UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





Form 10-KSB/A

Amendment No. 1

(Mark One)

|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF 1934
|- | --------------------------------------------------------------------------

For the fiscal year ended December 31, 2007



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF 1934
|- | ------------------------------------------------------------------------------

For the transition period from  to

Commission file number: 333-119632





SENDTEC, INC.

(Name of small business issuer in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 43-2053462                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|877 Executive Center Drive West St. Petersburg, Florida        |  | 33702                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Issuers telephone number: (727) 576-6630

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.001 per share





Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   ̈

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Check if there is no disclosure
of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB.   ̈

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x

The issuers revenues during the fiscal year ended December 31, 2007, were $30,802,543.

The aggregate market value of the issuers common equity held by non-affiliates, as of March 26, 2008, was $2,975,190.

As of March 26, 2008, there were 63,137,856 shares of the issuers common equity outstanding.

Documents incorporated by reference: None

Transitional Small Business Disclosure Format (Check one):    Yes   ̈    No  x









---

Explanatory Note

SendTec, Inc. (the Company) is filing this Amendment No. 1 on Form 10-KSB/A (Amendment) to its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007, as originally filed
April 9, 2008.

During June 2008, the Company completed an evaluation of its net operating loss carry forwards and the effect of the change in
ownership limitations imposed by the provisions of Section 382 of the Internal Revenue Code and similar state provisions. As a result, this Amendment No. 1 amends information in Note 12 to the Notes to Consolidated Financial Statements
regarding the amount of deferred tax assets, the valuation allowance of the deferred tax assets, and the net operating loss carry forwards that existed at December 31, 2007. This Form 10-KSB/A contains no changes to the Consolidated Balance Sheets,
Statements of Operations, Changes in Stockholders Equity or Cash Flows as previously reported. This Form 10-KSB/A includes changes in Note 12 to the Notes to Consolidated Financial Statements, as follows:

Paragraph 4 of Note 12- The deferred tax asset table has been changed as follows:

The Company has the following net deferred tax assets at December 31, 2007:



|                                 |  |         |             |   |                    |   |             |  
|-------------------------------- |  | ------- | ----------- | - | ------------------ | - | ----------- | -
|                                 |  | Amended |             |   | OriginallyReported |  
|Deferred tax assets              |  |         |             |   |                    |   |             |  
|Net operating loss carry forward |  | $       | 8,666,000   |   |                    | $ | 9,435,000   |  
|Stock based compensation         |  |         | 1,104,000   |   |                    |   | 1,104,000   |  
|Deferred finance fees            |  |         | 360,000     |   |                    |   | 360,000     |  
|Accrued expenses                 |  |         | 333,000     |   |                    |   | 333,000     |  
|Goodwill amortization/impairment |  |         | 2,780,000   |   |                    |   | 2,780,000   |  
|Other                            |  |         | 151,000     |   |                    |   | 151,000     |  
|Valuation allowance              |  |         | (13,394,000 | ) |                    |   | (14,163,000 | )
|                                 |  |         |             |   |                    |   |             |  
|Net deferred tax assets          |  | $       |            |   |                    | $ |            |  
|                                 |  |         |             |   |                    |   |             |  

Paragraph 5 of Note 12  The amount of the valuation allowance in the second sentence has been changed to
$13,394,000 from $14,163,000, as originally reported, and the phrase of which $875,000 relates to a reserve established for net operating losses generated by entities in which the business operations were discontinued during the year ended
December 31, 2006, has been deleted.

Paragraph 6 of Note 12  The amount of the net operating loss carry forwards as of December 31, 2007 in
the first sentence has been changed to $22,806,000 from $24,828,000, as originally reported.

Paragraph 6 of Note 12  This paragraph has been updated
as follows:

Amended

As
of December 31, 2007, the Company had net operating loss carry forwards of approximately $22,806,000 for tax purposes that will expire between the years 2025 and 2027. The net operating losses that the Company has generated to date are subject to
limitations due to the change in ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions. Furthermore, the Company believes there will be a further limitation as a result of the recapitalization
agreement (see Note 18). Such limitations are not expected to have a significant impact on the Companys future operating results as any limitation to the net operating loss carryforward resulting in a decrease in the deferred tax asset will
have a corresponding decrease in the valuation allowance.

Originally reported

As of December 31, 2007, the Company had net operating loss carry forwards of approximately $24,828,000 for tax purposes that will expire between the
years 2025 and 2027. The utilization of any net operating losses that the Company has generated to date may be subject to substantial limitations due to the change in ownership provisions under Section 382 of the Internal Revenue Code
and similar state provisions. The Company is currently evaluating such limitations, and believe that limitations are likely. Furthermore, the Company believes there will be a further limitation as a result of the recapitalization agreement (see Note
18). Such limitations are not expected to impact the Companys future operating results as any limitation to the net operating loss carryforward resulting in a decrease in the deferred tax asset will have a corresponding decrease in the
valuation allowance.

In addition, Item 13, the Exhibit Index, includes the certifications required pursuant to Rules 13a-14(a)/15d-14(a) of the Exchange
Act, which have been re-executed and re-filed as of the date of this Amendment. The certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Amendment as Exhibits 31.1 and 31.2 respectively.

This Amendment does not update any other disclosures to reflect developments since the original date of filing. Unaffected items have not been repeated in this
Amendment, and no other changes have been made.



---

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

June 20, 2008



SENDTEC, INC.By:

/s/ Paul SoltoffPaul SoltoffChief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors


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



|    |  |                                                        |  |  |  |                    
|--- |  | ------------------------------------------------------ |  |  |  | -------------------
|    |  |                                                        | 
|By: |  | /s/ Donald Gould, Jr.                                  |  |  |  | Date: June 20, 2008
|    |  | Donald Gould, Jr.                                      |  |  |  |                    
|    |  | Chief Financial Officer (Principal Accounting Officer) |  |  |  |                    
|    |  |                                                        | 
|By: |  | /s/ Vincent Addonisio                                  |  |  |  | Date: June 20, 2008
|    |  | Vincent Addonisio                                      |  |  |  |                    
|    |  | Director                                               |  |  |  |                    
|    |  |                                                        | 
|By: |  | /s/ Anthony Abate                                      |  |  |  | Date: June 20, 2008
|    |  | Anthony Abate                                          |  |  |  |                    
|    |  | Director                                               |  |  |  |                    
|    |  |                                                        | 
|By: |  |                                                        |  |  |  | Date: June 20, 2008
|    |  | Stephen Marotta                                        |  |  |  |                    
|    |  | Director                                               |  |  |  |                    
|    |  |                                                        | 
|By: |  |                                                        |  |  |  | Date: June 20, 2008
|    |  | Paul S. Dzera                                          |  |  |  |                    
|    |  | Director                                               |  |  |  |                    



40



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the

Board of Directors and Stockholders

of SendTec, Inc.

We have audited the
accompanying consolidated balance sheet of SendTec, Inc. and Subsidiaries (the Company) as of December 31, 2007, and the related consolidated statements of operations, stockholders equity and cash flows for the year ended December
31, 2007. 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 audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Since the date of completion of our audit of the accompanying financial statements and initial issuance of our report thereon dated April 8, 2008, the Company, as
discussed in Note 12, has completed its evaluation of the limitation of any net operating loss carry forwards that the Company has generated and has revised the information disclosed in Note 12 regarding the amount of deferred tax assets, the
valuation allowance of the deferred tax assets, and the net operating loss carry forwards that existed at December 31, 2007. No changes to the accompanying consolidated balance sheet, statements of operations, stockholders equity or cash
flows were made as a result of this evaluation.

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of SendTec, Inc. and Subsidiaries, as of December 31, 2007, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United
States of America.

/s/ Gregory, Sharer & Stuart, P.A.

St. Petersburg, Florida

April 8, 2008, except for the fourth, fifth and sixth

paragraphs of Note 12, as to which the date

is June 20, 2008



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the

Board of Directors and Stockholders

of SendTec, Inc.

We have audited the
accompanying consolidated statements of operations, stockholders equity and cash flows of SendTec, Inc. and Subsidiaries (the Company) for the year ended December 31, 2006. 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 audit.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, 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 consolidated financial statements
referred to above present fairly, in all material respects, the results of operations and cash flows of SendTec, Inc. and Subsidiaries, for the year ended December 31, 2006, in conformity with United States generally accepted accounting
principles.

As more fully described in Notes 2 and 8 to the consolidated financial statements, the Companys Senior Secured Convertible Debentures in
the principal amount of $34,580,000, as of December 31, 2006, are due on March 31, 2008. The Company currently lacks sufficient capital resources to repay this obligation upon its maturity. Accordingly, the Company must either restructure
this obligation or secure alternative financing to repay this obligation on March 31, 2008.

/s/ Marcum & Kliegman LLP

New York, New York

March 16, 2007



---

SENDTEC, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

DECEMBER
31, 2007



|                                                                                                                |  |   |             |  
|--------------------------------------------------------------------------------------------------------------- |  | - | ----------- | -
|ASSETS                                                                                                          |  |   |             |  
|Current assets                                                                                                  |  |   |             |  
|Cash                                                                                                            |  | $ | 4,408,969   |  
|Accounts receivable, less allowance for doubtful accounts of $326,000                                           |  |   | 10,319,977  |  
|Prepaid expenses                                                                                                |  |   | 219,704     |  
|                                                                                                                |  |   |             |  
|Total current assets                                                                                            |  |   | 14,948,650  |  
|Property and equipment, net                                                                                     |  |   | 1,082,462   |  
|Intangible assets, net                                                                                          |  |   | 6,760,696   |  
|Goodwill                                                                                                        |  |   | 22,863,827  |  
|Deferred financing and restructuing fees                                                                        |  |   | 306,969     |  
|Other assets                                                                                                    |  |   | 20,329      |  
|                                                                                                                |  |   |             |  
|Total assets                                                                                                    |  | $ | 45,982,933  |  
|                                                                                                                |  |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                            |  |   |             |  
|Current liabilities                                                                                             |  |   |             |  
|Accounts payable                                                                                                |  | $ | 8,723,727   |  
|Accrued expenses                                                                                                |  |   | 4,524,025   |  
|Accrued compensation                                                                                            |  |   | 321,031     |  
|Current portion of capital lease obligations                                                                    |  |   | 55,409      |  
|Deferred revenue                                                                                                |  |   | 2,087,087   |  
|                                                                                                                |  |   |             |  
|Total current liabilities                                                                                       |  |   | 15,711,279  |  
|Debentures payable, net of debt discount of $2,595,232                                                          |  |   | 30,134,768  |  
|Capital lease obligations, net of current portion                                                               |  |   | 16,404      |  
|Deferred rent                                                                                                   |  |   | 101,934     |  
|                                                                                                                |  |   |             |  
|Total liabilities                                                                                               |  |   | 45,964,385  |  
|Commitments and contingencies                                                                                   |  |   |             |  
|Stockholders equity                                                                                            |  |   |             |  
|Series A Convertible Preferred stock  $.001 par value; 10,000,000 authorized; no shares issued and outstanding |  |   |            |  
|Common stock  $.001 par value; 190,000,000 shares authorized; 53,101,189 shares issued and outstanding         |  |   | 53,101      |  
|Additional paid in capital                                                                                      |  |   | 82,918,691  |  
|Accumulated deficit                                                                                             |  |   | (82,953,244 | )
|                                                                                                                |  |   |             |  
|Total stockholders equity                                                                                      |  |   | 18,548      |  
|                                                                                                                |  |   |             |  
|Total liabilities and stockholders equity                                                                      |  | $ | 45,982,933  |  
|                                                                                                                |  |   |             |  

