INTER ACT SYSTEMS INC, 10-K405, 1999-03-31

INTER ACT SYSTEMS INC
10-K405, 1999-03-31
BUSINESS SERVICES, NEC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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: 333-12091

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INTER*ACT SYSTEMS, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

----------------------

<TABLE>
<S> <C>
NORTH CAROLINA 56-1817510
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)

14 WESTPORT AVENUE 06851
NORWALK, CONNECTICUT (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 750-0300

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NONE NONE
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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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 __ No __

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

As of March 31, 1999, the number of shares outstanding of the registrant's
Common Stock was 7,728,555. There is no trading market for the Common
Stock. Accordingly, the aggregate market value of the Common Stock held by
non-affiliates of the registrant is not determinable. See Part II, Item 5. of
this Report.

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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS

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<CAPTION>
PAGE NUMBER
OR REFERENCE
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PART 1
<S> <C> <C>
ITEM 1. Business.............................................................. 3
ITEM 2. Properties............................................................ 13
ITEM 3. Legal Proceedings..................................................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders................... 14

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................... 15
ITEM 6. Selected Consolidated Financial Data.................................. 15
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 16
ITEM 8. Financial Statements and Supplementary Data........................... 26
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 26

PART III

ITEM 10. Directors and Executive Officers of the Company....................... 27
ITEM 11. Executive Compensation................................................ 29
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........ 33
ITEM 13. Certain Relationships and Related Transactions........................ 36

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K...... 39
</TABLE>
2

CAUTIONARY STATEMENT FOR PURPOSE OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

The statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995), which can be identified by
the use of forward-looking terminology such as believes, expects, may, will,
should, or anticipates or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. In addition, from time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forwarding-looking statements may be included in, but are not
limited to, various filings made by the Company with the Securities and Exchange
Commission, or press releases or oral statements made by or with the approval of
an authorized executive officer of the Company. Forward-looking statements are
based on management's current views and assumptions and involve risks and
uncertainties that could significantly affect expected results. The Company
wishes to caution the reader that factors, such as those listed below, in some
cases have affected and could affect the Company's actual results, causing
actual results to differ materially from those in any forward-looking statement.
These factors include: (i) the Company's limited operating history, significant
losses, accumulated deficit, negative cash flow from operations and expected
future losses, (ii) the dependence of the Company on its ability to establish,
maintain and expand relationships with Manufacturers to promote brands on the
ILN (as defined herein) and the uncertainty of market acceptance for the ILN,
(iii) the uncertainty as to whether the Company will be able to manage its
growth effectively, (iv) the early stage of the Company's products and services
and technical and other problems that the Company has experienced and may
experience, (v) risks related to the Company's substantial leverage and debt
service obligations, (vi) the Company's dependence on third parties, (vii) the
intensely competitive nature of the consumer product and promotional industry,
(viii) risks that the Company's rights related to patents, proprietary
information and trademarks may not adequately protect its business, (ix) the
possible inability of new management to perform their respective roles and the
possible conflicts of interest of the Company's directors, officers and
principal shareholders in certain transactions with the Company. See Part II,
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors."

PART I

ITEM 1. BUSINESS

Inter*Act Systems, Incorporated ("Inter*Act" or the "Company") operates
one of the nation's largest electronic marketing networks linked to
supermarket retailers' loyalty card databases that can reach shoppers both
in-store and on the Internet. The Company's patented technologies enable
consumer products manufacturers ("Manufacturers") and supermarket retailers
("Retailers") to use historical purchase behavior data to deliver
shopper-specific purchase incentives and messages to customers moments before
shopping begins. The Company's proprietary system, called the Inter*Act Loyalty
Network'sm' ("ILN"), comprises over 2,700 server-based Smart Terminals'TM'
located inside the front entrance of more than 20 retail chains in the U.S. and
Europe, as well as a recently launched Company-owned Internet web site called
"Shopper Perks'sm'". The Smart Terminals'TM' are linked directly to each store's
point-of-sale scanning system via Company-owned in-store servers. This
in-store network allows Shopper Perks'sm' to offer consumers, in selected
markets at this time, the only commercial scale at-home/in-store electronic
platform for shopper incentives available the same day and directly at the cash
register. No paper is required at any time. This fully automated process
virtually eliminates the misredemption and fraud associated with paper coupons,
estimated by industry sources to cost manufacturers hundreds of millions of
dollars per year.

The Company's primary objective is to become the preeminent in-store and
Internet distributor of consumer packaged goods promotional incentives in the
U.S. and Europe by integrating the economic interests of Manufacturers,
Retailers, and consumers at a lower cost than any other in-store marketing
vehicle. The Company believes that the ILN capitalizes on the convergence of
major trends in the Manufacturer and Retailer industries to better target and
serve consumers. Manufacturers are striving to increase the efficiency of their
brand promotion through individually targeted incentives and are seeking to
offer promotions nearer to the shopper purchase decision. Retailers are
developing customer databases that identify individual

households and their product purchasing histories over time, thereby allowing
Retailers first to segment their customers by sales and profitability and then
reward them accordingly. Retailers are also seeking to offer rewards to and
communicate with their customers in-store as opposed to at home. In addition to
these industry trends, consumers are seeking greater convenience in shopping
without sacrificing savings. The Company owns a series of patents and exclusive
patent licenses that it believes are a significant barrier to other potential
in-store competitors.

In the U.S., as of March 15, 1999, the Company had installed systems in
approximately 1,800 stores, and had contracted to install systems in
approximately an additional 1,800 stores. In Europe, the Company has entered
into multi-year contracts with Sainsbury's, one of the largest Retailers in the
United Kingdom; Boots, the largest pharmacy retailer in the United Kingdom; and
Delhaize, one of the largest grocers in Belgium. Collectively, these chains
account for approximately 1,840 stores in Europe.

The Company is compensated by Manufacturers who purchase access to the
network on an exclusive category basis. Contracts are predominantly annual
commitments for a flat fee, allowing for periodic promotion through the ILN and
continuous data reporting on promotion results and category share movements.

INDUSTRY OVERVIEW

Manufacturers have traditionally used promotional vehicles such as mass
media advertising (newspapers, printed circulars, television, radio, and
billboards), Free Standing Inserts ("FSIs") and direct marketing techniques to
reach consumers. Promo Magazine estimated that in 1997 the promotion marketing
industry's gross revenues were $79.4 billion, an increase of 11% from their
survey of 1996 expenditures. A growing diversity of lifestyles and an expansion
in the amount of information delivered to increasingly fragmented consumer
segments have contributed to brand proliferation and a perceived decline in
brand loyalty. At the same time, changes in the workforce and demographic shifts
have made it increasingly difficult to reach purchasing decision makers using
traditional mass distributed promotional methods not targeted to specific
consumer segments.

Manufacturers have recognized the limitations of traditional promotional
vehicles. Despite the ineffectiveness of coupons and other mass distributed
promotional vehicles to reach consumers efficiently, they continue to be
prevalent promotional tools. According to NCH NuWorld Marketing, a coupon
clearinghouse, 276 billion coupons were distributed in the United States in
1997. While consumers continued to recognize the value of coupons by redeeming
them for an estimated $2.99 billion of savings in 1997, that reflected a drop of
$600 million from the 1996 dollar redemptions. The overall redemption rates of
distributed coupons dropped to around 1.7% in 1997, as reported by the
clearinghouse CMS, Inc., versus 2.8% in 1986. 1997 spending by Manufacturers on
FSIs at $6.24 billion was still less than 1995 high of $7 billion, though
slightly more than the $6 billion spent in 1996, in part because Manufacturers
are said to be increasing coupon values to attract consumers to use the FSIs.
For grocery products, 3.7 billion coupons were redeemed in 1997, a decline of
13% over the previous year.

In spite of the decreasing effectiveness of the more traditional
promotional methods such as coupons and mass media, and the corresponding
decline in Manufacturers' spending on promotional incentives such as FSIs,
Manufacturers are maintaining a similar level of overall investment in
brand promotions by shifting their promotional dollars to more targeted
vehicles. Not only have Manufacturers recognized the value of targeted
promotions, they have also recognized the effectiveness of promotions delivered
in close proximity to the purchase decision. It is estimated that 70% of all
brand purchase decisions are made by consumers while they are in the store,
according to Progressive Grocer Magazine and the Point-of-Purchase Advertising
Institute (POPAI). In-store promotion has enjoyed rapid growth as Manufacturers
have begun to shift promotion spending to emerging in-store platforms. As
reported in the Annual Survey of Promotional Practices, 72% of Manufacturers
utilized in-store electronic promotion techniques in 1996 as compared with
only 48% in 1994, while spending $850 million on these promotions, an increase
of 33% over 1994, according to Promo Magazine. In Promo Magazine's 1998 Annual
Report of the Promotion Industry, it reported that the distribution of in-store
electronic checkout, electronic shelf and handout coupons had an 8.3% share of
coupon distribution, up from 6.7% in 1996.

Retailers have also begun to institute changes in their approach to
reaching their customers. Retailers have invested in technology to improve
efficiency and inventory management. Advances in point of sale technology, in
addition to providing efficiency at check-out and a means of price and inventory
control, also provide a platform for Retailers to identify and target

their customer base. This new technology has enabled Retailers to develop
programs that permit them to capture information about and communicate with
targeted segments of their customer base.

Today Retailers have begun to concentrate on retaining and growing the 25%
of their customer base that accounts for an estimated 65% of total store sales
and 70% of their profits, according to a study released in 1999 by The
Partnering Group. Retailers are using loyalty-building frequent shopper card
programs ("frequent shopper cards") in order to establish a direct means of
rewarding these most important customers and to make their product mix more
attractive to their highest-spending shoppers. The card programs are also
designed to counteract competition from other supermarkets, mass merchandisers,
warehouse clubs and specialty Retailers. These frequent shopper cards enable
participating customers to take advantage of product discounts offered by that
store or by regional chains without presenting a paper coupon. In an ACNielsen
survey cited in In-Store (February 1999) it was reported that 66% of households
contacted had a least one frequent shopper card. According to Supermarket News
(April 1, 1996) 67% of these households always used the card when shopping, and
82% of these card holders say they use their cards every time they shop. It was
estimated that by year 2000, 75% of all U.S. households will have one or more
frequent shopper cards. In 1997 $172 million was spent to develop frequent
shopper card programs, with Retailers paying for most of the programs.
Approximately 9,000 grocery stores, representing 29.6% of all U.S. supermarkets,
participate in such programs as of early 1999, according to a study by Retail
Systems Consulting.

RATIONALE FOR THE ILN NETWORK

The ILN is positioned to provide a competitive advantage to Manufacturers
and Retailers, (i) by offering sophisticated targeting of consumers in close
proximity to the point of purchase decision at the beginning of the shopping
process, (ii) by offering promotions to consumers that are based on their past
purchase history, (iii) by providing comprehensive data reporting feedback on
promotion results and changes in a Manufacturer's (and its competitors')
category market share, and (iv) by delivering the promotions in a paperless
electronic system that improves the efficiency of redemptions.

BENEFITS FOR MANUFACTURERS

The Company believes that the ILN provides Manufacturers with a more
efficient means to promote consumer goods than traditional methods of promotion
and advertising.

Targets Incentives Based on Prior Purchase History. The Company believes
that Manufacturers would like to tailor promotional incentives by individual
households according to their degree of loyalty to the promoted brand. In order
for Manufacturers to offer targeted promotions they must have access to
household purchase history data and a targeting algorithm that can match the
desired promotions with the desired households. The ILN provides access to this
household data through its connection to the retailer point-of-sale system,
which permits the Company's Target Engine Software ("TES") to deliver different
promotional strategies for the same product depending on the buying habits of
each customer. See " -- Technology and Software -- ILN Software."

Delivers Promotions in Close Proximity to Brand Purchase Decisions. It is
estimated that 70% of all brand purchase decisions are made by consumers while
they are in the store according to Progressive Grocer Magazine and POPAI. The
Company believes that the ILN's store entrance location, which provides a
shopping list of promotions immediately prior to shopping affords Manufacturers
the most opportune time to reach shoppers with a targeted incentive.

The Company believes that the offering of personally customized discounts
to consumers in the store immediately prior to making purchase decisions
explains the historical average redemption rate for ILN-offered discounts of
approximately 35% (which the Company believes is two to five times higher than
that of other in-store vehicles and approximately 18 times higher than that of
FSIs).

Develops Manufacturer/Retailer Partnership. The Company believes that its
ILN provides a new and unique platform for Manufacturers to maximize the impact
of account-specific (i.e., retail chain-specific) promotion dollars. For
example, a Manufacturer-sponsored sweepstakes promotion may be conducted
electronically via the ILN and advertised jointly by the Manufacturer and
Retailer in a specific market area. In this way, the ILN can serve as a bridge
between the Manufacturer and the Retailer's frequent shopper card program.

Delivers Accountable Consumer Promotion Alternative. The Company believes
that the ILN offers Manufacturers the lowest cost alternative among coupon
promotional strategies because the ILN's electronic scanning of the frequent
shopping card at checkout verifies that items for which promotions were selected
were actually purchased, virtually eliminating the problem of mistaken and
fraudulent redemption of paper coupons. Industry sources estimate that this
costs Manufacturers hundreds of millions of dollars per year through other
coupon promotion vehicles.

Stimulates Incremental Product Sales. As a result of its front-end location
and targeted touch-screen promotional display, the Company believes that the ILN
increases the sales volume of promoted products. Sales increases are generally
attributable to a promotion motivating consumers to trade up in volume (e.g.,
buy two and get the third free), to try a new brand due to the value of the
offered incentive or to remind consumers to buy a specified brand due to the
on-screen prompt. Substantial sales increases at the product and category level
were attributed to the Company's ILN in Information Resources Inc. matched store
studies ("IRI Studies") performed for several Manufacturers. These studies
showed that Manufacturers who promoted products on the ILN enjoyed significant
product sales increases versus the same Manufacturer products not promoted on
the ILN in comparable stores.

Provides Promotion Flexibility. The ILN allows Manufacturers to adjust any
attribute of a promotion virtually on a daily basis. Modifications to
Manufacturer promotions can be introduced to the ILN remotely from the Company's
headquarters.

BENEFITS FOR RETAILERS

The Company believes that the ILN provides competitive advantages for
Retailers.

Provides Inexpensive, In-Store Platform To Reward The Most Valued Shoppers.
As in many industries, a small number of loyal customers account for a major
portion of revenue and profits per store. Many major supermarket chains have
developed frequent shopper card marketing programs to help them identify and
reward these valuable customers. The Company believes that the ILN, working in
conjunction with a store's frequent shopper card, offers Retailers a unique and
cost-efficient way to deliver in-store targeted messages, promotional incentives
and rewards to this important shopper segment. In a study conducted by the
Company, utilizing data procured from three ILN stores, the average transaction
size for a frequent shopper card holder who visited an ILN terminal was
approximately twice as large as the average transaction size of a frequent
shopper card holder and approximately three times as large as the average for
all customers.

Promotes Consumer/Retailer Communication. In addition to rewarding its best
customers, a store can use the ILN more generally to capture information from,
and to communicate with, cardholders through questionnaires, interactive games,
electronic sweepstakes, tie-in promotions with local media, charities, special
events and other merchandising theme promotions. Access to the ILN also enhances
the efforts by Retailers to promote acceptance and usage of their frequent
shopper cards.

Stimulates Incremental Product Sales. The Company believes that the ILN
stimulates incremental product sales for Retailers as a result of several
factors. The ILN's location at the store entrance enables it to remind a shopper
of an item they may have forgotten or stimulate them to purchase items in
addition to those they intended to purchase. The ILN also provides the Retailer
a channel to promote perishable foods and private label products. Finally, the
ILN program is able to track the time lapse since the last purchase of a
particular product and remind a consumer to buy the needed item in the store
that day rather than in another class of trade, such as convenience stores.

Distributes, Redeems and Clears Promotions Electronically. Traditional
promotion of food and related products relies upon paper-based systems such as
FSIs and other paper coupon vehicles. Paper-based promotions require Retailers
to handle paper at checkout and bundle paper records that must be sent to third
party clearing businesses. With the ILN, there is no paper for cashiers to
handle and no need for expensive third party clearing. See " -- Products and
Services -- Inter*Act Loyalty Network'sm' ("ILN")."

Generates Incremental Fee Revenue. Retailers receive revenue based upon
promotion redemptions, currently $0.08 per transaction. The Company believes
that this fee produces high-margin revenue for Retailers relative to the amount
of floor space that the ILN occupies.

BENEFITS FOR CONSUMERS

The Company believes that consumers who are introduced to the ILN continue
their usage as they discover the following benefits:

Provides Increased Purchasing Power and Convenience. Consumers want to
maximize the value of their shopping dollars through discounts and promotions,
but at the same time wish to limit the amount of time they invest preparing for
shopping. The ILN eliminates the time-consuming exercise of locating, clipping
and organizing individual coupons, and the consumer does not have to remember to
bring any paper coupons to the store or track expiration dates. The ILN is
conveniently located inside the store entrance where it can easily be accessed
at the beginning of shopping. In less than 60 seconds, the ILN terminal will
display approximately 35 to 40 customer-specific product promotions and will
dispense a shopping list for the product discounts selected by the customer,
which if redeemed could result in substantial savings to the consumer.

Provides Personalized Discounts and Incentives. The ILN is designed to
deliver customer-selected incentives that are customized to an individual
consumer's purchasing preferences. The Company believes that consumers prefer to
select and redeem promotions on the ILN that are targeted to their past
purchasing history as evidenced by redemption rates of targeted promotions that
are approximately twice the redemption rates of promotions that are randomly
presented.

In June 1997, the Company contracted Yankelovich Partners to conduct a
telephone "Habits and Usage" study among 302 frequent shopper card holders
selected at random. The results of the study indicate that the ILN system is an
attractive source of value to the customer with few barriers to trial and high
satisfaction rates promoting repeat usage. The study was conducted in the
Philadelphia market, where participating ILN chains include the market leader
ACME (a division of American Stores), SuperFresh (a division of A&P) and Laneco.
As shown on the graph below, the conversion from trial to repeat usage (trial to
acceptor) was 86%.

CONSUMER AWARENESS & ACCEPTANCE

[BAR CHART]

Source: Yankelovich Partners Habits and Usage Study June/July 1997

Accordingly, the Company believes that consumer marketing support that
raises awareness of the ILN will increase terminal usage among existing and new
frequent shopper card holders.

BUSINESS STRATEGY

INCREASE MANUFACTURER ENROLLMENT ON THE ILN

During the year ended December 31, 1998, approximately 100 Manufacturers
promoted approximately 270 products through the ILN in the United States and
Europe, the latter through a pilot begun at Sainsbury's in the United Kingdom in
June 1998. The Company is continually working to increase both the number of
brands per Manufacturer and dollars committed per brand as rollouts continue
across the United States and Europe.

NATIONWIDE AND EUROPEAN INSTALLATION OF THE ILN

The Company is actively pursuing multi-year contracts with additional major
Retailers who have or plan to launch loyalty programs in key geographic regions
across the United States and throughout Europe. The Company believes that
Manufacturers seek access to a promotion platform that incorporates such a
network of top loyalty marketing Retailers.

"TRUE" ELECTRONIC COMMERCE FOR MANUFACTURERS, RETAILERS, AND CONSUMERS THROUGH
SEAMLESS AT-HOME AND IN-STORE PLATFORMS

In March 1999, the Company launched its Internet product in certain
divisions of A&P. Called "Shopper Perks'sm', the product offers shoppers and
the consumer product promotion industry the first truly electronic home-to-store
transaction experience on a commercial scale. That is, the ILN's already-
existing point-of-sale ("POS") connection in A&P allows in-store electronic
redemptions at the cash register from previously home-selected promotions. Other
Internet-based promotion systems require paper in one form or another, primarily
mailing coupons to the consumer or distributing paper in the store to consumers
for redemption on a subsequent store visit. Importantly, the Company's in-store
terminals and Shopper Perks'sm' web site will complement each other by allowing
consumers to print a reminder list of selections either at home or at the
in-store terminals, which will "remember" what was selected at home. Also, the
Company expects that its in-store terminals will largely mirror the Internet
offers and thereby provide similar savings to the millions of grocery shoppers
who do not have Internet access.

ENLISTMENT OF ILN RETAILERS TO ASSIST IN THE MANUFACTURER SALES EFFORT

Substantially all of the Retailers who have installed the ILN are aiding
the Company in its efforts to expand Manufacturer participation on the ILN.
Retailer efforts include (i) the inclusion of ILN promotional materials in
Retailer sales meetings with Manufacturers; (ii) the distribution of letters to
Manufacturers indicating Retailer support of the ILN; and (iii) the placement of
ILN terminals in the lobbies or waiting rooms of Retailer headquarters.

CONTINUED EXPANSION OF ILN FUNCTIONALITY THROUGH INNOVATIVE PROPRIETARY SOFTWARE
DEVELOPMENT

The Company's video touch-screen platform offers virtually unlimited
opportunity for the creation of innovative in-store promotions that appeal to
consumers and make the ILN more personalized to each of them. The Company
intends to maximize this opportunity through aggressive proprietary software
development that anticipates and addresses the loyalty marketing goals of
Manufacturers and Retailers while simultaneously enhancing consumers' enjoyment
of an ILN visit.

LEVERAGING THE COMPANY'S GROWING DATABASE ON CONSUMER SHOPPING PATTERNS

Certain Manufacturers receive reports generated by the Company from its
extensive consumer behavior database. Each day the Company collects data on all
card-identified shoppers, whether or not they stopped at the Company's
terminals. For certain stores, this data is aggregated centrally at the
Company's headquarters. This information enables the Company to assist
Manufacturers in creating the optimal promotional strategy given the historical
impact of the ILN and other promotions initiated by Manufacturers.

ACQUISITION OF INTELLECTUAL PROPERTY RIGHTS

The Company has successfully acquired exclusive and non-exclusive licenses
to a number of patents covering various aspects of in-store promotion in general
and its business in particular. The Company believes that several of its
licensed patents

are seminal in the incentive distribution industry and afford the Company the
ability to aggressively protect its growing business franchise.

EUROPEAN EXPANSION

The Company believes that the European consumer promotion and retail
markets represent a substantial opportunity for the Company's products and
services. The Company, through a subsidiary, has entered into a four-year
exclusive contract to commercially deploy the ILN with Sainsbury's, one of the
largest Retailers in the United Kingdom. Rollout of the ILN is expected to
commence in 1999, on the heels of last year's successful pilot program. The
Company also entered into a five-year exclusive contract with Boots, the largest
pharmacy retailer in the United Kingdom, beginning with a pilot in early 1999,
and with Delhaize, one of the largest grocers in Belgium, also expected to
begin a pilot in 1999.

PRODUCTS AND SERVICES

INTER*ACT LOYALTY NETWORK'sm' ("ILN")

A customer can access the ILN by inserting his or her frequent shopper
card, as issued under the store's existing frequent shopper card program, into
the Company's ATM-like terminal(s) located near the entrance to the store. The
system identifies the customer and, based upon data gathered by the ILN on that
customer's cumulative purchasing history, displays full color images of
promotions and discounts specifically selected for that customer. The ILN may
also present several "universal" promotions (offered by either the Retailer or
Manufacturers) to all ILN visitors. The customer selects desired promotions,
usually price discounts, multiple purchase bonuses or free product samples, by
simply touching the desired product icon displayed on the screen. When the
selection process is complete (in less than 60 seconds for most shoppers), the
ILN terminal can deliver a "shopping list" of all selected promotions, which
serves to remind the customer of the selected promotions while shopping. After
shopping, the customer's purchases and frequent shopper card are electronically
scanned at checkout, and the ILN (i) verifies that the promoted items were
purchased, (ii) immediately notifies the store register system to give the
customer the selected discounts and promotions and (iii) records all the
customer's purchases for use in more accurately targeting promotions during
future visits. Due to technological constraints unique to certain Retailers in
approximately 450 stores, the ILN delivers individual coupons rather than a
shopping list.

The Company's contracts with Manufacturers provide them with the
opportunity to offer promotions on an exclusive basis within 13 four-week cycles
during a year. These product categories are generally based on standard industry
classifications of household and consumer products available in supermarkets.
The purchaser of a particular category is given the exclusive right to promote
products in that category for each cycle purchased. Categories are generally
purchased nationally, although programs can be developed with regional
differences in mind.

The Company's primary source of revenue is the sale of product category
cycles to Manufacturers. The Company's revenue is generated from a fee charged
for each redeemed electronic incentive and in certain cases an ILN access fee.

MANUFACTURER PRODUCTS

Consumer Product Incentives. The Company's business primarily derives
revenue from the presentation, distribution and/or redemption of consumer
promotions offered by Manufacturers. Manufacturers can buy access to the
Inter-Act Loyalty Network in both the U.S. and the U.K. on an annual, flat-fee
basis. The annual fee is tiered according to category velocity (i.e., a
Manufacturer promoting cola would pay more for such a category than one
promoting detergent given the greater consumer purchase frequency of colas), and
entitles the Manufacturer to: (1) category exclusivity all year, even during
"off" cycles of no promotion on the ILN; (2) ongoing point-of-sale data analysis
of not only the promoted brand results, but also of the category and the market
share dynamics of the individual competitors (names masked); and (3) renewal
rights on the following year. Discount face values and retailer handling fees
per redemption, both paid by the Manufacturer, are aggregated with the flat fee
to create the complete promotion budget for the Manufacturer.

This contrasts with the previous Company format in the U.S. market of
pay-on-redemption, which entitled Manufacturers to category exclusivity only in
the cycles during which they promoted, and which allowed Manufacturers to buy

as little as one cycle of promotion or as much as all 13 cycles. Data reporting
was less comprehensive, and renewal rights extended only to the specific cycles
that were purchased initially.

Internet Promotion & In-Store Redemption. In March 1999, the Company
launched its Internet product in certain divisions of A&P. Called "Shopper
Perks'sm'", the product offers shoppers and the consumer product promotion
industry the first electronic home-to-store transaction experience on a
commercial scale. That is, the ILN's already-existing POS connection in A&P will
allow in-store electronic redemptions at the cash register from promotions
previously selected at home or in the office. Other Internet-based promotion
systems require paper in one form or another, and primarily mail coupons to the
consumer or distribute paper in the store for redemption on a subsequent store
visit.

Media and Advertising Related Products. The Company plans to introduce an
Electronic Billboard advertising product later in 1999 to allow companies
outside the consumer products industry to promote on the ILN. The advertising
product will offer such companies the ability to place an advertisement that is
unobtrusive to the core ILN session (at side or bottom of screens). The Company
currently expects to structure its fees for this product on a cost per thousand
impressions basis.

RETAILER PRODUCTS

Although the Company derives its revenue from sales of customer incentives
to consumer products manufacturers, it is an essential part of the Company's
strategy to make the ILN one of the preferred loyalty marketing vehicles of
Retailers in the U.S. and Europe. To this end, the Company has developed a
variety of products designed to increase the effectiveness of Retailers'
communication with their top customers and to create a feeling of value and
excitement related to the ILN terminal that will drive greater traffic to the
terminal and the Retailer's frequent shopper card program. Although the Company
feels that these products and services are clearly value-added to its
Retailer-partners, it does not currently charge its Retailers for any of
these services.

Customer Specific Messages. The Company offers Retailers the ability to
deliver targeted messages to specific groups of customers according to their
relative profitability to the store and/or purchasing tendencies or other
parameters. The product, called "Stamp Saver", is being positioned as an
alternative to or re-enforcement of Retailers' cardholder-specific direct mail
programs.

Private Label and Perimeter Department Promotions. The ILN offers
Retailers the ability to permanently feature in-store promotions that grow
their most profitable segments, typically private label merchandise and
perimeter departments (e.g., bakery and deli).

Games. The ILN offers Retailers an electronic platform for sweepstakes and
games, such as the "spin and win" game, which is similar to a slot machine with
a touch-screen handle but that requires no wager to play. The prizes in such
sweepstakes and games are funded through the Retailers, which provide private
label products and third party consumer goods from local merchants, radio
stations which seek to cross promote on the ILN, and others.

Customer Give-Aways. The Company also offers promotions or prizes to
customers on an "Nth" terminal visitor basis (e.g., every tenth terminal
visitor). This functionality, called "Pre-wards," allows the Retailer to
generate excitement at the terminal through the element of potential surprise.
Additionally, this product creates another method for Retailers to offer prizes
that could drive customers to their perimeter departments or other areas where
they may want to increase traffic among their best customers.

Employee Rewards. Through the ILN Retailers conduct employee-only
communications allowing a convenient and accessable focal point for
disceminating news, information and rewards among other things.

RETAILER PARTNERS

As of December 31, 1998, the Company had over 3,600 stores in the United
States under contract and had installed terminals in approximately 1,800 stores.
The Company has installed its ILN in A&P (consisting of A&P, Farmer Jack, Food
Emporium, Kohl's, Super Fresh and Waldbaum's stores), American Stores (ACME,
Jewel, Lucky South and Lucky North divisions), Food Lion (Charlotte and Virginia
divisions), Gerland's, Grand Union and Laneco. The Company has contracts for
future installation in the remaining divisions of Food Lion, Weis Markets,
Giant, Cub Foods, Marsh, Riser, Randalls, Food Town, Price Chopper, and Eagle
Food supermarket chains.

TECHNOLOGY AND SOFTWARE

ILN SOFTWARE

The Company maintains a staff of software developers and engineers. This
team continually refines and enhances ILN functionality for both Manufacturers
and Retailers. It also has primary responsibility for developing the unique
interfaces required to connect the ILN to each Retailer's point-of-sale system.
The Company's core targeting products are driven by its proprietary Target
Engine Software ("TES") which collects and analyzes each shopper's cumulative
market basket of purchases stored over a rolling time period of between three
and 12 months depending on the size of the store. On a daily basis, TES tailors
discounts and promotions for each customer based upon previous purchase history.
It also selects targeted customer groups to receive special promotions as
designated by retailers. Presently the Company is developing software and
hardware enhancements to enable the Company to collect and analyze consumer data
over longer periods in all stores.

For each product category available on the ILN, the TES classifies each
consumer as follows:

<TABLE>
<CAPTION>
CLASSIFICATION CONSUMER DESCRIPTION
-------------- --------------------
<S> <C> <C>
"Targeted" Brand loyal............ Tends to purchase consistently the
Manufacturer's brand within the product category

"Targeted" Brand switcher......... Tends to demonstrate little brand loyalty,
buying several different brands over time
within a category

"Targeted" Brand competitive...... Tends to purchase consistently a competitor's
brand

"Untargeted" Entry level............ A consumer who has no record of purchasing
products within the product category
</TABLE>

Customers are offered promotions with specific incentives on specific
products depending on their individual purchasing profiles. For example, a
customer classified as "brand competitive" can be offered a higher discount than
would a consumer classified as a "brand switcher," who in turn would receive a
higher discount than would a consumer classified as "brand loyal." In this way,
the TES offers Manufacturers the ability to execute different promotional
strategies for the same product simultaneously. Manufacturers have the
flexibility to change the relative face values of redemptions for each targeted
category.

ILN software also enables event promotions (full screen(s) dedicated to the
promotion of a specific marketing campaign), sweepstakes and games, full-motion
videos and printed vouchers that shoppers can mail in for rebates or other
special promotions. The Company's current system release gives Retailers the
ability to target offers directly to a predetermined set of customers, such as
preferred shoppers.

ILN HARDWARE

INTER*ACT LOYALTY NETWORK
IN-STORE CONFIGURATION & INTERACTION

[GRAPH]

SALES AND MARKETING

The primary focus of the Company's sales effort is to attract national
Manufacturers to contract for ILN category cycles. The sales effort is conducted
primarily through the Company's direct sales force, all of whom are experienced
in packaged goods and marketing services sales. These people are organized into
geographical teams, with operations in San Francisco, Chicago, Cincinnati,
Atlanta, St. Louis, Cleveland and Norwalk. The teams are headed by group sales
directors who report to the Vice President, Brand Sales. The Company augments
its direct sales efforts through the development of strategic relationships with
prominent promotion agencies and food brokers. Through development of custom
events and packages, the Company can provide a unique offering to both of these
constituents, giving a competitive point of difference in the marketplace. This,
in turn, generates success stories for their managers that can be cultivated
into larger headquarter commitments.

The Company plans to continue to aggressively hire experienced,
well-trained industry sales professionals into key positions across the nation
and to invest in continuous training of the team.

Retailer sales efforts are conducted through direct mail campaigns and
trade shows led by a senior executive and supported by senior management.
Ongoing Retailer service, support, and product sales are provided by the
Company's Client Services group. Client Service account executives typically
have substantial industry experience selling packaged goods to Retailers and
are responsible for maximizing each Retailer's use of ILN retailer products.

SUPPLY OF ILN TERMINALS

The Company concluded a non-exclusive terminal supply agreement during the
second quarter of 1998 and expects to work with a number of major equipment
integrators to supply ILN terminals and servers to the Company. See Part II,
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Year Ended December 31, 1997 Compared with Year Ended December
31, 1996."

INTELLECTUAL PROPERTY MATTERS

The Company currently uses U.S. Patent No. 4,554,446 (the "'446 Patent") in
its in-store consumer product promotion and couponing business through license
agreements with the holders of rights in this patent, which provide the Company
with exclusive right to use the patent. The term of such agreement is for as
long as the patent remains valid and enforceable, subject to certain termination
rights as set forth in such agreement.

The Company also has certain exclusive and nonexclusive rights for U.S.
Patent No. Re.34,915 for a "Paperless System for Distributing, Redeeming and
Clearing Merchandise Coupons" pursuant to a patent license agreement. The term
of such agreement is for as long as the patent remains valid and enforceable,
subject to certain termination rights as set forth in such agreement. Management
believes that by obtaining the rights to this patent the Company will experience
a significant competitive edge in the electronic coupon redemption industry in
the future.

During 1998, the Company acquired by assignment all rights, title and
interest in and to (i) U.S. Patents Nos. 5,621,812; 5,638,457; 5,675,662;
5,237,620; 5,305,196; 5,448,471; 5,430,644; 5,659,469; 5,201,010; 5,327,508;

5,388,165; and 5,592,560; and related intellectual property rights; and (ii)
certain foreign counterpart patent applications, including PCT Application No.
PCT/US94/08221 and EPC Application #95906202.7. These patents and applications
generally disclose systems for targeted marketing in retail stores utilizing a
database including customer identification codes and purchase histories of
identified customers. Management believes that these patents will provide the
Company with a significant competitive advantage in its target market.

The Company has acquired the registered trademark Coupon Xpress'r'. The
Company has also filed applications for, and obtained federal registration of
the service marks Inter*Act'r', the Company's hand logo, Coupon Central'r' and
Inter*Act Promotion Network'r'. Inter*Act Loyalty Network is a service mark of
the Company and an application for federal registration of the mark is pending.
Applications for Banner Board'sm' and Check-In to Win'sm' are also pending. See
"Patents, Proprietary Information and Trademarks," and "Commitments for
Technology."

CUSTOMERS AND COMPETITION

The Company competes against a wide range of promotional media for
Manufacturers' advertising and promotional dollars, including television, radio,
print and direct mail. The Company also competes against providers of in-store
and point-of-sale marketing platforms, such as ActMedia, Inc. ("ActMedia"),
which provides automatic coupon dispensers in the aisles of supermarkets, and
Catalina Marketing Corporation, together with its subsidiaries and affiliates
("Catalina"), which provides an electronic marketing network that delivers
coupons to consumers at checkout lanes based on that day's purchases. The
Company competes for promotional dollars based on several factors, including the
ability to more accurately and effectively target consumers, the ability to
demonstrate Retailer support of the system, the ability to influence buying
behavior, promotion flexibility, and price. Most of the Company's competitors
are larger and have substantially greater resources than the Company. In many of
the grocery stores in which the Company has installed its ILN, ActMedia and
Catalina also provide their in-store promotion services.

EMPLOYEES

As of December 31, 1998, the Company had approximately 256 employees,
primarily full-time. None of the Company's employees is represented by a labor
union. The Company considers its relations with its employees to be good. The
Company's future success will depend in significant part on the continued
service of its key technical, sales and senior management personnel. Competition
for such personnel is intense and there can be no assurance that the Company can
retain its key managerial, sales and technical employees. The Company
anticipates that the nationwide commercialization of the ILN will require the
hiring of a substantial number of new employees in connection with the planned
expansion of its business.

RELATIONSHIP WITH VANGUARD

The Company receives business development and other support from Vanguard
Cellular Systems, Inc. (together with its subsidiaries, "Vanguard") the
Company's largest shareholder. Stephen R. Leeolou, Chief Executive Officer and
Chairman of the Company, is also President and Chief Executive Officer of
Vanguard. Six of the Company's nine directors are also directors of Vanguard.
Vanguard and AT&T Corp. have entered into an Agreement and Plan of Merger (as
amended, the "Vanguard Merger Agreement") pursuant to which Vanguard will be
merged into a wholly owned subsidiary of AT&T. The boards of directors of both
Vanguard and AT&T have approved the transaction, which is subject to approval of
the Vanguard shareholders and certain other conditions. Vanguard's shareholders
are scheduled to meet to consider the Vanguard Merger Agreement on April 27,
1999. Upon consummation of the merger of Vanguard and AT&T, AT&T will succeed to
Vanguard's ownership of the Company's debt and equity securities. See Part II,
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Risk Factors" and Part III, Item 12. "Security Ownership of
Certain Beneficial Owners and Management," and Part III, Item 13. "Certain
Relationships and Related Transactions".

ITEM 2. PROPERTIES

The Company is headquartered in Norwalk, Connecticut, where it leases
33,452 square feet of office space. The lease runs through January 31, 2000. The
Company is currently reviewing its alternatives to relocate its corporate
offices prior to expiration of its lease. The Company also leases 8,000 square
feet of warehouse storage space in Central Islip, New York. The lease runs
through February 2000. The Company intends to lease other warehouse storage
space as necessary and believes that suitable space will be readily available to
meet its anticipated needs for the foreseeable future. The Company believes this
space

is adequate to accommodate the Company's variable storage requirements.
Additional temporary warehouse space will be leased in Columbus, Ohio through
May 1999 which is used to store finished terminals, servers, and terminal
supplies.

ITEM 3. LEGAL PROCEEDINGS

In February 1996, the Company filed suit against Catalina Marketing
Corporation ("Catalina Marketing") alleging that Catalina Marketing has
infringed United States Patent No. 4,554,446 (the "'446 Patent") under which the
Company is licensee. The Company alleges that Catalina Marketing is infringing
this patent by making, using and offering for sale devices and systems that
incorporate and employ inventions covered by the '446 Patent. The Company is
seeking an injunction against Catalina Marketing to stop further infringement of
the patent, treble damages and the costs and expenses incurred in connection
with the suit. The complaint has been amended to add additional detail, and
Catalina Marketing has answered denying the allegations, raising certain
affirmative defenses, and seeking declaratory judgment of non-infringement,
invalidity or unenforceability of the '446 Patent. In May 1997, Catalina
Marketing asserted a counterclaim alleging that the Company is infringing a
newly issued Catalina Marketing Patent U.S. Patent No. 5,612,868 (the "'868
Patent"). The Company has answered denying the allegations, raising affirmative
defenses and seeking declaratory judgment of non-infringement, invalidity and
unenforceability of the '868 Patent. Discovery on the claims and counterclaims
will proceed and various motions are pending before the United States District
Court in the District of Connecticut. As with any litigation, the ultimate
outcome of the suit cannot be predicted. However, the Company intends to pursue
the action vigorously.

In January 1998, Catalina Marketing International, Inc. ("Catalina
International," a subsidiary of Catalina Marketing) filed suit against the
Company alleging that the Company has infringed United States Patent No.
4,674,041 (the "'041 Patent") which Catalina International acquired by
assignment in December 1997. Catalina International alleges that the Company is
infringing the '041Patent by making, using and offering for sale devices and
systems that incorporate and employ inventions covered by the '041 Patent. Also
in February 1998, Catalina International amended its complaint to join as
additional parties defendant Thermo Information Solutions, Inc. ("Thermo") and
Coleman Research Corporation ("Coleman"), who have manufactured terminals
pursuant to an agreement with the Company. Catalina International seeks
injunctive and declaratory relief as well as unspecified money damages against
all defendants, and has filed a motion for preliminary injunction against the
Company seeking to stop alleged infringement of the '041 Patent pending trial.
Various other motions are pending in the United States District Court in the
District of Connecticut, including the Company's motion for a more definite
statement. The Company intends to defend against Catalina International's claims
vigorously, and to pursue available remedies against Catalina International.
This action was recently consolidated with the litigation involving the '446
Patent and the '868 Patent for purposes of discovery and trial.

