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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2001

OR

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

For the transition period from ____________ to ____________ .

Commission file number 000-27065

APTIMUS, INC.
(Exact name of registrant as specified in its charter)

Washington 91-1809146
(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)

95 South Jackson Street
Suite 300
Seattle, Washington 98104
(Address of principal executive offices)

Registrant's telephone number: (206) 441-9100

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
------------------- -------------------
None N/A

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value
(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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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|


Aggregate market value of the registrant's Common Stock held by
non-affiliates as of February 28, 2002 was approximately $5,670,776. The number
of shares of the registrant's Common Stock outstanding as of February 28, 2002
was 3,988,466.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to shareholders
in connection with the Annual Meeting of Shareholders to be held on May 21, 2002
are incorporated by reference into Part III.

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FORWARD LOOKING STATEMENTS

Certain statements in this Annual Report constitute forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements can often be identified by terminology such as may,
will, should, expect, plan, intend, expect, anticipate, believe, estimate,
predict, potential or continue, the negative of such terms or other comparable
terminology. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Aptimus, Inc. ("Aptimus", "we", "us" or the "Company"), or
developments in the Company's industry, to differ materially from the
anticipated results, performance or achievements expressed or implied by such
forward-looking statements. Important factors currently known to management that
could cause actual results to differ materially from those in forward-looking
statements include, without limitation, fluctuation of the company's operating
results, the ability to compete successfully, the ability of the company to
maintain current client and distribution partner relationships and attract new
ones, the sufficiency of remaining cash and short-term investments to fund
ongoing operations and the ability to integrate acquired companies. For
additional factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements, please see the risks and
uncertainties described under "Business -- Risk Factors" in Part I of this
Annual Report. Certain of the forward-looking statements contained in this
Report are identified with cross-references to this section and/or to specific
risks identified under "Business -- Risk Factors."

PART I

Item 1: Business

Overview

Aptimus is positioning itself to become the leading online direct response
network. We provide high volume performance-based customer acquisition solutions
for major consumer marketers. The Aptimus Network presents consumers with
targeted offers geared to their immediate interests, allowing marketers to reach
a real-time hot list(TM) of consumers with the right offers when they are most
likely to respond. Our patent-pending offer presentation serving technology
enables us to promote offers contextually via third party Web sites across the
Internet through our Aptimus Direct Response System(TM). In addition, our email
campaigns reach a database of over twenty five million email consumers now
included in the Aptimus TransAction Masterfile.(TM) Built on a technology
platform that is flexible and scalable, the Aptimus Network can support millions
of users and hundreds of marketers and Web site partners.

Company History

We began our direct marketing business in 1994 as the FreeShop division of
Online Interactive, Inc. We later spun-off from Online Interactive, Inc. as
FreeShop International, Inc., later becoming FreeShop.com, Inc. and in October
2000 we changed our name to Aptimus, Inc. We began as an online direct marketing
Company focused on connecting marketers and consumers via our Web site,
FreeShop.com. The concept was to leverage the unique qualities of the Internet
to change the direct marketing paradigm and allow consumers to pick and choose
the promotional offers they actually want from direct marketers. This
site-centric approach led to the Company's growth through our initial public
offering in 1999 and into 2000. The core of our business model was the lead
generation business, a decades-old two-step marketing process where marketers
offer a free trial, sample or information as a first step to acquiring a new
customer. By the year 2000, our lead generation business was surrounded by
advertising and sponsorship opportunities, which grew to 65% of our revenues in
the second quarter of 2000.

During the year 2000, funding for Internet companies slowed and stock
prices generally declined. Lack of funding, combined with an increased focus
among Internet companies on profitability over growth objectives, resulted in
reduced marketing spending by Internet companies, most notably in the second
half of 2000. This drop in spending has had significant repercussions throughout
the industry and materially affected our advertising and sponsorship businesses.

While Aptimus faced major challenges in 2000 and our results suffered, we
maintained our aggressive posture and focused on what we know best - online
direct marketing. Toward that end, beginning in June 2000 we undertook an
evaluation of all aspects of how we do business. Through this effort, we made a
number of determinations and commitments that formed the basis of our strategy
going forward.


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o We determined that revenue streams from advertising and sponsorship
opportunities were declining quickly and would not likely return to
their earlier levels for some time to come. Those revenue streams
were critical to making rapid growth via our site-centric approach
possible, given the high marketing and infrastructure costs of
growing a Web site audience.

o We determined that our lead generation core business remained
strong, although the Internet-centric aspects such as e-mail list
development for Internet companies would be more challenging to
build. Direct marketing in general has continued to prosper, and
most direct marketers have recognized the importance of the Internet
as a key part of their distribution mix.

o We determined that all major sites throughout the industry would be
feeling the same impacts on advertising spending, and thus would be
seeking alternative revenue-generation opportunities such as
action-based pricing (where fees are paid on a per-lead or other
results basis).

o We determined that our direct marketing clients could be served
better by our placement of their offers in relevant context through
other companies' Web sites and email channels, without Aptimus
spending the significant resources required to continue to maintain
and grow our own audiences.

As a result of these determinations, we made a shift to build a network
strategy beginning in the Summer of 2000, placing direct marketing clients'
offers in contextually relevant locations on partner Web sites throughout the
Internet. Consistent with this new strategy, in October 2000 we renamed our
company Aptimus, Inc., and christened our network the Aptimus Network.

From the Summer of 2000 to the Summer of 2001, we laid the foundation for
our new network business model, and also reevaluated and changed all aspects of
our company in the process. We exited the Web site business and terminated most
of the contracts that were tied to our Web site business. We also reduced our
staff from a high of 215 to 28 at the end of 2001 primarily through
restructuring plans implemented in February of 2001 and June of 2001. In
addition, in November 2001 we completed a major issuer tender offer, acquiring
9,230,228 shares of our outstanding common stock, or approximately 69.87% of our
outstanding shares as of November 15, 2001. The issuer tender offer was
completed in order to increase the upside potential for continuing shareholders
who believed in the future of online direct marketing and our company while also
allowing shareholders who desired to exit the stock to do so at a substantial
premium to market prices at the time.

As of the Summer of 2001, we were a fully transitioned company focused
exclusively on our network business opportunity, and poised for a turnaround in
our growth. During the third quarter, we took 166,000 lead generation orders via
our network generating $188,000 in revenues, up from 100,000 orders in the
second quarter. The momentum continued to increase in the fourth quarter, where
we generated 342,000 orders and $378,000 in revenues, doubling both numbers on a
quarter-to-quarter basis.

With the continued positive momentum seen in the first quarter of 2002 to
date, a strong technology foundation, and a low fixed cost structure, we are on
our way to realizing the power and growth potential of our network model. We
hope to build on the foundation of our recent successes and develop Aptimus into
an Internet survivor and category leader.

Industry Background

Direct Marketing

Advertising expenditures can be broadly defined as either brand or direct
marketing. Brand advertising is intended to generate brand name awareness and
create a specific image for a particular company, product or service. Direct
marketing involves any direct communication to a consumer intended to generate a
specific response or action, generally a purchase of a product or service.

Traditional Direct Marketing

Traditional direct marketing media include direct mail, telemarketing,
newspaper, magazine, radio and television advertising. Although traditional
direct marketing is effective and widely used, it presents a number of
challenges for marketers and consumers alike. Traditional direct marketers
generally lack specific and timely information on a particular consumer's
immediate interests. As a result, marketers spend considerable resources on
communications most consumers don't want or need. For example, the average
response rate to an average credit card solicitation is only 1.2% according to
the Direct Marketing Association. Given the costs associated with traditional
direct marketing, which typically include printing, data processing, postage,
assembly, labor, telecommunications, and facilities, low response rates make the
process increasingly inefficient.


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Online Direct Marketing

Online direct marketing media include banner advertisements,
interstitials, advertorials, text-links, pop-ups, targeted email solicitations
and Web site sponsorships. Online direct marketing is more efficient than
traditional direct marketing because it requires lower production costs, and
provides easier and faster customer response features. In addition, online
direct marketing allows marketers to develop one-to-one relationships with
customers; collect instantaneous data and feedback on marketing campaigns; and
enables highly customized marketing campaigns.

Even with these advantages, direct marketers face challenges in realizing
the full potential of the Internet as a marketing medium. With millions of Web
sites, only a fraction of which have significant audiences, it is difficult for
marketers to decide where to spend their marketing budgets. Even leading brand
name marketers who build their own Web sites must find ways to attract a
sizeable audience. In addition, technological hurdles may impede conventional
direct marketers from successfully extending their activities to the Internet.

The Aptimus Solution

Aptimus provides a single-source online solution for marketers to acquire
new customers via online media. The Aptimus Network presents consumers with
relevant offers geared to their immediate interests, allowing marketers to reach
consumers with the right offers when they are most likely to respond. Our offer
presentation serving technology platform enables us to promote offers
contextually across the Internet. Our Aptimus TransAction Masterfile of over 25
million opt-in email names allows us to rapidly and aggressively promote
successful offers to both broad and targeted audiences. Built on a
patent-pending technology platform, which is flexible, scalable and proprietary,
the Aptimus Network can support millions of users and hundreds of Marketers and
Web site partners.

Contextual Marketing

The Aptimus Network draws its strength from contextual marketing. Marketer
offers are placed among partner Web sites and e-mail channels, complementing the
content and as a result creating value for consumers and marketers alike. The
result: the right offers presented at the right place and the right time.

Benefits to Consumers

Aptimus puts consumers in control of the direct marketing process by
empowering them to select offers that most interest them and meet their
individual needs. Through the Aptimus Network of Web site partners, we bring
together consumers and marketers in a contextual interactive environment. The
Aptimus Network has a broad range of offers from top consumer brands. The offers
include items such as catalogs, magazines, product samples, software, brochures,
and coupons, covering a variety of interests such as travel, personal finance,
entertainment and sports. In addition, because many offers are free or trial
offers, consumers are able to try new products and services before making
purchase decisions.

Benefits to Marketers

Aptimus benefits marketers by offering a powerful, cost effective way to
acquire customers online. Aptimus provides marketers with a diverse tool kit
designed to meet their objectives throughout the direct marketing process, from
awareness to interest to trial to sale. Our services include all facets of the
digital direct marketing process, from pre-campaign planning, to offer
consultation, creative execution, lead generation, campaign
measurement/reporting and campaign refinement. Marketers generally pay Aptimus
based solely on the results we achieve for them. Marketers pay Aptimus for the
number of leads and/or orders delivered. Since our lead generation services are
billed on a results basis, marketers can test direct marketing services with
little risk. Additionally, direct marketers control their campaigns by setting
budget, duration and lead volume caps. Most importantly, because consumers
select the offers they want to receive, direct marketers acquire higher quality
leads.

Benefits to Web site partners

Aptimus helps Web site partners by generating powerful new incremental
revenue streams from their current efforts, often through marketing placements
that are not otherwise monetized. Our base of clients and offers brings new
revenue opportunities and our dynamic platform automatically optimizes those
opportunities for maximum revenues. Compelling promotional offers also can help
to engage Web site visitors. Aptimus works closely with partners to identify
areas of their Web sites that have the most profit


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potential, and then dynamically serves targeted offers that match users'
interests. Partners share in the cost-per-action results. Similarly, partners
who have large opt-in email files can participate in the Aptimus TransAction
Masterfile for additional revenues through the delivery of special offers via
email to their customers.

Strategy

Our objective is to be the dominant pay-for-performance online direct
response network. We intend to achieve this objective by the following key
strategies:

Expand Client Base

Aptimus provides direct marketers with a cost-effective alternative to
traditional direct marketing and, as a result the Company has a significant
opportunity to increase the number of direct marketing clients we serve. In
particular, we are seeing more national consumer brand companies seeking
Internet-based direct marketing vehicles, and we plan to initiate new
relationships and expand our existing relationships with these companies. We
continue to focus our sales staff to drive this client growth. We plan to
continue to expand and refine the services we offer to our clients, including
enhanced marketing programs, new methods of presenting offers, expanded and
customized data-gathering options and increased opportunities for following up
on initial lead generation. In addition to enhancing our existing marketing
programs, we will be developing new programs in an effort to meet the needs of
new and different marketers. Finally, we also offer our services to advertising
and direct marketing agencies as a solution for their client companies to access
consumers on the Internet.

Grow Web site Distribution Partner Base

We intend to continue to grow our Partner web site distribution network by
focusing on the top 250 Web sites in audience size. Because our services are
performance based, it is critical that we have high volumes of marketing
impressions to create the maximum results. Thus, larger web sites, and
especially those with high volumes of transactional activities such as
registrations, joins, or purchases and/or large opt-in email files, are the most
valuable distribution partners for our network.

Expand Offers

The number and quality of offers available through our network are
critical to our ability to increase revenues. We plan to expand the number and
variety of offers in the Aptimus Network as rapidly as possible. We will drive
this expansion through the focused efforts of our growing internal sales team,
agent relationships, and advertising and direct marketing agency partnerships.

Increase Effective Revenues Per Impression

Our dynamic offer serving technology platform automatically maximizes
revenues on the fly through a patent-pending algorithmic approach. This
proprietary technology "optimizes" offer presentation on a real time basis,
assuring that the best performing offers in price and conversion (orders per
impression) automatically receive more exposure while lower performing offers
receive less exposure. Over time, as we continue to add new clients and offers,
this system should automatically increase our revenues based on the impressions
we receive for our offers. In addition, clients have a built-in incentive to
improve their offers and the fees they pay to Aptimus per order, as the revenue
results per impression for their offer will be a key factor in determining the
volumes of orders they receive.

Continue to Develop and Use Technology to Enhance Direct Marketing Capabilities

The Aptimus Network will continue to evolve in order to address the
evolving needs of direct marketers, web publishers and customers with a
sophisticated technology offering. The network resides on a proprietary platform
that is flexible, reliable and scalable. It can support millions of users and
hundreds of marketers and partners. We continually update our technology in
order to provide our marketer clients and partners with the most effective offer
presentations and reporting mechanisms.

Client Services

We offer marketers and Web site publishers a full suite of products and
services designed to meet their objectives throughout the entire marketing
process. We provide the infrastructure that makes direct marketing work in the
digital world. Combining media and


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technology expertise, our products and services enable direct marketers to
deliver the right offers to the right prospects, at the right time, while
helping Web publishers maximize their revenue and build their business online.

Our primary business is generating customer leads for our marketer clients
through free, trial and promotional offers. We promote these offers across our
network of partner Web sites and through email campaigns delivered to
company-owned and managed opt-in email lists. Consumers place orders for the
offers that interest them through us. We then deliver the order information to
our clients, who are each responsible for fulfilling these orders. Information
sent to our clients includes information required for order fulfillment as well
as additional information requested by the marketer. Marketers pay Aptimus for
each customer order, or lead, we generate.

Sales and Marketing

Client Base Development

We sell our solutions to direct marketer clients primarily through a sales
and marketing organization comprised of Aptimus employed sales staff and
independent contractors. Our salespeople are located in San Francisco, Seattle,
and New York. As part of our strategy to increase our client base, we will
expand our sales force and client account management teams on an as needed
basis. We conduct comprehensive marketing programs promoting Aptimus and our
services to support our direct sales efforts. These programs include public
relations and advertising campaigns, tradeshow exhibits, and other programs
designed to generate awareness and sales leads from major consumer direct
marketers. Our marketing efforts also include ongoing customer and prospect
communications programs.

Partner Base Development

Aptimus has a dedicated business development team who target and offer
high-quality Web publishers the opportunity to participate in the Aptimus
Network. Aptimus account managers work closely with our partner Web sites to
determine the most advantageous offer placements and presentation formats, often
monetizing previously untapped content. We continually and dynamically analyze
consumer response to offers placed on distribution partner Web sites in order to
optimize results. We also experiment with multiple overall presentation formats
and placements to maximize revenues for our distribution partners.

Operations and Technology

We have implemented a broad array of offer presentation, dynamic
optimization, customer service, transaction processing and reporting systems
using both proprietary and licensed technologies. The Aptimus Network resides on
a proprietary platform that is flexible, reliable and scalable. It can support
millions of users and large numbers of marketers and partners. Aptimus'
proprietary network has been developed using both data and process engineering
approaches to ensure a comprehensive and reliable architecture. Aptimus recently
filed a provisional patent application, with the US Patent and Trademark Office,
that covers our proprietary offer rotation engine as a whole as well as its
various unique component parts. The Aptimus Network technology has been created
with four foundation goals in mind:

Flexibility: The network is built entirely in Java, HTML, and XML,
and is intended to run across all platforms and networks.

Compatibility: To support the network, we have designed our remote
registration drivers to scale easily across partner Web sites with a
minimum of technical integration required.

Reliability: We have conducted hundreds of thousands of transactions
across our growing network of partner sites with a negligible failure
rate. All our data transfers are conducted according to industry-standard
security protocols, including Secure Sockets Layer (SSL).

Scalability: All of our technologies are designed for rapid,
complete deployment across a large number of distribution partners. We
leverage existing registration implementations at our partner sites to
speed up the integration process.

The Aptimus Network technology has been designed to evolve with the
business and the Internet marketplace.