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



F-1



---

SENDTEC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2007
AND 2006



|                                                                         |  |   |             |   |  |   |             |  
|------------------------------------------------------------------------ |  | - | ----------- | - |  | - | ----------- | -
|                                                                         |  |   | 2007        |   |  |   | 2006        |  
|Revenues, net                                                            |  | $ | 30,802,543  |   |  | $ | 35,863,027  |  
|Cost of revenues                                                         |  |   | 14,792,393  |   |  |   | 21,947,116  |  
|                                                                         |  |   |             |   |  |   |             |  
|Gross profit                                                             |  |   | 16,010,150  |   |  |   | 13,915,911  |  
|                                                                         |  |   |             |   |  |   |             |  
|Operating expenses                                                       |  |   |             |   |  |   |             |  
|Salaries, wages and benefits                                             |  |   | 11,332,371  |   |  |   | 8,954,594   |  
|Professional fees                                                        |  |   | 1,199,455   |   |  |   | 1,634,782   |  
|Restructuring costs                                                      |  |   | 491,237     |   |  |   |            |  
|Impairment of goodwill and intangibles                                   |  |   | 10,293,587  |   |  |   |            |  
|Other general and administrative                                         |  |   | 6,888,053   |   |  |   | 6,306,680   |  
|                                                                         |  |   |             |   |  |   |             |  
|Total operating expenses                                                 |  |   | 30,204,703  |   |  |   | 16,896,056  |  
|                                                                         |  |   |             |   |  |   |             |  
|Loss from operations                                                     |  |   | (14,194,553 | ) |  |   | (2,980,145  | )
|Other income (expense)                                                   |  |   |             |   |  |   |             |  
|Loss on deemed extinguishment of debt                                    |  |   |            |   |  |   | (22,363,432 | )
|Registration rights penalty                                              |  |   | 27,800      |   |  |   | 193,500     |  
|Waiver and covenant fee                                                  |  |   |            |   |  |   | (1,443,750  | )
|Loss on equity-method investment                                         |  |   |            |   |  |   | (153,389    | )
|Gain on disposition of equipment                                         |  |   |            |   |  |   | 7,471       |  
|Interest income                                                          |  |   | 130,397     |   |  |   | 109,627     |  
|Interest expense                                                         |  |   | (13,416,605 | ) |  |   | (11,224,205 | )
|                                                                         |  |   |             |   |  |   |             |  
|Total other expense                                                      |  |   | (13,258,408 | ) |  |   | (34,874,178 | )
|                                                                         |  |   |             |   |  |   |             |  
|Loss from continuing operations                                          |  |   | (27,452,961 | ) |  |   | (37,854,323 | )
|                                                                         |  |   |             |   |  |   |             |  
|Loss from discontinued operations                                        |  |   |            |   |  |   | (4,006,874  | )
|Loss on disposal of discontinued operations                              |  |   |            |   |  |   | (649,607    | )
|Cumulative effect of change in accounting principle                      |  |   | 88,500      |   |  |   |            |  
|                                                                         |  |   |             |   |  |   |             |  
|                                                                         |  |   | 88,500      |   |  |   | (4,656,481  | )
|                                                                         |  |   |             |   |  |   |             |  
|Net loss                                                                 |  | $ | (27,364,461 | ) |  | $ | (42,510,804 | )
|                                                                         |  |   |             |   |  |   |             |  
|Net loss per common share basic and diluted :                            |  |   |             |   |  |   |             |  
|- Continuing operations                                                  |  | $ | (0.50       | ) |  | $ | (0.82       | )
|- Discontinued operations                                                |  | $ |            |   |  | $ | (0.10       | )
|                                                                         |  |   |             |   |  |   |             |  
|- Total                                                                  |  | $ | (0.50       | ) |  | $ | (0.92       | )
|                                                                         |  |   |             |   |  |   |             |  
|Weighted average number of common shares outstanding  basic and diluted |  |   | 54,681,853  |   |  |   | 46,369,919  |  
|                                                                         |  |   |             |   |  |   |             |  

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



F-2



---

SENDTEC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED
DECEMBER 31, 2007 AND 2006



|                                                                               |  |                 |   |  |              |             |   |                          |            |   |                      |   |        |                    |  |   |                     |   |  |   |            |   |  |   |             |   |  |   |             |  
|------------------------------------------------------------------------------ |  | --------------- | - |  | ------------ | ----------- | - | ------------------------ | ---------- | - | -------------------- | - | ------ | ------------------ |  | - | ------------------- | - |  | - | ---------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                               |  | Preferred Stock |   |  | Common Stock |             |   | AdditionalPaid-InCapital |            |   | DeferredCompensation |   |        | AccumulatedDeficit |  |   | StockholdersEquity |  
|                                                                               |  | NumberofShares  |   |  | Amount       |             |   | NumberofShares           |            |   | Amount               |   |        |                    |  |  
|Balance January 1, 2006                                                       |  | 762,199         |   |  | $            | 10,289,690  |   |                          | 19,671,015 |   |                      | $ | 19,671 |                    |  | $ | 16,651,325          |   |  | $ | (1,851,973 | ) |  | $ | (13,077,979 | ) |  | $ | 12,030,734  |  
|Reversal of deferred compensation                                              |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   | (1,851,973          | ) |  |   | 1,851,973  |   |  |   |            |   |  |   |            |  
|Conversion of preferred stock into Common Stock                                |  | (762,199        | ) |  |              | (10,289,690 | ) |                          | 7,621,991  |   |                      |   | 7,622  |                    |  |   | 10,282,068          |   |  |   |           |   |  |   |            |   |  |   |            |  
|Common stock issued in private placement                                       |  |                |   |  |              |            |   |                          | 500,000    |   |                      |   | 500    |                    |  |   | 674,500             |   |  |   |           |   |  |   |            |   |  |   | 675,000     |  
|Common stock issued upon STAC consolidation                                    |  |                |   |  |              |            |   |                          | 9,506,380  |   |                      |   | 9,506  |                    |  |   | 5,296,517           |   |  |   |           |   |  |   |            |   |  |   | 5,306,023   |  
|Common stock issued upon exercise of warrants                                  |  |                |   |  |              |            |   |                          | 8,187,620  |   |                      |   | 8,188  |                    |  |   | 97,389              |   |  |   |           |   |  |   |            |   |  |   | 105,577     |  
|Beneficial conversion feature on Debentures assumed in consolidation with STAC |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   | 34,950,000          |   |  |   |           |   |  |   |            |   |  |   | 34,950,000  |  
|Common stock issued to Debenture Holders for a covenant penalty                |  |                |   |  |              |            |   |                          | 525,000    |   |                      |   | 525    |                    |  |   | 1,443,225           |   |  |   |           |   |  |   |            |   |  |   | 1,443,750   |  
|Common stock issued as employee compensation                                   |  |                |   |  |              |            |   |                          | 3,136      |   |                      |   | 3      |                    |  |   | 8,934               |   |  |   |           |   |  |   |            |   |  |   | 8,937       |  
|Adjustment of previous financing costs                                         |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   | (1,442              | ) |  |   |           |   |  |   |            |   |  |   | (1,442      | )
|Share based payment to transaction advisor                                     |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   | 750,000             |   |  |   |           |   |  |   |            |   |  |   | 750,000     |  
|Amortization of stock based compensation                                       |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   | 2,194,401           |   |  |   |           |   |  |   |            |   |  |   | 2,194,401   |  
|Issuance of warrants to consultant                                             |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   | 57,500              |   |  |   |           |   |  |   |            |   |  |   | 57,500      |  
|Common stock issued upon conversion of Debenture principal                     |  |                |   |  |              |            |   |                          | 740,000    |   |                      |   | 740    |                    |  |   | 369,260             |   |  |   |           |   |  |   |            |   |  |   | 370,000     |  
|Common stock issued as partial interest payment to Debenture Holders           |  |                |   |  |              |            |   |                          | 740,855    |   |                      |   | 741    |                    |  |   | 267,210             |   |  |   |           |   |  |   |            |   |  |   | 267,951     |  
|Reclassification of shares subject to put right                                |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   | (267,951            | ) |  |   |           |   |  |   |            |   |  |   | (267,951    | )
|Incremental value of beneficial conversion option in Debenture restructuring   |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   | 8,621,000           |   |  |   |           |   |  |   |            |   |  |   | 8,621,000   |  
|Net loss                                                                       |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   |                    |   |  |   |           |   |  |   | (42,510,804 | ) |  |   | (42,510,804 | )
|                                                                               |  |                 |   |  |              |             |   |                          |            |   |                      |   |        |                    |  |   |                     |   |  |   |            |   |  |   |             |   |  |   |             |  
|Balance  December 31, 2006                                                    |  |                |   |  |              |            |   |                          | 47,495,997 |   |                      |   | 47,496 |                    |  |   | 79,541,963          |   |  |   |           |   |  |   | (55,588,783 | ) |  |   | 24,000,676  |  
|Common stock issued upon conversion of Debenture principal                     |  |                |   |  |              |            |   |                          | 3,700,000  |   |                      |   | 3,700  |                    |  |   | 1,846,300           |   |  |   |           |   |  |   |            |   |  |   | 1,850,000   |  
|Amortization of stock based compensation                                       |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   | 710,551             |   |  |   |           |   |  |   |            |   |  |   | 710,551     |  
|Common stock issued as partial interest payment to Debenture Holders           |  |                |   |  |              |            |   |                          | 980,761    |   |                      |   | 980    |                    |  |   | 340,516             |   |  |   |           |   |  |   |            |   |  |   | 341,496     |  
|Common stock issued in settlement of litigation                                |  |                |   |  |              |            |   |                          | 1,200,000  |   |                      |   | 1,200  |                    |  |   | 310,800             |   |  |   |           |   |  |   |            |   |  |   | 312,000     |  
|Reclassification of shares subject to put rights                               |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   | (266,732            | ) |  |   |           |   |  |   |            |   |  |   | (266,732    | )
|Repurchase and retirement of Common Stock subject to redemption                |  |                |   |  |              |            |   |                          | (275,569   | ) |                      |   | (275   | )                  |  |   | 275                 |   |  |   |           |   |  |   |            |   |  |   |            |  
|Expiration of put rights                                                       |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   | 435,018             |   |  |   |           |   |  |   |            |   |  |   | 435,018     |  
|Net loss                                                                       |  |                |   |  |              |            |   |                          |           |   |                      |   |       |                    |  |   |                    |   |  |   |           |   |  |   | (27,364,461 | ) |  |   | (27,364,461 | )
|                                                                               |  |                 |   |  |              |             |   |                          |            |   |                      |   |        |                    |  |   |                     |   |  |   |            |   |  |   |             |   |  |   |             |  
|Balance  December 31, 2007                                                    |  |                |   |  | $            |            |   |                          | 53,101,189 |   |                      | $ | 53,101 |                    |  | $ | 82,918,691          |   |  | $ |           |   |  | $ | (82,953,244 | ) |  | $ | 18,548      |  
|                                                                               |  |                 |   |  |              |             |   |                          |            |   |                      |   |        |                    |  |   |                     |   |  |   |            |   |  |   |             |   |  |   |             |  