On May 27, 1998, the Company filed a new suit against Catalina Marketing
alleging that Catalina Marketing has infringed United States Patents Nos.
5,201,010; 5,338,165; 5,430,644; 5,448,471; 5,592,560; 5,621,812; 5,659,469; and
5,638,457(collectively, the "Deaton Patents"), which the Company acquired in
1998. The Company alleges that Catalina Marketing is infringing the Deaton
Patents by making, using, selling and offering for sale devices and systems that
incorporate and employ inventions covered by the Deaton Patents. The Company is
seeking an injunction against Catalina Marketing to stop further infringement of
these patents, treble damages and the costs and expenses incurred in connection
with the suit. Catalina Marketing has answered denying the allegations, raising
certain affirmative defenses, and seeking declaratory judgment of
non-infringement, invalidity or unenforceability of the Deaton Patents. This
action has been brought in the United States District Court in the District of
Connecticut. Catalina Marketing has also challenged some of the claims of six of
the Deaton Patents by provoking interference proceeding in the U.S. Patent and
Trademark Office. The Company intends to vigorously protect its rights under the
Deaton Patents both in the interference proceeding and in the new lawsuit. See
also "Patents, Proprietary Information and Trademarks," and "Intellectual
Property Matters."

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

No matters were submitted to a vote of security holders during the fourth
quarter of 1998.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

At March 31, 1999, the Company had outstanding 7,728,555 shares of common
stock (the "Common Stock"), held by 238 shareholders of record. These shares
were issued in a series of private offerings prior to December 31, 1997.

At March 31, 1999, the Company also had outstanding 273,528 shares of 10%
Series A Mandatorily Convertible Preferred Stock (the "Preferred Stock") held by
66 shareholders of record. The shares of Preferred Stock were sold pursuant to a
private offering of up to $40 million of Preferred Stock approved by the Board
of Directors of the Company in July 1998 in reliance on the exemption from
registration of such shares contained in Regulation D of the Securities and
Exchange Commission promulgated under the Securities Act of 1933, as amended
(the "1933 Act"), because the offers and sales of such shares were limited to
the Company's existing shareholders and others who were "Accredited Investors"
(as defined in Regulation D) and a limited number of the Company's existing
shareholders who were not Accredited Investors. As of December 31, 1998, the
Company had sold and issued 177,878 shares of Preferred Stock at a purchase
price of $100.00 per share resulting in approximately $17.8 million in gross
proceeds, $100,000 of which was received in the form of satisfaction of accounts
payable and the balance of which was received in cash. The proceeds of the
offering were and continue to be used for working capital and other general
corporate purposes.

In March 1999, the Board of Directors and shareholders of the Company
approved certain changes to the terms of the Preferred Stock and the Board of
Directors increased the offering of the Preferred Stock to an aggregate of $70
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." The changes apply to
all Preferred Stock issued and to be issued pursuant to the private offering.
During the first quarter of 1999, the Company issued and sold an additional
95,650 shares of Preferred Stock for which it received gross cash proceeds of
approximately $9.6 million.

The shares of Preferred Stock accrue dividends semi-annually at the rate of
10% per annum payable only in additional shares of Preferred Stock, and have a
liquidation preference equal to $100 per share plus accrued dividends. The
shares of Preferred Stock are convertible into a number of shares of Common
Stock equal to the liquidation preference divided by the conversion price of
$8.50 at the option of the holder or upon certain events, such as an initial
public offering of shares of Common Stock. Shares of Preferred Stock have voting
rights equivalent to the number of shares of Common Stock into which they are
convertible.

There is currently no established trading market for the Common Stock or
Preferred Stock. Inter*Act has no present intention to list the Common Stock or
Preferred Stock for trading on any securities exchange or on any automated
dealer quotation system.

The Company has not paid any cash dividends since its inception and does
not intend to pay cash dividends on its Common Stock in the foreseeable future.
The Company intends to retain future earnings to finance its operations and fund
the growth of its business. Any payment of dividends in the future will be at
the discretion of the Board of Directors of the Company and will depend upon,
among other things, the Company's earnings, financial condition, capital
requirements, level of indebtedness, contractual and other restrictions in
respect of the payment of dividends, and other factors the Company's Board of
Directors deems relevant. The Company's ability to pay dividends or make
distributions to shareholders is also restricted by the terms of the Indenture.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of the Company are
qualified by reference to, and should be read in conjunction with, Part II, Item
8. "Financial Statements and Supplementary Data -- Consolidated Financial
Statements", including notes thereto, and, Part II, Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations". In
February 1997, the Company elected to change its fiscal year end from the last
Saturday in September to December 31, effective December 31, 1996. For
comparability purposes, the following summary consolidated financial data of the
Company for the year ended 1996 has been restated into a comparable twelve month
period ended December 31, 1996. The consolidated financial data for the years
1994 through 1997 have been derived from audited consolidated financial
statements.

<TABLE>
<CAPTION>
THREE MONTH FISCAL YEARS
YEAR ENDED PERIOD ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 28, SEPTEMBER 30,
1998 1997 1996 1996 1995 1996 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Gross sales ........................$ 7,082 $ 1,672 $ 823 $ 408 $ 78 $ 492 $ 255 $ 6
Less: Retailer reimbursements .... (2,489) (964) (482) (240) (45) (287) (144) (4)
-------- -------- -------- -------- -------- -------- -------- --------
Net sales ........................ 4,593 708 341 168 33 205 111 2
-------- -------- -------- -------- -------- -------- -------- --------
Operating Expenses:
Direct costs ..................... 10,216 5,784 3,030 939 275 2,298 903 262
Selling, general and
administrative expenses .......... 29,169 26,352 8,468 3,077 1,453 6,911 3,391 1,973
Depreciation and amortization
of intangibles ................... 7,459 3,934 1,201 468 88 821 191 32
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses ......... 46,844 36,070 12,699 4,484 1,816 10,030 4,485 2,267
-------- -------- -------- -------- -------- -------- -------- --------
Operating loss ..................... (42,251) (35,362) (12,358) (4,316) (1,783) (9,825) (4,374) (2,265)
-------- -------- -------- -------- -------- -------- -------- --------
Other income (expense)
Interest income .................. 1,338 3,892 2,251 1,249 7 1,009 35 9
Interest expense ................. (21,147) (18,033) (6,948) (4,263) (58) (2,743) (187) (88)
Other expense .................... -- (301) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total other expense............... (19,809) (14,442) (4,697) (3,014) (51) (1,734) (152) (79)
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations before
Income taxes ....................... (62,060) (49,804) (17,055) (7,330) (1,834) (11,559) (4,526) (2,344)
Income taxes ....................... -- (10) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net loss ........................... (62,060) (49,814) (17,055) (7,330) (1,834) (11,559) (4,526) (2,344)
Preferred stock dividend accrued ... (354) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net loss attributable to
Common Stock .......................$(62,414) $(49,814) $(17,055) $(7,330) $(1,834) $(11,559) $(4,526) $(2,344)
======== ======== ======== ======= ======= ======== ======= =======
Loss Per Common Share
Basic and diluted ................ $(8.08) $(6.48) $(2.46) $(0.96) $(0.44) $(1.91) $(1.27) $(0.83)
====== ====== ====== ====== ====== ====== ====== ======
Weighted average number of
common shares:
Basic and Diluted ................ 7,729 7,692 6,939 7,669 4,126 6,038 3,556 2,830

Other Data: (in whole numbers)
Installed terminals at end
of period ........................ 2,728 1,840 623 623 96 614 62 7
Installed stores at
end of period .................... 1,845 1,148 335 335 51 328 25 3
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 28, SEPTEMBER 30,
1998 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) ....... $ 7,006 $ 38,478 $ 86,230 $ 91,835 $ (753) $ 63
Total assets .................... 60,491 81,023 105,765 107,757 2,178 644
Total debt ...................... 117,373 91,406 76,866 72,923 2,042 1,893
Common stock purchase warrants(1) 27,436 27,436 24,464 24,464 -- --
Stockholder's equity (deficit) .. (92,555) (48,432) 643 7,934 (910) (1,417)
</TABLE>

- ---------
(1) Reflects the effect of the valuation of the warrants issued in the Private
Placement, which are exercisable for 9.429 shares of Common Stock per
warrant. The exercise price of $.01 per share was deemed to have been paid
at the time of issuance. See Notes 6 and 8 to the Notes to Consolidated
Financial Statements.

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

The following should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto, and other financial information
included elsewhere in this report. This report contains certain statements
regarding future operating results and anticipated growth, the accuracy of which
is subject to many risks and uncertainties. Such trends, and their anticipated
impact on the Company, could differ materially from those discussed in this
report. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in " -- Risk Factors" and elsewhere in this
report.

The Company is one of the nation's largest in-store operators of
customer-interactive electronic marketing systems. The Company's patented
technologies enable consumer product manufacturers ("Manufacturers") and
supermarket retailers ("Retailers") to offer shopper-specific purchase
incentives and messages to customers moments before shopping begins. The Company
has also started offering consumers, in selected markets at this time, the only
in-home/in-store electronic platform for shopper incentives available the same
day and directly at the cash register. The Company's proprietary system, called
the Inter*Act Loyalty Network'sm' ("ILN"), utilizes patented, multimedia
touch-screen terminals, or Smart Terminals'TM', located in the entrance area of
retail grocery stores, as well as a Company owned Internet web site called
"Shopper Perks'sm'". The in-store terminals are connected to each store's
point-of-sale scanning system which allows the electronic promotions to be
immediately redeemed at the check-out. This in-store technology, networked to
the Company's headquarters, also enables the same day in-store electronic
fulfillment of Internet selected promotions. This fully automated process
virtually eliminates the misredemption and fraud associated with paper coupons,
estimated by industry sources to cost Manufacturers hundreds of millions of
dollars per year.

During 1996, 1997 and most of 1998, the Company recognized revenue as
electronic discounts were redeemed at store cash registers. Manufacturers paid a
fee to the Company for each redemption. The fee was composed of (i) a retailer
processing fee, (ii) a redemption fee and (iii) the face value of the coupon.
The Company, in turn, passed through both the retailer processing fee, which was
included in direct operating expenses, and the face value of the coupon to the
Retailer, while retaining the redemption fee. The Company recorded as net sales
the redemption fee and the retailer processing fee paid by the Manufacturers.

Beginning in 1998, the Company also had arrangements with Manufacturers
whereby the Company received a fixed payment over a fixed period. In these
cases, the Company recognizes revenue on a ratable basis over the fixed period
during which it is providing service or exclusivity to such Manufacturers, as
well as the retailer processing fee paid by the Manufacturers.

Certain Manufacturers pay the Company in advance for a portion of
anticipated redemptions or a portion of the fixed contract amount, as applicable
and these amounts are recorded as deferred revenue until earned through
redemption activity during the contract period.

Direct costs of the Company consist of such expenditures for direct store
support, paper used in the terminals to print shopping lists and recipes, direct
marketing costs, telecommunications between the stores and the Company and
retailer processing fees. Selling, general and administration expenses include
items relating to sales and marketing, administration, non-paid promotional
expenses and royalties payable under certain patent agreements.

Non-paid promotional expenses represent consumer discounts and retailer
processing fees paid to the Retailer by the Company on promotions offered on the
ILN that are not funded by a Manufacturer contract. Manufacturer participation
in the ILN to date has been characterized by a substantial number of trial
commitments leading to increasing dollar commitments to the ILN from those
Manufacturers as the network approaches a more national footprint. As the
network grows and is more widely accepted by Manufacturers, the Company believes
that the need for non-paid promotions will diminish and that revenues from
Manufacturers will increase.

To date, the Company has not generated significant operating revenue
relative to its expenses, has incurred significant losses and has experienced
substantial negative cash flow from operations. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development. The Company had an
accumulated stockholders deficit of $92.6 million as of December 31, 1998 and
has incurred losses of $62.1 million, $49.8 million, $7.3 million and $11.6
million for the years ended December 31, 1998 and 1997, the three month period
ended December 31, 1996 and the fiscal year ended September 28, 1996,
respectively. The Company expects to incur substantial additional costs to
install additional ILN terminals in retail supermarket stores and to sponsor
selected promotions to demonstrate the utility of the ILN to consumers,
Retailers and Manufacturers. The Company expects to incur net losses in 1999 and
may operate at a loss for the foreseeable future. There can be no assurance that
the Company will achieve profitability or, if achieved, sustain such
profitability.

YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997

The Company had installed 2,728 terminals in 1,845 stores as of December
31, 1998 as compared to 1,840 terminals in 1,148 stores as of December 31, 1997.

Manufacturers promoting on the ILN system during the 1998 and 1997 periods,
increased to approximately 100 from 52, respectively, while total products
promoted increased to approximately 270 from 116, including the European
Manufacturers and products for 1998. Net sales during the year ended December
31, 1998, increased to $4.6 million from $708,000 in 1997, primarily as a result
of the larger installed base of ILN terminals, and the increased number of
promotions run by key manufacturers as the network approaches a more national
footprint.

Operating loss for the year ended December 31, 1998 was $42.3 million
versus an operating loss of $35.4 million in 1997. The increased loss was
primarily due to higher depreciation and amortization expense, direct costs and
employee costs. Depreciation and amortization expense increased by $4.1 million
reflecting the addition of approximately $15.9 million in intellectual property
acquired and installation of 888 terminals during 1998. Direct costs increased
$4.4 million due to the costs associated with operating terminals installed in
1999, the full year costs related to terminals installed in 1998 and increased
retailer processing fees associated with the increased promotions during the
year. Employee costs increased as its number of employees grew 32%. Non-paid
promotions, which the Company historically has used to stimulate customer usage,
have been curtailed significantly in 1998 as the Company has been able to offer
a full range of products on its terminals which were paid for by Manufacturers.
Non-paid promotions declined from $6.3 million in 1997 to $4.7 million in 1998.
While the Company believes non-paid promotions will continue to be a valuable
tool, it expects non-paid promotions to continue to decline as the network has a
greater national footprint in the future.

Net loss for the year ended December 31, 1998 increased by approximately
$12.3 million from $49.8 million in 1997 period to $62.1 million primarily due
to higher operating losses of $6.9 million, increased non-cash interest expense
of $3.1 million and decreased interest income of $2.6 million. Non-cash interest
expense of $21.1 million during the year ended December 31, 1998 reflects the
interest expense related to the Company's issuance of $142 million of 14% Senior
Discount Notes in 1996 for which the Company received net proceeds of $90.8
million (See" -- Liquidity and Capital Resources"). Interest income of $1.3
million for 1998 reflects a decreased average cash balance during 1998 compared
to 1997.

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

The Company had installed 1,840 terminals in 1,148 stores as of December
31, 1997 as compared to 623 terminals in 335 stores as of December 31, 1996.

Manufacturers promoting on the ILN system during the 1997 and 1996 periods
increased to 52 from 26, respectively, while total products promoted increased
to 116 from 84. Net sales during the year ended December 31, 1997, increased to
$708,000 from $341,000 in the 1996 period, primarily as a result of the larger
installed base of ILN terminals. During the three month period ended December
31, 1997, net sales increased to $188,000 from $168,000 in the same period in
1996.

Operating loss for the year ended December 31, 1997 was $35.4 million
versus an operating loss of $12.4 million in calendar 1996. The increased loss
was primarily due to higher employee costs, non-paid promotions, settlement
costs incurred to terminate an exclusive supplier contract, fixed asset
write-offs, legal fees and depreciation expense. Higher employee costs of
approximately $5.5 million represent an increase of 96 employees, from 99
employees at December 31, 1996 to 195 employees at December 31, 1997. Most of
the increase in headcount represents additional technology and field service
personnel to support the increase in number of terminals and stores installed.
Non-paid promotion expense increased by $4.3 million in the 1997 twelve-month
period, to $6.3 million from $2.0 million in the comparable 1996 period. During
the third quarter of 1997, the Company entered into preliminary negotiations
with Coleman, a parent of Thermo, to terminate an exclusive supply agreement
whereby Coleman was to fulfill the Company's anticipated terminal requirements
for a three-year period. Such negotiations led to execution of a mutual
termination agreement during the first quarter of 1998. As part of this mutual
termination agreement, the Company agreed to pay $4.5 million, in installments,
to pay balances on previously purchased ILN equipment, to acquire certain
inventory and to obtain early release from the exclusivity provision of the
original contract to allow the Company to pursue relationships with new vendors.
Of this amount, $4.1 million was charged to operating income during 1997 and
approximately $400,000 related to supplies and terminal parts acquired by the
Company in the agreement and is reflected in

other current assets as of December 31, 1997. The Company recorded approximately
$1.1 million of fixed asset write-offs during the year ended December 31, 1997,
primarily representing the disposal of obsolete assets. Legal expense, primarily
costs associated with patent litigation, increased by $1.1 million over the
comparable 1996 period (see Note 11 to Notes to Consolidated Financial
Statements). Depreciation expense increased by $2.7 million reflecting the
addition of approximately 1,200 terminals installed in 800 stores from December
31, 1996 to December 31, 1997. Fourth quarter 1997 operating loss of $13.2
million was $8.9 million higher than in the fourth quarter of 1996, primarily
reflecting additional headcount and expenses associated with increased
installations of terminals, the Coleman settlement of approximately $2.8 million
(approximately $1.3 million was recorded in the third quarter of 1997),
increased non-paid promotion expense of $2.0 million and higher depreciation
expense of $831,000.

Net loss for the year ended December 31, 1997 increased by approximately
$32.7 million from $17.1 million in the comparable 1996 period to $49.8 million
primarily due to higher operating losses of $23.0 million, increased non-cash
interest expense of $11.1 million and higher other expenses of $300,000, offset
by an increase in interest income of $1.6 million. Non-cash interest expense of
$18.0 million during the year ended December 31, 1997 reflects the interest
expense on the issuance of $142 million of 14% Senior Discount Notes on August
2, 1996 for which the Company received net proceeds of $90.8 million (See" --
Liquidity and Capital Resources"). Interest income of $3.9 million for 1997
reflects an increased average cash balance during 1997 versus the comparable
period in 1996. Net loss for the three month period ended December 31, 1997, was
$17.3 million, an increase of $10.0 million compared to the same three month
period in 1996 due to increased operating losses and interest expense of $8.9
million and $400,000, respectively, and lower interest income of $500,000.

LIQUIDITY AND CAPITAL RESOURCES

For the years ended December 31, 1998 and 1997, the three-month period
ended December 31, 1996, and the fiscal year ended September 28, 1996, cash used
in operating activities was $38.4 million, $22.2 million, $2.6 million, and $6.7
million, respectively. From inception to December 31, 1998, the Company has
generated minimal revenue yet incurred expenses related to the development of
its ILN technology, marketing the product and recruiting additional
personnel. The Company has funded its operations through private sales of
equity and debt securities.

From its inception to December 31, 1998, the Company's shareholders have
contributed approximately $46.8 million of equity to the Company through a
series of private offerings of Common Stock, the conversion of approximately
$2.0 million in stockholder debt to Common Stock and a private offering of
Preferred Stock.

The private offering of Preferred Stock began in July 1998 when the Board
of Directors authorized the sale of up to $40 million of Preferred Stock, first
to the Company's shareholders and then to other investors. The Preferred Stock
originally offered was convertible into Common Stock at a conversion rate of
$10.00 per share of Common Stock. As of December 31, 1998, the Company had
issued and sold 177,878 shares of Preferred Stock for gross proceeds of
approximately $17.8 million. In March 1999, the Board of Directors and
shareholders of the Company approved certain changes to the Preferred Stock and
the Board increased the aggregate offering of Preferred Stock to $70 million.
Such changes consisted of (i) a reduction in the conversion price from $10.00 to
$8.50 per share of Common Stock into which each share of Preferred Stock is
convertible, (ii) an increase in the number of votes per share of Preferred
Stock from 10 to the number of shares of Common Stock into which it is
convertible (initially 11.7647), (iii) accrual of dividends on the Preferred
Stock semi-annually, as opposed to quarterly, to be paid only in shares of
Preferred Stock and (iv) the addition of anti-dilution provisions. Such changes
are applicable to all shares of Preferred Stock issued prior to the effective
date of the changes and all additional shares of Preferred Stock to be issued in
the private offering. During the first quarter of 1999, the
Company issued and sold an additional 95,650 shares of Preferred Stock
representing additional gross proceeds of approximately $9.6 million. Included
within such shares were 75,000 shares sold to LJR Limited Partnership for an
aggregate purchase price of $7.5 million. In connection with such investment,
the Company has undertaken to raise an additional $12 million in
proceeds from the sale of Preferred Stock prior to June 30, 1999. The Company
presently has commitments from investors to purchase in excess of $12 million
of Preferred Stock and expects to sell additional shares of Preferred Stock in
the private offering.

In 1996, the Company consummated a private offering of debt securities (the
"Private Placement") for which it received net proceeds of approximately $90.8
million. The Private Placement consisted of 142,000 units representing $142
million in aggregate principal amount of 14% Senior Discount Notes Due 2003 (the
"Notes") and warrants (the "Warrants") to purchase initially an aggregate of
1,041,428 shares of Common Stock of the Company at $.01 per share. As of
September 30, 1997, a Qualifying Initial Public Offering (as defined in the
Notes) had not been completed and; as a result, the Warrants were then adjusted
to entitle respective holders to purchase an aggregate of 1,338,918 shares of
Common Stock at $.01 per share. Therefore, the Company recorded additional
Common Stock Purchase Warrants of $3.0 million reflecting the valuation of the
additional 297,492 shares, or 2.095 shares issuable per warrant. For a further
description of the Notes and Warrants, See Notes 6 and 8 to the Notes to
Consolidated Financial Statements included elsewhere herein. In January 1997,
the Company consummated an exchange offer (the "Exchange Offer"), whereby the
holders of the Notes issued in the Private Placement exchanged such Notes for
new Notes (the "Exchange Notes") that were registered under the Securities Act
of 1933, as amended. The Exchange Notes do not bear legends restricting the
transfer thereof.

In May 1998, the Company incurred, in connection with the acquisition of
certain intellectual property, a note payable in the amount of approximately
$6.0 million. This note, which bears interest at 5.5% per year, is payable on
June 1, 1999. If, prior to the

maturity of this note, the Company completes a qualifying initial public
offering of Common Stock, as defined, the note would then be convertible into a
number of shares of the Company's Common Stock, equal to the then-outstanding
principal balance and accrued interest divided by $60.00, with an additional
provision which would require the Company to pay, in cash or Common Stock, the
difference between the value of such Common Stock and $6.0 million. This note is
reflected as a current liability in the Company's consolidated balance sheet as
of December 31, 1998.

At December 31, 1998, the Company had working capital of $7.0 million,
compared to working capital of $38.5 million at December 31, 1997. Total cash
and cash equivalents at December 31, 1998 and December 31, 1997 was $14.2
million and $45.2 million, respectively. The Company's current level of
indebtedness, amounting to approximately $117.4 million, represents long-term
debt resulting from the Private Placement and the purchase of intellectual
property. Approximately $6.0 million of such indebtedness is due to be repaid
on June 1, 1999.

In the year ended December 31, 1998, cash used in investing activities was
$10.2 million, primarily reflecting disbursements for net capital expenditures
of $8.1 million. During the year ended December 31, 1998, the Company installed
approximately 888 terminals in approximately 700 stores. The Company estimates
its 1999 capital expenditures will be approximately $20.0 million, to be used
primarily for ILN equipment purchases.

In the year end December 31, 1997, the three-month period ended December
31, 1996 and the fiscal year ended September 28, 1996, cash used in investing
activities was $20.9 million, $2.6 million and $8.7 million, respectively.
Expenditures for ILN equipment was the primary use of funds in each of these
years.

Cash provided by financing activities during 1998 was $17.6 million
resulting primarily from the Preferred Stock issuance. Financing activities
during the year ended December 31, 1997 and the three month period ended
December 31, 1996 did not provide any cash to the Company. In the fiscal year
ended September 28, 1996, cash provided by financing activities was $108.8
million, reflecting net proceeds received of $90.8 million from the Private
Placement and $18.3 million received from the issuance of Common Stock.

The Company will require additional proceeds from the sale of Preferred
Stock and financing from other sources to fund capital expenditures, working
capital requirements and operating losses incurred in connection with the
increased commercialization of its ILN. The Company presently has commitments
from investors to purchase in excess of $12 million of Preferred Stock,
although no assurances can be given that such purchases will occur. The
Company also intends to raise additional equity capital from the Preferred
Stock offering. In addition, the Company has received several multi-year
equipment leasing proposals from leasing companies for future purchases of ILN
equipment. There is no assurance that such additional financing can be
obtained. In such event, the Company believes that existing cash and cash
equivalents, together with reduced or delayed operating and capital
expenditures, will be sufficient to meet the Company's operating requirements
into the first quarter of 2000. Because of the Company's early stage of
development and the risks inherent in its business, there are a number of
material uncertainties that could result in shortfalls in revenue. For
example, shortfalls could occur if the Company experiences delays in
installations of the ILN such that any growth in the network is delayed.

If additional funds are raised through the issuance of equity securities,
the percentage ownership of the stockholders may experience additional dilution,
or such equity securities may have rights, preferences or privileges senior to
the Common Stock.

If additional funds are raised through debt financing, such financing will
increase the financial leverage of the Company and earnings would be reduced by
the associated interest expense. The Indenture related to the Exchange Notes
permits the Company to incur additional indebtedness, subject to certain
limitations. There can be no assurance that additional financing will be
available when needed on terms favorable to the Company or at all. If adequate
funds are not available on acceptable terms, the Company may be unable to
continue its planned ILN installations, expand either the number and dollar
amount of Manufacturer commitments, or respond to competitive pressures, any of
which could have a material adverse effect on the Company's results of
operations and financial condition.

YEAR 2000 COMPLIANCE

Since 1996, the Company has been surveying, assessing, and remediating all
known date-sensitive equipment, software, systems, and business-critical service
vendors for year 2000 compliance. The project included both information
technology ("IT") and non-information technology. As an information service
provider, the Company considers its terminal network as integral to its IT
infrastructure and the compliance project treated all aspects of the network as
such. Non-IT technology was considered limited to building security and services
for the central and satellite offices and was addressed as a set of
business-critical service vendors. The survey and assessment phase is
substantially complete for all areas except for external vendors. The details of
each are discussed in the following paragraphs.

In July 1998, the Company completed its source code review of all in-house
software and has corrected all problems found. The changes are incorporated into
the software release currently in production. In parallel to the source code
review and remediation, the Company began a thorough test of all production
systems in July 1998. The tests included all components of the system, including
in-house software, third-party software, and client software. Operational
requirements caused a six-week delay in testing, now on track to complete the
second quarter of 1999. With testing 90% complete, it has so far found
relatively few problems that were not already identified by the source code
review and remediation. On-going compliance testing will be added to the
standard regression tests to ensure that system changes do not introduce
compliance issues.

The Company has completed its assessment of all central office and in-store
computer equipment and identified the systems that will require upgrades to
become year 2000 compliant. The largest problem area identified were
approximately 600 of approximately 4500 in-store computer systems that were not
compliant due to problems with the on-board firmware. All non-compliant systems
originated from a single computer vendor. The vendor has identified two software
patches that will effectively circumvent the firmware problems, one patch for
the terminal systems and one for the server systems. The company has tested and
is ready to deploy the patch required for the terminal systems. The vendor has
indicated that they will make the patch needed for the store server systems
available in the first quarter of 1999. As soon as the company has completed
testing the server patch, all affected stores will receive the patches within
two weeks.

The project identified 107 mission critical service vendors and has
contacted all to determine year 2000 compliance status. So far 28 have
responded. All vendors who responded indicated that they were not yet fully year
2000 compliant but were executing a plan to become so.

A total estimate for the conversion is $200,000, which is being expensed as
incurred. To date approximately $155,000 has been spent. Approximately $95,000
of the cost is related to reprogramming or replacing software; approximately
$45,000 is related to replacement or upgrade of hardware; and $60,000 is related
to project management and administrative expenses. All of those costs are being
funded through proceeds from the issuance of Preferred Stock. These costs are an
immaterial part of the Company's Technology Division. The company has not
deferred any information technology projects due to addressing the Year 2000
issue.

From the progress the compliance project has made to date, the Company does
not consider there to be significant risk from areas over which the Company has
direct control, such as hardware and software that makes up the Inter*Act
Loyalty Network'sm'. Although the Company anticipates minimal business
disruption as a result of Year 2000 issues, breakdowns in the service
infrastructure that supports the network could have an impact on operations.
Possible consequences include, but are not limited to, loss of communication
links with certain stores, loss of electric power to the central office or to
isolated store systems, inability to process transactions because of failure
in our retail clients' point of sales systems, and an inability to execute
purchases for new equipment, or engage in similar business activities.

To date, the Company has not established a contingency plan for possible
Year 2000 issues. Where needed, the Company will establish contingency plans
based on its actual testing experience with its vendor base and its assessment
of outside risk. The Company expect contingency plans to be in place by July 31,
1999.

RISK FACTORS

The information contained in this report should be read in conjunction with
the following factors.

LIMITED OPERATING HISTORY; SIGNIFICANT LOSSES; ACCUMULATED DEFICIT; FUTURE
LOSSES

The Company was incorporated in February 1993 and has concentrated its
efforts on the development, testing and deployment of the ILN, on
capital formation and on the recruitment of management and other key employees.
Accordingly, the Company has a limited operating history upon which an
evaluation of the Company and its prospects can be based. To date, the Company
has generated minimal operating revenue relative to its expenses, has incurred
significant losses and has experienced substantial negative cash flow from
operations. The Company had an accumulated stockholders' deficit of $92.6
million as of December 31, 1998 and has incurred net losses of $62.4 million
and $49.8 million for the years ended December 31, 1998 and 1997, respectively.
The Company expects to incur substantial additional costs to install and
operate additional ILN terminals and to sponsor selected promotions to
demonstrate the utility of the ILN to consumers, Retailers and Manufacturers.
The Company expended $4.5 million and $6.3 million for the years ended
December 31, 1998 and December 31, 1997, respectively, to sponsor promotions.
The Company will incur net losses in fiscal 1999 and may operate at a loss for
the foreseeable future. There can be no assurance that the Company will ever
be able to achieve profitability or, if achieved, sustain such profitability.

The Company's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in the early stages of
their development. To address these risks, the Company must, among other things,
effectively manage any growth that may occur, successfully commercialize its
product by securing new and renewal commitments from Manufacturers, respond to
competitive developments and attract and retain management and other key
personnel.

ABILITY TO OBTAIN BRAND CONTRACTS; LENGTHY SALES CYCLE

All or substantially all the Company's revenue is expected to be derived
for the foreseeable future from fees paid by Manufacturers that promote products
on the ILN. However, many Manufacturers currently participating in the ILN are
doing so at relatively low promotional dollar commitments to test the ILN's
effectiveness. Accordingly, the Company's future success will depend
substantially on its ability to establish, maintain and expand relationships
with Manufacturers to promote their products using the ILN. Moreover, it is
critical that the Company obtain additional commitments from Manufacturers of
major brands in the most popular consumer product categories, as it has recently
done with Procter & Gamble and General Mills, and to develop long-term
relationships with these Manufacturers in order to ensure that an appropriate
mix of products is displayed on the ILN.

In addition, the Company has experienced a lengthy sales cycle in marketing
the ILN to Manufacturers. In most cases, the time between initial contact with
the Manufacturer and the execution of the final contract, if any, exceeds five
months. The Company could fail to obtain such commitments or could experience
substantial delays in obtaining such commitments, and, once such commitments are
received, the Company could fail to maintain relationships through renewal
contracts. There can be no assurance that the Company will obtain additional
commitments on a timely basis from any Manufacturers and maintain long-term
relationships with these Manufacturers to participate in the ILN. Even if the
Company obtains initial commitments from additional major and other
Manufacturers, these contracts typically have had short-term durations, and
there can be no assurance that such Manufacturers will make the ILN a component
of their long-term promotional strategies. Any of the foregoing events could
result in the Company incurring substantially greater losses for a longer period
than expected and could have a material adverse effect on the Company's
business, results of operations and financial condition. As a result, even
short-term difficulties in implementing its strategies could have a material
adverse effect on its results of operations and financial condition.

In order to enhance its prospects of enrolling Manufacturers in the ILN,
the Company has elected in the past, and expects to elect in the future, to
sponsor from time to time, at its own cost, selected product promotions in
certain stores to continue to demonstrate the effectiveness of the ILN. Since
these promotional expenditures are classified as selling, general and
administrative expenses and are incurred

to attract Manufacturers and enhance future revenue, the Company's current
losses will be increased in the period of the expenditures and, if the expected
future revenue does not materialize, liquidity difficulties currently
experienced by the Company could become more significant. See " -Limited
Operating History; Significant Losses; Accumulated Deficit; Future Losses".

UNCERTAINTY OF MARKET ACCEPTANCE

Because the utility and the ultimate attractiveness of the ILN to
Manufacturers is substantially dependent on the number of shoppers using the
system, the number of stores in which the Company has installed its ILN
significantly affects its revenue generation potential. The Company's
profitability and the success of its growth plans will be significantly affected
by its ability to contract with additional Retailers for the installation of the
ILN and to install the system in such stores in a rapid and orderly manner.
While the Company has contractual commitments from 19 supermarket chains and one
pharmacy chain in the U.S. and Europe as of March 15, 1999, there can be no
assurance that Retailers who currently, or in the future, have ILN terminals
installed will retain the ILN in their stores or that the Company will be able
to continue to increase the number of stores in which the ILN is installed.

The Company also is dependent on the level of general acceptance and usage
by consumers. Consumer acceptance and usage are dependent on many factors, such
as actual and perceived ease of use, access to terminals during peak shopping
periods, reliability of the Company's ILN and perceived attractiveness of the
product offerings of the ILN. There can be no assurance that an adequate number
of consumers will use the ILN at a level sufficient to support the ILN on an
ongoing basis or at a level that will attract additional Manufacturers.

Inasmuch as demand by Manufacturers, Retailers and consumers is
substantially interrelated, any significant continuous lack or lessening of
demand by any one of these constituencies could have an adverse effect on
overall market acceptance. See Part I, Item 1. "Business -- Business Strategy".

MANAGEMENT OF GROWTH

The Company's rapid growth has placed, and is expected to continue to
place, significant pressure on the Company's managerial, operational and
financial resources. To manage its growth, the Company must continue to
strengthen its management, implement and improve its operational and financial
systems and expand, train and manage its employee base. The Company also will be
required to develop and manage multiple relationships with various customers,
business partners and other third parties. The Company's systems, procedures or
controls may not be adequate to support the Company's operations and Company
management may not be able to achieve the rapid expansion necessary to exploit
potential market opportunities for the Company's products and services. Any
significant problems in the Company's commercialization of the ILN could create
a negative image in the consumer product promotion and discounting business that
may be impossible to overcome. The Company's future operating results will also
depend on its ability to expand its sales and marketing and research and
development organizations, to implement and manage new distribution channels to
penetrate markets and to expand its support organization. The Company's failure
to manage growth effectively will have a material adverse effect on the
Company's business, operating results and financial condition.

RISKS RELATING TO SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS

The Company is highly leveraged with indebtedness that is substantial in
relation to its stockholders' equity. As of December 1998, the Company had an
aggregate of $117.4 million of indebtedness and stockholders' deficit of $92.6
million. See Part II, Item 6. "Selected Consolidated Financial Data."

The Company's high degree of leverage could have important consequences
including but not limited to the following: (i) the Company's ability to obtain
additional financing for capital expenditures, working capital, general
corporate purposes or other purposes (including potential acquisitions) may be
impaired in the future; and (ii) the Company's flexibility to adjust to changing
market conditions and ability to withstand competitive pressures could be
limited, and the Company may be more vulnerable to a downturn in general
economic conditions of its business, or be unable to carry out capital spending
that is important to its growth strategy.

Pursuant to an Indenture dated as of August 1, 1996 (the "Indenture"), the
Company issued $142 million principal amount at maturity of 14% Senior Discount
Notes Due 2003 (the "Notes"). The first payment of interest in the
amount of approximately $9.8 million is due February 2000. In 1998, the Company
incurred a note payable in the amount of approximately $5.7 million in
connection with the acquisition of certain intellectual property. The note
principal, together with accrued interest payable at 5.5% per year, is payable
on June 1, 1999.

The Company's ability to make scheduled payments or to refinance its
obligations with respect to the Notes and its other indebtedness will ultimately
depend on its financial and operating performance, which in turn is subject to
prevailing economic and competitive conditions and to certain financial,
business and other factors that may be beyond its control, including operating
difficulties, increased operating costs, product prices, the response of
competitors, regulatory developments and delays in implementing its strategy.
The Company's ability to meet its debt service and other obligations will depend
on the extent to which the Company can implement successfully its business
strategy of achieving large-scale commercialization of the ILN. There can be no
assurance that the Company will be able to implement fully its strategy or that
the anticipated results of its strategy will be realized. See Part I, Item 1.
"Business -- Business Strategy."

If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, seek to obtain additional equity capital, or
restructure its debt. There can be no assurance that the Company's cash flow and
capital resources will be sufficient for payment of interest on and principal of
its indebtedness in the future, or that any such alternative measures would be
available at reasonable costs or would permit the Company to meet its scheduled
debt service obligations. In the absence of adequate operating results and/or
capital resources, the Company could face substantial liquidity problems and
might be required to dispose of material assets or operations to meet its debt
service and other obligations, and there can be no assurance as to the timing of
such sales or the proceeds which the Company could realize therefrom.

NEED FOR ADDITIONAL FINANCING

The Company will need to procure additional financing, the amount and
timing of which will depend on a number of factors including the pace of
expansion of the Company's markets and customer base, services offered, and
development efforts and the cash flow generated by its operations. In the event
that such additional financing is not obtained, the Company believes that
existing cash and cash equivalents, along with reduced or delayed operating and
capital expenditures, will be sufficient to meet the Company's operating
requirements into the first quarter of 2000. See " -- Liquidity and Capital
Resources." The Indenture limits the ability of the Company to incur additional
indebtedness in certain circumstances. If additional funds are raised through
debt financing, such financing will increase the financial leverage of the
Company and earnings would be reduced by the associated interest expense. There
can be no assurance that additional financing will be available when needed on
terms favorable to the Company. Any future debt financing or issuance of
preferred stock by the Company would be senior to the rights of the holders of
Common Stock, and any future issuance of Common Stock would result in the
dilution of the then existing stockholders' proportionate equity interests in
the Company. If adequate funds are not available on acceptable terms, the
Company may be unable to continue its planned ILN installations, expand either
the number and dollar amount of Manufacturer commitments, or respond to
competitive pressures, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition.

DEPENDENCE ON THIRD PARTIES

The Company's success is dependent upon its ability to obtain and maintain
favorable contracts with Retailers and Manufacturers. The Company has derived
and will continue to derive substantially all its revenue from the participation
of Manufacturers on the ILN and from the operation of the ILN in supermarkets.
Any decrease in Manufacturers' promotional expenditures in general or the
decision of Manufacturers to promote their products through marketing strategies
that do not include the ILN could result in a smaller overall market for the
Company's services. The Company is also dependent on its suppliers of ILN
terminals and servers. In addition, the Company is dependent upon the condition
and performance of its Retailer partners. Consequently, factors affecting the
advertising and promotional strategy of Manufacturers or the condition of its
Retail partners or suppliers, such as labor disputes or supply problems, could
have a material adverse effect on the Company's business, results of operations
or financial condition.

COMPETITION

The consumer product advertising and promotional business is intensely
competitive. Many media outlets compete for the advertising and promotional
dollars Manufacturers spend to promote their products. The Company's services
compete against these media outlets, such as television, radio, newspapers and,
most directly, coupons. A number of new, electronic marketing products and
services also have been introduced, including electronic shelf markers,
computer-screen equipped shopping carts, battery-powered coupon dispensers,
electronic marketing networks, Internet coupons and frequent shopper programs.
A number of potential competitors have failed because of a lack of acceptance,
lack of capital, technical problems or a combination of these factors. While
the Company believes it provides a cost-effective targeted marketing service,
there are many factors a Manufacturer will take into account in allocating
advertising or promotional expenditures, and there can be no assurance that
the Company's services will compete effectively against alternative marketing
outlets. Most of the Company's competitors in the consumer product promotional
and advertising business are larger, possess significantly greater financial
resources and have longer operating histories than the Company. See Part I,
Item 1. "Business --Customers and Competition."

PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS

The Company's success and ability to compete are dependent upon its
proprietary systems and technology. The Company holds licenses to United States
patents which cover various aspects of its systems and methods of distributing
promotions, and the Company also has an additional patent application pending.
Inter*Act Loyalty Network'sm' is a service mark of the Company and an
application for federal registration of the mark is pending. However, it is
possible that patent rights held by the Company may be held invalid or that
disputes with third parties over the scope of licensed patents and other
proprietary rights may occur, including the Company's trademarks. Certain
aspects of the Company's services may not be adequately protected from
infringement or copying and there can be no assurance that the Company's
licensed patents or its trademarks would be upheld if challenged or that
competitors might not develop similar or superior processes or services outside
the protection of any patents licensed to the Company. In addition, litigation
may be necessary to enforce or protect the Company's intellectual property
rights or to defend against claims of infringement or invalidity. The Company
is presently in litigation with Catalina Marketing Corporation and its
affiliates with each side claiming infringement of its respective patents.
See Part I, Item 3. "Legal Proceedings". Misappropriation of the Company's
intellectual property or any potential litigation on the Company's rights to
its intellectual property could have a material adverse effect on the Company's
business, results of operations and financial condition. See Part I, Item 1.
"Business -- Intellectual Property Matters".