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Competition

We face competition from other online advertising and direct marketing
companies like DoubleClick, Engage, Avenue A, and L90. For the most part these
competitors continue to sell advertising based on a cost-per-thousand model vs.
our pay-for-performance approach which we feel is superior, especially for
direct marketers. In some cases, these companies are also customers and
distribution partners of Aptimus.

Aptimus also competes for Internet advertising revenues with large Web
publishers and Web portals, such as AOL Time Warner, MSN and Yahoo!. These
companies also have the potential to become major distribution partners for
Aptimus.

We also compete with a number of small, privately funded direct
competitors who are attempting to build pay-for-performance direct marketing
networks, including companies such as Get Relevant. We believe our public
status, strong asset foundation, broad direct marketing industry recognition,
and stronger technology foundation position us to far exceed these companies in
scale over time.

Seasonality

Aptimus is subject to seasonal fluctuations. Direct Marketers generally increase
their customer acquisition efforts in the late third quarter and early fourth
quarter more than at any other time of the year. Further, in the United States
Internet user traffic typically drops during the summer months. Expenditures by
advertisers and direct marketers tend to vary in cycles that reflect overall
economic conditions as well as budgeting and buying patterns.

Intellectual Property

We regard our copyrights, service marks, trademarks, pending patents,
trade secrets, proprietary technology and similar intellectual property as
critical to our success, and we rely on trademark, patent and copyright law,
trade secret protection and confidentiality and license agreements with our
employees, customers, independent contractors, partners and others to protect
our intellectual property rights. We have registrations or pending registrations
of the trademark "Aptimus" and "The Aptimus Network" in the United States,
Australia, Canada, China, the European Union, and New Zealand. We also have a
pending provisional patent application in the United States that covers our
proprietary offer rotation engine as a whole as well as its various unique
component parts.

We have registered a number of domain names, including aptimus.com among
others. Internet regulatory bodies regulate domain names. The regulation of
domain names in the United States and in foreign countries is subject to change
in the future. Regulatory bodies 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 intellectual property rights is unclear.
Therefore, we could be unable to prevent third parties from acquiring domain
names that infringe on or otherwise decrease the value of our trademarks and
other proprietary rights.

Aptimus may be required to obtain licenses from others to refine, develop,
market and deliver new services. We may be unable to obtain any such license on
commercially reasonable terms, if at all, or guarantee that rights granted by
any licenses will be valid and enforceable.

Financial Information About Geographic Areas

For each of the Company's past three fiscal years, virtually all sales
have been attributed to North America and all long-lived assets of the Company
have been located in the United States.

Employees

As of February 28, 2002, Aptimus had a total of 28 employees. The current
employee mix includes 14 in sales and marketing, 7 in technology and
development, and 7 in finance and administration. Unions represent none of our
employees. We consider relations with our employees to be good.


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RISKS RELATED TO OUR BUSINESS

We have a limited operating history, which makes it difficult to predict our
future performance.

Our limited operating history makes predicting our future performance
difficult and does not provide investors with a meaningful basis for evaluating
an investment in our common stock. From our inception in June 1994 through June
1997, we existed as a division of Online Interactive, Inc. We began operations
as an independent company in June 1997. In the first half of 1998, we began
offering advertising opportunities on our Web sites and in our email
newsletters, in addition to our primary business of lead generation. As a
result, our performance from the end of the first quarter of 1998 through
January 2001 was not comparable to prior periods. In February 2001, we
repositioned the company as a direct marketing infrastructure provider, focusing
all our resources on building our direct marketing network. As a result, our
performance will not be comparable to prior periods. Moreover, the current
economic downturn in the Internet business, specifically, and the overall
economy, generally, has caused many online and traditional advertisers to
drastically cut back or eliminate their advertising and marketing budgets and,
in some cases, cease business operations altogether. Further erosion of this
revenue source may adversely affect our operating results.

We will face risks encountered by early-stage companies in Internet-related
businesses and may be unsuccessful in addressing these risks.

We face risks frequently encountered by early-stage companies in new and
rapidly evolving markets, including the market for online direct marketing. We
may not succeed in addressing these risks, and our business strategy may not be
successful. These risks include uncertainties about our ability to:

o attract a larger number of consumers to our direct marketing
network;

o contract with new marketing clients and add new and compelling
content to our offer network;

o contract with new online distribution partners with access to large
volumes of online users;

o contract with third-party providers of systems upon which our
services may depend;

o collect receivables for services performed from existing marketing
clients;

o manage our evolving operations;

o adapt to potential decreases in online advertising rates;

o successfully introduce new products and services;

o continue to develop and upgrade our technology and to minimize
technical difficulties and system downtime;

o create and maintain the loyalty of our customers, partners and
clients;

o maintain our current, and develop new, strategic relationships and
alliances; and

o attract, retain and motivate qualified personnel.

We have a history of losses, expect future losses and may never achieve
profitability.

We have not achieved profitability and are likely to continue to incur
substantial losses through 2002. We incurred net losses of $10.9 million, or
nearly 1.3 times the amount of our net revenues, for the year ended December 31,
1999, $21.1 million, or 1.2 times the amount of net revenues for the year ended
December 31, 2000, and $17.9 million, or more than 9.5 times the amount of our
net revenues, for the year ended December 31, 2001. As of December 31, 2001, our
accumulated deficit was $56.1 million. We have replaced an earlier strategy of
increased expenditures to accelerate growth with our current strategy of
maintaining operating expenses and capital expenditures to levels commensurate
with actual growth. In February 2001 the decision was made to discontinue
activities related to our consumer-direct Web sites. Although this decision has
resulted in a decrease in continuing operating expenses after the


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first quarter of 2001, we still must significantly increase net revenues to
achieve profitability. Even if we do achieve profitability, we may be unable to
sustain profitability on a quarterly or annual basis in the future. It is
possible that our net revenues will grow more slowly than we anticipate or that
operating expenses will exceed our expectations. Our accountants have noted that
these conditions raise substantial doubt about our ability to continue as a
going concern, as emphasized in their report included in this annual report.

Our quarterly operating results are uncertain and may fluctuate significantly,
which could negatively affect the value of our share price.

Our operating results have varied significantly from quarter to quarter in
the past and may continue to fluctuate. For example, during the year ended
December 31, 2001, the percentage of annual net revenues attributable to the
first, second, third and fourth quarters were 49.4%, 20.4%, 10.0% and 20.2%,
respectively. Our operating results for a particular quarter or year may fall
below the expectations of securities analysts and investors. With the
significant shift in the business to an online direct marketing infrastructure
provider, operating results in the near term may fall below earlier established
expectations of securities analysts and investors. These lower operating results
may cause a decrease in our stock price.

Our limited operating history and new business model makes it difficult to
ascertain the effects of seasonality on our business. We believe, however, that
our revenues may be subject to seasonal fluctuations because advertisers
generally place fewer advertisements during the first and third calendar
quarters of each year. In addition, expenditures by advertisers tend to be
cyclical, reflecting overall economic conditions as well as budgeting and buying
patterns. A decline in the economic prospects of advertisers could alter current
or prospective advertisers' spending priorities, or the time periods in which
they determine their budgets, or increase the time it takes to close a sale with
our advertisers.

If we cannot secure sufficient promotional offers from our marketer clients, our
business will suffer.

If we are unsuccessful in acquiring and renewing a continuing array of
free, trial and promotional offers for our distribution network, our order
volumes will likely decrease. The attractiveness of our offer network to
consumers and distribution partners is based in part on our ability to provide a
broad variety of offers of interest to consumers. In addition, a number of other
Web sites give consumers access to similar offers. We face competition for free,
trial and promotional offers from these Web sites as well as a variety of other
online and traditional competitors. Without sufficient variety and quality of
offers, our promotional offer network will become less attractive to both
marketers and our distribution partners through whose sites the offers are
promoted, and our ability to generate revenues from marketer clients will be
adversely affected.

If we cannot maintain our licenses with data owners, our business will suffer.

We distribute promotional offers by means of email to lists of names owned
by the company or managed by the company under license from third-party list
owners. Growth in this segment of our business accounts for an increasing
portion of our revenues. We face competition from other providers of list
management services. If we are unsuccessful in maintaining our current license
agreements with data list owners, our email-based order volumes will likely
decrease. As a consequence, our ability to generate revenues from the email
segment of our business will be adversely affected.

The majority of our contracts have month-to-month terms, and the loss of a
significant number of these contracts in a short period of time could harm our
business.

During the year ended December 31, 2001, nearly 100% of our contracts had
month-to-month terms with automatic renewal unless terminated by either party
with 30 days' notice. The loss of a significant number of these contracts in any
one period could result in a reduction in the size of our offer network, cause
an immediate and significant decline in our net revenues and cause our business
to suffer.

The loss of the services of any of our executive officers or key personnel would
likely cause our business to suffer.

Our future success depends to a significant extent on the efforts and
abilities of our senior management, particularly Timothy C. Choate, our
Chairman, President and Chief Executive Officer, Scott Rozic, our Executive Vice
President of Sales and Marketing, and other key employees, including our
technical and sales personnel. The loss of the services of any of these
individuals could harm our business. We may be unable to attract, motivate and
retain other key employees in the future. Competition for employees in our
industry has experienced a reduction in intensity. However, in the past we have
experienced difficulty in hiring qualified personnel.


10


We do not have employment agreements with any of our key personnel, nor do we
have key-person insurance for any of our employees.

Any future acquisitions present many risks and uncertainties generally
associated with acquisitions, including, without limitation:

o difficulties integrating operations, personnel, technologies,
products and information systems of acquired businesses;

o potential loss of key employees of acquired businesses;

o adverse effects on our results of operations from
acquisition-related charges and amortization of goodwill and
purchased technology;

o increased fixed costs, which could delay profitability;

o inability to maintain the key business relationships and the
reputations of acquired businesses;

o potential dilution to current shareholders from the issuance of
additional equity securities;

o inability to maintain our standards, controls, procedures and
policies;

o responsibility for liabilities of companies we acquire; and

o diversion of management's attention from other business concerns.

The aggregate value of our public float, or the shares of our common stock held
by non-insiders, has recently not been in compliance with NASDAQ's criteria for
continued listing on the NASDAQ National Market, and may be transferred to the
NASDAQ SmallCap Market or delisted if we are unable to comply.

Our common stock is quoted on the NASDAQ National Market. There are a
number of continuing requirements that must be met in order for the common stock
to remain eligible for quotation on the NASDAQ National Market or the NASDAQ
SmallCap Market. The failure to meet the maintenance criteria in the future
could result in the delisting of our common stock from NASDAQ. If our common
stock were to be delisted, trading, if any, in the common stock may then
continue to be conducted on the OTCBB. As a result, an investor may find it more
difficult to sell the common stock or to obtain accurate quotations as to the
market value of the common stock. By letter dated February 15, 2002, we were
advised by NASDAQ that we were then out of compliance with the NASDAQ rule that
requires companies listed on the exchange to maintain a minimum aggregate value
for its public float shares of $5.0 million. We cannot assume that we will
regain compliance with NASDAQ listing requirements within the prescribed
timeframes, or at all.

Since our stock price is volatile, we may become subject to securities
litigation that is expensive and could result in a diversion of resources.

The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile. Securities class action litigation has
often been brought against companies that experience volatility in the market
price of their securities. Litigation brought against us could result in
substantial costs to us in defending against the lawsuit and a diversion of
management's attention that could reduce the value of your investment.

If a significant number of our clients experience a decline in their financial
condition, the collectibility of our accounts receivable may suffer, materially
adversely affecting our financial results.

A decline in the financial condition of clients owing significant amounts
to us could cause us to write off the amounts owed by these entities as bad
debt, which could have a material adverse effect on our financial results.

An increase in the number of orders on our network may strain our systems or
those of our third-party service providers, and we are vulnerable to system
malfunctions.


11


Any serious or repeated problems with the performance of our network could
lead to the dissatisfaction of consumers, our marketer clients or our
distribution partners. The order volume on our network is expected to increase
over time as we seek to expand our client, consumer and distribution partner
base. The proprietary and third-party systems that support our network must be
able to accommodate an increased volume of traffic. Although we believe our
systems and those of our third-party hosting service providers can currently
accommodate well in excess of current order volumes, our network has, in the
past, experienced slow response times and other systems problems for a variety
of reasons, including failure of our third party Internet service providers,
hardware failures and failure of software applications. In these instances, our
network was typically unavailable or slow for approximately one and one-half to
two hours. Although these failures did not have a material adverse effect on our
business, we may experience similar problems in the future that could have a
material adverse effect on our business.

We face intense competition from marketing-focused companies for marketer
clients and may be unable to compete successfully.

We may be unable to compete successfully with current or future
competitors. We face intense competition from online advertising and direct
marketing companies like DoubleClick, Engage, Avenue A and L90. Competition with
smaller privately funded direct competitors such as Get Relevant also continues
to be a factor. We expect competition from online competitors to remain intense
because there are no substantial barriers to entry in our industry. Increased
competition could result in price reductions for online advertising space and
marketing services, reduced gross margins and loss of market share.

Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than Aptimus. These advantages may allow them to respond more quickly
and effectively to new or emerging technologies and changes in customer
requirements. These advantages may also allow them to engage in more extensive
research and development, undertake farther-reaching marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to potential
employees, strategic partners and advertisers. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective marketer
clients.

Online marketing is a rapidly developing industry, and new types of
products and services may emerge that are more attractive to consumers and
marketers than the types of services we offer. As a result, it is possible that
new competitors may emerge and rapidly acquire significant market share.

If our customers request products and services directly from our marketer
clients instead of requesting the product or service from us, our business could
suffer.

Our marketer clients, data licensors and/or distribution partners may
offer the same free, trial or promotional products or services on their own Web
sites or email programs that we offer via our offer distribution network and
email programs. Our customers may choose to request products or services
directly from our marketer clients, data licensors and/or distribution partners
instead of requesting the product or service through us, which would result in
lower net revenues to the Company from lead generation and cause our business to
suffer.

If third-party Internet service providers place limitations or restrictions on
commercial email addressed to their subscribers, our business could suffer.

Our email program distributes commercial email to company-owned and
licensed lists of individual Internet users, some of whom are subscribers of
third-party Internet service providers or ISP's such as AOL and MSN. These ISP's
have the ability to limit, restrict or otherwise filter the emails delivered to
their subscribers. Efforts by such ISP's to limit or restrict third-party
commercial emails such as ours, if successful, could result in lower net
revenues to the Company from lead generation and cause our business to suffer.

We may need to incur litigation expenses in order to defend our intellectual
property rights, and might nevertheless be unable to adequately protect these
rights.

We may need to engage in costly litigation to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the intellectual property rights of others. We can give no assurance
that our efforts to prevent misappropriation or infringement of our intellectual
property will be successful. An adverse determination in any litigation of this
type could require us to make significant changes to the structure and operation
of our services and features or to license alternative technology from another
party. Implementation of any of these alternatives could be costly and
time-consuming and may not be


12


successful. Any intellectual property litigation would likely result in
substantial costs and diversion of resources and management attention.

Our success largely depends on our trademarks, including "Aptimus", and
internally developed technologies, including our patent pending opt-in serving
platform, which includes offer rotation and implementation, order collection,
order processing and lead delivery, that we seek to protect through a
combination of patent, trademark, copyright and trade secret laws. Protection of
our proprietary technology and trademarks is crucial as we attempt to build our
proprietary advantage, brand name and reputation. Despite actions we take to
protect our intellectual property rights, it may be possible for third parties
to copy or otherwise obtain and use our intellectual property without
authorization or to develop similar technology independently. In addition, legal
standards relating to the validity, enforceability and scope of protection of
intellectual property rights in Internet-related businesses are uncertain and
still evolving. Although we are not currently engaged in any lawsuits for the
purpose of defending our intellectual property rights, we may need to engage in
such litigation in the future. Moreover, we may be unable to maintain the value
of our intellectual property rights in the future.

We could become involved in costly and time-consuming disputes regarding the
validity and enforceability of recently issued or pending patents.

The Internet, including the market for e-commerce and online advertising,
direct marketing and promotion, is characterized by a rapidly evolving legal
landscape. A variety of patents relating to the market have been recently
issued. Other patent applications may be pending. We have a pending provisional
patent application, which we intend to further develop and prosecute. It is
possible that significant activity in this area may continue and that litigation
may arise due to the patent holder's and/or our efforts to enforce applicable
patent rights.

We may incur substantial expense and management attention may be diverted
if litigation occurs. Moreover, whether or not claims against us have merit, we
may be required to enter into license agreements or be subject to injunctive or
other equitable relief, either of which would result in unexpected expenses or
management distraction.

We may face litigation and liability for information displayed on our network or
delivered in an email.

