issuance of nine convertible
promissory notes, and through June 2004 we received $3,300,000 in connection
with the issuance of six convertible promissory notes.

On December 31, 2003, we held $285,000 in cash and cash equivalents. In
addition, we had restricted cash of $127,000 in the form of three certificates
of deposit. Two of the certificates of deposit serve as collateral for letter of
credit commitments to secure our lease payment obligations for our Bethesda,
Maryland and our Foster City, California offices. The third is the remaining
balance of a certificate of deposit that served as collateral for a letter of
credit commitment related for our D&O insurance policy. As we made our monthly
payments on this policy, the certificate of deposit was reduced by the
corresponding amount and the money was transferred to our operating account. As
this D&O policy expired and the new one did not require a letter of credit
commitment, the $16,000 balance was transferred to our operating account in the
first quarter of 2004.

Cash used in operating activities for the year ended December 31, 2003 was
$5.1 million, an improvement of $11.6 million over the $16.7 million for the
year ended December 31, 2002. The improvement primarily reflects the decrease in
net losses adjusted for non-cash operating expenses of $6.3 million and $13.3
million, respectively, for each year. The activity for 2003 also reflects a
decrease in accounts receivable of $1.3 million and decrease in accounts
payable, deferred revenue and other accruals of $496,000 versus the $425,000
increase and $3.5 million decrease, respectively, for 2002.

Investing activities for the year ended December 31, 2003 and 2002 provided
$195,000 and $58,000, respectively, in cash. Cash provided by investing
activities for the year ended December 31, 2003 included a decrease in
restricted cash of $618,000 due to the reduction of the security deposit
required for the Maryland office, as well as the reduction in the letter of
credit commitment related to our D&O insurance policy. Activity for 2003 also
reflected the transaction compensation for the Patent related to the
BrightStreet.com acquisition of $411,000. Cash provided by investing activities
for the year ended December 31, 2002 included the conversion into cash of $1.0
million in restricted cash associated with the certificate of deposit that was
used as collateral for the letter of credit commitment for the Redwood Shores
office. In accordance with the amendment to the sublease agreement that provided
for an early termination of the sublease, this cash was subsequently transferred
to Inktomi Corporation. Cash provided by investing activities for 2002 also
reflected $428,000 used to purchase property and equipment, the $255,000 for the
letter of credit commitment related to our D&O insurance policy, as well as
acquisition costs for ConsumerREVIEW.com and BrightStreet.com of $175,000 and
$34,000, respectively.

For the year ended December 31, 2003, net cash provided by financing
activities of $2.8 million reflects the $3.5 million in funding associated with
issuance of nine convertible promissory notes, $360,000 in debt issuance costs,

29

$286,000 in payments for capital lease obligations and $41,000 in proceeds from
the exercising of stock options. The net cash provided by financing activities
of $10.1 million, for the year ended December 31, 2002, primarily reflects $10.3
million in proceeds from the notes receivable from stockholders that were issued
in conjunction with our October 2001 rights offering and $208,000 in payments
for capital lease obligations.

We currently anticipate that our existing cash resources will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
into the third quarter of 2005. This forecast is based on the current remaining
available line of credit at June 29, 2004 of up to $5.25 million from our credit
facility, structured in the form of two $6 million three-year convertible
promissory notes that were issued in March 2003 and March 2004. Funds underlying
the notes have been verified as fully available for our use as necessary,
although the ultimate funding of these notes may come from a variety of
different available sources. If future revenue is insufficient to cover our
operating costs, we will need to secure additional funds to ensure future
viability. We may need to raise additional funds sooner to fund our future
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. To the extent that our existing funds and
funds from the convertible promissory notes are not sufficient to enable us to
operate into the third quarter of 2005 and beyond, Friedli Corporate Finance has
provided a written commitment to provide us with a capital infusion of up to an
additional $8 million for continued operations and future business expansion
purposes, in both sales and marketing and merger and acquisition activities.
However, no formal terms and conditions have been agreed upon.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As of December 31, 2003, our contractual obligations and commercial
commitments, which consist of future minimum lease payments under non-cancelable
leases and long-term debt, are as follows:

less than
Contractual Obligations 1 year 1-3 years after 3 years total
- --------------------------------------------------------------------------------------

capital lease obligations (1) $ 199,136 $ 32,745 $ - $ 231,881
operating lease obligations 1,096,895 613,521 - 1,710,416
long-term debt (2) - 5,313,000 - 5,313,000
----------------------------------------------------
total $ 1,296,031 $ 5,959,266 $ - $ 7,255,297
====================================================

- ---------------
(1) Includes approximately $8,700 in interest.

(1) Includes approximately $828,000 in interest and $1,035,000 in final payment
fees.

Lease Obligations

We are obligated under non-cancelable capital leases for certain computer
and office equipment that expire by early 2006. In addition, we are obligated
under non-cancelable operating leases for office space, which expire by October
2005.

In March 2002, we subleased approximately 10,000 square feet of the office
space in our Bethesda, MD office, with a monthly base rent of approximately
$22,000 that increases 4% annually. This sublease commenced in March 2002 and
expires in September 2005. In addition, in February 2004, we signed another
sublease agreement with a monthly base rent of approximately $2,500 that
commenced in February 2004 and expires in September 2005.

Rent expense under operating leases was approximately $829,000, $1,549,000
and $3,541,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. In February 2002, we signed a Sublease Agreement to sublease a
portion of the sixth floor at the Bethesda, Maryland facility that commenced on
March 1, 2002 and expires on September 30, 2005.

Long-Term Debt

In March 2003, we executed convertible promissory notes in favor of Friedli
Corporate Finance, financial advisor to us, and InVenture, Inc., one of our

30

stockholders, for an aggregate sum of up to $6 million. The notes allowed us to
draw down against the available principal of up to $6 million at any time and in
any amount during the first two years of the notes. The terms of each of the
notes include, among other things:

o an 8% interest rate;
o a maturity date three years from the date of issuance;
o a conversion feature, which provides that under certain circumstances
each note will automatically convert to our common stock;
o a one-time final payment charge of 10% of the principal for each year
that the principal is not paid on or before each annual anniversary of
the date the notes were issued (with a maximum of 30%); and
o a security interest in substantially all of our assets.

Subsequent to the issuance of the promissory notes in March 2003, we,
Friedli Corporate Finance and InVenture, Inc. agreed to assemble a syndicate of
third parties to whom we would issue convertible promissory notes on terms
similar to the March 2003 $6 million convertible promissory notes that we issued
to Friedli Corporate Finance and InVenture, Inc. The aggregate dollar amount of
the convertible promissory notes that we issue to third parties through
syndication will reduce, on a dollar-for-dollar basis, the $6 million
convertible promissory notes of Friedli Corporate Finance and InVenture, Inc.
and the balance, if any, will continue to be available to us under Friedli
Corporate Finance's and InVenture, Inc.'s initial $6 million commitment. During
2003, we received an aggregate of $3,450,000 in connection with the issuance of
nine convertible promissory notes, and through June 2004 we received $3,300,000
in connection with the issuance of six convertible promissory notes. The terms
of each of the promissory notes are substantially similar to the $6 million
convertible promissory notes issued in March 2003, as noted above. In addition,
during March 2004, the credit facility available to us under Friedli Corporate
Finance's and InVenture, Inc.'s initial commitment was increased from $6 million
to $12 million, pursuant to amended notes. These additional funds have been
verified as fully available for our use as necessary, although Friedli Corporate
Finance and InVenture may ultimately fund such obligations through a variety of
different sources available to them. The general terms of the amended notes
remain the same as the terms of the $6 million convertible promissory notes
described above.

At December 31, 2003, we had accrued interest of approximately $100,000,
which is due within one year, and we had accrued final payment charges of
approximately $124,000, which is due at the time the corresponding convertible
promissory note's principal payment is made.

Patent Assignment

On December 3, 2001, in conjunction with the acquisition of substantially
all the assets of BrightStreet.com, 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 rights, title and interest in
and to all the issued and pending BrightStreet.com patents, subject to certain
pre-existing rights granted by BrightStreet.com to third parties, provided we
make a certain payment to BrightStreet.com by December 3, 2005 (the "Payment").

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, at any time prior to December 3, 2005 exceeds $4,000,000, the Payment will
be deemed to have been made. Additionally, we have the right, at any time prior
to December 3, 2005, to satisfy the Payment by paying to BrightStreet.com the
difference between the $4,000,000 and the total compensation already paid.

RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS

In July 2002, the FASB issued FAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, which nullifies EITF Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). FAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. If fair value cannot be reasonably
estimated, the liability shall be recognized initially in the period in which
fair value can be reasonably estimated. Under Issue 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit plan.
The provisions of FAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. We adopted the provisions of FAS 146 on
January 1, 2003. The adoption did not have a significant impact on our business,
financial condition, results of operations or cash flow.

31

In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others. FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. FIN 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of FIN
45 are applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim and
annual periods ending after December 15, 2002. We have certain guarantees
disclosable under FIN45:

o We guarantee the payment of sublease rentals to our landlord on
the property that we sublet. As of December 31, 2003, the maximum
guarantee on this property is approximately $498,000. This
sub-lease expires in September 2005.

o We sometimes indemnify certain of our customers against damages,
if any, they might incur as a result of a claim brought against
them related to patent infringement from the use of our products.
We are unable to estimate the maximum exposure of such
indemnifications due to the inherent uncertainty and the varying
nature of the contractual terms.

In November 2002, the EITF reached consensus on Issue 00-21, Revenue
Arrangements with Multiple Deliverables on a model to be used to determine when
a revenue arrangement with multiple deliverables should be divided into separate
units of accounting and, if separation is appropriate, how the arrangement
consideration should be allocated to the identified accounting units. The EITF
also reached a consensus that this guidance should be effective for all revenue
arrangements entered into during fiscal periods beginning after June 15, 2003.
The adoption did not have a significant impact on our business, financial
condition, results of operations or cash flow.

In December 2002, the FASB issued FAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amended FAS 123 Accounting for
Stock-Based Compensation. The new standard provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. Additionally, the statement amends the
disclosure requirements of FAS 123 to require prominent disclosures in the
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. This statement is effective for financial statements for fiscal years
ending after December 15, 2002. We have elected to continue to follow the
intrinsic value method in accounting for our stock-based employee compensation
arrangement as defined by APB 25, Accounting for Stock Issued to Employee, and
as allowed under FAS 123 and have made the applicable disclosures in Notes to
the consolidated financial statements as required by FAS 148.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. In December 2003, the FASB revised
FIN No. 46 to reflect decisions it made regarding a number of implementation
issues. FIN No. 46, as revised, requires that the primary beneficiary of a
variable interest entity consolidate the entity even if the primary beneficiary
does not have a majority voting interest. This interpretation applies to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support. This interpretation also identifies those situations where a
controlling financial interest may be achieved through arrangements that do not
involve voting interests. The interpretation also establishes additional
disclosures, which are required regarding an enterprise's involvement with a
variable interest entity when it is not the primary beneficiary. The
requirements of this interpretation are required to be applied for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions must be applied for the first interim or annual period ending after
December 15, 2003. We do not have any controlling interest, contractual
relationships or other business relationships with unconsolidated variable
interest entities and therefore the adoption of this standard did not have an
impact on our business, financial condition, results of operations or cash flow.

In April 2003, the FASB issued FAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. FAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under FAS 133. The
statement requires that contracts with comparable characteristics be accounted
for similarly and clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. FAS 149 is

32

effective for contracts entered into or modified after June 30, 2003, except in
certain circumstances, and for hedging relationships designated after June 30,
2003. The adoption did not have an impact on our business, financial condition,
results of operations or cash flow.

In May 2003, the FASB issued FAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. FAS 150
establishes standards for how certain free standing financial instruments with
characteristics of both liabilities and equity are classified and measured.
Financial instruments within the scope of FAS 150 are required to be recorded as
liabilities, or assets in certain circumstances, which may require
reclassification of amounts previously reported in equity. FAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The cumulative effect of a change in accounting principle
should be reported for financial instruments created before the issuance of this
Statement and still existing at the beginning of the period of adoption. The
adoption did not have a significant impact on our business, financial condition,
results of operations or cash flow.

On December 17, 2003, the Securities and Exchange Commission (SEC) issued
SAB 104, Revenue Recognition, which amends SAB 101, Revenue Recognition in
Financial Statements. SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
superseded as a result of the issuance of EITF 00-21. Additionally, SAB 104
rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers (the FAQ) issued with SAB 101 that had been codified in
SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB 104. While the wording of SAB 104 has changed to reflect
the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. The adoption of this standard did
not have an impact on our business, financial condition, results of operations
or cash flow.

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 business, financial conditions, results of operations and cash flow
to differ materially and/or adversely from those projected in any of our
forward-looking statements made in this Annual Report on Form 10-K or otherwise.
The following risk factors and other information in this Annual Report on Form
10-K should be carefully considered. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business,
financial conditions, results of operations and cash flow.

RISKS RELATED TO OUR BUSINESS

WE HAVE INCURRED NET LOSSES SINCE INCEPTION, EXPECT TO INCUR 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, 2003, we had an accumulated
deficit of approximately $129.1 million. We incurred net losses in 2003, 2002,
and 2001 of $12.3 million, $17.1 million and $45.0 million, respectively. We may
continue to incur losses and may never achieve profitability in the future. We
expect to incur lower net losses and negative cash flow during the next year or
so, with the overall goal of achieving profitability for the business. We expect
to spend additional financial resources to expand our business during the next
12 months until we are able to fund expansion initiatives through existing
working capital resources. We have quantified the specific amounts of operating
expenses and capital expenditures we expect to incur, and we currently
anticipate spending approximately $200,000 over the next 12 months on capital
expenditures and expenses associated with expanding our system capacity. If we
cannot achieve operating profitability or positive cash flows from our operating
activities, we may be unable to secure additional funding, our stock price may
decline and we may be unable to continue our operations.

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

33

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 customers we can attract to our solutions;
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 marketing
solutions;
o our customers' ability to sell their products and services to their
consumers; 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.

LOSS OF A SIGNIFICANT CUSTOMER COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOW.

Approximately 45% and 62% of our revenue for the years ended December 31,
2003 and 2002, respectively, was derived from one of our Interactive Database
Marketing System customers, Reckitt Benckiser. While this customer has renewed
its contract for the past three years, revenue generated from this customer has
decreased due to the renewals being at lower rates. If we lose this client,
there could be a material adverse effect on our business, financial condition,
results of operations and cash flow.

WE MAY REQUIRE ADDITIONAL CAPITAL TO FINANCE THE 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 cash resources will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
into the third quarter of 2005. This forecast is based on the current remaining
available line of credit at June 29, 2004 of up to $5.25 million from our credit
facility, structured in the form of two $6 million three-year convertible
promissory note that were issued in March 2003 and March 2004. If future revenue
is insufficient to cover our operating costs, we will need to secure additional
funds to ensure future viability. We may need to raise additional funds sooner
than anticipated to fund our future expansion, to develop new or enhanced
products or services, to respond to competitive pressures or to make
acquisitions. To the extent that our existing funds and funds from the
convertible promissory note are not sufficient to enable us to operate into the
third quarter of 2005 and beyond, Friedli Corporate Finance provided a written
commitment to provide us with a capital infusion of up to $20 million, of which
$12 million was the previously mentioned convertible promissory notes. However,
no formal terms and conditions have been agreed upon, other than the terms of
the $12 million convertible promissory notes. If Peter Friedli becomes
incapacitated or otherwise is unable to fulfill the commitment made through
Friedli Corporate Finance, we may not be able to replace such committed funds on
favorable terms or at all. No trustee or other arrangement currently exists to
guarantee us will receive the committed funding in the case of such incapacity.

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 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 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.

LOSS OF A SIGNIFICANT SOURCE OF FUNDING MAY LIMIT ABILITY TO EXPAND OR CONTINUE
OPERATIONS.

We rely on the services and financial assistance of Peter Friedli, who has
been supportive of us from a fundraising perspective. If Peter Friedli were to
decide not to support the business from a financial perspective in the future
and we are not able to secure funds from other external investors, our ability
to expand or continue operations may be limited.

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

34

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

o other providers of product reviews;
o publishers of content and information on special interest product
categories;
o shopping comparison or price search web sites; and
o providers of community forums, message boards, and photo
galleries.

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, such as vendors that provide:

o marketing technologies and services;
o e-mail marketing solutions;
o rewards programs;
o coupon and promotions programs; and
o interactive advertising agencies.

We believe the market for our ConsumerREVIEW.com division to also be rapidly
evolving and competitive. In this area, some of our current and potential
competitors include:

o marketing technologies and services;
o e-mail marketing solutions;
o rewards programs;
o coupon and promotions programs; and
o interactive advertising agencies.

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 ability to enter into relationships with 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 ability to enforce our intellectual property portfolio;
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 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 CLIENTS, AND BUILDING RECOGNITION OF THE E-CENTIVES BRAND MAY
REQUIRE US TO EXPEND SIGNIFICANT FUNDS ON MARKETING, EITHER OF WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND CASH FLOW.

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 website, 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' attention increases. Building recognition of the
E-centives brand may 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 a materially adverse affect
on our business, financial condition, results of operations and cash flow.

35

OUR CONSUMERREVIEW BRAND, AND THE BRANDS OF OUR RESPECTIVE WEB SITES, MAY NOT
ACHIEVE THE LEVEL OF RECOGNITION NECESSARY TO ATTRACT ADDITIONAL CLIENTS AND
CONSUMERS, AND BUILDING RECOGNITION OF SUCH BRANDS MAY REQUIRE US TO EXPEND
FUNDS ON MARKETING, EITHER OF WHICH COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOW.

To be successful, we also must continue to build and increase market
recognition of the brands within our ConsumerReview network of sites. We believe
that the recognition of these brands is critical to our success and the
importance of this will increase as more companies enter our market and
competition for marketers' and consumers' attention increases. Building
recognition of the ConsumerReview brands may require us to expend significant
funds on marketing. If we are not successful in our marketing efforts to
increase our brand awareness, our ability to attract consumers and marketing
clients could be harmed which would cause a materially adverse affect on our
business, financial condition, results of operations and cash flow.

OUR NETWORK INFRASTRUCTURE, COMPUTING SYSTEMS OR SOFTWARE MAY FAIL OR BE
COMPROMISED OR DAMAGED, WHICH COULD HARM OUR REPUTATION, AS WELL AS MATERIALLY
ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
CASH FLOW.

The performance of our hardware and software is critical to our business.
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 such disruptions were caused by unique errors in our software code that were
all subsequently corrected and did not have a material adverse effect on our
business. Any significant increase in the frequency or severity of future
disruptions could have a material adverse effect on our business, financial
condition, results of operations and cash flow.

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 regularly monitor and test our system and software, and from time to time
we 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.

Savvis (formerly Cable & Wireless USA) hosts our systems and provides us
with communications links. The delivery of our services is substantially
dependent on our ability and the ability of the provider to protect our computer
hardware and network infrastructure against damage from, among other things:

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

We rely on Savvis 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
Savvis to handle higher volumes of Internet use, could result in financial
losses or impair our reputation.

OUR SYSTEM CAPACITY NEEDS ARE UNTESTED AND OUR FAILURE TO HANDLE THE GROWTH OF
OUR DATABASE MAY MATERIALLY ADVERSELY EFFECT OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND CASH FLOW 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 amounts of users and
related data. A substantial increase in the number of users 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 clients' users 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

36

of our data, and could materially adversely affect our business, financial
condition, results of operations and cash flow. We believe that on average, our
various systems' hardware, at peak traffic levels, run at approximately 10-50%
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.

