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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from              to             

Commission file number 1-13806

REWARDS NETWORK INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code (312) 521-6767

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

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

Title of each class

None

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 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.    ¨

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

Based on the closing sale price of the registrant’s common stock as of June 30, 2003, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $162,656,416

The number of shares of Registrant’s common stock outstanding as of February 29, 2004 was 24,200,241.

DOCUMENTS INCORPORATED BY REFERENCE: Filings made by companies with the Securities and Exchange Commission (SEC) sometimes “incorporate information by reference.” This means that the company is referring you to information that either was previously filed or will be filed with the SEC, and this information is considered to be part of the document you are reading. Information contained in our Proxy Statement to be filed for the Annual Meeting of Stockholders to be held on May 25, 2004 is incorporated herein by reference in response to Items 10, 11, 12, 13 and 14.

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FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. The words “anticipates,” “intends,” “expects,” “could,” “should,” “plans,” “believes,” “estimates” or words or phrases of similar import generally identify forward-looking statements. You are cautioned that forward-looking statements are subject to risks, trends and uncertainties that could cause actual results, performance or achievements to differ materially from those expressed in any forward-looking statements. Important factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements include, but are not limited to the following: (i) our dependence on our relationships with airlines and other reward program partners for a significant number of our members, (ii) the concentration of a significant amount of our rewards currency in one industry group, the airline industry, (iii) our inability to attract and retain merchants and members, (iv) our inability to maintain an appropriate balance between the number of members and the number of participating merchants in each market, (v) the failure of our program offering members rewards for patronizing select hotels, (vi) changes to card association rules and practices, (vii) our dependence upon our relationships with transaction processors, presenters and aggregators, (viii) network interruptions or processing errors, (ix) our susceptibility to a changing regulatory environment, (x) increased operating costs due to privacy concerns of our marketing partners, credit card processors and the public, (xi) the failure of our security measures, (xii) our susceptibility to restaurant credit risk, (xiii) economic changes, (xiv) the loss of key personnel, (xv) increasing competition, (xvi) our inability to obtain sufficient cash, (xvii) our control by Samstock, L.L.C. and its affiliates, (xviii) the ability of our board of directors to issue shares of our preferred stock without stockholder approval, (xix) possible future sales of restricted and other shares, (xx) the price of our common stock could be volatile and (xxi) anti-takeover provisions that could delay or prevent a change in our control even if the change in control would be beneficial to our stockholders . We undertake no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time. See the cautionary statements included as Exhibit 99.1 to this annual report on Form 10-K for a more detailed discussion of the foregoing and other factors that could cause actual results to differ materially from those included in the forward-looking statements and that, among others, should be considered in evaluating our outlook.

PART I

Item 1. Business

Overview

We market and administer loyalty rewards programs that bring our participating merchants and members together. We do this by offering rewards in the form of savings and benefits to our members who patronize our participating merchants, principally restaurants and hotels. We attract participating restaurants by purchasing credits for food and beverages in advance and by providing yield management tools such as variable promotions, dining incentives and off-peak pricing to fill empty tables and generate incremental business. We attract participating hotels by providing yield management tools to fill empty hotel rooms and generate incremental business. We offer rewards in the form of cash, airline frequent flyer miles and other currencies to our members who patronize our participating merchants and pay using a credit card they have registered with us. We partner with airlines and banks to obtain and service members.

Effective December 9, 2003, we changed our corporate name to Rewards Network Inc. from iDine Rewards Network Inc. Shares of our common stock are traded on the American Stock Exchange under the symbol IRN.

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Participating Merchants

Restaurants

As of December 31, 2003, we had approximately 10,830 participating restaurants in over 55 metropolitan markets in more than 40 states. We primarily offer two plans for our participating restaurants — the Dining Credits Purchase Plan and the Revenue Management Plan.

Dining Credits Purchase Plan. Under this plan, we purchase food and beverage credits (“Rights to Receive”) from participating restaurants for typically 50% of the retail price for which they sell the food and beverages. We make these purchases with cash or by providing advertising and media placement services. We then provide our members with rewards in the form of savings or benefits for dining in our participating restaurants (in some cases, on certain days of the week or times of day, set at the discretion of the restaurant). When a member dines at a restaurant that participates in the Dining Credits Purchase Plan, we typically are entitled to 80% of the total transaction amount, and we generally debit this amount from the participating restaurant’s bank account. The remaining amount (typically 20%) is left with the participating restaurant to provide for items such as sales tax and tips. We believe that the Dining Credits Purchase Plan is designed so that participating restaurants can make a wholesale profit in advance through the sale of food and beverage credits that are utilized through subsequent dining transactions at the restaurants by our members.

If we do not purchase additional Rights to Receive from participating restaurants after the initial Rights to Receive are used and the participating restaurants do not terminate their agreements with us, then they continue to be included on our website list of participating merchants, and our members continue to earn rewards and savings by dining in those restaurants. In these cases, we may receive between 15% and 35% of the total transaction amount from the merchant in an arrangement similar to the Revenue Management Plan.

Revenue Management Plan. Under this plan, our members earn rewards by dining at participating restaurants (in some cases, on certain days of the week or times of day, set at the discretion of the restaurant) for which we receive a marketing fee. Under the Revenue Management Plan, we receive between 15% and 35% of the total transaction amount from the merchant. Although our revenue from these transactions is less than under the Dining Credits Purchase Plan, revenue management transactions do not require us to purchase any Rights to Receive from merchants. Our Revenue Management Plan is designed for restaurants that choose to only take advantage of our marketing services.

Hotels

In the second quarter of 2003, we launched a hotel revenue management product that focused principally on independent hotels, which typically do not have their own loyalty or rewards programs. In October 2003, we announced that we had entered into a relationship with Travelweb LLC, a leading travel distribution company, to expand our hotel rewards offering by including additional independent hotels as well as certain major U.S. hotel chains. Although our hotel loyalty and rewards program remains in its early stages, as of December 31, 2003, the number of participating hotels had grown to approximately 6,940. This number represents both hotels sourced through the Travelweb network as well as hotels under direct contract with us. Typically, our members have access to reduced rates at participating hotels and also earn rewards by using the credit cards they register with us to pay for hotel stays after making reservations through our website or call center. Under our Revenue Management Plan for hotels, we receive between 10% and 32% of the hotel room rate.

Members

As of December 31, 2003, we had approximately 3.4 million active member accounts (i.e., members with at least one transaction with one of our participating merchants during the last 12 months). An active member account may

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consist of more than one credit card registered with us and may have more than one person associated with the account, although we consider each member account to be held by one “member.” Our members come from a variety of sources and marketing efforts, including through direct solicitation or through our affiliations with major airlines, large banks, credit card issuers and other affinity partners. In our affiliate programs, members may be solicited for enrollment or may be directly enrolled by our affiliate partner. Our members have a choice of member programs. Membership in our programs that provide for cash rewards requires an annual fee, and membership in our programs that provide rewards to members in other currencies, such as airline frequent flyer miles, does not require an annual fee. Our membership programs consist of the following:

Rewards Network No Fee Program. Our no-fee program offers alternative currency rewards, predominantly airline frequent flyer miles on charges for food, beverages, tax and tip at participating restaurants and on charges for room rates at participating hotels. Members of this program are members of various loyalty program providers.