We may be subjected to claims for defamation, negligence, copyright or
trademark infringement and various other claims relating to the nature and
content of materials we publish on our offer distribution network or distribute
by email. These types of claims have been brought, sometimes successfully,
against online services in the past. We could also face claims based on the
content that is accessible from our network through links to other Web sites. In
addition, we may be subject to litigation based on laws and regulations
concerning commercial email. Any litigation arising from these claims would
likely result in substantial costs and diversion of resources and management
attention, and an unsuccessful defense to one or more such claims could result
in material damages and/or injunctive or other equitable relief. We have no
insurance coverage for these types of claims. Moreover, any claim that
successfully limited or entirely prevented our current commercial email
activities would result in lower net revenues to the Company and cause a
material adverse effect on our business.

Security and privacy breaches could subject us to litigation and liability and
deter consumers from using our network.

We could be subject to litigation and liability if third parties penetrate
our network security or otherwise misappropriate our users' personal or credit
card information. This liability could include claims for unauthorized purchases
with credit card information, impersonation or other similar fraud claims. It
could also include claims for other misuses of personal information, such as for
unauthorized marketing purposes. In addition, the Federal Trade Commission and
other federal and state agencies have been investigating various Internet
companies in connection with their use of personal information. We could be
subject to investigations and enforcement actions by these or other agencies. In
addition, we rent customer names and street addresses to third parties. Although
we provide an opportunity for our customers to remove their names from our
rental list, we nevertheless may receive complaints from customers for these
rentals.

The need to transmit confidential information securely has been a
significant barrier to electronic commerce and communications over the Internet.
Any compromise of security could deter people from using the Internet in general
or, specifically, from using the Internet to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
Many marketers seek to offer their products and services on our distribution
network because they want to encourage people to use the Internet to purchase
their goods or services. Internet security concerns could frustrate these
efforts. Also, our relationships with consumers may be adversely affected if the
security measures we use to protect their personal information prove to be
ineffective. We


13


cannot predict whether events or developments will result in a compromise or
breach of the technology we use to protect customers' personal information. We
have no insurance coverage for these types of claims.

Furthermore, our computer servers or those of our third-party hosting
service providers may be vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. We may need to expend significant additional
capital and other resources to protect against a security breach or to alleviate
problems caused by any such breaches. We may be unable to prevent or remedy all
security breaches. If any of these breaches occur, we could lose marketing
clients, distribution partners and visitors to our distribution network.

We may need additional financing, and our prospects for obtaining it are
uncertain.

Our business does not currently generate the cash necessary to fund our
operations. Should it become necessary, we may be unable to obtain additional
financing in the future. We currently anticipate that our available cash
resources will be sufficient to meet our currently anticipated capital
expenditures and working capital requirements for at least the next six to nine
months. Thereafter, we may need to raise additional funds to continue operation,
develop or enhance our services or products, fund expansion, respond to
competitive pressures or acquire businesses or technologies. Unanticipated
expenses, poor financial results or unanticipated opportunities that require
financial commitments could give rise to earlier financing requirements. If we
raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our existing shareholders would be
reduced, and these securities might have rights, preferences or privileges
senior to those of our common stock. Additional financing may not be available
on terms favorable to the Company, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of business opportunities, develop or enhance services
or products or otherwise respond to competitive pressures would be significantly
limited, and we might need to significantly restrict our operations.

RISKS RELATED TO OUR INDUSTRY

If the acceptance of online advertising and online direct marketing does not
increase, our business will suffer.

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. We
expect to derive almost all of our revenues from contracts with marketer clients
under which we provide online marketing services through our offer distribution
network and our commercial email programs. The Internet has not existed long
enough as a marketing medium to demonstrate its effectiveness relative to
traditional marketing methods. Marketers that have historically relied on
traditional marketing methods may be reluctant or slow to adopt online
marketing. Many marketers have limited or no experience using the Internet as a
marketing medium. In addition, marketers that have invested substantial
resources in traditional methods of marketing may be reluctant to reallocate
these resources to online marketing. Those 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. Moreover, the Internet-based companies that
have adopted online marketing methods may themselves develop more slowly than
anticipated or not at all. This, in turn, may result in slower growth in demand
for the online direct marketing services of the type provided by the company.

We do not know if accepted industry standards for measuring the
effectiveness of online marketing will develop. An absence of accepted standards
for measuring effectiveness could discourage companies from committing
significant resources to online marketing. There are a variety of pricing models
for marketing on the Internet. We cannot predict which, if any, will emerge as
the industry standard. Absence of such a standard makes it difficult to project
our future pricing and revenues.

If we are unable to adapt to rapid changes in the online marketing industry, our
business will suffer.

Online marketing is characterized by rapidly changing technologies,
frequent new product and service introductions, short development cycles and
evolving industry standards. We may incur substantial costs to modify our
services or infrastructure to adapt to these changes and to maintain and improve
the performance, features and reliability of our services. We may be unable to
successfully develop new services on a timely basis or achieve and maintain
market acceptance.

We face risks from potential government regulation and other legal uncertainties
relating to the Internet.

Laws and regulations that apply to Internet communications, commerce,
commercial email and advertising are becoming more prevalent. The adoption of
such laws could create uncertainty in use of the Internet and reduce the demand
for our services, or impair


14


our ability to provide our services to clients. Recently, Congress enacted
legislation regarding children's privacy on the Internet. Additional laws and
regulations may be proposed or adopted with respect to the Internet, covering
issues such as user privacy, freedom of expression, pricing, content and quality
of products and services, taxation, advertising, delivery of commercial email,
intellectual property rights and information security. The passage of
legislation regarding user privacy or direct marketing on the Internet may
reduce demand for our services or limit our ability to provide customer
information to marketers. Furthermore, the growth of electronic commerce may
prompt calls for more stringent consumer protection laws. For example, the
European Union has adopted a directive addressing data privacy that may result
in limits on the collection and use of consumer information. The adoption of
consumer protection laws that apply to online marketing could create uncertainty
in Internet usage and reduce the demand for our services, or impair our ability
to provide those services to clients.

In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. It is possible that future applications
of these laws to our business could reduce demand for our services or increase
the cost of doing business as a result of litigation costs or increased service
delivery costs.

Our services are available on the Internet in many states and foreign
countries, and these states or foreign countries may claim that we are required
to qualify to do business in their jurisdictions. Currently, we are qualified to
do business only in Washington and California. Our failure to qualify in other
jurisdictions if we were required to do so could subject us to taxes and
penalties and could restrict our ability to enforce contracts in those
jurisdictions.

Item 2: Properties

The company currently occupies 22,853 square feet in a leased facility in
Seattle, Washington and 7,188 square feet in a leased facility in San Francisco,
California. The current lease in Seattle expires in May 2004, and the current
lease in San Francisco expires in July 2003. The leased facilities are adequate
for the company's needs.

Item 3: Legal Proceedings

We are not engaged in any material litigation at this time.

Item 4: Submission of Matters to a Vote of Security Holders

At the Company's 2001 Annual Meeting of Shareholders held on June 12,
2001, Timothy C. Choate, John P. Ballantine, John B. Balousek, William J.
Lansing and William H. Fritsch were each elected as a director of the Company,
to serve until the next Annual Meeting of Shareholders and until his successor
is elected and qualified. In addition, our shareholders approved the adoption of
the Aptimus, Inc. 2001 Stock Plan, with 9,804,145 shares of common stock voting
in favor thereof, 736,559 shares voting against such adoption, 6,359 shares
abstaining thereto, and 3,504,290 shares cast as broker non-votes.


15


PART II

Item 5: Market for Registrant's Common Equity And Related Stockholder Matters

PRICE RANGE OF COMMON STOCK

The Company's Common Stock (the "Common Stock") has been quoted on the
Nasdaq National Market under the symbol "FSHP" since our initial public offering
on September 27, 1999 through October 23, 2000. Since October 24, 2000 the
Common Stock has been quoted on the Nasdaq National Market under the symbol
"APTM." Prior to that time, there was no public market for our common stock. The
following table shows the high and low closing sale prices for our common stock
as reported on the Nasdaq National Market for the periods indicated:

High Low
------- -------
Year Ended December 31, 2000
First quarter......................... $ 43.00 $ 17.75
Second quarter........................ $ 16.56 $ 4.94
Third quarter......................... $ 6.63 $ 2.81
Fourth quarter........................ $ 3.44 $ 0.75
Year Ended December 31, 2001
First quarter......................... $ 1.25 $ 0.38
Second quarter........................ $ 0.41 $ 0.27
Third quarter......................... $ 0.47 $ 0.16
Fourth quarter........................ $ 1.05 $ 0.44

As of February 28, 2002, there were 107 holders of record of the Common
Stock and 3,988,466 shares of the Common Stock outstanding.

The Company has never paid cash dividends on the Common Stock and does not
intend to pay cash dividends on the Common Stock in the foreseeable future. The
Company's board of directors intends to retain any earnings to provide funds for
the operation and expansion of the Company's business.

Recent Sales of Unregistered Securities

In November 2001, an aggregate of 635,000 shares of common stock were
issued to seven persons pursuant to restricted stock grants. The sales and
issuance of these securities were exempt from Securities Act registration under
Rule 506 of Regulation D and Section 4(2) of the Securities Act, on the basis
that the grants were to directors and officers of the Company and did not
involve a public offering.

In November 2001 the Company also released 89,196 shares of common stock
from escrow in connection with its December 2000 acquisition of XMarkstheSpot,
Inc. The sales and issuance of these securities were exempt from Securities Act
registration under Rule 506 of Regulation D and Section 4(2) of the Securities
Act, on the basis that the shares were issued to accredited investors and did
not involve a public offering.

Issuer Tender Offer

In November, 2001, the Company completed its cash tender offer to purchase
up to 10,750,000 shares of its common stock at $0.48 per share. A total of
9,230,228 shares of common stock (approximately 69.87% of the outstanding shares
as of November 15, 2001) were validly tendered pursuant to the offer and
accepted for payment by the Company. Following the purchase of the tendered
shares, approximately 3.98 million shares of the Company's common stock were
issued and outstanding. Of the Company's affiliates prior to the completion of
the tender offer, only Tim Choate continued to own more than 5% of the
outstanding common stock after the completion of the tender offer.


16


Establishment of Rights Plan

On March 12, 2002 the Company's board of directors declared a dividend
distribution of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock. The dividend is payable to the stockholders
of record on March 29, 2002, and with respect to Common Shares issued thereafter
until the distribution date and, in certain circumstances, with respect to
Common Shares issued after the distribution date. Each Right, when it becomes
exercisable, entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series C Preferred Stock, no par value per share,
of the Company at a price of $15.00 per one one-thousandth of a share of Series
C Preferred Stock, subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement") between the
Company and Mellon Investor Services LLC, as Rights Agent (the "Rights Agent"),
dated as of March 12, 2002, and filed with the SEC as an exhibit to the
Company's Form 8-K dated March 18, 2002. A more detailed description of the
Rights is contained in the Form 8-K dated March 18, 2002.


17


Item 6: Selected Financial Data

SELECTED FINANCIAL DATA

(in thousands, except per share data)

The following selected financial data are qualified in their entirety by
reference to, and you should read them in conjunction with, Aptimus' financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Annual Report. The selected financial data for the year ended June 30, 1997
reflects the net revenues, expenses and changes in division equity and cash
flows of the FreeShop Division of Online Interactive, Inc. Certain general and
administrative costs incurred by Online have been allocated to the Company on a
basis which management believes represents a reasonable allocation of such costs
to present FreeShop as a stand-alone company. These allocations consist
primarily of corporate expenses such as executive and other compensation,
depreciation, rent and legal expenses. The corporate expenses have been
allocated based on an estimate of Online personnel time dedicated to the
operations and management of FreeShop for the nine months ended March 31, 1997.
For the three-month period ended June 30, 1997, these corporate expenses were
generally allocated on a specific identification basis rather than on the basis
of personnel time.



FreeShop
Division Aptimus, Inc.
of Online ----------------------------------------------------------------------
Interactive, Inc Six Months
Fiscal Year Ended Year ended December 31,
Ended June 30, December 31, -----------------------------------------------------
1997 1997 1998 1999 2000 2001
---------------- ------------ -------- -------- -------- --------

Statement of Operations Data:
Revenues ............................. $ 1,198 $ 535 $ 1,251 $ 8,506 $ 16,873 $ 1,874
Operating expenses:
Sales and marketing ................ 1,810 1,175 3,088 15,042 29,571 6,185
Connectivity and network Costs ..... 310 128 181 616 2,047 2,101
Research and development ........... 135 182 387 901 2,439 1,632
General and administrative ......... 353 83 417 1,343 3,055 2,423
Depreciation and Amortization ...... 34 47 140 1,156 2,419 2,268
Equity-based compensation .......... -- 63 174 1,117 774 371
Restructuring costs ................ -- -- -- -- -- 4,998
-------- -------- -------- -------- -------- --------
Total operating Expenses ... 2,642 1,678 4,387 20,175 40,305 19,978
-------- -------- -------- -------- -------- --------
Operating loss ....................... (1,444) (1,143) (3,136) (11,669) (23,432) (18,104)
Interest expense ..................... -- 6 66 40 114 155
Other income, net .................... -- -- (3) (818) (2,442) (381)
-------- -------- -------- -------- -------- --------
Net loss ............................. $ (1,444) $ (1,149) $ (3,199) $(10,891) $(21,104) $(17,878)
======== ======== ======== ======== ======== ========
Basic and diluted net loss per
Share .............................. $ (0.31) $ (0.22) $ (0.51) $ (1.08) $ (1.36) $ (1.44)
======== ======== ======== ======== ======== ========
Shares used to compute basic and
Diluted per share amounts .......... 4,601 5,189 6,224 10,043 15,567 12,400
======== ======== ======== ======== ======== ========


As of June 30, As of December 31,
------------------------- -----------------------------------------------------
1997 1997 1998 1999 2000 2001
-------- -------- -------- -------- -------- --------

Balance Sheet Data:
Cash and cash equivalents ........ -- 26 2,892 33,795 12,854 3,651
Working capital (deficiency) ..... 322 (158) 2,014 46,736 23,032 4,387
Total assets ..................... $ 536 $ 645 $ 3,687 $ 55,816 $ 35,532 $ 7,510
Long-term obligations, less
current Portion ............... 5 160 195 40 944 68
Total shareholders' equity ....... 432 82 2,243 50,911 29,868 6,644



18


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

Overview

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

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

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

1. CoRegistration - This is our core focus, whereby we present relevant
offers to transacting consumers in a manner that allows them to
"opt-in" or choose the offers they wish to receive. By managing the
registration process, we can target offers "real time" based on the
site demographics, the data entered in the order process (e.g.
geotargeting), and/or the substance of the specific transaction.
Managed transactions include product purchases, email and site
registrations or joins, and other transactional actions occurring on
the web sites of our distribution partners.

2. Pop-Ups/Interstitials - We present relevant offers via advertising
screens that "pop up" or "pop under" when consumers take particular
actions such as visiting a specific web site or web page.

3. Email - We present relevant offers to consumers via opt-in email
lists, including lists that we own, lists that we manage for others,
and third party lists.

During 2001, we derived our revenues primarily from lead generation
contracts related to the Aptimus network of sites and opt-in email lists. We
receive lead generation revenues when we deliver customer information to a
marketer in connection with an offer in our network or opt-in email lists. We
received advertising revenues from sales of banner advertising, site
sponsorships and newsletter sponsorships. We also derived a small portion of our
lead generation revenues from the rental of customer names and street addresses
to third parties. Lead generation pricing is based on cost per lead and varies
depending on the type of offer. Generally, pricing of advertising is based on
cost per impression or cost per click through. In the second half of 2000, we
saw a shift away from these traditional advertising models towards a cost per
action model where advertisers pay based on actual orders or registrations
received. The services we deliver are primarily sold under short-term agreements
that are subject to cancellation. We recognize revenues in the period in which
we deliver the service, provided we have no further performance obligation.

On February 20, 2001, we announced our intention to reposition the Company
as a direct marketing infrastructure provider, focusing all of our resources on
building a direct marketing network. As part of this repositioning all
activities related to our consumer-direct Web sites, including FreeShop.com,
Desteo.com, and CatalogSite.com were discontinued. As a result of these
activities, we reduced staffing levels by 161 employees during the first quarter
of 2001. In June of 2001 the decision was made to modify the restructuring plan
by disposing of the technology acquired in the XMTS acquisition, to reduce
staffing by an additional 26 employees and to dispose of additional equipment
and software no longer being used in operations.