NEW MANAGEMENT; DEPENDENCE ON KEY EMPLOYEES

The Company's business operating results and financial condition depend in
significant part upon the continued contributions of its management and other
key technical personnel and sales people. Most of the Company's management and
sales force has been hired by the Company in the last eighteen months. The
Company's Senior Vice President, Chief Operating Officer and Chief Financial
Officer has served in such capacity since April 1997. From September 1996
through April 1997, he served as Chief Financial Officer. The Company's Senior
Vice President and Chief Technical Officer has served since October 1998 and its
Vice President of Brand Sales since February 1999. The Company's Chief Executive
Officer, Mr. Stephen Leeolou, was elected to such position on June 12, 1996.

An inability of new management and other recently hired employees of the
Company to adjust quickly to, and to perform as expected in, their respective
roles within the Company or an inability of the Company to attract and retain
employees with such skills could have a material adverse effect on the Company's
business, results of operations and financial condition. See Part III, Item 10.
"Directors and Executive Officers of the Company".

The Company is also highly dependent on certain key technical employees and
on its ability to recruit, retain and motivate high quality technical personnel.
All employment agreements entered into by the Company are terminable at will by
either party. See Part III, Item 10. "Directors and Executive Officers of the
Company". The Company's future success will depend on its ability to retain key
managers and employ additional qualified senior managers. Competition for such
personnel is intense and the inability to attract and retain additional
qualified employees or the loss of current key employees and managers could
materially and adversely affect the Company's business, results of operations
and financial condition.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company has experienced fluctuations in its quarterly operating results
and may continue to do so in the future. Some of the factors that may affect the
quarterly operating results of the Company include (i) the timing and nature of
expansion efforts in both new and existing markets, (ii) the introduction of new
products or services and the market response to those introductions, (iii)
relationships with Retailers, (iv) relationships with Manufacturers, (v)
seasonal trends, particularly in the retail grocery industry, (vi) changes in
pricing policies or service offerings, (vii) changes in the level of marketing
and other operating expenses to support future growth, (viii) the mix of product
and promotional offerings on the ILN, (ix) competitive factors and (x) general
economic conditions. Consequently, quarterly revenues and operating results may
fluctuate significantly, and the Company believes that period-to-period
comparisons of results will not necessarily be meaningful and should not be
relied upon as an indication of future performance.

RELATIONSHIP WITH DIRECTORS, OFFICERS AND PRINCIPAL SHAREHOLDERS; POTENTIAL
CONFLICTS OF INTEREST; CONTROL BY SIGNIFICANT SHAREHOLDER

The directors, officers and principal shareholders of the Company have
potential conflicts of interest in certain transactions with the Company and
between the Company and certain parties controlled by or otherwise related to
directors, officers or principal shareholders. These transactions include asset
purchases, private purchases of stock, loans to the Company, licensing of
proprietary rights, option grants, consulting agreements and other transactions.
See Part III, Item 13. "Certain Relationships and Related Transactions". In
addition, directors and officers of Vanguard who are also directors or officers
of the Company, including Stephen R. Leeolou, the Company's Chairman and Chief
Executive Officer, have certain fiduciary obligations to each organization.
Vanguard and directors and officers of Vanguard who are also directors and
officers of the Company are in positions involving the possibility of conflicts
of interest with respect to certain transactions concerning the Company. With
respect to future transactions, the Company currently has not adopted or
formulated any procedures to resolve conflicts of interest other than customary
board practices such as relying on the judgment of disinterested directors, when
appropriate.

As of March 31, 1999, Vanguard and certain of its officers and directors
who are also officers and directors of the Company owned beneficially
approximately 39% of the outstanding voting stock. As a result of the
relationship between Vanguard and the Company and this share ownership, Vanguard
has significant control over the Company and the conduct of its business. These
factors may have the effect of delaying, deferring or preventing a change in
control of the Company. In the second quarter of 1999, however, Vanguard is
expected to complete its merger with AT&T Corp. ("AT&T"). Although the voting
agreement that grants Vanguard six positions on the Company's Board of Directors
will terminate on such event, AT&T will succeed to Vanguard's ownership of the
Company's equity and debt securities. AT&T will then be the Company's largest
shareholder with approximately 26% of the Company's voting stock based on shares
outstanding as of March 31, 1999. Although the Company believes that having one
of the world's largest telecommunications company as a shareholder will be
positive to the Company, there can be no certainty as to the effects on the
Company that this ownership interest will have. See Part III, Item 10.
"Directors and Executive Officers of the Company" and Part III, Item 12.
"Security Ownership of Certain Beneficial Owners and Management".

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary financial information that are
required to be included pursuant to this Item 8. are listed in and follow the
Index to Financial Statements following Item 14 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth certain information about each of the
Company's executive officers and directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen R. Leeolou 43 Chairman of the Board of Directors, Chief Executive
Officer and Treasurer

Richard A. Vinchesi, Jr. 32 Senior Vice President, Chief Operating Officer and
Chief Financial Officer

Paul A. Nash 42 Senior Vice President, Director

Donald J. Anderson 52 Senior Vice President and Chief Technical Officer

Michael T. Leeolou 41 Vice President, Retail Services

Mary Braunsdorf 41 General Counsel and Secretary

Robert M. DeMichele 54 Director

William P. Emerson, Jr. 46 Director

Haynes G. Griffin 52 Director

Richard P. Ludington 52 Director

L. Richardson Preyer, Jr. 51 Director

Brian A. Rich 38 Director

Stuart S. Richardson 52 Director

Robert A. Silverberg 63 Director
</TABLE>

Stephen R. Leeolou has been a director of the Company since its inception
in 1993 and Chairman of the Board of Directors and Treasurer of the Company
since August 1995. In June 1996, Mr. Leeolou became Chief Executive Officer of
the Company. Mr. Leeolou is a co-founder, President and the Chief Executive
Officer of Vanguard and has served as an executive officer and director of
Vanguard since its inception in 1984. See Part III, Item 13. - "Certain
Relationships and Related Transactions". Stephen R. Leeolou is the brother of
Michael T. Leeolou.

Richard A. Vinchesi, Jr. has been Senior Vice President, Chief Operating
Officer and Chief Financial Officer of the Company since April 1997. He served
as Vice President and Chief Financial Officer of the Company from September 1996
to April 1997. Prior thereto, he served in various capacities in the Corporate
Finance department of Salomon Brothers Inc., most recently as a Vice President
in the Media Group.

Paul A. Nash has been a Senior Vice President and director of the Company
since its inception in 1993. In January 1999, Mr. Nash resigned from the Board
of Directors. From 1994 to January 1996, Mr. Nash was the Company's Chief
Operating Officer. Mr. Nash is presently serving as Senior Vice President of
Research and Development. Mr. Nash was Chairman and Chief Executive Officer for
Advanced Technical Services, Inc., a nationwide ATM manufacturing, maintenance
and support company from 1983 through 1992.

Donald J. Anderson has been Senior Vice President and Chief Technical
Officer of the Company since October 1998. Prior to joining the Company, he
served as Vice President - Information Services of Vanguard since 1995. In this
capacity, Mr. Anderson was responsible for all computer network and software
development operations. Prior to his position with Vanguard, Mr. Anderson was
Vice President - Development and Operations for Capital Data Systems from 1992
through 1995 and was responsible for development of paging and natural gas
billing systems.

Michael T. Leeolou has been Vice President, Retail Services of the Company,
since September 1996. From September 1995 through August 1996, Mr. Leeolou was a
Regional Sales Manager for Geotek Communications, Inc. From January 1990 through
August 1995 he was a Senior Account Executive with AT&T. Michael T. Leeolou is
the brother of Stephen R. Leeolou.

Mary Braunsdorf has been General Counsel of the Company since March 1998
and became Secretary in November 1998. Prior to joining the Company, Ms.
Braunsdorf served as corporate counsel for Timex Corporation since 1989 and also
served as Assistant Secretary for Timex and certain of its subsidiaries.

Robert M. DeMichele has been a director of the Company since 1995 and has
served as President, Chief Executive Officer and a director of Lexington Global
Asset Managers, Inc., a diversified financial services holding company, since
1995. Prior thereto, Mr. DeMichele was President, Chief Executive Officer and a
director of Piedmont Management Company, Inc., formerly the parent corporation
of Lexington Global Asset Managers, Inc. Mr. DeMichele also serves as a director
of Vanguard, Chartwell Reinsurance Co. and the Navigators Group, Inc.

William P. Emerson, Jr. has been a director of the Company since its
inception in 1993. During 1995, Mr. Emerson served as Chairman of the Company's
Board of Directors. Mr. Emerson has served as the President and Chief Executive
Officer of Wilmington Shipping Company since 1991. Wilmington Shipping Company
services the international trade community through various divisions that
provide steamship line agents, customs brokers and freight forwarders, and a
warehouse and container maintenance and repair station.

Haynes G. Griffin has been a director of the Company since its inception in
1993 and served as Chairman of the Board of Directors of the Company from 1993
through 1995. Mr. Griffin is a co-founder and Chairman of the Board of Vanguard
and has served as an executive officer and director of Vanguard since its
inception in 1984. Mr. Griffin is a member of the Board of Directors of
Lexington Global Asset Managers, Inc.

Richard P. Ludington has been a director of the Company since its inception
in 1993. Mr. Ludington is presently in the private practice of law. From 1996 to
1997, Mr. Ludington was Vice President-Real Estate of The ForestLand Group,
L.L.C., a timberland investment company. Prior thereto, Mr. Ludington served as
Southeast Regional Director for The Conservation Fund, a nonprofit organization
that creates partnerships with private and public sector corporations and
organizations to help protect America's outdoor environment.

L. Richardson Preyer, Jr. has been a director of the Company since its
inception in 1993. Mr. Preyer is a co-founder of Vanguard and has served as its
Vice Chairman of the Board, Executive Vice President and Treasurer since its
inception in 1983. Mr. Preyer is a cousin of Stuart S. Richardson.

Brian A. Rich has been a director of the Company since 1996. Mr. Rich is
currently a business consultant. From July 1995 through December 1998, Mr. Rich
served as Managing Director and Group Head of Toronto Dominion Capital, the U.S.
merchant bank affiliate of Toronto Dominion Bank. Prior thereto, Mr. Rich was a
managing director of the Communications Finance Group of Toronto Dominion Bank
in New York.

Stuart S. Richardson has been a director of the Company since 1995 and has
served as Chairman of Lexington Global Asset Managers, Inc., a diversified
financial services holding company, since 1995. Prior thereto, Mr. Richardson
was an executive of Piedmont Management Company, Inc., formerly the parent
corporation of Lexington Global Asset Managers, Inc., and served as its Vice
Chairman from 1986 to 1995. Mr. Richardson also serves as Vice Chairman of the
Board of Vanguard and as a director of Chartwell Reinsurance Co. Mr. Richardson
is a cousin of L. Richardson Preyer, Jr.

Robert A. Silverberg has been a director of the Company since 1996. Mr.
Silverberg served as Executive Vice President and Director of Vectra Bank from
1995-1998. Prior thereto, Mr. Silverberg was Chairman of the Board and President
of First Denver Corporation and Chairman of the Board of its subsidiary, First
National Bank of Denver. Mr. Silverberg was also the President and Chairman of
the Board of 181 Realty Company, a commercial real estate holding company and
from 1996 to 1998 served as a managing partner of Silverberg Investment Co.,
LLP. Mr. Silverberg has been a director of Vanguard since 1984.

<PAGE>

In addition to the officers of the Company mentioned above, Blair Jenkins
has been President and Chief Executive Officer of Inter*Act International
Holdings, Inc., the Company's subsidiary presently developing the Company's
United Kingdom business, since April 1997. From 1993 until joining the Company
in April 1997, he was a Chief Executive with Catalina Marketing U.K. Prior
thereto, he served as Senior Vice President Restaurant Operations with
Pepsico-Pizza Hut U.K. and Chief Executive of Allied Bakeries operating division
of Associated British Foods.

The Company's bylaws provide that the number of directors shall be not less
than seven nor more than 12, such number within the foregoing range to be fixed
from time to time by the Board of Directors or shareholders. The number is
presently fixed at 12, and there are presently three vacancies on the Board. The
holders of a majority of the Company's Common Stock have entered into a voting
agreement whereby Vanguard is entitled to designate six of the 12 directors
until such time as the Company has completed an initial public offering of its
Common Stock. This agreement is expected to terminate by its terms in the second
quarter of 1999 upon consummation of the merger between Vanguard and AT&T Corp.
Effective March 30, 1999, the holders of a majority of the Company's voting
stock entered into an separate agreement whereby LJR Limited Partnership is
entitled to designate one director. See Part III, Item 13. "Certain
Relationships and Related Transactions."

COMMITTEES

The Compensation and Stock Option Committee of the Board of Directors
consists of Messrs. Griffin (Chairman), Richardson, Preyer and Emerson. This
Committee recommends employee salaries and incentive compensation to the Board
of Directors and administers the Company's stock option plans.

The Audit Committee of the Board of Directors consists of Messrs.
Silverberg (Chairman), Emerson and Ludington. The Audit Committee makes
recommendations to the Board of Directors concerning its review of the Company's
internal controls and accounting system and its review of the annual audit, and
regarding the selection of independent auditors.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth all compensation paid by the Company to (i)
its Chairman of the Board and Chief Executive Officer and (ii) each of the four
most highly compensated individuals serving as executive officers of the Company
at the end of 1998 who received compensation in excess of $100,000
(collectively, the "Named Officers"), for services rendered in all capacities to
the Company during the periods indicated.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#)
- --------------------------- ---- ---------- --------- -----------
<S> <C> <C> <C> <C>
Stephen R. Leeolou, 1998 51,923 -- --
Chairman of the Board, Chief Executive Officer 1997 50,000 -- --
and Treasurer 1996 11,538 -- 192,600

Richard A. Vinchesi, Jr. 1998 160,962 20,000 100,000
Senior Vice President, Chief Operating Officer 1997 142,538 -- 52,000
and Chief Financial Officer 1996 33,157 15,000 48,000

Michael T. Leeolou 1998 138,327 35,000 80,000
Vice President, Retail Services 1997 -- -- 30,000
1996 -- -- 10,000

Paul A. Nash 1998 143,931 -- --
Senior Vice President 1996 138,600 -- --
1997 132,996 4,000 14,000

Thomas A. Manna 1998 150,577 77,500 --
Vice President National Sales 1997 105,962 155,000* 70,000
1996 -- -- --
</TABLE>

- ------------

* Of such amount, $100,000 represents a signing bonus payable to Mr. Manna
upon execution of an employment agreement.

Option Grants, Exercises and Holdings and Fiscal Year-end Option Values. The
following table summarizes all option grants during the year ended December 31,
1998 to the Named Officers.

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES TOTAL OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
GRANTED(#) 1998 (%) SHARE DATE
NAME ---------- ------------ --------- ----------
----
<S> <C> <C> <C> <C>
Stephen R. Leeolou -- -- -- --

Richard A. Vinchesi, Jr. 100,000 26% $10.00 04/19/08

Michael T. Leeolou 80,000 21% $10.00 04/19/08

Paul A. Nash -- -- -- --

Thomas A. Manna -- -- -- --
</TABLE>

(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation, mandated by rules
promulgated by the Securities and Exchange Commission, of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date, and are not intended to forecast possible future
appreciation, if any, in the price of the Company's Common Stock. The gains
shown are net of the option exercise price, but do not include deductions
for federal or state income taxes or

other expenses associated with the exercise of the options or the sale of
the underlying shares. The actual gains, if any, on the exercise of the
stock options will depend on the future performance of the Common Stock,
the option holder's continued employment through the option period and the
date on which the options are exercised.

No Named Officers exercised any stock options during 1998. The following
table sets forth information concerning all option holdings for the year ended
December 31, 1998, with respect to the Named Officers.

AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END 1998 OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT FISCAL OPTIONS AT FISCAL
ACQUIRED ON VALUE YEAR-END (#) YEAR-END($)(1)
EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME ------------ ------------ ------------------------- -------------------------
- ----
<S> <C> <C> <C> <C>
Stephen R. Leeolou 0 - 152,000 / 50,000 $688,700 / $225,000

Richard A. Vinchesi, Jr. 0 - 41,820 / 158,180 $ 48,000 / $ 72,000

Michael T. Leeolou 0 - 10,000 / 110,000 $ 18,000 / $ 27,000

Paul A. Nash 0 - 20,200 / 8,800 $ 97,000 / $ 41,000

Thomas A. Manna 0 14,000 / 56,000 $ 0 / $ 0
</TABLE>

- -----------

(1) There is no trading market for the Common Stock. Management estimated the
fair market value of the Common Stock to be $10.00 per share at December
31, 1998.

Stock Compensation Plans. The Company has a 1994 Stock Compensation Plan
that provides for the issuance of shares of Common Stock to key employees,
consultants and directors pursuant to stock options that meet the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (incentive stock
options), options that do not meet such requirements (nonqualified stock
options) and stock bonuses. All options under the plan must be granted at an
exercise price not less than fair market value. Stock bonuses may be in the form
of grants of restricted stock. No stock bonuses have been granted under the
plan. The aggregate number of shares of Common Stock that may be issued pursuant
to the plan may not exceed 330,000 shares, subject to adjustment upon occurrence
of certain events affecting the Company's capitalization. As of December 31,
1998, 22,900 shares remain available for future grants under the 1994 Stock
Compensation Plan.

The Company also has a 1996 Nonqualified Stock Option Plan that provides
for the issuance of shares of Common Stock to key employees, consultants and
directors pursuant to nonqualified stock options. All options must be granted at
an exercise price not less than $5.50 per share. The aggregate number of shares
of Common Stock that may be issued pursuant to the plan may not exceed 600,000
shares of Common Stock, subject to adjustment upon occurrence of certain events
affecting the Company's capitalization. As of December 31, 1998, 12,200 shares
remain available for future grants under the 1996 Nonqualified Stock Option
Plan.

The Company also has established the 1997 Long-Term Incentive Plan that
provides for the issuance of shares of Common Stock to officers, executive and
supervisory employees, directors or consultants pursuant to incentive and
nonqualified stock options, restricted and unrestricted stock awards and stock
appreciation rights. All options under the plan must be granted at an exercise
price not less than the fair market value of the Common Stock at the time of the
grant. No stock awards or stock appreciation rights have been granted under the
plan. The aggregate number of shares that may be issued pursuant to this plan
may not exceed 670,000 shares, subject to certain adjustments affecting the
Company's capitalization. As of December 31, 1998, 89,650 shares remain
available for future grants under this plan.

The foregoing plans are administered by the Compensation and Stock Option
Committee of the Board of Directors, which is authorized, subject to the
provisions of the Plan, to determine to whom and when options and bonuses may be
granted and the other terms and conditions of the grant.

DIRECTOR COMPENSATION

The directors of the Company were not compensated for their service as
directors during 1998.

EMPLOYMENT AND OTHER AGREEMENTS

All of the Company's employees, including the Named Officers, are employees
at will. Each of the Named Officers and each employee of the Company is required
to sign non-compete and non-disclosure agreements covering such items as
ownership and authorship of all work and materials, trade secrets, confidential
information, unfair business practices and covenants not to compete.

In connection with Mr. Manna's offer of employment in March 1997, the
Company and Mr. Manna entered into a letter agreement in which the Company
agreed to pay Mr. Manna a base salary of $145,000, a guaranteed $55,000
incentive pay amount in the first year of employment and a $100,000 incentive
pay amount in the second year of employment, contingent on reaching mutually
agreeable quarterly sales objectives. In addition, Mr. Manna was paid a one-time
signing bonus in the amount of $100,000 and was granted options to purchase an
aggregate of 70,000 shares of Common Stock at an exercise price of $10.00 per
share vesting over five years. Under the terms of his letter agreement, the
Company agreed to vest 50% of all unvested outstanding options that were granted
to Mr. Manna or 40,000 shares, whichever is greater, and to pay one year of
severance pay in the event Mr. Manna's employment was terminated by the Company
other than for cause within five years. In January 1999, Mr. Manna's employment
terminated. Pursuant to the terms of a severance and release agreement between
Mr. Manna and the Company, the Company agreed to continue Mr. Manna's annual
salary for a period of 12 months. The Company also agreed to pay $40,000 to Mr.
Manna as an incentive pay opportunity in equal monthly installments of $5,000.

In January 1999, the Company and Mr. Nash entered into an employment
agreement changing the terms of Mr. Nash's employment from at will status to a
contract employee terminable at the option of either party upon 30 days notice.
In connection with such agreement, Mr. Nash began a new position as Senior Vice
President--Patents and New Technology. Under this agreement, Mr. Nash receives a
base salary of $138,600 and the opportunity for bonuses.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Haynes G. Griffin, L. Richardson Preyer, Jr. and Stuart S. Richardson,
members of the Company's Compensation and Stock Option Committee, are
each directors of Vanguard and Messrs. Griffin and Preyer are also executive
officers of Vanguard. Stephen R. Leeolou, Chief Executive Officer of the
Company, also is a director and executive officer of Vanguard. Each of the
foregoing persons and Vanguard, as well as William P. Emerson, Jr., who is also
a member of the Compensation and Stock Option Committee, have provided capital
to the Company and engaged in related transactions. In addition, Vanguard has
provided and continues to provide certain services to the Company pursuant to
management services agreements. See Part III, Item 13. "Certain Relationships
and Related Transactions".

INDEMNIFICATION MATTERS

The North Carolina Business Corporation Act (the "Business Corporation
Act") provides for mandatory indemnification against reasonable expenses for a
director or officer who is wholly successful in the defense of any proceeding to
which he is a party because he is or was a director or officer of a corporation.
Additionally, as permitted by the Business Corporation Act, the Company's Bylaws
provide for indemnification of the Company's directors and Indemnified Officers
(executive officers who are also directors and any other officer, employee or
agent of the Company who is designated by the Board as an Indemnified Officer)
against any and all liability and expenses in any proceeding, including
reasonable attorneys' fees, arising out of their status or activities as
directors and officers, except for liability or litigation expense incurred on
account of activities that at the time taken were not in good faith or were
known or reasonably should have been known by such director or officer or
employee to be clearly in conflict with the best interests to the Company or
that such director or officer had reason to believe were unlawful.

At present, there is no pending litigation or proceeding involving any
director or officer, employee or agent of the Company where indemnification will
be required. The Company is not aware of any threatened litigation or proceeding
which may result in a claim for such indemnification.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL SHAREHOLDERS

The following table sets forth the beneficial ownership of the Company's
two classes of voting stock, the Common Stock and the 10% Series A Mandatorily
Convertible Preferred Stock (the "Preferred Stock") by each person known by the
Company to be the owner of 5% or more of the shares of each class, by each
person who is a director or Named Officer of the Company and by all directors
and executive officers of the Company as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (1)
-----------------------------
SHAREHOLDER COMMON STOCK PERCENT PREFERRED STOCK PERCENT
- ----------- ------------ ------- --------------- -------
<S> <C> <C> <C> <C>
Vanguard Cellular Operating Corp. (2) 2,944,381 33.47 80,000 29.25

Piedmont Acorn Investors Limited Partnership (3)(4) 786,286 10.17 30,522 11.16

Clearing Systems, Inc. (5) 816,902 10.57 0 -

Toronto Dominion Investments, Inc. 363,636 4.71 14,116 5.16

LJR Limited Partnership 0 - 75,000 27.42

Stephen R. Leeolou (6) 494,162 6.27 7,500 2.74

Michael T. Leeolou (7) 42,905 * 0 -

Paul A. Nash (8) 837,102 10.80 0 -

Richard P. Ludington (9) 113,567 1.47 1,000 *

William P. Emerson, Jr. (10) 300,337 3.86 0 -

Haynes G. Griffin (11) 374,762 4.83 1,250 *

L. Richardson Preyer, Jr. (4)(12) 381,762 4.91 5,000 1.83

Richard A. Vinchesi, Jr. (13) 57,780 * 0 -

Stuart S. Richardson (4)(14) 124,408 1.61 9,478 3.47

Robert A. Silverberg (15) 26,000 * 1,000 *

Robert M. DeMichele (4)(16) 73,500 * 0 -

Thomas A. Manna (17) 42,000 * 0 -

Brian A. Rich (18) 6,000 * 0 -

All Directors and Officers as a group (15 persons) (19) 2,815,472 34.31 25,228 9.22
</TABLE>

* Owns less than 1% of the total outstanding shares of class.

(1) Applicable percentage of ownership is based on outstanding shares of
Common Stock and Preferred Stock as of March 31, 1999. Beneficial ownership is
determined in accordance with the rules of the Commission and includes voting
and investment power with respect to securities. Shares of Common Stock issuable
under options or warrants currently exercisable or exercisable within 60 days of
March 31, 1999 are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options or warrants, but are not deemed
outstanding for purposes of computing the percentage of any other person. Except
for shares held jointly with a person's spouse or subject to applicable
community property laws, or as indicated in the footnotes to this table, each
stockholder identified in the table possesses sole voting and investment power
with respect to all shares shown as beneficially owned by such stockholder.

(2) Includes 900,113 shares of Common Stock that Vanguard has the right to
acquire at $23.50 per share under an amended and restated warrant. Also includes
169,722 shares of Common Stock that Vanguard has the right to acquire at $.01
per share under a warrant issued in the Private Placement. See Part III, Item
13. "Certain Relationships and Related Transactions". These shares may also be
deemed beneficially owned by Messrs. Stephen Leeolou, Griffin, Preyer and
Richardson, each of whom is a director and executive officer of Vanguard.

(3) These shares are owned of record by Piedmont Acorn Investors Limited
Partnership. Lunsford Richardson, Jr. is the general partner of Piedmont Acorn
Investors Limited Partnership and may also be deemed to beneficially own such
shares.

(4) The descendants of Lunsford Richardson, Sr., their spouses, trusts, and
corporations in which they have interests and charitable organizations
established by such descendants (collectively referred to as the "Richardson
Family") beneficially own approximately 1,281,548 shares, or 16.47%, of the
Common Stock and 45,000 shares, or 17.84%, of the Preferred Stock as of March
31, 1999. Such number of shares of Common Stock includes 786,286 shares owned by
Piedmont Acorn Investors Limited Partnership, 50,000 shares held by the Smith
Richardson Foundation, Inc., 50,000 shares held by Piedmont Harbor-Piedmont
Associates Limited Partnership, 256,254 shares held directly by L. Richardson
Preyer, Jr., 85,908 shares held in trusts for Mr. Preyer's children, and 39,600
and 13,500 shares which Mr. Preyer and Mr. Stuart S. Richardson, respectively,
have the right to acquire under presently exercisable options granted to them
under the Company's stock option plans. Such number of shares of Preferred
Stock includes 30,522 shares owned by Piedmont Acorn Investors Limited
Partnership, 9,478 shares held by Piedmont Harbor-Piedmont Associates Limited
Partnership and 5,000 shares held directly by L. Richardson Preyer, Jr., The
individuals and institutions constituting the Richardson Family have differing
interests and may not necessarily vote their shares in the same manner.
Furthermore, trustees and directors have fiduciary obligations (either
individually or jointly with other fiduciaries) under which they must act on
the basis of fiduciary requirements which may dictate positions that differ
from their personal interests.

(5) These shares are owned of record by Clearing Systems, Inc. ("CSI").
Paul A. Nash, an executive officer and former director of the Company, is a
principal shareholder of CSI and may also be deemed to beneficially own such
shares.

(6) Includes 152,000 shares of Common Stock that Mr. Stephen Leeolou has
the right to acquire under presently exercisable stock options granted to him
under the Company's stock option plans, includes 10,905 shares of Common Stock
held by trusts for the benefit of his children for which Mr. Michael T. Leeolou
serves as trustee. Such shares are also reported as beneficially owned by Mr.
Michael Leeolou. Does not include shares owned by Vanguard, for which Mr.
Leeolou serves as a director and executive officer. Mr. Stephen Leeolou
disclaims beneficial ownership of such shares.

(7) Includes 32,000 shares of Common Stock that Mr. Michael Leeolou has the
right to acquire under presently exercisable stock options granted to him under
the Company's stock option plans. Also includes 10,905 shares of Common Stock
held by trusts for the benefit of Mr. Stephen Leeolou's children for which Mr.
Michael Leeolou serves as trustee. Such shares are also reported as beneficially
owned by Mr. Stephen Leeolou.

(8) Includes 20,200 shares of Common Stock that Mr. Nash has the right to
acquire under presently exercisable stock options granted to him under the
Company's stock option plans. Also includes 816,902 shares of Common Stock owned
of record by CSI that may be deemed beneficially owned by Mr. Nash.

(9) Includes 18,000 shares of Common Stock that Mr. Ludington has the right
to acquire under presently exercisable stock options granted to him under the
Company's stock option plans and 17,113 shares of Common Stock held by a trust
for the benefit of his children.

(10) Includes 42,200 shares of Common Stock that Mr. Emerson has the right
to acquire under presently exercisable options granted to him under the
Company's stock option plans. Includes 30,000 shares of Common Stock held by a
trust for the benefit of his children, 5,000 shares of Common Stock held by an
entity controlled by Mr. Emerson, and 2,600 shares of Common Stock held by
members of his immediate family.

(11) Includes 32,600 shares of Common Stock that Mr. Griffin has the right
to acquire under presently exercisable options granted to him under the
Company's stock option plans, Includes 10,905 shares of Common Stock held in
trusts for the benefit of Mr. Griffin's children. Does not include shares owned
by Vanguard, for which Mr. Griffin serves as a director and executive officer,
and 85,702 shares of Common Stock owned by a partnership of which his brother is
general partner. Mr. Griffin disclaims beneficial ownership of such shares.

(12) Includes 39,600 shares of Common Stock that Mr. Preyer has the right
to acquire under presently exercisable options granted to him under the
Company's stock option plans. Includes 10,908 shares of Common Stock held in
trusts for benefit of Mr. Preyer's children. Such shares are also reported as
beneficially owned by Mr. Richardson. Does not include shares owned by Vanguard,
for which Mr. Preyer serves as a director and executive officer. Mr. Preyer
disclaims beneficial ownership of such shares.

(13) Includes 47,780 shares of Common Stock that Mr. Vinchesi has the right
to acquire under presently exercisable options granted to him under the
Company's stock option plans.

(14) Includes 10,908 shares of Common Stock held in trust for Mr. Preyer's
children for which Mr. Richardson serves as trustee. Such shares are also
reported as beneficially owned by Mr. Preyer. Includes 50,000 shares of Common
Stock held by the Smith Richardson Foundation, of which Mr. Richardson serves as
one of eight trustees and 50,000 shares of Common Stock and 9,478 shares of
Preferred Stock held by Piedmont Harbor-Piedmont Associates Limited Partnership,
of which Mr. Richardson is a general partner. The shares held by the Smith
Richardson Foundation are also reported as beneficially owned by Robert M.
DeMichele. Mr. Richardson disclaims beneficial ownership of the shares held by
such foundation and partnership. Does not include shares owned by Vanguard, for
which Mr. Richardson serves as Vice Chairman of the Board. Mr. Richardson
disclaims beneficial ownership of such shares. Includes 13,500 shares of Common
Stock that Mr. Richardson has the right to acquire under the presently
exercisable options granted to him under Company's stock option plans.

(15) Includes 6,000 shares of Common Stock that Mr. Silverberg has the
right to acquire under presently exercisable options granted to him under the
Company's stock option plans. The shares of Preferred Stock are owned of record
by an entity controlled by Mr. Silverberg.

(16) Includes 50,000 shares of Common Stock held by the Smith Richardson
Foundation, of which Mr. DeMichele serves as one of eight trustees. The shares
held by the Smith Richardson Foundation are also reported as beneficially owned
by Stuart S. Richardson. Mr. DeMichele disclaims beneficial ownership of the
shares held by such foundation. Includes 13,500 shares of Common Stock that Mr.
DeMichele has the right to acquire under presently exercisable options granted
to him under the Company's stock option plans.

(17) Includes 28,000 shares of Common Stock that Mr. Manna has the right to
acquire under presently exercisable options granted to him under the Company's
stock option plans.

(18) Does not include shares of Common Stock owned by Toronto Dominion
Investments, Inc., an affiliate of Mr. Rich's former employer, Toronto Dominion
Bank. Includes 6,000 shares of Common Stock that Mr. Rich has the right to
acquire under presently exercisable options granted to him under the Company's
stock option plans.

(19) Includes 478,380 shares of Common Stock that may be purchased under
presently exercisable options granted to directors and officers under the
Company's stock option plans.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company was incorporated in 1993 and in April of that year purchased
certain technology and other assets, including software and trademarks and
service marks under which the ILN was developed, and assumed certain
liabilities, of Clearing Systems, Inc. ("CSI") in exchange for 816,902 shares of
the Company's authorized Common Stock. CSI is a Delaware corporation founded in
1992 whose principal shareholders are Paul A. Nash, a director of the Company,
and Michael R. Jones, a former director of the Company. CSI was the shell
corporation under which certain of the Company's technology was first developed
and has had no business operation. On June 15, 1993, Mr. Jones assigned to the
Company his rights as licensee of certain patent rights, including the patent
presently used in the Company's business. See Part I, Item 1. "Business --
Intellectual Property Matters".

From time to time after such purchase, the Company has obtained capital for
its business by issuing shares of its Common Stock in private transaction and
directors, officers, and principal shareholders of the Company and members of
their immediate families and certain related entities have purchased shares. The
first of these transactions was consummated April 1993, whereby the Company
issued 1,999,998 shares of its Common Stock at a purchase price of approximately
$1.02 per share to certain individual investors including Messrs. Preyer,
Griffin, Leeolou, Emerson, and Ludington.

In connection with their April 1993 purchases of Common Stock, the initial
investors agreed to lend the Company and aggregate of $1.6 million. These loans
were made to the Company in 1994 and included loans made by the following
investors in the amounts indicated: Mr. Preyer, $196,722; Mr. Griffin, $196,722;
Mr. Leeolou, $196,722; Mr. Emerson, $177, 050; and Mr. Ludington, $65,574. Also
included were loans made by Alonzo Family Partners, Ltd., a limited partnership
owned by the brother of Haynes G. Griffin and certain members of the brother's
immediate family, which purchased part of an initial investor's interest and
agreed to fulfill a portion his loan commitment. The promissory notes issued for
such loans, bearing interest with rates from prime plus 2% to 15%, were
exchanged for 8.5% convertible notes in 1995 in the same principal amount and
with a conversion price of $5.00 per share.

In May 1995, Vanguard, purchased 400,000 shares of Common Stock of the
Company at a purchase price of $5.00 per share. In connection with such
purchase, Vanguard received a warrant to purchase up to an additional 10.27% of
the Common Stock of the Company (the "Vanguard Warrant"). The Vanguard Warrant
was restructured immediately prior to consummation of the Private Placement to
provide Vanguard with the right to buy 900,113 shares at any time before May 5,
2005 at $23.50 per share.

In October 1995, the Board of Directors approved a private offering of
Common Stock at a purchase price of $5.50 per share, pursuant to which $18.1
million of Common Stock was sold. The Purchasers included Mr. Preyer (45,454
shares), Mr. Griffin (45,454 shares), Mr. Leeolou (45,454 shares) Mr. DeMichele
(10,000 shares), Alonzo Family Partners, Ltd. (36,363 shares), Shipyard
Associates, a general partnership of which certain of Mr. Emerson's family
members and an entity affiliated with Mr. Emerson were general partners,
Vanguard (1,454,546 shares), Toronto Dominion Investments, Inc. ("TDI") (363,636
shares), and Piedmont Acorn Investors Limited Partnership (786,286 shares). In
connection with this offering, purchasers of $250,000 or more of Common Stock
received warrants to purchase a number of shares of Common Stock equal to 5% of
the shares purchased in the offering and purchasers of $1,000,000 or more of
Common Stock received warrants to purchase a number of shares of Common Stock
equal to 10% of the shares purchased in the offering. Purchasers of Common Stock
in this offering who were also purchasers of Common Stock in 1994 and earlier
1995 offerings (excluding Vanguard) were also offered warrants (at a purchase
price of $.01 per warrant share) to purchase Common Stock. The exercise price of
the warrants in this offering will equal the average sales price of the next $2
million of Common Stock issued and sold by the Company. Purchasers and
recipients of warrants in this offering included Mr. Preyer (2,773 shares), Mr.
Griffin (2,773 shares), Mr. Leeolou (2,773 shares), Mr. DeMichele (1,000
shares), Vanguard (145,455 shares), Piedmont Acorn Investors Limited Partnership
(78,629 shares), TDI (36,364 shares), Shipyard Associates (13,750 shares), Smith
Richardson Foundation, Inc. (2,500 shares) and Piedmont Harbor-Piedmont
Associates Limited Partnership (2,500 shares). These warrants expire on December
31, 2000.

On December 28, 1995, the Company issued to CSI a $375,000 note,
convertible into shares of Common Stock at the rate of $5.50 per share and
bearing interest at the rate of 8.5% per annum, in satisfaction of certain
obligations of the Company to CSI for consulting services rendered. In January
1996, at CSI's request the convertible note was partitioned and distributed to
certain creditors of CSI, including Mr. Nash ($90,000) and Mr. Jones ($216,000).
In connection with Mr.

Nash's agreement to assign his interest in a terminal design to the Company, Mr.
Nash's note was prepaid by the Company in January 1996.

Effective February 1, 1996, the holders of the 8.5% convertible notes
issued in 1995 converted the principal thereof into shares of Common Stock at
the conversion price of $5.00 per share and accepted Common Stock in lieu of
one-half of the accrued interest thereon at the rate of $5.50 per share. Shares
issued to converting noteholders pursuant to this conversion and interest
payment included the following: Mr. Preyer, 40,864 shares; Mr. Griffin, 40,864
shares; Mr. Leeolou, 40,864 shares; Mr. Emerson, 36,778 shares; Mr. Ludington,
13,620 shares; and Alonzo Family Partners, Ltd., 7,350 shares.

Effective May 31, 1996, other promissory notes issued in 1994 to Mr.
Emerson, Mr. Griffin, Mr. Leeolou, Mr. Preyer and Mr. Ludington, including
accrued interest, were exchanged for shares of the Common Stock at the rate of
$5.50 per share. Shares issued to exchanging noteholders pursuant to such
exchange included the following: Mr. Emerson, 11,169 shares; Mr. Griffin, 12,410
shares; Mr. Leeolou, 12,410 shares; Mr. Preyer, 12,410 shares; and Mr.
Ludington, 4,136 shares.

In June 1996, the Company entered into a management services agreement with
Vanguard for a two year term pursuant to which Vanguard agreed to provide
services to the Company from time to time to assist the Company in developing
accounting, human resources, information management, legal compliance, sales
training, research and development, business development and operation
procedures, and systems and programs. In 1996 and 1997, the Company issued an
aggregate of 20,000 shares of Common Stock to Vanguard as compensation for
services under this agreement. In June 1998, the Company and Vanguard entered
into a new management services agreement pursuant to which the Company agreed to
reimburse Vanguard a pro-rata portion of the salary and benefits paid by
Vanguard to its employees providing services to the Company at the Company's
request, based on their time devoted to the Company, plus Vanguard's
out-of-pocket expenses. For the fiscal years December 31, 1998, December 31,
1997 and September 28, 1996, the Company reimbursed Vanguard $78,000, $218,000
and $71,000, respectively, for services rendered to the Company.

In connection with their respective investments, Vanguard and TDI each
entered into agreements providing certain rights to have their shares of the
Company's Common Stock registered under the Securities Act. If the Company
proposes to make a registered public offering of any of its securities under the
Securities Act, other than certain specified types of offerings, the Company
will be obligated to give written notice of the proposed registration to
Vanguard and TDI. Upon receipt of such written notice of the proposed
registration, Vanguard and TDI will be entitled to request that all or a portion
of their Common Stock be included in such registration offering (a "Piggyback
Registration") except in certain specified circumstances. The agreements also
provide that, at any time after six months from the date the first registration
statement filed under the Securities Act by the Company becomes effective, the
shareholder is entitled to request registration for sale under the Securities
Act of all or a portion of its Common Stock (a "Demand Registration"), provided
that the shareholder shall not be entitled to request any Demand Registration
within the 12-month period immediately following the date of any previous
request for a Demand Registration. These rights to Piggyback and Demand
Registrations expire at such time as the recipient's shares subject to such
registration rights may be sold pursuant to Rule 144(k) of the Securities Act.

In August 1996, Vanguard purchased 18,000 of the Units sold in the Private
Placement.