Rewards Network Program. This is a fee-based program that typically offers up to 20% cash savings on charges for food, beverage, tax and tip at participating restaurants and up to 15% cash savings on charges for room rates at participating hotels. Members typically pay an upfront $49 annual fee. Alternatively, members may elect to “earn” their fee. In this case, benefits and rewards are retained by us until the member has reached the same $49 fee level, after which point the member receives a benefit and we (by not providing a benefit until $49 of benefits has accumulated) have effectively received a fee.

Registered Card Platform

A critical part of the administration of our loyalty and rewards programs is our registered card platform. Members who enroll in our programs simply register a major credit card with us and then present that registered credit card while transacting at a participating merchant. Based on our agreements with various processors and presenters throughout the country, we aggregate data for all the credit card transactions at our participating merchants. The transactions are then matched to a file containing the members’ registered card information. The matched transactions are qualified via business rules as to whether they are eligible for a reward. Qualified transactions are then used to provide member savings, airline frequent flyer miles or other currency benefits, as well as to invoice and collect from merchants, principally via an electronic debit to the merchant’s bank account.

Rewards

The vast majority of rewards are delivered to members in the form of a direct credit on their credit card statement, a cash-denominated reward to a loyalty or rewards program account or a mileage credit to their frequent flyer account. Only members of our Rewards Network Program are eligible to receive cash credit on their registered credit card accounts. Cash rewards typically represent up to 20% of the member’s total transaction amount with participating restaurants and typically up to 15% of the member’s room rate with participating hotels. Alternatively, Rewards Networks Program members may elect to receive rewards in the form of airline frequent flyer miles. Members receiving airline frequent flyer miles generally earn up to ten miles for each dollar spent at participating restaurants and up to five miles for each room rate dollar spent at participating hotels, provided that they make the hotel reservation through us. Loyalty partner program members may receive rewards either in cash or in alternative currencies such as airline frequent flyer miles. We communicate rewards to our members via a variety of communication tools: email, our website, newsletters, directories, toll-free numbers, fax back services and wireless devices such as personal digital assistants.

Canada

We plan to expand our rewards programs to Canada in 2004. Initially, we plan to offer our Dining Credit Purchase Plan and our Revenue Management Plan to restaurant merchants in the Ontario market.

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Marketing

Member Acquisition

As of December 31, 2003, we acquired members through the following four channels: third-party partner programs, our direct marketing programs, our Corporate Travel and Expense Reduction Program and our credit card issuer program. The table below sets forth for each channel the number of enrolled member accounts and active member accounts as of, and sales for the years ended, December 31, 2003 and 2002. Enrolled member accounts represent members that are eligible to transact with us and earn rewards or savings while active member accounts represent accounts with at least one qualified transaction with one of our participating merchants within the last 12 months. An enrolled member account may consist of more than one credit card registered with us and may have more than one person associated with the account, although we consider each account to be held by one “member.”

Airline frequent flyer programs represent the largest number of our member accounts obtained through this channel. As of December 31, 2003, we provided dining benefits to nine major airlines, which we believe makes us the largest provider of dining programs for the airline industry. We are actively working to expand our loyalty partnerships beyond airlines. Six Continents Hotels, Inc, Upromise, Inc., eBay Inc., and Electronic Script Incorporated (eScrip) are notable instances of non-airline partner program providers for which we provide dining benefits.

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Our business development group manages all Loyalty Partner Programs, the Corporate Travel and Expense Reduction Program and all Credit Card Issuer Programs. Focusing on member acquisition, this group consists of nine full-time client and partner management professionals.

Member Communications, Activation and Sustained Utilization

In 2003, we expanded and improved our data collection infrastructure to target our members for marketing communications, gather and analyze member account data and manage direct marketing campaigns. We also hired additional employees to focus on improving the utilization of our member database for marketing purposes.

In the latter part of 2003, we began testing direct marketing programs designed to increase the frequency with which members dine at participating restaurants and to shift behavior to off-peak dining periods (e.g., Sundays through Thursdays). We expect to refine these direct marketing programs as we build on the learning derived from our testing.

In 2003, we also completed the development of a pilot “Preferred Member Program” that we expect to launch in the first quarter of 2004. The objective of this program is to reward our most active members by providing them with an enhanced set of member benefits and targeted communications. We plan to evaluate the success of this program based on its effect on member retention, transaction frequency and average transaction amount.

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Toward the end of 2003, we expanded our hotel rewards product with a launch of member announcements that we expect to supplement with an array of communications in the first quarter of 2004 to coincide with the peak hotel booking season. This campaign will focus on convincing our active dining members with a demonstrated propensity to travel to make their hotel reservations with us.

Finally, in 2003 we completed the initial phase of the re-branding of iDine to the new Rewards Network identity. This included the re-branding of internal business materials, signage and announcements to press and key corporate constituencies (e.g. merchants, partners, etc.).

Website Marketing and Operations

Website(s) remain the center of our business. In addition to our own website, as of December 31, 2003, we hosted and managed more than 163 different websites on behalf of our partners and corporate clients. These websites typically have a search engine leading to information relating to participating restaurants and hotels, including restaurant and hotel descriptions, third-party reviews, menus, maps, photos and featured membership rewards offered by participating merchants. We strive to improve the content of the websites we host and manage with the goal of further influencing measurable dining and hotel decisions.

Merchant Marketing – Program Awareness and Establishing Brand Recognition

As part of our marketing efforts to merchants, we focus on developing sales support materials that include brochures and inserts. Additionally, our marketing efforts include a national, regional and local print media campaign, trade-show participation, industry lectures and speaking engagements. We also plan to create tools to measure the “cause and effect” influence we have in directing our members to participating merchants.

In the interest of improving the retention and recruitment of participating restaurants, we plan to provide a suite of marketing propositions that meet the needs of growing and expanding restaurants as well as mature, successful restaurants. This includes developing alternative offers to meet off-peak or real-time needs of the restaurant operators and developing alternative value propositions that are intended to appeal to the multi-unit restaurant sector.

Similarly, as we expand our hotel program marketing, we plan to increase our focus and relevancy to the different hotel merchant types.

Dependence on Rewards Program Partners

We depend on our relationships with reward program partners for a significant number of our members and a significant portion of our revenue. We are particularly dependent on our relationships with the airline frequent flyer program. For the year ended December 31, 2003, approximately 57% of our sales were derived from members enrolled through an airline frequent flyer program. As of December 31, 2003, we had contracts or relationships with nine major airlines and approximately 2.1 million of our 3.4 million active member accounts were enrolled through frequent flyer programs. In addition, as of December 31, 2003, member accounts enrolled through two of our reward program partners jointly accounted for approximately 40% of our active member accounts and approximately 33% of our sales for the year ended December 31, 2003. Members enrolled through the reward programs of each of United Airlines and Upromise, Inc. separately accounted for more than 10% of our revenue for that same period. We have a written agreement with United Airlines that continues until June 30, 2004 and a written agreement with Upromise, Inc. that continues until June 30, 2006.