The restructuring costs for the year ended December 31, 2001 of $4,998,000
were recognized in accordance with the guidance of Emerging Issues Task Force
94-3. The restructuring resulted in the following charges during 2001:



First Second Third Fourth
Types of Costs Quarter Quarter Quarter Quarter Total
- ----------------------------------- ---------- ---------- -------- -------- ----------

Employee severance ................ $1,462,000 $ 503,000 $ -- $ -- $1,965,000
Capitalized software costs ........ 364,000 0 364,000
Disposal of fixed assets, Net ..... 4,000 534,000 538,000
Impairment of intangible assets ... 976,000 1,155,000 2,131,000
---------- ---------- -------- -------- ----------
Total .......................... $2,806,000 $2,192,000 $ -- $ -- $4,998,000
---------- ---------- -------- -------- ----------
Balance of severance accrual at
end of period .................. $ 511,000 $ 204,000 $ 57,000 $ 15,000 $ 15,000
========== ========== ======== ======== ==========



19


In addition to severance costs, the repositioning resulted in the disposal
and abandonment of capitalized software and fixed assets. In conjunction with
the disposal of these assets, the Company received approximately $51,000 of
proceeds, which is included in the restructuring costs. Additionally, during
2001 we recorded a restructuring charge related to the impairment of intangible
assets related to the repositioning activities. Intangible assets related to the
acquisitions of Commonsite LLC and Travel Companions International, Inc. were
impaired in the first quarter of 2001 as they related to our consumer direct Web
site business for which a plan of exit was implemented in the first quarter of
2001. Intangible assets related to the business acquisition of XMarkstheSpot,
Inc. were impaired in the second quarter of 2001 as the majority of the acquired
workforce was terminated and the acquired technology was replaced. As of
December 31, 2001 no assets that were to be disposed of as part of the
restructuring plan remained on the balance sheet and we do not anticipate any
additional costs to be recorded as a result of our restructuring plan.

On a quarterly basis revenues declined from the third quarter of 2000
though the third quarter of 2001. This trend was reversed in the fourth quarter
of 2001 when revenues doubled compared to the third quarter of 2001. The decline
in quarterly revenues from their high of almost $5.9 million in the second
quarter of 2000 was primarily a result of the collapse in the Internet
advertising industry. Additionally during the first nine months of 2001 the
focus of management was on exiting from out traditional Web site business,
reducing costs, and improving out network technology platform. The fourth
quarter results demonstrate the success of our efforts to refocus and regrow our
business.

During the year ended December 31, 2001 we repurchased approximately
12,162,000 shares of our common stock. The majority of these shares were
purchased through an issuer tender offer completed in November 2001, in which
approximately 9,230,000 shares were acquired. In April 2001 2,720,000 shares
were redeemed from Fingerhut companies, Inc. and an additional 212,000 shares
were purchased throughout the year under a share repurchase program initiated in
August 2000. All shares of our common stock acquired by the Company in 2001 have
been cancelled.

On March 12, 2002 the Company's board of directors declared a dividend
distribution of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock. The dividend is payable to the stockholders
of record on March 29, 2002, and with respect to Common Shares issued thereafter
until the distribution date and, in certain circumstances, with respect to
Common Shares issued after the distribution date. Except as set forth below,
each Right, when it becomes exercisable, entitles the registered holder to
purchase from the Company one one-thousandth of a share of Series C Preferred
Stock, no par value per share, of the Company at a price of $15.00 per one
one-thousandth of a share of Series C Preferred Stock, subject to adjustment.
The description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and Mellon Investor Services LLC, as
Rights Agent (the "Rights Agent"), dated as of March 12, 2002, and filed with
the SEC as an exhibit to the Company's Form 8-K dated March 18, 2002. A more
detailed description of the Rights is contained in the Form 8-K dated March 18,
2002.

For the years ended December 31, 1999, 2000, and 2001 our ten largest
clients accounted for 30.8%, 28.0% and 40.2% of our net revenues, respectively.
No single client accounted for more than 10% of net revenues in the years ended
December 31, 1999 and 2000. One customer accounted for 10.3% of revenues during
the year ended December 31, 2001. Under this contract services were provided in
the previous year. However, due to collectibility concerns, we did not recognize
these revenues until the collection process was complete. We believe collection
and recognition of the remaining revenues under this contract will occur in the
first quarter of 2002.

Our business has been operating at a loss and generating negative cash
flows from operations since inception. As of December 31, 2001, we had an
accumulated deficit of approximately $56.1 million. Even with the reduction in
continuing operating expenses and growth in revenues, we anticipate our losses
and negative cash flows are likely to continue during the fiscal year ending
December 31, 2002.

Results of Operations

The following table sets forth statement of operations data for the
periods indicated as a percentage of net revenues:


20


Year Ended December 31,
-------------------------------
1999 2000 2001
------- ------- -------
Net revenues ........................ 100.0% 100.0% 100.0%
Operating expenses:
Sales and marketing ............... 176.8 175.3 330.0
Connectivity and network costs .... 7.2 12.1 112.1
Research and development .......... 10.6 14.5 87.1
General and administrative ........ 15.8 18.1 129.3
Depreciation and amortization ..... 13.6 14.3 121.0
Equity-based compensation ......... 13.1 4.6 19.8
Restructuring costs ............... 266.7
------- ------- -------
Total operating expenses .. 237.2 238.9 1,066.1
------- ------- -------
Operating loss ...................... (137.2) (138.9) (966.1)
Interest expense .................... 0.5 0.7 8.3
Other income, net ................... (9.6) (14.5) (20.3)
------- ------- -------
Net loss ............................ (128.0)% (125.1)% (954.0)%
======= ======= =======

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Net revenues. We derive our revenues primarily from lead generation
contracts. Leads are obtained both from a network of partner sites and
management of internal and external opt-in email lists. Our net revenues
decreased by $15.0 million, or 89%, to $1.9 million in the year ended December
31, 2001 from $16.9 million in the year ended December 31, 2000. This decline in
revenue resulted primarily from a general decline in the Internet advertising
industry and the shift in focus to a network lead generation model from a
consumer direct business model, including discontinuation of our consumer-direct
Web sites.

Connectivity and network costs. Connectivity and network costs consist of
expenses associated with the fees, maintenance and usage of our network as well
as email delivery costs. Such costs include network partner fees, email delivery
costs, Internet connection charges, hosting facility costs, banner ad serving
fees and personnel costs. Connectivity and network costs increased by $54,000,
or 3%, to $2.1 million in 2001 from $2.0 million in 2000. This increase resulted
from costs incurred to simultaneously support both the network and consumer
direct business models during the first two quarters of 2001. Connectivity and
network costs are likely to increase in 2002 as the network partner fees
increase with a corresponding increase in revenues. Since not all of the
connectivity and network costs vary with revenue the significant decrease in
revenue for the year 2001 has resulted in Internet and network connectivity
expense increasing as a percentage of revenue.

Sales and marketing. In the second half of 2001 sales and marketing
expenses consisted primarily of marketing and operational personnel costs, bad
debts, and outside sales costs. In the first half of 2001 and all of 2000, sales
and marketing expenses were primarily comprised of marketing and operational
personnel costs related to developing our brand and generating visits to our Web
sites, as well as personnel and other costs. Sales and marketing expenses
decreased by $23.4 million, or 79%, to $6.2 million in 2001 from $29.6 million
in 2000. The decrease in sales and marketing expenses is primarily a result of
$13.7 million reduction in advertising spending, $5.5 million in reduced payroll
costs, settlement of liabilities for $358,000 less than previously recorded and
recovery of $304,000 of amounts that had been reserved for as bad debts. As a
result of the decrease in revenue, sales and marketing expense has increased as
a percentage of revenue even though the total sales and marketing expense has
decreased.

Research and development. Research and development expenses primarily
include personnel costs related to maintaining and enhancing the features,
content and functionality of our Web sites, network and related systems.
Research and development expenses decreased by $800,000, or 33%, to $1.6 million
in 2001 from $2.4 million in 2000. Reductions in staff resulting from the
restructuring and cost cutting efforts have reduced labor expenses by
approximately $970,000 compared to the prior year. The reductions were partially
offset by increased consulting costs during the first quarter of 2001. These
consulting costs were incurred to integrate and improve the network technology
platform during the first three months of 2001. As a result of the decrease in
revenue, research and development expense has increased as a percentage of
revenue even though the total research and development expense has decreased.

General and administrative. General and administrative expenses primarily
consist of management, financial and administrative personnel expenses and
professional service fees. General and administrative expenses decreased by
$632,000, or 21%, to $2.4 million in 2001 from $3.1 million in 2000. The
decrease in general and administrative expenses is in equal measure a result of
decreases in labor costs and a decrease in revenue based business taxes. As a
result of the decrease in revenue, general and administrative expense has
increased as a percentage of revenue even though the total general and
administrative expense has decreased.


21


Depreciation and amortization. Depreciation and amortization expenses
consist of depreciation on leased and owned computer equipment, software, office
equipment and furniture and amortization on intellectual property, non-compete
agreements, acquired technology, work force in-place and goodwill from
acquisitions. Depreciation and amortization expenses decreased by $151,000, or
6%, to $2.3 million in 2001 from $2.4 million in 2000. The decrease in
depreciation and amortization is a result of a $447,000 increase in depreciation
expense and a $598,000 decrease in amortization expense. The net increase in
depreciation is a result of a $545,000 increase related to fixed assets acquired
in the year ended December 31, 2000, a $41,000 increase related to fixed assets
acquired in the year ended December 31, 2001, and a $139,000 decrease related to
disposals of fixed asset during 2001. The net decrease in amortization is
primarily a result of the write-off of intangible assets related to the
restructuring in the first and second quarter of 2001. This decrease was offset
by a $337,000 increase as a result of acquiring XMarkstheSpot, Inc. in December
2000. As a result of the decrease in revenue, depreciation and amortization
expense has increased as a percentage of revenue.

Equity-based compensation. Equity-based compensation expenses consist of
amortization of unearned compensation recognized in connection with stock
options and stock grants granted to employees and directors at prices below the
fair market value of our common stock. Unearned compensation is recorded based
on the intrinsic value when we issue stock options to employees and directors at
an exercise price below the estimated fair market value of our common stock at
the date of grant. Unearned compensation is also recorded based on the fair
value of the options granted as calculated using the Black-Scholes option
pricing model when options or warrants are issued to advisors and other service
providers. Unearned compensation is amortized over the vesting period of the
option or warrant. Equity-based compensation expenses decreased by $403,000, or
52%, to $371,000 in 2001 from $774,000 in 2000. The decrease in equity-based
compensation is primarily a result of options forfeited by terminated employees.
This decrease was offset by the recognition of $305,000 in equity-based
compensation for restricted stock grants issued in September 2001.

Restructuring costs. Restructuring costs consist of costs associated with
repositioning the Company as a direct marketing infrastructure provider and the
discontinuance of our consumer-direct Web sites. The restructuring category is
new for 2001, as this is the first time we have undertaken a restructuring. The
total costs of $4,998,000 are composed of $1,965,000 of severance costs,
$902,000 of losses related to abandonment and disposal of capitalized software
and fixed assets and $2,131,000 of losses related to impairment of intangible
assets resulting from the repositioning activities. We do not expect to incur
additional restructuring costs in the near term.

Interest expense. Interest expense results from capital equipment leases
and notes payable to Imperial Bank, Fingerhut Companies and AFCO. Interest
expense totaled $155,000 and $114,000 in the year ended December 31, 2001, and
2000, respectively. Interest expense increased due (1) the $838,000 note payable
to Fingerhut Companies that was entered into in April 2001 in partial
consideration for the redemption of common stock from Fingerhut Companies, (2)
the Imperial Bank notes were held for a greater portion of 2001 than 2000, and
(3) approximately $200,000 of capital leases were assumed in December 2000.
Interest expense is expected to decrease in 2002 as the Imperial Bank note
payable was paid off in August 2001 and the Fingerhut Companies note payable was
paid off in November 2001.

Other income, net. Other income, net, consists of interest income, gains
and losses on disposal of assets and impairments on long-term investments. Other
income, net, decreased by $2.1 million to $381,000 in 2001 from $2.4 million in
2000. Interest income has decreased as the balance available for investment has
decreased due to use of cash for operations and a decline in interest rates. In
addition to the decrease in interest income an impairment on long-term
investments of $197,000 and a $74,000 loss on disposal of fixed assets were
recorded during the year.

Income Taxes. No provision for federal income taxes has been recorded for
any of the periods presented due to our current loss position.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Net revenues. We derive our revenues primarily from online lead generation
and advertising contracts. Our net revenues increased by $8.4 million, or 98%,
to $16.9 million in the year ended December 31, 2000 from $8.5 million in the
year ended December 31, 1999. This growth in net revenues was attributable to an
increase in the number of visits to our Web sites and an increase in the size of
the Club FreeShop email list. Revenues from advertising services were $9.4
million in 2000, compared to $4.2 million in 1999. As a result in the overall
decline in Internet advertising spending and the shift in strategy to a network
model has resulted in significant decreases in revenues in the fourth quarter of
2000.

Sales and marketing. Sales and marketing expenses consist primarily of
marketing and promotional costs related to developing our brand and generating
visits to our Web sites, as well as personnel and other costs. Sales and
marketing expenses increased by $14.6


22


million, or 97%, to $29.6 million in 2000 from $15.0 million in 1999. The
increase was due primarily to a $7.9 million, or 598%, increase in advertising
and brand awareness spending and to a $2.6 million, or 196%, increase in
personnel costs. Advertising and brand awareness costs consisted primarily of
online advertising spending. As a percentage of net revenues, sales and
marketing expenses remained fairly consistent at 175.3% in 2000 and 176.8% in
1999.

Connectivity and network costs. Connectivity and network costs consist of
expenses associated with the maintenance and usage of our Web sites and email
delivery costs. Such costs include Internet connection charges, hosting facility
costs, banner ad serving fees and personnel costs. Connectivity and network
costs increased by $1.4 million, or 232%, to $2.0 million in 2000 from $0.6
million in 1999. One million of this increase was related to email delivery
costs.

Research and development. Research and development expenses primarily
include personnel costs related to maintaining and enhancing the features,
content and functionality of our Web sites and related systems. Research and
development expenses increased by $1.5 million, or 171%, to $2.4 million in 2000
from $0.9 million in 1999. The increase was primarily due to hiring additional
staff to support our growth, continued improvements in our internal systems and
enhancements and modifications to our Web sites. As a percentage of net
revenues, research and development expenses increased to 14.5% in 2000 from
10.6% in 1999.

General and administrative. General and administrative expenses primarily
consist of management, financial and administrative personnel expenses and
related costs and professional service fees. General and administrative expenses
increased by $1.7 million, or 128%, to $3.0 million in 2000 from $1.3 million in
1999. The increase was primarily due to increased personnel costs and
professional service fees necessary to support our growth. As a percentage of
net revenues, general and administrative expenses increased to 18.1% in 2000
from 15.8% in 1999.

Depreciation and amortization. Depreciation and amortization expenses
consist of depreciation on leased and owned computer equipment, software, office
equipment and furniture and amortization on intellectual property, non-compete
agreements, goodwill and other intangible assets from acquisitions. Depreciation
and amortization expenses increased by $1.3 million, or 109%, to $2.4 million in
2000 from $1.1 million in 1999. The increase in depreciation and amortization
primarily relates to the acquisition of additional computer equipment, furniture
and leasehold improvements. As a percentage of net revenues, depreciation and
amortization expenses increased to 14.3% in 2000 from 13.6% in 1999.

Equity-based compensation. Equity-based compensation expenses consist of
amortization of deferred stock compensation recognized in connection with stock
options and recognition of expenses when our principal shareholders sold our
stock to an employee at a price below the estimated fair market value of our
common stock. Deferred stock compensation is recorded based on the intrinsic
value when we issue stock options to employees and directors at an exercise
price below the estimated fair market value of our common stock at the date of
grant. Deferred stock compensation is also recorded based on the fair value of
the option granted as calculated using the Black-Scholes option pricing model
when options or warrants are issued to advisors and other service providers.
Deferred stock compensation is amortized over the vesting period of the option
or warrant. Equity-based compensation expenses decreased by $0.3 million, or
31%, to $0.8 million in 2000 from $1.1 million in 1999. The decrease resulted
primarily from recognition of $0.4 million of expense associated with the sale
of shares by a principal shareholder to an employee in April of 1999.

Interest expense. Interest expense relates to capital equipment leases and
a note payable to Imperial Bank, and totaled $114,000 in 2000 and $40,000 in
1999. The increase in interest expense is a result of the Imperial Bank note
payable obtained in June of 2000.

Other income, net. Other income, net, consists primarily of interest
income. Other income, net, increased by $1.6 million to $2.4 million in 2000
from $0.8 million in 1999. The increase was due to having higher cash balances
over the entire year compared to having significant cash balances for only one
quarter of 1999.

Income Taxes. No provision for federal income taxes has been recorded for
any of the periods presented due to our current loss position.

Liquidity and Capital Resources

Since we began operating as an independent company in June 1997, we have
financed our operations primarily through the issuance of equity securities.
Gross proceeds from the issuance of stock through December 31, 2001 totaled
$65.7 million, including $21.5 million raised from Fingerhut Companies. As of
December 31, 2001, we had approximately $4.7 million in cash, cash


23


equivalents and short-term securities, providing working capital of $4.4
million. No off balance sheet assets or liabilities existed at December 31,
2001.

Net cash used in operating activities was $12.5 million and $18.6 million
in the years ended December 31, 2001 and 2000, respectively. Cash used in
operating activities in the year ended December 31, 2001 resulted primarily from
net losses, and decreases in accrued liabilities and accounts payable, which
were partially offset by a decrease in accounts receivable and prepaid expenses.
Cash used in operating activities in the year ended December 31, 2000 resulted
primarily from net losses and increases in accounts receivable and prepaid
expenses and a decrease in accrued liabilities, which were partially offset by
an increase in accounts payable.