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
users and also collect data regarding the offers viewed and offers clicked-on by
such users. Privacy concerns may cause users to resist signing up for our
system, providing personal information and allowing us to monitor their usage.
If users were to reduce the information voluntarily supplied or block access to
their data, our ability to improve our database of user 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 TO THIRD PARTIES, WHICH COULD MATERIALLY ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOW.

We currently report consumer information to our clients about their users.
Our clients receive detailed and specific information about the activities of
their users for purposes of targeting marketing messages and promotions to
subscribers 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
user data to third parties. In addition, several states have proposed
legislation that would limit the uses of user information gathered online.
Consequently, any future regulation that would restrict our ability to provide
information regarding users would have a materially adverse impact on our
business, financial condition, results of operations and cash flow 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 and enforcing our intellectual property, which is one of our most
important assets. We have developed and acquired proprietary technology
including database and interface servers, offer creation and presentation
software, and software to enable communication between marketers' systems and
our system.

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 do not adequately protect our
intellectual property, our business, financial condition, results of operations
and cash flow could be materially adversely affected.

IF WE INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOW COULD BE MATERIALLY
ADVERSELY AFFECTED.

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

37

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, require us to enter into royalty or licensing
agreements or subject us to an injunction. 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. For more information on pending intellectual property litigation,
see Item 3 - "Legal Proceedings" for further details.

WE MAY BE SUBJECT TO CLAIMS BASED ON THE CONTENT OF PROMOTIONS WE DELIVER.

The online promotions developed by our clients 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 for which
we provide promotions technology. 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. Our clients or our
employees may make errors or enter inaccurate information, and we do not verify
the accuracy of information contained in the promotions or otherwise for
compliance with applicable advertising laws. 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 website through
links to other websites.

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 STOCK PRICE TO FLUCTUATE WIDELY
AND/OR MATERIALLY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL OPERATIONS, FINANCIAL
RESULTS AND CASH FLOW.

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 and/or
materially adversely affect our business, financial operations, financial
results and cash flow.

IF WE DO NOT MANAGE OUR GROWTH, OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND CASH FLOW COULD BE MATERIALLY ADVERSELY AFFECTED.

We may not be successful in managing our growth. We have gone from 60
employees at June 30, 1999 to 153 employees at December 31, 2001 to 50 employees
at December 31, 2003. 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.

To manage the expected growth of our operations, we will need to improve our
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, financial condition, results of operations and
cash flow could be materially adversely affected 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 Mehrdad Akhavan,
our Chief Executive Officer, and certain other key executives, whose
understanding of our services, strategy and relationships would be extremely
difficult to duplicate from outside our company. The loss of the services of any
of such key personnel could have a material adverse effect on our business,
financial condition, results of operations and cash flow. On June 17, 2004, our
co-founder Kamran Amjadi resigned as our Chairman and Chief Executive Officer.
On June 22, 2004, Mr. Akhavan, our co-founder and previously our President and
Chief Operating Officer, succeeded Mr. Amjadi as Chief Executive Officer, and
Mr. Sean Deson (who was named a director effective as of April 19, 2004) was
appointed as Chairman of the Board. David Samuels resigned as our Senior Vice

38

President, Chief Financial Officer and Treasurer, effective as of May 14, 2004,
by mutual agreement. Tracy L. Slavin (previously our Controller and Senior
Director of Accounting) Chief Financial Officer, effective as of June 22, 2004.
While we believe that we can effectively manage the transition, the departures
of Messrs. Amjadi and Samuels could have an adverse effect on our business.

We previously had an employment agreement with Mr. Akhavan, although such
agreement expired and Mr. Akhavan is currently operating in his capacity without
a written employment agreement. We do not maintain "key person" life insurance
policies. In addition, on December 8, 2003 Messrs. Amjadi and Akhavan were
awarded, 3,311,791 and 1,868,256 stock options, respectively, of which 2,311,791
and 1,304,134, respectively, vest upon issuance, although the underlying common
stock is subject to a twelve (12) month trading restriction from the date of
issuance of the options. Each officer's respective trading restriction
automatically sunsets upon such officer's respective termination from us for any
reason. Thus, commencing on June 17, 2004 when Mr. Amjadi resigned from service
with us, Mr. Amjadi's trading restriction was terminated and he may freely
exercise such stock options and sell all shares of underlying common stock,
which sale could adversely impact our stock price. If Mr. Akhavan leaves us, he
would be free, without restriction, to exercise such stock options and sell all
shares of underlying common stock, which sale could adversely impact our stock
price. The remaining 1,000,000 and 564,122 stock options, respectively,
automatically vest on the two year anniversary of the issuance date, although
vesting may be accelerated upon the achievement of certain performance criteria.

IF WE ARE UNABLE TO ATTRACT AND RETAIN HIGHLY SKILLED EMPLOYEES, OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOW COULD BE MATERIALLY
ADVERSELY AFFECTED.

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 competition in hiring and retaining personnel
from a number of sectors, including technology and Internet companies,
government contractors and traditional businesses. 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 materially adversely affect our business, financial
operations, financial results and cash flow.

WE HAVE STOCK-BASED COMPENSATION EXPENSE RELATING TO STOCK OPTION GRANTS, WHICH
WILL DECREASE EARNINGS OVER, AT LEAST, THE NEXT THREE 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, 2003, the charge relating to stock option grants was
approximately $2.6 million. We estimate the charge relating to stock option
grants will be $574,000, $320,000 and $243,000 in 2004, 2005 and 2006,
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.
Many 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.

MANY OF THE CLIENTS FOR OUR CONSUMERREVIEW.COM BUSINESS UNIT ARE EMERGING
INTERNET COMPANIES THAT REPRESENT CREDIT RISKS.

39

Many of our ConsumerREVIEW.com clients are Internet companies, 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 business, financial condition, results of operations
and cash flow could be materially adversely affected.

ADDITIONAL RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

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, 2003, our Board of Directors, owned directly or indirectly
approximately 51.4% of our outstanding common stock. Mr. Amjadi resigned as a
director and officer on June 17, 2004, and continues to hold his common stock.
Effective as of April 19, 2004, Sean Deson was appointed to our Board of
Directors and, as of June 29, 2004, owned none of our common stock. As of June
29, 2004, our current Board of Directors owned directly or indirectly
approximately 48.5% of our outstanding common stock. To the extent that these
stockholders exercise their voting rights in concert, they may to be able to
control most matters requiring stockholder approval, such as electing a majority
of the directors and approving significant corporate matters, including a merger
or sale of the business. The interest of these stockholders may at times
conflict with the interests of our other stockholders.

ALTHOUGH OUR COMMON STOCK IS LISTED ON 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.

For the most part, trading in our common stock has been low. Although our
common stock has been listed on 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 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 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 solely on the SWX Swiss
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 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 recent
acquisition of substantially all of the assets of Consumer Review, Inc., and in
connection with the issuance of warrants to certain insider and third-parties
and the related registering and listing of such stock, all of the shares of our
common stock will be eligible for trading on the SWX Swiss Exchange. If a
significant amount of such shares are offered for sale on the SWX Swiss Exchange
after such lock-up periods expire, and registration is completed, it could
decrease our stock price, among other things.

DURING 2003, STOCKHOLDERS EXPERIENCED DILUTION IN THEIR EQUITY OWNERSHIP AND
VOTING POWER IN OUR COMPANY DUE TO THE CONVERSION OF OUR SERIES A CONVERTIBLE
PREFERRED STOCK, AND THEY MAY EXPERIENCE FURTHER DILUTION IF OUTSTANDING
OPTIONS, WARRANTS AND CONVERTIBLE PREFERRED STOCK ARE EXERCISED, IF THE
AUTOMATIC CONVERSION OF OUR OUTSTANDING CONVERTIBLE PROMISSORY NOTES OCCURS AND
IF WE OFFER ADDITIONAL SHARES OF OUR COMMON STOCK FOR SALE IN FUTURE MONTHS.

41

During 2003, stockholders experienced substantial dilution of their
percentage of equity ownership interest and voting power in our company. In
addition, stockholders may experience substantial dilution based on the
conversion of our Series B convertible preferred stock and/or the exercising of
outstanding warrants and options, as well as the possible automatic conversion
of our outstanding convertible promissory notes. It is also 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.

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. We categorize all of our market risk sensitive instruments as
non-trading or other instruments.

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.

Our long-term debt bears interest at fixed rates; therefore, our results of
operations would be not be affected by interest rate changes. However, if
interest rates decline below our fixed rates, we would be paying out of market
rates.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements and supplementary data required by this Item are
attached starting on page F-1 and are set forth on the pages indicated in Item
15.

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

None.

ITEM 9A - CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of the Chief Executive Officer and
Chief Financial Officer, has evaluated the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(3) under the Exchange Act)
as of December 31, 2003. Based on such evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end of such period,
except as noted below, the Company's disclosure controls and procedures were
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and were operating in an effective manner.

Limitations on the Effectiveness of Controls

A control system is subject to inherent limitations and, as a result, can
provide only reasonable, not absolute, assurance that the system's objectives
will be achieved. In the first instance, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, decision-making in
connection with system design or operation can be faulty, and breakdowns can
occur because of simple error or mistake. In addition, controls can be
circumvented by the acts of single individuals, by collusion of two or more
individuals, or by management override of the controls. The design of any system
of controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated objectives under all potential future conditions. Over
time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. In light
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation

42

In a Form 8-K filed with the SEC on May 13, 2004, we disclosed that, in
connection with finalizing our Annual Report, we had encountered a recent
non-financial representation by a senior Company official that we deemed to be
inaccurate. Our Board of Directors determined that it was appropriate to
undertake an independent investigation to review this and other matters. Our
Board of Directors established a separate Committee of the Board to lead the
investigation, with Sean Deson (a non-management director) serving as Chairman
of the Committee. The Committee retained an independent law firm, which then
conducted the investigation and looked into various matters, including the
following:

o the adequacy of Company procedures regarding the issuance of press releases,
including a possible misstatement in a certain press release issued by the
Company,

o corporate governance and Board independence issues, including the adequacy
of the Company's internal controls governing employee and officer conduct,
and

o the accuracy and completeness of financial disclosures, including those
related to certain expense reversals or accruals.

In connection with its investigation, the independent law firm reviewed a
significant number of Company documents and records, and interviewed numerous
individuals with relevant knowledge of the matters at hand. As of the conclusion
of the investigation, all matters reviewed had no material impact to our current
or previously reported financial results or disclosures. The two areas of
concern noted by the investigation were related to:

o A certain press release issued by the Company in late 2003 introducing four
new technology features that had misstated certain factual information about
the availability of one of the new technology features at the time the press
release was issued. Specifically, a senior Company official likely made a
misrepresentation to the Company's auditors concerning the availability of
that one feature at the time when the press release was issued.

o A single, isolated episode in which a small number (approximately 300
prints) of a pilot program's coupons were improperly printed by unauthorized
users. In connection with such unauthorized use, a senior Company official
directed the allocation of such coupons to known user accounts to, according
to the senior Company official, enable the proper tracking of such coupons.
The investigation suggested that this action may have been inappropriate or
could have been construed as misleading by an external party.

The investigation also determined that neither of these two matters had any
impact on current or previously reported financial statements or disclosures.

In response to recommendations by the independent law firm as to a plan of
remediation, we have taken or expect to take the actions recommended by the
independent law firm, including certain changes in management as noted below.

In performing its audit of our consolidated financial statements for the
year ended December 31, 2003, and in connection with its review of the results
of the independent investigation described above, our independent auditors, KPMG
LLP, noted two matters involving our internal controls that it considered to be
reportable conditions under the standards established by the American Institute
of Certified Public Accountants. A reportable condition is a matter coming to
the auditors' attention that, in its judgment, relate to significant
deficiencies in the design or operation of internal control and could adversely
affect our ability to record, process, summarize and report financial data
consistent with the assertions of management in the financial statements.

The first identified reportable condition related to appropriate segregation
of duties to ensure that accurate information is contained in certain types of
internal and external corporate communications, including press releases. The
second identified reportable condition related to the absence of certain
controls such as a mechanism for employees to report concerns of questionable
employee behavior to an independent party for investigation and resolution.
Neither reportable condition was considered to be a material weakness.

In response, in part, to the results of the investigation, and, in part, in
order to pursue new professional opportunities, the Company's co-founder and
then Chairman & Chief Executive Officer voluntarily decided to resign his
positions from the Company effective June 17, 2004. On June 22, 2004, Mehrdad
Akhavan, the Company's co-founder, President and Chief Operating Officer, was
appointed as the new Chief Executive Officer. Sean Deson (who was named a
non-management director effective as of April 19, 2004 and served as Chairman of
the special Committee that led the investigation) was appointed as the new
Chairman of the Board. Tracy L. Slavin, the Company's Controller and Senior
Director of Accounting, was appointed Chief Financial Officer effective June 22,
2004.

43

Also, the Company intends to make changes to its controls and procedures to
enhance integrity, accuracy and reliability, including the following:

o Strengthening its internal processes and review procedures to assure that
accurate information is contained in external corporate communications,

o Implementing a mechanism for employees to properly communicate and address
their concerns, including to an independent party,

o Expanding its current Board of Directors to accommodate a separately
designated Audit Committee, and

o Adding an independent director to the Board of Directors.

The Company believes that its efforts should resolve both reportable
conditions.

The Company is fully committed to implementing controls identified by the
Company's independent auditors, and anticipates completing its remediation
efforts in connection with the reportable conditions identified by its
independent auditors as soon as possible.

Internal Control over Financial Reporting

No change in the Company's internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during
the fiscal quarter ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. As previously discussed, the Company intends to take
necessary steps to address certain reportable conditions noted above while
enhancing and improving its internal controls and procedures.

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, 2003.

Name Age Position(s) with Company
- ---------------------------------------------------------------------------------------------

Kamran Amjadi 40 Chairman, Chief Executive Officer and Director
Mehrdad Akhavan 40 President, Chief Operating Officer, Secretary and Director
David Samuels 42 Senior Vice President, Chief Financial Officer and Treasurer
Wendy Roberts 39 Senior Vice President, Business Development
Paul Wassem 33 Vice President and General Manager for ConsumerREVIEW.com
Ira Becker 36 Vice President of Strategic Alliances
Alex Sukhenko 35 Vice President of Engineering
John Hoffman 44 Vice President of Network Operations
Amori Langstaff 32 Vice President of Client Services
Tracy Slavin 34 Controller and Senior Director of Accounting
Peter Friedli 49 Director

Kamran Amjadi resigned as our Chairman and Chief Executive Officer on June
17, 2004. Prior to that time, he had 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 was appointed as our Chief Executive Officer on June 22,
2004. Prior to that time, he had 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 resigned as our Senior Vice President, Chief Financial Officer
and Treasurer, effective as of May 14, 2004, by mutual agreement. Prior to that
time, Mr. Samuels had served as our Senior Vice President, Chief Financial
Officer and Treasurer since April 2001 and oversaw all financial and
investor-related matters for E-centives. Prior to joining E-centives, Mr.

44

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 spent February 1990 to January
2000 with Host Marriott Services Corporation, serving most recently as Vice
President of Finance, Development and Operations for New Markets where he
functioned in the capacity of a divisional CFO driving strategic and business
growth initiatives for a $200 million revenue business unit. He began his
financial career as an auditor with KPMG LLP.

Wendy Roberts oversees the development of new market strategies and was
hired as our Vice President of Emerging Markets in May 2002 and in March 2003
she was promoted to Senior Vice President, Business Development. Wendy brings
more than 18 years of experience in the areas of new business development,
management consulting and strategic planning. From 1997 to 2001, she served as
Senior Partner at ionStrategy and served as Vice President of New Business
Development and as Partner of Strategy at Agency.com, a leader in the
development of Digital Relationship Management for Fortune 1000 companies. There
she developed and grew vertical market strategies and relationships in the areas
of Pharmaceuticals, Financial Services and Insurance, High Technology, Retail
and Travel. Through various senior roles in Sales, Marketing, Consulting and
Client Management areas, Wendy has lead efforts to develop Relationship
Management strategies for many leading companies.

Paul Wassem joined us in December 2002, in conjunction with the acquisition
of the ConsumerREVIEW.com division, as Vice President and General Manager for
ConsumerREVIEW.com. Prior to the acquisition, he was the President and CEO of
ConsumerREVIEW, Inc. Before joining ConsumerREVIEW.com in June 2000, he was a
channel manager at BuyersEdge.com, an online marketplace backed by CMGI @
Ventures. From 1998 to 2000, Paul was vice president and general manager of GSS,
Inc., a start-up staffing firm. Until 1998, he was a general manager at
Borg-Warner Security Corporation. During his nine years at Borg-Warner, Paul was
promoted from front-line sales and consulting positions to executive general
management.

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 resigned as our Vice President of Engineering, Messaging &
Data Warehouse during May 2004. Prior to that time, he had served in various
positions with us since March 1999, most recently as Vice President of
Engineering, Messaging & Data Warehouse. From September 1996 to February 1999,
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.

John Hoffman oversees our internal and external computer services, security
and operation as our Vice President of Network Operations. He became a member or
our team when we acquired BrightStreet.com in December 2001. At BrightStreet
Inc.'s he oversaw their network infrastructure, where he managed more than 24
systems providing scalability and high availability architectures. John brings
more than 19 years of experience in computer operations, software development
and security. He has obtained varied development and operational experience both
in high security government work and the Internet. Prior to BrightStreet, he
held various positions at Lockheed Missile & Space Company, from 1998 to 2000,
and at Netcom Online Communications, from 1994 to 1998.

Amori Langstaff, our Vice President of Client Services, joined us in March
2000. Amori oversees all client implementations, managing such processes as
account services, business strategy, performance analyses and production. She
brings to E-centives ten years of experience designing and delivering
results-based database and customer loyalty marketing solutions for retail and
hospitality companies, including the Mandarin Oriental Hotel Group, Asset
Marketing and Regent International Hotels. Amori has extensive experience in
creating and implementing marketing campaigns, customer segmentations, database
marketing programs and corporate business plans, and in leading consultative
client engagements. At E-centives, her contributions have promoted better and
more profitable client relationships, streamlined sales and fulfillment
processes, and produced standardized training and performance programs.

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

45

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.

Tracy Slavin became our Chief Financial Officer in June 2004. Ms. Slavin
joined us in September 2000, and until her promotion served as Controller and
Senior Director of Accounting. Ms. Slavin, a CPA, has an MBA and over twelve
years of corporate accounting, finance and auditing experience. Prior to joining
E-centives, she served as Vice President of Accounting for Thomson Financial, a
division of The Thomson Corporation, a leading provider of financial
information, analysis, research and software products. From 1993 to 1997, Ms.
Slavin served as Assistant Controller for Phillips International, Inc., a
consumer and business-to-business information company. Ms. Slavin began her
career as an auditor with PriceWaterhouseCoopers LLP.

BOARD OF DIRECTORS

As of December 31, 2003, our Board of Directors consisted of Kamran Amjadi,
Mehrdad Akhavan and Peter Friedli, with Mr. Amjadi serving as Chairman of the
Board. Effective as of April 19, 2004, Sean Deson was appointed to our Board of
Directors. On June 17, 2004, Mr. Amjadi resigned as director and Chairman of our
Board of Directors, and on June 22, 2004, Mr. Deson was appointed Chairman of
the Board. For his agreement to serve as Chairman of the Board, we agreed to
award Mr. Deson 50,000 shares of our common stock. Our Board of Directors
currently consists of Sean Deson, Mehrdad Akhavan and Peter Friedli.