Competition

We compete for both members and participating merchants, although we believe that we are the largest multi- credit card type rewards platform in the dining sector. Our competitors include discount programs offered by major credit card companies, other companies that offer different kinds of travel service or discount marketing programs and

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numerous small companies that offer services that may compete with the services offered or to be offered by us. We also compete with various finance companies to address the liquidity needs of restaurant merchants. We anticipate continued growing competition from various e-commerce ventures. Certain of our competitors or potential competitors have substantially greater financial resources and expend considerably larger sums than we do for new product development and marketing. Further, we must compete with many larger and better-established companies for the hiring and retention of qualified sales and marketing personnel. We believe that our programs contribute to our competitiveness and allow us to offer better value and service to our members and participating merchants due to the fact that our programs: (1) are usable by members at participating merchants with very few restrictions; (2) provide substantial savings without the need for a member to present discount coupons or a separate card when paying for a meal or hotel stay; (3) direct significant numbers of customers to participating merchants; and (4) provide participating restaurants with either cash in advance of customer transactions or customized revenue management plans.

Employees

As of December 31, 2003, we had 399 full-time employees. We believe that our relationships with our employees are good. None of our employees are represented by a labor union.

Executive Officers of the Registrant

The following table sets forth certain information concerning our executive officers as of March 1, 2004:

George S. Wiedemann has been a director since 1998 and became President and Chief Executive Officer in September 2002. From October 2000 to September 2002, Mr. Wiedemann was the Chairman of the Board and Chief Executive Officer of Responsys Inc., a provider of online direct marketing technology. Prior to that, Mr. Wiedemann was Chairman of the Board and Chief Executive Officer of GreyDirect Marketing Group, Inc., a direct marketing agency he founded in 1979 that specializes in multimedia direct response advertising. Mr. Wiedemann served as Chairman of the Board of the Direct Marketing Association in 1999.

Bryan R. Adel became Vice President, General Counsel, Secretary and Chief Privacy Officer in April 2003. For the previous ten years, Mr. Adel held various positions at McDonald’s Corporation, the world’s leading food service retailer, most recently Managing Counsel, International Legal. From January 2001 to February 2003, Mr. Adel served on the board of directors of Chipotle Mexican Grill, Inc., a company that operates quick-service eateries that is majority owned by McDonald’s Corporation.

Gerald J. Hughes became Chief Operating Officer, Dining in January 2004. From July 2003 to January 2004, he was Executive Vice President, Business Development, and from November 2000 to July 2003, Mr. Hughes was Senior Vice President, Business Development. Prior to that, he served as Vice President of Business Development for our subsidiary iDine.com, Inc. From 1996 through 1999, Mr. Hughes was a management consultant with Deloitte Consulting, a management consulting firm.

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Kenneth R. Posner became Senior Vice President, Finance and Administration, in August 2003 and Chief Financial Officer in October 2003. Since August 2002, Mr. Posner has served as President and Chief Executive Officer of Angelo and Maxie’s, Inc., a company that operates steakhouses. From April 2001 to July 2003, Mr. Posner served as President and Chief Financial Officer of Angelo and Maxie’s, Inc., and from April 1999 to July 2000, he was Executive Vice President and Chief Financial Officer of Lodgian, Inc., an owner and operator of full-service hotels. For 18 years prior to that, he was Senior Vice President of Finance and Treasurer of H Group Holdings, Inc., a diversified company with interests in the hotel, gaming and real estate industries. He has also served on the boards of directors for most business units of H Group Holdings, Inc. and as a trustee of all of its employee benefit programs.

Anthony Priore became Chief Marketing Officer in July 2003. From March 2003 until he joined us, Mr. Priore was Senior Vice President of Electronic Marketing Services at Experion, Inc., a strategic consulting firm, and from January 2001 to November 2002, he was President and Chief Operating Officer of MarketsOnDemand, a database firm. Beginning in March 1999, Mr. Priore served as Senior Vice President of Marketing at YesMail.com, a provider of web-based relationship marketing solutions, and for the four years prior to that, he was Vice President of Marketing at Peapod, Inc., an Internet grocer.

Domenic A. Rinaldi became Executive Vice President, Sales in May 2003. From 2001 to 2003, Mr. Rinaldi was President and Chief Executive Officer of Timeless Hospitality Inc., which provided an Internet booking engine to the hotel industry. From 1997 through 2001, Mr. Rinaldi was Chief Operating Officer of WorldRes.com., an online hotel reservation network.

Gregory J. Robitaille became Executive Vice President of Corporate Development in February 2001. From April 2000 to January 2001, Mr. Robitaille managed our revenue management and web site projects, and from September 1995 to March 2000, he was a managing director for Equity Group Investments, L.L.C., a private investment firm affiliated with Samstock, L.L.C., our largest stockholder.

Available Information

Our principal executive offices are located at 2 North Riverside Plaza, Suite 950, Chicago, Illinois 60606, and our telephone number is (312)521-6767. Our website is www.rewardsnetwork.com. We make available free of charge on or through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with or furnish such material to the SEC. You may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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Item 2. Properties

The following table sets forth certain information regarding our principal facilities as of December 31, 2003:

In addition to the properties listed above, we have eight sales offices throughout the United States. We believe our properties are generally in good condition and adequate for our needs. Furthermore, we believe that suitable additional or replacement space will be available when and if needed.

Item 3. Legal Proceedings

We are a party to various lawsuits arising out of the conduct of our business, none of which is expected to have a material adverse effect on our financial condition or results of operations.

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

No matters were submitted to a vote of stockholders during the three-month period ended December 31, 2003.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock is listed on the American Stock Exchange. The following table sets forth, for the periods presented, the high and low sales prices per share of our common stock, as reported on the American Stock Exchange.

We have not paid cash dividends on our common stock in our two most recent fiscal years. We do not expect to pay any cash dividends on our common stock in the foreseeable future. The number of holders of record of our common stock as of March 4, 2004 was approximately 290.

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The following table presents information as of December 31, 2003 regarding our equity compensation plans:

Equity Compensation Plan Information

Item 6. Selected Financial Data (Dollars in thousands except for per share data)

We changed our fiscal year end to December 31 from September 30, effective the three-month period ended December 31, 2001. The financial information for the three-months ended December 31, 2001 and 2000 (unaudited) is provided for comparative purposes.

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The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the notes to those financial statements, which are included in this annual report on Form 10-K.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except per share data)

The following discussion should be read in conjunction with the consolidated financial statements and the notes to those financial statements provided under Part II, Item 8 of this annual report on Form 10-K.

Overview

We market and administer loyalty rewards programs that bring our participating merchants and members together. We do this by offering rewards in the form of savings and benefits to our members who patronize our participating merchants, principally restaurants and hotels. We attract participating restaurants by purchasing credits for food and beverages in advance and by providing yield management tools such as variable promotions, dining incentives and off-peak pricing to fill empty tables and generate incremental business. We attract participating hotels by providing similar yield management tools to fill empty hotel rooms and generate incremental business. We offer rewards in the form of cash, airline frequent flyer miles and other currencies to our members who patronize our participating merchants and pay using a credit card they have registered with us. We partner with significant airlines and banks to obtain and service members.

Our business is dependent on, among other things, our members’ continuing propensity to dine in our participating restaurants and earn rewards. In this regard, having a diverse and expanding inventory of participating restaurants is an important element to our continuing growth and profitability. In 2004, we plan to add to our national sales force and expand our merchant product offerings to facilitate the continuing growth of our participating merchant base.