Net cash provided by (used in) investing activities was $10.8 million and
$(2.5 million) in the years ended December 31, 2001 and 2000, respectively. In
the year ended December 31, 2001, $370,000 was used to purchase computer
equipment, software, furniture, office equipment and to pay for leasehold
improvements; $81,000 was received from the sale of computer equipment and
furniture and $11.1 million, net, was received from the of sale and purchase of
short-term securities. In the year ended December 31, 2000, $1.6 million was
used to acquire substantially all of the assets of XMarkstheSpot, Inc., $3.2
million was used to purchase computer equipment and software, furniture, office
equipment and to pay for leasehold improvements and $2.3 million was received
from the sale of short-term securities.

Net cash provided (used in) by financing activities was $(7.4 million) and
$202,000 in the years ended December 31, 2001 and 2000, respectively. Net cash
used in financing activities in 2001 resulted from the repurchase of nearly 12.2
million shares of common stock for $4.9 million, principle payments of $156,000
on capital leases and $2.4 million in principle payment on notes payable. Net
cash provided by financing activities in 2000 resulted from receipt of $2.0
million from a note payable and $0.3 million from the issuance of common stock
pursuant to option agreements and the Company's employee stock purchase plan.
These proceeds were offset by the repurchase of $1.6 million in common stock,
payments of $0.4 million on the note payable and payments of $0.1 million on the
capital leases.

We believe our current cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
at least the next six to nine months. Thereafter, we may need to raise
additional capital to meet our long-term operating requirements. Although cost
reduction measures were implemented in the second quarter of 2001 and revenues
in the fourth quarter of 2001 were higher than in the third quarter 2001 there
is no assurance these trends can be maintained.

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

The following table summarizes the contractual obligations and commercial
commitments entered into by the Company.



Payments Due by Period
--------------------------------------------------
Contractual Obligations Total 2002 2003 2004
- ------------------------------------------ -------- -------- -------- --------

Notes payable............................. $ 89 $ 89 $ -- $ --
Capital lease obligations................. 177 104 73
Operating leases.......................... 2,288 970 952 366
Other long-term obligations............... 1,120 535 540 45
-------- -------- -------- --------
Total Contractual Cash Obligations.... $ 3,674 $ 1,698 $ 1,565 $ 411
======== ======== ======== ========


One of the companies operating agreements included in other long-term
obligations above can be terminated early but calls for an early termination
fee. If the contract is terminated before February 2003 the termination fee is
50% of the remaining first year payments and 10% of the remaining second year
payments with a minimum fee of $150,000. The maximum termination fee would be
$301,500.


24


Critical Accounting Policies

Our significant accounting policies are described in Note 2 to the
financial statements included in Item 8 of this Annual Report. We believe our
most critical accounting policies include revenue recognition, allowance for
doubtful accounts and fixed assets.

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

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

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

Office furniture and equipment...... Five years
Computer hardware and software...... Three years
Leasehold improvements.............. Three to Five years

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

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

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivatives and Hedging Activities," which establishes accounting and reporting
standards for derivative financial instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133 is effective for the
Company's 2001 fiscal year. The adoption of this statement did not have an
impact on the results of operations, financial position or cash flows of the
Company as the Company does not hold any derivative financial instruments.

In June 2001, the FASB approved SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 is required
to be adopted for all business combinations occurring after June 30, 2001 while
SFAS no. 142 is required to be adopted for fiscal years beginning after December
15, 2001. SFAS No. 141 prospectively prohibits the pooling of interest method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 142
requires companies to cease


25


amortizing goodwill that existed at June 30, 2001. Any goodwill resulting from
acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142
also establishes a new method of testing goodwill for impairment on an annual
basis or on an interim basis if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying value. The adoption of SFAS No. 141 and 142 will not have a significant
impact on the results of operations, financial position or cash flows as the
Company has not completed any business combinations since June 30, 2001 and as
described in Note 3 goodwill from past business combinations remaining was
written-off during the year ended December 31, 2001.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in FAS 143,
a legal obligation is an obligation that a party is required to settle as a
result of an existing or enacted law, statute, ordinance, or written or oral
contract or by legal construction of a contract under the doctrine of promissory
estoppel. This statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002, although earlier application is encouraged.
We are currently assessing the impact of SFAS 143 on our operating results and
financial condition.

In October 2001, the FASB issued SFAS No.144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 establishes a single
accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", for long-lived assets to be disposed of by sale, and resolves
significant implementation issues related to SFAS 121. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
although earlier application is encouraged. We are currently assessing the
impact of SFAS 144 on our operating results and financial condition.

Item 7A: Quantitative and Qualitative Disclosures About Market Risk

All of the Company's cash equivalents, short-term securities and capital
lease obligations are at fixed interest rates and therefore the fair value of
these instruments is affected by changes in market interest rates. As of
December 31, 2001, however, the Company's cash equivalents and short-term
securities mature within three months. As of December 31, 2001, the Company
believes the reported amounts of cash equivalents, short-term securities,
capital lease obligations and notes payable to be reasonable approximations of
their fair values. As a result, the Company believes that the market risk and
interest risk arising from its holding of financial instruments is minimal.


26


Item 8: Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

Aptimus, Inc.
Financial Statements

Page
----

Report of Independent Accountants .......................... 28
Balance Sheet as of December 31, 2000 and 2001 ............. 30
Statement of Operations for the years ended December 31,
1999, 2000 and 2001 ...................................... 31
Statement of Shareholders' Equity for the years ended
December 31, 1999, 2000 and 2001 ......................... 32
Statement of Cash Flows for the years ended December 31,
1999, 2000 and 2001 ...................................... 33
Notes to Financial Statements .............................. 34


27


Report of Independent Accountants

To the Board of Directors and Shareholders of Aptimus, Inc.

We have audited the accompanying balance sheet of Aptimus, Inc. at
December 31, 2001, and the related statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aptimus, Inc., as of
December 31, 2001, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America. In addition in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(2) on page 49
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.


Moss Adams LLP

Seattle, Washington
January 30, 2002


28


Report of Independent Accountants

To the Board of Directors and Shareholders of Aptimus, Inc.

In our opinion, the accompanying December 31, 2000 balance sheet and
December 31, 2000 and 1999 statements of operations, of shareholders' equity and
of cash flows listed in the index appearing under Item 14(a)(1) on page 49
present fairly, in all material respects, the financial position of Aptimus,
Inc. at December 31, 2000, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule at December 31,
2000 and 1999, listed in the index appearing under Item 14(a)(2) on page 49
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

The financial statements described in the preceding paragraph have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company has suffered
recurring losses from operations that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


PricewaterhouseCoopers LLP
Seattle, Washington
February 28, 2001


29


APTIMUS, INC.

BALANCE SHEET
(in thousands)

ASSETS



December 31,
---------------------
2000 2001
-------- --------

Cash and cash equivalents ................................... $ 12,854 $ 3,651
Accounts receivable, net .................................... 2,240 269
Prepaid expenses and other assets ........................... 646 219
Short-term investments ...................................... 12,012 1,046
-------- --------
Total current assets .............................. 27,752 5,185
Fixed assets, net of accumulated depreciation ............... 4,760 2,115
Intangible assets, net ...................................... 2,643 33
Long-term investments ....................................... 345 147
Deposits .................................................... 32 30
-------- --------
$ 35,532 $ 7,510
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable ............................................ $ 2,573 $ 204
Accrued and other liabilities ............................... 1,154 421
Current portion of capital lease obligations ................ 193 84
Current portion of notes payable ............................ 800 89
-------- --------
Total current liabilities ......................... 4,720 798
Capital lease obligations, net of current portion ........... 144 68
Notes payable, net of current portion ....................... 800
-------- --------
Total liabilities ................................. 5,664 866
-------- --------
Commitments and contingent liabilities (note 9)
Shareholders' equity Common stock, no par value; 100,000
Shares authorized, 15,505 and 3,985 issued and
Outstanding at December 31, 2000 and 2001, respectively ... 65,874 60,173
Additional paid-in capital .................................. 2,518 2,534
Deferred stock compensation ................................. (352) (13)
Accumulated deficit ......................................... (38,172) (56,050)
-------- --------
Total shareholders' equity ........................ 29,868 6,644
-------- --------
$ 35,532 $ 7,510
======== ========


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


30


APTIMUS, INC.

STATEMENT OF OPERATIONS
(in thousands, except per share data)



Year ended December 31,
----------------------------------
1999 2000 2001
-------- -------- --------

Net revenues .................................... $ 8,506 $ 16,873 $ 1,874
Operating expenses:
Sales and marketing ........................... 15,042 29,571 6,185
Connectivity and network costs ................ 616 2,047 2,101
Research and development ...................... 901 2,439 1,632
General and administrative .................... 1,343 3,055 2,423
Depreciation and amortization ................. 1,156 2,419 2,268
Equity-based compensation ..................... 1,117 774 371
Restructuring costs ........................... 4,998
-------- -------- --------
Total operating expenses .............. 20,175 40,305 19,978
-------- -------- --------
Operating loss .................................. (11,669) (23,432) (18,104)
Interest expense ................................ 40 114 155
Other income net ................................ (818) (2,442) (381)
-------- -------- --------
Net loss ........................................ $(10,891) $(21,104) $(17,878)
======== ======== ========
Basic and diluted net loss per share ............ $ (1.08) $ (1.36) $ (1.44)
======== ======== ========
Weighted average shares used in computing per
Share information ............................. 10,043 15,567 12,400
======== ======== ========


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


31


APTIMUS, INC.

STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)



Series B
convertible
preferred stock Common stock Additional
-------------------- -------------------- paid-in
Shares Amount Shares Amount capital
-------- ---------- -------- ---------- ----------

Balances at December 31, 1998............. -- -- 8,141 7,816 294
Repurchase of common stock................ (160) (77)
Issuance of common stock.................. 160 400
Issuance of common stock upon
conversion of promissory note........... 20 50
Issuance of common stock in connection
with business acquisition............... 53 736
Shares sold to employee by principle
shareholder............................. 406
Issuance of common stock in initial
public offering, net of expenses of
$4,134.................................. 3,680 40,026
Exercise of stock options and
warrants................................ 878 17,495 118 141
Conversion of preferred stock............. (878) (17,495) 3,512 17,495
Deferred compensation related to
grants of stock options................. 2,324
Deferred compensation related to
forfeitures of stock options............ (166)
Amortization of deferred stock
compensation............................
Net loss..................................
---- ---------- ------- --------- --------
Balances at December 31, 1999............. -- -- 15,524 66,587 2,858
Repurchase of common stock................ (664) (1,637)
Exercise of stock options and
warrants................................ 211 229
Issuance of shares under employee
stock purchase program.................. 28 115
Deferred compensation related to
grants of stock options................. 146
Deferred compensation related to
forfeitures of stock options............ (486)
Amortization of deferred stock
Compensation............................
Issuance of common stock in connection
with business acquisition............... 406 580
Net loss..................................
---- ---------- ------- --------- --------
Balances at December 31, 2000............. -- -- 15,505 65,874 2,518
Repurchase of common stock................ (12,162) (5,637) 7
Exercise of stock options and
Warrants................................ 56 14 (14)
Issuance of shares under employee
stock purchase program.................. 7 3
Issuance of restricted shares under
2001 Stock Plan......................... 635 304
Deferred compensation related to
Forfeitures of stock options............ (281)
Amortization of deferred stock
Compensation............................
Adjustments to common stock in
Connection with a business acquisition.. (56) (81)
Net loss..................................
---- ---------- ------- --------- --------
Balance on December 31, 2001.............. -- $ -- 3,985 $ 60,173 $ 2,534
==== ========== ======= ========= ========


Deferred Total
stock Accumulated Shareholders'
Compensation Deficit equity
------------ ----------- -------------

Balances at December 31, 1998............. (13) (5,854) 2,243
Repurchase of common stock................ (323) (400)
Issuance of common stock.................. 400
Issuance of common stock upon
conversion of promissory note........... 50
Issuance of common stock in connection
with business acquisition............... 736
Shares sold to employee by principle
shareholder............................. 406
Issuance of common stock in initial
public offering, net of expenses of
$4,134.................................. 40,026
Exercise of stock options and
warrants................................ 17,636
Conversion of preferred stock............. --
Deferred compensation related to
grants of stock options................. (2,324) --
Deferred compensation related to
forfeitures of stock options............ 166 --
Amortization of deferred stock
compensation............................ 705 705
Net loss.................................. (10,891) (10,891)
--------- ---------- ----------
Balances at December 31, 1999............. (1,466) (17,068) 50,911
Repurchase of common stock................ (1,637)
Exercise of stock options and
warrants................................ 229
Issuance of shares under employee
stock purchase program.................. 115
Deferred compensation related to
grants of stock options................. (146) --
Deferred compensation related to
forfeitures of stock options............ 486 --
Amortization of deferred stock
Compensation............................ 774 774
Issuance of common stock in connection
with business acquisition............... 580
Net loss.................................. (21,104) (21,104)
--------- ---------- ----------
Balances at December 31, 2000............. (352) (38,172) 29,868
Repurchase of common stock................ (5,630)
Exercise of stock options and
Warrants................................ --
Issuance of shares under employee
stock purchase program.................. 3
Issuance of restricted shares under
2001 Stock Plan......................... 304
Deferred compensation related to
Forfeitures of stock options............ 281 --
Amortization of deferred stock
Compensation............................ 58 58
Adjustments to common stock in
Connection with a business acquisition.. (81)
Net loss.................................. (17,878) (17,878)
--------- ---------- ----------
Balance on December 31, 2001.............. $ (13) $ (56,050) $ 6,644
========= ========== ==========


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


32


APTIMUS, INC.

STATEMENT OF CASH FLOWS
(in thousands)



Year ended December 31,
----------------------------------
1999 2000 2001
-------- -------- --------

Cash flows from operating activities
Net loss .................................................... $(10,891) $(21,104) $(17,878)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .......................... 1,156 2,419 2,268
Bad debt expense (recovery) ............................ 393 1,995 (296)
Amortization of deferred stock compensation ............ 705 774 371
Shares sold or transferred to employees by principal
Shareholders ......................................... 406
Restructuring costs .................................... 4,998
Cash paid for restructuring costs ...................... (1,900)
Loss (gain) on disposal of property and equipment ...... (2) (3) 74
Impairment of long-term investment ..................... 197
Amortization of discount on short-term investments ..... (154) (301) (84)
Changes in assets and liabilities, net of effects of
business acquisitions:
Accounts receivable .................................. (3,489) (1,107) 2,267
Prepaid expenses and other assets .................... (352) (253) 564
Accounts payable ..................................... 906 1,203 (2,384)
Accrued and other liabilities ........................ 2,237 (2,236) (739)
-------- -------- --------
Net cash used in operating activities ................ (9,085) (18,613) (12,542)
-------- -------- --------
Cash flows from investing activities
Purchase of property and equipment ..................... (2,263) (3,239) (370)
Proceeds from disposal of fixed assets ................. 23 81
Payment for business acquisitions ...................... (1,841) (1,554)
Purchase of short-term investments ..................... (15,298) (21,259) (3,947)
Sale of short-term investments ......................... 1,500 23,500 14,997
(Purchase of) proceeds from long-term investments ..... (1) 1
-------- -------- --------
Net cash used in investing activities ............. (17,902) (2,530) 10,762
-------- -------- --------
Cash flows from financing activities
Proceeds from note payable ........................... 2,000
Repayment of notes payable ........................... (400) (2,375)
Principal payments under capital leases .............. (112) (105) (156)
Repurchase of common stock ........................... (400) (1,637) (4,899)
Issuance of common stock, net of issuance costs ...... 40,908 344 7
Issuance of Series B preferred stock ................. 17,494
-------- -------- --------
Net cash provided by financing activities ......... 57,890 202 (7,423)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ........ 30,903 (20,941) (9,203)
Cash and cash equivalents at beginning of period ............ 2,892 33,795 12,854
-------- -------- --------
Cash and cash equivalents at end of period .................. $ 33,795 $ 12,854 $ 3,651
======== ======== ========


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


33


APTIMUS, INC.

NOTES TO FINANCIAL STATEMENTS

1. Organization and business

Aptimus began as a division of Online Interactive, Inc. (Online), a
Washington corporation, incorporated in July 1994. On June 30, 1997, Online
Interactive contributed the FreeShop Division, including certain net assets, to
its wholly owned subsidiary, FreeShop International, Inc., a Washington
corporation incorporated on June 23, 1997, which then began operating as a
separate entity.

On February 19, 1999, FreeShop International, Inc. changed its name to
FreeShop.com, Inc. On October 16, 2000 FreeShop.com, Inc. changed its name to
Aptimus, Inc. (Aptimus or the Company). Aptimus operates an online direct
marketing network. Aptimus is primarily an online marketing service that
generates sales leads, creates product awareness, and initiates consumer
purchases through multiple online marketing vehicles, including free and trial
offers, banner advertising, email newsletter sponsorship, and others.

The Company has been in operation since 1994 and has incurred operating
losses since inception. The financial statements have been prepared assuming the
Company will continue as a going concern and do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets and liabilities that may result from this uncertainty.