Compensation 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. As of December 31, 2003, the Compensation Committee consisted of Mr.
Friedli, the committee's chairman, and Mr. Amjadi. Mr. Amjadi resigned from the
Compensation Committee on June 17, 2004.

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

46

AUDIT COMMITTEE/AUDIT COMMITTEE FINANCIAL EXPERT

We do not have a separately designated standing Audit Committee of our Board
of Directors, and therefore we do not have any independent audit committee
financial experts under Item 401(h) of Regulation S-K. We are listed on the SWX
Swiss Exchange, which exchange does not currently require that listed companies
have an audit committee. We intend to expand our current Board of Directors to
accommodate a separately designated Audit Committee, and to appoint members of
such an Audit Committee, at a later date.

BENEFICIAL OWNERSHIP REPORTING COMPLIANCE UNDER SECTION 16

To our knowledge, based solely on review of the copies of reports under
Section 16(a) of the Exchange Act that have been furnished to us and written
representations that no other reports were required, during the fiscal year
ended December 31, 2003 all executive officers, directors and greater than 10%
beneficial owners have complied with all applicable Section 16(a) filing
requirements.

CODE OF ETHICS

The Board of Directors has not yet adopted a Code of Ethics, but plans to
establish one during 2004 that will apply to all of our employees. Once
established, the Code of Ethics will be publicly available at our website
(www.e-centives.com) and we intend to disclose any amendments to the Code of
Ethics or any waiver from a provision of the Code of Ethics on our website.

ITEM 11 - EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation paid during the year ended
December 31, 2003 to our Chief Executive Officer, our two other most highly
compensated executive officers at December 31, 2003, and two other employees
(collectively, the "Named Executive Officers").

Long-Term
Compensation
Annual -------------
Compensation Securities
----------------------- Underlying
Name and Principal Position(s) Year Salary ($) Bonus ($) Other ($) Options
- ------------------------------------------------------------------------------------------------------------------------------------
Kamran Amjadi

Chairman, Chief Executive Officer and Director 2003 $160,083 (1) $25,000 (2) $ - 3,311,971
2002 $170,000 $ - $ - -
2001 $170,000 $ - $ - -

Mehrdad Akhavan
President, Chief Operating Officer, Secretary and Director 2003 $141,250 (1) $25,000 (2) $ - 1,868,256
2002 $150,000 $ - $ - -
2001 $150,000 $ - $ - -

David Samuels (3)
Senior Vice President, Chief Financial Officer and Treasurer 2003 $171,289 (1) $25,000 (2) $ - 350,000
2002 $170,000 $ - $ - -
2001 $123,958 (3) $ - $ - 100,000

Wendy Roberts (4)
Senior Vice President, Business Development 2003 $188,333 (1) $ - $ - 350,000
2002 $116,667 $ - $ - 150,000

Ira Becker
Vice President of Strategic Alliances 2003 $141,250 (1) $15,000 (2) $ 2,814 (5) 350,000
2002 $143,313 $ - $ 3,840 (5) -
2001 $135,000 $15,000 $ - -

- ----------------
(1) Salaries for 2003 included a 10% deferral that began in June 2003.
(2) Bonuses paid during 2003 were earned during 2002.
(3) David Samuels joined E-centives in April 2001 as Chief Financial Officer
and Treasurer. Accordingly, the 2001 information for Mr. Samuels is for the
period from April 2001 to December 31, 2001. David Samuels left E-centives
in May 2004.

47

(4) Wendy Roberts joined E-centives in May 2002 as Vice President of Emerging
Markets and in March 2003 she was promoted to Senior Vice President,
Business Development.
(5) Represents Commissions paid.

EMPLOYMENT AGREEMENTS

Mehrdad Akhavan has been employed by us under an employment agreement that
expired on August 31, 2002, and until June 17, 2004, Kamran Amjadi was employed
by us under an employment agreement that expired on August 31, 2002. Mr. Amjadi
and Mr. Akhavan's employment agreements provided for annual base salaries of
$170,000 and $150,000, respectively, subject to increase by the Board of
Directors. Each employment agreement provided for an annual bonus of $50,000.
Pursuant to such agreements, each of Messrs. Amjadi and Akhavan could be
terminated without cause at any time, so long as we pay the full balance of
their salaries for the term. If we are taken over, sold, or involved in a merger
or acquisition of any kind and the same salary was not offered to Messrs. Amjadi
and Akhavan for the remaining term of their agreements, they would be entitled
to payment of the full balance of their salaries for the term. Pursuant to such
agreements, each of Messrs. Amjadi and Akhavan agreed for a period of one year
following resignation or termination of the agreement not to compete directly
with or be employed by any person or organizations that compete directly with
our products or services developed or in development at the time of their
termination. On June 17, Mr. Amjadi resigned as our Chairman and Chief Executive
Officer. To date, we have not renewed Mr. Akhavan's employment agreement, and as
such he remains employee "at will." In addition, on December 8, 2003 Messrs.
Amjadi and Akhavan were awarded 3,311,791and 1,868,256 stock options,
respectively, of which 2,311,791 and 1,304,134, respectively, vest upon
issuance, although the underlying common stock is subject to a twelve (12) month
trading restriction from the date of issuance of the options. Each officer's
respective trading restriction automatically sunsets upon such officer's
respective termination from us for any reason. Thus, Mr. Amjadi's trading
restriction terminated as of June 17, 2004 and he may freely exercise such stock
options and sell all shares of underlying common stock, which sale can adversely
impact our stock price. If Mr. Akhavan leaves us, he would be free, without
restriction, to exercise such stock options and sell all shares of underlying
common stock, which sale could adversely impact our stock price. The remaining
1,000,000 and 564,122 stock options, respectively, automatically vest on the two
(2) year anniversary of the issuance date, although vesting may be accelerated
upon the achievement of certain performance criteria.

OPTION GRANTS IN LAST FISCAL YEAR

The following table contains information concerning grants of stock options
made to each of the Named Executive Officers during the year ended December 31,
2003:

Potential Realizable Value
% of Total at Assumed Annual Rates
Number of Shares Options of Stock Price Appreciation
of Common Stock Granted to Exercise for Option Term (4)
Underlying Employees Price Per Expiration ------------------------------
Name Options Granted in 2003 Share Date 5% 10%
- ----------------------------------------------------------------------------------------------------------------

Kamran Amjadi 3,311,791 (1) 38.8% $ 0.13 10/08/12 $ 270,760 $ 686,158
Mehrdad Akhavan 1,868,256 (1) 21.9% $ 0.13 10/08/12 152,742 387,077
David Samuels 350,000 (2) 4.1% $ 0.13 10/08/12 28,615 72,515
Wendy Roberts 350,000 (2) 4.1% $ 0.13 10/08/12 28,615 72,515
Ira Becker 350,000 (2) 4.1% $ 0.13 10/08/12 28,615 72,615

- ------------------------------
(1) These options were authorized by the board of directors in October 2002 and
have a grant date of October 8, 2002, but were not issued until December 2003.

(2) These options were authorized by the board of directors in October 2002 and
have a grant date of October 8, 2002, but were not issued until November 2003.

(3) These options were authorized by the board of directors in December 2002 and
have a grant date of December 2, 2002, but were not issued until May 2003.

(4) The potential realizable value is calculated based on the term of the option
at its grant date (ten years). It is calculated assuming that the fair market
value of our common stock on the date of grant appreciates at the indicated
annual rate compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the appreciated
stock price.

48

AGGREGATED OPTION EXERCISES AND HOLDINGS

The following table presents information with respect to stock options
exercised by each of our Named Executive Officers during the year ended December
31, 2003 and stock options owned by each of our named executive officers at
December 31, 2003 on an aggregated basis.

Number of Shares Number of Securities Underlying Value of Unexercised
Aquired on Value Unexercised Options at In-the-Money Options at
Name Exercise Realized (1) December 31, 2003 December 31, 2003
- --------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
---------------------------------------------------------------------

Kamran Amjadi - $ - 2,686,791 1,000,000 $ 928,179 $ 401,498
Mehrdad Akhavan - - 1,679,134 564,122 523,607 226,494
David Samuels - - 150,000 300,000 35,131 105,393
Wendy Roberts - - 125,000 375,000 36,312 108,937
Ira Becker 87,500 $32,943 100,000 262,500 - 105,393

- ---------------------
(1) Represents the difference between the exercise price and the fair market
value of our common stock on the date of exercise.

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

The following table presents information regarding the beneficial ownership
of common stock as of March 1, 2004:

o each person, or group of affiliated persons, who is the beneficial
owner of more than 5% 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, 6th 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 March 1, 2004 are deemed outstanding. These shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other person.

Shares Beneficially Owned
----------------------------
Name Number Percent of Class
- -------------------------------------------------------------------------

Kamran Amjadi (1) 4,282,791 7.1
Mehrdad Akhavan (2) 2,339,134 3.9
Peter Friedli (3) 29,529,341 49.3
c/o Friedli Corporate Finance AG
Freigutstrasse 5
8002 Zurich, Switzerland
Venturetec, Inc. (4) 8,112,743 13.8
c/o Friedli Corporate Finance AG
Freigutstrasse 5
8002 Zurich, Switzerland
New Venture AG (5) 8,112,743 13.8
c/o Friedli Corporate Finance AG
Freigutstrasse 5
8002 Zurich, Switzerland
InVenture, Inc. (6) 11,983,337 20.8
c/o Friedli Corporate Finance AG
Freigutstrasse 5
8002 Zurich, Switzerland

49

Bank J Vontobel & Co AG (7) 5,000,000 8.0
Bahnhofstrasse 3
8002 Zurich, Switzerland
Rahn & Bodmer Banquiers (8) 4,187,535 6.8
Talstrasse 15, Postfach
8002 Zurich, Switzerland
David Samuels (9) 168,750 *
Paul Wassem (10) 49,500 *
Lawrence Brand (11) 0 *
All executive officers and directors as a
group (6 persons) (12) 36,369,516 56.4

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

(1) Includes 2,686,791shares issuable upon exercise of vested stock options.

(2) Includes 1,679,134 shares issuable upon exercise of vested stock options.

(3) Includes 7,299,608 shares of common stock, 90,000 shares issuable upon
exercise of vested stock options and 1,065,000 shares issuable upon
exercise of warrants held by Mr. Friedli individually, as well as shares of
common stock and common stock underlying warrants held by entities over
which Mr. Friedli has control, as follows: InVenture, Inc. -- 11,983,337
shares of common stock; Joyce, Ltd. -- 235,000 shares of common stock; Pine
Inc. -- 255,000 shares of common stock; Savetech, Inc. -- 165,383 shares of
common stock; Spring Technology Corp. -- 177,520 shares of common stock;
USVentech -- 145,750 shares of common stock; and Venturetec, Inc. --
7,112,743 shares of common stock and 1,000,000 issuable on exercise of
warrants. Mr. Friedli has sole voting and investment power with respect to
8,454,608 shares and shared voting and investment power with respect to
21,074,733 shares. See Item 13 - "Certain Relationships and Related Party
Transactions -- Stock Purchases and Related Matters" for a description of
Mr. Friedli's relationships with these entities.

(4) Includes 7,112,743 shares of common stock and 1,000,000 issuable on
exercise of warrants. Venturetech, Inc. has shared voting and investment
power with respect to 8,112,743 shares.

(5) Includes 7,112,743 shares of common stock and 1,000,000 issuable on
exercise of warrants held by Venturetech, Inc. New Venturetec AG may be
deemed to control Venturetec, Inc. by virtue of its ownership of 100% of
Venturetec, Inc.'s capital stock and its corresponding right to elect
Venturetec, Inc.'s directors, and, therefore, our capital stock owned by
Venturetec, Inc. may also be deemed to be beneficially owned by New
Venturetec, Inc. New Venturetech AG has shared voting and investment power
with respect to 8,112,743 shares.

(6) Includes 11,983,337 shares of common stock. InVenture, Inc. has shared
voting and investment power with respect to 11,983,337 shares.

(7) Includes 5,000,000 shares of common stock.

(8) Includes 4,187,535 shares of common stock.

(9) Includes 168,750 shares issuable upon exercise of vested stock options.

(10) Includes 49,500 shares issuable upon exercise of vested stock options.

(11) Lawrence Brand left the company in February 2002.

(12) Includes 29,630,341 shares of common stock, 4,674,175 shares issuable upon
exercise of vested stock options and 2,065,000 shares issuable upon
exercise of warrants.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Below is information as of December 31, 2003 with respect to compensation
plans under which equity securities are authorized for issuance.

50

A B C
- ------------------------------------------------------------------------------------------------------------------------------------
Number of securities to be issued Weighted-average exercise Number of securities remaining
upon exercise of outstanding price of outstanding options, available for future issuance under
options, warrants and rights warrants and rights equity compensation plans (excluding
securities reflected in column A)
- ------------------------------------------------------------------------------------------------------------------------------------

Equity compensation
plans approved by
security holders (1) 9,708,222 $ 1.10 11,201,778 (2)

Equity compensation
plans not approved by
security holders - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 9,708,222 11,201,778
===========================================================================================================

(1) Plans approved by stockholders include the Amended and Restated Stock
Incentive and Option Plan.

(2) 90,000 options were granted to Peter Friedli, one of our directors, as
compensation for a non-employee member of our board of directors.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

STOCK PURCHASES AND RELATED MATTERS

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

On October 8, 2002, the Board of Directors approved the issuance of
6,000,000 warrants to four investors as consideration for a $20 million
financing commitment. Two of the investors, Peter Friedli and Venturetec, are
our stockholders and pursuant to the terms of the private placement, each
received 1,000,000 warrants. As part of this financing, in March 2003, we
executed convertible promissory notes in favor of Friedli Corporate Finance and
InVenture, Inc. The notes allow us to draw down against the available principal
of up to $6 million at any time and in any amount during the first two years of
the notes. All principal drawn upon will be secured by substantially all of our
assets. Subsequent to the issuance of these promissory notes, we, Friedli
Corporate Finance and InVenture, Inc. agreed to assemble a syndicate of third
parties to whom we would issue convertible promissory notes on terms similar to
the March 2003 $6 million convertible promissory notes. The aggregate dollar
amount of the convertible promissory notes that we issue to third parties
through syndication will reduce, on a dollar-for-dollar basis, the $6 million
convertible promissory notes of Friedli Corporate Finance and InVenture, Inc.
and the balance, if any, will continue to be available to us under the initial
$6 million commitment. As part of the syndication process, during 2003, we
issued nine convertible promissory notes totaling $3,450,000. During March 2004,
the credit facility available to us under Friedli Corporate Finance's and
InVenture, Inc.'s initial commitment was increased from $6 million to $12
million, pursuant to amended notes. The general terms of the amended notes
remain the same as the terms of the $6 million notes described above.

Peter Friedli also earns fees for his help in raising funds for the Company.
As a result of his help in securing the funds associated with the convertible
promissory notes, Peter Friedli was paid $360,000 during 2003. In conjunction
with the $3.3 million of funds received during the first and second quarters of
2004, Peter Friedli is to be provided with an additional $330,000 in fees, which
Mr. Friedli has indicated to us will be distributed to a number of third party
banks and individuals who assisted in financing effort. In addition, on December
8, 2003, Peter Friedli was issued 345,000 warrants with an exercise price of
$0.50 and an expiration date of December 8, 2007 in connection with his
continued support of the business and his assistance with fundraising.

Venturetec and Pine were debentureholders in Consumer Review, Inc.
Therefore, as a result of our acquisition of substantially all of the assets of
Consumer Review, Inc. in December 2002, Venturetec and Pine received 240,315
shares and 4,500 shares, respectively, of our Series B convertible preferred
stock.

51

As part of our October 2001 rights offering, we sold shares of our common
stock to Venturetec and Pine. 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
(approximately $5.2 million) and Pine's note was in the principal amount of CHF
8,687,530 (approximately $5.3 million). However, 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 rights
offering. The CHF 2,500,000 (approximately $1.5 million) in cash originally
indicated as originating from Venturetec was reallocated as follows:

o In a private sale, InVenture purchased from Pine 1,041,667 shares of
common stock, originally purchased by Pine pursuant to the rights
offering, for CHF 2,083,334. As part of this transaction, Pine was
credited with paying us CHF 2,083,334 (approximately $1.3 million) 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 $4.1 million), with 2% interest accruing from October
19, 2001 and a maturity date that was extended to May 15, 2002. We
simultaneously returned Pine's original CHF 8,687,530 promissory note.
All of the outstanding principal and interest under the promissory
notes was fully received in April 2002.

o Venturetec paid us CHF 416,666 (approximately $256,000) 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 $6.5 million), with 2% interest accruing from October
19, 2001 and a maturity date that was 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 $6.8 million), 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. All of the outstanding principal and
interest under the promissory notes was fully received in April 2002.

On June 22, 2004, Mr. Sean Deson (who was named a director effective as of
April 19, 2004) was appointed as Chairman of the Board. For his agreement to
serve as Chairman of the Board, we agreed to award Mr. Deson 50,000 shares of
our common stock. Mr. Deson is the founder of Deson & Co., Deson Ventures, and
Treeline Capital, all technology-focused investment related firms. Prior to
founding his investment firms, Mr. Deson was a Senior Vice President at
Donaldson, Lufkin & Jenrette, now Credit Suisse First Boston. Messrs. Friedli
and Deson have co-invested in a number of operating companies.

LOANS TO MEMBERS OF MANAGEMENT AND BOARD OF DIRECTORS

We do not have any outstanding loans to officers or members of the Board of
Directors.

OTHER TRANSACTIONS

In July 1996, we entered into a consulting agreement with Friedli Corporate
Finance, whereby Mr. Friedli provides us with financial consulting services and
investor relations advice. Pursuant to a renewed agreement, which is scheduled

to expire in November 2006, Friedli Corporate Finance, Inc. is paid $4,000 per
month plus reimbursement of expenses related to Mr. Friedli's services.
Consulting expense under the Friedli Corporate Finance agreement was
approximately $63,000 for each of the years ended December 31, 2003, 2002 and
2001. In addition, under the original 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, Friedli Corporate Finance permanently waived its rights to
purchase shares of common stock in our initial public offering and our future
offerings.

We engaged Friedli Corporate Finance to support us in connection with our
2001 rights offering. In association with this support, we reimbursed Friedli
Corporate Finance approximately $100,000 in expenses.

52

On June 22, 2004, Mr. Sean Deson (who was named a director effective as of
April 19, 2004) was appointed as Chairman of the Board. For his agreement to
serve as Chairman of the Board, we agreed to award Mr. Deson 50,000 shares of
our common stock. Mr. Deson is the founder of Deson & Co., Deson Ventures, and
Treeline Capital, all technology-focused investment related firms. Prior to
founding his investment firms, Mr. Deson was a Senior Vice President at
Donaldson, Lufkin & Jenrette, now Credit Suisse First Boston. Messrs. Friedli
and Deson have co-invested in a number of operating companies.

ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES

Aggregate fees for professional services rendered to the Company by KPMG LLP
as of or for the years ended December 31, 2003 and 2002 are summarized in the
table below.