The restaurant industry has continuously grown in terms of revenues and number of units over the past 13 years, according to information published by the National Restaurant Association. The resiliency of the industry throughout the economic cycle, in terms of unit supply, is directly correlated to consumers’ increased frequency of dining outside the home. We believe that if this trend continues, it should help us to increase the number of our participating restaurants and increase the number of our members.

We generate revenue when our members dine at participating restaurants and use a credit card that they have registered with us and when our members stay at participating hotels after making a reservation through us and use a credit card that they have registered with us. For transactions at participating restaurants, our revenue is equal to a percentage of our members’ total dining transaction. For transactions at participating hotels, our revenue is equal to a percentage of our members’ room rate. These revenues are applied to recover our costs where we have purchased food and beverage credits; provide rewards to our members; cover our selling, general and administrative expenses; and generate operating income that provides a return for our stockholders.

We have been providing loyalty rewards programs in the restaurant industry since 1984. We launched programs in the hotel industry in 2003 and expect to announce the launch of programs for retailers in the second half of 2004. We believe that expansion of our loyalty rewards programs across several industries, thereby providing our members with multiple opportunities to transact and earn rewards, is the correct strategic approach to growing our business. These new programs are of a marketing nature and, therefore, we expect that they will not require a substantial outlay of capital to merchants.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets

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and liabilities. On an on-going basis, we evaluate our estimates, including those related to the provision for Rights to Receive losses, the valuation allowance, if any, for net deferred tax assets, investments and intangible assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Allowance for Rights to Receive Losses

We provide allowances for Rights to Receive losses based on our estimate of losses that would result from the inability of participating merchants to remain in business and enable us to recover outstanding Rights to Receive. If the financial condition of our merchant base were to deteriorate beyond our expectations, resulting in participating merchants’ inability to provide food and beverage to our members thereby reducing the recoverability of Rights to Receive, additional allowances may be required.

We review our ability to realize Rights to Receive on a periodic basis and provide for anticipated losses on Rights to Receive from restaurants that have ceased operations, restaurants that otherwise fail to pay us for unused Rights to Receive and restaurants whose Rights to Receive are not being utilized by our members. All other balances are segregated and evaluated based on the size of balance and the number of months required to recover the Rights to Receive outstanding. Losses are reduced by recoveries of Rights to Receive previously written off. Account balances are charged off against the allowance after collection efforts have been exhausted.

Deferred Tax Assets Valuation Allowance

We record a valuation allowance to reduce our deferred tax assets when future realization is in question. We consider future taxable income and available tax planning strategies in assessing the need for the valuation allowance. In the event we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period in which such determination is made.

Impairment Loss of Unamortized Goodwill

From time to time, we evaluate whether events and changes in circumstances warrant the recognition of an impairment loss of unamortized goodwill. The conditions that would trigger an impairment assessment of unamortized goodwill include a significant, sustained negative trend in our operating results or cash flows, a decrease in demand for our programs, a change in the competitive environment and other industry and economic factors. Recoverability of an asset is measured by comparison of its carrying amount to the expected future cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of projected cash flows and, if different conditions prevail or judgments are made, a material write-down of goodwill could occur.

We adopted SFAS No. 142, the current standard for periodic assessment of the carrying value of intangible assets, including goodwill, in the first quarter of 2002. With the adoption of SFAS No. 142, we assessed the impact based on a two-step approach to assess goodwill based on applicable reporting units and reassessed any intangible assets, including goodwill, recorded in connection with our previous acquisitions. There were no impairment charges recorded as a result of our assessments. As of December 31, 2003, we had unamortized goodwill of $9,671.

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Revenue Recognition

We recognize revenue when our members patronize our participating merchants and pay using a credit card they have registered with us. Revenue is recognized only if the member’s transaction qualifies in accordance with the rules of the particular marketing program. The amount of revenue recognized is that portion of the member’s total transaction amount that we are entitled to receive in cash, in accordance with the terms of our contract with the participating merchant. Under the typical Dining Credits Purchase Plan contract, we are required to leave some portion of the member’s total transaction amount with the merchant to provide for payment of sales tax and tips. For example, if a member’s total transaction amount is $100 at a participating restaurant merchant, as evidenced by the full amount of the credit card transaction, and our contract provides for us to leave behind 20%, the amount of revenue we recognize is $80, representing what we will actually realize in cash. Similarly, under the typical Revenue Management Plan contract, we recognize revenue only to the extent that we are contractually entitled to receive cash for a portion of the member’s total transaction amount. The same $100 transaction referred to above at a revenue management merchant may only yield $30 in cash to be realized. A $100 room rate at a revenue management hotel merchant will yield between $10 and $32.

Membership and Renewal Fee Income

Membership and renewal fee income consists principally of renewal fees from the cash reward Rewards Network Program members and is recognized over the membership period, which is usually twelve months beginning in the month the fee is received. Cardholder membership fees are cancelable and refunded to members, if requested, on a pro rata basis based on the remaining portion of the membership.

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Results of Operations

As a means of better explaining our operations and results, the following table illustrates the relationship between revenue and expense categories for the years ended December 31, 2003 and 2002, the year ended September 30, 2001 and the three months ended December 31, 2001 and 2000 (unaudited), respectively. The three-month periods are provided to allow for the comparison with our operations for the year ended December 31, 2001.

Percentage of Sales

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Comparison of the Years Ended December 31, 2003 and 2002

The following table sets forth for the periods presented our sales, components of our costs of sales and certain other information for each of our two revenue plans.

Results of Operations (Year ended December 31, 2003 versus December 31, 2002)

As more fully discussed below, sales for 2003 increased primarily due to the following factors: an increase in the number of our active member accounts, an increase in the number of our participating merchants and our expansion into secondary geographic markets.

Qualified transactions at our participating merchants (which are transactions where our members are entitled to receive rewards or savings) rose 27.8% for the year ended December 31, 2003 as compared to the prior year. A decrease in the average transaction amount to $50.51 for the year ended December 31, 2003 from $52.46 for the prior year was more than offset by the increase in number of transactions which increased by 32.7% to approximately 10,466 for 2003 as compared with 7,885 for 2002. The increase in the number of transactions was primarily the result of a 38.2% increase in the number of our active member accounts as well as a 11.9% increase in the number of our participating merchants at December 31, 2003 as compared with December 31, 2002. An active member account is an account with at least one qualified transaction with one of our participating merchants during the previous 12 months. Expansion into secondary markets, along with decreased sales in some large metropolitan markets due to the loss of some large and multi-unit restaurants, contributed to a lower average transaction amount in 2003 compared to 2002. As of the date of this annual report on Form 10-K, we expect to continue to see a reduction in our average transaction amount due to our further expansion into secondary markets where the average transaction amount tends to be lower than in the large metropolitan markets such as New York, Chicago, San Francisco and Los Angeles.

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Sales yield, which represents sales as a percentage of qualified transactions, decreased to 66.0% for the year ended December 31, 2003 compared with 69.9% for the year ended December 31, 2002. The decline in the sales yield reflects the changing mix in business propositions marketed to our merchants. Under our Dining Credits Purchase Plan, sales are recognized as the amount of a member’s dining transaction recovered from the merchant, typically 80%. Under our Revenue Management Plan, the percentage of a member’s transaction that we recover from the merchant, and therefore recognize as sales, ranges between 10% and 35%. For the year ended December 31, 2003, Revenue Management Plan qualified transactions increased 78.7% to $109,834 when compared with the same period in 2002. As we move more to a marketing company business model, it is anticipated that a larger percentage of our qualified transactions will be derived from our Revenue Management Plan arrangements. Although we receive less cash in Revenue Management Plan transactions than we receive in Dining Credits Purchase Plan transactions, we do not have the financial risk associated with purchasing Rights to Receive.