In July 1998, the Board of Directors approved a private offering of
Preferred Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." In
October 1998, Vanguard purchased 80,000 shares of Preferred Stock for an
aggregate purchase price of $8 million.

Stephen R. Leeolou, Chief Executive Officer and Chairman of the Company, is
a co-founder of Vanguard and currently serves as its President and Chief
Executive Officer. Other directors of Vanguard are also directors of Inter Act
and, through a voting agreement with a majority of the Company's stockholders,
Vanguard is entitled to have six of its designees on the Company's Board of
Directors until such time as the Company effects an initial public offering of
its Common Stock or upon a change in control of Vanguard, which is expected to
occur in the second quarter of 1999 upon consummation of the merger of Vanguard
with AT&T Corp. See Part III, Item 10. "Directors and Executive Officers of the
Company".

In addition to Vanguard, Inter*Act has received, and expects to continue
receiving, substantial business development support from its other large
shareholders, including the Richardson Family, founders and former operators of
the consumer products company Richardson-Vicks, Inc., and TDI, a wholly owned
indirect subsidiary of Toronto Dominion Bank, which is one of the largest media
finance institutions in the world.

Stock options have been granted under the Company's stock option plans from
time to time the Company directors and officers. See Part III, Item 10,
"Directors and Executive Officers of the Registrant" and Part III, Item 11,
"Executive Compensation".

In March 1999, the Company and LJR Limited Partnership ("LJR") entered
into a stock purchase agreement for the sale of $7.5 million of Preferred
Stock. In connection with its investment, LJR was granted the right to have an
advisor attend meetings of the Board of Directors and committee meetings and
was also granted registration rights similar to those granted to Vanguard and
TDI. In addition, the Company and a majority of the holders of its voting
stock entered into an agreement pursuant to which LJR is entitled to designate
one director on the Company's Board of Directors. LJR's rights to its Board
representative and advisor terminates upon consummation of an initial public
offering of the Company's Common Stock.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K

(a) List of documents filed as part of this report:

1. The financial statements listed on page F-1.

2. All schedules are omitted because they are not applicable, not
required or the requested information is included in the Consolidated
Financial Statements or notes thereto.

3. Exhibits to this report are listed below and in the accompanying Index
to Exhibits.

*3(a)(2) Articles of Amendment of the Company, dated May 21, 1997 and
effective June 3, 1997, filed as Exhibit 3(a)(2) to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.

3(a)(3) Articles of Amendment of the Company, dated March 29, 1999.

3(b) Amended and Restated Bylaws of the Company.

*4(a)(1) Specimen Certificate of the Company's Common Stock, filed as
Exhibit 4(a) to the Company's Registration Statement on Form S-4
(No. 333-12091).

4(a)(2) Specimen Certificate of the Company's 10% Series A Mandatorily
Convertible Preferred Stock.

*4(b) Indenture dated August 1, 1996, between the Company and Fleet
National Bank, as trustee, relating to $142,000,000 in principal
amount of 14% Senior Discount Notes due 2003, filed as Exhibit
4(b) to the Company's Registration Statement on Form S-4
(No. 333-12091).

*10(a)(1) Shareholders' Agreement dated April 16, 1993, between the Company
and its shareholders, filed as Exhibit 10(m) to the Company's
Registration Statement on Form S-4 (No. 333-12091).

*10(a)(2) Amendment No. 1 to Shareholders' Agreement dated June 17, 1994,
between the Company and its shareholders, filed as Exhibit 10(n)
to the Company's Registration Statement on Form S-4 (No.
333-12091).

*10(a)(3) Registration Rights Agreement dated May 5, 1995, between the
Company and Vanguard Cellular Systems, Inc., filed as Exhibit
10(c) to the Company's Registration Statement on Form S-4 (No.
333-12091).

*10(a)(4) Amendment No. 1 to Registration Rights Agreement dated October
1995, between the Company and Vanguard Cellular Systems, Inc.,
filed as Exhibit 10(d) to the Company's Registration Statement on
Form S-4 (No. 333-12091).

*10(a)(5) Subscription Agreement dated October 1995, between the Company
and Vanguard Cellular Systems, Inc., filed as Exhibit 10(f) to
the Company's Registration Statement on Form S-4 (No. 333-12091).

*10(a)(6) Registration Rights Agreement dated March 1996 between the
Company and Toronto Dominion Investments, Inc., filed as Exhibit
10(e) to the Company's Registration Statement on Form S-4 (No.
333-12091).

*10(a)(7) Exchange and Registration Rights Agreement dated July 30, 1996,
between the Company and the Initial Purchasers, filed as Exhibit
10(o) to the Company's Registration Statement on Form S-4 (No.
333-12091).

*10(a)(8) Amended and Restated Common Stock Purchase Warrant granted to
Vanguard Cellular Operating Corp., filed as Exhibit 10(k) to the
Company's Registration Statement on Form S-4 (No. 333-12091).

*10(a)(9) Warrant Agreement dated August 1, 1996, between the Company and
Fleet National Bank, as Warrant Agent, filed as Exhibit 10(l) to
the Company's Registration Statement on Form S-4 (No. 333-12091).

*10(a)(10) Voting Agreement among the Company, Vanguard Cellular Operating
Corp. and certain shareholders dated as of November 1, 1996,
filed as Exhibit 10(ii) to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998.

10(a)(11) Amendment No. 1 to Voting Agreement among the Company, Vanguard
Cellular Operating Corp. and certain shareholders, dated
September 30, 1998.

10(a)(12) Form of Rights Offering Subscription Agreement for the Company's
10% Series A Mandatorily Convertible Preferred Stock.
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*10(b)(1) Company's 1994 Stock Compensation Plan, filed as Exhibit 10(i) to
the Company's Registration Statement on Form S-4 (No. 333-12091).

*10(b)(2) Form of Incentive Stock Option Agreement under the 1994 Stock
Compensation Plan, filed as Exhibit 10(k) to the Company's
Registration Statement on Form S-4 (No. 333-12091).

*10(b)(3) Company's 1996 Nonqualified Stock Option Plan, filed as Exhibit
10(g) to the Company's Registration Statement on Form S-4 (No.
333-12091).

*10(b)(4) Form of Nonqualified Stock Option Agreement under the 1996
Nonqualified Stock Option Plan, filed as Exhibit 10(h) to the
Company's Registration Statement on Form S-4 (No. 333-12091).

*10(b)(5) Company's 1997 Long-Term Incentive Plan, as amended, filed as
Exhibit 10(jj) to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1998.

*10(b)(6) Form of Incentive Stock Option Agreement to the 1997 Long-Term
Incentive Plan, filed as Exhibit 10(aa) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.

*10(b)(7) Form of Nonqualified Stock Option Agreement to the 1997 Long-Term
Incentive Plan, filed as Exhibit 10(bb) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.

*10(c)(1) Assignment of License Agreement dated June 15, 1993 among Gerald
Singer and Arthur Murphy as Licensors, Michael R. Jones as
Licensee and Network Licensing, Inc. as Assignee, filed as
Exhibit 10(q) to the Company's Registration Statement on Form S-4
(No. 333-12091).

*10(c)(2) Security Agreement dated June 16, 1993 between Michael R. Jones
and Network Licensing, Inc, filed as Exhibit 10(r) to the
Company's Registration Statement on Form S-4 (No. 333-12091).

*10(c)(3) Sublicense dated June 16, 1993 between Network Licensing, Inc.
and the Company, filed as Exhibit 10(s) to the Company's
Registration Statement on Form S-4 (No. 333-12091).

*10(c)(4) Settlement Agreement and Mutual General Release dated as of
September 6, 1994 among Gerald R. Singer, Arthur J. Murphy,
Lenora Singer, Joan Murphy, Network Licensing, Inc. and the
Company, filed as Exhibit 10(t) to the Company's Registration
Statement on Form S-4 (No. 333-12091).

*10(c)(5) Amended and Restated Patent Rights Assignment/Consulting
Agreement dated as of March 29, 1995 between Joseph F. Stratton
and the Company, filed as Exhibit 10(u) to the Company's
Registration Statement on Form S-4 (No. 333-12091).

*10(c)(6) Agreement Regarding Licensing matters dated as of January 22,
1996 among Michael R. Jones, Network Licensing, Inc. and the
Company, filed as Exhibit 10(v) to the Company's Registration
Statement on Form S-4 (No. 333-12091).

*10(c)(7) Letter Agreement dated July 22, 1996 between Gerald Singer,
Arthur J. Murphy and the Company, filed as Exhibit 10(w) to the
Company's Registration Statement on Form S-4 (No. 333-12091).

*10(c)(8) Assignment dated as of July 23, 1996 from Network Licensing, Inc.
to the Company, filed as Exhibit 10(x) to the Company's
Registration Statement on Form S-4 (No. 333-12091).

*10(c)(9) Patent License Agreement dated August 20, 1997, between the
Company and Coupco, Inc, filed as Exhibit 10(cc) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997 (Portions of this exhibit have been omitted pursuant to a
request for confidential treatment).

*10(c)(10) Patent Purchase Agreement dated May 22, 1998, between the
Company, Credit Verification Corporation and David W. Deaton,
filed as Exhibit 10(hh) to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998 (Portions of this exhibit
have been omitted pursuant to a request for confidential
treatment)

10(c)(11) Letter Agreement dated October 2, 1998 between Leona R. Singer,
Trustee under the Gerald And Leona R. Singer Family Trust, Arthur
J. Murphy and the Company.

*10(d)(1) Letter Agreement dated March 17, 1997 between the Company and
Thomas A. Manna, filed as Exhibit 10(ee) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.

10(d)(2) Severance and Release Agreement dated January 23, 1999 between
the Company and Thomas A. Manna.

*10(d)(3) Form of Employment, Noncompetition and Nondisclosure Agreement,
filed as Exhibit 10(aa) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.

10(d)(4) Employment Agreement dated January 7, 1999 between the Company
and Paul Nash.

*10(e)(1) Management Services Agreement dated June 17, 1998, between the
Company and Vanguard Cellular Financial, filed as Exhibit 10(kk)
to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1998.

*21 List of Subsidiaries of the Company, filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.

27 Financial Data Schedule.
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* Incorporated by reference to the statement or report indicated.

(b) Reports on Form 8-K.

The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the fourth quarter of 1998.

See (a)3 of this Item 14 for a listing of Exhibits filed as a part of this
Report.

(d) Additional Financial Statement Schedules.

None. Additional financial statement schedules are not filed herewith, as the
information required therein is either not applicable, or can be found in the
Consolidated Financial Statements or the Notes thereto.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT

Neither an annual report covering the Company's last fiscal year nor proxy
materials with respect to any annual or other meeting of security holders have
been sent to security holders. The Company currently anticipates that it will
send to security holders an annual report covering the year ended December 31,
1998 at a future date.

SIGNATURES

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

INTER*ACT SYSTEMS, INCORPORATED

By: /s/Richard A. Vinchesi, Jr.
-------------------------------------------------
RICHARD A. VINCHESI, JR., SENIOR VICE PRESIDENT,
CHIEF OPERATING OFFICER AND CHIEF FINANCIAL OFFICER

March , 1999

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Stephen R. Leeolou Chairman of the Board of Directors, March 31, 1999
........................................ Chief Executive Officer and
(STEPHEN R. LEEOLOU) Treasurer

/s/ Richard A. Vinchesi, Jr. Senior Vice President, Chief March 31, 1999
........................................ Operating Officer and Chief
(RICHARD A. VINCHESI, JR.) Financial Officer (principal
accounting and principal financial
officer)

/s/ Robert M. DeMichele Director March 31, 1999
........................................
(ROBERT M. DEMICHELE)

/s/ William P. Emerson, Jr. Director March 31, 1999
........................................
(WILLIAM P. EMERSON, JR.)

Director March , 1999

........................................
(HAYNES G. GRIFFIN)

/s/ Richard P. Ludington Director March 31, 1999
........................................
(RICHARD P. LUDINGTON)

/s/ L. Richardson Preyer, Jr. Director March 31, 1999
........................................
(L. RICHARDSON PREYER, JR.)

Director March , 1999

.......................................
(BRIAN A. RICH)

........................................ Director March , 1999
(STUART S. RICHARDSON)

........................................ Director March , 1999
(ROBERT A. SILVERBERG)
</TABLE>

INTER*ACT SYSTEMS, INCORPORATED
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended December 31, 1998 and 1997,
the three month period ended December 31, 1996 and the fiscal year ended September 28, 1996 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997,
the three month period ended December 31, 1996 and the fiscal year ended September 28, 1996 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1998 and 1997, the three month period ended December 31, 1996 and the
fiscal year ended September 28, 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To INTER*ACT SYSTEMS, INCORPORATED:

We have audited the accompanying consolidated balance sheets of Inter*Act
Systems, Incorporated (a North Carolina corporation) and subsidiaries as of
December 31, 1998 and December 31, 1997, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the years ended
December 31, 1998 and 1997, the three month period ended December 31, 1996 and
the fiscal year ended September 28, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Inter*Act Systems,
Incorporated and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years ended December 31, 1998
and 1997, the three month period ended December 31, 1996 and the fiscal year
ended September 28, 1996, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

New York, New York
March 30, 1999

F-2

INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,166 $ 45,211
Receivables, net 3,667 813
Other current assets 2,964 3,067
--------- ---------
Total current assets 20,797 49,091

Property, plant and equipment, net 28,102 26,900
Bond issuance costs, net 2,776 3,302
Patents, licenses and trademarks, net 8,771 1,687
Other noncurrent assets 45 43
--------- ---------
Total assets $ 60,491 $ 81,023
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,075 $ 3,204
Accrued expenses 3,016 6,870
Current portion of long-term debt 5,554 --
Deferred revenue 2,146 539
--------- ---------
Total current liabilities 13,791 10,613

Long-term debt, net of discount and current portion 111,819 91,406
--------- ---------
Total liabilities 125,610 102,019
--------- ---------
Common stock purchase warrants 27,436 27,436
--------- ---------
Commitments and contingencies (note 14)

Stockholders' equity (deficit):
10% Series A Mandatorily Convertible Preferred stock, no par value,
authorized 5,000,000 shares; 177,878 and 0 shares issued and outstanding at
December 31, 1998 and 1997, respectively 18,142 --
Common stock, no par value, authorized 20,000,000 shares; 7,728,555 shares issued
and outstanding at December 31, 1998 and 1997 28,251 28,251
Additional paid-in capital 768 768
Deferred compensation (416) (570)
Accumulated other comprehensive income (loss) (19) (14)
Accumulated deficit (139,281) (76,867)
--------- ---------
Total stockholders' equity (deficit) (92,555) (48,432)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 60,491 $ 81,023
========= =========
</TABLE>

The accompanying notes are an integral part of these
consolidated balance sheets.

F-3

INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTH FISCAL
YEAR ENDED PERIOD ENDED YEAR ENDED
---------- ------------ ----------
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 28,
1998 1997 1996 1996
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Gross sales $ 7,082 $ 1,672 $ 408 $ 492
Less: Retailer reimbursements (2,489) (964) (240) (287)
-------- -------- ------- --------
Net sales 4,593 708 168 205
-------- -------- ------- --------

Operating expenses:

Direct costs 10,216 5,784 939 2,298
Selling, general and administrative expenses 29,169 26,352 3,077 6,911
Depreciation and amortization of intangible assets 7,459 3,934 468 821
-------- -------- ------- --------
Total operating expenses 46,844 36,070 4,484 10,030
-------- -------- ------- --------

Operating loss (42,251) (35,362) (4,316) (9,825)
-------- -------- ------- --------

Other income (expense):
Interest income 1,338 3,892 1,249 1,009
Interest expense (21,147) (18,033) (4,263) (2,743)
Other expense -- (301) -- --
-------- -------- ------- --------
Total other expense (19,809) (14,442) (3,014) (1,734)
-------- -------- ------- --------

Loss before income taxes (62,060) (49,804) (7,330) (11,559)
Income taxes -- (10) -- --
-------- -------- ------- --------
Net loss (62,060) (49,814) (7,330) (11,559)

Preferred stock dividends accrued (354) -- -- --
-------- -------- ------- --------
Net loss attributable to common stock $(62,414) $(49,814) $(7,330) $(11,559)
======== ======== ======= ========

Per share information:
Net loss per common share:
Basic and Diluted $ (8.08) $ (6.48) $ (0.96) $ (1.91)
======== ======== ======= ========

Common shares used in computing per share amounts:
Basic and Diluted 7,729 7,692 7,669 6,038
======== ======== ======= ========
</TABLE>

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

F-4

INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTH FISCAL
YEAR ENDED PERIOD ENDED YEAR ENDED
---------- ------------ ----------
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 28,
1998 1997 1996 1996
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(62,060) $(49,814) $ (7,330) $ (11,559)
Items not affecting cash and cash equivalents:
Depreciation and amortization of fixed and intangible assets 7,985 3,934 468 821
Loss on disposal of assets 113 1,097 -- 74
Non-cash interest on discounted bonds 20,413 17,972 4,217 2,626
Equity in earnings of affiliate, net -- 301 -- --
Other items, net 156 319 38 381
Changes in working capital:
Receivables, net (2,854) (196) (373) (169)
Accounts payable and accrued expenses (3,883) 6,416 1,038 1,208
Other current assets 99 (2,260) (866) (255)
Deferred revenues 1,607 60 250 207
-------- -------- -------- ---------
Net cash used in operating activities (38,424) (22,171) (2,558) (6,666)
-------- -------- -------- ---------

Cash flows from investing activities:
Expenditures for property, plant and equipment (8,085) (20,110) (2,584) (8,739)
Proceeds from disposal of assets -- -- -- 57
Patent acquisition costs (2,090) (800) -- --
-------- -------- -------- ---------
Net cash used in investing activities (10,175) (20,910) (2,584) (8,682)
-------- -------- -------- ---------

Cash flows from financing activities:
Net proceeds from issuance of 14% Senior Notes -- -- -- 90,865
Long-term debt repayments (125) -- (32) (20)
Proceeds from common stock issuance, net -- -- -- 18,256
Proceeds from preferred stock issuance 17,688 -- -- --
Amount due (from) to related parties, net -- -- -- (339)
-------- -------- -------- ---------
Net cash provided by (used in) financing activities 17,563 -- (32) 108,762
-------- -------- -------- ---------
Foreign exchange effects on cash and cash equivalents
(9) (14) -- --
-------- -------- -------- ---------
Net (decrease) increase in cash and cash equivalents (31,045) (43,095) (5,174) 93,414

Cash and cash equivalents at beginning of period 45,211 88,306 93,480 66
-------- -------- -------- ---------
Cash and cash equivalents at end of period $ 14,166 $ 45,211 $ 88,306 $ 93,480
======== ======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 45 $ 39 $ 10 $ 94
======== ======== ======== =========
Supplemental disclosures of non-cash investing
and financing activities:
Deferred compensation related to stock options
granted $ -- $ -- $ -- $ 768
======== ======== ======== =========
Issuance of common stock in consideration of
certain obligations $ -- $ 600 $ -- $ 2,141
======== ======== ======== =========
Issuance of common stock purchase warrants in
connection with issuance of 14% Senior Discount Notes $ -- $ 2,972 $ -- $ 24,464
======== ======== ======== =========
Issuance of note payable for patent acquisition $ 5,679 $ -- $ -- $ --
======== ======== ======== =========
Dividends payable in preferred stock (Note 9 and 16) $ 354 $ -- $ -- $ --
======== ======== ======== =========
</TABLE>

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

F-5

INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
--------------- ------------ PAID-IN DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME(LOSS)
------ ------ ------ ------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 -- $ -- 3,931 $ 7,254 $ -- $ -- $ --
Issuance of common stock -- -- 3,329 18,311 -- -- --
Conversion of certain obligations to
common stock -- -- 409 2,086 -- -- --
Deferred Compensation related to
stock options granted -- -- -- -- 768 (768) --
Amortization of deferred compensation -- -- -- -- -- 6 --
Net loss -- -- -- -- -- -- --
------- -------- ------- --------- --------- ---------- ---------- -

Balance at September 28, 1996 -- -- 7,669 27,651 768 (762) --
Amortization of deferred compensation -- -- -- -- -- 39 --
Net loss -- -- -- -- -- -- --
------- -------- ------- --------- --------- ---------- ---------- -

Balance at December 31, 1996 -- -- 7,669 27,651 768 (723) --
Issuance of common stock -- -- 60 600 -- -- --
Amortization of deferred compensation -- -- -- -- -- 153 --
Net loss -- -- -- -- -- -- --
Other comprehensive income (loss) -
Foreign currency translation -- -- -- -- -- -- (14)
adjustment ------- -------- ------- --------- --------- ---------- ----------- -

Balance at December 31, 1997 -- -- 7,729 28,251 768 (570) (14)
Issuance of preferred stock 178 17,788 -- -- -- -- --
Issuance of common stock -- -- -- -- -- -- --
Preferred stock dividends accrued -- 354 -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- 154 --
Net loss -- -- -- -- -- -- --
Other comprehensive income (loss) -
Foreign currency translation -- -- -- -- -- -- (5)
adjustment ------- -------- ------- --------- --------- ---------- ---------- -

Balance at December 31, 1998 178 $ 18,142 7,729 $ 28,251 $ 768 $ (416) $ (19)
======= ======== ======= ========= ========= ======== =======

<CAPTION>
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY COMPREHENSIVE
DEFICIT (DEFICIT) INCOME (LOSS)
------- --------- -------------
<S> <C> <C> <C>
Balance at September 30, 1995 $ (8,164) $ (910)
Issuance of common stock -- 18,311
Conversion of certain obligations to
common stock -- 2,086
Deferred Compensation related to
stock options granted -- --
Amortization of deferred compensation -- 6
Net loss (11,559) (11,559) $ (11,559)
---------- ----------- =========

Balance at September 28, 1996 (19,723) 7,934
Amortization of deferred compensation -- 39
Net loss (7,330) (7,330) $ (7,330)
---------- ----------- =========

Balance at December 31, 1996 (27,053) 643
Issuance of common stock -- 600
Amortization of deferred compensation -- 153
Net loss (49,814) (49,814) $ (49,814)
Other comprehensive income (loss) -
Foreign currency translation -- (14) (14)
adjustment ---------- ----------- -----------

Balance at December 31, 1997 (76,867) (48,432) $ (49,828)
Issuance of preferred stock -- 17,788 =========
Issuance of common stock -- --
Preferred stock dividends accrued (354) --
Amortization of deferred compensation -- 154
Net loss (62,060) (62,060) $ (62,060)
Other comprehensive income (loss) -
Foreign currency translation -- (5) (5)
adjustment ---------- ----------- ------------

Balance at December 31, 1998 $ (139,281) $ (92,555) $ (62,065)
========== ========= =========
</TABLE>

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

F-6

INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997, THE THREE MONTH PERIOD ENDED
DECEMBER 31, 1996 AND FOR THE FISCAL
YEAR ENDED SEPTEMBER 28, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND PER NOTE DATA)

1. BUSINESS DESCRIPTION

Inter*Act Systems, Incorporated ("Inter*Act" or the "Company") operates
one of the nation's largest electronic marketing networks linked to
supermarket retailers' loyalty card databases that can reach shoppers both
in-store and on the Internet. The Company's patented technologies enable
consumer products manufacturers ("Manufacturers") and supermarket retailers
("Retailers") to use historical purchase behavior data to deliver
shopper-specific purchase incentives and messages to customers moments before
shopping begins. The Company's proprietary system, called the Inter*Act Loyalty
Network'sm' ("ILN"), comprises over 2,700 server-based Smart Terminals'TM'
located inside the front entrance of more than 20 retail chains in the U.S. and
Europe, as well as a recently launched Company-owned Internet web site called
"Shopper Perks'sm'". The Smart Terminals'TM' are linked directly to each store's
point-of-sale scanning system via Company-owned in-store servers. This
in-store network allows Shopper Perks'sm' to offer consumers, in selected
markets at this time, the only commercial scale at-home/in-store electronic
platform for shopper incentives available the same day and directly at the
cash register. No paper is required at any time. This fully automated process
virtually eliminates the misredemption and fraud associated with paper
coupons, estimated by industry sources to cost manufacturers hundreds of
millions of dollars per year.

Certain factors could affect Inter*Act's actual future financial
results. These factors include: (i) the Company's limited operating history,
significant losses, accumulated deficit and expected future losses, (ii) the
dependence of the Company on its ability to establish, maintain and expand
relationships with manufacturers to promote brands on the ILN and the
uncertainty of market acceptance for the ILN, (iii) the uncertainty as to
whether the Company will be able to manage its growth effectively, (iv) the
early stage of the Company's products and services and technical and other
problems that the Company has experienced and may experience, (v) risks related
to the Company's substantial leverage and debt service obligations, (vi) the
Company's dependence on third parties, (vii) the intensely competitive nature of
the consumer product and promotional industry and (viii) risks that the
Company's rights related to patents, proprietary information and trademarks may
not adequately protect its business (See Note 14 for a description of litigation
concerning intellectual property).

From inception to December 31, 1998, the Company has not had
significant revenues, has incurred recurring losses and has experienced negative
operating cash flow, and there is no assurance that the product the Company has
developed will achieve widespread success in the marketplace. In addition to
increasing its revenues, the Company intends to raise additional equity or debt
capital to fund its ongoing expansion plans. There is no assurance that such
additional financing can be obtained. In the event that such additional
financing is not obtained, the Company believes that existing cash and cash
equivalents, cash received from sales of preferred stock
since December 31, 1998 (See Note 16) and reduced or delayed operating and
capital expenditures will be sufficient to meet the Company's operating
requirements into the first quarter of 2000.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The financial statements include the consolidated accounts of the
Company and its wholly-owned subsidiaries: Network Licensing, Inc. ("NLI"),
Inter*Act International Holdings, Inc. ("Inter*Act International"), Inter*Act
Holdings Limited, ("Inter*Act Holdings") and Inter*Act U.K. Limited ("Inter*Act
U.K."). Inter*Act International, Inter*Act Holdings and Inter*Act U.K. were
incorporated during 1997. All intercompany accounts and transactions have been
eliminated in consolidation.

F-7

FISCAL YEAR

On February 13, 1997, the Company elected to change its fiscal year end
from the last Saturday in September to December 31, effective December 31, 1996.
The Company's 1996 fiscal year ended on the Saturday closest to September 30.
The financial statements for fiscal 1996 contain activity for fifty-two weeks.

REVENUE RECOGNITION

REDEMPTION-BASED

During 1996, 1997 and most of 1998, the Company recognized revenue as
electronic discounts are redeemed at store cash registers. Manufacturers pay a
fee to the Company for each redemption. The fee is composed of (i) a retailer
processing fee, (ii) a redemption fee and (iii) the face value of the coupon.
The Company, in turn, passes through both the retailer processing fee, which is
included in direct operating expenses, and the face value of the coupon to the
Retailer, while retaining the redemption fee. The Company records as net sales
the redemption fee and the retailer processing fee paid by the Manufacturers.

FIXED FEE ARRANGEMENTS

Beginning in 1998, the Company also has arrangements with Manufacturers
whereby the Company receives a fixed payment over a fixed period. In these
cases, the Company recognizes revenue on a ratable basis over the fixed period
during which they are providing service or exclusivity to the Manufacturers, as
well as the retailer processing fee paid by the Manufacturers.

DEFERRED REVENUE

CASH AND CASH EQUIVALENTS

Cash and cash equivalents, which at December 31, 1998 and December 31,
1997 were primarily comprised of money market funds and overnight repurchase
agreements, are stated at cost, which approximates market value. Highly liquid
investments with original maturities of three months or less are considered cash
equivalents.

RECEIVABLES, NET

Accounts receivable included in current assets are stated net of
allowances for doubtful accounts of approximately $127 and $30 at December 31,
1998 and 1997, respectively. The Company recorded approximately $80, $30 and $10
for bad debt expense for the years ended December 31, 1998 and 1997 and the
three month period ended December 31, 1996, respectively. The Company did not
record an allowance for doubtful accounts or bad debt expense for the fiscal
year ended September 28, 1996.

F-8

PROPERTY, PLANT AND EQUIPMENT

Depreciation is generally provided on the straight-line method for
financial reporting purposes over the estimated useful lives of the underlying
assets. Machinery and equipment are depreciated over a period ranging from 3 to
5 years and leasehold improvements are amortized using the straight-line method
over the term of the lease or the estimated useful life of the improvements,
whichever is shorter. In-store machinery and equipment are depreciated over five
years. Repairs and maintenance are charged to expense as incurred.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs incurred by the Company are included in
selling, general and administrative expenses. Such costs for the years ended
December 31, 1998 and 1997, the three month period ended December 31, 1996 and
the fiscal year ended September 28, 1996 were $297, $646, $121 and $800,
respectively.

BOND ISSUANCE COSTS

Bond issuance costs incurred by the Company are costs associated with a
private placement offering of 14% Senior Discount Notes during fiscal 1996 (the
"Private Placement") (See Note 6) and are being amortized over seven years using
the effective interest rate method. Accumulated amortization was $1,160 and $633
at December 31, 1998 and 1997, respectively. The Company recorded amortization
expense on the bond issuance costs of $526, $464, $102 and $67 for the years
ended December 31, 1998 and 1997, the three month period ended December 31, 1996
and the fiscal year ended September 28, 1996, respectively.

PATENTS, LICENSES AND TRADEMARKS

Acquisition costs for patents, licenses and trademarks and legal fees
incurred for the improvement and protection of the Company's patents, licenses
and trademarks have been deferred and are being amortized over fifteen years or
the remaining life of the patent, license or trademark, whichever is less, using
the straight-line method. Accumulated amortization was $780 and $95 at December
31, 1998 and 1997, respectively. The Company recorded amortization expense
related to patents, licenses and trade marks of $686, $131, $10 and $22 for the
years ended December 31, 1998 and 1997, the three month period ended December
31, 1996 and the fiscal year ended September 28, 1996, respectively.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of foreign entities have been translated using
the exchange rates in effect at the balance sheet dates. Results of operations
of foreign entities are translated using the average exchange rates prevailing
throughout the period. Local currencies are considered functional currencies of
the Company's foreign operating entities. Translation effects are accumulated as
part of the cumulative foreign translation adjustment, which is reflected in
equity as accumulated other comprehensive income (loss). Gains and losses from
foreign currency transactions are included in net loss for the period. The
Company did not incur material foreign exchange gains or losses during any
period presented. The Company has not entered into any derivative transactions
to hedge foreign currency exposure.

F-9

LONG-LIVED ASSETS

The Company accounts for long-lived assets according to Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This standard
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes. It also requires the company
to adjust its deferred tax balances in the period of enactment for the effect of
enacted changes in tax rates and to provide a valuation allowance against such
deferred tax assets that are not, more likely than not, to be realized.

STOCK-BASED COMPENSATION

The Company has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," by continuing to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," while providing the required pro forma disclosures as if the fair
value method had been applied (See Note 13). Under APB 25, the Company does not
recognize compensation expense for options granted to employees which are
granted at exercise prices which equal or exceed fair market value on the date
of grant.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company calculates the fair value of financial instruments and
includes this additional information in the notes to financial statements when
the fair value is different than the book value of those financial instruments.
When the fair value approximates book value, no additional disclosures is made.
The Company uses quoted market prices whenever available to calculate these fair
values. When quoted market prices are not available, the Company uses standard
pricing models for various types of financial instruments which take into
account the present value of estimated future cash flows. At December 31, 1998,
the carrying value of all financial insturments approximated fair value, with
the following exceptions:

14% Senior Discount Notes (See Note 6): Management of the Company
does not believe that the recent transaction in which the Company
repurchased Notes is indicative of the fair market value of the
Notes. There is no regular market for the Notes, nor is there a
readily-available market value, which management of the Company
believes does differ materially from the carrying value of
$111,819.

Common Stock Purchase Warrants (See Notes 6 and 8): Based on
recent equity transactions (See Note 16), the Common Stock
Purchase Warrants with a carrying value of $27,436 have an implied
market value of $11,367.

F-10

NET LOSS PER SHARE

Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share" (See Note 10). In accordance with SFAS No. 128, net loss
per common share amounts ("basic EPS") were computed by dividing net loss by the
weighted average number of common shares outstanding and contingently issuable
shares (which satisfy certain conditions) and excluded any potential dilution.
Net loss per common share amounts, assuming dilution ("diluted EPS"), were
computed by reflecting potential dilution from the exercise of stock options and
warrants. SFAS No. 128 requires the presentation of both basic EPS and diluted
EPS on the face of the income statement. Net loss per share amounts for the same
prior-year periods have been restated to conform with the provisions of SFAS No.
128; however, the result of that restatement was not material. In all periods
presented, the impact of convertible preferred stock (See Note 9), stock options
and warrants was anti-dilutive, and basic and diluted EPS are the same.

COMPREHENSIVE INCOME (LOSS)

During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which requires companies to report all changes
in equity during a period, except those resulting from investments by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income is the total of net income and all other nonowner changes
in equity (or other comprehensive income) such as unrealized gains/losses on
securities classified as available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of annual financial
statements. The Company has chosen to disclose comprehensive income (loss),
which for 1998 and 1997 includes its net loss and foreign currency translation
adjustments, in the accompanying consolidated statements of stockholders'
equity. For the period ended December 31, 1996 and the fiscal year ended
September 28, 1996, the Company's comprehensive losses were the same as its net
losses.

SEGMENT REPORTING

Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." Pursuant
to this pronouncement, reportable operating segments are determined based on the
Company's management approach. The management approach, as defined by SFAS No.
131, is based on the way that the chief operating decision maker organizes the
segments within an enterprise for making operating decisions and assessing
performance. The Company's results of operations are reviewed by the chief
operating decision maker on a consolidated basis and the Company operates in
only one segment. The Company has presented required geographical segment data
in Note 15, and no additional segment data has been presented.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets (specifically with
respect to the lives of in-store machinery and equipment) 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.

F-11

RECLASSIFICATIONS

Certain prior year financial statement amounts have been reclassified
to conform with the current year presentation.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - NEW ACCOUNTING PRONOUNCEMENT

In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.

SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998). While the Company operates in international markets, it does so
presently without the use of derivative instruments, and does not expect the
impact of the adoption of this standard to be material with reference to
derivatives. The impact of the adoption of this pronouncement on the Company's
accounting for Common Stock Purchase Warrants (See Notes 6 and 8) may, however,
be material depending on the fair value of these warrants at the date of
adoption.

3. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consisted of the following:

DECEMBER 31,
------------
1998 1997
---- ----

<S> <C> <C>
Land and buildings $ 87 $ 77
Machinery and equipment
In-Store 32,637 28,383
Other 6,708 3,067
---------- ----------
Total machinery and equipment 39,345 31,450
---------- ----------
39,432 31,527
Less: accumulated depreciation (11,330) (4,627)
---------- ----------
Property, plant and equipment, net $ 28,102 $ 26,900
========== ==========

</TABLE>

Depreciation expense was approximately $6,773, $3,800, $456 and $786
for the years ended December 31, 1998 and 1997, the three month period ended
December 31, 1996 and the fiscal year ended September 28, 1996, respectively.

F-12

4. LEASES

The Company leases office facilities and equipment under various
operating lease agreements expiring through year 2003. Future minimum lease
payments under noncancelable operating leases at December 31, 1998 were as
follows:

OPERATING LEASE
COMMITMENTS

<S> <C>
1999 $ 1,244
2000 743
2001 444
2002 316
2003 305
Thereafter 1,664

</TABLE>

Rent expense of $476, $383, $57 and $222 was recognized for the years
ended December 31, 1998 and 1997, the three month period ended December 31, 1996
and the fiscal year ended September 28, 1996, respectively, and is included in
selling, general and administrative expenses.

5. RELATED PARTY TRANSACTIONS

On April 14, 1993, in connection with its organization, the Company
entered into an agreement with Clearing Systems, Inc. ("CSI"), a Delaware
corporation, whereby approximately 817,000 shares of the Company's common stock
were exchanged for certain assets, consisting primarily of acquired technology
and research and development, at the then estimated fair market value of $612,
and assumption of certain liabilities of CSI. The agreement provided that CSI
would consult on matters pertaining to the Company's technology, vendor
relations, customer contacts and strategic planning and be paid a fee when, and
if, the Company installed 50 ILN terminals or achieved $1,000 in revenues.
During December 1995, in anticipation of the Company's limited cash resources,
the parties amended the consulting agreement to provide that CSI would receive a
$375 note, convertible into shares of the Company's common stock at a rate of
$5.50 per share and bearing interest at the rate of 8.5% per annum, in
satisfaction of the amounts due under the consulting agreement. The Company
repaid $139 of the note in 1997 and the remaining portion of $236 in 1998. The
entire consulting fee of $375 was recorded as an expense during the fiscal year
ended September 28, 1996.

The Company is party to various agreements with Vanguard Cellular
Systems, Inc. (together with its subsidiaries, "Vanguard"). As of December 31,
1998, Vanguard has beneficial ownership of approximately 1.9 million shares of
the Company's common stock, 80,000 shares of the Company's preferred stock and
18,000 units issued in the Private Placement (See Note 6). The Company's
Chairman and Chief Executive Officer is also co-founder, President and Chief
Executive Officer of Vanguard. Six of the Company's directors are also directors
of Vanguard.

F-13

On June 17, 1996, the Company entered into a two-year management
services agreement with Vanguard. Under the agreement, Vanguard agreed to assist
the Company in developing accounting, human resources, information management,
legal compliance, sales training, research and development, business development
and operations procedures, systems and programs. For services rendered under the
agreement, the Company issued 10,000 shares of its common stock upon execution
of the agreement and issued 10,000 shares in June 1997. In addition, the Company
agreed to reimburse Vanguard for any expenses incurred in the course of
providing consulting services. This agreement terminated a previous consulting
agreement with Vanguard dated January 30, 1996. On June 18, 1998 the Company and
Vanguard entered into a new one-year management services agreement similar to
the one just expired, pursuant to which the Company agreed to reimburse Vanguard
a pro-rata portion of the salary and benefits paid by Vanguard to its employees
providing services to the Company at the Company's request, based on their time
devoted to the Company plus Vanguard's out-of-pocket expenses. This agreement
does not cover the services provided by the Company's Chief Executive Officer or
provide for the issuance of stock to Vanguard. Pursuant to the management
services agreements, the Company has paid Vanguard approximately $78, $218, $42
and $29 during the years ended December 31, 1998 and 1997, the three month
period ended December 31, 1996 and the fiscal year ended September 28, 1996,
respectively.

In May 1995, the Company issued 400,000 shares of common stock to
Vanguard at a purchase price of $5.00 per share. In connection with this
issuance, Vanguard also received a warrant (the "Vanguard Warrant") to purchase
up to an additional 400,000 shares of the Company's common stock at the
agreed-upon fair market value of such stock at the time of exercise. The terms
of the Vanguard Warrant were restructured immediately prior to the consummation
of the Private Placement (See Note 6) to provide that Vanguard has the right to
buy 900,113 shares at any time before May 5, 2005 at $23.50 per share, which
was, in the opinion of management, the fair market value of the related common
stock at the date of restructuring. The restructured Vanguard Warrant also
provides that Vanguard may pay the exercise price either in cash or, if the fair
market value of the common stock at the time of exercise is greater than the
exercise price, by surrendering any unexercised portion of the Vanguard Warrant
and receiving the number of shares equal to (i) the excess of fair market value
per share at the time of exercise over the exercise price per share multiplied
by (ii) the number of shares surrendered.

On May 5, 1995, the Company entered into a Registration Rights
Agreement with Vanguard relating to certain warrants and shares of common stock
of the Company owned by Vanguard. The agreement provides that Vanguard may at
any time after six months from the date the first registration statement filed
by the Company under the Securities Act of 1933 becomes effective, request the
Company to effect the registration of certain securities held by Vanguard as
expeditiously as may be practicable. However, the Company is entitled to decline
such a request if, in the Company's judgment, such demand registration would not
be in the Company's best interest. The Company may only decline such a request
once and a declination will only be effective for a three-month period. In
addition, the agreement allows Vanguard certain "piggyback" registration rights
on any security offerings the Company may undertake provided, however, that the
Company's underwriter determines, in their sole discretion, that such shares
will not jeopardize the success of the proposed offering by the Company. The
agreement terminates on the earlier of five years from date of the Company's
first registration statement becomes effective or such time as Vanguard may sell
its securities pursuant to Rule 144 under the Securities Act.

F-14

In connection with an investment of $8,000 in common stock (See Note
7), the Company, Vanguard and shareholders representing a majority of the
outstanding common stock entered into a voting agreement in November 1996 (the
"Voting Agreement") pursuant to which such shareholders agreed to vote their
shares in all elections of directors so as to elect to the Board of Directors
six persons nominated by Vanguard. The Voting Agreement terminates upon an
initial public offering of the Company's common stock or upon a change in
control of Vanguard such as that anticipated by the merger of Vanguard and AT&T
Corp. expected to occur in 1999.