The Company's ability to continue as a going concern is dependent on a
number of factors, including the success of the Company's intention to
reposition itself as a direct marketing infrastructure provider (Note 3), its
level of future revenues under the new operating plan and its ability to keep
operating costs low. There can be no assurance that the Company will be able to
increase revenues or contain operating expenses as planned.

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

2. Summary of significant accounting policies

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 amounts 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 could differ from those
estimates.

Cash, cash equivalents and short term investments

The Company generally considers any highly liquid investments purchased
with an original or remaining maturity of three months or less at the date of
purchase to be cash equivalents.

The Company classifies, at the date of acquisition, its marketable
securities into categories in accordance with the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." At December 31, 2000 and 2001, short-term
investments consisted of commercial paper and certificates of deposit with
maturities of less than one year. Currently, the Company classifies all of its
short-term investments as held to maturity, which are reported at amortized
cost, which approximated their fair value at December 31, 2000 and 2001.
Realized gains and losses and declines in value of securities judged to be other
than temporary are included in other income (expense), net.

The Company invests its cash and cash equivalents in deposits at three
major financial institutions that may, at times, exceed federally insured
limits. Management believes that the risk of loss is minimal. To date, the
Company has not experienced any losses related to temporary cash investments.


34


Property and equipment

Property and equipment are stated at cost less accumulated depreciation
and are depreciated using the straight-line method over their estimated useful
lives. Leasehold improvements are amortized on a straight-line method over their
estimated useful lives or the term of the related lease, whichever is shorter.
The estimated useful lives are as follows:

Office furniture and equipment...... Five years
Computer hardware and software...... Three years
Leasehold improvements.............. Three to Five years

The cost of normal maintenance and repairs are charged to expense as
incurred and expenditures for major improvements are capitalized. Gains or
losses on the disposition of assets in the normal course of business are
reflected in the results of operations at the time of disposal. Equipment under
capital leases, which all contain bargain purchase options, is recorded at the
present value of minimum lease payments and is amortized using the straight-line
method over the estimated useful lives of the related assets.

Intangible assets

Intangible assets are stated at cost less accumulated amortization and are
amortized using the straight-line method over their estimated useful lives. The
estimated useful lives are as follows:

Client list................................ One year
Work force in place........................ One year
Non-compete agreement and customer lists... Two years
Acquired technology........................ Two years
Aptimus trademark and logo ................ Three years
Goodwill................................... Three years
Worldwide Brochures database............... Five years

At December 31, 2000 and 2001, accumulated amortization of intangible
assets was $1,783,000 and $24,000, respectively. In conjunction with the
restructuring described in Note 3, all intangible assets except for the Aptimus
trademark and logo were written-off.

Long-term investments

Long-term investments consist of minority equity investments in non-public
companies. These investments are being accounted for on the cost basis and will
be evaluated for impairment each quarter. During the year ended December 31,
2001 the Company recorded a charge of approximately $197,000 related to the
impairment of these investments.

Impairment of long-lived assets

The Company evaluates its long-lived assets for impairment and continues
to evaluate them as events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable. The Company
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with these assets. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are adjusted to their
fair values. No losses for impairment were recognized during, 1999, 2000, or
2001.

Fair value of financial instruments

The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, short-term investments, accounts receivable, accounts
payable, accrued liabilities and long-term debt approximate fair value because
of their short maturities.

Deferred revenues

Deferred revenues consist of advance billings and payments on marketing
contracts and are included in accrued and other liabilities in the accompanying
balance sheet.


35


Revenue recognition

The Company currently derives revenue from providing lead generation
activities through a network of partners and e-mail mailings. Prior to May 15,
2001 the Company derived revenue from its online marketing service activities,
including lead generation, advertising, and list rental.

Lead generation revenues consist of fees received, generally on a per
inquiry basis, for delivery of leads to clients. Revenue is recognized in the
period the leads are provided to the client.

Advertising revenues consist of email newsletter sponsorships, banner
advertising, and anchor positions. Newsletter sponsorship revenues are derived
from a fixed fee or a fee based on the circulation of the newsletter. Newsletter
sponsorship revenues are recognized in the period in which the newsletter is
delivered. Banner advertising and anchor positions can be based on impressions,
fixed fees, or click throughs. Fixed fee contracts, which range from three
months to two years, are recognized ratably over the term of the agreement,
provided that no significant Company obligations remain. Revenue from
impressions or click through based contracts is recognized based on the
proportion of impressions or click throughs delivered, to the total number of
guaranteed impressions or click throughs provided for under the related
contracts.

List rental revenues are received from the rental of customer names to
third parties through the use of list brokers. Revenue from list rental
activities is recognized in the period the names are delivered by the list
broker to the third party.

Included in net revenues are barter revenues, which are generated from
exchanging lead generation and advertising services for advertising services.
Such transactions are recorded at the estimated fair value based on comparable
cash transaction. Revenue from barter transactions is recognized when
advertising or lead generation is provided, and services received are charged to
expense when used. For the years ended December 31, 1999 and 2000, the Company
recognized revenue from barter transactions of $489,000, $1,738,000,
respectively. No barter transactions were entered into or barter revenue
recognized during the year ended December 31, 2001.

The Company also had advertising and lead generation agreements that
provided for payment in equity securities of non-public companies. Revenue is
recognized under such agreements when sufficient contemporaneous evidence exists
concerning the value of the equity securities. Revenue recognized under such
agreements, for the year ended December 31, 2000, was $344,000. No similar
arrangements existed in 1999 or 2001.

Advertising costs

The Company expenses advertising costs as incurred. Total advertising
expense for the years ended December 31, 1999, 2000 and 2001 were $8,600,000,
$15,586,000 and $1,455,000, respectively.

Research and development costs

Research and development costs are expensed as incurred.

Web site development costs

Costs incurred in developing the Company's Web sites are accounted for in
accordance with Emerging Issues Task Force Issues Summary 00-02, "Accounting for
Web site Development Costs." As such, the Company expenses all costs incurred
that relate to the planning and post implementation phases of development. Costs
incurred in the development phase are capitalized and recognized over the Web
site's estimated useful life if the Web site is expected to have a useful life
beyond one year. Costs capitalized are included in fixed assets and are
amortized over three years. Costs associated with repair or maintenance of
existing sites or the development of Web site content are expensed as incurred.

Income taxes

The Company accounts for income taxes under the asset and liability
method, which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets


36


and liabilities. If it is more likely than not that some portion of a deferred
tax asset will not be realized, a valuation allowance is recorded.

Net loss per share

Basic net loss per share represents net loss available to common
shareholders divided by the weighted average number of shares outstanding during
the period. Diluted net loss per share represents net loss available to common
shareholders divided by the weighted average number of shares outstanding,
including the potentially dilutive impact of common stock options and warrants.
Common stock options and warrants are converted using the treasury stock method.
Basic and diluted net loss per share is equal for all periods presented because
the impact of common stock equivalents is antidilutive.

The following table sets forth the computation of the numerators and
denominators in the basic and diluted net loss per share calculations for the
periods indicated and those common stock equivalent securities not included in
the diluted net loss per share calculation (in thousands):



Year ended December 31,
----------------------------------
1999 2000 2001
-------- -------- --------

Numerator:
Net loss ......................................... $(10,891) $(21,104) $(17,878)
======== ======== ========
Denominator:
Weighted average shares used in computing net loss
per share ..................................... 10,043 15,567 12,400
======== ======== ========
Potentially dilutive securities consist of the
following:
Options to purchase common stock ................. 1,123 1,397 1,236
Warrants to purchase common stock ................ 28 16 16
-------- -------- --------
1,151 1,413 1,252
======== ======== ========


Concentrations of credit risk

Concentrations of credit risk with respect to accounts receivable exist
due to the large number of Internet based companies. This risk is mitigated due
to the wide variety of customers to which the Company provides services, as well
as the customer's dispersion across many different geographic areas. During the
years ended December 31, 1999 and 2000, no single customer accounted for greater
than 10% of total net revenues. During the year ended December 31, 2001 one
client account for 10.3% of net revenues. As of December 31, 1999 and 2001, a
single customer accounted for 13.1% and 22% of outstanding accounts receivable,
respectively. No single customer accounted for more than 10% of accounts
receivable balances as of December 31, 2000. The Company maintains an allowance
for doubtful accounts receivable based upon its historical experience and the
expected collectibility of all accounts receivable.

Stock compensation

The Company has elected to apply the disclosure-only provision of SFAS No.
123 for employee stock-based compensation plans. Accordingly, the Company
accounts for stock-based compensation to employees using the intrinsic-value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Compensation expense
for stock options is measured as the excess, if any, of the fair value of the
Company's common stock at the date of grant over the exercise price. The Company
records the fair value of equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and the Emerging Issues Task
Force consensus in Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction With Selling,
Goods or Services".

Comprehensive income

To date, the Company has not had any transactions required to be reported
in comprehensive income other than its net loss.


37


Recent accounting pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivatives and Hedging Activities," which establishes accounting and reporting
standards for derivative financial instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133 is effective for the
Company's 2001 fiscal year. The adoption of this statement did not have an
impact on the results of operations, financial position or cash flows of the
Company as the Company does not hold any derivative financial instruments.

In June 2001, the FASB approved SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 is required
to be adopted for all business combinations occurring after June 30, 2001 while
SFAS no. 142 is required to be adopted for fiscal years beginning after December
15, 2001. SFAS No. 141 prospectively prohibits the pooling of interest method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 142
requires companies to cease amortizing goodwill that existed at June 30, 2001.
Any goodwill resulting from acquisitions completed after June 30, 2001 will not
be amortized. SFAS No. 142 also establishes a new method of testing goodwill for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying value. The adoption of SFAS No. 141 and 142
will not have a significant impact on the results of operations, financial
position or cash flows as the Company has not completed any business
combinations since June 30, 2001 and as described in Note 3 goodwill from past
business combinations remaining was written-off during the year ended December
31, 2001.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in FAS 143,
a legal obligation is an obligation that a party is required to settle as a
result of an existing or enacted law, statute, ordinance, or written or oral
contract or by legal construction of a contract under the doctrine of promissory
estoppel. This statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002, although earlier application is encouraged.
We are currently assessing the impact of SFAS 143 on our operating results and
financial condition.

In October 2001, the FASB issued SFAS No.144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 establishes a single
accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", for long-lived assets to be disposed of by sale, and resolves
significant implementation issues related to SFAS 121. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
although earlier application is encouraged. We are currently assessing the
impact of SFAS 144 on our operating results and financial condition.

3. Restructuring Costs

On February 20, 2001, we announced our intention to reposition the Company as a
direct marketing infrastructure provider, focusing all of our resources on
building a direct marketing network. As part of this repositioning all
activities related to our consumer-direct Web sites, including FreeShop.com,
Desteo.com, and CatalogSite.com were discontinued. As a result of these
activities, we reduced staffing levels by 161 employees during the first quarter
of 2001. In June of 2001 the decision was made to modify the restructuring plan
by disposing of the technology acquired in the XMarkstheSpot acquisition, to
reduce staffing by an additional 26 employees and to dispose of additional
equipment and software no longer being used in operations.

The restructuring costs for the year ended December 31, 2001 of $4,998,000 were
recognized in accordance with the guidance of Emerging Issues Task Force 94-3.
The restructuring resulted in the following charges during 2001 (in thousands):



First Second Third Fourth
Types of Costs Quarter Quarter Quarter Quarter Total
- ------------------------------------------------ ------- ------- ------- ------- -------

Employee severance.............................. $1,462 $ 503 $ -- $ -- $ 1,965
Capitalized software costs...................... 364 364
Disposal of fixed assets, Net................... 4 534 538
Impairment of intangible assets................. 976 1,155 2,131
-------
Total........................................ $2,806 $ 2,192 $ -- $ -- $ 4,998
====== ======= ------ ------ =======
Balance of severance accrual at end of period.. $ 511 $ 204 $ 57 $ 15 $ 15
====== ======= ====== ====== =======



38


In addition to severance costs, the repositioning resulted in the disposal
and abandonment of capitalized software and fixed assets. In conjunction with
the disposal of these assets, the Company received approximately $51,000 of
proceeds, which is included in the restructuring costs. Additionally, during
2001 we recorded a restructuring charge related to the impairment of intangible
assets related to the repositioning activities. Intangible assets related to the
acquisitions of Commonsite, LLC and Travel Companions International, Inc. were
impaired in the first quarter of 2001 as they related to our consumer direct Web
site business for which a plan of exit was implemented in the first quarter of
2001. Intangible assets related to the business acquisition of XMarkstheSpot,
Inc. were impaired in the second quarter of 2001 as the majority of the acquired
workforce was terminated and the acquired technology was replaced. At December
31, 2001 no assets that were to be disposed of as part of the restructuring plan
remained on the balance sheet and we do not anticipate any additional costs to
be recorded as a result of our restructuring plan.

4. Accounts receivable

Accounts receivable consist of the following (in thousands):

December 31,
------------------
2000 2001
------- -------
Accounts receivable .......................... $ 4,041 $ 337
Less: Allowance for doubtful accounts ........ (1,785) (66)
Less: Allowance for list rental adjustments .. (16) (2)
------- -------
$ 2,240 $ 269
======= =======

5. Property and equipment

Property and equipment consist of the following (in thousands):

December 31,
------------------
2000 2001
------- -------
Computer hardware and software .................... $ 5,208 $ 3,272
Office furniture and equipment .................... 674 473
Leasehold improvements ............................ 842 892
------- -------
6,724 4,637
Less: Accumulated depreciation and amortization ... (1,964) (2,522)
------- -------
$ 4,760 $ 2,115
======= =======

Property and equipment includes equipment under capital leases in the
amount of $424,000 and $83,000 at December 31, 2000 and 2001, respectively.
Accumulated amortization on this equipment was $54,000 and $44,000 at December
31, 2000 and 2001, respectively.

6. Accrued and other liabilities

Accrued and other liabilities consist of the following (in thousands):

December 31,
-----------------
2000 2001
------- -------
Accrued advertising expense ....... $ 727 $ 105
Accrued network partner fees ...... 95
Accrued commissions ............... 77 8
Accrued public relations costs .... 16 0
Deferred revenue .................. 70 24
Accrued vacation .................. 148 58
Restructuring costs ............... 15
Other ............................. 116 116
------- -------
$ 1,154 $ 421
======= =======

7. Note payable

On June 29, 2000 the Company borrowed $2 million under an equipment term
loan with Imperial Bank. The loan and security agreement with Imperial Bank
provided for up to a $2 million term loan for equipment and up to $750,000 under
a revolving line-of-


39


credit facility. The term loan was collateralized by a first priority security
interest in all of the Company's unpledged assets. Borrowings under this
facility were payable in thirty equal monthly installments of principal plus
accrued interest through December 2002. Interest was accrued at the bank's prime
rate plus 1.0%. The revolving line-of-credit allowed for draws up to the amount
of eligible account receivable balances, generally those less than 90 days old.
Advances on the revolving line of credit were to bear interest on the
outstanding daily balance at a rate of 0.75% above the bank's prime rate,
10.25%. No amounts were borrowed under the line-of-credit and the term loan was
repaid in August 2001.

In September 2001 the Company borrowed $126,000 under a premium financing
agreement with AFCO. The agreement is secured by the unearned premiums of the
underlying insurance policy. Borrowings under this agreement are payable in 10
equal monthly payments through July 27, 2002 and bear interest at 8.5%.

Debt outstanding at December 31, 2001 becomes due as follows (in
thousands):

Years ending December 31,
2002........................... $ 89

8. Related party transactions

During January 1999, the Company repurchased 50,000 shares of common stock
from a principal shareholder for $125,000 and subsequently retired the shares.
The repurchase price of $2.50 per share was less than the $5.20 per share
estimated fair value of the common stock at the date of repurchase.

During April 1999 one of the Company's principal shareholders sold 40,000
shares of common stock to an employee at a price below the estimated fair market
value as an inducement for the employee to work for the Company. $406,000 of
equity-based compensation expense was recorded in connection with this
transaction.

During the year ended December 31, 1999 and 2000, the Company provided
services in the amount of $425,000 and $250,000 to a company for which Fingerhut
is a significant shareholder. During the year ended December 31, 2000 Fingerhut
acted as the list broker for the Company. Fees paid to Fingerhut for such
services were $36,000. During 2001, the Company repurchased all shares of common
stock held by Fingerhut (see Note 10).

In June 2001, certain assets of the Company's suspended Desteo operation
were sold to an entity controlled by relatives of the Company's CEO, Tim Choate.
Mr. Choate had no involvement in negotiating the terms of the sale . The sale,
which is in form substantially similar to the Company's earlier sale of certain
of its FreeShop-related assets to Altura International, Inc., was on an earn-out
basis in which the obligations of the purchaser are secured by the assets sold.


40


9. Commitments and contingencies

The Company's office facilities are leased under operating leases that
provide for minimum rentals and require payment of property taxes and include
escalation clauses. In addition, the Company also leases certain equipment under
agreements treated for financial reporting purposes as capital leases.