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



F-3



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SENDTEC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2007
AND 2006



|                                                                                       |  |      |             |   |      |   |             |  
|-------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                       |  | 2007 |             |   | 2006 |  
|CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES                                        |  |      |             |   |      |   |             |  
|Net loss  continuing operations                                                       |  | $    | (27,452,961 | ) |      | $ | (37,854,323 | )
|                                                                                       |  |      |             |   |      |   |             |  
|Adjustments to reconcile net loss to net cash used in continuing operating activities: |  |      |             |   |      |   |             |  
|Impairment loss on goodwill and intangibles                                            |  |      | 10,293,587  |   |      |   |            |  
|Loss on deemed extinguishment of debt                                                  |  |      |            |   |      |   | 22,363,432  |  
|Depreciation and amortization                                                          |  |      | 1,682,897   |   |      |   | 1,467,055   |  
|Stock-based compensation                                                               |  |      | 710,551     |   |      |   | 834,506     |  
|Non-cash interest expense                                                              |  |      | 11,365,355  |   |      |   | 9,256,907   |  
|Non-cash restructuring charge                                                          |  |      | 51,818      |   |      |   |            |  
|Waiver and covenant fee                                                                |  |      |            |   |      |   | 1,443,750   |  
|Provision for doubtful accounts                                                        |  |      | 289,745     |   |      |   | 269,480     |  
|Loss on equity-method investment                                                       |  |      |            |   |      |   | 153,389     |  
|Registration rights penalty                                                            |  |      | (27,800     | ) |      |   | (193,500    | )
|Gain on disposition of equipment                                                       |  |      |            |   |      |   | (7,471      | )
|Gain on reduction in legal settlement                                                  |  |      | (144,000    | ) |      |   |            |  
|Changes in assets and liabilities:                                                     |  |      |             |   |      |   |             |  
|Accounts receivable                                                                    |  |      | (1,165,412  | ) |      |   | (2,133,570  | )
|Prepaid expenses and other assets                                                      |  |      | 101,788     |   |      |   | (139,113    | )
|Deferred financing and restructuing fees                                               |  |      | (306,969    | ) |      |   |            |  
|Accounts payable                                                                       |  |      | (773,215    | ) |      |   | (426,902    | )
|Accrued expenses                                                                       |  |      | 3,074,148   |   |      |   | 1,100,914   |  
|Accrued compensation                                                                   |  |      | 63,392      |   |      |   | (86,958     | )
|Deferred rent                                                                          |  |      | (30,067     | ) |      |   | (19,205     | )
|Deferred revenue                                                                       |  |      | 979,118     |   |      |   | 587,456     |  
|                                                                                       |  |      |             |   |      |   |             |  
|Total adjustments                                                                      |  |      | 26,164,936  |   |      |   | 34,470,170  |  
|                                                                                       |  |      |             |   |      |   |             |  
|Net cash used in continuing operating activities                                       |  |      | (1,288,025  | ) |      |   | (3,384,153  | )
|                                                                                       |  |      |             |   |      |   |             |  
|CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES                                        |  |      |             |   |      |   |             |  
|Cash acquired in business combination                                                  |  |      |            |   |      |   | 9,347,155   |  
|Cash received in reconciliation of asset purchase                                      |  |      |            |   |      |   | 318,750     |  
|Purchases of property and equipment                                                    |  |      | (190,612    | ) |      |   | (647,493    | )
|Proceeds from disposition of equipment                                                 |  |      |            |   |      |   | 22,051      |  
|Investment in prospective acquiree                                                     |  |      |            |   |      |   | (194,827    | )
|Cash used in acquisition                                                               |  |      |            |   |      |   | (20,619     | )
|                                                                                       |  |      |             |   |      |   |             |  
|Net cash (used in) provided by continuing investing activities                         |  |      | (190,612    | ) |      |   | 8,825,017   |  
|                                                                                       |  |      |             |   |      |   |             |  
|CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES                                        |  |      |             |   |      |   |             |  
|Net proceeds from sales of Common Stock                                                |  |      |            |   |      |   | 675,000     |  
|Repurchase of Common Stock subject to redemption                                       |  |      | (99,667     | ) |      |   |            |  
|Proceeds received upon exercise of warrants                                            |  |      |            |   |      |   | 105,577     |  
|Principal payments on capital lease obligations                                        |  |      | (131,515    | ) |      |   | (75,134     | )
|                                                                                       |  |      |             |   |      |   |             |  
|Net cash (used in ) provided by continuing financing activities                        |  |      | (231,182    | ) |      |   | 705,443     |  
|                                                                                       |  |      |             |   |      |   |             |  
|CASH FLOWS OF DISCONTINUED OPERATIONS                                                  |  |      |             |   |      |   |             |  
|Net cash used in operating activities                                                  |  |      |            |   |      |   | (1,486,638  | )
|Net cash provided by investing activities                                              |  |      |            |   |      |   | 1,302,647   |  
|Net cash provided by financing activities                                              |  |      |            |   |      |   |            |  
|                                                                                       |  |      |             |   |      |   |             |  
|Net cash used in discontinued operations                                               |  |      |            |   |      |   | (183,991    | )
|                                                                                       |  |      |             |   |      |   |             |  
|Net (decrease) increase in cash                                                        |  |      | (1,709,819  | ) |      |   | 5,962,316   |  
|Cash  beginning of year                                                               |  |      | 6,118,788   |   |      |   | 156,472     |  
|                                                                                       |  |      |             |   |      |   |             |  
|Cash  end of year                                                                     |  | $    | 4,408,969   |   |      | $ | 6,118,788   |  
|                                                                                       |  |      |             |   |      |   |             |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                       |  |      |             |   |      |   |             |  
|Cash paid during the years for:                                                        |  |      |             |   |      |   |             |  
|Interest                                                                               |  | $    | 1,305,404   |   |      | $ | 2,148,472   |  
|Income taxes                                                                           |  | $    | 13,170      |   |      | $ |            |  
|Non-cash investing and financing activities                                            |  |      |             |   |      |   |             |  
|Issuance of Common Stock in connection with consolidation                              |  | $    |            |   |      | $ | 5,306,022   |  
|New capital lease obligations                                                          |  | $    | 36,925      |   |      | $ | 241,500     |  
|Issuance of Common Stock in connection with partial payment of legal settlement        |  | $    | 312,000     |   |      | $ |            |  
|Conversion of Debentures Principal into Common Stock                                   |  | $    | 1,850,000   |   |      | $ |            |  
|Issuance of Common Stock subject to put rights                                         |  | $    | 266,732     |   |      | $ |            |  
|Expiration of Common Stock put rights                                                  |  | $    | 435,018     |   |      | $ |            |  
|STAC Consolidation  See Note 4                                                        |  |      |             |   |      |   |             |  

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



F-4



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SENDTEC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 1  BASIS OF PRESENTATION AND BUSINESS ORGANIZATION

Basis of presentation

The consolidated financial statements contained herein include SendTec, Inc., formerly RelationServe Media, Inc. (the
Company or SendTec), and its wholly owned subsidiaries, SendTec Acquisition Corp. (STAC) which became a wholly-owned subsidiary of the Company on February 3, 2006, RelationServe Access, Inc
(Access), and Friendsand.com, Inc. (Friendsand). On July 11, 2006, the stockholders approved the Company to change its name to SendTec, Inc. All material intercompany balances and transactions have been eliminated in the
accompanying consolidated financial statements.

On October 31, 2005, STAC acquired the assets of SendTec (formerly a subsidiary of theglobe.com,
Inc.). As of October 31, 2005 and through February 1, 2006, the Company held approximately 23% of the total voting interests in STAC. Accordingly, from October 31, 2005 through February 1, 2006, the Company accounted for its
investment in STAC in accordance with the provisions of APB 18, The Equity Method of Accounting for Investments in Common Stock, which provides for companies to record, in results of operations, their proportionate share of earnings or
losses of investees when they are deemed to influence but not control the affairs of the investee enterprise. The Company recorded a charge of $153,389 for its proportionate share of STACs losses for the period of January 1, 2006 through
February 3, 2006.

On June 15, 2006, the Company sold substantially all of the business and net assets of its wholly-owned subsidiary
RelationServe Access, Inc. The loss on the sale of the net assets and the operating results of Access are presented in the accompanying statements of operations under the categories titled loss on disposal of discontinued operations and
loss from discontinued operations respectively. The Company also ceased operations of the business of Freindsand.com, Inc. (Friendsand) as of June 30, 2006. The operating results of Friendsand and the loss on the
write-down of the business assets are also included under the same categories.

Organization and description of business

The Company was originally formed as Chubasco Resources Corp. (Chubasco) in the State of Nevada as an exploration stage company engaged in the business of
mineral exploration. On June 13, 2005, Chubasco completed a reverse merger (accounted for as a recapitalization transaction) with RelationServe, Inc., (RelationServe). Relationserve was a Delaware corporation formed in March 2005
that operated a marketing business it acquired in a reverse acquisition in May 2005. RelationServe, through its wholly-owned subsidiary, RelationServe Access, Inc. (Access) purchased certain assets and assumed certain liabilities of Omni
Point Marketing LLC (Omni Point), and through its wholly-owned subsidiary, Friendsand.com Inc. (Friendsand), acquired Friendsand LLC (Friendsand LLC). Chubasco changed its name to Relationserve Media, Inc. (still
a Nevada corporation) following its merger with Relationserve of Delaware. On August 29, 2005, the Company completed a reincorporation merger in which RelationServe Media, Inc. survived such merger as a Delaware corporation.

The primary business of the Company is direct response marketing services and technology that provides customers a wide range of direct marketing products and services
to help market their products and services on the Internet and through traditional media channels such as television, radio, and print advertising.

Effective February 3, 2006, the Company completed its acquisition of the net assets and business of STAC as described in Note 4.

NOTE 2
 LIQUIDITY FINANCIAL CONDITION AND LEGAL MATTERS

Liquidity and Financial Condition

The Company incurred a loss of approximately $27,453,000 from continuing operations for the year ended December 31, 2007, which includes an aggregate of
approximately $24,342,000 in non-cash charges which principally includes:



|                                                             |  |   |           
|------------------------------------------------------------ |  | - | ----------
|Impairment losses relating to goodwill and intangible assets |  | $ | 10,294,000
|Non-cash interest                                            |  |   | 11,365,000
|Depreciation and amortization                                |  |   | 1,683,000 
|Stock based compensation                                     |  |   | 710,000   
|Provision for bad debts                                      |  |   | 290,000   
|                                                             |  |   |           
|Total non-cash charges                                       |  | $ | 24,342,000
|                                                             |  |   |           



F-5



---

On March 26, 2008, the Company and current debenture holders (the Holders) entered into a recapitalization
agreement (the Agreement) which provides, among other things, that the Holders shall exchange the Senior Secured Convertible Debentures due March 31, 2008 (the Debentures) with a current outstanding principal amount of
$32,730,000 into shares of the Companys Series B Convertible Preferred Stock (the Series B Preferred) and certain amended and restated Debentures (the Amended Debentures), and extends the due date of the amended and
restated Debentures for up to three years (see Note 18). As a result of the new agreement, the Debentures have been reflected as a long term liability in the accompanying consolidated balance sheet.