6. LONG-TERM DEBT

Long-term debt consisted of the following:

DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
14% Senior Discount Notes(a) $ 111,819 $ 91,406
Note payable for patent acquisition(b) 5,554 --
---------- ----------
117,373 91,406
Less: Current portion of long-term debt 5,554 --
---------- ----------
$ 111,819 $ 91,406
========== ==========

</TABLE>

(a) In August 1996, the Company, through the Private Placement, issued
142,000 units, each consisting of a 14% senior discount note due 2003
(collectively, the "Notes") with a principal amount at maturity of $1,000
and a warrant to purchase 7.334 shares (adjusting to 9.429 shares at
September 30, 1997 if the Company did not complete a qualified initial
public offering of common stock by that date) of common stock of the
Company at $.01 per share. The gross proceeds of $94,800 were allocated by
the Company to the value of the warrants of approximately $24,500 (See Note
8) and to the discounted notes of approximately $70,300. Expenses of the
offering of approximately $3,900 were capitalized as bond issuance costs
and are being amortized over the remaining term of the Notes (See Note 2).
The Company did not complete a qualified initial public offering of common
stock by September 30, 1997; as a result, the Company recorded additional
common stock purchase warrants and related debt discount of $3,000,
reflecting the valuation of an additional 297,490 shares, or 2.095 shares
issuable per warrant.

The Notes will accrue cash interest at a rate of 14% per annum, commencing
on August 1, 1999, payable semi-annually on February 1 and August 1 of each
year commencing on February 1, 2000. The debt discount related to the
difference between the face value of the notes ($142,000) and the proceeds
of the Private Placement ($94,800) is being accreted over the period to
August 1, 1999. The debt discount related to the portion of the Private
Placement allocated to the value of the warrants ($27,400 in aggregate) is
being accreted over the full term of the Notes to August 1, 2003. Interest
expense on the notes, including the accretion of debt discount and
amortization of issuance costs, is being recognized at a constant rate of
interest over the life of the Notes. Discount accretion of $20,400,
$17,500, $4,100 and $2,600 and amortization of bond issuance costs of
approximately $526, $464, $102 and $67 have been recognized as interest
expense during the years ended December 31, 1998 and 1997, the three month
period ended December 31, 1996 and the fiscal year ended September 28,
1996, respectively.

See Note 16 for a description of the Company's repurchase of certain of the
Notes subsequent to December 31, 1998.

F-15

(b) In 1998, the Company issued a note payable in the amount of
approximately $5,679 in connection with the acquisition of certain
intellectual property. This note, which bears interest at 5.5% per
year, is payable on June 1, 1999. If, prior to the maturity of this
note, the Company completes a qualifying initial public offering of
common stock, as defined, the note would then be convertible into a
number of shares of the Company's common stock, equal to the
then-outstanding principal balance and accrued interest divided by
$60.00, with an additional provision which would require the Company to
pay, in cash or common stock, the difference between the value of such
common stock and $6,000. This note is reflected as a current liability
in the accompanying consolidated balance sheet as of December 31, 1998.

7. COMMON STOCK

The Company issued no shares of common stock during the year ended
December 31, 1998.

During the year ended December 31, 1997, the Company issued 60,000
shares of Common Stock, consisting of 50,000 shares for partial consideration in
the acquisition of certain intellectual property and 10,000 shares issued
pursuant to the management service agreement the Company had with Vanguard (See
Note 5). The issuance of these shares was recorded at $10.00 per share, which
management believes approximates the fair market value of the shares on dates of
issuance.

During the fiscal year ended September 28, 1996, the Company issued
approximately 3,738,000 shares of common stock, of which approximately 3,418,000
shares were issued at a purchase price of $5.50 per share and approximately
320,000 were issued at a purchase price of $5.00 per share. Approximately
3,319,000 shares were issued as part of a private offering of common stock at a
purchase price of $5.50 per share. In connection with this offering, purchasers
of $250, or more of common stock received warrants to purchase a number of
shares of common stock equal to 5% of the shares purchased in the offering and
purchasers of $1,000 or more of common stock received warrants to purchase a
number of shares of common stock equal to 10% of the shares purchased in the
offering. The exercise price of all warrants issued or sold in connection with
this offering will equal the sales price of the next $2,000 of common stock
issued and sold by the Company. Purchasers of common stock in this offering who
were also purchasers of common stock in certain earlier offerings were also
offered warrants (at a purchase price of $.01 per warrant share) to purchase
common stock. Approximately 323,216 warrants were issued under this offering and
expire on December 31, 2000. Also during the year ended September 30, 1996,
10,000 shares of common stock were issued pursuant to the management services
agreement the Company had with Vanguard (See Note 5) at the then estimated fair
market value of $5.50 per share. In addition, the Company converted
approximately $2,100 in debt, notes payable and related accrued interest due to
stockholders into 409,000 shares of common stock. Notes payable to stockholders
of $1,600 were converted into approximately 320,000 shares of common stock at a
conversion price of $5.00 per share. Fifty percent of accrued interest on these
notes payable were converted into approximately 13,000 shares at a conversion
price of $5.50 per share and the remaining fifty percent of accrued interest was
paid in cash. Other notes payable to stockholders with a principal amount of
approximately $371 and related accrued interest of approximately $47 were
converted into approximately 76,000 shares of common stock at a conversion price
of $5.50 per share.

F-16

8. COMMON STOCK PURCHASE WARRANTS

In addition to the Vanguard Warrant to purchase 900,113 shares and the
warrants to purchase an aggregate of 323,216 shares issued in the private
offering described in Note 7, the Company has other issued and outstanding
warrants.

In August 1996, the Company, through the Private Placement (See Notes 2
and 6), issued 142,000 units, each consisting of a 14% senior discount note due
2003 (collectively, the "Notes") with a principal amount at maturity of $1,000
per note and a warrant to purchase 7.334 shares (adjusted to 9.429 shares at
September 30, 1997 when the Company did not complete a qualified initial public
offering of common stock by that date) of common stock of the Company at $.01
per share. These warrants (the "Note Warrants") are exercisable on or after the
earliest to occur of (i) August 1, 2000, (ii) a change of control, (iii) (a) 90
days after the closing of an initial public offering or (b) upon the closing of
the initial public offering but only in respect of warrants required to be
exercised to permit the holders thereof to sell shares in the initial public
offering, (iv) a consolidation, merger or purchase of assets involving the
Company or any of its subsidiaries that results in the common stock of the
Company becoming subject to registration, (v) an extraordinary cash dividend or
(vi) the voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Company. The number of shares of the common stock for which a
Note Warrant is exercisable is subject to adjustment upon the occurrence of
certain events.

Holders of Note Warrants (or common stock issued in respect thereof)
will be entitled to include the common stock issued or issuable upon the
exercise of the Note Warrants (the "Underlying Common Stock") in a registration
statement whenever the Company or any shareholder proposes to effect a public
equity offering with respect to common stock of the Company (other than
redeemable stock), except to the extent the managing underwriter for such
offering determines that such registration and sale would materially adversely
affect the price, timing or distribution of the shares to be sold in such public
equity offering. Following the occurrence of an initial public offering, holders
of Note Warrants and Underlying Common Stock representing not less than 25% of
all the outstanding Note Warrants and Underlying Common Stock, taken together,
will have the right, on one occasion, to require the Company to register these
securities pursuant to an effective registration statement.

After August 1, 2001, the Company may be required, under certain
circumstances, to purchase, at fair market value, the outstanding Note Warrants
and Underlying Common Stock issued. Depending on the fair market value at that
time, there may be a charge to earnings in connection with the repurchase of
warrants and Underlying Common Stock.

Management of the Company believes, based on independent third party
valuations, that the value of the Company's common stock at the date of the
initial issuance of the Note Warrants was $23.50 per share and, accordingly,
allocated approximately $24,500 of the proceeds of the Private Placement to the
value of the Note Warrants based on 142,000 units consisting of warrants to
purchase 7.334 shares of common stock per unit with an exercise price of $.01
per share. Effective September 30, 1997, the Company recorded an additional
$3,000, reflecting the valuation of an additional 297,490 shares, or 2.095
(9.429 less 7.334) shares issuable per Note Warrant, when the Company did not
complete a qualifying initial public offering by that date. This aggregate
amount is classified between liabilities and stockholders' equity (deficit) in
the accompanying consolidated balance sheets. The value of the original Note
Warrants and the incremental value of the 2.095 additional Note Warrants issued
per unit of the Notes effective September 30, 1997 have, since their issuance,
been accounted for as an additional debt discount subject to accretion as
described in Note 6.

F-17

9. PREFERRED STOCK

During the third quarter of 1998, the Company's Board of Directors
authorized the issuance of up to $40,000 in preferred stock in a private
placement. During the fourth quarter of 1998, the Company issued 177,878 shares
of 10% Series A Mandatorily Convertible Preferred Stock ("Preferred Stock") at a
price of $100 per share, for total proceeds of approximately $17,788. Of the
total proceeds of $17,788, $17,688 was received in cash by December 31, 1998 and
$100 was exchanged for the forgiveness of accounts payable in the same amount.
Dividends on the Preferred Stock initially accrued quarterly from the date of
issuance at a rate of 10% per annum. Dividends were initially payable in cash,
by delivery of shares of Preferred Stock, or by a combination thereof at the
Company's option. Accrued dividends, payable in preferred stock (See Note 16),
were $354 as of December 31, 1998. The holder of each share of Preferred Stock
was initially entitled to ten votes per share. The shares have certain voluntary
and mandatory conversion rights into the Company's common stock (at a conversion
price per share of common stock equal to $10.00, plus accrued and unpaid
dividends) under certain events, such as an initial public stock offering. See
Note 16 for a description of changes to the terms of Preferred Stock and the
sale of additional Preferred Stock subsequent to December 31, 1998.

10. NET LOSS PER SHARE

A reconciliation between the net loss and common shares of the basic
and diluted EPS computations is as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- --------------------------------
PER SHARE PER SHARE
NET LOSS SHARES AMOUNT NET LOSS SHARES AMOUNT
-------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net loss
attributable to
common stock $(62,414) 7,729 $(8.08) $(49,814) 7,692 $(6.48)
Effect on Dilutive
Securities:
Warrants -- -- -- -- -- --
Stock Options -- -- -- -- -- --
------- ------ ----- ------ ------- -----
Diluted EPS
Net loss
attributable to
common stock and
assumed option
exercise $(62,414) 7,729 $(8.08) $(49,814) 7,692 $(6.48)
========= ===== ======= ======== ===== ======

<CAPTION>
THREE MONTH PERIOD FISCAL YEAR ENDED
DECEMBER 31, 1996 SEPTEMBER 28, 1996
------------------------------- ------------------------------
PER SHARE PER SHARE
NET LOSS SHARES AMOUNT NET LOSS SHARES AMOUNT
-------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net loss
attributable to
common stock $(7,330) 7,669 $(0.96) $(11,559) 6,038 $(1.91)
Effect on Dilutive
Securities:
Warrants -- -- -- -- -- --
Stock Options -- -- -- -- -- --
------ ----- ------ -------- ----- -----
Diluted EPS
Net loss
attributable to
common stock and
assumed option
exercise $(7,330) 7,669 $(0.96) $(11,559) 6,038 $(1.91)
======= ===== ====== ======== ===== ======
</TABLE>

There were no reconciling items to be reported by the Company in the
calculation for basic EPS and diluted EPS for all periods presented. Inclusion
of the Company's outstanding common stock purchase warrants and stock options
(See Notes 8 and 13) would have an antidilutive effect on earnings per share
and, as a result, they are not included in the calculation of diluted EPS for
any period presented.

11. DEFERRED COMPENSATION

In September 1996, the Company issued options to purchase 48,000 shares
of common stock at an exercise price of $7.50 per share under the 1996
Nonqualified Stock Option Plan (See Note 13), which was an exercise price below
the then-estimated fair market value of the Company's common stock on the date
of grant. Accordingly, the Company has recorded a deferred compensation charge
of $768, which will be amortized ratably over the five-year vesting period of
the related options. Accumulated amortization was $352 and $198 at December 31,
1998 and 1997, respectively. Amortization expense of deferred compensation was
$154, $153, $39 and $6 for the years ended December 31, 1998 and 1997, the three
month period ended December 31, 1996 and for the fiscal year ended September 28,
1996, respectively.

F-18

12. INCOME TAXES

The components of cumulative deferred tax assets and liabilities were
as follows:

DECEMBER 31,
------------
1998 1997
---- ----

<S> <C> <C>
Cumulative Amounts:
Deferred Tax Assets:
Accrued Bonus/Deferred Compensation/other $ 324 $ 174
Amortization of Warrant Expense 2,759 1,545
Interest Accretion 8,090 4,464
Other 113 13
Bond Issuance Cost Amortization 408 222
Net Operating Loss Carryforward 43,179 24,294
---------- ----------
Total Deferred Tax Assets 54,873 30,712
---------- ----------
Deferred Tax Liabilities:
Depreciation (1,488) (1,157)
---------- ----------
Total Deferred Tax Liabilities (1,488) (1,157)
---------- ----------
Net Deferred Tax Asset before Valuation Allowance 53,385 29,555
---------- ----------
Valuation Allowance (53,385) (29,555)
---------- ----------
Net Deferred Tax Asset $ -- $ --
========== ==========

</TABLE>

In accordance with the provisions of Internal Revenue Code Section 382,
utilization of the Company's net operating loss carryforwards could be limited
in years following a change in the Company's ownership, which could occur at the
time of an initial public offering or other change in control. Net operating
losses incurred after the date of the change of ownership are not limited unless
another change in ownership occurs. At December 31, 1998 the amount of net
operating loss carryforward is approximately $93,600. These losses begin to
expire in the 2008 tax year.

Creditable foreign taxes paid by the Company or its subsidiaries will
be subject to Internal Revenue Code Section 904, Limitation on Foreign Tax
Credit, because the Company does not have a Federal Income Tax liability. The
Foreign Tax Credit limitation may be carried back two years and forward five
years. The Company has the option of deducting these foreign taxes in lieu of
the credit. In general, since the Company does not have a federal tax liability,
the deduction method will increase the amount of net operating losses which are
available to be carried forward fifteen years. Through December 31, 1998, the
Company has not paid or accrued foreign taxes.

SFAS No. 109 requires a valuation allowance to be recorded when it is
more likely than not that some or all of the deferred tax assets may not be
realized. At each of the balance sheet dates, a valuation allowance for the full
amount of the net deferred tax asset was recorded. This valuation allowance is
recorded due to both the uncertainty of future income and the possible
application of Internal Revenue Code Section 382 limitations on the use of the
net operating loss carryforwards.

F-19

13. STOCK OPTION PLANS

The Company has in place the 1994 Stock Compensation Plan, which
provides for the issuance of shares of common stock to key employees,
consultants and directors pursuant to stock options that meet the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (incentive stock
options), options that do not meet such requirements (nonqualified stock
options) and stock bonuses. All options under the plan must be granted at an
exercise price not less than fair market value. Stock bonuses may be in the form
of grants of restricted stock. The aggregate number of shares of common stock
that may be issued pursuant to the plan may not exceed 330,000 shares, subject
to adjustment upon occurrence of certain events affecting the Company's
capitalization. As of December 31, 1998, an aggregate of 22,900 shares remain
available for future grants under this plan.

The Company also has in place the 1996 Nonqualified Stock Option Plan,
which provides for the issuance of shares of common stock to key employees,
consultants and directors pursuant to nonqualified stock options. All options
must be granted at an exercise price not less than $5.50 per share. The
aggregate number of shares of common stock that may be issued pursuant to the
plan may not exceed 600,000 shares, subject to adjustment upon occurrence of
certain events affecting the Company's capitalization. As of December 31, 1998,
an aggregate of 12,200 shares remain available for future grants under this
plan.

The Company also has in place the 1997 Long-Term Incentive Plan
("Long-Term Incentive Plan") for the purpose of promoting the long-term
financial performance of the Company by providing incentive compensation
opportunities to officers, executive or supervisory employees, directors or
consultants of the Company or any subsidiary. The plan allows for the Company to
grant stock options for the purchase of shares of stock to grantees under the
plan in such amounts as the Compensation Committee of the Board of Directors, in
its sole discretion, determines. The stock options granted under the Plan will
be designated as either: (i) Incentive Stock Options or (ii) Nonqualified Stock
Options. The purchase price for shares acquired pursuant to the exercise will be
determined at the time of grant; however, it will not be less than the fair
market value of the shares at the time of the grant. The Long-Term Incentive
Plan also allows the Company to grant Stock Appreciation Rights in any amount,
at its sole discretion, either alone or in combination with other awards granted
under the Plan. An aggregate of 670,000 shares of common stock are reserved for
issuance pursuant to awards under this plan. As of December 31, 1998, options to
purchase 580,350 shares of common stock were issued and outstanding under the
Long-Term Incentive Plan, all at an exercise price of $10.00 per share.
Management believes that these options were granted at fair market value of
common stock at the dates of grant. No Stock Appreciation Rights were awarded
through December 31, 1998. The awards vest annually over five years from the
date of grant with the exception of 63,500 options, which became immediately
exercisable.

The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with SFAS No. 123 (See Note 2), the Company's
net loss and net loss per share would have been changed to the following pro
forma amounts:

THREE MONTH FISCAL
YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 28,
1998 1997 1996 1996
---- ---- ---- ----

<S> <C> <C> <C> <C>
Net Loss: As Reported $(62,414) $(49,814) $(7,330) $(11,559)
Pro Forma (63,186) (50,353) (7,355) (11,832)
Net Loss Per Share: Basic and Diluted As Reported (8.08) (6.48) (.96) (1.91)
Basic and Diluted Pro Forma (8.18) (6.55) (.96) (1.96)

</TABLE>

F-20

Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. A summary
of the status of the Company's stock option plans for the years ended December
31, 1998 and 1997, the three month period ended December 31, 1996 and the fiscal
year ended September 28, 1996 is presented in the table and narrative below:

THREE MONTH
YEAR ENDED YEAR ENDED PERIOD ENDED FISCAL YEAR
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 SEPTEMBER 28, 1996
----------------- ----------------- ----------------- ------------------
WTD AVG WTD AVG WTD AVG WTD AVG
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
------ -------- ------ -------- ------ -------- ------ --------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,259,400 7.34 821,100 $ 5.40 844,100 $ 5.40 266,600 $4.77
Granted 388,100 10.00 543,400 10.00 -- -- 617,500 5.65
Exercised -- -- -- -- -- -- -- --
Forfeited (10,500) 7.22 (2,200) 5.23 (3,000) 5.50 (7,000) 5.00
Expired (161,750) 9.60 (102,900) 5.91 (20,000) 5.50 (33,000) 5.08
------- --------- -------- --------
Outstanding at end of year 1,475,250 7.79 1,259,400 7.34 821,100 5.40 844,100 5.40
========= ========= ======= =======
Exercisable at end of year 766,890 6.51 571,250 6.16 332,400 5.15 320,200 5.16
========= ======= ======= =======
Weighted average fair value of
options granted N/A 7.79 N/A 7.34 N/A 5.40 N/A 5.40

</TABLE>

The options outstanding at December 31, 1998 have exercise prices
between $1.86 and $10.00, with a weighted average exercise price of $7.79 and a
weighted average remaining contractual life of 7.6 years.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes Option Pricing Model with the following weighted-average
assumptions used for grants in the years ended December 31, 1998 and 1997, the
three month period ended December 31, 1996 and the fiscal year ended September
28, 1996 respectively: risk free interest rates of 5.09%, 6.49%, 6.45%,
and 6.60%; and expected dividend yields of 0%, expected lives of 5 years, and
expected stock volatility of 20% in 1998 and 0% for each other respective
period.

The foregoing plans are administered by the Compensation and Stock
Option Committee of the Board of Directors, which is authorized, subject to the
provisions of the plans, to determine to whom and when options and bonuses may
be granted and the other terms and conditions of the grant.

F-21

14. COMMITMENTS AND CONTINGENCIES

COMMITMENTS FOR TECHNOLOGY

The Company is party to several patent licensing agreements relating to
its in-store consumer product promotion and couponing business. With respect to
one license agreement under which the Company is assignee, the Company is
required to pay a royalty of 2% of the gross collected revenues of the Company,
to the extent derived from the Company's exploitation of the patent, with such
royalty decreasing to 1% of such revenues after $10 million in aggregate
royalties have been paid to the licensors. This license agreement requires that
certain minimum monthly payments be made to the licensors, and be exceeded
within approximately two years, in order to avoid triggering a termination right
on the part of the licensors. With respect to another license agreement, the
Company is required to pay the licensor a royalty of .8% of the gross collected
revenues of the Company to the extent derived from the Company's exploitation of
the patent, until such time as the licensor has received the aggregate sum of
$600 after which no additional royalty payments are required. Under a third
agreement, the Company is required to pay the licensor a royalty of 1% of the
gross revenues related to the Company's exploitation of the patent subject to
certain minimum annual payments, should the Company wish to maintain exclusive
rights under such patent. Under these agreements, the Company recorded royalty
payments of $475, $398, $99 and $333 for the years ended December 31, 1998 and
1997, the three month period ended December 31, 1996 and the fiscal year ended
September 28, 1996, respectively.

LITIGATION

During the fiscal year ended September 28, 1996, a lawsuit was filed
and settled against the Company alleging certain patent infringement. The
Company expressly denied any wrongdoing and settled the case to avoid lengthy
litigation costs. Under the settlement agreement, the Company was required to
pay $400 and in return, received, among other things, the worldwide, perpetual
right to use such patent, dismissal with prejudice and release of all related
claims. The cost of the settlement of $400 was expensed during the fiscal year
ended September 28, 1996.

In February 1996, the Company filed suit against Catalina Marketing
Corporation ("Catalina") alleging that Catalina has a patent under which the
Company is licensee. The Company alleges that Catalina is infringing the patent
by making, using and offering for sale devices and systems that incorporate and
employ inventions covered by that patent. The Company is seeking an injunction
against Catalina to stop further infringement of the patent, treble damages and
the costs and expenses incurred in connection with the suit. The complaint has
been amended to add additional detail, and Catalina has answered denying the
allegations and raised certain affirmative defenses. In May 1997, Catalina
asserted a counterclaim alleging that the Company is infringing a newly issued
Catalina Patent. The Company has answered denying the allegations, raising
affirmative defenses. Discovery on the claims and counterclaims will proceed,
and various motions are pending before the United States District Court. The
Company intends to pursue the action vigorously.

F-22

In January 1998, Catalina Marketing International, Inc. ("Catalina
International"), an affiliate of Catalina, filed suit against the Company
alleging that the Company has infringed a patent which Catalina International
acquired by assignment in December 1997. Catalina International alleges that the
Company is infringing this patent by making, using and offering for sale devices
and systems that incorporate and employ inventions covered by this patent. In
February 1998, Catalina International amended its complaint to join as
additional parties' defendant entities who have manufactured kiosks pursuant to
an agreement with the Company. Catalina International seeks injunctive and
declaratory relief as well as unspecified money damages against all defendants,
and has filed a motion for preliminary injunction against the Company seeking to
stop alleged infringement of this patent pending trial. Various other motions
are pending in the United States District Court. The Company intends to defend
against Catalina International's claims vigorously, and to pursue available
remedies against Catalina International. This action was recently consolidated
with the litigation involving the patents described above for purposes of
discovery and trial.

On May 27, 1998, the Company filed a new suit against Catalina alleging
that Catalina has infringed a series of patents collectively referred to as the
"Deaton Patents", which the Company acquired by assignment in May 1998 (See Note
6b). The Company alleges that Catalina is infringing the Deaton Patents by
making, using, selling and offering for sale devices and systems that
incorporate and employ inventions covered by the Deaton Patents. The Company is
seeking an injunction against Catalina to stop further infringement of these
patents, treble damages and the costs and expenses incurred in connection with
the suit. Catalina has answered denying the allegations and raising certain
affirmative defenses. Catalina has also challenged some of the claims of six of
the Deaton Patents by provoking an interference proceeding in the U.S. Patent
and Trademark Office. The Company intends to vigorously protect its rights under
the Deaton Patents both in the interference proceeding and in the new lawsuit.

15. SEGMENT DATA

As described in Note 2, effective December 31, 1998, the Company
adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." While the Company's results of operations are primarily reviewed
on a consolidated basis, the chief operating decision maker also manages the
enterprise in two geographic segments: (i) North American and (ii) Europe. The
following represents selected consolidated financial information for the
Company's segments for the year ended December 31, 1998 (the Company's results
of operations Europe were not material during 1997, and the Company only
operated in one geographic segment during the three month period ended December
31, 1996 and the fiscal year ended September 28, 1996):

For the year ended December 31, 1998
Operating Data North America Europe Eliminations Consolidated
-------------- ------------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 2,632 $ 2,241 $ (280) $ 4,593
Loss from operations $ (41,150) $ (1,111) $ - $ (42,251)
Depreciation $ 7,182 $ 277 $ - $ 7,459
Capital Expenditures $ 6,538 $ 1,547 $ - $ 8,085
Identifiable Assets $ 59,864 $ 1,873 $ (1,596) $ 60,141

</TABLE>

F-23

16. SUBSEQUENT EVENTS

Repurchase of Notes

In March 1999, the Company repurchased 2,425 Notes (See Note 6), each
with a face value of $1,000 per note, for an aggregate of $194 in cash. The Note
Warrants originally issued as part of the offering of the Notes continue to be
outstanding after the repurchase of the Notes. This repurchase of Notes will
result in a gain on extinguishment of debt in the first quarter of 1999.

Sale of Preferred Stock

In March 1999, the Board of Directors and shareholders of the Company
approved certain changes to the Company's Preferred Stock and authorized an
increase in the private placement offering from $40 million to $70 million (See
Note 9). Changes to Preferred Stock consisted of (i) a reduction in the
conversion price from $10.00 to $8.50 per share of common stock into which each
share of Preferred Stock is convertible, (ii) an increase in the number of votes
per share of Preferred Stock from 10 to the number of shares of common stock
into which it is convertible (initially 11.7647), (iii) accrual of dividends on
the Preferred Stock semi-annually, as opposed to quarterly, to be paid only in
shares of Preferred Stock and (iv) the addition of anti-dilution provisions.
Such changes are applicable to all shares of Preferred Stock issued prior to the
effective date of the changes and all additional shares Preferred Stock to be
issued in the private offering.

As of December 31, 1998, the Company had 177,878 shares of Preferred
Stock outstanding, which were sold in the fourth quarter of 1998 at a purchase
price of $100 per share. During the first quarter of 1999, the Company issued an
additional 95,650 shares of Preferred Stock at a purchase price of $100 per
share for gross proceeds of approximately $9,600. In connection with the sale
of $7,500 of Preferred Stock to a major investor, the Company has undertaken
to raise an additional $12,000 in proceeds from the sale of Preferred Stock
prior to the end of the second quarter of 1999. The Company presently has
commitments from investors to purchase in excess of $12,000 of Preferred Stock
and expects to sell additional shares of Preferred Stock in the private
offering.

F-24

The following table sets forth as of September 30, 1998 the
consolidated short-term debt and capitalization of the Company and as adjusted
to give pro forma effect to the issuance of Preferred Stock as if it had
occurred as of December 31, 1998:

DECEMBER 31, 1998 DECEMBER 31, 1998
ACTUAL PRO FORMA
------ ---------

<S> <C> <C>
Short-term debt and current portion of long-term debt $ 5,554 $ 5,554
========== =========
Long-term debt, net of discount and current portion $ 111,819 $ 111,819
---------- ---------
Common stock purchase warrants 27,436 27,436
---------- ---------

Stockholders' equity (deficit):
Preferred stock, no par value, authorized 5,000,000 shares; 177,878 and
273,528 shares issued and outstanding, actual and pro forma, respectively 18,142 27,707
Common stock, no par value, authorized 20,000,000 shares; 7,728,555 shares
issued and outstanding, actual and pro forma 28,251 28,251
Additional paid-in capital 768 768
Deferred compensation (416) (416)
Accumulated other comprehensive income (loss) (19) (19)
Accumulated deficit (139,281) (139,281)
---------- ---------
Total stockholders' equity (deficit) (92,555) (82,990)
---------- ---------
Total capitalization $ 46,700 $ 56,265
========== =========
</TABLE>

F-25

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
*3(a)(1) Articles of Incorporation of the Company, with amendments,
through June 12, 1996, filed as Exhibit 3(a)(1) to the
Company's Registration Statement on Form S-4 (No. 333-12091).
*3(a)(2) Articles of Amendment of the Company, dated May 21, 1997 and
effective June 3, 1997, filed as Exhibit 3(a)(2) to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1997.
3(a)(3) Articles of Amendment of the Company, dated March 29, 1999.
3(b) Amended and Restated Bylaws of the Company.
*4(a)(1) Specimen Certificate of the Company's Common Stock, filed as
Exhibit 4(a) to the Company's Registration Statement on Form
S-4 (No. 333-12091).
4(a)(2) Specimen Certificate of the Company's 10% Series A Mandatorily
Convertible Preferred Stock.
*4(b) Indenture dated August 1, 1996, between the Company and Fleet
National Bank, as trustee, relating to $142,000,000 in
principal amount of 14% Senior Discount Notes due 2003, filed
as Exhibit 4(b) to the Company's Registration Statement on
Form S-4 (No. 333-12091).
*10(a)(1) Shareholders' Agreement dated April 16, 1993, between the
Company and its shareholders, filed as Exhibit 10(m) to the
Company's Registration Statement on Form S-4 (No. 333-12091).
*10(a)(2) Amendment No. 1 to Shareholders' Agreement dated June 17,
1994, between the Company and its shareholders, filed as
Exhibit 10(n) to the Company's Registration Statement on Form
S-4 (No. 333-12091).
*10(a)(3) Registration Rights Agreement dated May 5, 1995, between the
Company and Vanguard Cellular Systems, Inc., filed as Exhibit
10(c) to the Company's Registration Statement on Form S-4 (No.
333-12091).
*10(a)(4) Amendment No. 1 to Registration Rights Agreement dated October
1995, between the Company and Vanguard Cellular Systems, Inc.,
filed as Exhibit 10(d) to the Company's Registration Statement
on Form S-4 (No. 333-12091).
*10(a)(5) Subscription Agreement dated October 1995, between the Company
and Vanguard Cellular Systems, Inc., filed as Exhibit 10(f) to
the Company's Registration Statement on Form S-4 (No.
333-12091).
*10(a)(6) Registration Rights Agreement dated March 1996 between the
Company and Toronto Dominion Investments, Inc., filed as
Exhibit 10(e) to the Company's Registration Statement on Form
S-4 (No. 333-12091).
*10(a)(7) Exchange and Registration Rights Agreement dated July 30,
1996, between the Company and the Initial Purchasers, filed as
Exhibit 10(o) to the Company's Registration Statement on Form
S-4 (No. 333-12091).
*10(a)(8) Amended and Restated Common Stock Purchase Warrant granted to
Vanguard Cellular Operating Corp., filed as Exhibit 10(k) to
the Company's Registration Statement on Form S-4 (No.
333-12091).
*10(a)(9) Warrant Agreement dated August 1, 1996, between the Company
and Fleet National Bank, as Warrant Agent, filed as Exhibit
10(l) to the Company's Registration Statement on Form S-4 (No.
333-12091).
*10(a)(10) Voting Agreement among the Company, Vanguard Cellular
Operating Corp. and certain shareholders dated as of November
1, 1996, filed as Exhibit 10(ii) to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1998.
10(a)(11) Amendment No. 1 to Voting Agreement among the Company,
Vanguard Cellular Operating Corp. and certain shareholders,
dated September 30, 1998.
10(a)(12) Form of Rights Offering Subscription Agreement for the
Company's 10% Series A Mandatorily Convertible Preferred
Stock.
*10(b)(1) Company's 1994 Stock Compensation Plan, filed as Exhibit 10(i)
to the Company's Registration Statement on Form S-4 (No.
333-12091).
*10(b)(2) Form of Incentive Stock Option Agreement under the 1994 Stock
Compensation Plan, filed as Exhibit 10(k) to the Company's
Registration Statement on Form S-4 (No. 333-12091).
*10(b)(3) Company's 1996 Nonqualified Stock Option Plan, filed as
Exhibit 10(g) to the Company's Registration Statement on Form
S-4 (No. 333-12091).
</TABLE>

<TABLE>

<S> <C>
*10(b)(4) Form of Nonqualified Stock Option Agreement under the 1996
Nonqualified Stock Option Plan, filed as Exhibit 10(h) to the
Company's Registration Statement on Form S-4 (No. 333-12091).
*10(b)(5) Company's 1997 Long-Term Incentive Plan, as amended, filed as
Exhibit 10(jj) to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998.
*10(b)(6) Form of Incentive Stock Option Agreement to the 1997 Long-Term
Incentive Plan, filed as Exhibit 10(aa) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
*10(b)(7) Form of Nonqualified Stock Option Agreement to the 1997
Long-Term Incentive Plan, filed as Exhibit 10(bb) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
*10(c)(1) Assignment of License Agreement dated June 15, 1993 among
Gerald Singer and Arthur Murphy as Licensors, Michael R. Jones
as Licensee and Network Licensing, Inc. as Assignee, filed as
Exhibit 10(q) to the Company's Registration Statement on Form
S-4 (No. 333-12091).
*10(c)(2) Security Agreement dated June 16, 1993 between Michael R.
Jones and Network Licensing, Inc, filed as Exhibit 10(r) to
the Company's Registration Statement on Form S-4 (No.
333-12091).
*10(c)(3) Sublicense dated June 16, 1993 between Network Licensing, Inc.
and the Company, filed as Exhibit 10(s) to the Company's
Registration Statement on Form S-4 (No. 333-12091).
*10(c)(4) Settlement Agreement and Mutual General Release dated as of
September 6, 1994 among Gerald R. Singer, Arthur J. Murphy,
Lenora Singer, Joan Murphy, Network Licensing, Inc. and the
Company, filed as Exhibit 10(t) to the Company's Registration
Statement on Form S-4 (No. 333-12091).
*10(c)(5) Amended and Restated Patent Rights Assignment/Consulting
Agreement dated as of March 29, 1995 between Joseph F.
Stratton and the Company, filed as Exhibit 10(u) to the
Company's Registration Statement on Form S-4 (No. 333-12091).
*10(c)(6) Agreement Regarding Licensing matters dated as of January 22,
1996 among Michael R. Jones, Network Licensing, Inc. and the
Company, filed as Exhibit 10(v) to the Company's Registration
Statement on Form S-4 (No. 333-12091).
*10(c)(7) Letter Agreement dated July 22, 1996 between Gerald Singer,
Arthur J. Murphy and the Company, filed as Exhibit 10(w) to
the Company's Registration Statement on Form S-4 (No.
333-12091).
*10(c)(8) Assignment dated as of July 23, 1996 from Network Licensing,
Inc. to the Company, filed as Exhibit 10(x) to the Company's
Registration Statement on Form S-4 (No. 333-12091).
*10(c)(9) Patent License Agreement dated August 20, 1997, between the
Company and Coupco, Inc, filed as Exhibit 10(cc) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (Portions of this exhibit have been omitted
pursuant to a request for confidential treatment).
*10(c)(10) Patent Purchase Agreement dated May 22, 1998, between the
Company, Credit Verification Corporation and David W. Deaton,
filed as Exhibit 10(hh) to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1998 (Portions of this
exhibit have been omitted pursuant to a request for
confidential treatment)
10(c)(11) Letter Agreement dated October 2, 1998 between Leona R.
Singer, Trustee under the Gerald And Leona R. Singer Family
Trust, Arthur J. Murphy and the Company.
*10(d)(1) Letter Agreement dated March 17, 1997 between the Company and
Thomas A. Manna, filed as Exhibit 10(ee) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
10(d)(2) Severance and Release Agreement dated January 23, 1999 between
the Company and Thomas A. Manna.
*10(d)(3) Form of Employment, Noncompetition and Nondisclosure
Agreement, filed as Exhibit 10(aa) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997.
10(d)(4) Employment Agreement dated January 7, 1999 between the Company
and Paul Nash.
*10(e)(1) Management Services Agreement dated June 17, 1998, between the
Company and Vanguard Cellular Financial, filed as Exhibit
10(kk) to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998.
*21 List of Subsidiaries of the Company, filed as Exhibit 21 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
27 Financial Data Schedule.
</TABLE>

- -----------------
* Incorporated by reference to the statement or report indicated.

STATEMENT OF DIFFERENCES
------------------------

The trademark symbol shall be expressed as ........................... 'TM'
The registered trademark symbol shall be expressed as ................ 'r'
The service mark symbol shall be expressed as ........................ 'sm'
The section symbol shall be expressed as ............................. 'SS'
The paragraph symbol shall be expressed as ........................... [p]

<PAGE>

EX-3
EXHIBIT 3(a)(3)

ARTICLES OF AMENDMENT

INTER*ACT SYSTEMS, INCORPORATED

The undersigned corporation hereby submits pursuant to Sections 55-6-02
and 55-10-06 of the North Carolina General Statutes these Articles of Amendment
for the purpose of amending its Articles of Incorporation.

1. The name of the corporation is Inter*Act Systems, Incorporated.

2. The Articles of Incorporation of the corporation are hereby amended
by replacing the Statement of Rights and Preferences of the 10% Series A
Mandatorily Convertible Preferred Stock attached thereto with the Amended and
Restated Statement of Rights and Preferences of the 10% Series A Mandatorily
Convertible Preferred Stock attached hereto.

3. The foregoing amendment to the Articles of Incorporation was duly
adopted by the Board of Directors on March 15, 1999.

4. The foregoing amendment to the Articles of Incorporation was duly
approved at a meeting held for that purpose on March 26, 1999 by (i) holders of
more than a majority of the outstanding votes represented by the shares of the
common stock and 10% Series A Mandatorily Convertible Preferred Stock of the
corporation voting together as a single voting group and (ii) by holders of more
than 75% of the outstanding shares of the 10% Series A Mandatorily Convertible
Preferred Stock of the corporation, in the manner prescribed by the North
Carolina Business Corporation Act.

This the 29th day of March, 1999.

INTER*ACT SYSTEMS, INCORPORATED

By: /s/ Stephen R. Leeolou
---------------------------------------
Stephen R. Leeolou, Chief Executive Officer

Amended and Restated
Statement of Rights and Preferences of the
10% Series A Mandatorily Convertible Preferred Stock
of Inter*Act Systems, Incorporated

Section 1. Number and Designation. A series consisting initially of
700,000 shares of the authorized preferred stock of the corporation, no par
value, is designated "10% Series A Mandatorily Convertible Preferred Stock" (the
"Series A Preferred Stock"). The number of shares of Series A Preferred Stock
shall not be increased but may be decreased from time to time by resolution of
the Board of Directors; provided, that the number of authorized shares of Series
A Preferred Stock shall be increased by the number of shares of Series A
Preferred Stock issued in respect of dividends pursuant to Section 3(b) hereof.

Section 2. Ranking. For purposes of this Statement of Rights and
Preferences, any stock of any class or classes of the corporation shall be
deemed to rank:

(a) prior to the Series A Preferred Stock, either as to dividends or
upon liquidation, if the holders of such class or classes shall be entitled to
the receipt of dividends or of amounts distributable upon dissolution,
liquidation or winding up of the corporation, as the case may be, in preference
or priority to the holders of Series A Preferred Stock;

(b) on a parity with Series A Preferred Stock (the "Parity Stock"),
either as to dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation prices per share or sinking
fund provisions, if any, shall be different from those of Series A Preferred
Stock, if the holders of such stock shall be entitled to the receipt of
dividends or of amounts distributable upon dissolution, liquidation or winding
up of the corporation, as the case may be, without preference or priority, one
over the other, as between the holders of such stock and the holders of Series A
Preferred Stock; or

(c) junior to Series A Preferred Stock, either as to dividends or upon
liquidation, if such class shall be the common stock, no par value, of the
corporation (the "Common Stock") or if the holders of Series A Preferred Stock
shall be entitled to receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the corporation, as the case may be,
in preference or priority to the holders of shares of such class or classes.

Section 3. Dividends and Distributions.

(a) For each semi-annual dividend period (a "Dividend Period") dividends
payable on each share of Series A Preferred Stock shall be payable at a rate of
10% per annum of the initial liquidation preference of $100 per share divided by
two. Each Dividend Period shall commence on the April 1 and October 1 following
the last day of the preceding Dividend Period and shall end on and include the
day next preceding the first day of the next Dividend Period. Dividends shall be
cumulative from the date of original issue and shall be payable, when, as and if
declared

by the Board of Directors or by a duly authorized committee thereof, on March 31
and September 30 of each year, commencing on March 31, 1999. Each such dividend
shall be paid to the holders of record of shares of Series A Preferred Stock as
they appear on the stock register of the corporation on such record date, not
exceeding 45 days preceding the payment date thereof, as shall be fixed by the
Board of Directors of the corporation or by a duly authorized committee thereof.
Dividends on account of arrears for any past Dividend Periods may be declared
and paid at any time, without reference to any regular dividend payment date, to
holders of record on such date, not exceeding 45 days preceding the payment date
thereof, as may be fixed by the Board of Directors of the corporation or by a
duly authorized committee thereof.