2003 2002
------------------------------
Audit fees (1) $210,345 $195,655

Audit Related fees 0 0

Tax fees (2) 33,380 51,865

All Other fees 0 0
------------ -------------
Total fees $243,725 $247,520
============ =============

- -------------------------
(1) Audit fees include consents and review of and assistance with documents
filed with the SEC.
(2) Tax fees consisted of fees for tax consultation and tax compliance
services.

Approximately 21% and 14% of the total revenues we paid to KPMG LLP in 2002
and 2003, respectively, were fees for tax consultation and tax compliance
services.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

As we do not have an Audit Committee, the Board of Directors has established
a policy regarding pre-approval of all audit and non-audit services provided to
us by our independent auditor. On an ongoing basis, management communicates
specific projects and categories of service for which the advance approval of
the Board of Directors is requested. The Board of Directors reviews these
requests and advises management if the Board of Directors approves the
engagement of the independent auditor. On a periodic basis, management reports
to the Board of Directors regarding the actual spending for such projects and
services compared to the approved amounts. The projects and categories of
service are as follows:

o Audit fees: Professional services rendered for the audits of the
consolidated financial statements of the Company and assistance with
review of documents filed with the SEC.
o Audit Related fees: Services related to employee benefit plan audits,
business acquisitions, accounting consultations and consultations
concerning financial and accounting and reporting standards.
o Tax fees: Services related to tax compliance, including the preparation
of tax returns, tax planning and tax advice.
o All Other fees: Other services are pre-approved on an
engagement-by-engagement basis.

PART IV

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS AND SCHEDULES

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

Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Loss F-4
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7

53

See Schedule II - Valuation and Qualifying Accounts and Reserves

All other schedules have been omitted, as the required information is
included in our Consolidated Financial Statements or the notes thereto, or
is not applicable or required.

REPORTS ON FORM 8-K

On November 14, 2003 we filed a Form 8-K under Item 12 reporting that we had
issued a press release announcing our financial results for the quarter
ended September 30, 2003.

EXHIBITS

See Exhibit Index attached.

54

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 June 30, 2004.

E-CENTIVES, INC.

By: /s/ Mehrdad Akhavan
--------------------------
Mehrdad Akhavan
Chief Executive Officer

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

Name Title Date
---- ----- ----

/s/ Mehrdad Akhavan June 30, 2004
- ------------------------
Mehrdad Akhavan Chief Executive Officer (Principal
Executive Officer) and Director

/s/ Tracy L. Slavin June 30, 2004
- ------------------------
Tracy L. Slavin Chief Financial Officer (Principal
Financial and Accounting Officer)

/s/ Sean Deson June 30, 2004
- ------------------------
Sean Deson Chairman and Director

/s/ Peter Friedli June 30, 2004
- ------------------------
Peter Friedli Director

55

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive loss and cash flows for each of the years in the three-year period
ended December 31, 2003. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. 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.

As discussed in Note 1 to the consolidated financial statements, the Company
is dependent upon its principal stockholder for continued funding.

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, 2003 and 2002 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Notes 2 and 7 to the consolidated financial statements,
effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".

/s/ KPMG LLP
McLean, Virginia
June 29, 2004

F-1

E-CENTIVES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2003 December 31, 2002
---------------------- --------------------

ASSETS

Current assets:

Cash and cash equivalents $ 285,076 $ 2,317,354
Accounts receivable, net of allowance for doubtful
accounts of $63,086 and $75,108 at December 31, 2003
and December 31, 2002, respectively 1,582,763 2,973,129
Other receivables - 140,169
Prepaid expenses 67,367 297,888
Restricted cash 57,069 635,049
Other - 16,203
----------------------- -----------------------
Total current assets 1,992,275 6,379,792
Property and equipment, net 849,407 2,281,155
Other intangible assets, net 2,063,507 3,185,213
Restricted cash 70,000 110,000
Deferred financing fee 857,840 720,000
Other assets - 14,790
----------------------- -----------------------
Total assets $ 5,833,029 $ 12,690,950
======================= =======================

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable $ 2,654,601 $ 1,957,590
Accrued expenses 765,691 1,254,773
Accrued restructuring costs 77,276 717,079
Deferred revenue 653,741 1,095,613
Current portion of capital leases 297,327 224,914
Other liabilities 214,783 90,552
----------------------- -----------------------
Total current liabilities 4,663,419 5,340,521
Capital leases, net of current portion 31,718 245,614
Long-term debt 3,450,000 -
Other long-term liabilities 124,465 -
----------------------- -----------------------
Total liabilities 8,269,602 5,586,135
----------------------- -----------------------
Commitments and contingencies
Stockholders' equity (deficit):
Series A convertible preferred stock (voting), $.01 par value, 9,600,000
shares of preferred stock authorized, 0 and 2,000,000 shares issued and
outstanding at December 31, 2003
and December 31, 2002, respectively. - 20,000
Series B convertible preferred stock (voting), $.01 par value,
400,000 shares of preferred stock authorized, issued,
and outstanding at December 31, 2003 and December 31, 2002. 4,000 4,000
Common stock, $.01 par value, 120,000,000 shares authorized
57,663,609 and 37,349,284 shares issued and outstanding
at December 31, 2003 and December 31, 2002, respectively. 576,636 373,493
Additional paid-in capital 126,073,611 123,452,566
Accumulated other comprehensive gain - 3,386
Accumulated deficit (129,090,820) (116,748,630)
----------------------- -----------------------
Total stockholders' equity (deficit) (2,436,573) 7,104,815
----------------------- -----------------------
----------------------- -----------------------
Total liabilities and stockholders' equity (deficit) $ 5,833,029 $ 12,690,950
======================= =======================

See accompanying notes to consolidated financial statements.

F-2

E-CENTIVES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended December 31,
2003 2002 2001
----------------------------------------------------------

Revenue $ 6,059,123 $ 7,220,798 $ 5,053,624
Operating expenses:
Cost of revenue 2,866,193 4,415,722 8,395,162
Product development, exclusive
of stock-based compensation 2,518,649 4,068,402 7,933,192
General and administrative, exclusive
of stock-based compensation 7,632,263 10,763,390 12,591,620
Sales and marketing, exclusive
of stock-based compensation 2,311,809 3,885,839 9,997,131
Network partner fees - 2,271 985,593
Restructuring and impairment charges - 1,128,400 9,876,123
Stock-based compensation:
Product development 156,316 60,409 200,822
General and administrative 2,203,114 105,825 362,365
Sales and marketing 248,146 193,282 299,932
----------------------------------------------------------
Loss from operations (11,877,367) (17,402,742) (45,588,316)
Interest expense (479,172) (58,078) (3,630)
Interest income 10,963 296,457 607,957
Other income 3,386 - -
Loss before income taxes (12,342,190) (17,164,363) (44,983,989)
Income taxes - 19,476 (19,476)
-----------------------------------------------------------
Net loss $ (12,342,190) $ (17,144,887) $ (45,003,465)
===========================================================

Basic and diluted net loss per
common share ($0.29) ($0.46) ($2.68)
Shares used to compute basic and
diluted net loss per common share 42,521,083 37,349,270 16,810,366

See accompanying notes to consolidated financial statements.

F-3

E-CENTIVES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS

Series A Preferred Stock Series B Preferred Stock
------------------------ ------------------------
Shares Amount Shares Amount
---------- ------------ ----------- -----------
Balance at December 31, 2000 -- $ -- -- $ --
=========== ============ =========== ============

Rights Offering 2,000,000 20,000 -- --
Exercise of stock options -- -- -- --
Acquisition of Commerce Division -- -- -- --
Acquisition of BrightStreet.com -- -- -- --
Stock-based compensation -- -- -- --
Foreign Currency Translation Adjustment -- -- -- --
Net loss -- -- -- --
Comprehensive loss
---------- ------------ ----------- -----------
Balance at December 31, 2001 2,000,000 20,000 -- --
=========== ============ =========== ============
Rights Offering -- -- -- --
Exercise of stock options -- -- -- --
Issuance of Warrants -- -- -- --
Acquisition of the Consumer Review -- -- 400,000 4,000
Stock-based compensation -- -- -- --
Foreign Currency Translation Adjustment -- -- -- --
Net loss -- -- -- --
Comprehensive loss
---------- ------------ ----------- -----------

Balance at December 31, 2002 2,000,000 20,000 400,000 4,000
=========== ============ =========== ============
Conversion of Series A preferred stock to common stock (2,000,000) (20,000) -- --
Issuance of Warrants -- -- -- --
Exercise of stock options -- -- -- --
Stock-based compensation -- -- -- --
Foreign Currency Translation Adjustment -- -- -- --
Net loss -- -- -- --
Comprehensive loss
----------- ------------ ----------- -----------
Balance at December 31, 2003 -- $ -- 400,000 $ 4,000
=========== ============ =========== ============

Common Stock Additional
------------------------------- paid-in
Shares Amount Capital
------------ ------------ ----------------

Balance at December 31, 2000 15,168,434 $ 151,684 $ 85,282,822
============ ============= ================
Rights Offering 20,000,000 200,000 22,222,571
Exercise of stock options 11,875 119 28,006
Acquisition of Commerce Division 2,168,945 21,690 11,755,682
Acquisition of BrightStreet.com -- -- 185,000
Stock-based compensation -- -- 863,119
Foreign Currency Translation Adjustment -- -- --
Net loss -- -- --
Comprehensive loss
------------ ------------ ----------------
Balance at December 31, 2001 37,349,254 373,493 120,337,200
============== ============ ================
Rights Offering -- -- (27,855)
Exercise of stock options 30 -- 105
Issuance of Warrants -- -- 720,000
Acquisition of the Consumer Review -- -- 2,063,600
Stock-based compensation -- -- 359,516
Foreign Currency Translation Adjustment -- -- --
Net loss -- -- --
Comprehensive loss
------------ ------------ ----------------
Balance at December 31, 2002 37,349,284 373,493 123,452,566
============== ============ ================
Conversion of Series A preferred stock to common stock 20,000,000 200,000 (180,000)
Issuance of Warrants -- -- 155,250
Exercise of stock options 314,325 3,143 38,219
Stock-based compensation -- -- 2,607,576
Foreign Currency Translation Adjustment -- -- --
Net loss -- -- --
Comprehensive loss
------------ ------------ ----------------
Balance at December 31, 2003 57,663,609 $ 576,636 $ 126,073,611
============== ============ ================

See accompanying notes to consolidated financial statements.
F-4

E-CENTIVES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS

Accumulated
Notes Other Total
Receivable from Comprehensive Comprehensive Accumulated Stockholders'
Shareholders Loss Gain (Loss) Deficit Equity
(Deficit)

Balance at December 31, 2000 $ -- $ -- $ -- $ 54,600,278) $ 30,834,228
================== ============== ============== ============== ==============
Rights Offering (10,576,941) -- -- 11,865,630
Exercise of stock options -- -- -- 28,125
Acquisition of Commerce Division -- -- -- -- 11,777,372
Acquisition of BrightStreet.com -- -- -- -- 185,000
Stock-based compensation -- -- -- -- 863,119
Foreign Currency Translation Adjustment -- -- (16,997) -- (16,997)
Net loss -- -- -- (45,003,465) (45,003,465)
(16,997)
Comprehensive loss (45,003,465)
------------------ ----------------- ------------- -------------- --------------
Balance at December 31, 2001 (10,576,941) (45,020,462) (16,997) (99,603,743) 10,533,012
================== ================= ============== ============== ==============
Rights Offering 10,576,941 -- -- 10,549,086
Exercise of stock options -- -- -- 105
Issuance of Warrants -- -- -- -- 720,000
Acquisition of the Consumer Review -- -- -- -- 2,067,600
Stock-based compensation -- -- -- -- 359,516
Foreign Currency Translation Adjustment -- -- 20,383 -- 20,383
Net loss -- -- -- (17,144,887) (17,144,887)
20,383
Comprehensive loss (17,144,887)
------------------ -----------------= ------------- -------------- --------------
Balance at December 31, 2002 -- (17,124,504) 3,386 (116,748,630) 7,104,815
================== ================= ============== ============== ==============
Conversion of Series A preferred
stock to common stock -- -- -- --
Issuance of Warrants -- -- -- 155,250
Exercise of stock options -- -- -- -- 41,362
Stock-based compensation -- -- -- -- 2,607,576
Foreign Currency Translation Adjustment -- -- (3,386) -- (3,386)
Net loss -- -- -- (12,342,190) (12,342,190)
(3,386)
Comprehensive loss (12,342,190)
------------------ -----------------= ------------- -------------- --------------
Balance at December 31, 2003 $ -- $ (12,345,576) $ 0 $ (129,090,820) $ (2,436,573)
================== ================= ============== ============== ==============

See accompanying notes to consolidated financial statements.

F-5

E-CENTIVES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31,
2003 2002 2001
--------------------------------------------------
Cash flows from operating activities:

Net loss $ (12,342,190) $ (17,144,887) $ (45,003,465)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 3,006,890 5,274,070 6,182,141
Amortization of deferred financing fee 222,160 - -
Stock-based compensation 2,607,576 359,516 863,119
Provision for doubtful accounts 44,097 35,263 493,168
Issuance of warrants for consulting services 155,250 - -
Foreign currency translation gain (3,386) - -
Restructuring charge - (2,096,982) 469,397
Foreign currency loss on notes receivable - 258,230 -
(Increase) decrease in:
Accounts receivable 1,346,269 (425,369) 481,335
Prepaid expenses and other current assets 246,724 (43,022) 1,002,351
Other receivable 140,169 534,397 146,613
Increase (decrease) in:
Accounts payable 721,845 (35,187) (447,594)
Deferred revenue (441,872) (1,428,114) 795,724
Accrued expenses and other liabilities (775,759) (2,014,053) 10,248,497
-------------------------------------------------
Net cash used in operating activities (5,072,227) (16,726,138) (24,768,714)
-------------------------------------------------
Cash flows from investing activities:
Sale of short-term investments - - 114,491
Decrease (increase) in restricted cash 617,980 711,812 (913,877)
Acquisition of property and equipment (51,531) (428,254) (895,323)
Decrease (increase) in security deposits 14,790 (15,641) (37,855)
Refund of purchase of property and equipment 25,050 - -
Purchase of intangible asset (411,299) - -
Acquisition of ConsumerREVIEW.com - (175,302) -
Acquisition of BrightStreet.com - (34,254) (1,924,380)
Acquisition of Commerce Division - - (1,115,955)
-------------------------------------------------
Net cash provided by (used in) investing activities 194,990 58,361 (4,772,899)
-------------------------------------------------
Cash flows from financing activities:
Payments on obligations under capital lease (286,403) (208,331) (16,621)
Proceeds from issuance of debt 3,450,000 - -
Debt issuance costs (360,000) - -
Net proceeds from rights offering - (27,855) 12,606,016
Proceeds from notes receivable - 10,318,953 -
Exercise of stock options 41,362 105 28,125

Payment of dividends - - (1,235,688)
-------------------------------------------------
Net cash provided by financing activities 2,844,959 10,082,872 11,381,832
-------------------------------------------------
Net decrease in cash and cash equivalents (2,032,278) (6,584,905) (18,159,781)
Cash and cash equivalents, beginning of period 2,317,354 8,902,259 27,062,040
-------------------------------------------------
Cash and cash equivalents, end of period $ 285,076 $ 2,317,354 $ 8,902,259
-------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 32,973 $ 58,078 $ 3,630

Supplemental disclosure of non-cash investing and financing activities:
During 2003, 2,000,000 shares of the Company's series A convertible
preferred stock was converted into 20,000,000 shares of the Company's
common stock.
During December 2003, the Company issued 345,000 warrants valued at
$155,250.
During September 2003, the Company entered into a capital lease for
approximately $114,000 for hardware.
During January 2003, the Company entered into a capital lease for
approximately $24,000 for telephone related equipment.
During October 2002, the board of directors approved the issuance of
6,000,000 warrants valued at $720,000.
Inconjunction with the acquisition of ConsumerREVIEW.com in December 2002,
the Company issued 400,000 shares of series B preferred stock, valued at
$2,067,600.

F-6

Inconjunction 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, which were
not earned and therefore cancelled in June 2003.
Inconjunction 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. The right to exercise the
contingent performance-based warrant expired on March 27, 2002.

See accompanying notes to consolidated financial statements.

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. and again, in March 1999, the Company
amended its articles of incorporation to change its name to E-centives, Inc.
During March 2001, the Company expanded its international operations by
establishing a subsidiary in the United Kingdom, E-centives Limited. However,
the operations of this subsidiary were terminated in conjunction with the
Company's second quarter 2002 restructuring plan that involved closing down the
operating activities of the Commerce Division.

E-centives provides interactive direct marketing technologies and services
for global marketers. The Company offers a complete suite of technologies,
including several patented components, which enable businesses to acquire and
retain relationships with their audiences. The Company's current principal
products are the Interactive Database Marketing System, the Promotions System,
the E-mail Marketing System and advertising and e-commerce related services
provided through its ConsumerREVIEW.com division. During 2002, plans were
approved to close the Commerce Division and, by August 30, 2002, the Company
discontinued offering the services provided by its Commerce Engine and Commerce
Network systems. In addition, in July 2002, the Company reduced its workforce
due to its decision to close down its PerformOne Network system.

One of the Company's Interactive Database Marketing System customers,
Reckitt Benckiser PLC, contributed 45% and 62%, respectively, of the Company's
revenue for the years ended December 31, 2003 and 2002. This customer's initial
contract expired in October 2002, its first renewal agreement with the Company
expired in October 2003, and the customer entered into a subsequent renewal
agreement that expires in December 2004. However, due to the lower scope of work
to be performed by the Company, and the customer's savings through automation,
the fixed fees associated with the most recent contract renewal are
approximately one-half of the fixed fees associated with the renewal contract
that expired in October 2003. Such fees may increase with the addition of new
countries, brands and services with the customer, which additions are currently
under negotiation. Loss of this customer, or failure to complete negotiations to
increase the fixed fees associated with the renewal contract to pre-November
2003 levels could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flow.

The Company currently anticipates that its existing cash resources will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures into the third quarter of 2005. This forecast is based on the
remaining available line of credit at June 29, 2004 of up to $5.25 million from
the credit facility, structured in the form of two $6 million three-year
convertible promissory notes that were issued in March 2003 and during March
2004. Should future revenue be insufficient to cover the Company's operating
costs, the Company will need to secure additional funds to ensure future
viability. The Company may need to raise additional funds sooner than
anticipated to fund its future expansion, to develop new or enhanced products or
services, to respond to competitive pressures or to make acquisitions. To the
extent that the Company's existing funds and funds from the convertible
promissory notes are not sufficient to enable the Company to operate into the
third quarter of 2005 and beyond, Friedli Corporate Finance provided a written
commitment to provide the Company with an additional capital infusion of up to
$8 million. However, no formal terms and conditions have been agreed upon, other
than the terms of the $6 million, amended to $12 million, convertible promissory
notes. The Company cannot be certain that additional financing will be available
to them on acceptable terms, or at all. If adequate funds are not available, or
not available on acceptable terms, the Company may not be able to expand its
business.

F-7

The Company is dependent upon its principal shareholder for continued funding.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The accompanying consolidated financial statements include the accounts of
the Company and its subsidiary, which was closed during 2002. 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, intangible
assets, depreciation and amortization, goodwill, employee benefits,
restructuring accruals, taxes and contingencies. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined to be
necessary.

(c) Cash and Cash Equivalents

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.

(d) 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 (see Note 6).

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.