The Company believes that its current capital resources combined with revenues it expects to generate during the next twelve months will enable it to fund its operating
activities through December 31, 2008. The Company may seek to raise additional capital to fund the growth of its business and believes it has access to capital resources; however, other than the Concurrent Offering (see Note 18) the Company has
not secured any commitments for new financing at this time nor can the Company provide any assurance that it will be successful in its efforts to raise additional capital if considered necessary. The Company is currently restricted from incurring
additional indebtedness other than certain permitted indebtedness specified under the terms of the amended and restated Debentures.

Legal Proceedings

Other than the actions stated below, the Company is involved in various matters or disputes arising in the ordinary course of the Companys
business. Adverse future developments affecting our pending legal proceedings and other contingencies may also have a material adverse impact on our liquidity.

On April 5, 2006, Ohad Jehassi (Jehassi), the Companys former Chief Operating Officer, filed an action against the Company in the Circuit Court for the 17th Judicial Circuit in Broward County, Florida. Jehassi alleged
that the Company breached an employment agreement and owes him salary and other benefits in connection with such alleged breach. On June 21, 2006, Jehassi filed an Amended Complaint adding a claim for an alleged violation of Floridas
Whistleblower Act, and on August 14, 2006, filed a Third Amended Complaint adding a claim for unpaid wages under a Florida statute. Jehassi seeks damages of approximately $500,000 plus attorneys fees, costs and expenses and shares of the
Companys stock he alleges he is entitled to. The Company has filed an answer to the Third Amended Complaint denying that Jehassi is entitled to any relief and has asserted a counterclaim against Jehassi. In February 2007, Mr. Jehassi
filed a Fourth Amended Complaint (substantially similar to the Third Amended Complaint). The case is now in the discovery phase. The Company believes this action is without merit, and intends to vigorously defend itself with respect to this matter;
however, its outcome or range of possible loss, if any, cannot be predicted at this time. The Company cannot provide any assurance that the outcome of this matter will not have a material adverse effect on its financial position or results of
operations.

On February 3, 2006, InfoLink Communications Services, Inc, (InfoLink) filed a complaint against the Company and Omni Point
Marketing LLC in the Circuit Court of Miami Dade County, Florida, asserting violation of the federal CAN SPAM ACT of 2003, 15 U.S.C. ss. 7701, and breach of an alleged licensing agreement between Omni Point Marketing LLC and InfoLink. InfoLink seeks
actual damages in an amount of approximately $100,000 and approximately $1,500,000 in statutory damages. The Company does not believe that InfoLink has sufficiently pled any factual basis to support its claim. The Company filed a motion asking the
Court to enter sanctions against InfoLink, including, but not limited to, dismissal of the case with prejudice for InfoLinks failure to comply with a court order to produce discovery materials. The Company intends to vigorously defend itself
with respect to this matter; however, its outcome or range of possible loss, if any, cannot be predicted at this time. The Company cannot provide any assurance that the outcome of this matter will not have a material adverse effect on its financial
position or results of operations.

On or about June 15, 2006, R&R Investors Ltd. (R&R) commenced an action in the Supreme Court
of the State of New York, County of New York, against the Company and Come & Stay S.A. asserting a claim for breach of contract related to a purported agreement concerning the sale of RelationServe Access, Inc and Friendsand, Inc. R&R
initially sought an injunction enjoining the transfer of RelationServe Access, Inc. and Friendsand, Inc. stock. The Court denied R&Rs motion. R&R effectuated service of the complaint on the Company in August 2006. The Company has
served an answer to R&Rs complaint denying that R&R is entitled to any relief. This action is now in the discovery phase. The Company intends to vigorously defend itself with respect to this matter; however, its outcome or range of
possible loss, if any, cannot be predicted at this time. The Company cannot provide any assurance that the outcome of this matter will not have a material adverse effect on its financial position or results of operations.



F-6



---

On or about April 28, 2006, LeadClick Media, Inc. (LeadClick) commenced an action against the Company in
the Superior Court for the State of California, County of San Francisco, alleging breach of contract seeking to recover $379,146, plus interest. During August 2007, the Company reached an agreement settling this matter for $260,000 to be paid to
LeadClick Media in three installments and executed a mutual release with LeadClick. During the year ended December 31, 2007, the Company paid $200,000 with respect to this settlement. The accompanying consolidated balance sheet includes a
$60,000 liability for the remaining amount due under the settlement of this obligation, which was paid in January 2008. The case has been dismissed with prejudice.

Pursuant to an Asset Purchase Agreement, dated as of June 6, 2006, relating to certain discontinued operations of the Company, the Company believes the purchaser (Come & Stay, S.A.) is required to assume certain liability with
respect to this matter, however, the purchaser has contested this fact. As a result, the Company has commenced an arbitration proceeding before the International Chamber of Commerce seeking to have the purchaser assume liability for amounts that
were paid by the Company to Leadclick, as mentioned in the preceding paragraph.

On or about August 31, 2006, an action was commenced in the United
States District Court for the Southern District of Florida (Case No. 06-61327) by Richard F. Thompson, as the putative class representative, against the Company and certain of the Companys former officers and directors alleging securities
laws violations in connection with the purchase of the Companys stock during the period of May 24, 2005 to August 2006. The named plaintiff in the case previously filed suit against the Company, as an individual, in State Court in
Indiana, which action was dismissed in July 2006. The Florida District Court permitted the plaintiff to file an amended complaint and on November 13, 2006, plaintiff filed a First Amended Class Action Complaint (the First
Amended Complaint) adding an additional plaintiff, L. Alan Jacoby, who purportedly purchased 10,000 shares of the Companys Common Stock in the open market, and naming additional former and present officers and directors of the Company
and others as defendants. The First Amended Complaint, styled as a class action, alleges violations of Section 11 and Section 12(2) of the Securities Act and Section 10(b) of the Securities Exchange Act, and Rule 10b-5 promulgated
thereunder. Plaintiffs claim, among other things, violations of the various acts: (a) by selling securities through persons who were not registered as agents and/or broker dealers with the Securities Exchange Commission or the States of Florida or
Indiana and were not affiliated as an agent or representative of any broker/dealer; (b) by failing to disclose to purchasers of RelationServe Media, Inc. stock that they were selling securities of RelationServe stock through unregistered agents and
broker/dealers was in violation of state and federal securities laws which caused a substantial contingent liability for claims of rescission by investors and exposing RelationServe to substantial legal fees, criminal and civil liability which would
have a material adverse impact to the RelationServes financial condition; (c) by failing to disclose that in July 2005 RelationServes Chief Executive Officer and Chief Operating Officer received evidence of accusations of employee theft
of data and employee kickbacks had been made and the matter was so material that CEO hired an outside attorney to investigate the matter; (d) failing to disclose that a former director has previously been sued by stockholders of two other
corporations; and (e) by failing to disclose that financial statements beginning the third quarter of 2005 were false and misleading as senior officer of the Company, Richard Hill, had directed that finance recognize income in the third quarter in
violation of Sarbanes-Oxley Act of 2002. The invoices directed to be recorded either did not exist or were otherwise untraceable, cancelled, or were never shipped, with the exception of just a few (adjustments to income that would be required as a
result of the allegations, if any, relate to certain discontinued operations). In addition to the claims of securities law violations, plaintiffs claim violation of Section 20(a) of the Exchange Act as to controlling persons of the Company,
violations of the Florida Securities Act, violations of the Indiana Securities Act, sales of unregistered, non-exempt securities, violation of anti-fraud provisions under Indiana law, deception under Indiana law, and fraud. Plaintiffs seek
rescission, damages, treble damages, punitive damages, compensatory damages, interest, costs, and attorneys fees.

The First Amended
Complaint repeats and re-alleges various claims made by Ohad Jehassi, our former Chief Operating Officer in a matter pending before the Circuit Court of the 17th Judicial Circuit, Broward County, Florida (Case No. 06-004597), Ohad Jehassi v.
RelationServe Media, Inc., a Florida corporation, and Relationserve Media, Inc., d/b/a Sendtec Acquisition Corp., a Florida corporation (the Jehassi Complaint). The initial complaint filed by Jehassi on or about April 5, 2006, alleged,
among other things, that we breached our employment agreement with Jehassi and owe him salary and other benefits in connection with such alleged breach. On June 21, 2006, Jehassi filed an amended complaint adding a claim for an alleged violation of
Floridas Whistleblowers Act, and on August 14, 2006, filed a third amended complaint adding a claim for unpaid wages under Florida statutes. Mr. Jehassi seeks damages of approximately $500,000 plus attorneys fees,
costs, and expenses and shares of our stock he alleges he is entitled to. We have asserted that Mr. Jehassi was removed from his position with us for cause and is therefore not entitled to any of the relief he seeks and has asserted a counterclaim
against Mr. Jehassi related to the shares of our common stock Jehassi claims he is entitled to. The substance of Mr. Jehassis whistleblower claims have been adapted in the First Amended Complaint filed by Thompson as the basis for asserting
that we filed false and misleading financial statements and that we violated the Sarbanes-Oxley Act of 2002. The court dismissed the First Amended Complaint on March 6, 2007. By the terms of the courts order, the plaintiffs were given leave to
refile a new complaint on or before March 19, 2007, and on March 19, 2007, plaintiffs filed a second amended complaint.

By decision dated June 12,
2007, the District Court dismissed the Second Amended Complaint, with prejudice, and state law claims without prejudice. Plaintiffs have noted their appeal of the June 12, 2007 dismissal of the Second Amended Complaint.

On September 19, 2007, the parties attended court ordered mediation but were unable to reach a compromise. Briefing on the appeal has been completed and the parties
are awaiting a ruling from the Court of Appeals. Although the Company is vigorously contesting the appeal, its outcome or range of possible loss, if any, cannot be predicted at this time. The Company cannot provide any assurance that the outcome of
this matter will not have a material adverse effect on its financial position or results of operations.

On July 25, 2007, Richard F. Thompson, along
with new plaintiffs, Parabolic Investment Fund, Ltd and Gregory Thompson filed a Class Action Compliant in the Circuit Court for the Seventeenth Judicial Circuit in and for Broward County, Florida, on behalf of themselves, and others similarly
situated naming the Company, and certain former officers and directors of the Company, as defendants. The plaintiffs claim violations of certain state laws regarding the sale of securities by unregistered broker/dealers and failure to report such
violations. The Court dismissed the class action complaint, and plaintiffs subsequently filed a First Amended Class Action Complaint raising the same allegations. The Company filed a motion to dismiss the amended class action complaint and a hearing
on the motion was heard on January 16, 2008. On March 27, 2008, the Companys motion to dismiss was granted and the plantiffs amended complaint was dismissed.