(b) Dividends payable on shares of Series A Preferred Stock for any
period greater or less than a full Dividend Period, shall be computed on the
basis of a 360-day year consisting of twelve 30-day months and the actual number
of days elapsed in the period. Notwithstanding paragraph (a) of this Section 3,
any dividends payable on the shares of Series A Preferred Stock prior to a
Qualified Public Offering (defined below), including without limitation any or
all dividends in arrears, shall be paid in additional shares of Series A
Preferred Stock. The corporation shall pay such dividend by issuing to such
holder of Series A Preferred Stock additional shares of Series A Preferred Stock
having an aggregate initial liquidation preference equal to the amount of cash
dividends otherwise payable to such holder.

(c) No full dividends shall be declared or paid or set apart for payment
on the Preferred Stock of any series ranking, as to dividends, on a parity with
or junior to the Series A Preferred Stock for any period unless full cumulative
dividends have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for such payment on the Series
A Preferred Stock for all Dividend Periods terminating on or prior to the date
of payment of such full cumulative dividends. When dividends are not paid in
full, as aforesaid, upon the shares of Series A Preferred Stock and any other
series of Parity Stock, all dividends declared upon shares of this Series and
such other series of Parity Stock shall be declared pro rata so that the amount
of dividends declared per share on the Series A Preferred Stock and such other
Parity Stock shall in all cases bear to each other the same ratio that accrued
and unpaid dividends per share on the shares of Series A Preferred Stock and
such other Parity Stock bear to each other. Holders of shares of Series A
Preferred Stock shall not be entitled to any dividend, whether payable in cash,
property or stock, in excess of full cumulative dividends, as herein provided,
on the Series A Preferred Stock. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on the
Series A Preferred Stock which may be in arrears.

(d) So long as any shares of Series A Preferred Stock are outstanding,
no dividend (other than a dividend in Common Stock or in any other stock ranking
junior to this series as to dividends and upon liquidation and other than as
provided in paragraph (c) of this Section 3) shall be declared or paid or set
aside for payment or other distribution declared or made upon the Common Stock
or upon any other stock ranking junior to or on a parity with this Series as to
dividends or upon liquidation, nor shall any Common Stock or any other stock of
the corporation

ranking junior to or on a parity with this Series as to dividends or upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such stock) by the corporation (except by
conversion into or exchange for stock of the corporation ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation) unless, in each
case, the full cumulative dividends on all outstanding shares of Series A
Preferred Stock shall have been paid or declared and set aside for payment for
all past Dividend Periods.

Section 4. Voting Rights.

(a) Except as otherwise expressly provided herein or as required by law,
the holders of each share of Series A Preferred Stock shall be entitled to vote
on all matters submitted to shareholders for voting, voting together with the
holders of Common Stock as a single group, and shall be entitled to notice of
any shareholders' meeting in accordance with applicable law and the Bylaws of
the corporation. Each share of Series A Preferred Stock shall entitle the holder
thereof to such number of votes per share on each such matter as shall equal the
number of shares of Common Stock (including fractions of a share) into which
each share of Series A Preferred Stock is convertible pursuant to Section 5(a)
on the record date with respect to such matter. Except as provided in the next
succeeding sentence, the approval of holders of 75% of the outstanding shares of
Series A Preferred Stock shall be required prior to the corporation's issuing
any shares of a class of preferred stock that ranks on a parity with or senior
to the Series A Preferred Stock. Notwithstanding the foregoing sentence, the
corporation may issue up to $90 million of Series A Preferred Stock and Parity
Stock without the approval of any holders of Series A Preferred Stock. The
corporation may not amend or alter any of this Statement of Rights and
Preferences without the approval of the holders of 75% of the outstanding Series
A Preferred Stock.

Section 5. Conversion of Series A Preferred Stock. The holders of Series
A Preferred Stock shall have conversion rights as follows (the "Conversion
Rights"):

(a) Right to Convert. Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of the corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is equal to the Liquidation Preference on the date of conversion
divided by $8.50, as adjusted pursuant to Section 5(g) below (the "Conversion
Price").

(b) Mandatory Conversion. Each share of Series A Preferred Stock shall
automatically be converted into such number of fully paid and nonassessable
shares of Common Stock as is equal to the Liquidation Preference on the date of
conversion divided by the Conversion Price, upon (i) the closing of the sale of
the Common Stock in a Qualified Public Offering (defined below), (ii) the
closing of any Transaction (as defined in Section 5(h) below) in which each
holder of shares of Series A Preferred Stock is entitled to receive an

amount of cash or marketable securities having a current market value at least
equal to the Liquidation Preference of such shares of Series A Preferred Stock
(a "Qualified Transaction") or (iii) the vote or written consent of holders of
not less than 75% of the outstanding shares of Series A Preferred Stock. Notice
of any Qualified Public Offering or Qualified Transaction shall be given to each
holder of Series A Preferred Stock at least thirty days prior to anticipated
date of closing and conversion. "Qualified Public Offering" means a firm
commitment, public offering of the Common Stock pursuant to a registration
statement declared effective under the Securities Act of 1933, as amended,
underwritten by a securities firm of nationally recognized standing with an
aggregate offering price to the public of not less than $30 million and a price
per share not less than the Conversion Price.

(i) To convert shares of Series A Preferred Stock into shares of
Common Stock, the holder of such shares of Series A Preferred Stock
shall (A) surrender the certificate or certificates therefor, duly
endorsed, at the office of the corporation or of any transfer agent for
such stock, (B) give written notice to the corporation at such office
that it elects to convert the same, (C) state therein the name or names
in which it wishes the certificate or certificates for shares of Common
Stock to be issued and (D) deliver to the corporation an executed
joinder agreement pursuant to which such holder agrees to become a party
to and be bound by the Shareholders' Agreement dated as of April 16,
1993 among the corporation and the holders of Common Stock, as amended
(the "Shareholders' Agreement"). The corporation shall, as soon as
practicable thereafter and at its expense, issue and deliver to such
holder a certificate or certificates for the number of shares of Common
Stock to which such holder is entitled. Such conversion shall be deemed
to have been made immediately prior to the close of business on the date
of surrender of the shares of Series A Preferred Stock to be converted,
and the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.

(ii) If the conversion is mandatory pursuant to Section 5(b) of
this Statement of Rights and Preferences, the conversion shall be
conditioned upon the closing with the underwriters of the sale of
securities pursuant to such Qualified Public Offering, the closing of
such Qualified Transaction or the vote or written consent of holders of
not less than 75% of the outstanding shares of Series A Preferred Stock,
as the case may be, and the Series A Preferred Stock shall be deemed to
have been converted immediately prior to the occurrence of such event.

(d) Reservation of Stock Issuable Upon Conversion. The corporation shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, free of preemptive rights, solely for the purpose of
effecting the conversion of the shares of

Series A Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of Series A Preferred Stock; and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of Series A Preferred Stock, the
corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain the requisite
shareholder approval of any necessary amendment to these Articles of
Incorporation.

(e) Fractional Shares. No fractional share shall be issued upon the
conversion of any share or shares of Series A Preferred Stock. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more than
one share of Series A Preferred Stock by a holder thereof shall be aggregated
for purposes of determining whether the conversion would result in the issuance
of any fractional share. If, after the aforementioned aggregation, the
conversion would result in the issuance of a fraction of a share of Common
Stock, the corporation shall, in lieu of issuing any fractional share, pay the
holder otherwise entitled to such fraction a sum in cash equal to the same
fraction of the fair market value per share as of the date of conversion.

(f) No Impairment. The corporation will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, share exchange, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
corporation, including without limitation the adjustments required under this
Section 5, and will at all times in good faith assist in the carrying out of all
the provisions of this Section 5 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of Series A Preferred Stock against impairment.

(g) Adjustment to Conversion Price. The Conversion Price shall be
adjusted as follows:

(i) If, at any time during the period when the Series A
Preferred Stock remains outstanding, the corporation shall declare and
pay on shares of Common Stock a dividend payable in shares of Common
Stock or shall split the then outstanding shares of Common Stock into a
greater number of shares, then the number of shares of Common Stock
which the holders of the Series A Preferred Stock would receive upon
conversion thereof, as in effect at the time of taking of a record for
such dividend or at the time of such stock split, shall be
proportionately increased and the Conversion Price shall be
proportionately decreased, and conversely, if at any time the
corporation shall contract or reduce the number of outstanding shares of
Common Stock by combining such shares into a smaller number of shares,
then the number of shares which may be purchased upon the

conversion of the Series A Preferred Stock at the time of such action
shall be proportionately decreased as of such time, and the Conversion
Price shall be proportionately increased.

(ii) If the corporation shall issue or sell shares of its Common
Stock (including without limitation shares issued upon exercise of
options, rights or warrants) at a price per share (taking into account,
to the extent applicable, any price paid for the option, right or
warrant) less than the Conversion Price, then, forthwith upon such issue
or sale, the Conversion Price shall be reduced to an amount equal to (i)
the cash consideration per share received by the corporation as
consideration for such sale or issue, plus (ii) the per share amount of
any other consideration received by the corporation as consideration for
such sale or issue, as such amount shall be determined in good faith by
the Board of Directors of the corporation, whose determination shall be
conclusive and described in a resolution of the Board of Directors.

(iii) If the corporation shall issue or sell securities
convertible into Common Stock entitling the holders thereof to convert
such securities into shares of Common Stock at a conversion price per
share (i.e., the amount payable upon involuntary liquidation, in the
case of preferred stock, or the principal amount, in the case of debt,
divided by the number of shares of Common Stock issuable upon conversion
thereof) which is less than the Conversion Price, then, forthwith upon
such issue or sale, the Conversion Price shall be reduced to an amount
equal to such lower conversion price, as such amount shall be determined
in good faith by the Board of Directors of the corporation, whose
determination shall be conclusive, and described in a resolution of the
Board of Directors.

(iv) Notwithstanding anything to the contrary contained herein,
the provisions of paragraphs (i), (ii) and (iii) of this Section 5(g)
shall not apply with respect to the issuance of any Excluded Securities
(as defined below). For the purposes hereof, "Excluded Securities" means
(A) shares of Common Stock issued in connection with the exercise or
grant of options or rights granted to employees, directors or
consultants of the corporation pursuant to the terms of any stock
compensation plan of the corporation in effect on March 1, 1999 or
adopted by the shareholders of the corporation after March 1, 1999, (B)
shares of Common Stock to be issued in connection with the exercise of
options or warrants issued by the corporation and outstanding on March
1, 1999 and (C) warrants issued to any person as a condition to such
person providing debt financing to the corporation (provided that the
Board of Directors of the corporation unanimously approves the issuance
of debt to such person) and any shares of Common Stock issued in
connection with the exercise of such warrants.

(v) Whenever the Conversion Price shall be adjusted as provided
in this Section 5(g), the corporation shall as soon as practicable
thereafter file at its principal office, a statement signed by its Chief
Financial Officer, showing in reasonable detail the basis for such
adjustment and the actual Conversion Price that shall be in effect after
such

adjustment and shall cause a copy of such statement to be sent to the
holders of the Series A Preferred Stock at their addresses on the books
and records of the corporation.

(h) Changes in Common Stock. In case at any time the corporation shall
initiate any transaction or be a party to any transaction (including, without
limitation, a merger, consolidation, share exchange, sale, lease or other
disposition of all or substantially all of the corporation's assets, charter
amendment, recapitalization or reclassification of the Common Stock or a "Stock
Sale," as defined below) in connection with which the previously outstanding
Common Stock shall be changed into or exchanged for different securities of the
corporation or capital stock or other securities of another corporation or
interests in a non-corporate entity or other property (including cash) or any
combination of the foregoing (each such transaction being herein called a
"Transaction"), then, as a condition of the consummation of the Transaction,
lawful, enforceable and adequate provision shall be made so that the holders of
Series A Preferred Stock shall be entitled to receive upon conversion of their
shares of Series A Preferred Stock at any time on or after the consummation of
the Transaction, in lieu of the shares of Common Stock issuable upon such
conversion prior to such consummation, the securities or other property
(including cash) to which such holders of Series A Preferred Stock would have
been entitled upon consummation of the Transaction if such holders had converted
their shares of Series A Preferred Stock immediately prior thereto (subject to
adjustments from and after the consummation date as nearly equivalent as
possible to the adjustments provided for in this Section 5). If a purchase,
tender or exchange offer is made to and accepted by the holders of more than 50%
of the outstanding Common Stock (a "Stock Sale"), and if the holders of Series A
Preferred Stock so designate in a written notice given to the corporation, such
holders of Series A Preferred Stock shall be entitled to receive upon the
conversion of their shares of Series A Preferred Stock at any time on or after
the consummation of the Stock Sale in lieu of the shares of Common Stock
issuable upon conversion prior to the consummation of the Stock Sale, the
securities or other property to which such holders of Series A Preferred Stock
would have been entitled if such holders had converted their shares of Series A
Preferred Stock prior to the expiration of such purchase, tender or exchange
offer and had accepted such offer (subject to adjustments from and after the
consummation of such purchase, tender or exchange offer as nearly equivalent as
possible to the adjustments provided for in this Section 5). The corporation
will not effect any Transaction unless prior to the consummation thereof each
corporation or entity (other than the corporation) which may be required to
deliver any securities or other property upon the conversion of Series A
Preferred Stock as provided herein shall assume, by written instrument delivered
to the holders of Series A Preferred Stock, the obligation to deliver to such
holders such securities or other property as in accordance with the foregoing
provisions such holders may be entitled to receive. The foregoing provisions of
this Section 5(h) shall similarly apply to successive Transactions.

(i) Other Action Affecting Common Stock. In case at any time or from
time to time the corporation shall take any action affecting the Common Stock,
other than an action described in Section 5(h) hereof, then, unless in the
opinion of the Board of Directors of the corporation such action will not have a
material adverse effect upon the rights of the holders of

Series A Preferred Stock (taking into consideration, if necessary, any prior
actions which the Board of Directors deemed not to materially adversely affect
the rights of the holders), the conversion formula set forth in Section 5(a)
shall be adjusted in such manner and at such time as the Board of Directors of
the corporation may in good faith determine to be equitable in the
circumstances.

(j) Issue Taxes. The corporation shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of shares of Series A Preferred Stock pursuant
hereto; provided, that the corporation shall not be obligated to pay any
transfer taxes resulting from any transfer requested by any holder in connection
with any such conversion.

(k) Any shares of Series A Preferred Stock which shall at any time have
been converted pursuant to this Section 6 shall, after such conversion, have the
status of authorized but unissued shares of preferred stock, without designation
as to series until such shares are once more designated as part of a particular
series by the Board.

Section 6. Liquidation Preference.

(a) Series A Preferred Stock. In the event of any liquidation,
dissolution or winding up of the corporation, either voluntary or involuntary,
the holders of the Series A Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets or surplus funds of
the corporation to the holders of any stock ranking junior to the Series A
Preferred Stock, an amount equal to $100.00 per share plus the amount of accrued
and unpaid dividends thereon (the "Liquidation Preference")(such Liquidation
Preference to be adjusted for any combinations, consolidations, stock
distributions or stock dividends with respect to shares of the Series A
Preferred Stock). If upon the occurrence of any such liquidation, dissolution or
winding up of the corporation the assets and funds to be distributed among the
holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such holders of the full Liquidation Preference, then the entire
assets and funds of the corporation legally available for distribution after
payment of any amounts due and owing to holders of any stock ranking senior to
the Series A Preferred Stock shall be distributed ratably among the holders of
Series A Preferred Stock based upon the number of shares of Series A Preferred
Stock then held by them.

(b) Consolidation, Merger, etc. Not a Liquidation. The consolidation or
merger of the corporation with or into any other entity, the acquisition of the
capital stock of the corporation in a share exchange or the sale, lease or other
disposition of all or substantially all of the assets, property or business of
the corporation shall not be deemed to be a liquidation, dissolution or winding
up of the corporation within the meaning of this Section 6.

(c) Valuation of Securities. Any securities to be distributed pursuant
to this Section 6 in a liquidation, dissolution or winding up of the corporation
shall be the fair market value

thereof, as determined in good faith by the Board of Directors of the
corporation or, if so required by a holder of Series A Preferred Stock, as
determined by a national or regional investment bank or a national accounting
firm mutually selected by such holder and the corporation, the fees and expenses
of which shall be paid by the corporation.

(d) Notice. Written notice (the "Notice") of any such liquidation,
dissolution or winding up of the corporation within the meaning of this Section
6, which states the payment date, the place where said payments shall be made
and the date on which Conversion Rights (as defined in Section 5) terminate as
to such shares (which shall be not less than 20 days after the date such notice
is given), shall be given by first class mail, postage prepaid, or by telecopy,
facsimile or recognized overnight courier, not less than 30 nor more than 60
days prior to the payment date stated therein, to the then holders of record of
Series A Preferred Stock and Common Stock, such Notice to be addressed to each
such holder at its address as shown on the records of the corporation.

Section 7. Redemption Rights.

(a) The corporation shall have the right at any time after November 1,
2005 to redeem, out of funds legally available therefor, any outstanding shares
of Series A Preferred Stock, in whole or in part, for a redemption price equal
to the Liquidation Price per share of the Series A Preferred Stock (calculated
as if the corporation liquidated on the date of redemption). On November 1,
2008, the corporation shall redeem, out of funds legally available therefor, any
outstanding shares of Series A Preferred Stock, in whole or in part, for a
redemption price equal to the Liquidation Price per share of the Series A
Preferred Stock (calculated as if the corporation liquidated on the date of
redemption).

(b) In the event that fewer than all the outstanding Series A Preferred
Stock are to be redeemed, except as otherwise provided by law, the number of
shares to be redeemed shall be determined by the Board and the shares to be
redeemed shall be determined by lot or pro rata as may be determined by the
Board or by any other method as may be determined by the Board in its sole
discretion to be equitable.

(c) In the event the corporation shall redeem shares of Series A
Preferred Stock, notice of such redemption shall be given by first class mail,
postage prepaid, mailed not less than 30 nor more than 60 days prior to the
redemption date, to each holder of record of the shares to be redeemed, at such
holder's address as the same appears on the stock register of the Corporation.
Each such notice shall state: (i) the redemption date; (ii) the number of shares
of Series A Preferred Stock to be redeemed and, if fewer than all the shares
held by such holder are to be redeemed, the number of such shares to be redeemed
from such holder; (iii) the redemption price; and (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price.

(d) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the corporation in providing
money for the payment of the redemption price), the redeemed shares of Series A
Preferred Stock shall no longer be deemed to be outstanding, and all rights of
the holders thereof as stockholders of the corporation (except the right to
receive from the corporation the redemption price) shall cease. Upon surrender
in accordance with said notice of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board shall so require and
the notice shall so state), such shares shall be redeemed by the corporation at
the redemption price aforesaid. In case fewer than all the shares represented by
any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares without cost to the holder thereof.

(e) Any shares of Series A Preferred Stock which shall at any time have
been redeemed shall, after such redemption, have the status of authorized but
unissued shares of preferred stock, without designation as to series until such
shares are once more designated as part of a particular series by the Board.

<PAGE>

EX-3
EXHIBIT 3(b)

AMENDED AND RESTATED

BYLAWS

INTER*ACT SYSTEMS, INCORPORATED

ARTICLE I

Offices

1. Principal Office. The principal office of the corporation shall be
located at such place as the Board of Directors may determine.

2. Other Offices. The corporation may have offices at such other places,
either within or without the State of North Carolina, as the Board of Directors
may from time to time determine, or as the affairs of the corporation may
require.

ARTICLE II

Shareholders' Meetings

1. Place of Meetings. All meetings of the shareholders shall be held at the
principal office of the corporation, or at such other place, either within or
without the State of North Carolina, as shall be designated in the notice of the
meeting or agreed upon by a majority of the shareholders entitled to vote
thereat.

2. Annual Meetings. The annual meeting of shareholders shall be held each
year within six months of the close of the corporation's preceding fiscal year
on a date to be determined by the Board of Directors for the purpose of electing
directors of the corporation and for the transaction of such other business as
may be properly brought before the meeting.

3. Substitute Annual Meetings. If the annual meeting shall not be held on
the day designated by these bylaws, a substitute annual meeting may be called in
accordance with the provisions of Section 4 of this Article. A meeting so called
shall be designated and treated for all purposes as the annual meeting.

4. Special Meetings. Special meetings of the shareholders may be called at
any time by the Chairman, President, Secretary or Board of Directors of the
corporation.

5. Notice of Meetings. Written or printed notice stating the time and place
of the meeting shall be delivered no fewer than 10 nor more than 60 days before
the date thereof, either personally or by mail, by or at the direction of the
President, the Secretary, or other person calling the meeting, to each
shareholder of record entitled to vote at such meeting and to each nonvoting
shareholder entitled to notice of the meeting. If the corporation is required by
law to give notice of proposed action to nonvoting shareholders and the action
is to be taken without a meeting pursuant to Section 9 of this Article, written
notice of such proposed action shall be delivered to such shareholders not less
than 10 days before such action is taken.

If notice is mailed, such notice shall be effective when deposited in the
United States mail with postage thereon prepaid and correctly addressed to the
shareholder's address shown in the corporation's current record of shareholders.

In the case of an annual or substitute annual meeting, the notice of
meeting need not specifically state the business to be transacted thereat unless
it is a matter with respect to which specific notice to the shareholders is
expressly required by the provisions of the North Carolina Business Corporation
Act. In the case of a special meeting the notice of meeting shall specifically
state the purpose or purposes for which the meeting is called.

When a meeting is adjourned for more than 120 days after the date fixed for
the original meeting or if a new record date for the adjourned meeting is fixed,
notice of the adjourned meeting shall be given as in the case of an original
meeting. When a meeting is adjourned for 120 days or less and no new record date
for the adjourned meeting is fixed, it is not necessary to give notice of the
adjourned meeting other than by announcement at the meeting at which the
adjournment is taken.

6. Waiver of Notice. A shareholder may waive any notice required by law,
the Articles of Incorporation, or these bylaws before or after the date and time
stated in the notice. Such waiver must be in writing, be signed by the
shareholder entitled to the notice, and be delivered to the corporation for
inclusion in the minutes or filing with the corporate records. A shareholder's
attendance at a meeting waives objection to lack of notice or defective notice
of the meeting, unless the shareholder at the beginning of the meeting objects
to holding the meeting or transacting business at the meeting. A shareholder's
attendance at a meeting also waives objection to consideration of a particular
matter at the meeting that is not within the purpose or purposes described in
the notice of meeting, unless the shareholder objects to considering the matter
before it is voted upon.

7. Quorum. Shares representing a majority of the outstanding votes entitled
to vote upon a particular matter within each voting group represented in person
or by proxy shall constitute a quorum at meetings of shareholders. If there is
no quorum at the opening of a meeting of shareholders, such meeting may be
adjourned from time to time by a vote of a majority of the votes on the motion
to adjourn; at any adjourned meeting at which a quorum is present, any business
may be transacted which might have been transacted at the original meeting
unless a new record date is or must be set for the adjourned meeting.

Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is set for that adjourned
meeting.

8. Voting of Shares. Except to the extent the Articles of Incorporation
provide for multiple or fractional votes per share for certain classes of
capital stock, each outstanding share having voting rights shall be entitled to
one vote on each matter submitted to a vote at a meeting of the shareholders.
Except in the election of directors, a majority of the votes cast on any matter
at a meeting of shareholders at which a quorum is present shall be the act of
the shareholders on that matter, unless a greater vote is required by law, by
the Articles of Incorporation or by a bylaw adopted by the shareholders of the
corporation.

9. Informal Action by Shareholders. Any action which is required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed, either before or after the time the action which is the subject of the
shareholder approval is taken, by all of the persons who would be entitled to
vote upon such action at a meeting and delivered to the corporation for
inclusion in the minutes or filing with the corporate records. Unless otherwise
fixed by law or these bylaws, the record date for determining the shareholders
entitled to take action without a meeting shall be the date the first
shareholder signs the consent.

10. Voting Lists. After fixing a record date for a meeting, the corporation
shall prepare an alphabetical list of the names of all the shareholders entitled
to notice of such meeting, arranged by voting group and within each voting group
by class or series of shares, with the address of and number of shares held by
each shareholder. Such list shall be available for inspection by any
shareholder, beginning two business days after notice is given of the meeting
for which the list was prepared and continuing through the meeting, at the
corporation's principal office or at a place identified in the meeting notice in
the city where the meeting will be held. A shareholder, or his agent or
attorney, is entitled on written demand to inspect and, subject to the
requirements of North Carolina law, to copy the list, during regular business
hours and at his expense, during the period it is available for inspection. This
list shall also be produced and kept open at the time and place of the meeting
and shall be subject to inspection by any shareholder, or his agent or attorney,
during the whole time of the meeting or any adjournment.

11. Proxies. Shares may be voted either in person or by one or more agents
authorized by a written appointment form executed by the shareholder or by his
duly authorized attorney in fact. An appointment form is valid for 11 months
from the date of its execution, unless a different period is expressly provided
in the appointment form. An appointment is revocable by the shareholder unless
the appointment form conspicuously states that it is irrevocable and the
appointment is coupled with an interest.

12. Shares Held by Nominees. The corporation may establish a procedure by
which the beneficial owner of shares that are registered in the name of a
nominee is recognized by the corporation as a shareholder. The extent of this
recognition may be determined in the procedure.

ARTICLE III

Directors

1. General Powers. Subject to the Articles of Incorporation, all corporate
powers shall be exercised by or under the authority of, and the business and
affairs of the corporation be managed under the direction of, its Board of
Directors.

2. Number, Term and Qualifications. The number of directors of the
corporation shall be not less than 7 nor more than 12. The number of directors
may be fixed or changed from time to time, within the foregoing range, by the
shareholders or the Board of Directors. The Board of Directors may also increase
or decrease this number, but not by more than 30%, during any twelve-month
period. Directors need not be residents of the State of North Carolina or
shareholders of the corporation.

3. Term and Election. The Board of Directors shall be divided into classes,
as nearly equal in number as the then total number of directors constituting the
entire Board permits, designated as Class I Directors, Class II Directors and
Class III Directors, respectively, at the time of their election and shall have
the terms of office as follows: The term of office of Class I Directors shall
expire at the 1998 Annual Meeting of Shareholders; the term of office of Class
II Directors shall expire at the 1999 Annual Meeting of Shareholders; and the
term of office of Class III Directors shall expire at the 2000 Annual Meeting of
Shareholders; with the members of each class of directors to hold office until
their successors are elected and qualified. At each Annual Meeting of the
Shareholders subsequent to the 1997 Annual Meeting of Shareholders, directors
elected to succeed those whose terms are expiring shall be elected for a term of
office to expire at the third succeeding Annual Meeting of Shareholders and
until their respective successors are elected and qualified. Persons who receive
a plurality of the votes cast at any election of directors shall be deemed to
have been elected.

4. Removal. Notwithstanding any other provision of the bylaws of the
corporation, any director or the entire Board of Directors of the corporation
may be removed at any time, but only for cause and only by the affirmative vote
of the holders of at least two-thirds (66-2/3%) of the outstanding shares of
capital stock of the corporation entitled to vote generally in elections of
directors (considered for this purpose as a single class). If any directors are
so removed, new directors may be elected at the same meeting.

A director may not be removed by the shareholders at a meeting unless the
notice of the meeting states that the purpose, or one of the purposes, of the
meeting is removal of the director.

5. Vacancies. Unless the Articles of Incorporation provide otherwise, if a
vacancy occurs on the Board of Directors, including, without limitation, a
vacancy resulting from an increase in the number of directors or from the
failure by the shareholders to elect the full authorized number of directors,
the vacancy may be filled by the shareholders or the Board of Directors. If the
directors remaining in office constitute fewer than a quorum of the Board of
Directors, vacancies may be filled by the affirmative vote of a majority of all
the directors, or by the sole remaining

director. A vacancy that will occur at a specific later date may be filled
before the vacancy occurs but the new director may not take office until the
vacancy occurs. A director elected to fill a vacancy shall serve for the
unexpired term of his predecessor in office and until his successor is elected
and qualified.

6. Chairman. There may be a Chairman of the Board of Directors elected by
the directors from their number at any meeting of the Board. The Chairman shall
preside at all meetings of the Board of Directors and perform such other duties
as may be directed by the Board. The Board of Directors may designate the
Chairman of the Board or any Vice-Chairman of the Board as an officer of the
corporation.

7. Compensation. The Board of Directors may compensate a director for his
services as such and may provide for the payment of all expenses incurred by a
director in attending regular and special meetings of the Board or in otherwise
fulfilling his duties as a director.

8. Executive and Other Committees. Unless otherwise provided in the
Articles of Incorporation or the bylaws, the Board of Directors, by resolution
adopted by a majority of the number of directors then in office, may designate
from among its members an executive committee and one or more other committees,
each consisting of two or more directors. To the extent specified by the Board
of Directors or in the Articles of Incorporation of the corporation, such
committees shall have and may exercise all of the authority of the Board of
Directors in the management of the business and affairs of the corporation,
except that a committee may not authorize distributions; approve or propose to
shareholders action that North Carolina law requires be approved by
shareholders; fill vacancies on the Board of Directors or on any committee;
amend the Articles of Incorporation; adopt, amend, or repeal bylaws; approve a
plan of merger not requiring shareholder approval; authorize or approve
reacquisition of shares of capital stock of the corporation, except according to
a formula or method prescribed by the Board of Directors; or authorize or
approve the issuance or sale or contract for sale of shares, or determine the
designation and relative rights, preferences, and limitations of a class or
series of shares, except that the Board of Directors may authorize a committee
(or a senior executive officer of the corporation) to do so within limits
specifically prescribed by the Board of Directors.

ARTICLE IV

Meetings of Directors

1. Regular Meetings. A regular meeting of the Board of Directors shall be
held immediately after, and at the same place as, the annual meeting of the
shareholders. The Board of Directors may also provide, by resolution, the time
and place, either within or without the State of North Carolina, for the holding
of additional regular meetings.

2. Special Meetings. Special meetings of the Board of Directors may be
called by or at the request of the Chairman of the Board, the President or any
two directors. Such meetings may be held within or without the State of North
Carolina.

3. Notice of Meetings. Regular meetings of the Board of Directors may be
held without notice.

The person or persons calling a special meeting of the Board of Directors
shall, at least two days before the meeting, give notice thereof by any usual
means of communication. Such notice need not specify the purpose for which the
meeting is called.

4. Waiver of Notice. Any director may waive any required notice before or
after the date and time stated in the notice. Attendance at or participation by
a director in a meeting shall constitute a waiver of notice of such meeting,
unless the director at the beginning of the meeting (or promptly upon his
arrival) objects to holding the meeting or transacting any business at the
meeting and does not thereafter vote for or assent to action taken at the
meeting.

5. Quorum. A majority of the number of directors prescribed, or, if no
number is prescribed, the number in office immediately before the meeting
begins, shall constitute a quorum for the transaction of business at any meeting
of the Board of Directors.

6. Manner of Acting. Except as otherwise provided by law, the Articles of
Incorporation or these bylaws, an act of the majority of the directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors.

The vote of a majority of the directors then holding office shall be
required to adopt, amend or repeal a bylaw, if otherwise permissible. Approval
of a transaction in which one or more directors have an adverse interest shall
require a majority, not less than two, of the disinterested directors then in
office, even though less than a quorum.

7. Presumption of Assent. A director of the corporation who is present at a
meeting of the Board of Directors or a committee of the Board of Directors when
corporate action is taken shall be deemed to have assented to the action taken
unless his contrary vote is recorded; he objects at the beginning of the meeting
(or promptly upon his arrival) to holding it or transacting business at the
meeting; his dissent or abstention is entered in the minutes of the meeting; or
he files written notice of dissent or abstention with the presiding officer of
the meeting before its adjournment or with the corporation immediately after the
adjournment of the meeting. The right of dissent or abstention is not available
to a director who voted in favor of such action.

8. Informal Action by Directors and Attendance by Telephone. Action taken
by a majority of the directors without a meeting is nevertheless Board action if
written consent to the action in question, describing the action taken, is
signed by all the directors and filed with the minutes of the proceedings of the
Board or with the corporate records, whether done before or after the action so
taken. Such action shall be effective when the last director signs the consent,
unless the consent specifies a different effective date. The Board of Directors
may permit any or all directors to participate in a regular or special meeting
by, or conduct the meeting through the use of, any means of communication by
which all directors participating may simultaneously hear each other during the
meeting. A director participating in a meeting by this means is deemed to be
present in person at the meeting.

9. Loans to Directors. Except as otherwise provided by law, the corporation
shall not directly or indirectly lend money to or guarantee the obligation of a
director of the corporation unless the particular loan or guarantee is approved
by a majority of the votes represented by the outstanding voting shares of all
classes, voting as a single voting group, except the votes of shares owned by or
voted under control of the benefited director, or unless the corporation's Board
of Directors determines that the loan or guarantee benefits the corporation and
either approves the specific loan or guarantee or a general plan authorizing
loans and guarantees. The fact that a loan or guarantee is made in violation of
this Section does not affect the borrower's liability on the loan.

ARTICLE V

Officers

1. Designation and Number of Officers. The officers of the corporation
shall consist of Executive Officers and Nonexecutive Officers. The Executive
Officers of the corporation shall consist of the Chairman, the President, any
Executive Vice Presidents and Senior Vice Presidents, the Secretary, the
Treasurer and any Vice Presidents or other officers designated an Executive
Officer by the Board of Directors. Nonexecutive Officers are all officers other
than Executive Officers including, without limitation, Assistant Vice
Presidents, Assistant Secretaries, Assistant Treasurers and Vice Presidents.

The Board of Directors may designate any Executive Officer as Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief
Accounting Officer or Chief Technical Officer, which officer shall have such
authority as the Board of Directors may designate. Any two or more offices may
be held by the same person, except the offices of President and Secretary, but
no officer may act in more than one capacity where action of two or more
officers is required. It shall not be necessary for any officer to be a
shareholder of the corporation.

2. Election or Appointment and Term. The Executive Officers of the
corporation shall be elected by the Board of Directors. Such election may be
held at any regular or special meeting of the Board. Unless otherwise determined
by the Board of Directors, the Chief Executive Officer may appoint Nonexecutive
Officers. Appointments by the Chief Executive Officer shall become effective
upon the Chief Executive Officer's executing minutes of appointment and
inserting such minutes into the corporation's minute book. Each Executive and
Nonexecutive Officer shall hold office until his death, resignation, retirement,
removal, disqualification or until his successor is elected or appointed and
qualified.

3. Removal. Any officer or agent of the corporation may be removed by the
Board with or without cause. Any officer or agent appointed by the Chief
Executive Officer may be removed by him with or without cause. The removal of an
officer or agent pursuant to this section shall be without prejudice to the
contract rights, if any, of the person so removed.

4. Compensation. The compensation of all Executive Officers shall be fixed
by the Board of Directors. Unless otherwise determined by the Board, the
compensation of Nonexecutive

Officers appointed by the Chief Executive Officer of the corporation shall be
fixed by him. No officer shall serve the corporation in any other capacity and
receive compensation therefor unless such additional compensation be authorized
by the Board of Directors.

5. Chairman. The Chairman shall preside at all meetings of the Board of
Directors and of the shareholders and shall perform such other duties as may be
assigned to him by the Board.

6. President. The President shall, unless otherwise determined by the Board
of Directors, be the Chief Executive Officer of the corporation and, subject to
the control of the Board of Directors, shall supervise and control the
management of the corporation according to these bylaws. He shall, in the
absence of the Chairman, preside at all meetings of the shareholders. He shall
sign, with any other proper officer, certificates for shares of the corporation,
and any deeds, mortgages, bonds, contracts or other instruments that may
lawfully be executed on behalf of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be delegated by the Board of Directors to
some other officer or agent; and, in general, he shall perform all duties
incident to the office of President and such other duties as may be prescribed
by the Board of Directors from time to time.

7. Vice Presidents. The Vice Presidents shall perform such duties and shall
have such other powers as the Board of Directors or the President shall
prescribe. The Board of Directors may designate one or more Vice Presidents as
Executive or Senior Vice President, or any other title that the Board of
Directors deems appropriate, and may rank the Vice Presidents in order of
authority. The Vice President, or, if more than one, the highest ranking
available Vice President, shall, in the absence or disability of the President,
perform the duties and exercise the powers of that office.

8. Secretary. The Secretary shall keep accurate records of the acts and
proceedings of all meetings of shareholders and directors. He shall give all
notices required by law and by these bylaws. He shall have general charge of the
corporate records and books and of the corporate seal, and he shall affix the
corporate seal to any lawfully executed instruments requiring it. He shall have
general charge of the stock transfer books of the Corporation and shall keep, at
the registered or principal office of the Corporation, a record of shareholders
showing the name and address of each shareholder and the number and class of the
shares held by each. He shall sign such instruments as may require his
signature, and in general, shall perform all duties incident to the office of
Secretary and such other duties as may be assigned to him from time to time by
the President or by the Board of Directors.

9. Treasurer. The Treasurer shall have custody of all funds and securities
belonging to the Corporation and shall receive, deposit or disburse the same
under the direction of the Board of Directors and the President. He shall keep
full and accurate records of the finances of the Corporation in books especially
provided for the purpose; and he shall prepare or cause to be prepared, for each
fiscal year, annual financial statements of the corporation including a balance
sheet as of the end of the fiscal year, an income statement for that year, and a
statement of cash flows for the year, all in reasonable detail, including
particulars as to convertible securities then

outstanding, which financial statements or written notice of their availability
shall be mailed to each shareholder within 120 days after the close of each
fiscal year. The Treasurer shall, in general, perform all duties incident to his
office and such other duties as may be assigned to him from time to time by the
President or by the Board of Directors.

10. Assistant Officers. The Assistant Vice Presidents, Secretaries and
Treasurers shall, in the absence or disability of their superiors, perform the
duties and exercise the powers of those offices and shall, in general, perform
such other duties as shall be assigned to them by the President or by the
respective officers to whom they report.

11. Internal Auditor. The Chief Executive Officer may appoint one or more
internal auditors with the concurrence of the Audit Committee of the Board of
Directors. Any internal auditors so appointed may not be dismissed without the
concurrence of the Audit Committee.

12. Contract Rights. The appointment of an officer does not itself create
contract rights in the office.

13. Bonds. The Board of Directors may by resolution require any or all
officers, agents and employees of the corporation to give bond to the
corporation, with sufficient sureties, conditioned on the faithful performance
of the duties of their respective offices or positions, and to comply with such
other conditions as may from time to time be required by the Board of Directors.

ARTICLE VI

Contracts, Checks and Deposits

1. Contracts. The Board of Directors may authorize any officer or officers,
agent or agents, to enter into any contract or execute and deliver any
instrument on behalf of the corporation, and such authority may be general or
confined to specific instances.

2. Checks and Drafts. All checks, drafts or orders for the payment of money
issued in the name of the corporation shall be signed by such officer or
officers, agent or agents of the corporation and in such manner as shall from
time to time be determined by resolution of the Board of Directors.

3. Deposits. All funds of the corporation not otherwise employed shall be
deposited from time to time to the credit of the corporation in such
depositories as the Board of Directors shall direct.

ARTICLE VII

Certificates for Shares and Transfer Thereof

1. Certificates for Shares. The Chairman or the President and the Secretary
or the Treasurer or any other two officers designated by the Board of Directors
shall sign (either manually or in facsimile) share certificates. Shares may but
need not be represented by certificates. Unless otherwise provided by law, the
rights and obligations of shareholders are identical whether or not their shares
are represented by certificates. If shares are issued without certificates, the
corporation shall, within a reasonable time after such issuance, send the
shareholder a written statement of the information required on certificates by
law. At a minimum each share certificate or information statement shall state on
its face the following information: the name of the corporation and that it is
organized under the law of North Carolina; the name of the person to whom
issued; the number and class of shares and the designation of the series, if
any, the certificate or information statement represents; if the corporation is
authorized to issue different classes of shares or different series within a
class, a summary of, or alternatively, a conspicuous statement on the back or
front of the certificate or contained in the information statement that the
corporation will furnish in writing and without charge, the designations,
relative rights, preferences, and limitations applicable to each class and the
variations in rights, preferences, and limitations determined for each series
(and the authority of the Board of Directors to determine variations for future
series); and, a conspicuous statement of any restrictions on the transfer or
registration of transfer of the shares.

2. Transfer of Shares. Transfer of shares of the corporation evidenced by
certificates shall be made only on the stock transfer books of the corporation
by the holder of record thereof, or by his legal representative, who shall
furnish proper evidence of authority to transfer, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary or
other officer or agent designated by the Board of Directors, and on surrender
for cancellation of the certificate for such shares. Transfer of shares of the
corporation not evidenced by certificates shall be made upon delivery to the
corporation of such documentation as the corporation shall require.