(e) Long-Lived and Amortizable Intangible Assets

Effective January 1, 2002, the Company adopted the provisions of 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 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). The Company assesses the recoverability of
long-lived assets, including amortizable intangible assets, whenever adverse
events or changes in circumstances or business climate indicate that the
carrying value of the asset may not be recoverable. Each impairment test is
based on a comparison of the undiscounted cash flows to the recorded value of
the asset. If impairment is indicated, the asset is written down by the amount,
if any, in which the carrying value of the asset exceeds the related fair value
of the asset. 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. No impairment charges
were recorded during 2002 or 2003.

In accordance with the amortization provisions of FAS 142, Goodwill and
Other Intangible Assets, the Company amortizes intangible assets with definite
useful lives over their respective estimated useful lives to their estimated
residual values, and reviews them for impairment in accordance with FAS 144.

F-8

Amortizable intangible assets at December 31, 2003, consisted of patents,
technology and tradenames, which were acquired in connection with the
BrightStreet.com and ConsumerREVIEW.com acquisitions, while at December 31, 2002
amortizable intangible assets consisted of technology and tradenames. As of
December 31, 2003, the Company had the following amortizable intangible assets:

Gross Carrying Accumulated Net
Amount Amortization Value
---------------------------------------------
Amortizable intangible assets:

Patents $ 411,299 $ (102,418) $ 308,881
Technology 3,774,685 (2,091,875) 1,682,810
Tradenames 112,408 (40,592) 71,816
---------------------------------------------
Total amortizable intangible assets $ 4,298,392 $(2,234,885) $ 2,063,507
---------------------------------------------

Aggregate Amortizaton Expense:
For the year ended December 31, 2003 $ 1,428,574

Estimated Amortizaton Expense:
For the year ended December 31, 2004 $ 1,529,221
For the year ended December 31, 2005 $ 534,286
For the year ended December 31, 2006 $ -

Had the amortization provisions of FAS 142 been applied as of January 1,
2001 for all of the Company's acquisitions, it would not have had a material
adverse effect on the Company's net loss and loss per common share for the year
ended December 31, 2001.

(f) Goodwill

Goodwill represents the excess of costs over fair value of tangible and
separately identifiable intangible assets of businesses acquired. The Company
adopted the provisions of FAS 142 as of January 1, 2002. Goodwill and intangible
assets acquired in a purchase business combination that are determined to have
an indefinite useful life are not amortized, but instead tested for impairment
at least annually in accordance with the provisions of FAS 142. At Janauary 1,
2002, goodwill related to the reclassification of employee workforce that was
recorded in connection with the purchase of the Commerce Division. During the
second quarter of 2002, due to the closure of the Commerce Division, the
goodwill was deemed impaired and the net value of approximately $657,000 was
written off. At December 31, 2003, the Company had no goodwill or other
intangible assets with indefinite useful lives.

(g) Deferred Revenue

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

(h) Revenue Recognition

Revenue is generated by providing promotions marketing services, e-mail
marketing services and various other consulting services, as well as licensing
the Company's software products. The Company's current products are principally
the Interactive Database Marketing System, the Promotions System and the E-mail
Marketing System, as well as advertising and e-commerce services provided
through ConsumerREVIEW.com. The Company eliminated the offerings of the Commerce
Engine, the Commerce Network and the PerformOne Network during 2002, so these
products did not contribute any revenue for the year ended December 31, 2003,
but did for the years ended December 31, 2002 and 2001.

The Company's Interactive Database Marketing System, which represented 53%,
67% and 1% of the Company's 2003, 2002 and 2001 revenue, respectively, is a
solution targeted at consumer packaged goods companies that allows businesses to
establish direct consumer relationships through a set of integrated tools that
include targeted e-mail marketing, a customer transaction database, a data
warehouse, a micro site and survey generator and a patented coupon promotion
system. It is primarily the combination of the Company's Promotions System and
E-mail Marketing System. Revenue is generated by charging fees for system
licensing, data hosting, site hosting, database management, account management,
strategy services, creative services, e-mail delivery and management services,
as well as tracking and analytical services. Revenue related to licensing fees

F-9

is recognized ratably over the license period, one-time service fees for setting
up the customer is recognized ratably over the expected term of the customer
relationship and all other revenue is recognized when the service is provided,
assuming collection is reasonably assured. For agreements that also include a
performance-based incentive fee component that is not finalized until a
specified date, the Company recognizes the amount that would be due under the
formula at interim reporting dates as if the contract was terminated at that
date. This policy does not involve a consideration of future performance, but
does give rise to the possibility that fees earned by exceeding performance
targets early in the measurement period may be reversed due to missing
performance targets later in the measurement period. The Company's only client
with a performance-based incentive fee contributed approximately $96,000,
$1,064,000 and $0, respectively, in such revenue for the years ended December
31, 2003, 2002 and 2001, from the original contract that expired in October
2002. The first renewal agreement, which began in November 2002, also includes
performance-based incentive fees that contributed $223,000 in revenue for the
year ended December 31, 2003. The second renewal agreement, which began in
November 2003 and ends in December 2004, does not contain a performance-based
incentive fee component.

The Company's Promotions System enables companies to create, manage, deliver
and track promotional vehicles, such as print-at-home online coupons. The
system's printable coupons can be individually tailored with relevant content
and different incentive values based on the respective recipients, enabling
manufacturers to target coupons much more efficiently and cost-effectively than
traditional methods. In addition, the system has high tracking capabilities,
including individually coded offers that can be cross-referenced against
specific consumer profiles. The technology can also be used to build knowledge
about consumers, such as their prior product purchases and loyalty data, and to
get a more accurate measure of the actual impact of online marketing
expenditures on sales. For the years ended December 31, 2003, 2002 and 2001,
revenues from the Promotions System have been included in revenues generated
from the Interactive Database Marketing System and the revenue recognition
policies are the same as those for the Interactive Database Marketing System.

The Company's E-mail Marketing System, which represented 3%, 5% and 2% of
the 2003, 2002 and 2001 revenue, respectively, 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 analytical services. Revenue related to
one-time service fees for setting up the customer is recognized ratably over the
expected term of the customer relationship, while all other revenue is
recognized when the service is provided.

ConsumerREVIEW.com, which was acquired in December 2002, manages web
communities around common product interests. The web properties are dedicated to
meeting the needs of consumers who are researching products on the web. Revenue
is predominantly generated through advertising and e-commerce fees. Advertising
revenue is derived from the sale of advertisements on pages delivered to
community members of the Company's websites. This revenue is recognized in the
period in which the advertisements are delivered. E-commerce fees are derived
from on-line performance-based programs and are earned on either a lead referral
basis or on an affiliate commission basis. Revenue is earned from
performance-based programs when a user of the Company's websites responds to a
commerce link by linking to a customer's websites. For lead referral programs,
customers are charged on a cost-per-click basis, and revenue is recognized in
the month the click occurs. For affiliate-commissions programs, revenue is
recognized when the commission is earned, which is in the month the transaction
occurs. ConsumerREVIEW.com represented 44% and 3% of the company's total revenue
for 2003 and 2002, respectively.

PromoMail, the principal offering of the PerformOne Network, was a service
that consisted of targeted e-mails highlighting specific e-centives. Marketers
purchased this service on a fixed fee basis or on a performance basis. For the
fixed fee contracts, participating marketers were charged a fixed fee for each
member to whom the e-mail was sent and revenue related to the service was
recognized upon transmission of the e-mail. When marketers purchased the service
on a performance basis, revenue was based solely on the actions of the Company's
members. The Company earned a contractually specified amount based on the number
of members who clicked 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. Beginning January 1, 2002, revenue for performance related
agreements was being recognized upon cash receipts from the marketers for the
actions of the Company's members or upon notification of the actions for
marketers that prepay. Prior to January 1, 2002, revenue was recognized upon
notification of the actions of the Company's members. This change in revenue
recognition policy was due to the uncertainty in estimating the revenue and,
therefore, the collectibility of the revenue. Due to the closure of the
PerformOne Network during 2002, PromoMail contributed no revenue for 2003, but
represented 4% and 62% of the Company's revenue for the years ended December 31,
2002 and 2001, respectively.

F-10

The Commerce Engine, which the Company stopped offering during the second
quarter of 2002, provided Internet portals and other website customers with an
infrastructure to enable their end users to make purchase decisions for goods
and services. The Commerce Engine provided 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. Revenue, which was recognized ratably over the
expected term of the contract, was primarily generated through license, support
and maintenance fees.

The Commerce Network, which the Company stopped offering during the second
quarter of 2002, enabled merchants to distribute and promote their products to
the end users of the Company's Commerce Engine customers. The system collected
product data from merchants, normalized it into appropriate categories, indexed
it and made it available for access through the Commerce Engine. Revenue was
primarily based on the actions of the end users of the Commerce Engine. The
Company earned a contractually specified amount based on the number of end users
who clicked on the specified link or the amount of sales generated by the end
users. Beginning January 1, 2002, revenue was recognized upon cash receipts from
the merchants, and prior to January 1, 2002 revenue was recognized when an
action occurred by an end user. This change in revenue recognition policy was
due to the uncertainty in estimating the revenue and, therefore, the
collectibility of the revenue.

Customers may also contract for consulting services, such as assistance with
promotions planning, consumer acquisition and analytics. Revenue related to
these services is recognized as the related services are provided.

Revenue for the first two quarters of 2001 included barter revenue
("marketing partner transactions"), which represented exchanges of promotional
e-mail deliveries for reciprocal advertising space or traffic on other websites.
There were no marketing partner transactions during the third and fourth
quarters of 2001 or during 2002 or 2003. Revenue and expenses from marketing
partner transactions were 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
was based upon the Company's recent historical experience of cash received for
similar e-mail deliveries. Such revenue was recognized when the promotional
e-mails were delivered. Corresponding expenses were recognized for the
advertisements received when the advertisements were displayed on the reciprocal
websites or properties, which was typically in the same period as delivery of
the promotional e-mails and were included in sales and marketing expense.

For the years ended December 31, 2003, 2002 and 2001 one of the Company's
Interactive Database Marketing System customers contributed $2.7 million, $4.5
million and $58,000 in revenue, respectively. This customer's original agreement
expired in October 2002; however, the customer subsequently signed two annual
renewal agreements, with the most recent agreement ending in December 2004. This
customer also represented approximately $874,000 of the $1,583,000 net accounts
receivable balance as of December 31, 2003 and approximately $2.6 million of the
$3.0 million net accounts receivable balance as of December 31, 2002. The
Company does not believe there is a significant risk of uncollectibility due to
the customer's payment history and credit-worthiness.

(i) Cost of Revenue

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

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.

F-11

(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 $5,000, $47,000 and $4,309,000 during 2003, 2002, and 2001,
respectively.

(m) Stock-Based Compensation

At December 31, 2003, the Company had one stock-based employee compensation
plan, which is described more fully in Note 14b. As permitted under FAS 148,
Accounting for Stock-Based Compensation--Transition and Disclosure, which
amended FAS 123, Accounting for Stock-Based Compensation, the Company has
elected to continue to follow the intrinsic value method in accounting for its
stock-based employee compensation arrangement as defined by APB 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. The following table
illustrates the effect on net income and earnings per share if the company had
applied the fair value recognition provisions of FAS 123 to stock-based employee
compensation.

Year ended December 31,
---------------------------------------------
2003 2002 2001
---------------------------------------------

Net loss applicable to common stockholders, as reported $ (12,342,190) $ (17,144,887) $ (45,003,465)
Add: Total stock-based employee compensation
expense included in reported net loss, net of
related tax effects 2,607,576 359,516 863,119
Deduct: Total stock-based employee compensation
expense as determined under fair value based
method for all awards, net of related tax effects (2,069,647) (1,301,288) (2,437,069)
---------------------------------------------
Pro forma net income $ (11,804,261) $ (18,086,659) $ (46,577,415)
=============================================

Basic and diluted net loss per share:
As reported $ (0.29) $ (0.46) $ (2.68)
Pro forma (0.28) (0.48) (2.77)

(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 carry forwards. 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. Under the provisions of FAS 128,
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.

F-12

(p) Fair Value of Financial Instruments

The Company considers the carrying value of the Company's financial
instruments, which include cash equivalents, restricted cash, accounts
receivable, accounts payable, and accrued expenses to approximate fair value at
December 31, 2003 and 2002 because of the relatively short period of time
between origination of the instruments and their expected realization or
settlement. The convertible promissory notes issued in connection with the
Company's syndication process were recorded at their respective faced values,
which is assumed to approximate fair value.

(q) Concentration of Credit Risk

Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash equivalents, restricted
cash and accounts receivable. The Company maintains its cash and cash
equivalents and restricted cash 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. The Company believes it is not
exposed to significant credit risk related to cash and cash equivalents and
short-term investments.

In the year ended December 31, 2003, the Company incurred charges related to
bad debt of approximately $44,000. While the Company believes that its allowance
for doubtful accounts as of December 31, 2003 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.

There was one customer that accounted for 55% and 86%, respectively, of the
Company's accounts receivable at December 31, 2003 and 2002. For the years ended
December 31, 2003 and 2002, one customer accounted for 45% and 62%,
respectively, of revenue, while for the year ended December 31, 2001 no one
customer accounted for more than 10% of revenue.

(r) 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.

(s) 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. For the year ended December
31, 2003, the Company recorded no foreign currency translation gain or loss, but
for the years ended December 31, 2002 and 2001, the Company recorded a foreign
currency translation gain and loss of approximately $20,000 and ($17,000),
respectively.

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. There were no gains or losses
resulting from foreign currency transactions during 2003, and for the years
ended December 31, 2002 and 2001, the Company recorded a foreign currency
transaction loss and gain of approximately ($258,000) and $43,000, respectively.

(t) Comprehensive Income (Loss)

Effective January 1, 1998, the Company adopted the provisions of FAS 130,
Reporting Comprehensive Income. FAS 130 established standards for reporting
comprehensive income and its components in financial statements.

The functional currency of the Company's international operation, which was
closed during 2002, was the local currency. Accordingly, all assets and
liabilities of its U.K. subsidiary were translated using exchange rates in
effect at the end of the period, and revenue and costs were translated using
weighted average exchange rates for the period. The related translation
adjustments were reported in accumulated other comprehensive income (loss) in
stockholders' equity (deficit).

Year Ended December 31,
2003 2002 2001
--------------------------------------------------

Net loss $ (12,342,190) $ (17,144,887) $ (45,003,465)
Other comprehensive income (loss):
Foreign currency translation adjustments (3,386) 20,383 (16,997)
--------------------------------------------------
Comprehensive loss $ (12,345,576) $ (17,124,504) $ (45,020,462)
===================================================

(u) Recent Accounting Pronouncements

In July 2002, the FASB issued FAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, which nullifies EITF Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). FAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. If fair value cannot be reasonably
estimated, the liability shall be recognized initially in the period in which
fair value can be reasonably estimated. Under Issue 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit plan.
The provisions of FAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted the provisions of FAS 146
on January 1, 2003. The adoption did not have a significant impact on the
Company's business, financial condition, results of operations or cash flow.

F-13

In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others. FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. FIN 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of FIN
45 are applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim and
annual periods ending after December 15, 2002. See Note 11.

In November 2002, the EITF reached consensus on Issue 00-21, Revenue
Arrangements with Multiple Deliverables on a model to be used to determine when
a revenue arrangement with multiple deliverables should be divided into separate
units of accounting and, if separation is appropriate, how the arrangement
consideration should be allocated to the identified accounting units. The EITF
also reached a consensus that this guidance should be effective for all revenue
arrangements entered into during fiscal periods beginning after June 15, 2003.
The adoption did not have a significant impact on the Company's business,
financial condition, results of operations or cash flow.

In December 2002, the FASB issued FAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amended FAS 123 Accounting for
Stock-Based Compensation. The new standard provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. Additionally, the statement amends the
disclosure requirements of FAS 123 to require prominent disclosures in the
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. This statement is effective for financial statements for fiscal years
ending after December 15, 2002 and the applicable required disclosures have been
made in these consolidated financial statements. The Company has elected to
continue to follow the intrinsic value method in accounting for its stock-based
employee compensation arrangement as defined by APB 25, Accounting for Stock
Issued to Employee as allowed under FAS 123 (see Note 14b).

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. In December 2003, FASB revised FIN 46
to reflect decisions it made regarding a number of implementation issues. FIN
46R requires that the primary beneficiary of a variable interest entity
consolidate the entity even if the primary beneficiary does not have a majority
voting interest. This interpretation applies to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support. This interpretation also
identifies those situations where a controlling financial interest may be
achieved through arrangements that do not involve voting interests. The
interpretation also establishes additional disclosures, which are required
regarding an enterprise's involvement with a variable interest entity when it is
not the primary beneficiary. The requirements of this interpretation are
required to be applied for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions must be applied for the first
interim or annual period ending after December 15, 2003. The Company does not
have any controlling interest, contractual relationships or other business
relationships with unconsolidated variable interest entities and therefore the
adoption of this standard did not have an impact on the Company's business,
financial condition, results of operations or cash flow.

In April 2003, the FASB issued FAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. FAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under FAS 133. The
statement requires that contracts with comparable characteristics be accounted
for similarly and clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. FAS 149 is
effective for contracts entered into or modified after June 30, 2003, except in
certain circumstances, and for hedging relationships designated after June 30,
2003. The adoption of this standard did not have any impact on the Company's
business, financial condition, results of operations or cash flow.

In May 2003, the FASB issued FAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. FAS 150
establishes standards for how certain free standing financial instruments with
characteristics of both liabilities and equity are classified and measured.
Financial instruments within the scope of FAS 150 are required to be recorded as
liabilities, or assets in certain circumstances, which may require
reclassification of amounts previously reported in equity. FAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The cumulative effect of a change in accounting principle
should be reported for financial instruments created before the issuance of this
Statement and still existing at the beginning of the period of adoption. The
adoption of this standard did not have any impact on the Company's business,
financial condition, results of operations or cash flow.

On December 17, 2003, the Securities and Exchange Commission (SEC) issued
SAB 104, Revenue Recognition, which amends SAB 101, Revenue Recognition in
Financial Statements. SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
superseded as a result of the issuance of EITF 00-21. Additionally, SAB 104
rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers (the FAQ) issued with SAB 101 that had been codified in
SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB 104. While the wording of SAB 104 has changed to reflect
the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. The adoption of this standard did
not a significant impact on the Company's business, financial condition, results
of operations or cash flow.

F-14

(3) EQUITY OFFERINGS

(a) Initial Public Offering

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 the Company's
then-existing Series A convertible preferred stock, 2,500,000 shares of the
Company's then-existing Series B convertible preferred stock, and 2,328,434
shares of the Company's then-existing 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 of common stock
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 the number of shares of common stock purchased by such
subscriber 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 (see Note
14a). After deducting expenses, underwriting discounts and any foreign currency
loss, the net proceeds from this transaction were approximately $22.2 million,
with $12.6 million of the net proceeds received by December 31, 2001 and the
remaining net proceeds of $9.6 million, which related to promissory notes issued
to the Company as part of the consideration for the rights offering, was
received during the second quarter of 2002.

During 2003, all of the shares of the Company's Series A convertible
preferred stock, that were issued in connection with the rights offering, were
converted into 20,000,000 shares of the Company's common stock. Such shares of
common stock have been listed on the SWX Swiss Exchange since February 21, 2002.

(c) Series B Convertible Preferred Stock

During December 2002, the Company issued 400,000 shares of Series B
convertible preferred stock as part of the Company's acquisition of
substantially all of the assets of Consumer Review, Inc. See Notes 4c and 14a.