On September 28, 2006, Wedbush Morgan Securities, Inc. (Wedbush) commenced arbitration against the Company seeking $500,000 in damages, plus interest and attorneys fees, as a result of an
alleged breach of contract. On October 29, 2007 the arbitrator awarded Wedbush $694,197, which the Company recorded during the year ended December 31, 2007. In December 2007, the Company filed a motion to vacate the arbitrators award
in the United States District Court for the Central District of California, and the motion was denied.



F-7



---

On or about September 26, 2006, the Company received copies of three consumer complaints filed by Chirag Chaman,
Chief Operating Officer of MX Interactive, LLC. These complaints were submitted to the SEC, the New York Attorney General, and the Florida Attorney General, and assert various claims with respect to the failure to issue to MX Interactive LLC 45,454
shares of stock which claimant alleges the Company agreed to transfer pursuant to a written assignment agreement. Claimant asserts that, in July 2005, a third party agreed to transfer rights to receive shares of Company stock to claimant and failed
to do so, and that the Company is under an obligation to transfer such shares and satisfy the obligation under the assignment agreement. The Company believes these claims to be substantially without merit and intends to vigorously defend itself with
respect to this matter, however its outcome or range of possible loss, if any, cannot be predicted at this time. The Company cannot provide any assurance that the outcome of this matter will not have a material adverse effect on its financial
position or results of operations.

The Company received a letter dated August 11, 2006 from counsel to Sunrise Equity Partners, L.P., demanding
return of its $750,000 investment, with interest. Subsequently, counsel to Sunrise Equity Partners, L.P. has made demands for issuance of additional shares of Common Stock on the same basis as the amendment to the Companys Debentures and has
threatened legal action, although, to date, no action has been taken. Due to the uncertainty of this matter, the Company cannot predict the outcome or range of possible loss, if any. The Company cannot provide any assurance that the outcome of this
matter will not have a material adverse effect on its financial position or results of operations.

On September 14, 2007, the Company filed a breach
of contract and collection of trade receivables action against a former customer, Cosmetique, Inc. The Company is seeking recovery of at least $2.4 million, as of December 31, 2007. This amount includes invoiced advertising services, as well as
other commissions estimated at approximately $0.2 million, as of December 31, 2007. The action is in the initial stage. While it is impossible to predict the outcome of any litigation with certainty, the Company believes it has valid claims and
intends to prosecute them vigorously. The amounts have been reflected as accounts receivable in the accompanying consolidated balance sheet as of December 31, 2007. In March 2008, Cosmetique filed a counterclaim alleging, among other things,
breach of contract, negligent misrepresentation, fraud in the inducement, and violation of the Illinois Consumer Fraud and Deceptive Trade Practices Act. In making these claims Cosmetique alleges that Sendtec made false statements, either
intentionally or negligently, in the negotiation and/or performance of the parties contracts and that Sendtec failed to comply with the terms of those contracts. Sendtec strenuously denies these allegations and intends to vigorously defend
these counter-claims.

Cosmetiques failure to pay its obligations to the Company has caused the Company to delay certain payments for costs the
Company incurred in connection with its work for Cosmetique. Although the Company is not aware of any vendor lawsuits that have been filed, at least one vendor, ValueClick, Inc., has threatened to file suit against the Company for collection of
these amounts.

In December 2007, the Company filed an amended complaint for the collection of trade receivables against a former customer, Crystal Care
International, Inc. The Company is seeking recovery of at least $282,000, as of December 31, 2007. In January 2008, Crystal Care filed a counterclaim alleging, among other things, negligence and unfair trade practices. The action is in the
initial stage. While it is impossible to predict the outcome of any litigation with certainty, the Company believes it has valid claims and intends to prosecute them vigorously. The amounts have been reflected as accounts receivable in the
accompanying consolidated balance sheet as of December 31, 2007.

NOTE 3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include
the accounts of SendTec, Inc. and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Investments in which the Company has a 20% to 50% ownership interest are accounted for using
the equity method.

Revenue Recognition

The Company follows
the guidance of the Securities and Exchange Commissions Staff Accounting Bulletin (SAB) 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been
rendered or product delivery has occurred, the selling price to the customer is fixed or determinable, and collectibility is reasonably assured. The Company, in accordance with Emerging Issues Task Force (EITF) Issue 99-19 Reporting
Revenue Gross as a Principal vs. Net as an Agent, reports revenues for transactions in which it is the primary obligor on a gross basis and revenues in which it acts as an agent on and earns a fixed percentage of the sale on a net basis, net
of related costs. Credits or refunds are recognized when they are determinable and estimable. The following policies reflect specific criteria for the various revenue streams of the Company:

Internet advertising: Revenue from the distribution of Internet advertising, which principally includes the placement of banner ads and e-mail
transmission services, is recognized when Internet users visit and complete actions at an advertisers website. Revenue consists of the gross value of billings to clients, including the recovery of costs incurred



F-8



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to acquire online media required to execute client campaigns. The Company reports these revenues gross because it is responsible for fulfillment of the
service, has substantial latitude in setting price and assumes the credit risk for the entire amount of the sale, and it is responsible for the payment of all obligations incurred with media providers.

Online search: Revenue derived from search engine marketing services, such as search engine keyword buying, is recognized on a net basis in the
period when the associated keyword search media is clicked on by a consumer. SendTec typically earns a media commission equal to a percentage of the keyword search media purchased for its clients. In many cases, the amount SendTec bills to clients
significantly exceeds the amount of revenue that is earned due to the existence of various pass-through charges such as the cost of the search engine keyword media. Amounts received in advance of search engine keyword media purchases are deferred
and included in deferred revenue in the accompanying balance sheet. The Company reports these revenues on a net basis since amounts earned are based on a fixed percentage of the selling price.

Direct response media: Revenue derived from the purchase and tracking of direct response media, such as television and radio commercials, is
recognized on a net basis when the associated media is aired. In many cases, the amount the Company bills to clients significantly exceeds the amount of revenue that is earned due to the existence of various pass-through charges such as the cost of
the television and radio media.

Amounts received in advance of media airings are deferred and included in deferred revenue in the
accompanying balance sheet. The Company reports these revenues on a net basis since amounts earned are based on a fixed percentage of the selling price.

Advertising programs: Revenue generated from the production of direct response advertising programs, such as infomercials, is recognized on the completed contract method when such programs are complete and
available for airing. Production activities generally take 8 to 12 weeks and the Company usually collects amounts in advance and at various points throughout the production process. Amounts received from customers prior to completion of commercials
are included in deferred revenue and direct costs associated with the production of commercials in process are also deferred and included in prepaid expenses. The Company reports these revenues gross because it is responsible for the fulfillment of
the service.

Revenues by revenue stream are as follows:



|                      |  |                                 |            |      |   |           
|--------------------- |  | ------------------------------- | ---------- | ---- | - | ----------
|                      |  | For the years endedDecember 31,
|                      |  | 2007                            |            | 2006
|Internet advertising  |  | $                               | 18,613,715 |      | $ | 27,396,945
|Online search         |  |                                 | 5,098,868  |      |   | 1,744,078 
|Direct response media |  |                                 | 2,545,519  |      |   | 2,213,229 
|Advertising programs  |  |                                 | 4,421,412  |      |   | 4,069,091 
|Other                 |  |                                 | 123,029    |      |   | 439,684   
|                      |  |                                 |            |      |   |           
|                      |  | $                               | 30,802,543 |      | $ | 35,863,027
|                      |  |                                 |            |      |   |           

Cost of Revenues

Cost of revenues principally include the costs incurred to acquire online media required to execute internet advertising campaigns and direct production costs related to producing advertising programs. Cost of revenues does not include any
allocation of operating expenses such as salaries, wages and benefits or other general and administrative expenses. There is no cost of revenues from online search, and direct response media, since those revenue streams are reported as revenue net
of related costs.

Cash and Cash Equivalents

Cash and cash
equivalents consist of highly liquid investments with original maturities of three months or less.

Accounts Receivable

Accounts receivable are generally due 30 days from the invoice date. The Company has a policy of reserving for uncollectible accounts based on its best estimate of the
amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may
indicate that the realization of an account may be in doubt. Accounts are deemed past due when they are not paid in accordance with contractual terms. Account balances deemed to be uncollectible are charged to the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote. At December 31, 2007, the Company established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amount of $326,000.



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Property and Equipment

Property and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gains or losses are included in results of operations in the year of disposition. Leasehold improvements are amortized over the shorter of the life of the lease or the estimated useful life. Depreciation
and amortization are computed by the straight-line method over the following estimated useful lives:



|                                         |  |      
|---------------------------------------- |  | -----
|                                         |  | Years
|Computer equipment                       |  | 3 - 5
|Furniture, fixtures and office equipment |  | 5 - 7
|Software                                 |  | 3    

Goodwill and Intangible Assets

The Company accounts for goodwill and intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires
that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. Goodwill represents
the excess of the purchase price over the fair value of net assets acquired in business combinations. SFAS 142 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on
an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. The Company operates a single reporting unit. Significant judgments required to estimate the fair value of reporting
units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.

The Companys amortizable intangible assets include customer relationships and covenants not to compete. These costs are being amortized using the straight-line
method over the following estimated useful lives:



|                       |  |      
|---------------------- |  | -----
|                       |  | Years
|Customer relationships |  | 8.5  
|Non-compete agreements |  | 3  5

In accordance with SFAS 144 The Impairment or Disposal of Long-Lived Assets, the Company reviews the
carrying value of intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to
generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.

Use of Estimates

The preparation of financial statements in conformity with
generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant
estimates in 2007 and 2006 include the allowance for doubtful accounts, stock-based compensation, the useful life of property and equipment and intangible assets, impairment of intangible assets and goodwill, debenture modification accounting,
income taxes, and loss contingencies.

Fair Value of Financial Instruments

The carrying amounts reported in the balance sheet for cash, accounts receivable, prepaid expenses, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments.
The carrying amount of the Companys convertible debentures is intended to approximate fair value, pursuant to the debenture modification dated November 10, 2006, as such instruments have effective yields that are consistent with instruments of
similar risk, when taken together with equity instruments issued to the investors of these instruments. On March 26, 2008, the Company recapitalized the debentures (see Note 18), however the Company believes it is not practicable to determine the
effect, if any, on the fair value of the debentures at December 31, 2007 as a result of this transaction.



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Debentures

The Company
accounts for conversion options embedded in convertible notes in accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and EITF 00-19 Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF 00-19). SFAS 133 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments
and to account for them as free standing derivative financial instruments in accordance with EITF 00-19. SFAS 133 provides for an exception to this rule when convertible notes, as host instruments, are deemed to be conventional as that term is
described in the implementation guidance under Appendix A to SFAS 133 and further clarified in EITF 05-2 The Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19 and when conversion options are considered equity.