3. Fixing Record Date. For the purpose of determining the shareholders
entitled to notice of a meeting of shareholders, to vote, to take any other
action, or to receive a dividend with respect to their shares, the Board of
Directors may fix in advance a date as the record date for any such
determination of shareholders. Such record date fixed by the Board of Directors
under this Section shall not be more than 70 days before the meeting or action
requiring a determination of shareholders.

If no record date is fixed for the determination of shareholders entitled
to notice of or to vote at a meeting of shareholders, or shareholders entitled
to a dividend, the close of the business day before the first notice is
delivered to shareholders or the date on which the Board of Directors authorizes
the dividend, as the case may be, shall be the record date for such
determination of shareholders.

When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section, such determination shall
apply to any adjournment thereof unless the Board of Directors fixes a new
record date, which it must do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting.

4. Lost Certificates. If a shareholder claims that a certificated security
has been lost, apparently destroyed or wrongfully taken, the corporation shall
issue a new certificated security or, at the option of the corporation, an
equivalent noncertificated security in place of the original security, if the
shareholder so requests before the corporation has notice that the security has
been acquired by a bona fide purchaser, files with the corporation a sufficient
indemnity bond if so required by the corporation, and satisfies any other
reasonable requirements imposed by the corporation.

5. Holder of Record. The corporation may treat as absolute owner of shares
the person in whose name the shares stand of record on its books just as if that
person had full competency, capacity and authority to exercise all rights of
ownership irrespective of any knowledge or notice to the contrary or any
description indicating a representative, pledge or other fiduciary relation or
any reference to any other instrument or to the rights of any other person
appearing upon its record or upon the share certificates except that any person
furnishing to the corporation proof of his appointment as a fiduciary shall be
treated as if he were a holder of record of its share.

The corporation may reject a vote, consent, waiver, or proxy appointment if
the Secretary or other officer or agent authorized to tabulate votes, acting in
good faith, has reasonable basis for doubt about the validity of the signature
on it or about the signatory's authority to sign for the shareholder.

6. Reacquired Shares. The corporation may acquire its own shares and shares
so acquired constitute authorized but unissued shares.

7. Rights, Options and Warrants. The corporation may issue rights, options
or warrants for the purchase of shares of the corporation. The Board of
Directors shall determine the terms upon which the rights, options or warrants
are issued, their form and content, and the consideration for which the shares
are to be issued. Without limitation, the Board of Directors may include on such
rights, options and warrants restrictions or conditions that preclude or limit
the exercise, transfer or receipt of such rights, options or warrants by the
holder or holders, or beneficial owner or owners, of a specified number or
percentage of the outstanding voting shares of the corporation or by any
transferee of such holder or owner, or that invalidate or void such rights,
options or warrants held by any such holder or owner or by such transferee. In
addition, the Board of Directors may implement rights plans that create purchase
or conversion rights that are not exercisable by a hostile bidder involved in a
hostile takeover of the corporation.

ARTICLE VIII

Indemnification

1. Extent. In addition to the indemnification otherwise provided by law,
the corporation shall indemnify and hold harmless its directors and Indemnified
Officers (as hereinafter defined) against liability and expenses in any
proceeding, including reasonable attorneys' fees, arising out of their status as
directors or officers or their activities in any of such capacities or in any
capacity in which any of them is or was serving, at the corporation's request,
in another corporation, partnership, joint venture, trust or other enterprise,
and the corporation shall indemnify and hold harmless those directors and
officers who are deemed to be fiduciaries of the corporation's present and
future employee pension and welfare benefit plans as defined under the Employee
Retirement Income Security Act of 1974 ("ERISA fiduciaries") against liability
and expenses in any proceeding, including reasonable attorneys' fees, arising
out of their status or activities as ERISA fiduciaries; provided, however, that
the corporation shall not indemnify a director or Indemnified Officer against
liability or litigation expense that he may incur on account of his activities
that at the time taken were known or reasonably should have been known by him to
be clearly in conflict with the best interests of the corporation, and the
corporation shall not indemnify an ERISA fiduciary against any liability or
litigation expense that he may incur on account of his activities that at the
time taken were known or reasonably should have been known by him to be clearly
in conflict with the best interests of the employee benefit plan to which the
activities relate. The corporation shall also indemnify the director,
Indemnified Officer, and ERISA fiduciary for reasonable costs, expenses and
attorneys' fees in connection with the enforcement of rights to indemnification
granted herein, if it is determined in accordance with Section 2 of this Article
that the director, Indemnified Officer and ERISA fiduciary is entitled to
indemnification hereunder.

2. Determination. Any indemnification under Section 1 of this Article shall
be paid by the corporation in any specific case only after a determination that
the director, Indemnified Officer or ERISA fiduciary did not act in a manner, at
the time the activities were taken, that was known or reasonably should have
been known by him to be clearly in conflict with the best interests of the
corporation, or the employee benefit plan to which the activities relate, as the
case may be. Such determination shall be made (a) by the affirmative vote of a
majority (but not less than two) of directors who are or were not parties to
such action, suit or proceeding or against whom any such claim is asserted
("disinterested directors") even though less than a quorum, or (b) if a majority
(but not less than two) of disinterested directors so direct, by independent
legal counsel in a written opinion, or (c) if there are less than two
disinterested directors, by the affirmative vote of all of the directors, or (d)
by the vote of a majority of all of the voting shares other than those owned or
controlled by directors or officers who were parties to such action, suit or
proceeding or against whom such claim is asserted, or by a unanimous vote of all
of the voting shares, or (e) by a court of competent jurisdiction.

3. Advanced Expenses. Expenses incurred by a director, Indemnified Officer
or ERISA fiduciary in defending a civil or criminal claim, action, suit or
proceeding may, upon approval of a majority (but not less than two) of the
disinterested directors, even though less than a quorum, or, if there are less
than two disinterested directors, upon unanimous approval of the

Board of Directors, be paid by the corporation in advance of the final
disposition of such claim, action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director, Indemnified Officer or ERISA
fiduciary to repay such amount unless it shall ultimately be determined that he
is entitled to be indemnified against such expenses by the corporation.

4. Corporation. For purposes of this Article, references to directors or
officers of the "corporation" shall be deemed to include directors, officers and
ERISA fiduciaries of Inter*Act Systems, Incorporated, its subsidiaries, and all
constituent corporations absorbed into Inter*Act Systems, Incorporated or any of
its subsidiaries by a consolidation or merger.

5. Indemnified Officer. For purposes of this Article, "Indemnified Officer"
shall mean all Executive Officers of the corporation and each other officer,
employee and agent of the corporation who is designated by the Board of
Directors as an "Indemnified Officer".

6. Reliance and Consideration. Any director, Indemnified Officer or ERISA
fiduciary who at any time after the adoption of this Bylaw serves or has served
in any of the aforesaid capacities for or on behalf of the corporation shall be
deemed to be doing or to have done so in reliance upon, and as consideration
for, the right of indemnification provided herein. Such right shall inure to the
benefit of the legal representatives of any such person and shall not be
exclusive of any other rights to which such person may be entitled apart from
the provision of this Bylaw. No amendment, modification or repeal of this
Article VIII shall adversely affect the right of any director, Indemnified
Officer or ERISA fiduciary to indemnification hereunder with respect to any
activities occurring prior to the time of such amendment, modification or
repeal.

7. Insurance. The corporation may purchase and maintain insurance on behalf
of its directors, officers, employees and agents and those persons who were
serving at the request of the corporation as a director, officer, partner,
trustee, employee, or agent of, or in some other capacity in, another
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Article or otherwise. Any full or partial payment made by
an insurance company under any insurance policy covering any director, officer,
employee or agent made to or on behalf of a person entitled to indemnification
under this Article shall relieve the corporation of its liability for
indemnification provided for in this Article or otherwise to the extent of such
payment, and no insurer shall have a right of subrogation against the
corporation with respect to such payment.

ARTICLE IX

General Provisions

1. Dividends. The Board of Directors may from time to time declare, and the
corporation may pay, dividends on its outstanding shares in such manner and upon
such terms and conditions as are permitted by law and by its Articles of
Incorporation.

2. Waiver of Notice. Whenever any notice is required to be given to any
shareholder or director under the provisions of the North Carolina Business
Corporation Act or under the provisions of the Articles of Incorporation or
bylaws of the corporation, a waiver thereof in writing signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be equivalent to such notice.

3. Fiscal Year. Unless otherwise ordered by the Board of Directors, the
fiscal year of the corporation shall be the calendar year.

4. Inspection of Records by Shareholders. The shareholders shall not be
entitled to inspect or copy any accounting records of the corporation or any
records of the corporation with respect to any matter which the corporation
determines in good faith may, if disclosed, adversely affect the corporation in
the conduct of its business or may constitute material nonpublic information at
the time the shareholder's notice of demand to inspect and copy is received by
the corporation.

5. Amendments. Notwithstanding any other provision of the Articles of
Incorporation or the Bylaws of the corporation, the Board of Directors of the
corporation shall have the power to adopt, amend or repeal the bylaws of the
corporation except to the extent limited by laws. The shareholders of the
corporation may exercise their power to adopt, amend or repeal the bylaws of the
corporation only by the affirmative vote of the holders of at least two-thirds
(66-2/3%) of the outstanding shares of capital stock of the corporation entitled
to vote generally in the election of directors (considered for this purpose as
one class and notwithstanding that some lesser percentage may be permitted by
law, or permitted or required by the Articles of Incorporation or the bylaws of
the corporation).

6. Inapplicability of Article 9A. Article 9A of Chapter 55 of the General
Statutes of North Carolina, entitled "Control Share Acquisition Act," shall not
apply to this corporation.

- -------------------------------------------------------------------------------

I, Mary Braunsdorf, the duly elected, qualified and acting Secretary of
Inter*Act Systems, Incorporated, do hereby certify that the foregoing are the
Amended and Restated Bylaws of Inter*Act Systems, Incorporated, adopted by the
Board of Directors on April 30, 1997 and by the shareholders of the corporation
on May 20, 1997, and reflecting amendments thereto adopted by the Board of
Directors on July 15, 1998, January 20, 1999 and March 15, 1999.

IN WITNESS WHEREOF, I have hereunto set my hand this 15th day of March,
1999.

(CORPORATE SEAL)

/s/Mary Braunsdorf
_________________________
Mary Braunsdorf

<PAGE>

EX-4
EXHIBIT 4(a)(2)

INCORPORATED UNDER THE LAWS OF
NORTH CAROLINA

Number Shares

INTER*ACT SYSTEMS, INCORPORATED

10% Series A Mandatorily Convertible Preferred Stock

This Certifies that ____________________________________________________is the
registered holder of _______________________________________________Shares of
the 10% Series A Mandatorily Convertible Preferred Stock of Inter*Act Systems,
Incorporated transferable only on the books of the Corporation by the holder
hereof in person or by Attorney upon surrender of this Certificate properly
endorsed.

In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ______________ day of ________________ A.D.

[Form of Reverse of Certificate]

The shares evidenced by this certificate have not been registered under the
Securities Act of 1933, as amended, or under the securities laws of any state.
The shares may not be sold, transferred, pledged or hypothecated in the absence
of an effective registration statement under the Securities Act of 1933, as
amended, and such registration or qualification as may be necessary under the
securities laws of any state, or an opinion of counsel satisfactory to the
corporation that such registration or qualification is not required.

The shares of common stock into which the shares represented by this certificate
are convertible, and the transfer thereof, are subject to the provisions of that
certain Shareholders' Agreement dated as of April 16, 1993, as amended and as
may be subsequently amended. Copies of the Shareholders' Agreement and
amendments thereto are on file in, and may be examined at, the principal office
of the Corporation.

THE CORPORATION WILL, UPON REQUEST, FURNISH ANY SHAREHOLDER, WITHOUT CHARGE,
INFORMATION IN WRITING AS TO THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND
RELATIVE RIGHTS OF ALL CLASSES OF SHARES AND ANY SERIES THEREOF AND THE
AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE VARIATIONS FOR FUTURE SERIES.

For Value Received, ________________ hereby sell, assign and transfer unto
_____________ Shares represented by the within Certificate, and do hereby
irrevocable constitute and appoint ________________________ Attorney to transfer
the said Shares on the books of the within named Corporation will power of
substitution in the premises.

Dated _____________________

<PAGE>

<PAGE>
EX-10
EXHIBIT 10(a)(11)

AMENDMENT NO. 1 TO VOTING AGREEMENT

THIS AMENDMENT NO. 1 TO VOTING AGREEMENT (the "Amendment") made and entered
into as of September 30, 1998 by and among Inter*Act Systems, Incorporated, a
North Carolina corporation (the "Company"), Vanguard Cellular Operating Corp., a
North Carolina corporation and wholly owned subsidiary of Vanguard Cellular
Systems, Inc. ("Vanguard"), and those individuals or entities whose names appear
on the signature pages hereto (individually, a "Shareholder" and collectively,
the "Shareholders");

W I T N E S S E T H:

WHEREAS, the Company, Vanguard and the Shareholders are parties to a Voting
Agreement dated as of November 1, 1996 (the "Voting Agreement") pursuant to
which the Shareholders agreed to vote all of their shares of common stock of the
Company, and to use their best efforts otherwise, so as to elect and maintain
out of the twelve director positions on the Board of Directors of the Company
six persons nominated by Vanguard; and

WHEREAS, the Voting Agreement was entered into based upon the relationship
between the Company and Vanguard as known to the Shareholders at such time, and
the parties hereto desire to amend the Voting Agreement to provide that it shall
terminate in the event there is a change in control of Vanguard;

NOW, THEREFORE, in consideration of the foregoing and the premises and the
mutual covenants contained herein, the parties hereto, intending legally to be
bound, hereby agree as follows:

1. Amendment to Voting Agreement. The Voting Agreement is hereby modified
and amended by amending Section 4 of the Voting Agreement in its entirety to
read as follows:

4. Amendment and Termination. This Agreement may be amended only by an
instrument in writing executed by all the parties hereto. This Agreement
shall be terminated upon the earlier to occur of: (i) written notice of
termination from Vanguard to the Shareholders; (ii) an underwritten public
offering of shares of the Company's Common Stock pursuant to a registration
statement filed under the Securities Act of 1933, as amended; (iii) a
Change in Control of Vanguard (as defined below) or (iv) ten years from the
date hereof.

For purposes of clause (iii) of this Section 4, "Vanguard" shall mean
Vanguard Cellular Systems, Inc., a North Carolina corporation and parent
company of Vanguard Cellular Operating Corp., and "Change in Control" shall
mean the occurrence of any of the following events:

(a) Any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") but excluding any employee benefit plan of the
Vanguard) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities
of Vanguard representing 50% or more of the combined voting power of
Vanguard's outstanding securities then entitled ordinarily (and apart
from rights accruing under special circumstances) to vote for the
election of directors; or

<PAGE>

(b) Individuals who are "Continuing Directors" (as hereinafter
defined) cease for any reason to constitute at least a majority of the
Board of Directors of Vanguard; or

(d) The closing of a merger, consolidation or like business
combination or reorganization of Vanguard the consummation of which
would result in the occurrence of any event described in clause (i) or
(ii) above.

For purposes of the foregoing, "Continuing Directors" shall mean
(i) the directors of Vanguard in office on July 22, 1998 and (ii) any
successor to any such director (and any additional director) who after
such date (y) was nominated or selected by a majority of the
Continuing Directors in office at the time of his nomination or
selection and (z) who is not an "affiliate" or "associate" (as defined
in Regulation 12B under the Exchange Act) of any person who is the
beneficial owner, directly or indirectly, of securities representing
50% or more of the combined voting power of Vanguard's outstanding
securities then entitled ordinarily to vote for the election of
directors.

2. Effect of Amendment. The parties hereto acknowledge and agree that,
except as modified hereby, all of the terms and provisions of the Voting
Agreement shall remain in full force and effect.

3. Successors and Assigns. This Amendment shall be binding upon and shall
inure to the benefit of the parties hereto and their respective heirs,
executors, successors, personal representatives and assigns.

4. Counterparts. This Amendment may be executed in multiple counterparts,
each of which shall be considered to be and have the force and effect of an
original.

IN WITNESS WHEREOF, each of the parties hereto has executed or caused this
Amendment to be executed by its duly authorized officials, as of the date and
year first above written.

INTER*ACT SYSTEMS, INCORPORATED

By: /s/ Stephen R. Leeolou
---------------------------
Chief Executive Officer

VANGUARD CELLULAR OPERATING CORP.

By: /s/ Haynes G. Griffin
--------------------------
President

SHAREHOLDERS:

ALONZO FAMILY PARTNERS, LTD.

By:/s/ Clarence A. Griffin
------------------------
General Partner

<PAGE>

/s/ Timothy G. Biltz
-------------------------
Timothy G. Biltz

/s/ F. Cooper Brantley
------------------------
F. Cooper Brantley

/s/ Doris R. Bray
------------------------
Doris R. Bray

CLEARING SYSTEMS, INC.

By: /s/ Henry L. Sloan III
------------------------
Vice President-Treasurer

/s/ Robert M. DeMichele
-----------------------
Robert M. DeMichele

/s/ William P. Emerson
-----------------------
William P. Emerson

CO-TRUSTEES FOR WILLIAM P. EMERSON
IRREVOCABLE TRUST DATED JULY 17,
1996

By: /s/ William O.J. Lynch
------------------------------
William O.J. Lynch, Co-Trustee

/s/ Dennis B. Francis
-----------------------------
Dennis B. Francis

-----------------------------
Deborah J. Francis

/s/ S. Tony Gore III
-----------------------------
S. Tony Gore III

/s/ Haynes G. Griffin
-----------------------------
Haynes G. Griffin

STEPHEN L. HOLCOMBE IRREVOCABLE
TRUST

By: /s/ Stephen L. Holcombe
---------------------------
Stephen L. Holcombe, Trustee

<PAGE>

/s/ Robert F. Hutchens
----------------------------
Robert F. Hutchens

/s/ Stephen R. Leeolou
----------------------------
Stephen R. Leeolou

/s/ Richard P. Ludington
----------------------------
Richard P. Ludington

WILLIAM AND MAXWELL LUDINGTON
TRUST

By: /s/ Richard P. Ludington
--------------------------
Richard P. Ludington, Trustee

/s/ William F. Penwell
-----------------------------
William F. Penwell

/s/ L. Richardson Preyer, Jr.
-----------------------------
L. Richardson Preyer, Jr.

/s/ Richard C. Rowlenson
-----------------------------
Richard C. Rowlenson

/s/ Peter B. Ruffin, Jr.
-----------------------------
Peter B. Ruffin, Jr.

/s/ Robert A. Silverberg
-----------------------------
Robert A. Silverberg

/s/ Van E. Snowdon
-----------------------------
Van E. Snowdon

/s/ Deborah A. Snowdon
-----------------------------
Deborah A. Snowdon

TORONTO DOMINION INVESTMENTS,
INC.

By: /s/ Martha L. Gariepy
--------------------------
Vice-President

/s/ Richard A. Vinchesi, Jr.
-----------------------------
Richard A. Vinchesi, Jr.

<PAGE>

EX-10
EXHIBIT 10(a)(12)

INTER*ACT SYSTEMS, INCORPORATED

SUBSCRIPTION AGREEMENT

AGREEMENT by and between Inter*Act Systems, Incorporated, a North Carolina
corporation (the "Corporation") and the undersigned subscriber (the
"Subscriber") for shares ("Preferred Shares") of Series A Mandatorily
Convertible Preferred Stock ("Preferred Stock") being offered to existing
shareholders of the Corporation pursuant to the terms described in a Private
Placement Memorandum dated July 27, 1998 (the "Memorandum").

WHEREAS, the Corporation has offered the Subscriber an opportunity to
purchase shares of Preferred Stock in the Corporation pursuant to a rights
offering (the "Offering") of up to 300,000 shares of Preferred Stock pursuant to
the terms of the Memorandum that has been delivered to the Subscriber by the
Corporation,

WHEREAS, the Subscriber desires to purchase certain of the Preferred Shares
being offered and to become a holder of Preferred Stock of the Corporation.

NOW, THEREFORE, the parties hereby agree as follows:

1. The Subscriber hereby subscribes and agrees to purchase, subject to the
terms and conditions of this Subscription Agreement (the "Agreement") the number
of Preferred Shares set forth at the end of this Agreement. This subscription
and Agreement represent an irrevocable offer by the Subscriber to subscribe for
such number of Preferred Shares, except as expressly provided herein. This
Agreement, subject to the terms hereof, shall become a contract for the sale of
said Preferred Shares upon the acceptance thereof by the Corporation on or
before October 31, 1998. THE MINIMUM SUBSCRIPTION AMOUNT IS 50 PREFERRED SHARES
(OR $5,000).

2. If the Subscriber wishes to purchase a percentage of the 300,000
Preferred Shares offered pursuant to the rights offering greater than its
percentage of the Company's Common Stock (the "Allocated Amount"), the
additional number of shares Subscriber wishes to purchase is included in the
number of Preferred Shares subscribed for at the end of this Agreement.
Subscriber understands that any Preferred Shares for which subscriptions have
not been received by August 31, 1998 ("Excess Shares") will be allocated on a
pro rata basis among subscribers who have subscribed for additional shares and
that the Corporation is not obligated to make any further solicitation to
shareholders of the Corporation for the sale of any Excess Shares.

3. The Corporation reserves the unrestricted right to accept or reject this
subscription, in whole or in part, and to allocate to any subscriber less than
the number of

Preferred Shares subscribed, and to withdraw this offer at any
time, as provided in the Memorandum. The subscription will not become effective
unless and until accepted.

4. Please check the method of payment.

[ ] This subscription is accompanied by a check in an amount representing
$100.00 for each Preferred Share to which the Subscriber has subscribed.
The check is payable to "NationsBank, N.A., as Escrow Agent for Inter*Act
Systems, Incorporated" (the "Escrow Agent") as Escrow Agent for both the
Subscriber and the Corporation.

[ ] The Subscriber has wired funds in an amount representing $100.00 for each
Preferred Share to which the Subscriber has subscribed to the following
account:

NationsBank, N.A.
ABA # 111000025
Credit to FTA 018-00-1981-0
Attention: Settlements
Reference: Inter*Act Systems Escrow Account
Account No:10-02-002-0006874

5. If this subscription is not accepted by the Corporation or if there are
not subscriptions accepted for 150,000 Preferred Shares by October 31, 1998,
none of the Preferred Shares will be sold and the Escrow Agent shall promptly
return the full amount of the Subscriber's deposit with interest to the
Subscriber. If this subscription is accepted by the Corporation and if the
Offering is subscribed to the extent of 150,000 Preferred Shares by the end of
the Offering Period, then upon receipt of confirmation of the sale, the Escrow
Agent shall pay the full amount of the Subscriber's deposit, plus interest
earned thereon, into an account established by the Corporation. In the event
there is not a sufficient number of Excess Shares to honor all or any portion of
the subscription in excess of Subscriber's Allocated Amount, the Escrow Agent
shall promptly return the payment for such portion, with interest, to
Subscriber.

6. The Subscriber hereby makes the representations and warranties set forth
below with the express intention that they be relied upon by the Corporation in
determining the suitability of the Subscriber to purchase Preferred Shares:

a. The Subscriber is fully aware that the Preferred Shares have not
been registered under the Securities Act of 1933, as amended (the "Act"),
or under any applicable state securities law. The Subscriber further
understands that the Preferred Shares are being sold in reliance on the
exemptions from the registration requirements of the Act provided by
Section 4(2) thereof and by Regulation D promulgated thereunder, and in
reliance on exemptions from the registration requirements of the applicable
state law, on the ground that the Offering involved has been limited to
accredited investors described in the Accredited Investor Questionnaire and
a limited number of other

qualifying investors described in the Qualified Investor Questionnaire, as
the case may be, of even date herewith;

b. The Subscriber is acquiring the Preferred Shares for his, her or
its own account as principal for the Subscriber's investment and not with a
view to resale or distribution;

c. The Subscriber has been furnished and has carefully read the
Memorandum and has been given the opportunity to ask questions of, and
receive answers from, the Corporation concerning the terms and conditions
of the Offering and to obtain such additional information which the
Corporation possesses or can acquire without unreasonable effort or expense
that is necessary to verify the accuracy of the information contained
therein or information that has been otherwise provided by the Corporation;

d. The Subscriber fully understands and agrees that the Subscriber
must bear the economic risk of investment in the Preferred Shares for an
indefinite period of time because, among other reasons, the Preferred
Shares have not been registered under the Act, or under any applicable
state securities laws, and, therefore, cannot be sold, pledged, assigned or
otherwise disposed of unless they are subsequently registered under any
applicable securities laws or an exemption from such registration is
available. The Subscriber further understands and agrees that the
Corporation will not honor any attempt by the Subscriber to sell, pledge,
transfer or otherwise dispose of any Preferred Shares in the absence of an
effective registration statement for such Preferred Shares or an opinion of
counsel satisfactory to the Corporation that an exemption from any
applicable registration requirements is available. The Subscriber further
understands that the Corporation is under no obligation to register the
Preferred Shares or make an exemption from registration available and that
the Corporation has not represented that it will make any attempt to so
register the Preferred Shares or to make such an exemption thereto
available;

e. The Subscriber understands that the certificate(s) representing the
Preferred Shares will bear restrictive legends substantially in the
following form:

THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES
LAWS OF ANY STATE. THE SHARES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH REGISTRATION OR
QUALIFICATION AS MAY BE NECESSARY UNDER THE SECURITIES LAWS OF ANY
STATE, OR AN

OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION OR QUALIFICATION IS NOT REQUIRED.

THE SHARES OF COMMON STOCK INTO WHICH THE SHARES REPRESENTED BY
THIS CERTIFICATE ARE CONVERTIBLE, AND THE TRANSFER THEREOF, ARE
SUBJECT TO THE PROVISIONS OF THAT CERTAIN SHAREHOLDERS' AGREEMENT
DATED AS OF APRIL 16, 1993, AS AMENDED AND AS MAY BE SUBSEQUENTLY
AMENDED. COPIES OF THE SHAREHOLDERS' AGREEMENT AND AMENDMENTS THERETO
ARE ON FILE IN, AND MAY BE EXAMINED AT, THE PRINCIPAL OFFICE OF THE
CORPORATION.

f. The Subscriber has sought such accounting, legal and tax advice as
the Subscriber has considered necessary to make an informed investment
decision;

g. The Subscriber is aware that no federal or state agency has made
any finding or determination as to the fairness of an investment in the
Preferred Shares, nor any recommendation or endorsement of any such
investment; and

h. The Subscriber has delivered herewith a Representation of
Accredited Investor (attached as Exhibit 1 hereto) or a Representation of
Qualified Investor (attached as Exhibit 2 hereto), as the case may be, and
the Subscriber represents that the information contained in such
Representation is true and accurate as of the date hereof. The Subscriber
agrees to advise the Corporation if any of the information contained in the
Representation materially changes prior to acceptance of this subscription.

i. The Subscriber has delivered herewith a Form W-9 - Request for
Taxpayer Identification Number and Certification (attached as Exhibit 3
hereto), and the Subscriber represents that the information contained in
such Form W-9 is true and accurate as of the date hereof. The Subscriber
agrees to supplement the information in such Form W-9 as may be necessary
to ensure that the information contained in such Form W-9 remains correct
in all material respects.

7. The Subscriber acknowledges that subscribers who upon conversion of
their Preferred Shares would own more than 1% of the total number of shares of
outstanding Common Stock ("Eligible Holders") will be entitled to the
registration rights set forth on Exhibit A hereto. The Subscriber agrees to be
bound by the terms set forth on Exhibit 4 hereto to the extent that it attempts
to exercise registration rights in respect of Common Stock issued upon
conversion of its Preferred Shares.

8. The Subscriber acknowledges that the Common Stock of the Corporation
into which the Preferred Shares are convertible will be issued subject to a
Shareholders' Agreement

dated as of April 16, 1993 among the Corporation and all of its shareholders, as
amended by Amendment No. 1 to Shareholders' Agreement dated as of June 17, 1994
(the "Shareholders' Agreement"). Subscriber hereby agrees that upon any
conversion of the Preferred Shares, Subscriber will execute a Joinder Agreement
and will agree to be bound by the terms of the Shareholders' Agreement, as it
may be amended from time to time, unless the Shareholders' Agreement is
terminated prior to the issuance of Common Stock to Subscriber. Notwithstanding
the foregoing, however, in the event the Shareholders' Agreement is terminated
prior to the issuance of Common Stock to the Subscriber, the Subscriber
nevertheless agrees to be bound by the lock-up agreement contained in Section 23
of the Shareholders' Agreement or any similar lock-up agreement then in effect
with respect to the Company's shareholders. A copy of the Shareholders's
Agreement is available upon request.

9. The subscription herein shall survive the death or disability of any
individual Subscriber and the dissolution or termination of any subscribing
entity, and this Agreement shall be binding upon the heirs, executors,
administrators, successors and assigns of any such Subscriber. All pronouns and
any variations thereof used herein shall be deemed neuter, singular or plural as
the identity of the Subscriber may require.

[Remainder of Page Intentionally Left Blank]

The number of Preferred Shares subscribed by the Subscriber and their
registration of ownership are set forth as follows:

PLEASE TYPE OR PRINT

Owner: _____________________________ _________________________
Social Security or Federal
Employer's ID Number

Residence
Address: _____________________________
Mailing Address
(if other than _____________________________
Residence): _____________________________
Telephones: Res._________________________
Bus._________________________

Joint Owner:
(if any): ______________________________
______________________________
Social Security or Federal
Employer's ID Number

Residence Address: _____________________________
Mailing
(if other _____________________________
Residence): _____________________________
Telephone: Res: _____________________________
Bus. _____________________________

PREFERRED SHARES TO BE REGISTERED AS INDICATED BELOW:

[ ] Sole ownership
[ ] Joint tenants with right of survivorship
[ ] Tenants in common

Number of Preferred Shares subscribed for*:_______________
Total Purchase Price ($100.00 per Preferred Share)*: _______________

Dated:________________________________________, 1998
* NOTE THAT THE MINIMUM SUBSCRIPTION AMOUNT IS 50 PREFERRED SHARES (OR $5,000).

Signature form for individuals

_______________________________________(SEAL)
Signature

Name: _________________________________

_______________________________________(SEAL)
(Signature of Joint Owner, if any)

Name: ________________________________

Signature form for corporations:

_______________________________________
(Name of corporation)

By:
_____________________________________
(Signature of Officer)

_______________________________________
(Name and Title)

Signature form for Partnerships:

_______________________________________
(Name of Partnership)

By its Partners:

_______________________________________
Name

Each Partner Individually:

_______________________________________
Name

ACCEPTANCE OF SUBSCRIPTION

The foregoing Subscription Agreement is ACCEPTED by the Corporation on
behalf of the Corporation on this ____ day of __________________ , 1998, to the
extent of __________________ Preferred Shares.

Inter*Act Systems, Incorporated

By: ___________________________________
Name:
Title:

EXHIBIT 1

REPRESENTATION OF ACCREDITED INVESTOR

In connection with the proposed offering by Inter*Act Systems,
Incorporated, a North Carolina corporation (the "Corporation"), of shares of the
Series A Mandatorily Convertible Preferred Stock of the Corporation (the
"Preferred Shares") at a purchase price of $100.00 per share in a transaction
intended to qualify as a private placement of securities exempt from
registration under the Securities Act of 1933, as amended (the "Act"), pursuant
to Section 4(2) thereof and Regulation D promulgated thereunder, I, the
undersigned, furnish the following representations and information:

REPRESENTATIONS

1. I am not relying upon the advice of an attorney, accountant or other advisor
in making a final investment decision to purchase shares since I believe I have
such knowledge and experience in financial and business matters to be capable of
evaluating the merits and risks of an investment in the shares. I am offering as
evidence of my knowledge and experience in these matters the information
indicated below.

2. I am an Accredited Investor (as that term is defined in Attachment A hereto),
as evidenced by my satisfying at least one of the following standards (initial
the one that applies):

[ ]a. I am an individual and had Income in excess of $200,000 in 1996 and
1997 or joint Income with my spouse in excess of $300,000 in 1996 and
1997 and reasonably expect to have Income in excess of this level in
1998. For purposes of this Representation, "Income" shall mean salary
and bonus income, taxable income (gross receipts less cost of goods or
services and expenses) in the case of sale of proprietorships,
distributable income from trusts and partnerships, interest and
dividend income (excluding unrealized gains) and vested contributions
made on behalf of an individual; or

[ ]b. I am an individual and my net worth (i.e., excess of total assets over
total liabilities), either individually or together with my spouse, is
at least $1,000,000; or

[ ]c. I am a corporation or partnership, not formed for the purpose of
acquiring the shares, with total assets in excess of $5,000,000; or

[ ]d. I am an entity in which all of the equity owners meet the standards
set forth in any of the immediately preceding subparagraphs. (If this
standard is initialed, then each such equity owner must complete and
return a copy of this Representation); or

[ ]e. Other (specify by reference to Attachment A):

_________________________

3. I am acquiring the Preferred Shares for my own account as principal for my
investment and not with a view toward resale or distribution.

4. My present financial position, including my other security holdings, and my
financial needs are such that:

a. my investment in the Preferred Shares is suitable for me, and I am
able to bear the economic risk of losing all funds invested; and

b. I am able to bear the economic burden of having all such funds tied up
in an essentially illiquid investment for an extended period of time.

5. All questions that I have had concerning the investment have been answered to
my complete satisfaction.

6. All documents, books and records of the Corporation relative to this
investment have been made available for my inspection.

7. I further acknowledge that the representations and information contained
herein support the reasonable belief of Inter*Act Systems, Incorporated that I
qualify within one of the above categories of Accredited Investors.

PERSONAL AND FINANCIAL INFORMATION

8. Name: _________________________________ Birth Date: _______________________

9. Permanent Residence Address (other than Post Office Box), including County,
and Telephone Number: ______________________________________________________
_________________________________________________________________________

10. Name of Current Business, Business Address and Telephone Number: ___________
____________________________________________________________________________
_________________________________________________________________________

Type of Current Business: __________________________________________________

Position Held in Current Business, Responsibilities Involved in Position and
Number of Years Employed in Position: ______________________________________
_________________________________________________________________________
_________________________________________________________________________

11. Name and Type of Business of Employer(s) or Business Association(s) during
Past Five Years and Dates of Employment: ___________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

Position(s) Held during Past Five Years and Above-named Employers:
_________________________________________________________________________
_________________________________________________________________________

Responsibilities Involved in Above-named Positions:
_________________________________________________________________________
_________________________________________________________________________

12. Send correspondence to:
Home: ______________________________________________________________________
Office: ____________________________________________________________________

Other: _____________________________________________________________________

13. Business or Professional Education and Degrees Received are as follows:

<TABLE>
<CAPTION>
Year
School Degree Received
------ ------ --------

------------------------- ----------- ------------

</TABLE>

<TABLE>
<CAPTION>
Year
School Degree Received
------ ------ --------

<S> <C> <C>
--------------------------- ------------ -------

--------------------------- ------------ --------

</TABLE>

14. The approximate percentage of my current income by source is as follows:

<TABLE>
<S> <C>
Salary ______%

-----------------------------------------

Bonus and Commissions ______%

-----------------------------------------

Dividends and Interest ______%

-----------------------------------------

Real Estate Income ______%

-----------------------------------------

Other Income ______%

-----------------------------------------

100%
------
------

</TABLE>

15. The following approximate percentages of my net worth are invested in

<TABLE>
<S> <C>
a. "tax shelter" partnerships: ______%

---------------------------------------------

b. marketable securities: ______%

---------------------------------------------

c. cash: ______%

---------------------------------------------

d. real estate: ______%

---------------------------------------------

e. venture capital (equity of companies
characterized by rapid growth and high
risk/return investment potential): ______%

---------------------------------------------
100%
-------
-------

</TABLE>

16. The source(s) of the funds that I intend to use to invest is (are): (If
funds are to be borrowed, so state).

___________________________________________________________________________
___________________________________________________________________________

17. Any contingent liabilities for which I may be obligated are as follows:
(State dollar amount and describe contingent liability).

___________________________________________________________________________
___________________________________________________________________________

INFORMATION CONCERNING MY INVESTMENT EXPERIENCE:

18. Prior Investment:

a. The frequency of my investment in marketable securities is:

[ ] often [ ] occasionally
[ ] seldom [ ] never

b. I have participated in the following types of investments:

[ ] Limited Partnerships
[ ] Tax shelters
[ ] Private placements of securities
[ ] Real estate
[ ] Oil and gas investment
[ ] Equipment leasing shelters

c. I was not required to use a purchaser representative for any private
placements.

IN WITNESS WHEREOF, I have executed this Representation of Accredited
Investor this ____ day of ________ , 1998 and declare that it is truthful and
correct.

- --------------------------------------------------------------------------------

__________________________________ _____________________________________
Signature of Prospective Purchaser Signature of Prospective Co-Purchaser
- --------------------------------------------------------------------------------

__________________________________ _____________________________________
PRINT Purchaser Name PRINT Co-Purchaser Name
- --------------------------------------------------------------------------------

__________________________________ _____________________________________
Title, if applicable Title, if applicable
- --------------------------------------------------------------------------------

</TABLE>

(Check one)

___ Individually

___ Joint tenants with right of survivorship

___ Tenants in common

___ In Partnership

___ As custodian, Trustee or agent for ________________________

___ Corporation

ATTACHMENT A

[Definition of Accredited Investor]

Reg. 'SS'230.501. As used in Regulation D ('SS''SS'230.501-230.508), the
following terms shall have the meaning indicated:

(a) Accredited investor. "Accredited investor" shall mean any person who
comes within any of the following categories, or who the issuer reasonably
believes comes within any of the following categories, at the time of the sale
of the securities to that person:

(1) Any bank as defined in section 3(a)(2) of the Act, or any savings
and loan association or other institution as defined in section 3(a)(5)(A)
of the Act whether acting in its individual or fiduciary capacity, any
broker or dealer registered pursuant to section 15 of the Securities
Exchange Act of 1934; any insurance company as defined in section 2(13) of
the Act; any investment company registered under the Investment Company Act
of 1940 or a business development company as defined in section 2(a)(48) of
that Act; Small Business Investment Company licensed by the U.S. Small
Business Administration under section 301(c) or (d) of the Small Business
Investment Act of 1958; any plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or its
political subdivisions for the benefit of its employees, if such plan has
total assets in excess of $5,000,000; employee benefit plan within the
meaning of the Employee Retirement Income Security Act of 1974 if the
investment decision is made by a plan fiduciary, as defined in section 3(21)
of such Act, which is either a bank, savings and loan association, insurance
company, or registered investment adviser, or if the employee benefit plan
has total assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are accredited investors;
[Amended in Release No. 33-6758 ([p] 84,211), effective April 11, 1988, 53
F.R. 7866; and Release No. 33-6825 ([p] 84,404), effective April 19, 1989,
54 F.R. 11369.]

(2) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;

(3) Any organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000; [Amended in Release No.
33-6758 ([p] 84,211), effective April 11, 1988, 53 F.R. 7866.]

(4) Any director, executive officer, or general partner of the issuer
of the securities being offered or sold, or any director, executive officer,
or general partner of a general partner of that issuer;

(5) Any natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his purchase exceeds $1,000,000;

(6) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current
year; [Amended in Release No. 33-6738 ([p] 84,221), effective
April 11, 1988, 53 F.R. 7866.]

(7) Any trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered, whose purchase
is directed by a sophisticated person as described in
'SS' 230.506(b)(2)(ii); and [Added in Release No. 33-6758 ([p] 84,221),
effective April 11, 1988, 53 F.R. 7866.]

(8) Any entity in which all of the equity owners are accredited
investors. [Amended in Release No. 33-6758 ([p] 84,221), effective April 11,
1988, F.R. 7866.]

EXHIBIT 2

REPRESENTATION OF QUALIFIED INVESTOR

In connection with the proposed offering by Inter*Act Systems, Incorporated,
a North Carolina corporation (the "Corporation"), of shares of the Series A
Mandatorily Convertible Preferred Stock of the Corporation (the "Preferred
Shares") at a purchase price of $100.00 per share in a transaction intended to
qualify as a private placement of securities exempt from registration under the
Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) thereof
and Regulation D promulgated thereunder, I, the undersigned, furnish the
following representations and information:

REPRESENTATIONS

1. I have received and carefully reviewed the Memorandum and Exhibits thereto,
and have obtained such additional information as I have requested through
discussions with representatives of the Corporation and otherwise.

2. I am sufficiently experienced in financial and business matters to be capable
of utilizing such information to evaluate the merits and risks of my investment
and to make an informed decision relating thereto, or I have utilized the
services of a purchaser representative as that term is defined in Rule 501(h)
promulgated under the Securities Act of 1933, as amended, and together we are
sufficiently experienced in financial and business matters that we are capable
of utilizing such information to evaluate the merits and risks of my investment,
and to make an informed decision relating thereto. The name, address, certain
representations and signature of any purchaser representative on whose advice I
have relied in making a decision concerning the purchase of Preferred Shares is
included with these representations in the form of Attachment A hereto.