(d) Warrants

In March 2001, as part of the purchase price for the Commerce Division, the
Company issued to Inktomi Corporation a warrant to purchase 1,860,577 shares of
the Company's common stock upon the achievement of revenue targets for the
Commerce Division at the end of 12 months following the closing of this
acquisition. Because the revenue targets were not met, the warrants were not
earned. See Note 4a.

In December 2001, as part of the purchase price for substantially all of
BrightStreet.com's assets, the Company issued 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
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 was
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. However, since the target revenue was not reached, the
warrants were not earned and were deemed expired as of June 3, 2003. See Note
4b.

On October 8, 2002, the Company's board of directors authorized the issuance
of 6,000,000 warrants to four investors as consideration for a $20 million
financing commitment, which was memorialized in a letter to the Company, by
Friedli Corporate Finance, dated September 12, 2002. In the commitment letter,
Friedli Corporate Finance, agreed to provide the Company with the $20 million
financing commitment, for continued operations and future business expansion
purposes, in both sales and marketing and merger and acquisition activities. The
warrants were issued to the investors in January 2003 in connection with Friedli
Corporate Finance agreeing to provide the financing commitment. The warrants
entitle each investor to purchase one share of the Company's common stock, $0.01
per value per share, for an initial exercise price of CHF 0.19 per share during
the exercise period. Pursuant to an amendment to the warrants, the exercise
period began three months from January 6, 2003 and will end on April 7, 2008.
The fair value of these warrants, using the Black-Scholes pricing model on the
date they were granted, is estimated to be approximately $720,000 and was
recorded as a deferred financing fee. This deferred financing fee is being
amortized, to interest expense, over the three-year life of the $6 million
convertible promissory note, dated March 18, 2003, that was issued in relation
to these warrants.

In addition, on December 8, 2003, Peter Friedli was issued 345,000 warrants,
with an exercise price of $0.50 and an expiration date of December 8, 2007, in
connection with his continued support of the business and his assistance with
fundraising. The fair value of these warrants, using the Black-Scholes pricing
model on the date they were granted, is estimated to be approximately $155,000
and was included as a component of general and administrative costs in the
accompanying consolidated statement of operations.

F-15

(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, were to be
released based upon the achievement of contractually defined revenue and
performance targets for the Commerce Division. However, the targets were not
met, so the shares were released from escrow and returned to E-centives. The
remaining 637,925 of escrow shares were held in satisfaction of any potential
indemnity claims and were released to Inktomi in June 2002. 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. Because the revenue
targets were not met, the warrants were not earned.

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. During 2002, the reseller agreement was terminated.

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 amortized 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:

Current assets $984,542
Fixed assets, net 5,657,205
Internally developed software 5,549,168
Intangible assets 1,626,433
Deferred revenue (924,022)
------------
Total consideration $ 12,893,326
------------

Following the acquisition of the Commerce Division, the Commerce Division
business began to deteriorate. Less money was being spent on this type of
technology by businesses, as the returns perhaps did not appear to justify
investing in the products and services offered through the Commerce Division. As
a result, several of the Commerce Division clients that were up for renewal did
not renew their agreements and a large new customer terminated its contract
early. Additionally, with many companies having less discretionary funds due to
slow downs in the capital markets, new customers were not entering into
contracts for the Commerce Division offerings. Therefore, the Commerce Division
experienced a significant increase in expenses without the corresponding
increase in revenues. Due to the decline in the customer base, the Company
concluded that the benefits derived from the Commerce Division would not be
sufficient to support the product offerings and the decision was made to close
the Commerce Division during the second quarter of 2002.

(b) BrightStreet.com

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 of
its 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 the Company's common stock valued at approximately
$185,000, a contingent performance-based warrant to purchase up to 250,000
shares of the Company's common stock and approximately $369,000 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. Because
the target revenue was not met, the performance-based warrant was not earned.

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 rights,
title and interest in and to all the issued and pending BrightStreet.com patents
(collectively, the "Patents"), subject to certain pre-existing rights granted by
BrightStreet.com to third parties ("Pre-existing Rights"), provided the Company
makes a certain payment to BrightStreet.com by December 3, 2005 (the "Payment").
If the Company makes such Payment by that date, the Company shall own all
rights, title and interest in and to the Patents, subject to the Pre-existing
Rights. Until such Payment is made, the Company has, subject to the Pre-existing
Rights, an exclusive, worldwide, irrevocable, perpetual, transferable, and
sub-licensable right and license under the Patents, including the rights to
control prosecution of the Patents and Patent applications and the right to sue
for the infringement of the Patents. Until the Company takes formal title to the
Patents, it may not grant an exclusive sublicense to the Patents to any
unaffiliated third party. In the event the Company does not make the Payment by
December 3, 2005, the Company shall retain a license to the Patents, but the
license shall convert to a non-exclusive license, and other rights to the
Patents and Patent applications shall revert to BrightStreet.com or its
designee.

F-16

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, at any time prior to December 3, 2005 exceeds $4,000,000, the Payment will
be deemed to have been made. Additionally, the Company has the right, at any
time prior to December 3, 2005, to satisfy the Payment by paying to
BrightStreet.com the difference between the $4,000,000 and the total
compensation already paid. During 2003, the Company recorded approximately
$411,000 in additional transaction compensation, representing $61,000 royalty
accrual and $350,000 in patent fees.

The BrightStreet.com 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 is amortizing the identifiable intangible assets
on a straight-line basis over three years. The original total purchase price of
$2,221,901 was allocated as follows:

Fixed assets, net $ 742,301
Accounts Receivable 136,827
Licensed technology 2,086,305
Capital lease obligations (695,479)
Other liabilities (48,053)
------------
Total consideration $ 2,221,901
------------

Due to additional transaction compensation incurred during 2003, the Company
subsequently recorded a patent intangible asset for $411,000, representing the
$61,000 royalty accrual (as noted above) and $350,000 in patent fees. This
intangible asset has the potential to increase if the Company incurs more
transaction compensation related to the Patent.

(c) ConsumerREVIEW.com

On December 4, 2002, the Company acquired substantially all of Consumer
Review Inc.'s assets and certain of its liabilities through an Asset Purchase
Agreement. The cost of the acquisition was approximately $2.6 million,
consisting of 400,000 shares of Series B convertible preferred stock valued at
approximately $2.1 million, $290,000 in cash and about $216,000 in acquisition
costs. At closing, the Series B convertible preferred stock was placed into
escrow. Upon the one year anniversary of the closing date, the conversion rate
for each share of the Series B convertible preferred stock was determined based
upon the achievement of contractually defined revenue during the calculation
period and was adjusted pursuant to a defined schedule. Based upon the revenue
generated by the ConsumerREVIEW.com division during the calculation period, the
conversion rate for each share of the Series B convertible preferred stock will
be adjusted to 8 to 1. The stock consideration will then be disbursed in
accordance with the terms of the Escrow Agreement.

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 a third-party appraiser to perform a valuation of the
Series B convertible preferred stock and the intangible assets. The Company is
amortizing the identifiable intangible assets on a straight-line basis over
three years. The total purchase price of $2,573,471 was allocated as follows:

Cash $ 352,097
Fixed Assets 231,834
Accounts Receivable 1,688,380
Technology 112,408
Tradenames (95,330)
Other liabilities -----------
$2,573,471
Total consideration ===========

(5) LETTERS OF CREDIT

The Company's restricted cash relates to three letters of credits associated
with their Bethesda, Maryland office, their Foster City Office and their D&O
Insurance policy. The following table shows the balances of restricted cash as
of December 31, 2003:

Bethesda, Foster City, D&O
Maryland California Insurance Total
-----------------------------------------------------

Current Restricted Cash Balance at January 31, 2003 $ 379,579 $ - $ 255,470 $ 635,049
Non- Current Restricted Cash Balance at January 31, 2003 70,000 40,000 - 110,000
-----------------------------------------------------
Total Restricted Cash Balance at January 31, 2003 449,579 40,000 255,470 745,049
-----------------------------------------------------

Activity
Interest - 849 18,988 19,837
Lease termination fee (309,579) - - (309,579)
Reduction in security deposit (70,000) (70,000)
Transfers to operating account - - (258,239) -
-----------------------------------------------------
Total activity (379,579) 849 (239,250) (359,742)
-----------------------------------------------------

Current Restricted Cash Balance at December 31, 2003 - 40,849 16,220 57,069
Non- Current Restricted Cash Balance at December 31, 2003 70,000 - - 70,000
-----------------------------------------------------
Total Restricted Cash Balance at December 31, 2003 $ 70,000 $ 40,849 $ 16,220 $ 127,069
=====================================================

F-17

(a) Bethesda, Maryland Office

As part of the amended and modified lease agreement dated June 29, 2000 for
the Company's headquarters office space lease in Bethesda, Maryland, the Company
was required to have an irrevocable letter of credit as a security deposit
throughout the lease term of five years. In the event that the letter of credit
was drawn upon, the Company established a certificate of deposit for an
equivalent amount, which served as collateral for the letter of credit. The
$449,579 letter of credit, which was reduced from the first year value of
$542,984 on June 29, 2001, was to be reduced by 20% on the first day of each
subsequent lease year. However, in accordance with a September 25, 2002 partial
lease termination agreement, which provided for early termination of half of the
office space, a new letter of credit was established with a provision that
permitted a partial draw by the landlord of $309,579 any time after January 1,
2003 as partial consideration for the new agreement. Per the new agreement, in
April 2003 the required security deposit for the remaining office space was
reduced to $70,000; therefore, the letter of credit and the associated
certificate of deposit was also reduced to that amount. As of December 31, 2003,
the balance was $70,000 and it will remain at that value until the expiration of
the lease.

(b) Foster City, California Office

In November 2002, the Company entered into a sublease agreement for office
space in Foster City, California. As part of the sublease agreement, the Company
is required to have an irrevocable letter of credit in the amount of $40,000 as
a security deposit throughout the lease term and has therefore established a
certificate of deposit for this amount. The lease for this office space ends in
November 2004.

(c) D&O Insurance

In October 2002, the Company established an approximate $280,000 certificate
of deposit to serve as collateral for a letter of credit commitment related to
its D&O insurance policy. As the Company made its monthly payments on the
policy, the certificate of deposit was reduced by the corresponding amount and
the money was transferred to its operating account. Due to a renegotiation of
the D&O policy, the Company's rates were reduced and the required letter of
credit was reduced. As a result, in June 2003, an additional $39,000 was
transferred out of the certificate of deposit that serves as collateral for the
letter of credit commitment. At December 31, 2003, the remaining balance of the
letter of credit was approximately $16,000, and subsequent to December 31, 2003,
the amount was transferred to the Company's operating account. No letter of
credit is required for the current renewal of the D&O policy.

(6) PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

December 31,
--------------------
useful life 2003 2002
-------------------------------------------

Computer equipment 3 years $ 7,315,814 $ 7,169,246
Furniture and equipment 5-7 years 195,562 195,562
Leasehold improvements 5 years 23,072 23,072
---------------------------
7,534,448 7,387,880
Less: accumulated depreciation (6,685,041) (5,106,725)
---------------------------
$ 849,407 $ 2,281,155
============================

(7) INTANGIBLE ASSETS AND GOODWILL

In conjunction with the acquisition of substantially all the assets of
Consumer Review, Inc. in December 2002, the Company recorded approximately
$1,688,000 and $112,000 for technology and tradenames, respectively. The
intangible assets were recorded at their estimated fair value and are being
amortized on a straight-line basis over three years.

In association with the acquisition of substantially all of
BrightStreet.com's assets in December 2001, the Company acquired licensed
technology and a patent. The intangible assets were recorded at their estimated
fair value and are being amortized on a straight-line basis over three years.
The licensed technology and related patent, which had a total net book value of
approximately $950,000 at December 31, 2003, was reviewed for impairment under
FAS 144 and the fair value, as determined by an independent appraiser, supported
the recoverability at the book value.

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 were being amortized on a straight-line basis over
three and two years, respectively. The Company adopted the provisions of FAS 142
as of January 1, 2002 and as a result, during the first quarter of 2002,
reclassified approximately $1,000,000 of intangible assets, approximately
$657,000 net of accumulated amortization, associated with employee workforce
from intangible assets to goodwill and therefore no longer amortized the
assembled workforce. During the second quarter of 2002, due to the closure of
the Commerce Division, the associated values of the goodwill for the assembled
workforce and the customer list intangible asset were deemed impaired and the
net values of approximately $657,000 and $37,000, respectively, were written
off.

F-18

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 was amortized on a straight-line basis over three years and was fully
amortized by the end of the first quarter of 2002. In conjunction with the
Company's decision to scale back the PerformOne Network, during 2002 the patent,
which had a net value of $0, was written off.

As of December 31, 2003 and 2002, intangible assets consisted of the
following:

Gross Carrying Accumulated Net
Amount Amortization Value
---------------------------------------------
Amortizable intangible assets:

Patents $ 411,299 $ (102,418) $ 308,881
Technology 3,774,685 (2,091,875) 1,682,810
Tradenames 112,408 (40,592) 71,816
---------------------------------------------
Total amortizable intangible assets $ 4,298,392 $(2,234,885) $ 2,063,507
---------------------------------------------

Aggregate Amortizaton Expense:
For the year ended December 31, 2003 $ 1,428,574

Estimated Amortizaton Expense:
For the year ended December 31, 2004 $ 1,529,221
For the year ended December 31, 2005 $ 534,286
For the year ended December 31, 2006 $ -

(8) RESTRUCTURING AND IMPAIRMENT CHARGES

During the third quarter of 2002, the Company signed a partial lease
termination agreement, approved a plan to reduce the workforce associated with
closing down of its PerformOne Network and evaluated its existing reserve
established for the closure of the Commerce Division. A net
restructuring/impairment charge of approximately $1.2 million was recorded to
reflect these actions. The charge included the costs associated with terminating
half of the office space lease for the Bethesda, Maryland facility, the costs of
severance and other employee benefits related to the termination of 19
employees, as well as an increase in the reserve associated with terminating the
office lease in the UK. The Company expected the cost to terminate the UK office
lease to consist of monthly rental through September 30, 2002 and forfeiture of
the Company's security deposit of approximately $102,000. This is based on the
Company's best estimate, however, the landlord of the UK office facility has not
responded to requests to enter into a termination agreement. The Company does
not believe that there is any additional exposure; however, if the landlord of
the UK office facility does not agree to a termination agreement, the Company
could face a potential additional liability of approximately $364,000 for rental
payments through September 2004. As noted below, in the fourth quarter of 2001,
the Company recorded a restructuring charge that included consolidation of
excess space associated with the Bethesda facility. Due to the partial lease
termination agreement for this facility, the approximately $1.4 million
remaining balance of the associated 2001 reserve was reversed.

During the second quarter of 2002, the Company's management approved plans
to terminate the lease for the Redwood Shores, California facility and to close
the Commerce Division. The $7.8 million restructuring/ impairment charge that
reflected these actions consisted of the costs associated with terminating the
Redwood Shores lease, the costs of severance and other employee benefits related
to the reduction in workforce of 18 employees, the costs connected with
terminating the UK office lease, as well as the costs associated with closing
down the Commerce Division and the disposal and write-down of related tangible
and intangible assets. As discussed below, in the fourth quarter of 2001, the
Company recorded a restructuring charge for the consolidation of excess space
related to the Redwood Shores facility. As a result of the early termination of
the lease for this facility, the approximately $6.5 million remaining balance of
the related 2001 reserve was reversed.

The reversals of the remaining balances of the 2001 reserves established for
the Bethesda and Redwood Shores offices, combined with the new charges for the
second and third quarters of 2002, resulted in a net restructuring/impairment
charge of approximately $1.1 million for the year ended December 31, 2002.

The following table shows the balance, as of December 31, 2003, of the
accrued restructuring/impairment charges recorded in 2002.

Employee
Termination severance and Revaluation of Disposal of
of facility other benefit intangible intangible
Total leases related costs assets assets Other
-----------------------------------------------------------------------------------------------
Balance at January 1, 2002 $ - $ - $ - $ - $ - $ -

Restructuring charges, net 8,969,582 2,614,213 211,223 694,174 5,054,306 395,666
Cash (payments)/receipts (2,508,303) (2,158,695) (200,115) - 180,408 (329,901)
Non-cash charges (5,744,200) 295,045 - (694,174) (5,279,306) (65,765)
------------------------------------------------------------------------------------------------
Balance at December 31, 2002 717,079 750,563 11,108 - (44,592) -
Cash (payments)/receipts (639,803) (685,298) (3,115) - 48,610 -
------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 77,276 $ 65,265 $ 7,993 $ - $ 4,018 $ -
================================================================================================

F-19

Termination
of facility
Total leases Other
-----------------------------------------------

Balance at December 31, 2002 717,079 750,563 (33,484)
Cash (payments)/receipts (639,803) (685,298) 45,495
-----------------------------------------------
Balance at December 31, 2003 $ 77,276 $ 65,265 $ 12,011
===============================================

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 growth areas of
the Company's business. The Company recorded a restructuring/impairment charge
of approximately $9.9 million related to these actions. This charge was
comprised of the costs related to the consolidation of excess facilities,
severance and other employee benefit costs related to the termination of 63
employees, as well as a revaluation of the intangible assets associated with the
Commerce Division. During 2002, as a result of the early termination of the
Redwood Shores office lease and the partial termination of the Bethesda office
lease, the remaining balances of the reserves associated with these offices, of
approximately $6.5 million and $1.4 million, respectively, were reversed and new
reserves were established.

(9) INCOME TAXES

The Company has incurred operating losses since its inception and has
recognized no US current or deferred income tax provision or benefit. The
components of income tax expense (benefit) attributable to operations are as
follows:

Year ended December 31,
---------------------------------
2003 2002 2001
---------------------------------
Current
Federal $ - $ - $ -
State - - -
Foreign - (19,476) 19,476
--------------------------------
Total current - (19,476) 19,476
--------------------------------

Deferred
Federal - - -
State - - -
Foreign - - -
--------------------------------
Total deferred - - -
--------------------------------
Total tax expense $ - $ (19,476) $ 19,476
================================

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

Year ended December 31,

2003 2002 2001
-----------------------------------------

Expected tax benefit (expense) at statutory rate $ 4,211,501 $ 5,835,883 $ 15,294,556
State tax, net of federal 476,526 642,643 1,136,850
Stock-based compensation, not deductible (54,251) (122,235) (259,800)
Foreign tax rate differential - (43,238) 16,102
Other, net (2,922) 13,368 (203,151)
Increase in valuation allowance (4,630,853) (6,306,945) (15,977,033)
-----------------------------------------
Tax (expense) benefit - 19,476 (19,476)
=========================================

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

Year ended December 31,
-----------------------------------
2003 2002
-----------------------------------
Deferred tax assets:

Net operating loss and general bussiness credits carryforwards $ 42,873,853 $ 38,472,698
Restructuring reserve - 276,536
Start-up costs and organized costs 362,484 1,087,450
Intangible assets 1,897,497 860,749
accrued expenses 94,750 166,381
Deferred compensation 1,133,564 139,700
Allowance for doubtful accounts receivable 23,909 28,466
Property and equipment 536,933 540,488
-----------------------------------
Total gross deferred tax assets 46,922,990 41,572,468
Valuation allowance (46,922,990) (41,572,468)
-----------------------------------
$ - $ -
===================================

F-20

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or the entire amount of
deferred tax assets will not be realized. The ultimate realization of the
deferred tax asset is dependent upon the generation of future taxable income
during the periods in which temporary differences become deductible and credit
carry forwards are available. Management considers scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies which can be implemented by the Company in making this assessment.
Based upon the lack of historical taxable income, scheduled reversal of deferred
tax liabilities, projections for future taxable income and uncertainty regarding
ultimate realization of the tax benefits regarding the deferred tax assets, the
Company has established a valuation allowance of $46,922,000 and $41,572,000 as
of December 31, 2003 and 2002, respectively. The net change in the valuation
allowance for the years ended December 31, 2003 and 2002 was an increase of
$5,351,000 and $5,538,000, respectively. The federal net operating loss is
$112,113,000 as of December 31, 2003. The Federal net operating loss carry
forward period expires commencing in 2011 through the year 2022. 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 may occur. As a
result, the net operating loss carry forward may not be fully utilized before
expiration.