The Company accounts for convertible notes (deemed conventional) in accordance with the provisions of EITF (EITF) 98-5 Accounting for
Convertible Securities with Beneficial Conversion Features, (EITF 98-5), and EITF 00-27 Application of EITF 98-5 to Certain Convertible Instruments. Accordingly, the Company records, as a discount to convertible notes,
the intrinsic value of such conversion options based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts
under these arrangements are amortized over the term of the related debt to their earliest date of redemption.

Common Stock Purchase Warrants and Other
Derivative Financial Instruments

The Company accounts for the issuance of Common Stock purchase warrants and other freestanding derivative financial
instruments in accordance with the provisions of EITF 00-19. Based on the provisions of EITF 00-19, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a
choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash
settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).

Registration Rights Agreements

During the year ended December 31,
2006, the Company accounted for registration rights agreements in accordance with View C of EITF 05-4 Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF 00-19 (EITF 05-4).
Accordingly, the Company classifies as liability instruments, the fair value of registration rights agreements when such agreements (i) require it to file, and cause to be declared effective under the Securities Act, a registration statement
with the SEC within contractually fixed time periods, and (ii) provide for the payment of liquidating damages in the event of its failure to comply with such agreements. Under View C of EITF 05-4, (i) registration rights with these
characteristics are accounted for as derivative financial instruments at fair value and (ii) contracts that are (a) indexed to and potentially settled in an issuers own stock and (b) permit gross physical or net share settlement
with no net cash settlement alternative are classified as equity instruments.

Effective January 1, 2007, the Company adopted FSP EITF 00-19-2,
Accounting for Registration Payment Arrangements. FSP EITF 00-19-2 addresses an issuers accounting for registration payment arrangements. This pronouncement specifies that the contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument, should be separately recognized and accounted for as a contingency in accordance
with SFAS 5 Accounting for Contingencies. The adoption of this pronouncement did not have a material effect on the Companys financial statements.

The Company is currently obligated under two registration rights agreements requiring it maintain the effectiveness of a registration statement covering the resale of shares underlying previous placements of preferred stock and convertible
debt with warrants through at least March 31, 2008 or until all shares have been sold by the selling stockholders in these registrations. The maximum amount of penalty that Company could incur (payable in cash) as of December 31, 2007 is
not substantially different than the amount the Company has recorded. On January 1, 2007, the Company reduced the carrying amount of its liability for estimated penalties in accordance with FSP EITF 00-19-02 by approximately $89,000. The
reduction in the carrying amount of the registration rights liability upon the adoption of FSP EITF 00-19-2 is presented as a cumulative effect of a change in accounting principle in the accompanying statement of operations for the year ended
December 31, 2007.



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Net Loss Per Share

In
accordance with SFAS No. 128 Earnings Per Share, Basic net loss per share is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. Diluted net loss per share is
computed by dividing net loss by the weighted average number of shares of Common Stock, Common Stock equivalents and potentially dilutive securities outstanding during each period. Diluted loss per common share is not presented because it is
anti-dilutive. The Companys Common Stock equivalents at December 31, 2007 and 2006 include the following:



|                               |  |            |  |           
|------------------------------ |  | ---------- |  | ----------
|                               |  | 2007       |  | 2006      
|Options                        |  | 6,774,500  |  | 6,030,000 
|Warrants                       |  | 8,697,487  |  | 8,697,487 
|Convertible Debentures         |  | 65,460,000 |  | 69,160,000
|                               |  |            |  |           
|Total Common Stock equivalents |  | 80,931,987 |  | 83,887,487
|                               |  |            |  |           

The Company included 3,230,730 Common Stock purchase warrants exercisable at $0.01 per share, in the table above
in its determination of basic and diluted loss per share for the years ended December 31, 2007 and 2006, since warrants are exercisable for nominal consideration.

Income Taxes

The Companys accounts for income taxes in accordance SFAS 109, Accounting for Income
Taxes. This approach requires recognition of income tax currently payable, as well as deferred tax assets and liabilities resulting from temporary differences by applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of assets and liabilities. SFAS 109 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using
a more likely than not standard. The Company assesses its deferred tax assets quarterly to determine if valuation allowances are required. See Note 12 for further discussion of the valuation allowances recorded in 2007.

Effective January 1, 2007, we adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109. FIN 48 defines the methodology for recognizing the benefits of tax return positions as well as guidance regarding the measurement of the resulting tax benefits. FIN 48 requires an enterprise to recognize the
financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. In addition, FIN 48 provides guidance
on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of whether a tax position meets the more-likely-than-not recognition threshold requires a substantial degree of
judgment by management based on the individual facts and circumstances. Actual results could differ from these estimates.

The Company has not recognized
any income tax expense (benefit) in the accompanying financial statements for the years ended December 31, 2007 and 2006. Deferred tax assets, which principally arise from net operating losses, are fully reserved due to managements
assessment that it is more likely than not that the benefit of these assets will not be realized in future periods.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123R Share Based Payments. This statement is a revision of SFAS No. 123, and
supersedes APB Opinion No. 25, and its related implementation guidance. SFAS 123R addresses all forms of share based payment (SBP) awards including shares issued under employee stock purchase plans, stock options, restricted stock
and stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that is measured at fair value on the awards grant date, based on the estimated number of awards that are expected to vest.

The Company adopted the modified prospective method with respect to accounting for its transition to SFAS 123(R) and measured unrecognized compensation cost as described
in Note 15. Accordingly, the Company recognized $1,104,805 for the fair value of stock options expected to vest during the year ended December 31, 2006, of which, $768,069 of stock based compensation is reflected in continuing operations and
$336,739 is reflected in discontinued operations. These amounts include the fair value of the vested portion of share based payments made to former employees of Access in the amount $336,739 during the year ended December 31, 2006, which are
reported in discontinued operations.

Advertising

The Company
expenses the cost of advertising, which includes print advertising and online advertising, in accordance with the AICPA Accounting Standards Executive Committees Statement of Position (SOP) 93-7, Reporting on Advertising
Costs (SOP 93-7). Advertising costs are expensed the first time the advertisement runs. Online marketing fees and print media placement costs are expensed in the month the advertising appears.

Advertising and promotional expenses are net of amounts reimbursed to the Company by its partners. Advertising costs were approximately $478,000 and $390,000 for the
years ended December 31, 2007 and 2006, respectively, and are included in other general and administrative expenses in the consolidated statements of operations.

Concentration of Credit Risk

The Company maintains its cash in bank deposit accounts, which, at times, exceed federally
insured limits. At December 31, 2007, the Company had approximately $4,409,000 in United States bank deposits, which exceed federally insured limits. The Company has not experienced any losses in such accounts through December
31, 2007.



F-12



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Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155 Accounting for Certain Hybrid Financial Instruments-an amendment of SFAS No. 133 and 140 (SFAS 155). SFAS 155 addresses the following: a) permits fair
value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS
133; c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; d)
clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and e) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial instrument. The Company adopted SFAS 155 on January 1, 2007. The adoption of this pronouncement did not have an effect on the Companys financial statements.

In March 2006, the FASB issued SFAS 156 Accounting for Servicing of Financial Assets  an amendment of SFAS No. 140 (SFAS
156). SFAS 156 is effective for the first fiscal year beginning after September 15, 2006. SFAS 156 changes the way entities account for servicing assets and obligations associated with financial assets acquired or disposed of. The Company
adopted SFAS 156 on January 1, 2007. The adoption of this pronouncement did not have an effect on the Companys financial statements.

In
September 2006, the FASB issued SFAS 157 Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of
SFAS 157 are effective for the first fiscal year beginning after November 2007. The Company is currently evaluating the impact of adopting SFAS 157 on its financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB
108). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current years financial
statements are materially misstated. SAB 108 is effective for the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not impact the Companys financial statements.

In November 2006, the EITF reached a final consensus in EITF Issue 06-6 Debtors Accounting for a Modification (or Exchange) of Convertible Debt
Instruments (EITF 06-6). EITF 06-6 addresses the modification of a convertible debt instrument that changes the fair value of an embedded conversion option and the subsequent recognition of interest expense for the associated
debt instrument when the modification does not result in a debt extinguishment pursuant to EITF 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. The consensus is applicable to modifications or
exchanges of debt instruments occurring in interim or annual periods beginning after November 29, 2006. The adoption of EITF 06-6 did not have a material impact on the Companys financial statements.

In November 2006, the FASB ratified EITF Issue No. 06-7, Issuers Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument
When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (EITF 06-7). At the time of issuance, an embedded conversion option in a
convertible debt instrument may be required to be bifurcated from the debt instrument and accounted for separately by the issuer as a derivative under FAS 133, based on the application of EITF 00-19. Subsequent to the issuance of the convertible
debt, facts may change and cause the embedded conversion option to no longer meet the conditions for separate accounting as a derivative instrument, such as when the bifurcated instrument meets the conditions of Issue 00-19 to be classified in
stockholders equity. Under EITF 06-7, when an embedded conversion option previously accounted for as a derivative under FAS 133 no longer meets the bifurcation criteria under that standard, an issuer shall disclose a description of the
principal changes causing the embedded conversion option to no longer require bifurcation under FAS 133 and the amount of the liability for the conversion option reclassified to stockholders equity. EITF 06-7 is applicable to all previously
bifurcated conversion options in convertible debt instruments that no longer meet the bifurcation criteria in FAS 133 in interim or annual periods beginning after December 15, 2006, regardless of whether the debt instrument was entered into
prior or subsequent to the effective date of EITF 06-7. The adoption of EITF 06-7 did not have a material impact on the Companys financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 provides companies with an option to report selected financial assets and
liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact of the adoption of this statement on the Companys financial statements.

In December 2007, the FASB issued SFAS 141R, Business Combinations and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51. SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and
reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141R and SFAS 160 are effective for both public and private companies for fiscal years beginning on
of after December 15, 2008. SFAS 141R will be applied prospectively. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 will be
applied prospectively. Early adoption is prohibited for both standards. We do not expect either of these standards to have a significant impact on our financial statements.



F-13



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Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not
require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

NOTE 4 
ACQUISITION OF SENDTEC

On August 9, 2005, the Company entered into an asset purchase agreement (the Asset Purchase Agreement), as amended
on August 23, 2005, with theglobe.com, Inc. and its wholly-owned subsidiary, SendTec. The Asset Purchase Agreement provided for the Company to purchase, through SendTec Acquisition Corp. (STAC), the business and assets of SendTec (the
Asset Purchase). The Company formed STAC solely to purchase the business and assets of SendTec. The Company made an initial investment in STAC of $10,000,000 in exchange for all of the common stock and voting interests of STAC (the
STAC Common Stock). The Company financed its investment in STAC by issuing 762,199 shares of convertible preferred stock to unrelated third party investors for $10,289,690 in cash that were converted into 7,621,991 shares of its common
stock at the date of consolidation as described below.