3. I am acquiring the Preferred Shares for my own account as principal for my
investment and not with a view toward resale or distribution.

4. My present financial position, including my other security holdings, and my
financial needs are such that:

a. my investment in the Preferred Shares is suitable for me, and
I am able to bear the economic risk of losing all funds invested; and

b. I am able to bear the economic burden of having all such funds tied up
in an essentially illiquid investment for an extended period of time.

5. All questions that I have had concerning the investment have been answered to
my complete satisfaction.

6. All documents, books and records of the Corporation relative to this
investment have been made available for my inspection.

7. I further acknowledge that the representations and information contained
herein support the reasonable belief of Inter*Act Systems, Incorporated that I
qualify as a sophisticated investor for purposes of Rule 506.

PERSONAL AND FINANCIAL INFORMATION

8. Name:____________________________ Birth Date: ___________________________

Type of Current Business: __________________________________________________

Position Held in Current Business, Responsibilities Involved in Position and
Number of Years Employed in Position: ______________________________________
____________________________________________________________________________
____________________________________________________________________________

11. Name and Type of Business of Employer(s) or Business Association(s) during
Past Five Years and Dates of Employment: ___________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________

Position(s) Held during Past Five Years and Above-named Employers: _________
____________________________________________________________________________
____________________________________________________________________________

Responsibilities Involved in Above-named Positions:

____________________________________________________________________________
____________________________________________________________________________

12. Send correspondence to:
Home: ______________________________________________________________________
Office: ____________________________________________________________________

Other: _____________________________________________________________________

13. Business or Professional Education and Degrees Received are as follows:

--------------------------------------------------------------------
School Degree Year Received
------ ------ -------------
<S> <C> <C>

_________________________ _______________ __________________

--------------------------------------------------------------------
_________________________ _______________ __________________

--------------------------------------------------------------------

</TABLE>

14. The approximate percentage of my current income by source is as follows:

<TABLE>

<S> <C>
-----------------------------------------
Salary ______%

-----------------------------------------

Bonus and Commissions ______%

-----------------------------------------

Dividends and Interest ______%

-----------------------------------------

Real Estate Income ______%

-----------------------------------------

Other Income ______%

-----------------------------------------
100%
______
-----------------------------------------

</TABLE>

15. The following approximate percentages of my net worth are invested in

<TABLE>

<S> <C>
-------------------------------------------------
a. "tax shelter" partnerships: ______%
-------------------------------------------------
b. marketable securities: ______%
-------------------------------------------------
c. cash: ______%
-------------------------------------------------
d. real estate: ______%
-------------------------------------------------
e. venture capital (equity of
companies characterized by rapid
growth and high risk/return ______%
investment potential):
-------------------------------------------------
100%
_______
-------------------------------------------------

</TABLE>

16. The source(s) of the funds that I intend to use to invest is (are): (If
funds are to be borrowed, so state).

___________________________________________________________________________
___________________________________________________________________________

17. Any contingent liabilities for which I may be obligated are as follows:
(State dollar amount and describe contingent liability).

___________________________________________________________________________
___________________________________________________________________________

INFORMATION CONCERNING MY INVESTMENT EXPERIENCE:

18. Prior Investment:

a. The frequency of my investment in marketable securities
is:

[ ] often [ ] occasionally
[ ] seldom [ ] never

b. I have participated in the following types of investments:

[ ] Limited Partnerships
[ ] Tax shelters
[ ] Private placements of securities
[ ] Real estate
[ ] Oil and gas investment
[ ] Equipment leasing shelters

c. I [ ] was [ ] was not required to use a purchaser representative for
any private placements.

IN WITNESS WHEREOF, I have executed this Representation of Qualified Investor
this ____ day of ____________, 1998 and declare that it is truthful and correct.

- --------------------------------------------------------------------------------

__________________________________ _____________________________________
Title, if applicable Title, if applicable
- --------------------------------------------------------------------------------

</TABLE>

(Check one)

___ Individually

___ Joint tenants with right of survivorship

___ Tenants in common

___ In Partnership

___ As custodian, Trustee or agent for ________________________

___ Corporation

Attachment A

Statement of Purchaser Representative

I, ________________________________, have been appointed as the purchaser
representative for [ name of shareholder ] (the "Purchaser") in connection with
the private placement by Inter*Act Systems, Incorporated (the "Issuer") of its
Series A Mandatorily Convertible Preferred Stock.

I hereby certify as follows:

1. I am not an affiliate, director or officer or other employee of the
Issuer, or beneficial owner of 10% or more of any class of the equity
securities or 10% or more of an equity interest in the Issuer.

2. I have sufficient knowledge and experience in financial and business
matters to be capable of evaluating, alone, or together with other purchaser
representatives of the Purchaser, or together with the Purchaser, the merits
and risks of the prospective investment.

3. I have fully and truthfully disclosed to Purchaser any material
relationship between me or any of my affiliates and the Issuer or its
affiliates that exist now, or have existed at any time during two years, as
well as any compensation received, or to be received, as a result of such
relationship.

IN WITNESS WHEREOF, this Statement of Purchaser Representative is delivered
to the Corporation on this __ day of ___________, 1998.

______________________________________
Signature of Purchaser Representative

______________________________________
Address

______________________________________
City, State & Zip Code

______________________________________
Telephone Number

EXHIBIT 4

REGISTRATION RIGHTS

SECTION 1. Definitions. The following terms shall have the following
meanings for the purpose of this Exhibit A:

(a) "Blackout Period" has the meaning assigned to such term in Section
2(a) hereof.

(b) "Closing" and "Closing Date" are defined as the sale and issuance
of the Preferred Stock and the date of sale and issuance of the Preferred
Stock, respectively, pursuant to the Subscription Agreement.

(d) "Decline Notice" has the meaning assigned to that term in Section
2(b) hereof.

(e) "Demand Registration" has the meaning assigned to that term in
Section 2(a) hereof.

(f) "Eligible Holder" means a holder of shares of Preferred Stock or
Registrable Securities who holds (or would hold upon the conversion of any
outstanding shares of Preferred Stock) in excess of one percent (1%) of the
total outstanding shares of Common Stock.

(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

(h) "Expiration Date" has the meaning assigned to that form in Section
12.

(i) "Person" means any individual, corporation, limited liability
company, partnership, association, trust or other entity or organization.

(j) "Piggyback Registration" has the meaning assigned to that term in
Section 3 hereof.

(k) "Preferred Stock" means the Series A Mandatorily Convertible
Preferred Stock of the Company.

(l) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in

compliance with the Securities Act, or the securities laws of any
jurisdiction other than the United States, and the declaration or ordering
of effectiveness of such registration statement or document, or similar
action in such other jurisdiction.

(m) "Registrable Securities" means the shares of Common Stock issued or
issuable in connection with the conversion of Preferred Stock or issued as a
dividend or other distribution with respect to, or in exchange for or in
replacement of such Common Stock (whether through stock dividends, stock
splits, reclassifications, mergers, consolidations, recapitalizations or
otherwise).

(n) "Registration Expenses" has the meaning assigned to that term in
Section 6(a) hereof.

(o) "Registration Rights" means the rights to Demand Registration and
Piggyback Registration of Eligible Holders pursuant to this Agreement and
any other similar rights of any other Person that are in existence as of the
date hereof.

(p) "SEC" means the Securities and Exchange Commission.

(q) "Secondary Securities" has the meaning assigned to that term in
Section 7 hereof.

(r) "Securities Act" means the Securities Act of 1933, as amended.

(s) "Violation" has the meaning assigned to that term in Section 9(a)
hereof.

SECTION 2. Registration Upon Demand. (a) At any time prior to the Expiration
Date and after six months from the date that the first registration statement
filed by the Company under the Securities Act with respect to the Common Stock
becomes effective, upon the written request of Eligible Holders representing not
less that 50% of the total numbers of shares of Common Stock issued or issuable
upon conversion of the Preferred Stock that are held by Eligible Holders
("Requesting Holders") requesting that the Company effect the registration under
the Securities Act of its Registrable Securities (which request shall specify
the intended method of distribution thereof), the Company shall use its best
efforts to register under the Securities Act (a "Demand Registration"), as
expeditiously as may be practicable, the Registrable Securities that the Company
has been requested to register; provided, however, that Eligible Holders shall
entitled to request (i) more than two (2) Demand Registrations or (ii) any
Demand Registration within the twelve-month period immediately following the
date of any previous request for a Demand Registration hereunder.

(b) The Company may, at any one time during the term of this Agreement,
decline a Demand Registration request of Requesting Holders by notifying such
Requesting Holders in writing within fifteen (15) days of the receipt of such
request (a "Decline Notice") if, in the Company's judgment, such Demand
Registration would not be in the Company's best interest.

The Decline Notice shall be effective for a three-month period commencing on the
date thereof (the "Blackout Period") and shall operate as a bar to any
additional Demand Registration requests of Eligible Holders for the remainder of
the Blackout Period.

SECTION 3. "Piggyback" Registrations. If, at any time during the term of
this Agreement, the Company proposes to register any securities under the
Securities Act in connection with any offering of its securities, whether or not
for its own account (other than a registration statement filed with respect to
the issuance of Common Stock, or securities convertible into or exchangeable for
Common Stock, or rights to acquire Common Stock, on Form S-4 or otherwise in
connection with an acquisition, merger or other transaction or on Form S-8 with
respect to shares issuable pursuant to options granted or to be granted to
employees of the Company), the Company shall furnish prompt written notice to
each Eligible Holder of its intention to effect such registration and the
intended method of distribution in connection therewith. On each such occasion,
upon the written request of an Eligible Holder made to the Company within 30
days after the receipt of such a notice by the Company, the Company shall
include in such registration such amount of the Registrable Securities as such
Eligible Holder shall notify to the Company in writing (a "Piggyback
Registration"), subject to Section 7 hereof.

SECTION 4. Obligations of the Company. Whenever the Company is required
under this Agreement to effect the registration of any Registrable Securities,
the Company shall, as expeditiously as may be practicable:

(a) Prepare and file with the SEC a registration statement with respect
to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and keep such registration
statement effective for up to 60 days.

(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of
applicable law with respect to the disposition of all securities covered by
such registration statement.

(c) Furnish to the Requesting Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of applicable law, and such other documents as it may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by it.

(d) Use its best efforts to register and qualify the securities covered
by such registration statement under such other securities laws of such
jurisdictions in which the securities are being registered as shall be
reasonably requested by the Requesting Holders; provided, however, that the
Company shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such jurisdictions.

(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. The
Requesting Holders shall also enter into and perform its obligations under
such an agreement.

(f) Notify the Requesting Holders, at any time when a prospectus
relating thereto is required to be delivered under applicable law, of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of circumstances then existing.

SECTION 5. Furnish Information. It shall be a condition precedent to the
obligation of the Company to take any action pursuant to this Agreement that
each Eligible Holder shall furnish to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
disposition of such securities as shall be reasonably required to effect the
registration of the Registrable Securities.

SECTION 6. Expenses of Registration. (a) With respect to a Demand
Registration, the Company shall bear and pay all out-of-pocket expenses incurred
in connection with the registrations, filings or qualifications of Registrable
Securities, with respect to the registrations made pursuant to Sections 2 and 4,
including, without limitation, all registration, filing, and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the Company
and one (but only one) counsel representing all of the Eligible Holders (the
"Registration Expenses"), but excluding underwriting discounts and commissions
relating to Registrable Securities.

(b) With respect to a Piggyback Registration, each Eligible Holder shall pay
a portion of the Registration Expenses incurred by or on behalf of such Eligible
Holder for its benefit pro rata based on the percentage of the aggregate number
of shares registered pursuant to such registration which are represented by the
Registrable Securities of such Eligible Holder; provided, however, such Eligible
Holder may elect to be responsible for the payment of only those expenses it
would bear had it exercised its right to its Demand Registration at the
Company's expense if not previously exercised (in which case, such Eligible
Holder would be obligated to pay a portion of the Registration Expenses incurred
by or on behalf of such Eligible Holder for its benefit in connection with any
Demand Registration); and provided, further, that if the Company should agree to
bear the Registration Expenses of any other stockholder in any Piggyback
Registration for any other stockholder of Company on terms more favorable than
those applicable to the Eligible Holders, the Company will bear the expenses of
the Eligible Holders in the Piggyback Registration without requiring the payment
of such expenses in connection with a Demand Registration available to the
Investor or provide the more favorable terms to the Eligible Holders, as the
case may be.

SECTION 7. Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 3 to include any of the Registrable
Securities of any Eligible Holder in the registration of the securities to be
included in such underwriting, or in such underwriting itself, unless such
Eligible Holder accepts the terms of the underwriting as agreed upon between the
Company and the underwriters selected by it, and then only in such quantity as
the underwriters determine in their sole discretion will not jeopardize the
success of the offering by the Company. If the total amount of securities,
including Registrable Securities, requested by shareholders to be included in
such offering, whether upon exercise of Registration Rights or otherwise
(collectively, "Secondary Securities"), exceeds the number of Secondary
Securities that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only such number of Secondary Securities, including
Registrable Securities, as the underwriters determine in their sole discretion
will not jeopardize the success of the offering. The Secondary Securities so
included shall be apportioned among the Eligible Holders and such other selling
shareholders having exercised Registration Rights, pro rata in proportion to the
total number of Secondary Securities, including Registrable Securities, owned by
the Eligible Holders and such other selling shareholders, respectively, before
any Secondary Shares shall be included on behalf of any other shareholder, or in
such other proportion as may be agreed to by all such shareholders and the
Eligible Holders.

SECTION 8. Delay of Registration. The Eligible Holders shall not have any
right to obtain or seek an injunction restraining or otherwise delaying any
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Agreement.

SECTION 9. Indemnification. In the event any Registrable Securities are
included in a registration statement under this Agreement:

(a) To the extent permitted by law, the Company will indemnify and hold
harmless the Eligible Holder, any underwriter (as defined in the Securities
Act or other applicable law) for the Eligible Holder and each Person, if
any, who controls an Eligible Holder or underwriter within the meaning of
the Securities Act, the Exchange Act or other applicable law, against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Securities Act or other applicable law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading,
or (iii) any violation or alleged violation by the Company of the Securities
Act or other applicable law, or any rule or regulation promulgated under the
Securities Act or other applicable

law; and the Company will pay to each Eligible Holder, underwriter or
controlling Person any reasonable legal or other expenses incurred by it
in connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 9(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company
be liable in any such case for any such loss, claim, damage, liability, or
action to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by an
Eligible Holder or such underwriter or controlling Person.

(b) To the extent permitted by law, each Eligible Holder will indemnify
and hold harmless the Company, each of its directors, each of its officers
who has signed the registration statement, each Person, if any, who controls
the Company within the meaning of the Securities Act or other applicable
law, any underwriter, and any controlling Person of any such underwriter,
against any losses, claims, damages, or liabilities (joint or several) to
which any of the foregoing Persons may become subject, under the Securities
Act or other applicable law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Eligible Holder expressly for use in connection with such
registration; and such Eligible Holder will pay any reasonable legal or
other expenses incurred by any Person to be indemnified pursuant to this
Section 9(b), in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this Section 9(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of such Eligible Holder, which
consent shall not be unreasonably withheld; and provided further, however,
that in no event shall any indemnity under this Section 9(b) exceed the
gross proceeds from the offering received by such Eligible Holder.

(c) Promptly after receipt by an indemnified party under this Section 9
of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 9, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, to assume the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that an
indemnified party (together with all other indemnified parties which may be
represented without conflict by one counsel) shall have the right to retain
one separate counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to
actual or potential differing interests between such indemnified

party and any other party represented by such counsel in such proceeding.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action, if prejudicial to
its ability to defend such action, shall relieve such indemnifying party of
any liability to the indemnified party under this Section 9, but the
omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 9.

(d) The obligations of the Company and each Eligible Holder under this
Section 9 shall survive the completion of any offering of Registrable
Securities under a registration statement pursuant to this Agreement, and
otherwise.

SECTION 10. Reports. With a view to making available to the holders of
Preferred Stock and Registrable Securities the benefits of Rules 144 and 144A
under the Securities Act and any other applicable rule or regulation in each
other jurisdiction where the Company's securities are registered that may at any
time permit the Investor to sell securities of the Company to the public without
registration, the Company agrees to do the following from the date of
effectiveness of the Company's first registration statement filed under the
Securities Act until the Expiration Date:

(a) make and keep public information available, as those terms are
understood and defined in Rule 144 or other applicable law, at all times;

(b) file with the SEC and the applicable authority in each other
jurisdiction where the Company's securities are registered in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act, and the similar laws of each such other
jurisdiction; and

(c) furnish to each holder of Preferred Stock or Registrable Securities
forthwith upon request, (i) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents filed by the
Company with governmental authorities (including the SEC), and (ii) such
other information as may be reasonably requested in availing the Investor of
any rule or regulation of the SEC or similar authorities in any jurisdiction
where the Company's securities are registered, which permits the selling of
any such securities without registration.

SECTION 11. "Market Stand-Off" Agreement. Each holder of Preferred Stock or
Registrable Securities hereby agrees that, during the duration of the period
specified by the Company and an underwriter of Common Stock or other securities
of the Company following the effective date of a registration statement of the
Company under the Securities Act (but no longer than six months), it shall not,
to the extent requested by the Company and such underwriter, directly or
indirectly sell, offer to sell, contract to sell (including, without limitation,
any short sale), grant any option to purchase or otherwise transfer or dispose
of any securities of the Company held by such holder at any time during such
period except Common

Stock included in such registration and except in a private transaction in which
the transferee of such holder agrees to abide by the agreement of the holder
pursuant to this Agreement for the remaining duration of the period specified to
the holder by the Company and the underwriter. In order to enforce the foregoing
covenant, the Company may impose stop-transfer instructions, consistent with the
provisions of this Section 11, with respect to the shares of Preferred Stock or
the Registrable Securities of the Investor (and the shares or securities of
every other Person subject to the foregoing restriction) until the end of such
period.

SECTION 12. Termination. Except for the right to indemnification provided
herein, no holder of Registrable Securities shall be entitled to exercise any
right provided for in this Exhibit A after the earlier of (i) five years
following the date of effectiveness of the Company's first registration
statement filed under the Securities Act or (ii) the date all of the Registrable
Securities then owned by Investor may be immediately resold pursuant to Rule 144
(such date, the "Expiration Date").

<PAGE>

EX-10
EXHIBIT 10(c)(11)

INTER*ACT SYSTEMS, INCORPORATED
14 WESTPORT AVENUE
NORWALK, CONNECTICUT 06851

October 2, 1998

Arthur J. Murphy
18337 Superior Street
Northridge, California 91325

Leona R. Singer, Trustee
under the GERALD AND LEONA R. SINGER
FAMILY TRUST dated May 18, 1995
3142 Pacific Coast Highway, Suite 208
Torrance, California 90505

This letter amends in certain respects the present agreement (the "License
Agreement") whereby Inter*Act Systems, Incorporated, a North Carolina
corporation ("Inter*Act") (formerly Interactive Networks Incorporated), has the
exclusive (to the extent of your rights therein) worldwide right and license to
manufacture, use, sell and grant sublicenses with respect to United States
Patent Number 4,554,446, United States Patent Number 4,672,377 and United States
Patent Number 5,305,195 and improvements thereon (collectively, the "Patents")
and has agreed to pay you certain royalties. The Agreement is reflected in: (i)
a License Agreement dated as of December 31, 1990 (the "Original License
Agreement") between Arthur J. Murphy, an individual ("Murphy"), and Gerald
Singer, an individual (deceased) ("Singer"), as licensors and Michael R. Jones,
an individual ("Jones"), as original licensee; (ii) an Assignment of License
Agreement dated as of June 15, 1993 (the "Assignment") among Murphy, Singer,
Jones and Network Licensing, Inc., a North Carolina corporation and wholly owned
subsidiary of Inter*Act ("Network"); (iii) an Addendum to License Agreement
dated as of June 15, 1993 (the "Addendum") among Murphy, Singer and Network;
(iv) a Sublicense Agreement dated as of June 16, 1993 between Inter*Act and
Network (the "Sublicense"); (v) a Settlement Agreement and Mutual General
Release dated as of September 6, 1994 (the "Settlement Agreement") among Murphy
and Singer, their spouses, Network and Inter*Act; and, (vi) a Letter Agreement
dated July 22, 1996 (the "Letter Agreement") among Murphy, Singer and Inter*Act.

The Original License Agreement, as modified by the Assignment, Addendum,
Settlement Agreement and Letter Agreement, is referred to herein as the "License
Agreement". The rights of

Network in and to the License Agreement have been assigned to Inter*Act by
instrument dated July 23, 1996. The rights of Singer in and to the Patents and
the License Agreement have been assigned to Gerald Singer and Leona R. Singer,
Trustees, or their Successor, under the GERALD AND LEONA R. SINGER FAMILY TRUST
dated May 18, 1995.

The License Agreement is amended as follows:

1. Paragraph G.3 of the License Agreement is amended in its entirety to
read as follows:

If Licensee desires to file an infringement action, Licensor must be
notified and Licensee will bear all costs, expenses and attorneys'
fees associated with the lawsuit. In the event of recovery from such
action instituted by Licensee, all amounts recovered, whether cash or
other property, will belong to Licensee and amounts recovered, whether
cash or other property, as a result of infringement of the Patents in
excess of the costs, expenses and attorneys' fees of such action (the
"Infringement Recoveries") will be subject to the royalty provisions
of paragraph B; provided, however, that a royalty of seven percent
(7%) shall be paid on the Infringement Recoveries until such time as
Licensor has received the aggregate sum of Ten Million Dollars
($10,000,000) in royalties under paragraph B and this subparagraph G.3
of this Agreement. Thereafter Infringement Recoveries will be subject
to a royalty of six percent (6%) and other gross collected revenues
referred to in paragraph B will be subject to a royalty of one percent
(1%) as provided in paragraph B.

2. Paragraph D.3 of the License Agreement is amended in its entirety to
read as follows:

Either party may terminate this License Agreement at any time after
only the minimum payments called for in Paragraph B.1 hereof shall
have been paid to the Licensor for any period of sixty-two months (62)
consecutive months beginning on or after October 1, 1998.

If the following is in accordance with our agreements, please sign the enclosed
copy of this letter and return it to us.

INTER*ACT SYSTEMS, INCORPORATED

/s/Stephen R. Leeolou
___________________________________________
Stephen R. Leeolou, Chief Executive Officer

AGREED TO AND ACCEPTED:

/s/Arthur J. Murphy
_____________________
by Arthur J. Murphy Jr. Attorney-in-fact
_________________________________________

Arthur J. Murphy

/s/Leona R. Singer, Trustee
_________________________________________
Leona R. Singer, Trustee under the
GERALD AND LEONA R. SINGER
FAMILY TRUST dated May 1, 1995

<PAGE>

EX-10
EXHIBIT 10(d)(2)

SEVERANCE AND RELEASE AGREEMENT
-------------------------------

THIS SEVERANCE AND RELEASE AGREEMENT (the "Agreement"), entered into as
of January 23, 1999 by and between Inter*Act Systems, Incorporated, a North
Carolina corporation (the "Company"), and Thomas A. Manna, an individual and
resident of New York ("Manna"),

W I T N E S S E T H:

Whereas, Manna and the Company desire to memorialize their understanding
and agreement with respect to various matters relating to the termination of
Manna's employment with the Company;

NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledge, the parties hereto agree as follows:

1. Resignation Date. Manna understands, acknowledges and agrees to
resign as an employee and an officer of the Company and that his employment with
the Company shall terminate as of January 7, 1999.

2. Severance Benefit. After the Effective Date, the Company will
continue to pay Manna's salary minus applicable withholdings for a period of 12
months from the "Presentation Date" of this Severance and Release Agreement, as
provided for in the offer letter from the Company to Manna dated March 15, 1997
("March 15, 1997 Letter"). In addition the Company will pay Manna $40,000.00 as
an Incentive Pay Opportunity stipulated in the letter of September 1, 1998,
amending the March 15, 1997 Letter). Manna and the Company agree that the terms
of both the letter of September 1, 1998 and the March 15, 1997 Letter are hereby
amended to pay out the $40,000.00 Incentive Pay Opportunity in equal
installments of $5,000.00 per month. Manna acknowledges and agrees that, except
for accrued salary, vacation pay and reimbursement of expenses approved in
accordance with Company policy owing through January 7, 1999, he is entitled to
no other salary, compensation, benefits, bonuses or perquisites from the
Company. As additional consideration the Company will pay for Manna's full
medical and dental premiums for a period of six months from the "Presentation
Date" under federal COBRA regulations. COBRA insurance coverage for the 12 month
period beyond that will be at Manna's expense.

3. Stock Options. Manna's options to purchase shares of Inter*Act's
common stock will vest as set forth in the March 15, 1997 Letter and as provided
for in the 1994 Stock Compensation Plan Agreement and the 1996 NonQualified
Stock Option Plan Agreement between Manna and the Company, both of which were
dated as of March 31, 1997. Manna's vested options will expire if unexercised
within three months following the termination of Manna's employment.

Severance and Release Agreement Page 1 of 4

Subject to Board or Committee approval, Manna's Option Agreements will
be voluntarily amended to extend the exercise period for all vested shares for a
period of one year from Manna's resignation date.

4. Release. As material inducement for the Company to enter into this
Agreement, to pay the severance benefit and accelerate the options described
herein, Manna for himself, his heirs, his executors, administrators, successors
and assigns, fully, finally and forever releases and discharges the Company and
each and every one of its affiliate and parent companies, agents, directors,
employees, officers, successors, assigns and attorneys (hereinafter collectively
referred to as "the Company"), of and from any, every and all manner of actions,
cause and causes of actions, suits, debts, dues, sums of money, damages,
judgments, decrees, claims, costs, expenses, loss of services, back wages, front
pay, liquidated damages, punitive damages, injunctive relief, attorneys' fees
and demands of whatsoever kind and nature prior to and including the Effective
Date of this Agreement, including but not limited to all claims based on
allegations of discrimination, whether based on grounds of race, color,
religion, sex, age, national origin, disability or otherwise, and particularly
on account of any claims arising under the Age Discrimination In Employment Act
("ADEA"), the Employee Retirement Income Security Act, Title VII of the Civil
Rights Act of 1964 claims relating to hiring, assignment, classification,
transfer, promotion, compensation, fringe benefits, layoffs, leaves of absence,
discipline, demotion, termination, forced resignation, referrals for employment
or otherwise, claims relating in any way to the termination of Manna or the
execution of this Agreement, and any other federal, state or common law claims
which Manna now has or claims to have, or which Manna at any time heretofore had
or claimed to have against any of them (collective, "Such Claims"). Manna
further covenants not to sue or bring any administrative actions relating to any
Such Claims, except that this release and covenant not to sue shall not release
the Company of the continuing payments and benefits obligations set forth in
this Agreement.

5. Other Benefits. The parties further agree that COBRA rights following
the Effective Date of this Agreement have been or will be tendered to Manna for
the purpose of continuing health coverage of Manna and /or his dependents, and
that if Manna elects to continue applicable health benefits under COBRA, the
Company will continue the benefits as required by law provided that Manna makes
the applicable individual premium payments in a timely manner after the initial
six month period paid by the Company. The parties further agree that the
termination of Manna's employment shall not prejudice any vested benefits which
Manna has in any pension, profit sharing, retirement or other benefit plans
beyond January 7, 1999. Finally, the parties agree that the payments and
benefits set forth herein constitute all the payments and benefits Manna is
entitled to receive in the future from the Company.

6. Confidentiality. The parties agree that the terms of the Agreement
shall remain confidential and shall not be disclosed to persons other than the
following: specific representatives of the Company (Stephen R. Leeolou, Richard
A. Vinchesi, Peter S. Rickler), members of Manna's immediate family and the
attorneys, accountants and other advisors representing the parties, except that
the terms of this Agreement may be disclosed

Severance and Release Agreement Page 2 of 4

as required by law. Also, Manna agrees that he will continue to hold in
confidence all knowledge or information of a confidential nature with respect to
the business of the Company, and its affiliated companies, received by him
during his employment with the Company..

7. Future Employment. Manna waives any and all claims of employment, now
and in the future, with or by the Company or its affiliate companies, and agrees
that under no circumstances will the Company or its affiliate companies be
required to employ Manna in the future. Further, Manna agrees not to apply for
or otherwise seek employment with the Company or its affiliate companies in the
future.

8. Employment, Noncompetition and Nondisclosure Agreement. Manna agrees
that the Employment, Noncompetition and Nondisclosure Agreement Employee between
him and the Company entered into as of March 31, 1997 shall remain in full force
and effect and bind Manna.

9. Acknowledgments. Manna acknowledges that he has carefully read this
Agreement, that he knows and understands the contents of this Agreement, that he
has had ample opportunity to review the terms of this Agreement, that he is
under no pressure to execute this Agreement, that he has consulted or had the
opportunity to consult with a lawyer regarding this Agreement, and that he
executes this Agreement of his own free act and deed.

10. Entire Agreement. This Agreement contains all the terms and
conditions agreed upon by the parties with respect to the subject matters
hereof, and the parties agree that there are no other terms or conditions of
this Agreement, except as expressly set forth herein. Further, the parties agree
that this Agreement shall not be altered or modified or in any way changed
except in writing signed by the parties.

11. Presentation Date. This Agreement is presented to Manna for
consideration as of the date this Agreement is signed by Manna as set forth
below (the "Presentation Date"). Manna shall be entitled to twenty-one (21) days
from the Presentation Date to consider this Agreement. If Manna has any
questions or concerns about this document he is advised by the Company to
consult with an attorney or anyone else he chooses during this twenty-one (21)
day period prior to executing this Agreement. The execution of this Agreement by
the Company shall constitute a binding written offer of the Agreement but shall
remain valid for written acceptance by Manna only for a period of twenty-one
(21) days from the Presentation Date.

12. Effective Date. If Manna executes the Agreement within twenty-one
(21) days from the Presentation Date, the parties agree that Manna shall have
seven (7) days from this execution date to revoke the Agreement, and that if not
revoked, the Agreement shall become effective and enforceable on the day after
the seven (7) day revocation period has expired (the "Effective Date").

[remainder of page is intentionally left blank]

Severance and Release Agreement Page 3 of 4

IN WITNESS WHEREOF, the undersigned, with authority duly given, hereto set their
hands and seals as of the dates set forth below.

Executed by the Company, this 2nd day of March, 1999.

INTER*ACT SYSTEMS, INCORPORATED

By: Stephen R. Leeolou
----------------------
Chairman & CEO

ATTEST:

- -----------------------
Secretary

THIS DOCUMENT WAS PRESENTED TO THOMAS A. MANNA FOR
CONSIDERATION ON JANUARY 23, 1999.

/s/Thomas A. Manna
------------------------
Thomas A. Manna

WITNESS:

- -------------------------------
Name:

Executed by Thomas A. Manna this ___ day of ________, 1999.

/s/Thomas A. Manna
--------------------------
Thomas A. Manna

WITNESS:

- -------------------------------
Name:

Signed before me this 12th day of February 1999

/s/Suzanne L. Geary
- --------------------
Suzanne L. Geary
Notary Public

Severance and Release Agreement Page 4 of 4

<PAGE>

EX-10

EXHIBIT 10(d)(4)

EMPLOYMENT AGREEMENT

THIS AGREEMENT is entered into as of this 7th day of January, 1999, between
Inter*Act Systems, Incorporated, a North Carolina corporation with offices at 14
Westport Avenue, Norwalk, Connecticut 06851 (the "Company") and Paul A. Nash, an
individual residing at 1010 Catamount Road, Fairfield, CT 06430 ("Nash" or the
"Employee").

1. Employment; Board.

(a) Nash and Company have agreed to change the status of Nash's employment
from an at-will employee to a contract employee. The Company hereby
employs Nash, and Nash hereby accepts employment, on the terms and
conditions hereinafter set forth. The title of Nash's new position
shall be Senior Vice President, Patents and New Technology.

(b) Nash has agreed to resign from the Board of Directors of the Company
and will sign a resignation letter effective January 1, 1999.

2. Responsibilities. Nash's duties shall be to work with the Company's
General Counsel on the following: (a) Supporting the Company's litigation effort
against Catalina and litigation efforts relating to any other matters of which
Nash has knowledge; (b) Identifying patents of interest relating to Company
activities and proposed activities, such as the Company's Internet couponing
effort; (c) Assisting in the prosecution of patents on inventions developed or
to be developed by Company employees; (d) Developing a program to identify
infringers of the Company's owned or licensed patents with a modest budget for
travel and other expenses; and (e) Other similar matters that Nash and the
General Counsel or CEO reasonably agree would promote the Company's business in
conformance with the Company's rules and policies. (f) Nash hereby covenants and
agrees (i) not to make or publish in any manner any disparaging statements or
remarks about the Company, its business, services or products or any of its
employees, officers or directors, (ii) not to disclose information not already
disclosed by Company management to non-executive employees concerning Company
plans

or finances to such employees, regardless of how such information was obtained,
or (iii) not to disclose material insider information, regardless of how
acquired, to anyone not already in possession of such information, as confirmed
by the CEO, COO or General Counsel.

3. Opportunity for Outside Consulting Projects. Although Nash's primary
responsibility under this Agreement shall be the performance of the duties set
out in section 1(b) above, Company agrees that to the extent the Company and
Nash agree his activities for the Company do not take up all his time during the
working day, Nash may pursue outside consulting arrangements with parties that
do not compete against the Company and that are approved in advance in writing
by the CEO and/or the General Counsel (see Exhibit A for such an arrangement
approved by the Company). In that process, Company agrees that Nash may use a de
minimus amount of his time at and resources of the Company (e.g. phone, fax,
e-mail) in such outside consulting, to allow for the complications of trying to
segregate it from his duties to the Company under this Agreement.

4. Compensation. (a) The Company will pay to Nash as base compensation for
his services hereunder an annual salary of $138,600, payable every two weeks in
increments of $5,330.77. Nash shall be eligible for merit increases in base
compensation in accordance with the Company policies applicable to employees of
similar status, including the opportunity for additional options on the
Company's stock. In addition, the Company shall also reimburse Nash for all
reasonable out-of pocket expenses necessarily incurred by Nash in the
performance of his duties hereunder and approved in advance by the CEO or
General Counsel.

(b) In addition, Nash will be eligible for a bonus tied to the revenues
paid to the Company by infringers of the Company's intellectual property
according to the following formula: Nash shall be paid 10% of any collected
royalties or up-front cash payments to the Company from parties, other than
Catalina or parties working with Catalina, who enter into licenses of Company
patents where Nash conducted an investigation of their activities, such amounts
to be calculated after deducting Company's expenses directly related to pursuing
the licensee and any payments that might be made to the relevant licensors. If
the Company decides not to

-2-

enter into a license with such infringers but to attempt to shut them down, Nash
shall be paid 10% share of any damages paid to the Company, such amount to be
calculated after deducting Company's expenses directly related to such legal
action and any payments that might be made to the relevant licensors.

5. Term. Except as hereinafter set forth, the term of this Agreement shall
begin on the date first written above and shall continue on the same terms and
conditions until it is terminated by either party to this Agreement, provided
the party wishing to terminate this Agreement gives the other party hereto 30
days written notice of the intent to terminate. Nash agrees that in the event of
such termination he will work with the CEO and/or General Counsel to educate
them on the status of all outstanding matters on which he is working, and will
assist in any Company litigation or patent filings to the extent reasonably
necessary, with the Company paying his reasonable expenses relating to such
assistance. In addition, the Company may terminate this Agreement for cause at
any time without notice.

6. Additional Benefits. In addition to the compensation provided for in
Section 4 hereof, the Company shall provide Nash with the employee benefit
programs currently available to Company employees of similar status, together
with such additions thereto as may from time to time be made. It is expressly
understood and agreed, however, that the Company shall have the right to modify
or substitute for any or all of such programs. Nash shall also be entitled each
year to a vacation, holidays, sick days and personal days in accordance with
existing Company policy.

7. 1993 Agreement. The parties agree that the Non-Competition Agreement
dated April 14, 1993 between Nash and the Company (the "1993 Agreement"), which
contains certain non-competition, confidentiality and business material
provisions, continues in effect and is not superceded or modified by this
Agreement.

8. Assignment of Copyrightable Material and Inventions. Nash assigns, and
will promptly disclose and assign, to the Company exclusively, all written
material, inventions, discoveries, improvements, devices, tools, appliances,
designs, practices, processes, methods, formulae, products, trade secrets and
the like (hereinafter collectively called "inventions"),

-3-

whether or not patentable, directly or indirectly useful in or related to the
Company's business, which Nash shall make, originate, conceive or reduce to
practice, either solely or jointly with others, during the term of Nash's
employment by the Company or six months thereafter that (a) relate to the
Company's business or actual or demonstrably anticipated research or development
or a reasonable or contemplated expansion thereof, or (b) result from any work
performed by Nash for the Company, or (c) are developed using the Company's
equipment, supplies, facilities or trade secret information, other than work
approved by the CEO or General Counsel as provided under section 3 above and not
otherwise covered by (a), (b) or (d) of this section 8, or (d) are based upon or
related to the Company's "confidential information" (as that phrase is defined
in the 1993 Agreement); and Nash further agrees that during and after the term
of Nash's employment, without charge to the Company but at its expense, Nash
will execute, acknowledge and deliver any and all papers and take any other
reasonable actions necessary or helpful for the Company to obtain patents or
copyrights for its own benefit on said inventions in any and all countries or to
otherwise protect and secure the Company's interests in said inventions; said
patents, copyrights, applications for patents or copyrights and inventions to
remain the property of the Company whether patented or copyrighted or not. In
the event that Nash is unable or unavailable or shall refuse to sign any lawful
or necessary document required in order for Inter*Act to apply for and obtain a
patent or patents with respect to any work performed by Nash (including
applications or renewals, extensions, divisions or continuations), Nash hereby
irrevocably designates and appoints Inter*Act and its duly authorized officers
and agents as Nash's agents and attorneys-in-fact to act for and on Nash's
behalf, and in his or her place and stead, to execute and file any such
applications and to do all other lawfully permitted acts to further the
prosecution and issuance of patents with respect to such new developments with
the same legal force and effect as if executed by Nash.

9. Remedies for Breach. In the event of Nash's breach or threatened breach
of any provision of Sections 7 and 8 hereof, the Company shall be entitled to an
injunction restraining Nash from such breach. Nothing herein shall be construed
as prohibiting the Company from pursuing any other remedies available to it,
including the recovery of damages from Nash. In

-4-

addition, in the event of a violation of section 2(f), the Company's obligation
to make payments under section 4(b) would be terminated.

10. Savings Provision. In case any one or more of the provisions contained
in this Agreement shall, for any reasons, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal or unenforceable provision or
provisions had never been contained herein. If, moreover, any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
excessively broad as to time, duration, geographical scope, activity or subject,
it shall be construed, by limiting and reducing it, so as to be enforceable to
the fullest extent compatible with the applicable law as it shall then appear.

11. Non-Waiver. Any of the terms, covenants, representations, warranties or
conditions hereof may be waived, only by a written instrument executed by Nash
and Company, or, in the case of a waiver, by or on behalf of the party or
parties waiving compliance. The failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect the right
at a later time to enforce the same. No waiver by any party of any conditions,
or of any breach of any term, covenant, representation or warranty contained in
this Agreement, in any one or more instances, shall be deemed to be construed as
a further or continuing waiver of any such condition or breach or a waiver of
any other condition or of any breach of any other term, covenant, representation
or warranty.

12. Binding Effect. This Agreement and the rights and obligation hereunder
shall inure to the benefit of, and be binding upon, the heirs, executors and
administrators of Nash and the Company's successors and assigns.

13. Notice. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered mail to
Nash's residence in the case of Nash or to its principal office in the case of
the Company.

-5-

14. Amendments. This Agreement may not be amended, suspended, terminated or
otherwise modified in any respect unless the same shall be in writing and signed
by both parties to this Agreement.

15. Headings. The headings contained in this Agreement are for reference
purposes only and do not affect the interpretation or meaning of this Agreement.

16. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same agreement.

17. Applicable Law. This Agreement shall be interpreted in accordance with
the laws of the State of Connecticut.

18. Necessity for Agreement. Nash agrees and acknowledges that nothing
contained in this Agreement nor the enforcement by the Company of any covenant
herein alters or shall alter Nash's ability to obtain a livelihood for Nash or
Nash's family. Nash recognizes that this Agreement is reasonably necessary to
set out the terms of employment to protect the Company's proprietary and
confidential information.

IN WITNESS WHEREOF, the parties have hereunto set their hands on the date
first written above.

INTER*ACT SYSTEMS, INCORPORATED

By: /s/ Stephen R. Leeolou
______________________________
Chairman & CEO

PAUL A. NASH

-6-

/s/ Paul A. Nash
__________________________________

-7-

<PAGE>

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18,142,000
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