Sales for the year ended December 31, 2003 were up 20.7% when compared to the prior year. We have expanded the number of accounts enrolled through almost all our airline relationships, in the year ended December 31, 2003 we experienced an increase in the number of our active member accounts from all but one of our airline partners. In the year ended December 31, 2003, we also had increases in active member accounts enrolled through existing partner loyalty programs and we added a new Diners Club credit card program. We expect to continue to add to our Corporate Travel and Expense Reduction Program that at December 31, 2003 included 114 corporations, up from 69 corporations at December 31, 2002. We also expect that with the addition of members and participating merchants as well as planned marketing activities in 2004, sales will continue to increase.

Cost of sales, which is composed of the cost of Rights to Receive sold, related processing fees and provision for Rights to Receive losses, decreased to 52.7% of sales during 2003 compared to 54.0% of sales for 2002. The decrease is primarily attributable to the increase in sales under our Revenue Management Plan to 8.3% of total sales for 2003 compared to 6.0% of total sales for 2002. There is neither cost of sales nor provision for losses associated with sales under our Revenue Management Plan and, therefore the relative increase in these sales as a percentage of total sales results in a lower total cost of sales percentage. Also contributing to the decline in cost of sales was a decline in the rate of provision for Rights to Receive losses, which was lowered in the fourth quarter (due to our better-than-expected Rights to Receive charge-off experience). The overall rate for 2003 was 4.7% of total sales compared to 5.3% for 2002. The overall decrease in cost of sales percentage was offset in part from a slightly lower sales yield in 2003 compared with 2002 as well as increased processing fees due to increased volume and pricing for processing. We expect that our cost of sales in 2004 will be positively impacted to the extent that the trend in Rights to Receive loss experience is sustained. For example, a 50 basis point increase in the rate of provision for Rights to Receive losses would result in a decrease in net income of $1,000.

Member rewards and savings increased to 20.6% of sales for 2003 compared to 20.0% of sales for 2002. This increase can also be attributed to growth in sales under our Revenue Management Plan. Member rewards and savings represent a greater percentage of Revenue Management Plan sales than of Dining Credits Purchase Plan sales due to the lower yield on Revenue Management Plan sales.

Membership and renewal fee income decreased $410 or 8.3% for the year ended December 31, 2003 compared with the prior year. The decreased fee income reflects a change in our marketing strategy. In the fourth quarter of 1999, we reduced our marketing of the fee-based membership due to changes in the regulatory environment regarding direct marketing solicitations and we shifted our marketing strategy to focus mainly on marketing a no-fee dining program to key affinity and loyalty partners where we could take advantage of the registered card platform and enroll large quantities of accounts at a very low cost of acquisition and solicitation.

Salaries and benefits increased $3,018 or 16.8% to $21,001 during the year ended December 31, 2003 from $17,983 for the year ended December 31, 2002 mainly as a result of annual merit increases, higher employee benefit costs and a planned increase in the number of employees (from 333 at December 31, 2002 to 399 at December 31, 2003) principally in customer services, information technology, marketing, corporate and business development.

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Sales commissions and expenses amounted to 4.5% of sales for the year ended December 31, 2003 compared to 3.9% for the year ended December 30, 2002. In April 2002, we changed our sales consultants’ compensation plan resulting in compensation being paid primarily in the form of sales commission. Therefore, 2002 sales commissions and expenses reflect only nine months of the new sales compensation plan versus a full year in 2003. Sales commissions and expenses also increased due to sales contest awards, moving expenses and a 67.3% increase in Revenue Management Plan sales where the commission rate was slightly higher during 2003. In January 2004, we adopted a new sales consultant compensation plan which we believe will decrease sales commission as a percentage of sales in 2004.

Member and merchant marketing expenses increased $119 or 1.7% for the year ended December 31, 2003 compared with the prior year. During 2003, there was a 26.0% increase in compensation paid to loyalty partners as a result of increased sales generated from loyalty partner programs as well as an increase in the compensation rate of one significant partner. This was offset by a reduction in member marketing, principally incentive rewards used to increase member transactions.

Printing and postage remained almost unchanged at $6,136 for the year ended December 31, 2003 compared with $6,142 for the year ended December 31, 2002. A reduction in directory printing and mailing costs that we began to realize in the second half of 2003 offset the increase in these costs experienced in the first half of 2003. During the third quarter of 2003, we commenced a marketing initiative of replacing national directories with a customized, pocket- sized, eight-panel directory of restaurant listings in a member’s frequent dining areas (Fold-N-Go statements) for segments of our membership base. These Fold-N-Go statements are less expensive to produce and distribute than the directories. We intend to phase out all directories during 2004 and replace them with Fold-N-Go statements.

General and administrative expenses increased $1,297 or 7.3% for the year ended December 31, 2003 compared with the prior year. However, in 2002, we recorded a $1,500 charge for severance versus $880 in 2003. Excluding the impact of severance expenses, general and administrative expenses increased $1,917 for the year ended December 31, 2003 compared with the prior year. The increase is primarily the result of increases in rent and other office expenses, corporate and moving expenses related to the opening of the Chicago executive offices, recruiting costs relating to the hiring of several officers, professional fees related to restaurant collection matters and general insurance related principally to increased workers compensation insurance premiums due to the increased number of employees.

Interest expense and financing costs related to our securitization facility and convertible subordinated debenture offering increased $427 for the year ended December 31, 2003 compared to 2002. Favorable interest rates experienced during 2003 were offset by higher renewal fees, an increase in the securitization facility limit and costs associated with the issuance of the debentures.

Our effective tax rate for 2003 was 40.0%. Our 2003 earnings reflect our fully taxable status whereas the 2002 operating results include the reversal of a deferred tax valuation reserve allowance of $3,676 and utilization of net operating loss carry forwards. Assuming a fully taxable position and statutory tax rates, net income for 2002 would have been $11,102. We expect to be recording income tax at the effective rate of 40.0% for 2004. See note 1(n) in the notes to our consolidated financial statements filed with this annual report on Form 10-K for a reconciliation of the differences between the non-GAAP financial measure presented here with the most comparable financial measure presented in accordance with GAAP.

Net income decreased 18.3% to $15,710 for the year ended December 31, 2003 compared to $19,235 in 2002. Diluted earnings per share decreased 24.4% to $0.62 for 2003 compared to $0.82 for 2002. The 2003 earnings reflect our fully taxable status whereas 2002 includes a significantly lower effective tax rate due to utilization of net operating loss carry forwards and the reversal of a deferred tax valuation reserve allowance. Assuming a fully

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taxable position and statutory tax rates, net income for 2002 would have been $11,102 (or $0.47 per fully diluted share). See Note 1(n) in the notes to our consolidated financial statements filed with this annual report on Form 10-K for a reconciliation of the differences between the non-GAAP financial measure presented here with the most comparable financial measure presented in accordance with GAAP.