The Asset Purchase Agreement, as originally contemplated by the parties, provided for the closing
of this transaction to occur through STAC, as a wholly-owned or majority-owned subsidiary of the Company, on or prior to October 31, 2005. As a result of the financing arrangements provided under the Securities Purchase Agreement and related
agreements, the Asset Purchase was restructured to include certain additional conditions for the Company to satisfy prior to completing its acquisition of SendTec. In connection therewith, the Company, on October 31, 2005 assigned its rights under
the Asset Purchase Agreement to STAC with the consent of the sellers in the transaction and entered into certain other agreements providing for the financing of the transaction. As a result of such financing arrangements, STAC temporarily became a
23% owned Investee of the Company upon closing the Asset Purchase and upon STACs concurrent issuance (to certain of the Debenture Holders), in a private placement, of STAC Series A Redeemable Preferred Stock representing 64% of the aggregate
voting interests in STAC. STAC completed the Asset Purchase on October 31, 2005. The remaining 9% interest in STAC was issued to members of the SendTec management in exchange for cash of approximately $500,000 and services valued at approximately
$4.8 million (which was charged to STAC operations). The purchase consideration (paid by STAC to the sellers) and a breakdown of the excess of the purchase price over the net assets acquired as of such date is as follows:



|                                                             |  |   |           
|------------------------------------------------------------ |  | - | ----------
|                                                             |  |  
|Consideration Paid                                           |  | $ | 39,850,000
|Transaction expenses                                         |  |   | 580,000   
|                                                             |  |   |           
|Total purchase cost                                          |  | $ | 40,430,000
|                                                             |  |   |           
|Assets acquired (fair value)                                 |  |   |           
|Cash                                                         |  |   | 2,364,486 
|Accounts receivable                                          |  |   | 8,085,292 
|Prepaid expenses                                             |  |   | 130,322   
|Property and equipment                                       |  |   | 843,221   
|Other assets                                                 |  |   | 28,604    
|                                                             |  |   |           
|Tangible assets acquired                                     |  |   | 11,451,925
|                                                             |  |   |           
|Liabilities assumed (fair value)                             |  |   |           
|Accounts payable                                             |  |   | 8,035,497 
|Accrued expenses                                             |  |   | 425,728   
|Deferred revenue                                             |  |   | 245,791   
|                                                             |  |   |           
|Liabilities assumed                                          |  |   | 8,707,016 
|                                                             |  |   |           
|Net assets acquired                                          |  |   | 2,744,909 
|                                                             |  |   |           
|Purchase price in excess of net assets acquired Allocated to |  | $ | 37,685,091
|Customer relationships                                       |  |   | 8,729,000 
|Covenant not to compete                                      |  |   | 590,000   
|                                                             |  |   |           
|Goodwill                                                     |  | $ | 28,366,091
|                                                             |  |   |           



F-14



---

STAC financed its purchase of SendTec by issuing (a) 10,000,000 shares of its par value $0.001 Common Stock (STAC
Common Stock) to the Company for $10,000,000 in cash and (b) pursuant to a Securities Purchase Agreement, which is more fully described in Note 8, $34,950,000 of its 6% Senior Secured Convertible Debentures due October 30, 2009 (the STAC
Debentures) to institutional investors. In addition, certain Debenture Holders simultaneously purchased 279,669 shares of STACs Series A Redeemable Preferred Stock (the STAC Preferred Stock) at a price of $1.00 per share for
net proceeds of approximately $280,000 and STAC management purchased 531,700 shares of STAC Common Stock for $531,700. STAC also issued, for no consideration, an additional 4,774,323 shares of STAC Common Stock to STAC (formerly SendTec) management
concurrent with its purchase of Send Tec on October 31, 2005. Each share of STAC Preferred Stock possessed 100 votes per share, representing approximately 64% of the total voting interests of STAC. The Company retained, through the date of
consolidation, approximately 23% of the total voting interests in STAC. The remaining 9% voting interests in STAC were owned by STAC management.

The Asset
Purchase Agreement, Securities Purchase Agreement, STAC Preferred Stock Agreement and RelationServe Preferred Stock Agreement and certain other contemporaneous agreements entered into with the management of STAC provided for the mandatory
consolidation of STAC, as defined in the Securities Purchase Agreement (the Consolidation) with the Company upon the attainment of certain contractual milestones (the Consolidation Milestones).

Such Consolidation Milestones, as defined in the Securities Purchase and related agreements, principally included the delivery, by the Company to the Investors and their
agent in the transaction, of its (a) audited financial statements for the nine months ended September 30, 2005 (the Audited Financial Statements), (b) satisfactory evidence that it had achieved certain minimum levels of revenue, earnings
and cash flow as specified in the aforementioned agreements (the Financial Covenants), (c) a letter from its legal counsel providing negative assurance that reports the Company has filed with SEC since June 10, 2005 through the date of
the letter contain no material misstatements or omissions of fact and (d) satisfactory evidence that certain stockholders relinquished their equity or other interest in the Company (as of the time of the Consolidation) and gave the Company a general
release of all claims and entered into non-competition and non-solicitation agreements reasonably satisfactory to the Debenture Holders.

The Company, STAC
and the Debenture Holders also entered into an Investor Rights Agreement (the Investor Rights Agreement) providing, among other things, for the formation of a five member board, including one member to jointly represent the Company and a
debenture investor, and the mandatory effectuation of a liquidity event, as defined, in the event that the Consolidation Milestones and related Consolidation had not been completed.

Upon the satisfaction of the Consolidation Milestones on February 3, 2006, STAC became a wholly-owned subsidiary of the Company in connection with a series of transactions that took place on the Consolidation Date.
These transactions included (i) the automatic conversion of all the Companys Preferred Stock into 7,621,991 shares of the Companys Common Stock (ii) the STAC Debentures becoming automatically convertible into the Companys Common
Stock and (iii) the mandatory exchange of all STAC Common Stock held by STAC management for 9,506,380 shares of the Companys Common Stock.

As
described in Note 1, the Company accounted for its investment in STAC, through the date of the consolidation under the equity method prescribed in APB 18. Accordingly, the Company recorded a $153,389 charge for its proportionate share of STACs
losses for the period of January 1, 2006 through February 3, 2006.

The Company delivered satisfactory evidence of its completion of the Consolidation
Milestones on or about February 1, 2006 and completed its consolidation with STAC on February 3, 2006. The Company acquired SendTec for the purpose of providing it with a platform that would enable the Company to provide its customers with a full
range of on-line and off-line marketing and advertising solutions.



F-15



---

The tangible net assets of STAC at the date of the consolidation are as follows:



|                             |  |   |           
|---------------------------- |  | - | ----------
|                             |  |  
|Cash                         |  | $ | 9,347,155 
|Accounts receivable, net     |  |   | 7,580,221 
|Prepaid expenses             |  |   | 167,879   
|Property and equipment       |  |   | 842,278   
|Other assets                 |  |   | 15,329    
|                             |  |   |           
|Total tangible assets        |  |   | 17,952,862
|                             |  |   |           
|Liabilities assumed:         |  |   |           
|Accounts payable             |  |   | 9,848,134 
|Accrued expenses             |  |   | 1,353,229 
|Deferred revenue             |  |   | 520,513   
|Deferred rent                |  |   | 151,206   
|                             |  |   |           
|Total liabilities assumed    |  |   | 11,873,082
|                             |  |   |           
|Net tangible assets acquired |  | $ | 6,079,780 
|                             |  |   |           

A reconciliation of the amount of goodwill recorded by STAC upon its acquisition of SendTec on October 31, 2005 to
the amount recorded by the Company upon its consolidation with STAC on February 3, 2006, is as follows:



|                                                                                                                                           |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | - | ---------- | -
|                                                                                                                                           |  |   |           
|Excess of purchase price over net assets acquired by STAC at October 31, 2005 allocated to goodwill                                        |  | $ | 28,366,091 |  
|Net Losses of STAC for the period of November 1, 2005 through January 31, 2006, net of equity loss recognized by the Company of $1,187,491 |  |   | 3,975,513  |  
|Consolidation Date adjustments to the fair values of :                                                                                     |  |   |            |  
|Senior Secured Convertible Debentures                                                                                                      |  |   | (486,224   | )
|Non-compete agreements                                                                                                                     |  |   | (117,666   | )
|Company Transaction Expenses                                                                                                               |  |   | 1,273,086  |  
|Assumption of registration rights obligation at fair value                                                                                 |  |   | 250,000    |  
|Dividend paid to STAC Preferred Stockholders                                                                                               |  |   | 3,737      |  
|                                                                                                                                           |  |   |            |  
|Excess of purchase price over net assets acquired at February 3, 2006 allocated to goodwill                                                |  |   | 33,264,537 |  
|Less cash received in March 2006 under a purchase price adjustment                                                                         |  |   | (318,750   | )
|                                                                                                                                           |  |   |            |  
|Excess of purchase price over net assets acquired as of December 31, 2006 allocated to goodwill                                            |  | $ | 32,945,787 |  
|                                                                                                                                           |  |   |            |  

The Company acquired the assets of SendTec, and accordingly, goodwill and intangibles are amortizable for tax
purposes.

The Company, following its Consolidation with STAC also performed a preliminary analysis of the excess of the purchase price plus transactions
over the net assets acquired, which were subsequently consolidated with the Company on February 1, 2006. The Company, based on its preliminary analysis, allocated $1,866,000 of the excess to non-compete agreements and the remaining amount of $
38,643,674 (as adjusted by the amounts for additional changes made at the consolidation date) to goodwill. The Company performed a valuation study of its purchase price allocation. As a result of the study, the Company reallocated
(i) $8,729,000 of the excess to customer relationships, (ii) reduced the amount allocated non-compete agreements to $590,000 and reduced capitalized software to $388,000.



F-16



---

The following unaudited pro-forma information reflects the results of continuing operations of the Company, as if the
acquisition had been consummated as of January 1, 2006:



|                                       |  |                                     |             |  
|-------------------------------------- |  | ----------------------------------- | ----------- | -
|                                       |  | For the year endedDecember 31, 2006 |            
|Revenues                               |  | $                                   | 38,738,000  |  
|Net Loss  continuing operations       |  |                                     | (38,111,000 | )
|Net Loss per share  basic and diluted |  |                                     | (0.82       | )

The 2006 amounts include a debt restructuring charge of $22,363,432.

The pro forma results, which are based on significantly limited information, is presented for illustration purposes only and is not indicative of the results that the
Company would have achieved or could potentially achieve in future periods had it completed this transaction on the date indicated.

NOTE 5 
PROPERTY AND EQUIPMENT

At December 31, 2007, property and equipment consist of the following:



|                              |  |   |           |  
|----------------------------- |  | - | --------- | -
|Equipment                     |  | $ | 969,578   |  
|Furniture and fixtures        |  |   | 255,838   |  
|Leasehold improvements        |  |   | 31,394    |  
|Software                      |  |   | 679,274   |  
|                              |  |   |           |  
|Property and equipment        |  |   | 1,936,084 |  
|Less accumulated depreciation |  |   | (853,622  | )
|                              |  |   |           |  
|Property and equipment, net   |  | $ | 1,082,462 |  
|                              |  |   |           |  

Depreciation expense was approximately $496,600 and $359,000 for the years ended December 31, 2007 and 2006,
respectively. In addition, the Company disposed of an asset with an accumulated depreciation of approximately $1,500 during the year ended December 31, 2006.