Future minimum lease payments under the non-cancelable leases are as
follows (in thousands).

Capital Operating
Year ending December 31, leases leases
------------------------ ------- -------
2002 ............................................. 104 970
2003 ............................................. 73 952
2004 ............................................. 366
------- -------
Total minimum lease payments ....................... 177 $ 2,288
=======
Less: Amount representing interest ................. (25)
-------
Present value of capital lease obligations ......... 152
Less: Current portion .............................. (84)
-------
Capital lease obligations, net of current portion .. $ 68
=======

Rent expense for the years ended December 31, 1999, 2000 and 2001, was
$325,000, $712,000 and $824,000 respectively. The company has also entered into
other agreements with service providers that are either non-cancelable, have
extended cancellation notification terms, or contain cancellation fees. Such
agreements call for payments totaling approximately $1.1 million through
February 2004.

Litigation

The Company is subject to various claims and pending or threatened
lawsuits in the normal course of business. Management believes that the outcome
of any such lawsuits would not have a materially adverse effect on the Company's
financial position, results of operations or cash flows.

10. Shareholders' equity

Preferred stock

In May 1999, the Board of Directors designated 1,250,000 shares of
preferred stock as Series B convertible preferred stock. Each share of Series B
convertible preferred stock is convertible into four shares of common stock.
Each share of Series B convertible preferred stock has similar rights and
obligations as four shares of common stock, except it has no voting rights.
During 1999, 877,967 shares of Series B preferred stock were issued pursuant to
warrants and converted into common shares on October 1, 1999.

Subject to the provisions of the articles of incorporation and limitations
prescribed by law, the board of directors has the authority to issue, without
further vote or action by the shareholders, up to 6,814,516 additional shares of
preferred stock in one or more series.

Common stock

On August 9, 1999, the Board of Directors declared a 1 for 2.5 reverse
stock split on the Company's common stock. Common stock issued, stock option,
warrant and convertible preferred stock information in these financial
statements have been restated to reflect this reverse split.

In October 1999 the Company closed its initial public offering of
3,680,000 shares of the Company's common stock at $12.00 per share. Total
proceeds, net of offering costs of $4,134,000, were $40,026,000. Concurrent with
the closing of the initial public offering, Fingerhut exercised their remaining
rights to purchase 405,359 additional shares of Series B convertible preferred
stock for $8,879,000. Upon the closing of the initial public offering all of the
Company's Series B convertible preferred stock converted into 3,511,868 shares
of common stock.

In April 2001, the Company repurchased 2,720,000 shares of common stock
from Fingerhut in exchange for $250,000 in cash and a note payable for $838,000.
The note payable called for equal monthly payments, including interest at 9.5%,
for 18 months through October 2002. As part of the repurchase Fingerhut was also
issued a warrant for 150,000 shares with an exercise price of $2.50 per


41


share, subject to adjustment if future sales of common stock are sold for less
than $0.40 per share. The warrants were valued at $7,200 for which an expense
was recorded. In November 2001 the note payable to Fingerhut was paid-off early
at a $100,000 discount and the warrant was cancelled. The early extinguishment
of the note payable is shown as a reduction of the cost to repurchase the shares
in the common stock account in the accompanying financial statements.

During November 2001, we completed an issuer tender offer by purchasing
9,230,000 shares of our Common Stock (the Tender Offer) for $0.48 per share in
cash for an aggregate purchase price of approximately $4,565,000, including
associated costs. We announced the tender offer on August 27, 2001 and commenced
the tender offer on October 10, 2001 by filing a Schedule TO-I. Following
completion of the tender offer approximately 3,985,000 shares of common stock
remained outstanding.

During the years ended December 31, 2000 and 2001 the company repurchased
664,000 and 212,000 shares for approximately $1,637,000 and $184,000,
respectively, under a 10b-18 stock repurchase plan approved by the Board of
Directors and initiated in August 2000.

Warrants

In connection with the sale of common stock to Fingerhut, the Company
issued to Fingerhut a series of warrants to purchase shares of the Company's
common stock. These warrants were modified in May 1999 to allow for the purchase
of Series B convertible preferred stock. These warrants were exercised for
Series B preferred stock and converted to common stock during 1999.

In connection with the redemption of common stock from Fingerhut, in April
2001, the Company issued to Fingerhut a warrant for 150,000 shares with an
exercise price of $2.50 per share, subject to adjustment if future sales of
common stock are sold for less than $0.40 per share. This warrant was cancelled
in November 2001.

In return for various services the Company has issued warrants to purchase
shares of common stock. At December 31, 2001, warrants outstanding are as
follows:

Year of issue Shares Exercise price Year of expiration
------------- ------ -------------- ------------------
1997 2,400 $ 1.02 2002
1998 14,000 $ 1.02 2003

Stock options

Effective June 30, 1997, the Company approved the 1997 Stock Option Plan
(the 1997 Plan) to provide for the granting of stock options to employees,
directors and consultants of the Company to acquire ownership in the Company and
provide them with incentives for their service. Under the terms of the Plan,
1,813,000 shares of common stock remain unissued and have been reserved for
issuance to plan participants.

Effective June 12, 2001 the shareholders approved the 2001 Stock Plan (the
2001 Plan) to provide for the granting of stock options and restricted stock to
employees, directors and consultants of the Company to provide them with
incentives for their service. Under the terms of the Plan, 1,765,000 shares of
common stock remain unissued and have been reserved for issuance to plan
participants.

The Plans are administered by the Board of Directors of the Company, which
determines the terms and conditions of the options or restricted stock shares
granted, including exercise price, number of shares granted and the vesting
period of such shares. The maximum term of options is ten years from the date of
grant. The options are generally granted at the estimated fair value of the
underlying stock, as determined by the Board of Directors, on the date of grant.
As of December 31, 2001, options to purchase 893,000 and 1,450,000 shares of
common stock were available for future grant under the 1997 Plan and the 2001
Plan, respectively. During 2001, 635,000 shares of restricted stock were issued
to the Board of Directors and certain members of senior management that by its
terms became fully vested as a result of the tender offer. For the year ended
December 31, 1999, 2000 and 2001, $2,324,000, $211,000 and $304,000,
respectively, of deferred compensation was recorded for options and restricted
stock grants for which the exercise price was lower than the fair market value
at the date of grant. The deferred compensation recognized is amortized over the
vesting period of the related options in accordance with Financial Accounting
Standards Board interpretation No. 28. During the years ended December 31, 1999,
2000 and 2001, $166,000, $486,000 and $281,000 of unamortized deferred
compensation was reversed due to forfeitures of options.

The following table presents option activity under the Plans (in
thousands, except per share data):


42




Year ended December 31,
------------------------------------------------------------
1999 2000 2001
----------------- ------------------ ------------------
Weighted Weighted Weighted
average average Average
exercise exercise Exercise
Shares price Shares price Shares price
------ -------- ------ -------- ------ --------

Options outstanding at beginning of period..... 815 $1.12 1,123 $3.92 1,397 $6.12
Options granted................................ 498 7.68 786 9.00 1,258 0.40
Options exercised.............................. 108 1.21 200 1.14 223 0.35
Options forfeited.............................. 82 2.45 312 8.61 1,197 5.56
----- ----- -----
Options outstanding at end of period........... 1,123 $3.92 1,397 $6.12 1,235 $1.88
===== ===== =====
Weighted average fair value of options
granted during the period.................... $9.99 $6.49 $0.29



43


The following table summarizes information about stock options outstanding
under the Plans at December 31, 2001 (in thousands, except per share data and
remaining contractual life):



Options outstanding Options exercisable
- ----------------------------------------------------------------- -----------------------------
Weighted average
remaining
contractual Weighted average Weighted average
Range of Number of life exercise Number of Exercise
exercise prices shares (in years) price Shares price
- --------------- --------- ---------------- ---------------- --------- ----------------

$0.38 -- $0.47 781 9.6 $ 0.42 371 $ 0.40
1.02 -- 1.50 226 6.5 1.32 226 1.32
2.00 -- 5.00 23 6.8 3.11 19 2.79
5.31 -- 9.56 161 8.5 5.91 54 5.91
11.50 -- 14.63 39 7.9 13.28 18 13.22
23.44 -- 36.00 5 8.1 32.06 5 32.06
- --------------- ----- ---
1,235 8.7 $ 1.88 693 $ 1.75
===== ===


The weighted average fair values and weighted average exercise prices per
share at the date of grant for options granted under the plans were as follows:



Year ended December 31,
---------------------------------------------------
Average fair value Average exercise price
------------------------ ------------------------
1999 2000 2001 1999 2000 2001
------ ------ ------ ------ ------ ------

Options granted with exercise prices less than
the fair value of the stock on the date of grant ..... $10.18 $12.61 $ -- $ 5.18 $15.82 $ --
Options granted with exercise prices equal to the
fair value of the stock on the date of grant ......... $ 9.42 $ 4.78 $ 0.29 $13.19 $ 6.63 $ 0.40
Options granted with exercise prices greater than
the fair value of the stock on the date of grant ..... $ 9.80 $18.99 $ -- $15.19 $27.96 $ --


During the years ended December 31, 1999, 2000 and 2001, the Company
granted options to purchase 12,000, 5,000 and zero shares of common stock,
respectively, to consultants, advisors and investment managers and as severance
to certain employees.

The Company follows SFAS No. 123 in accounting for options and warrants
issued to non-employees. During the year ended December 31, 1999, the Company
recognized $28,000 of expense in connection with options issued to advisors. In
determining the fair value of the options and warrants granted or issued to
non-employees on the date of grant, the Company used the Black-Scholes
option-pricing model with the following assumptions:

Year ended December 31,
--------------------------
1999 2000 2001
------ ------ ------
Weighted average risk free interest rate ... 4.63% 6.62% n/a
Weighted average expected life (in years) .. 1.00 10.00 n/a
Volatility ................................. 100% 100% n/a
Dividends .................................. none none n/a

No warrants were issued during 1999 or 2000. The weighted-average fair
value of warrants issued during 2001 was $0.05 per share.

Fair Value Pro Forma Disclosures

Had compensation expense for employee-related options been determined
based on the fair value at the grant dates consistent with the method of SFAS
No. 123, "Accounting for Stock Based Compensation," the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below (in thousands, except per share data):

Year ended December 31,
----------------------------------
1999 2000 2001
-------- -------- --------
Net loss As reported ......... $(10,891) $(21,104) $(17,878)
Pro forma .................. $(12,031) $(24,093) $(18,810)
Loss per share as reported ... $ (1.08) $ (1.36) $ (1.44)
Pro forma .................. $ (1.20) $ (1.55) $ (1.52)


44


For SFAS No. 123 pro forma disclosure, the fair value of each option is
estimated on the date of grant using the Black-Scholes option pricing model for
the years ended December 31, 1999, 2000 and 2001, with the following assumptions
used for grants to employees:

Year ended December 31,
--------------------------
1999 2000 2001
------ ------ ------
Weighted average risk free interest rate .... 5.62% 6.29% 4.42%
Weighted average expected life (in years) ... 3.94 4.00 4.00
Volatility .................................. 100% 100% 100%
Dividends ................................... none none none

11. Equity based compensation

Equity based compensation by statement of operations classifications is as
follows:

Year ended December 31,
--------------------------
1999 2000 2001
------ ------ ------
Sales and marketing ......................... $ 862 $ 545 $ 25
Internet and network ........................ 14 21 4
Research and development .................... 80 114 8
General and administrative .................. 161 94 334
------ ------ ------
Total Equity-based compensation ........ $1,117 $ 774 $ 371

12. Stock purchase plan

The Company's Board of Directors adopted the Employee Stock Purchase Plan
(the Purchase Plan) on April 17, 2000 under which two million shares have been
reserved for issuance. Under the Purchase Plan, eligible employees may purchase
common stock in an amount not to exceed 50% of the employees' cash compensation
or 1,800 shares per purchase period. The purchase price per share will be 85% of
the common stock fair value at the lower of certain plan-defined dates. Pursuant
to the Purchase Plan, 28,436 shares were purchased at a weighted average price
of $4.04 per share for the year ended December 31, 2000, and 7,200 shares were
purchased at a weighted average price of $0.39 per share for the year ended
December 31, 2001.

13. Employee retirement plan

During 1999, the Company established the FreeShop.com, Inc. 401(k) plan, a
tax-qualified savings and retirement plan intended to qualify under Section 401
of the Internal Revenue Code. All employees who satisfy the eligibility
requirements relating to minimum age and length of service are eligible to
participate in the plan and may enter the plan on the first day of any month
after they become eligible to participate. Participants may make pre-tax
contributions to the plan of up to 15% of their eligible earnings, subject to a
statutorily prescribed annual limit. The Company may make matching contributions
of up to 100% of the first 6% of the compensation elected for contribution to
the plan by an employee. Each participant is fully vested in his or her
contributions and the investment earnings thereon, but vesting in any matching
contributions by us takes place over a period of five years. The Company has
made no matching contributions to the plan as of December 31, 2001.

14. Income taxes

A current provision for income taxes was not recorded for the years ended
December 31, 1999, 2000 and 2001 due to taxable losses incurred during such
periods. A valuation allowance has been recorded for deferred tax assets because
realization is primarily dependent on generating sufficient taxable income prior
to the expiration of net operating loss carry-forwards.

Deferred tax assets at December 31, 2000 and 2001 are as follows (in
thousands):

December 31,
--------------------
2000 2001
-------- --------
Net operating loss carryforwards ................ $ 11,936 $ 18,908
Nondeductible allowances and accruals ........... 1,830 205
Expense related to stock options and warrants ... 0 45
-------- --------
13,766 19,158
Less: Valuation allowance ....................... (13,766) (19,158)
-------- --------
$ -- $ --
======== ========


45


At December 31, 2001, the Company had net operating loss carry forwards of
approximately $55.6 million for federal income tax reporting purposes. The net
operating losses will expire beginning in 2012 if not previously utilized.
Should certain changes in the Company's ownership occur, there could be a
limitation on the utilization of its net operating losses.

15. Supplemental cash flow information

The following items are supplemental information required for the
statement of cash flows (in thousands):

Year ended December 31,
---------------------------
1999 2000 2001
------- ------- -------
Cash paid during the period for interest .......... $ 40 $ 114 $ 154
======= ======= =======
Directors and Officers insurance premium financed.. $ -- $ -- $ 126
======= ======= =======
Repurchase of common stock with note payable ...... $ -- $ -- $ 838
======= ======= =======
Common stock issued in connection with business
combination ..................................... $ 736 $ 580 $ (81)
======= ======= =======
Conversion of note payable ........................ $ 50 $ -- $ --
======= ======= =======

16. Acquisitions

In May 1999, Aptimus entered into purchase and sale agreements to acquire
substantially all of the assets of Commonsite LLC (Commonsite) and Travel
Companions International, Inc. (Travel). Total consideration for the acquired
assets of the two companies was $2,577,000, which was comprised of $1,841,000 in
cash and 52,920 shares of common stock, valued at $13.91 per share. The
aggregate purchase price was allocated to the net assets acquired, based upon
their respective fair market values. The excess of the purchase price over the
fair market value of the assets acquired and liabilities assumed of $1,382,000
has been allocated to cost in excess of net assets acquired and was being
amortized over three years. In February 2001 the decision to discontinue
operations related to these acquisition was made and the remaining cost in
excess of net assets acquired was written off as a restructuring charge in the
first quarter of 2001.

In connection with the acquisitions, assets acquired and liabilities
assumed were as follows (in thousands):

Fair value of tangible assets acquired ... $ 55
Liabilities assumed ...................... (145)
Fair value of customer lists ............. 560
Fair value of database ................... 375
Fair value of client lists ............... 300
Fair value of non-compete agreement ...... 50
Goodwill ................................. 1,382
-------
$ 2,577
=======

In November 2000, Aptimus entered into purchase and sale agreements to
acquire substantially all of the assets of XMarkstheSpot, Inc. Total
consideration for the acquired assets was $2,077,000, which was comprised of
$1,497,000 in cash and 405,588 shares of common stock, valued at $1.43 per
share. The aggregate purchase price was allocated to the net assets acquired,
based upon their respective fair market values. In June of 2001 the majority of
the acquired workforce was terminated and the acquired technology was replaced,
accordingly the balance of the work force in place and acquired technology were
written off as restructuring charges in the second quarter of 2001.

In connection with the acquisition, the purchase price was allocated as
follows (in thousands):

Fair value of tangible assets acquired ... $ 671
Liabilities assumed ...................... (297)
Fair value of acquired technology ........ 1,314
Fair value of work force in place ........ 389
-------
$ 2,077
=======


46


The following summarizes the unaudited pro forma results of operations, on
a combined basis, as if the Company's acquisition of Commonsite and Travel
occurred as of the beginning of 1998, and the acquisition of XMarkstheSpot,
Inc., occurred as of the beginning of 1999 after including the impact of certain
adjustments such as amortization of cost in excess of net assets acquired (in
thousands, except per share data):

Year ended December 31,
----------------------
1999 2000
-------- --------
(unaudited)
Net revenues ..................................... $ 8,877 $ 18,181
Pro forma net loss ............................... $(14,678) $(28,447)
Pro forma basic and diluted net loss per share ... $ (1.40) $ (1.78)

The unaudited pro forma results are not necessarily indicative of the
results of operations which would actually have been reported had the
acquisition occurred prior to the beginning of the periods presented. In
addition, they are not intended to be indicative of future results.