Comparison of the Years Ended December 31, 2002 and 2001

The following table sets forth for the periods presented our sales, components of our costs of sales and certain other information for each of our two revenue plans.

Qualified transactions in our participating merchants rose 58.2% for the year ended December 31, 2002 as compared to the prior year. A decrease in the average transaction amount to $52.46 for the year ended December 31, 2002 from $53.64 for the prior year was more than offset by the 61.8% increase in the number of transactions to 7,885 for 2002 compared with 4,873 for 2001. The increase in the number of transactions was primarily the result of a 100.5% increase in the number of our active members as well as a 25.3% increase in the number of our participating merchants at December 31, 2002 compared to December 31, 2001.

Sales yield, which represents sales as a percentage of qualified transactions, decreased to 69.9% for the year ended December 31, 2002 compared with 75.2% for the year ended December 31, 2001. The decline in the sales yield reflects the changing mix in business propositions available to our participating merchants. Under our Dining Credits Purchase Plan, sales are recognized in the amount of a member’s total transaction amount recovered from the merchant, typically 80%. Under our Revenue Management Plan, the percentage of a member’s total transaction amount that we recover from the merchant and, therefore recognize as sales, ranges between 15% and 35%. For the year ended December 31, 2002, Revenue Management Plan qualified transactions increased 194.0% to $61,447 compared with same period in 2001.

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Sales for the year ended December 31, 2002 increased 47.0% to $289,095 when compared to the prior year. Each of our territories experienced an increase in sales on a year over year basis, with New York, Chicago, Los Angeles, South Florida and San Francisco leading the way with increases of $8,303, $5,529, $4,854, $4,435 and $4,299, respectively, or 29.4%, 41.2%, 33.4%, 42.6% and 36.5%, respectively.

Cost of sales decreased to 54.0% of sales during 2002 compared to 54.5% of sales for 2001. The decrease is primarily attributable to the increase in sales under our Revenue Management Plan to 6.0% of total sales for 2002 compared to 3.3% of total sales for 2001. There is neither cost of sales nor provision for losses associated with sales under our Revenue Management Plan and, therefore, the relative increase in these sales as a percentage of total sales results in a lower total cost of sales percentage. Also contributing to the decline in cost of sales was lower processing costs associated with the registered card program versus the private label program to $712 or 0.2% of sales for the year ended December 31, 2002 compared with $1,273 or 0.6% of sales for the year ended December 31, 2001. These reductions are somewhat offset by an increase in the provision for Rights to Receive losses to $15,198 or 5.3% of sales for the year ended December 31, 2002 from $9,659 or 4.9% of sales for the year ended December 31, 2001 reflecting our perception of the increased market risk in the dining and hospitality industry at that time.

Member rewards and savings decreased to 20.0% of sales for 2002 compared to 21.2% of sales for 2001. The reduction is primarily a result of the increased spending by airline frequent flyer members and loyalty partner participants who receive rewards in a currency other than cash or rewards at a rate less than our typical 20% benefit. Rewards in currencies other than cash have an effective cost that is lower than cash rewards principally because we receive volume-purchasing discounts from our partners. Additionally, the Corporate Travel and Expense Reduction Program introduced in fiscal 2001 has a feature whereby the rebates back to the corporate partners are not paid until a certain level of qualified spend is achieved by their employees. These foregone savings are deferred and recognized on an effective rate basis as a reduction in the overall savings and rewards expense.

Membership and renewal fee income decreased to $4,962, of which $141 was initial fee income for the year ended December 31, 2002, compared to $6,845, of which $132 was initial fee income for the same period during 2001. The decreased fee income reflected a change in our marketing strategy. In the fourth quarter of 1999, we reduced our marketing of the fee-based membership due to changes in the regulatory environment regarding direct marketing solicitations and we shifted our marketing strategy to focus mainly on marketing a no-fee dining program to key affinity and loyalty partners where we can take advantage of the registered card platform and enroll large quantities of accounts at a very low cost of acquisition and solicitation.

Salaries and benefits increased $790 or 4.6% to $17,983 during the year ended December 31, 2002 from $17,193 during the year ended December 31, 2001 primarily as a result of annual merit increases and an increase in the number of employees (to 333 at December 31, 2002 from 245 employees at December 31, 2001), principally in sales, media barter and hotel development, information technology and marketing. Although the increase in the number of sales consultants represented the greatest increase for a functional group, salaries are not affected by this increase, since sales consultants’ compensation is commission-based. However, benefits received by sales consultants contributed to the overall increase in salaries and benefits for the year ended December 31, 2002.

Sales commissions and expenses amounted to 3.9% of sales for the year ended December 31, 2002 compared to 2.8% for the year ended December 30, 2001. As discussed above, in April 2002 we changed our sales consultants’ compensation plan resulting in compensation being paid primarily in the form of sales commissions. Therefore, 2002 reflects only nine months of the new sales compensation plan.

Member and merchant marketing expenses were $7,074 for the year ended December 31, 2002 versus $3,854 for the year December 31, 2001, an increase of $3,220 or 83.5%. The main reason for the increase in member and merchant marketing during the 2002 period was increased compensation paid to partners that provide us access to large memberships. Also contributing to the overall increase was the increase in marketing

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efforts designed to stimulate our member base by providing additional rewards and incentives to increase member spending in our programs. Further, we continued our marketing efforts to activate certain enrolled accounts in our database, mainly airline frequent flyer members. Finally, during the fourth quarter of 2002, we incurred hotel related marketing expense, such as member surveys, as we prepared for the launch of our hotel rewards product in 2003.

Printing and postage increased $1,433 or 30.4% when comparing the year ended December 31, 2002 with the same period in the prior year. This increase was principally due to the increase in the cost of printing and postage associated with directory and newsletter mailings as a result of the increase in both our member base as well as our merchant base. The larger merchant portfolio increased the size of the directory printing while increased active members resulted in more directories being mailed. We also had an increase in fulfillment costs relating to the increase in our active member base.

General and administrative expenses increased $820 or 4.8% when comparing the year ended December 31, 2002 with the prior year. The increase in expenses was related to an increase in professional fees of $357 (mainly legal fees relating to restaurant collections, corporate and securities related matters and UCC filings); and an increase of $1,465 in other expenses (primarily for severance expenses relating to the termination of our former President and Chief Executive Officer). These increases in expenses were somewhat offset by a decrease of $512 in depreciation and amortization primarily due to the adoption of Statement of Financial Accounting Standards No. 142 (“FAS No. 142”), “Goodwill and Other Intangible Assets” and the change in the accounting for goodwill from an amortization method to an impairment-only approach; $286 in rent and other offices expense primarily due to the decrease in building related expenses and equipment rental; $134 in telephone partly due to fewer calls to our member services call center; and a decrease of $70 in programming and systems expenses (reflecting the elimination during late 2001 of charges associated with the upgrade of our website).

Other expense, net of income during the year ended December 31, 2002 amounted to $1,993 versus $3,504 for the same period in 2001, a decrease of $1,511. The principal reason for the change was a decrease of $2,017 in interest expense and financing costs during the year ended December 31, 2002. The decrease related to reduced amortization of upfront financing fees and favorable interest rates. The effective interest rate of the securitization decreased to 3.7% for the year ended December 31, 2002 from 7.1% for the year ended December 31, 2001.