(10) LONG-TERM DEBT

The Company's long-term debt of $3,450,000 and other long-term liabilities
of $124,465 at December 31, 2003, consists of the principal balance and final
payment charges, respectively, associated with nine convertible promissory notes
issued from May 2003 through December 2003. The terms of the notes include,
among other things:

o an 8% interest rate;
o a maturity date three years from the date of issuance;
o a conversion feature, which provides that under certain circumstances
that the note will automatically convert to our common stock;
o a one-time final payment charge of 10% of the principal for each year
that the principal is not paid on or before each annual anniversary of
the date the note was issued (with a maximum of 30%); and
o a security interest in substantially all of our assets.

The $3,450,000 of long-term debt matures in 2006. If the Company holds this
long-term debt to maturity, as currently intended, a final payment charge of
$1,035,000 will be due in 2006.

(11) GUARANTEES AND INDEMNIFICATIONS

The Company adopted FIN 45 effective December 31, 2002. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
certain guarantees and indemnifications issued or modified after December 31,
2002. Accordingly, any contractual guarantees or indemnifications the Company
issues or modifies subsequent to December 31, 2002 will be evaluated and, if
required, a liability for the fair value of the obligation undertaken will be
recognized. The adoption of FIN 45 did not have a material effect on the
Company's financial position or results of operations.

The Company guarantees the payment of sublease rentals to its Landlord on
the property that it sublets. As of December 31, 2003, the maximum guarantee on
this property is approximately $498,000. This sub-lease expires in September
2005.

The Company sometimes indemnifies certain of its customers against damages,
if any, they might incur as a result of a claim brought against them related to
patent infringement from the use of the Company's products. The Company is
unable to estimate the maximum exposure of such indemnifications due to the
inherent uncertainty and the varying nature of the contractual terms.

(12) COMMITMENTS AND CONTINGENCIES

(a) Leases

In association with the acquisition of BrightStreet.com's assets, 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 for computer
equipment. 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. This is a guarantee under FIN 45; however, the Company cannot
estimate the maximum exposure.

The Company is obligated under non-cancelable capital leases, for certain
computer and office equipment, that expire by early 2006. In addition, the
Company is obligated under non-cancelable operating leases, primarily for office
space, which expire on various dates through 2005.

F-21

Amounts related to assets under non-cancelable capital leases that have been
capitalized as property and equipment as of December 31, 2003 and 2002 are as
follows:

December 31,
--------------------------------
2003 2002
--------------------------------
Computer equipment $ 527,282 $ 407,412
Office equipment 23,789 -
Less: accumulated depreciation (315,433) (147,121)
--------------------------------
$ 235,638 $ 260,291
================================

Rent expense under operating leases was approximately $829,000, $1,549,000
and $3,541,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. In February 2002, the Company signed a Sublease Agreement to
sublease a portion of the sixth floor at the Bethesda, Maryland facility that
commenced on March 1, 2002 and expires on September 30, 2005.

As of December 31, 2003, future minimum lease payments and future sublease
rental income under non-cancelable leases are as follows:

Year Ending December 31, Capital Leases Operating Leases Rental Income
- -----------------------------------------------------------------------------------------

2004 $ 304,992 $ 1,096,895 $ 308,228
2005 32,744 613,521 241,835
2006 - - -
- -----------------------------------------------------------------------------------------
Total 337,736 $ 1,710,416 $ 550,063
===========================
Less: amount representing interest
(rates approximating 8.3%) (8,691)
---------------
Present value of net minimum lease payments 329,045
Less: current installments (297,327)
---------------
Obligation under capital leases,
excluding current portion $ 31,718
===============

(b) Patent Assignment

On December 3, 2001, in conjunction with the acquisition of substantially
all the assets of BrightStreet.com, 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 rights, title and
interest in and to all the issued and pending BrightStreet.com patents
(collectively, the "Patents"), subject to certain pre-existing rights granted by
BrightStreet.com to third parties, provided the Company makes a certain payment
to BrightStreet.com by December 3, 2005 (the "Payment").

In exchange for the rights granted under the Assignment, beginning December
2002, the Company is obligated to pay BrightStreet.com 10% 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, at any time prior to December 3, 2005 exceeds $4,000,000, the Payment will
be deemed to have been made. Additionally, the Company has the right, at any
time prior to December 3, 2005, to satisfy the Payment by paying to
BrightStreet.com the difference between the $4,000,000 and the total
compensation already paid.

(c) Litigation

The Company is subject to legal proceedings and claims, which arise in the
ordinary course of business. Other than the matters described below, as of
December 31, 2003, management is not aware of any asserted or pending litigation
or claims against the Company that would have a material adverse effect on the
Company's financial condition, results of operations or liquidity.

On or about September 24, 2003, Trifocal, LLC ("Trifocal") filed suit
against the Company in California Superior Court, County of Santa Clara,
alleging (inter alia) breach of contract and intentional and negligent
misrepresentation. Trifocal initially claimed approximately $126,819 in
specified money damages, as well as additional unspecified money damages,
interest, punitive damages and attorneys' fees and costs. Trifocal explicitly
stated that it intended to amend its complaint with respect to damages. In
December 2003, the Company removed the case to the United States District Court
for the Northern District of California (San Jose Division), denied any
liability, and filed counterclaims seeking money damages in excess of $1.8
million for Trifocal's breach of contract, breach of the implied covenant of
good faith and fair dealing, intentional interference with contract, negligent
interference with contract, and breach of fiduciary duty. Pursuant to local
court rules regarding alternative dispute resolution, the parties are
participating in mediation. The initial mediation was held on June 28, 2004.

F-22

On or about November 14, 2002, the Company filed a joint patent
infringement action with Black Diamond CCT Holding, LLC against Coupons, Inc. in
the Federal District Court of Maryland. In this suit, the Company alleges
infringement of two U.S. patents relating to online coupons, rights of which the
Company acquired from BrightStreet.com. Coupons, Inc. has answered the Company's
complaint by denying infringement and has raised affirmative defenses including
non-infringement, invalidity, unenforceability, laches and/or estoppels,
defenses under 35 U.S.C. section 273 and other defenses. No counter claims were
filed against the Company by Coupons, Inc. The case has been proceeding through
discovery, although no trial date has yet been set. The Company and Black
Diamond have filed a motion to add Consumer Networks, LLC and News America
Incorporated as defendants based on their partnerships with Coupons, Inc.
Additionally, the Company has filed a motion to add another one of its patents
that relates to infringement by Coupons, Inc.'s email services. The court has
not yet ruled on these motions.

On January 21, 2004, E-centives, Inc. and Black Diamond CCT Holding, LLC
had filed (but not served) a patent infringement action against Consumer
Networks, LLC in California. In this suit, the Company alleged infringement of
two U.S. patents relating to online coupons, rights of which the Company
acquired from BrightStreet.com, Inc. If the Maryland court grants the motion to
add Consumer Networks, LLC to that action, the California suit will not be
separately pursued. To date, no answer has been filed by Consumer Networks, LLC.

On or about October 10, 2002, the Company received a demand letter from
Orrick, Herrington & Sutcliffe, LLP, ("Orrick") a law firm representing Bowne of
New York City ("Bowne") demanding payment of $91,527 for financial printing
services allegedly rendered by Bowne. The letter also indicated that if the
matter was not amicably resolved, then Bowne would commence legal proceedings.
The parties have now settled this dispute and entered into a formal settlement
agreement whereby the Company has agreed to pay $71,734 in equal installments
over six months commencing on or about February 4, 2003. The Company's records
reflect two payments remain outstanding. Orrick has indicated to the Company
that it believes that the Company is in default of the settlement agreement.

There were no other material additions to, or changes in status of, any
ongoing, threatened or pending legal proceedings during the year ended December
31, 2003, including no changes in the status of the settlement with
coolsavings.com, Inc. ("coolsavings"). 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 during 2001, was due if, within one
year from the date of entry of the Stipulated Order of Dismissal filed
on or about March 3, 2000, 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.
However, a dispute has arisen between the parties regarding whether
this portion of the license fee is actually due, despite Catalina
Marketing Corporation not prevailing in its motion. This dispute is
based in part on the fact that the Company may be entitled to a license
under the coolsavings' patent at issue as a result of its acquisition
of the assets of BrightStreet.com, which acquisition included the
settlement of infringement litigation between coolsavings and
BrightStreet.com regarding the same coolsavings patent at issue in the
Company's settled litigation. Coolsavings previously filed a lawsuit to
collect such $250,000 amount, but later voluntarily dismissed the
lawsuit without prejudice.

F-23

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's having to make this payment
continues to remain remote.

(d) Employment Agreements

The Company has employment agreements with certain officers and employees.
The Company also has bonus agreements with certain officers and employees as
defined in the agreements.

(13) SEGMENT INFORMATION

(a) Operating Segments

Starting in 2002, with the acquisition of substantially all of the assets of
Consumer Review, Inc., the Company had two reportable operating segments:
E-centives and ConsumerREVIEW.com. For 2003, E-centives included the services of
the Interactive Database Marketing System, the Promotions System and the E-mail
Marketing System. For 2002, E-centives also included the services of the
PerformOne Network, the Commerce Engine and the Commerce Network, which were no
longer offered by the fourth quarter of 2002. ConsumerREVIEW.com includes
advertising and e-commerce services that are provided through its network of web
communities.

Information as to the operations of the segments of the Company for 2003 and
2002 is set forth below based on the nature of the products and services
offered. The Company's chief operating decision maker evaluates performance
based primarily on operating profit and cash generated from operations. The
accounting policies of the operating segments are the same as those described in
the summary of significant accounting.

The asset, other unallocated amounts, represents corporate assets that
consist of cash and equivalents, as well as restricted cash.

As of and for the years ended December 31, 2002 and 2003

Segment Unallocated Consolidated
2003 E-centives ConsumerReview.com Totals Amounts Total
- ------------------------------------------------------------------------------------------------------------------

Operating revenue $3,386,115 $ 2,673,008 $6,059,123 $ - $ 6,059,123
Operating loss (11,311,587) (565,780) (11,877,367) - (11,877,367)
Depreciation and amortization 2,214,465 792,425 3,006,890 - 3,006,890
Assets 3,673,420 1,747,464 5,420,884 412,145 5,833,029
Capital expenditures 47,034 4,497 51,531 - 51,531

Segment Unallocated Consolidated
2002 E-centives ConsumerReview.com Totals Amounts Total
- ------------------------------------------------------------------------------------------------------------------
Operating revenue $7,006,835 $ 213,963 $7,220,798 $ - $ 7,220,798
Operating loss (17,367,368) (35,374) (17,402,742) - (17,402,742)
Depreciation and amortization 5,205,381 68,689 5,274,070 - 5,274,070
Assets 7,134,390 2,494,157 9,628,547 3,062,403 12,690,950
Capital expenditures 410,934 17,320 428,254 - 428,254

(b) Customers

For the years ended December 31, 2003 and 2002, one of the Company's
Interactive Database Marketing System customers, Reckitt Benckiser PLC,
contributed $2.7 million and $4.5 million, respectively, in revenue, or 45% and
62%, respectively, of the Company's revenue. This customer's original agreement
expired in October 2002, and the customer subsequently entered into two renewal
agreements, with the most recent one expiring on December 31, 2004. This
customer also represented approximately $874,000 of the $1,583,000 net accounts
receivable balance as of December 31, 2003. The Company does not believe there
is a significant risk of uncollectibility due to the customer's payment history
and credit-worthiness.

No other customer represented 10% or more of the Company's revenue for the
years ended December 31, 2003, 2002 and 2001.

F-24

(14) 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 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. These 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. During 2003, all of the shares of Series A convertible
preferred stock that were issued in conjunction with the rights offering were
converted into common stock; therefore, as of December 31, 2003, there were no
shares of Series A convertible preferred stock outstanding. Such shares of
common stock have been listed on the SWX Swiss Exchange since February 21, 2002.

VOTING: The holders of Series A convertible preferred stock shall vote with
the holders of common stock on all matters submitted to the stockholders.
Each share of Series A convertible 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 convertible preferred
stock.

VOLUNTARY CONVERSION: Each share of Series A convertible 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 convertible 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 million or equivalent in USD;
(3) change of control; or (4) two years from the date of issuance. Due to
the fact that the first three situations did not occur prior to the two year
anniversary of the issuance date, all unconverted shares were converted to
common stock on the two year anniversary date. Such shares of common stock
have been listed on the SWX Swiss Exchange since February 21, 2002.

LIQUIDATION: Upon any liquidation, dissolution or winding up of the Company,
each holder of Series A convertible preferred stock will be entitled to
receive, prior to any distribution with respect to the Company's common
stock and Series B convertible preferred stock, an amount equal to: all cash
available for distribution to all classes of stockholders, calculated as if
the Series A convertible 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 formula
to be determined by the board of the Company) prior to the calculation of
the liquidation preference in favor of the Series convertible A preferred
stockholders.

As part of the Company's acquisition of substantially all of the assets of
Consumer Review, Inc. in December 2002, 400,000 shares of Series B convertible
preferred stock were issued. As of December 31, 2003, there were 400,000 shares
of Series B convertible preferred stock authorized, issued and outstanding.

VOTING: The holders of Series B convertible preferred stock shall vote with
the holders of common stock on all matters submitted to the stockholders.
Within the first twelve months of issuance, each holder of shares of Series
B convertible preferred stock will be entitled to one vote for each share of
Series B convertible preferred stock held immediately after the close of
business on the record date fixed for such meeting or the effective date of
such written consent. After the first twelve months from issuance, each
holder of shares of Series B convertible preferred stock will be entitled to
such number of votes as will be equal to the whole number of shares of
common stock into which such holder's aggregate number of shares of Series B
convertible preferred stock are convertible (pursuant to the conversion
table below) immediately after the close of business on the record date
fixed for such meeting or the effective date of such written consent.

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

F-25

VOLUNTARY CONVERSION: Each share of Series B convertible preferred stock is
convertible into the Company's common stock, beginning one year after the
closing date of the Consumer Review, Inc. acquisition, based upon the
achievement of contractually defined revenue during the calculation period.
Based upon the revenue generated by the ConsumerREVIEW.com division during
the calculation period, the conversion rate for each share of the Series B
convertible preferred stock will be adjusted to 8 to 1.

MANDATORY CONVERSION: Each share of Series B convertible preferred stock
shall automatically be converted into shares of common stock at the
conversion rate (as defined above) upon the earlier to occur of: (i) the
consummation by the Company of a public offering of equity securities with
proceeds in excess of CHF 20,000,000 or equivalent in United States Dollars,
(ii) an Acquisition, Asset Transfer or other Liquidation (as defined below)
or (iii) thirty months from the date of issuance, provided the Series B
preferred convertible 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 if the Company experienced a change in control before the one year
anniversary of the closing date of the ConsumerREVIEW.com acquisition.

LIQUIDATION: Upon any voluntary or involuntary liquidation, dissolution or
winding up of the Company ("Liquidation"), before any distribution or
payment is made to the holders of the common stock and any other stock of
the Company that is not by its terms expressly senior in right of payment to
the Series B convertible preferred stock, but following any distribution or
payment to the holders of the Series A convertible preferred stock (which is
expressly senior to the Series B convertible preferred stock), the holders
of Series B convertible preferred stock will be entitled to be paid out of
the assets of the Company with respect to each share of Series B convertible
preferred stock held, an amount equal to the product of (i) (a) if the
Liquidation is not a sale, conversion or other transfer of the Company's
stock, the average of the high and low closing prices of the Company's
common stock on the day prior to the date of such Liquidation, as such
prices are reported by the SWX Swiss Exchange, after applying the CHF-USD
exchange rates, as determined by 5 p.m., Swiss time on such date, by
swissfirst Bank AG or (b) if the Liquidation is a sale, conversion or other
transfer of the Company's stock, the purchase price or other valuation of
the Company's common stock pursuant to such Liquidation, and (ii) the number
of shares of common stock into which a share of Series B convertible
preferred stock would be convertible pursuant to the conversion table above
if the conversion had occurred immediately prior to such Liquidation, as
appropriately adjusted for any future stock splits, stock combinations, or
similar transactions affecting the Series B convertible preferred stock. If,
upon any Liquidation, the assets of the Company are insufficient to make
payment in full to all holders of Series B convertible preferred stock, then
such assets will be distributed among the holders of Series B convertible
preferred stock at the time outstanding, ratably in proportion to the full
amounts to which they would otherwise be respectively entitled. After
payment in full to the holders of Series B convertible preferred stock of
the aggregate liquidation preference as aforesaid, the holders of the Series
B convertible preferred stock shall, as such, have no right or claim to any
of the remaining assets of the Company. The following events will be
considered a Liquidation: any merger, consolidation, business combination,
reorganization, reclassification or recapitalization of the Company in which
the Company is not the surviving entity or in which the stockholders of all
classes and series of stock of the Company immediately prior to such
transaction own capital stock representing less than 50% of the Company's
voting power of all classes and series of stock immediately after such
transaction (an "Acquisition"); or a sale, lease or other disposition of all
or substantially all of the assets of the Company (an "Asset Transfer").

(b) 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, 2003, there were
21,000,000 shares of common stock reserved for issuance and there were 9,798,222
options to purchase shares of common stock outstanding at a weighted average
exercise price of $1.10 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, 2003 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.

F-26

From 1997 through 2003, the following performance-based option grants were
issued:

Year Options Price
--------------------------------------
1997 65,618 $ 2.50
1998 34,400 $ 2.50
1999 50,000 $ 2.50
1999 110,400 $ 3.50
2001 25,000 $ 3.40
2002 200,000 $ 0.50
2003 10,000 $ 0.55
2003 216,810 $ 0.14
2003 16,500 $ 0.41
2003 1,564,122 $ 0.13

Compensation expense related to performance-based option grants of $ 84,556,
$0 and ($302,304) was recorded in 2003, 2002 and 2001. 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. There was no compensation expense
related to performance-based options during 2002, as all options issued in 2002
had an exercise price in excess of the stock price at December 31, 2002 and all
options issued prior to 2002 were fully vested.