17. Quarterly financial information (unaudited)

The following table sets forth the Company's unaudited quarterly financial
information for the years ending December 31, 1999, 2000, and 2001 (in
thousands, except per share data).



Three months ended
--------------------------------------------
3/31/99 6/30/99 9/30/99 12/31/99
-------- -------- -------- --------

Net revenue .............................. 667 1,397 2,386 4,056
Net loss ................................. $ (1,366) $ (2,503) $ (3,508) $ (3,514)
======== ======== ======== ========
Basic and diluted net loss per share ... $ (0.17) $ (0.30) $ (0.42) $ (0.23)
======== ======== ======== ========


Three months ended
--------------------------------------------
3/31/00 6/30/00 9/30/00 12/31/00
-------- -------- -------- --------

Net revenue .............................. 5147 5,877 3,492 2,357
Net loss ................................. $ (4,175) $ (4,612) $ (5,958) $ (6,359)
======== ======== ======== ========
Basic and diluted net loss per share ... $ (0.27) $ (0.29) $ (0.38) $ (0.41)
======== ======== ======== ========


Three months ended
--------------------------------------------
3/31/01 6/30/01 9/30/01 12/31/01
-------- -------- -------- --------

Net revenue .............................. 926 381 188 379
Net loss ................................. $ (8,858) $ (5,475) $ (1,848) $ (1,697)
======== ======== ======== ========
Basic and diluted net loss per share ... $ (0.57) $ (0.42) $ (0.15) $ (0.20)
======== ======== ======== ========


18. SUBSEQUENT EVENT

Establishment of Rights Plan

On March 12, 2002 the Company's board of directors declared a dividend
distribution of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock. The dividend is payable to the stockholders
of record on March 29, 2002, and with respect to Common Shares issued thereafter
until the distribution date and, in certain circumstances, with respect to
Common Shares issued after the distribution date. Except as set forth below,
each Right, when it becomes exercisable, entitles the registered holder to
purchase from the Company one one-thousandth of a share of Series C Preferred
Stock, no par value per share, of the Company at a price of $15.00 per one
one-thousandth of a share of Series C Preferred Stock, subject to adjustment.
The description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and Mellon Investor Services LLC, as
Rights Agent (the "Rights Agent"), dated as of March 12, 2002, and filed with
the SEC as an exhibit to the Company's Form 8-K dated March 18, 2002. A more
detailed description of the Rights is contained in the Form 8-K dated March 18,
2002.


47


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

As previously disclosed in our Current Report of Form 8-K filed December
17, 2001, effective December 10, 2001, Aptimus, Inc. ("Company") dismissed its
independent accountant, PricewaterhouseCoopers LLP ("PWC"). Effective December
10, 2001, the Company engaged Moss Adams LLP ("Moss Adams") to be the Company's
new independent accountant. The dismissal of PWC and appointment of Moss Adams
was unanimously approved by the Company's Board of Directors upon the
recommendation of the Audit Committee of the Board of Directors. Moss Adams has
accepted the engagement. During the two most recent fiscal years and through
December 10, 2001, the Company has not consulted with Moss Adams regarding
either (i) the application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that might be
rendered on the Company's financial statements, and either a written report was
provided to the Company's or oral advice was provided that Moss Adams concluded
was an important factor considered by the Company in reaching a decision as to
the accounting, auditing or financial reporting issue; or (ii) any matter that
was either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of
Regulation S-K, or a reportable event, as that term is defined in Item
304(a)(1)(v) of Regulation S-K.

The reports of PWC on the Company's financial statements for the past two
fiscal years did not contain any adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principals, except that, the Independent Auditors' Report on the Company's
financial statement for the fiscal year ended December 31, 2000 did contain an
explanatory paragraph regarding the uncertainty of the Company's ability to
continue as a going concern.

In connection with its audits for the two most recent fiscal years and
through December 10, 2001, there were no disagreements with PWC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
PWC would have caused them to make reference thereto in their reports on the
financial statements for such years, except that in connection with its audit
for the year ended December 31, 2000 PWC reported to the Company's Audit
Committee a disagreement regarding the valuation of private equity in an entity
received by the Company for services performed on behalf of such entity. The
divergent views of PWC and the Company related to the level and recentcy of
evidence needed to support recognition of revenue for such transaction. This
matter was satisfactorily resolved.

During the two most recent fiscal years and through December 10, 2001
there were no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)), except that in connection with its audit for the year ended
December 31, 2000 PWC communicated to the Board of Directors two matters
involving the internal control structure and its operation that PWC considered
to be material weaknesses; namely (i) the Company's internal credit controls and
its evaluation of collectibility prior to recognition of revenue; and (ii)
properly identifying barter transactions and assessing the appropriateness of
any related revenue recognition.

PART III

Item 10: Directors and Officers of the Registrant

Information with respect to Directors may be found under the caption
"Election of Directors and Management Information" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 21, 2002 (the
"Proxy Statement"). Such information is incorporated herein by reference.

Item 11: Executive Compensation

The information in the Proxy Statement set forth under the captions
"Information Regarding Executive Officer Compensation" and "Information
Regarding the Board and its Committees" is incorporated herein by reference.

Item 12: Security Ownership of Certain Beneficial Owners and Management

The information set forth under the caption "Information Regarding
Beneficial Ownership of Principal Shareholders, Directors, and Management" of
the Proxy Statement is incorporated herein by reference.

Item 13: Certain Relationships and Related Transactions

The information set forth under the caption "Certain Relationships and
Related Transactions" of the Proxy Statement is incorporated herein by
reference.


48


PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) 1. Financial Statements

The following financial statements of the registrant and the Report of
Independent Accountants thereon are included herewith in Item 8 above.

Page
----
Reports of Independent Accountants .......................... 28
Balance Sheet as of December 31, 1999 and 2000 .............. 30
Statement of Operations for the years ended December 31,
1998, 1999 and 2000 ....................................... 31
Statement of Shareholders' Equity for the years ended
December 31, 1998, 1999 and 2000 .......................... 32
Statement of Cash Flows for the years ended December 31,
1998, 1999 and 2000 ....................................... 33
Notes to Financial Statements ............................... 34

(a) 2. Financial Statement Schedules

Schedule No. Description
------------ -----------
1.1 Valuation and Qualifying Accounts and Reserves

(b) Reports on Form 8-K

On December 17, 2001, the Company filed a Form 8-K announcing its
dismissal of its independent accountant, PricewaterhouseCoopers LLP and its
engagement of Moss Adams LLP to be the Company's new independent accountant.

(c) Exhibits:

Exhibit
Number Description
- ------ -----------

3.1* Second Amended and Restated Articles of Incorporation of registrant.

3.1.1^^ Articles of Amendment filed September 16, 2000.

3.1.2 Articles of Amendment filed March 29, 2002.

3.2* Amended and Restated Bylaws of registrant.

4.1* Specimen Stock Certificate.

4.2* Form of Common Stock Warrant.

4.3^^^ Rights Agreement dated as of March 12, 2002 between registrant and
Mellon Investor Services LLC, as rights agent.

10.1*++ Form of Indemnification Agreement between the registrant and each of
its directors.

10.2.*++ 1997 Stock Option Plan, as amended.

10.3.*++ Form of Stock Option Agreement.

10.4* Investor Subscription Agreement, dated December 10, 1998, between
registrant and Fingerhut Companies, Inc.

10.5* Warrant Agreement, dated December 10, 1998, between registrant and
Fingerhut Companies, Inc.

10.6* Stockholders Agreement, dated December 10, 1998, among registrant,
Timothy C. Choate, John P. Ballantine and Fingerhut Companies, Inc.

10.7* Asset Purchase Agreement, dated May 5, 1999, among registrant,
Travel Companions International, Inc., Jeff Mohr and Janet Mohr.

10.8* Asset Purchase Agreement, dated May 6, 1999, among registrant,
Commonsite LLC and Alan Bennett.


49


Exhibit
Number Description
- ------ -----------

10.9* Registration Rights Agreement, dated May 6, 1999, between registrant
and Commonsite LLC.

10.10* Loan and Security Agreement, dated September 18, 1998, between
registrant and Imperial Bank.

10.11* Lease Agreement, dated September 23, 1997 and amended as of February
16, 1999, between registrant and Merrill Place LLC.

10.11.1* Second Amendment to Lease, dated November 30, 1999, between
registrant and Merrill Place LLC.

10.12* Promotion Agreement, dated May 18, 1998 and amended as of June 30,
1998 and September 30, 1998, between registrant and CNET, Inc.

10.13+* Linkshare Network Membership Agreement, dated September 23, 1998,
between registrant and Linkshare Corporation.

10.14* Letter Agreement dated June 18, 1999 between registrant and
Fingerhut.

10.15* Escrow Agreement dated June 18, 1999 between registrant and
Fingerhut.

10.16* Common Stock Purchase Warrant dated January 26, 1998 in favor of
Karrie Lee.

10.17* Warrant to Purchase Stock dated September 18, 1998 in favor of
Imperial Bank.

10.18* Common Stock Purchase Warrant dated January 23, 1998 in favor of
Hallco Leasing Corporation.

10.19* Common Stock Purchase Warrant dated December 4, 1997 in favor of
Hallco Leasing Corporation.

10.20* Common Stock Purchase Warrant dated January 26, 1998 in favor of
Employco, Inc.

10.21+* Marketing Agreement with NewSub Services, Inc. effective as of June
1, 1999.

10.22+* Marketing Agreement with eNews.com, Inc. dated December 8,1999.
(Incorporated by reference Exhibit 10.1 to the Company's Report on
Form 8-K filed January 12, 2000).

10.23** Asset Purchase Agreement, dated November 22, 2000, among Aptimus,
Inc. and XMarkstheSpot, Inc.

10.24*** Stock Redemption Agreement, dated as of April 16, 2001, by and
between registrant and Fingerhut Companies. Inc.

10.25^++ Aptimus, Inc. 2001 Stock Plan.

10.25.1^^ Form of Stock Option Agreement.

10.25.2^^ Form of Restricted Stock Agreement (for grants).

10.25.3^^ Form of Restricted Stock Agreement (for rights to purchase).

10.26^^ Letter Agreement, dated November 13, 2001, by and between registrant
and Fingerhut Companies, Inc.

16.1# Letter dated December 12, 2001 from PricewaterhouseCoopers LLP to
the Securities and Exchange Commission.

23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.

23.2 Consent of Moss Adams LLP, independent accountants.

- ----------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-81151).
** Incorporated by reference to the Company's Annual Report on Form 10-K,
dated April 2, 2001.
*** Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 16, 2001.
^ Incorporated by reference to the Company's Proxy Statement on Schedule
14A, dated May 17, 2001.
^^ Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
dated November 14, 2001.
^^^ Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 12, 2002.
# Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 10, 2001.
+ Confidential treatment has been granted as to certain portions of this
Exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
++ Management compensation plan or agreement.


50


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Aptimus, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

March 29, 2002 APTIMUS, INC.


By: /s/ TIMOTHY C. CHOATE
----------------------------------------
Timothy C. Choate,
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report to be signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.

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


/s/ TIMOTHY C. CHOATE Chairman of the Board, March 29, 2002
- ---------------------- President, Chief Executive
Timothy C. Choate Officer and Director


/s/ JOHN A. WADE Vice President, Finance March 29, 2002
- ---------------------- Chief Financial Officer and
John A. Wade Chief Accounting Officer


/s/ JOHN B. BALOUSEK Director March 29, 2002
- ----------------------
John B. Balousek


/s/ WILLIAM H. FRITSCH Director March 29, 2002
- ----------------------
William H.Fritsch


/s/ ROBERT W. WRUBEL Director March 29, 2002
- ----------------------
Robert W. Wrubel


51


EXHIBIT INDEX

Exhibit
Number Description
- ------ -----------
3.1* Second Amended and Restated Articles of Incorporation of registrant.

3.1.1^^ Articles of Amendment filed September 16, 2000.

3.1.2 Articles of Amendment filed March 29, 2002.

3.2* Amended and Restated Bylaws of registrant.

4.1* Specimen Stock Certificate.

4.2* Form of Common Stock Warrant.

4.3^^^ Rights Agreement dated as of March 12, 2002 between registrant and
Mellon Investor Services LLC, as rights agent.

10.1* Form of Indemnification Agreement between the registrant and each of
its directors.

10.2* 1997 Stock Option Plan, as amended.

10.3* Form of Stock Option Agreement.

10.4* Investor Subscription Agreement, dated December 10, 1998, between
registrant and Fingerhut Companies, Inc.

10.5* Warrant Agreement, dated December 10, 1998, between registrant and
Fingerhut Companies, Inc.

10.6* Stockholders Agreement, dated December 10, 1998, among registrant,
Timothy C. Choate, John P. Ballantine and Fingerhut Companies, Inc.

10.7* Asset Purchase Agreement, dated May 5, 1999, among registrant,
Travel Companions International, Inc., Jeff Mohr and Janet Mohr.

10.8* Asset Purchase Agreement, dated May 6, 1999, among registrant,
Commonsite LLC and Alan Bennett.

10.9* Registration Rights Agreement, dated May 6, 1999, between registrant
and Commonsite LLC.

10.10* Loan and Security Agreement, dated September 18, 1998, between
registrant and Imperial Bank.

10.11* Lease Agreement, dated September 23, 1997 and amended as of February
16, 1999, between registrant and Merrill Place LLC.

10.11.1* Second Amendment to Lease, dated November 30, 1999, between
registrant and Merrill Place LLC.

10.12* Promotion Agreement, dated May 18, 1998 and amended as of June 30,
1998 and September 30, 1998, between registrant and CNET, Inc.

10.13+* Linkshare Network Membership Agreement, dated September 23, 1998,
between registrant and Linkshare Corporation.

10.14* Letter Agreement dated June 18, 1999 between registrant and
Fingerhut.

10.15* Escrow Agreement dated June 18, 1999 between registrant and
Fingerhut.

10.16* Common Stock Purchase Warrant dated January 26, 1998 in favor of
Karrie Lee.

10.17* Warrant to Purchase Stock dated September 18, 1998 in favor of
Imperial Bank.

10.18* Common Stock Purchase Warrant dated January 23, 1998 in favor of
Hallco Leasing Corporation.

10.19* Common Stock Purchase Warrant dated December 4, 1997 in favor of
Hallco Leasing Corporation.

10.20* Common Stock Purchase Warrant dated January 26, 1998 in favor of
Employco, Inc.

10.21+* Marketing Agreement with NewSub Services, Inc. effective as of June
1, 1999.

10.22+* Marketing Agreement with eNews.com, Inc. dated December 8,1999.
(Incorporated by reference Exhibit 10.1 to the Company's Report on
Form 8-K filed January 12, 2000).

10.23** Asset Purchase Agreement, dated November 22, 2000, among Aptimus,
Inc. and XMarkstheSpot, inc.

10.24*** Stock Redemption Agreement, dated as of April 16, 2001, by and
between registrant and Fingerhut Companies. Inc.

10.25^++ Aptimus, Inc. 2001 Stock Plan.

10.25.1^^ Form of Stock Option Agreement.


52


Exhibit
Number Description
- ------ -----------
10.25.2^^ Form of Restricted Stock Agreement (for grants).

10.25.3^^ Form of Restricted Stock Agreement (for rights to purchase).

10.26^^ Letter Agreement, dated November 13, 2001, by and between registrant
and Fingerhut Companies, Inc.

16.1# Letter dated December 12, 2001 from PricewaterhouseCoopers LLP to
the Securities and Exchange Commission.

23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.

23.2 Consent of Moss Adams LLP, independent accountants.

- ----------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-81151).
** Incorporated by reference to the Company's Annual Report on Form 10-K,
dated April 2, 2001.
*** Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 16, 2001.
^ Incorporated by reference to the Company's Proxy Statement on Schedule
14A, dated May 17, 2001.
^^ Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
dated November 14, 2001.
^^^ Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 12, 2002.
# Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 10, 2001.
+ Confidential treatment has been granted as to certain portions of this
Exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
++ Management compensation plan or agreement.


53


Valuation and Qualifying Accounts and Reserves



Balance at Charges to Charges to Balance at
beginning costs and other end of
of period expenses accounts Deductions period
---------- ---------- ---------- ---------- ----------

Year ended December 31, 1999
Allowance for doubtful accounts .... 42,651 393,221 -- 64,756 371,116
Tax valuation allowance ............ 1,482,745 -- 4,327,069 5,809,814
Year ended December 31, 2000
Allowance for doubtful accounts .... 371,116 1,994,844 -- 564,901 1,801,059
Tax valuation allowance ............ 5,809,814 -- 7,956,001 13,765,815
Year ended December 31, 2001
Allowance for doubtful accounts .... 1,801,059 (296,481) -- 1,436,578 68,000
Tax valuation allowance ............ 13,765,815 -- 4,468,418 18,234,233



54