Income before taxes was $17,907 for the year ended December 31, 2002 compared to $3,468 for the same period in 2001. A net operating loss carryforward of $11,387 was available at December 31, 2001. The net deferred tax asset, principally related to the net operating loss carryforward and the provision for losses on Rights to Receive remained fully reserved. In the second quarter of 2002, we reevaluated the valuation allowance due to our having achieved six consecutive profitable quarters and the projection of continued profitability through fiscal 2002. This resulted in a tax benefit of $3,676 being recognized in the quarter ended June 30, 2002. During the six months ended December 31, 2002, we recorded an income tax expense of $2,267 based on an estimated annual effective tax rate of 11%.

Net income was $19,235 or $0.82 per fully diluted share for the year December 31, 2002 compared to of $3,312 or $0.13 per fully diluted share for 2001.

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Contractual Obligations

We lease facilities and equipment under long-term operating leases. These contractual obligations entered into in the ordinary course of business are not required to be reflected in our consolidated balance sheets, but may impact our liquidity. The following table sets forth our future minimum lease payments under non-cancelable operating leases, long-term debt and other contractual obligations and commitments at December 31, 2003:

Liquidity and Capital Resources (dollars in thousands except per share data)

General

Our working capital was $114,863 at December 31, 2003 versus $34,742 at December 31, 2002. The $80,121 increase can be primarily attributed to our issuance of $70,000 of convertible subordinated debentures which are classified as long-term and the pay down of the $60,000 outstanding under our securitization facility which was classified as short-term.

Operating activities during the year ended December 31, 2003 resulted in net cash provided of $11,736. An increase in our Revenue Management Plan which requires no cash outlay, and the increase in sales from our expansion into new markets and increases in existing markets were responsible for the inflow from operations. As of December 31, 2003, we had $50,000 available under our securitization facility to fund any increase in the Dining Credits Purchase Plan merchant portfolio.

Cash used in investing activities was $22,932 for the years ended December 31, 2003 and was invested in government notes and used for the purchase of property and equipment. As of December 31, 2003, we had $10,291 in short-term securities which at the date of purchase have a maturity date of less than 90 days as well as $8,395 in investments with an average maturity between one and two years. Capital expenditures for the year ended December 31, 2003 were $5,505 as compared with $5,135 in 2002. We believe that cash to be used in investing activities associated with capital expenditures in the year ending December 31, 2004 will be approximately $5,000. Expenditures pertaining to leasehold improvements for the new Chicago executive offices were the principal reason for the increase during 2003.

During the year ended December 31, 2003, the principal source of financing cash flow was provided from the issuance of our 3 ¹/4% Convertible Subordinated Debentures. A part of the net proceeds from this debt issuance was used to pay down our securitization facility to zero.

We believe that investments available for sale at December 31, 2003, together with cash on hand, cash generated from operations and available under the securitization facility or a replacement facility will be sufficient to satisfy all of our funding requirements during 2004.

Convertible Subordinated Debentures

On October 15, 2003, we completed a private placement of $60,000 principal amount of our 3 ¹/4% Convertible Subordinated Debentures with a final maturity date of October 15, 2023. In addition, the initial purchaser exercised the option granted by us to purchase an additional $10,000 principal amount of debentures, bringing the total offering to $70,000. The debentures bear interest at 3.25% per annum, payable on April 15 and October 15 of each year, commencing on April 15, 2004. The net proceeds from the offering were $67,500 and the issuance costs of

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$2,500 will be amortized over five years. Holders of the debentures may require us to repurchase for cash all or part of their debentures on October 15, 2008, October 15, 2013 and October 15, 2018 or upon a change of control at a price equal to 100% of the principal amount of the debentures, together with accrued and unpaid interest. We may redeem the debentures, in whole or in part, at any time after October 15, 2008 at a price equal to 100% of the principal amount of the debentures, together with accrued and unpaid interest. The debentures are convertible prior to the maturity date into shares of our common stock at an initial conversion price of $17.89 per share, subject to adjustment for certain events, upon the occurrence of any of the following: (i) the closing price of our common stock on the trading day prior to the conversion date was 110% or more of the conversion price of the debentures on such trading day; (ii) we have called the debentures for redemption; (iii) the average of the trading prices of the debentures for any five consecutive trading day period was less than the average conversion value for the debentures during that period, subject to certain limitations; or (iv) we make certain distributions to holders of our common stock or enter into specified corporate transactions.

Securitization of Rights to Receive

On May 14, 2003, we renewed our revolving securitization for a new 364-day term and increased the facility limit to $100,000 from $80,000. As part of the renewal, we paid fees of $500, a portion of which was expensed in connection with the subsequent reduction in the facility limit from $100,000 to $50,000, and we are amortizing the balance over the remainder of the renewal term. In connection with the renewal, the terms were amended to state that if there are any changes in accounting standards or any issuances of pronouncements released by any accounting body, or any change in interpretation or application of existing or future accounting standards that causes or requires the consolidation of assets and liabilities of the conduits with the assets and liabilities of the banks, the program fee rate will increase from 0.85% to no more than 1.50% of the facility limit. There were no other material changes to the terms of the facility in connection with the renewal.

Our revolving securitization of our Rights to Receive is privately placed through asset-backed commercial paper conduits. Borrowing capacity under the facility is recalculated weekly based on a formula-driven advance rate applied to the then-current balance of Rights to Receive that is eligible to be securitized. The advance rate is determined based on recent sales trends and months on hand of Rights to Receive. Based on the level of eligible Rights to Receive at December 31, 2003, and the fact that there were no outstanding borrowings under the facility at that date, we had the full $50,000 limit available for borrowing.

The interest rate applicable to the facility is the rate equivalent to the rate (or if more than one rate, the weighted average of the rates) at which commercial paper having a term equal to the related commercial paper tranche period may be sold plus applicable placement agent or commercial paper dealer fees and commissions. The conduits require that a liquidity facility be provided by an A1/P1 rated financial institution in the amount equal to 102% of the securitization amount. The facility contains various restrictive covenants regarding collateral eligibility, interest rate coverage and concentration limitations and also requires us to maintain a minimum net worth. In addition, the facility contains a covenant that limits the dollar amount of contracts that we can write without the prior approval of the conduit. This liquidity facility must be renewed annually. As such, borrowings under the securitization are classified as short-term.

We believe that the revolving nature of the securitization facility, the ability to increase capacity for growth and the current favorable interest rate environment make this a reasonable financing vehicle. As of the date of this annual report on Form 10-K, it is our present intention either to renew the securitization in May 2004 or to replace it with an alternative line of credit financing vehicle.

Rights to Receive

We funded $25,585 of Rights to Receive from our operating cash flows for the year ended December 31, 2003 compared with $52,865 for the year ended December 31, 2002. We believe that the continued increase in the

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number of our participating merchants is essential to attract and retain members. We strive to manage the dynamics of each market by balancing the Rights to Receive acquired to the member demand. This balance is critical to achieving the participating merchants’ objectives of incremental business and yield management and the members’ desire for an adequate amount of desirable dining establishments. Also, as we move more to a marketing company business model demonstrating our value proposition to our merchants, it is anticipated that a larger percentage of our qualified member transactions will be derived from our Revenue Management Plan arrangements. With the Revenue Management Plan, no Rights to Receive are purchased in advance, and therefore, there is no cash outlay. Management believes that the purchase of Rights to Receive can be funded generally from cash generated from operations, proceeds from investments and, if needed, from funds made available through the securitization facility or an alternative financing vehicle.