As allowed by FAS 123, the Company applies the intrinsic value-based method
of accounting prescribed by APB 25 and related interpretations in accounting for
its employee stock options, rather than the alternative fair value accounting
method. 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. In 2003, 2002 and 2001, the Company recorded equity-based compensation
expense, exclusive of performance based stock option compensation expense, of $
2,542,327, $359,516 and $1,165,423, respectively. These expenses relate to the
difference between the fair value of the Company's common stock on the grant
date and the exercise price of 8,297,087 options granted in 2003, 1,517,564
options granted in 2000 and 960,800 options granted in 1999. Additionally, the
Company expects to incur approximately $574,000, $320,000 and $243,000,
respectively, of stock-based compensation expense during 2004, 2005 and 2006.
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
applicable to common stockholders would have been adjusted to the pro forma
amounts presented below:

Year ended December 31,
---------------------------------------------
2003 2002 2001
---------------------------------------------

Net loss applicable to common stockholders, as reported $ (12,342,190) $ (17,144,887) $ (45,003,465)
Add: Total stock-based employee compensation
expense included in reported net loss, net of
related tax effects 2,607,576 359,516 863,119
Deduct: Total stock-based employee compensation
expense as determined under fair value based
method for all awards, net of related tax effects (2,069,647) (1,301,288) (2,437,069)
---------------------------------------------
Pro forma net income $ (11,804,261) $ (18,086,659) $ (46,577,415)
=============================================

Basic and diluted net loss per share:
As reported $ (0.29) $ (0.46) $ (2.68)
Pro forma (0.28) (0.48) (2.77)

The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
options issued during 2003, 2002 and 2001, respectively: volatility factors of
120%, 147% and 100%, risk-free interest rates of 3%, 3% and 5%, weighted-average
expected life of 5 years, and no dividend yields.

The weighted-average fair value of stock options granted during 2003, 2002
and 2001 was $0.53, $0.44 and $3.02, respectively.

F-27

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

Number of shares Weighted average
exercise price
------------------------------------------
Balance, January 1, 2001 2,814,850 $ 5.82
Granted 1,596,250 3.93
Exercised (11,875) 2.37
Canceled (1,236,895) 4.66
-------------
Balance, December 31, 2001 3,162,330 5.34
Granted 445,000 0.49
Exercised (30) 3.50
Canceled (1,400,500) 4.05
-------------
Balance, December 31, 2002 2,206,800 5.18
Granted 8,594,897 0.13
Exercised (314,325) 0.13
Canceled (689,150) 2.61
-------------
Balance, December 31, 2003 9,798,222 $ 1.10
=============

The following table summarizes information concerning currently outstanding
and exercisable options at December 31, 2003:

Options outstanding
------------------------------------------
Weighted-
Number average Options
outstanding remaining exercisable
at contractual at
Range of exercise prices 12/31/2003 life 12/31/2003
- ------------------------------------------------------------------------
$0.13 - $0.50 8,433,222 9.8 years 4,583,076
$0.54 - $0.84 132,500 8.3 years 49,250
$1.50 8,000 7.6 years 4,000
$2.50 372,000 5.2 years 372,000
$3.40 - $3.86 188,000 6.7 years 147,000
$5.15 - $5.53 58,000 7.2 years 29,000
$6.50 36,000 6.5 years 27,000
$8.02 - $8.17 5,500 7.0 years 3,250
$9.37 12,000 7.0 years 9,000
$11.21 3,000 6.8 years 2,250
$13.00 550,000 6.5 years 550,000
9,798,222 9.4 years 5,775,826
============= =============

(c) 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 warrants issued in 2002 were issued in
consideration of a financing commitment (see Note 3d). The warrants issued
during 2003 were issued in connection with Peter Friedli's continued support of
the business and his assistance with fundraising.

F-28

The warrant issued to Inktomi Corporation, in 2001, as part of the Commerce
Division acquisition was a contingent performance-based warrant that Inktomi was
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. Since revenue did not meet the contractually defined revenue
target, the right to exercise the earn-out warrant expired during 2002.

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.
Since revenue did not meet the contractually defined revenue target, the right
to exercise the performance-based warrant expired during 2003.

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

Weighted Average
Share Exercise Price
------------------------------------
Balance, January 01, 2001 607,485 $ 5.82
Granted 2,610,577 4.27
-----------
Balance, December 31, 2001 3,218,062 4.56
Granted 6,000,000 0.13
Expired (1,860,577) 5.51
-----------
Balance, December 31, 2002 7,357,485 0.71
Granted 345,000 0.50
Expired (628,000) 0.14
-----------
Balance, December 31, 2003 7,074,485 $ 0.75
===========

Of the 229,485 outstanding balance of warrants granted through December 31,
2000, 119,485 expire on February 18, 2005 and 110,000 expire on December 31,
2008. The 1,860,577 warrants granted to Inktomi during 2001 expired on March 28,
2002 and the 250,000 performance-based warrants that were granted to
BrightStreet.com during 2001 expired on June 03, 2003. The remaining 500,000
warrants issued to BrightStreet.com expire on December 3, 2005. The 6,000,000
warrants issued during 2002 expire on April 7, 2008 and the 345,000 warrants
issued in 2003 expire on December 8, 2007.

(d) 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.

(15) RELATED PARTY TRANSACTION

Peter Friedli, one of the Company's directors and stockholders (that
directly or indirectly owns approximately 47.5% of the Company's outstanding
common stock), serves as the investment advisor to both Venturetec and Pine, and
also serves as President of Venturetec and its parent corporation, New
Venturetec AG. Mr. Friedli also has relationships with several of the Company's
other stockholders; he serves as the investment advisor to InVenture, Inc.,
Joyce, Ltd., Savetech, Inc., Spring Technology Corp. and USVentech, Inc. Mr.
Friedli also serves as the President of Friedli Corporate Finance, Inc., a
consulting company that is utilized by the Company.

F-29

On October 8, 2002, the Company's board of directors approved the issuance
of 6,000,000 warrants to four investors as consideration for a $20 million
financing commitment which was memorialized in a letter to the Company, by
Friedli Corporate Finance, dated September 12, 2002. The warrants entitle each
investor to purchase one share of the Company's common stock, $0.01 per value
per share, for an initial exercise price of CHF 0.19 per share during the
exercise period. Pursuant to an amendment to the warrants, the exercise period
began three months from January 6, 2003 and ends on April 7, 2008. The fair
value of these warrants, using the Black-Scholes pricing model on the date they
were granted, was estimated to be approximately $720,000. Two of the investors,
Peter Friedli and Venturetec, are stockholders of the Company and pursuant to
the terms of the private placement each received 1,000,000 warrants. As part of
this financing, in March 2003, the Company executed convertible promissory notes
in favor of Friedli Corporate Finance and InVenture, Inc. The notes allow the
Company to draw down against the available principal of up to $6 million at any
time and in any amount during the first two years of the notes. All principal
drawn upon will be secured by substantially all of the Company's assets.
Subsequent to the issuance of these promissory notes, the Company, Friedli
Corporate Finance and InVenture, Inc. agreed to assemble a syndicate of third
parties to whom the Company would issue convertible promissory notes on terms
similar to the March 2003 $6 million convertible promissory notes. The aggregate
dollar amount of the convertible promissory notes that the Company issues to
third parties through syndication will reduce, on a dollar-for-dollar basis, the
$6 million convertible promissory notes of Friedli Corporate Finance and
InVenture, Inc. and the balance, if any, will continue to be available to the
Company under the initial $6 million commitment. As part of the syndication
process, during 2003, the Company issued nine convertible promissory notes
totaling $3,450,000. During March 2004, the credit facility available to the
Company under Friedli Corporate Finance's and InVenture, Inc.'s initial
commitment was increased from $6 million to $12 million.

Venturetec and Pine were debentureholders in Consumer Review, Inc.
Therefore, as a result of the Company's acquisition of substantially all of the
assets of Consumer Review, Inc. in December 2002, Venturetec and Pine received
240,315 shares and 4,500 shares, respectively, of the Company's Series B
convertible preferred stock.

As part of its October 2001 rights offering, the Company sold shares of its
common stock to Venturetec and Pine. Venturetec and Pine each delivered a
promissory note as consideration for the subscription price for the shares of
common stock for which each company subscribed. Venturetec's note (which was
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 $5.2 million)
and Pine's note was in the principal amount of CHF 8,687,530 (approximately $5.3
million). However, on 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 (approximately $1.5 million) in cash
originally indicated as originating from Venturetec was reallocated as follows:

o In a private sale, InVenture purchased from Pine 1,041,667 shares
of common stock, originally purchased by Pine pursuant to the
rights offering, for CHF 2,083,334. As part of this transaction,
Pine was credited with paying CHF 2,083,334 (approximately $1.3
million) and delivered an amended and restated secured promissory
note, in the principal amount of CHF 6,604,196 (approximately $4.1
million), with 2% interest. The Company simultaneously returned
Pine's original CHF 8,687,530 promissory note. All of the
outstanding principal and interest under the promissory notes was
fully received by April 2002.

o Venturetec paid us CHF 416,666 (approximately $256,000) and
delivered an amended and restated secured promissory note, in the
principal amount of CHF 10,583,334 (approximately $6.5 million),
with 2% interest. This CHF 10,583,334 reflects an increase in
Venturetec's secured promissory note to CHF 11,000,000
(approximately $6.8 million), reflecting Venturetec's original
subscription price for the shares of 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. All of the outstanding principal
and interest under the promissory notes was fully received by
April 2002.

In July 1996, the Company entered into a consulting agreement with Friedli
Corporate Finance, which was subsequently renewed in 2001 and again in 2003.
Under the agreement, Friedli Corporate Finance 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 Friedli Corporate Finance
clients/investors and the Company by disseminating information to such investors
on behalf of the Company. Consulting expense under the Friedli Corporate Finance
agreement was approximately $63,000 for each of the years ended December 31,
2003, 2002 and 2001. In connection with his continued support of the business
and his assistance with fundraising, on December 8, 2003, Peter Friedli was
issued 345,000 warrants with an exercise price of $0.50 and an expiration date
of December 8, 2007. As a result of the help provided in securing the funds
associated with the convertible promissory notes, Peter Friedli was paid fees of
$360,000 during 2003. In conjunction with the $3.3 million of funds received
during the first and second quarters of 2004, Peter Friedli is to be provided
with an additional $330,000 in fees, which Mr. Friedli has indicated to the
Company will be distributed to a number of third party banks and individuals who
assisted in the financing effort. In addition, the Company engaged Friedli
Corporate Finance to support the Company in connection with the October 2001
rights offering and paid $100,000 in expenses for such rights offering support.

F-30

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

As a member of the Company's board of directors, through December 31, 2003,
Peter Friedli has received 90,000 options as Director Compensation (see Item 10
- - "Directors And Executive Officers Of The Registrant" for further details).

(16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables contain unaudited Statement of Operations information
for each quarter of 2003, 2002 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.

2003
-----------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------------------

Revenues $ 1,621,735 $ 1,380,657 $ 1,457,411 $ 1,599,320
Operating loss (2,859,221) (2,393,645) (1,998,054) (4,626,447)
Loss before income tax (2,861,751) (2,474,838) (2,151,324) (4,854,277)
Net loss applicable to common stockholders (2,861,751) (2,474,838) (2,151,324) (4,854,277)
Basic and diluted net loss per common share $ (0.08) $ (0.06) $ (0.05) $ (0.09)

2002
-----------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------------------
Revenues $ 1,343,138 $ 1,919,718 $ 2,645,321 $ 1,312,621
Operating loss (6,639,926) (7,260,093) (616,878) (2,885,845)
Loss before income tax (6,520,556) (7,152,186) (593,825) (2,897,796)
Net loss applicable to common stockholders (6,529,413) (7,162,389) (608,352) (2,844,733)
Basic and diluted net loss per common share $ (0.17) $ (0.19) $ (0.02) $ (0.08)

2001
-----------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------------------
Revenues $ 1,802,575 $ 1,403,293 $ 735,086 $ 1,112,670
Operating loss (7,786,645) (11,158,778) (8,065,224) (18,577,669)
Loss before income tax (7,456,198) (10,997,034) (8,004,793) (18,525,964)
Net loss applicable to common stockholders (7,456,198) (10,997,034) (8,004,793) (18,545,440)
Basic and diluted net loss per common share $ (0.49) $ (0.63) $ (0.46) $ (1.07)

(17) SUBSEQUENT EVENTS

(a) Credit Facility

During March 2004, the credit facility available to the Company under
Friedli Corporate Finance's and InVenture, Inc.'s initial commitment was
increased from $6 million to $12 million.

(b) Convertible Promissory Notes

As part of the Company's syndication process, as discussed in Note 15, from
January 2004 through June 2004, the Company issued six convertible promissory
notes with principal amounts of $100,000, $400,000, $200,000, $600,000,
$1,000,000 and $1,000,000. The terms of the notes include, among other things:

o an 8% interest rate;
o a maturity date three years from the date of issuance;
o a conversion feature, which provides that under certain circumstances
the note will automatically convert to common stock of the Company;
o a one-time final payment charge of 10% of the principal for each year
that the principal is not paid on or before each annual anniversary of
the date the note was issued (with a maximum of 30%); and
o a security interest in substantially all of the Company's assets.

F-31

(c) Options

From January 2004 through June 2004, 99,250 options that were previously
granted to employees were exercised.

(d) ACQUISITION

Pursuant to an Asset Purchase Agreement dated as of June 25, 2004, the
Company acquired substantially all of the assets and certain of the liabilities
of Collabrys, Inc. ("Collabrys"). Collabrys is a provider of interactive
marketing technologies and services to enable customer acquisition and
retention. Consideration consists of a $15,000 cash payment and a 7% royalty
payment on revenue, as defined in the purchase agreement.

F-32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors:
E-centives, Inc.:

Under date of June 29, 2004, we reported on the consolidated balance sheets
of E-centives, Inc. and subsidiary as of December 31, 2003 and 2002 and the
related consolidated statements of operations, stockholders' equity (deficit)
and comprehensive loss and cash flows for each of the years in the three-year
period ended December 31, 2003 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 Notes 2 and 7 to the consolidated financial statements,
effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".

/s/ KPMG LLP
McLean, Virginia
June 29, 2004

F-33

SCHEDULE II

E-CENTIVES, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

Column A Column B Column C Column D
- ------------------------------------------ ------------ ------------------------------------------- ----------------
Balance at Charged to Charged
Beginning Costs and Net to Other
Description of Period Expenses Cash Paid Accounts Deductions
- ------------------------------------------ ------------ ------------------------------------------- ----------------
Year ended December 31, 2003:

Allowance for doubtful accounts $ 75,108 $ 44,097 $ - $ - $ (56,119) (4)
============= ============================================ ================
Valuation allowance on deferred tax asset $ 41,572,468 $ 5,350,522 $ - $ - $ -
============= ============================================ ================
Accrued restructuring charge $ 717,079 $ - $ (639,803) $ - $ -
============= ============================================ ================
Year ended December 31, 2002:
Allowance for doubtful accounts $ 148,127 $ 35,263 $ - $ 35,314 (1) $ (143,596) (4)
============= ============================================ ================
Valuation allowance on deferred tax asset $ 36,034,723 $ 5,537,745 $ - $ - $ -
============= ============================================ ================
Accrued restructuring charge $ 9,062,950 $ 1,128,400 $ (3,730,071) $ (5,744,200) (2) $ -
============= ============================================ ================

Year ended December 31, 2001:
Allowance for doubtful accounts $ 252,016 $ 493,168 $ - $ (210,000) (3) $ (387,057) (4)
============= ============================================ ================
Valuation allowance on deferred tax asset $ 20,057,690 $ 15,977,033 $ - $ - $ -
============= ============================================ ================
Accrued restructuring charge $ - $ 9,406,726 $ (343,776) $ - $ -
============= ============================================ ================

Column A Column E
- ------------------------------------------ ---------------
Balance
at End of
Description Period
- ------------------------------------------ ---------------
Year ended December 31, 2003:
Allowance for doubtful accounts $ 63,086
===============
Valuation allowance on deferred tax asset $ 46,922,990
===============
Accrued restructuring charge $ 77,276
===============
Year ended December 31, 2002:
Allowance for doubtful accounts $ 75,108
===============
Valuation allowance on deferred tax asset $ 41,572,468
===============
Accrued restructuring charge $ 717,079
===============

Year ended December 31, 2001:
Allowance for doubtful accounts $ 148,127
===============
Valuation allowance on deferred tax asset $ 36,034,723
===============
Accrued restructuring charge $ 9,062,950
===============

- ----------

(1) allowance for doubtful accounts recorded in connection with the acquisition
of substantially all the assets of Consumer Review, Inc.
(2) fixed assets, intangible assets, deferred rent, prepaid expenses and other
assets
(3) deferred revenue
(4) accounts receivable

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).

2.4 Asset Purchase Agreement, dated November 08,
2002, by and between E-centives, Inc. and
Consumer Review, Inc. (incorporated herein by
reference to Exhibit 2.1 to the Amended
Current Report on Form 8-K filed by E-centives
on December 13, 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(1) Common Stock Purchase Warrant, dated as of
March 28, 2001, between E-centives, Inc. and
Inktomi Corporation.

4.4(1) Warrant to Purchase Common Stock, dated as of
December 3, 2001, between E-centives, Inc. and
BrightStreet.com, Inc.

4.5(1) 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))

10.12 Modification, Assignment and Assumption
Agreement, dated November 1, 2001, by and
among E-centives, Inc., BrightStreet.com, Inc.
and Pentech Financial Services, Inc.
(incorporated herein by reference to Exhibit
10.12 to the Annual Report Form 10-K filed by
E-centives on March 31, 2003).

23.1* Consent of KPMG LLP.

31.1* Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.

31.2* Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.

32.1* Certification of the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, furnished under Exhibit 32 of
Item 601 of Regulation S-K. 32.2*
Certification of the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, furnished under Exhibit 32 of
Item 601 of Regulation S-K.

- ----------

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

* Filed or furnished with this report.

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and stockholders:
E-centives, Inc.:

We consent to the incorporation by reference in the registration statements (No.
333-69276 and No. 333-58244) on Form S-8 and the registration statement (No.
333-73900) on Form S-3 of E-centives, Inc. of our reports dated June 29, 2004,
with respect to the consolidated balance sheets of E-centives, Inc. and
subsidiary as of December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity (deficit) and comprehensive loss,
and cash flows for each of the years in the three year period ended December 31,
2003, and the related financial statement schedule, which reports appear in the
December 31, 2003 annual report on Form 10-K of E-centives, Inc.

Our reports dated June 29, 2004, contain an explanatory paragraph that states
that effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets.

/s/ KPMG LLP
McLean, Virginia
June 29, 2004

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mehrdad Akhavan, certify that:

1) I have reviewed this annual report on Form 10-K of E-centives, Inc.;

2) Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;

3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;

4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and

5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):

a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.

Date: June 30, 2004
By: /s/ Mehrdad Akhavan
-----------------------------------------
Mehrdad Akhavan
Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Tracy L. Slavin, certify that:

1) I have reviewed this annual report on Form 10-K of E-centives, Inc.;

2) Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;

3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;

4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and

5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):

a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.

Date: June 29, 2004
By: /s/Tracy L. Slavin
-----------------------------------------
Tracy L. Slavin
Chief Financial Officer

Exhibit 32.1

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of E-centives, Inc. (the "Company") on
Form 10-K for the fiscal year ended December 31, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
undersigned's knowledge:

(a) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934;

and

(b) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.

Dated this 30th day of June, 2004

By: /s/ Mehrdad Akhavan
------------------------------------------
Mehrdad Akhavan
Chief Executive Officer

EXHIBIT 32.2

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of E-centives, Inc. (the "Company") on
Form 10-K for the fiscal year ended December 31, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
undersigned's knowledge:

(a) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934;

and

(b) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.

Dated this 29th day of June, 2004

By: /s/Tracy L. Slavin
-----------------------------------------
Tracy L. Slavin
Chief Financial Officer