Common and Series A Preferred Stock

On June 12, 2002, we sold 3,000 shares of our common stock at $9.50 per share in a private placement to a group of 15 unaffiliated institutional investors from which we received $26,280, net of financial advisory, agent and legal fees.

The entire net proceeds from the stock issuance were used to repurchase shares of our outstanding Series A Convertible Preferred Stock issued in connection with a rights offering on November 30, 1999. We commenced a cash tender offer on June 13, 2002 to purchase up to 2,475 shares, or 61.1%, of our outstanding Series A Convertible Preferred Stock at a price of $10.62 per share. The tender offer expired on July 15, 2002, and a total of 3,177 shares of Series A Convertible Preferred Stock were tendered. Since more than the maximum 2,475 shares of Series A Convertible Preferred Stock were tendered, we accepted and paid for shares on a pro rata basis from among the validly tendered shares. In addition to the purchase price, tendering stockholders also received a payment in lieu of cash dividends for the period July 1 through July 15, 2002 equal to $0.006 per share of Series A Convertible Preferred Stock accepted.

Furthermore, on December 24, 2002, we gave notice to holders of our Series A Preferred Stock of our intention to exercise our right to convert all of the issued and outstanding shares of Series A Preferred Stock into shares of our common stock. On January 23, 2003, 1,329 shares of our Series A Preferred Stock were converted into 1,586 shares of our common stock. Each share of our Series A Preferred Stock was converted into 1.19316 shares of our common stock. Each holder of record of Series A Preferred Stock on January 23, 2003 also received a partial quarterly cash dividend pro-rated for the period from January 1, 2003 through January 23, 2003.

Business Expansion and Outlook

We intend to increase our sales force during 2004 as we increase the number of our participating restaurant merchants. We expect that a significant number of the new restaurant merchants will be participants in the Dining Credits Purchase Plan and, therefore, we will use some of our capital to fund this growth.

In addition, in 2004 we plan to increase our marketing efforts in the hotel rewards product offering, expand geographically into Canada and launch a retail rewards product offering. Although we will be marketing the hotel rewards portion of our business throughout the year, we believe that our expenditures in the first quarter of 2004 will be significantly higher than in the rest of 2004 to correspond with the peak hotel booking season and the fourth quarter 2003 expansion of this product offering to approximately 7,000 hotels. We are targeting the second quarter of 2004 for the introduction of our programs in Canada, and we expect to increase the number of participating restaurant merchants in Canada during the second half of the year. As of the date of this annual report on Form 10-K, our retail initiative is in test, and we expect to announce the initial retail product offerings during the second half of 2004. There is no assurance that our efforts to increase the number of participating merchants or that the expansion of our programs into Canada will be successful.

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The competitive environment in which we operate suggests that we will need to expand our array of product offerings to improve retention of existing restaurant merchants and attract new restaurant merchants to our program. The failure rate in the restaurant industry is quite high. Although we experience merchant attrition due to the closing of restaurants, we also lose merchants as a result of their dissatisfaction with our program’s impact on their business.

In 2004, we plan to create and deploy merchant marketing tools that are being designed to demonstrate the value of our product offerings in an effort to improve our rate of retention of restaurant merchants. Additionally, we plan to develop alternative marketing propositions that we believe will have broader applicability to both independent and chain restaurant merchants. This expanded array of product offerings will include products that result in more favorable economics for the restaurant merchant and, therefore, will reduce our sales yield percentage.

Also in 2004, we plan to implement changes to our member rewards and savings propositions. These changes are being designed to provide enhanced member benefits to our more active members and, similarly, reduced member benefits to our less active members. The tiered member benefit schedule that may result from our planned changes could reduce the percentage of sales represented by member rewards and savings.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk (in thousands)

Our exposure to market risk for changes in interest rates is limited to the exposure related to our revolving securitization, investments available for sale and short-term investments, each of which is tied to market rates. Our revolving securitization is at an interest rate equivalent to the rate at which commercial paper having a term equal to the related commercial paper tranche period may be sold plus applicable placement agent or commercial paper dealer fees and commissions. The commercial paper rate and thus the interest rate under the facility are subject to interest rate risk. However, as described below, on October 15, 2003 we reduced the balance of the revolving securitization to zero thereby at least temporarily eliminating this interest rate risk.

On October 15, 2003, we issued $70,000 in convertible subordinated debentures. The interest rate on the debentures is fixed at 3.25% per annum. Part of the proceeds from this offering was used to pay down the revolving securitization to zero, and the facility limit was reduced to $50,000. The market value of the debentures will fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest and the market value of the debentures will generally fluctuate in tandem with changes in the price of our common stock.

Our investments in available for sale and short-term investments are made according to a policy intended to preserve our invested principal funds by seeking to limit default risks, market risk and reinvestment risk. At December 31, 2003, the average maturity of our investment portfolio approximated one year. At December 31, 2003, we had investments in government and municipal notes of $18,686. We generally invest our excess cash in high-credit fixed income securities and money market funds. The fair value of fixed income securities may be adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. Cash equivalents consist of short-term investments with reputable financial institutions with durations of no more than 90 days. All of our cash equivalent and marketable fixed income securities are designated as available-for-sale and, accordingly, are presented at fair value on our balance sheets.

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Item 8. Financial Statements

INDEX TO FINANCIAL STATEMENTS

Consolidated financial statements applicable to Rewards Network Inc. and subsidiaries are contained on the page(s) indicated. The unaudited financial information for the three months ended December 31, 2000 is presented for comparative purposes.

Selected quarterly financial data under the caption “Note 16 Selected Quarterly Financial Data (unaudited)” are also filed as part of this annual report on Form 10-K.

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Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

As of the end of the period covered by this report, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed in our filings with the SEC.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this annual report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information included under the captions “Election of Directors,” “Board of Director Meetings and Committees of Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2004 (our “Proxy Statement”) is incorporated herein by reference. See also the section captioned “Executive Officers of the Registrant” in Part I, Item 1 of this annual report on Form 10-K.

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer or controller or persons performing similar functions. A copy of our code of ethics is filed as Exhibit 14.1 to this annual report on Form 10-K.

Item 11. Executive Compensation

Information included under the captions “Director Compensation,” “Executive Compensation and Related Information” and “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information included under the captions “Equity Compensation Plan Information” and “Beneficial Ownership of Common Stock” in our Proxy Statement is incorporated herein by reference. See also the section captioned “Equity Compensation Plan Information” in Part II, Item 5 of this annual report on Form 10-K.

Item 13. Certain Relationships and Related Transactions

Information included under the caption “Certain Relationships and Related Transactions” in our Proxy

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Statement is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information included under the caption “Independent Accountants” in our Proxy Statement is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

The following financial statements are filed as part of this annual report on Form 10-K:

Selected quarterly financial data under the caption “Note 16 Selected Quarterly Financial Data (Unaudited)” are also filed as part of this annual report on Form 10-K.

Schedule II – Valuation and Qualifying Accounts is filed as part of this annual report on Form 10-K.

See response to Item 15(c) below.