Fixed assets include $278,500 of equipment purchases that were financed under capital lease obligations as of December 31, 2007, of which $36,900 and $241,500 were purchased during the years ended December 31, 2007 and 2006,
respectively. The accumulated depreciation on these assets amounted to $142,400 as of December 31, 2007.

NOTE 6  GOODWILL AND AMORTIZABLE
INTANGIBLE ASSETS

At December 31, 2007, goodwill and other intangible assets consist of the following:



|                                                   |  |   |             |  
|-------------------------------------------------- |  | - | ----------- | -
|Goodwill  January 1, 2007                         |  |   | 32,945,787  |  
|Impairment loss                                    |  |   | (10,081,960 | )
|                                                   |  |   |             |  
|Goodwill  December 31, 2007                       |  | $ | 22,863,827  |  
|                                                   |  |   |             |  
|Amortizable Intangible Assets:                     |  |   |             |  
|Non-compete agreements                             |  | $ | 590,000     |  
|Less accumulated amortization                      |  |   | (378,373    | )
|                                                   |  |   |             |  
|Non-compete agreements, netbefore impairment loss |  |   | 211,627     |  
|Impairment loss                                    |  |   | (211,627    | )
|                                                   |  |   |             |  
|Non-compete agreements, netafter impairment loss  |  |   |            |  
|                                                   |  |   |             |  
|Customer relationships                             |  |   | 8,729,000   |  
|Less accumulated amortization                      |  |   | (1,968,304  | )
|                                                   |  |   |             |  
|Intangible assets, net                             |  | $ | 6,760,696   |  
|                                                   |  |   |             |  

The Company, as of December 31, 2007 evaluated the carrying amount of its goodwill in accordance with SFAS 142 to
determine whether circumstances indicate that the carrying amount of the goodwill exceeds its net realizable value. The Company determined that the net carrying amount of the reporting unit exceeded its fair value as of December 31, 2007.
Accordingly, the Company recorded a $10,081,960 impairment charge to reduce the carrying amount of the goodwill to its estimated recoverable value.

The
Company determined in accordance with the guidelines established under SFAS 142 that a confluence of circumstances that occurred during the year ended December 31, 2007 caused a decline in the Companys market capitalization and enterprise
value during the quarter ended December 31, 2007. These events include, among other things, the loss of a major customer, the decision to no longer pursue opportunities in certain media sales, the use of capital resources to settle certain legal
claims and uncertainty as to our ability to restructure our Debentures. In performing this evaluation, the Company considered a variety of factors including its market capitalization adjusted for a control premium and a discounted cash flow forecast
to determine the enterprise value of the business using the income approach. Making estimates about the carrying values of intangible assets requires management to exercise significant judgment. It is at least reasonably possible that the estimate
of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or
more future confirming events. Accordingly, the actual results regarding estimates of the carrying value of our goodwill and other intangibles could differ materially from the Companys estimates.



F-17



---

The Company also evaluated the carrying amounts of its other intangible assets in accordance with SFAS 144. Under SFAS
144, a long lived asset is deemed to have been impaired when the carrying amount of the asset exceeds its undiscounted future cash flows and the fair value of the asset is less than the carrying amount. The Company, in performing its evaluation of
the carrying amounts of these assets included all future cash inflows less those cash outflows specifically related to the use of the asset over the remaining useful lives of the assets. The Company, based on this evaluation determined that the net
future cash flows over the remaining useful lives of these assets exceed their carrying amounts at December 31, 2007. The Company determined that the carrying amount of its non-compete agreements exceeded its fair value as of December 31,
2007 and that a non-cash impairment charge in the amount of $211,627 is necessary for the year ended December 31, 2007. The Company also determined that no impairment charge is considered necessary for the year ended December 31, 2007 for
its customer relationships since its fair value exceeded the carrying amount as of December 31, 2007.

Amortization expense with respect to the
customer relationships and non-compete agreements amounted to approximately $1,186,000 and $1,109,000 for the years ended December 31, 2007 and 2006, respectively. Amortization expense subsequent to the year ended December, 2007 is as follows:



|                          |  |   |          
|------------------------- |  | - | ---------
|Years ending December 31: |  |   |          
|2008                      |  | $ | 1,026,941
|2009                      |  |   | 1,026,941
|2010                      |  |   | 1,026,941
|2011                      |  |   | 1,026,941
|2012                      |  |   | 1,026,941
|2013                      |  |   | 1,026,941
|2014                      |  |   | 599,050  
|                          |  |   |          
|                          |  | $ | 6,760,696
|                          |  |   |          



F-18



---

NOTE 7  ACCRUED EXPENSES

As of December 31, 2007, accrued expenses are comprised of the following:



|                                 |  |   |          
|-------------------------------- |  | - | ---------
|Legal contingencies loss reserve |  | $ | 885,000  
|Media costs                      |  |   | 2,441,905
|Interest                         |  |   | 901,367  
|Other                            |  |   | 295,753  
|                                 |  |   |          
|Total accrued expenses           |  | $ | 4,524,025
|                                 |  |   |          

NOTE 8  DEBENTURES

As described in Note 4, STAC financed its purchase of SendTec, in part, by issuing the Senior Secured Convertible Debentures in the original principal amount of $34,950,000 with an original maturity date of
October 30, 2009 and bearing interest at 6%. The STAC Debenture provided, among other things, for the Company to assume liability for the STAC Debentures on the date of Consolidation. Accordingly, the Company is obligated under the terms of the
Securities Purchase Agreement, as amended, to repay $32,730,000 of the remaining principal balance due on the STAC Debentures on March 31, 2008. The Debentures are secured by substantially all assets of the Company.

The Debentures were amended on November 10, 2006 to provide for a (i) reduction in the conversion price from $1.50 per share to $.50 per share and
(ii) change the maturity date from October 31, 2009 to March 31, 2008, in exchange for a release of previous instances of non-compliance with certain financial covenants. The modification of the Debentures resulted in a constructive
extinguishment of this instrument under its terms prior to the date of the modification. The Debentures, under the original terms, were fully discounted at the time they were assumed by the Company concurrent with its Consolidation of STAC on
February 3, 2006. The difference between the carrying value of the Debentures and their mandatory redemption amount is being accreted as interest expense through March 31, 2008.

A summary of the remaining carrying amount of the Debentures at December 31, 2007, after giving effect to $2,220,000 of principal converted to 4,440,000 shares of
Common Stock, is as follows:



|                                                                       |  |   |            |  
|---------------------------------------------------------------------- |  | - | ---------- | -
|Remaining Principal (due March 31, 2008 with interest at 6% per annum) |  | $ | 32,730,000 |  
|Less unamortized discount                                              |  |   | (2,595,232 | )
|                                                                       |  |   |            |  
|Net Carrying Value                                                     |  | $ | 30,134,768 |  
|                                                                       |  |   |            |  

Interest expense is as follows:



|                                        |  |                                 |            |      |   |           
|--------------------------------------- |  | ------------------------------- | ---------- | ---- | - | ----------
|                                        |  | For the yearsended December 31,
|                                        |  | 2007                            |            | 2006
|Discount amortization                   |  | $                               | 11,290,590 |      | $ | 8,856,974 
|Contractual interest                    |  |                                 | 2,098,768  |      |   | 1,944,859 
|Amortization of deferred financing fees |  |                                 | *          |      |   | 399,933   
|                                        |  |                                 |            |      |   |           
|Debenture interest                      |  | $                               | 13,389,358 |      | $ | 11,201,766
|                                        |  |                                 |            |      |   |           



| | written off in November 2006 as a result of restructure of the Debentures.
|- | --------------------------------------------------------------------------



F-19



---

As of September 30, 2007, the Company was not in compliance with the requirement to have a minimum cash balance of
$3,500,000 pursuant to the financial covenants the Company is required to maintain under the modified terms of the Securities Purchase Agreement with the Debenture holders. In addition, the Company did not make a required interest payment of
approximately $502,000 due on November 1, 2007. The Companys failure to meet the financial covenants and to make interest payments are events of default under the Debentures.

On March 26, 2008, the Company and Debenture holders entered into an agreement which provides, among other things, for the conversion of certain Debenture principal into Preferred Shares of the Company, and extends
the due date of the remaining Debenture principal for up to three years (see Note 18).

Debt Extinguishment Accounting

On November 10, 2006, the Companys stockholders approved an increase in the authorized capital of the Company to 190,000,000 shares to meet the requirements of
all potential conversions of the Senior Secured Convertible Debentures and other derivative instruments into Common Stock, at which time the amendments to the Securities Purchase Agreement as stipulated in the term sheet, became effective. The
Company accounted for the amendments to the Securities Purchases Agreement in accordance with the guidelines enumerated in EITF Issue No. 96-19 Debtors Accounting for a Modification or Exchange of Debt Instruments. EITF 96-19
provides that a substantial modification of terms in an existing debt instrument should be accounted for like, and reported in the same manner as, an extinguishment of debt. EITF 96-19 further provides that the modification of a debt instrument by a
debtor and a creditor in a non-troubled debt situation is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least ten
percent different from the present value of the remaining cash flows under the terms of the original instrument at the date of the modification.

The
Company evaluated its issuance of the amended Debenture agreement to determine whether the modification in the conversion feature and change in the maturity date resulted in the issuance of a substantially different debt instrument. The Company
determined after giving effect to the changes in these features, including the substantial decrease in the conversion price of the instrument, that the Company had issued a substantially different debt instrument, which resulted in a constructive
extinguishment of the original debt instrument. Accordingly, the Company recorded a loss on the extinguishment of debt in the amount of $22,363,432, which included a charge of $1,535,228 to expense the unamortized portion of deferred financing
costs, $8,621,000 for incremental fair value of the change in the conversion option, $19,456,093, to record the estimated fair value of the new debt instrument, less $7,248,889 to derecognize the carrying value of the original debt instrument The
debt extinguishment charge is included in the accompanying statement of operations for the year ended December 31, 2006.

The Company, in determining
the extent of the modification, related extinguishment charge and fair value of the new debt instrument compared the discounted cash flows of the old debt instrument, immediately prior to the modification, to the cash flows of the new debt
instrument using a discount of 52.43%. Under this methodology, the cash flows of the new debt instrument, which included the effect of having reduced the conversion price from $1.50 per share to $.50 per share, substantially exceeded the discounted
present value of the remaining cash flows of the old debt instrument. As result, the Company computed the fair value of new debt instrument by discounting all future flows under such instrument at the rate of 52.43 %. The Company believes that the
discount rate of 52.43% results in a fair and reasonable estimation of the fair value of the Debentures in the circumstances. The extinguishment charge resulting from the modification includes the effects of derecognizing the carrying value of the
old debt instrument prior to its modification (including the unamortized discount with respect to the old debt), establishing the fair value of the new debt instrument at its modification date, recording a charge for the incremental fair value of
the conversion option and reducing to zero, the unamortized portion of deferred financing costs.

The Company also evaluated whether the conversion option
under the newly established debt instrument should be bifurcated from its host and recorded as a free standing derivative in accordance with the provision of SFAS 133, EITF 05-2 and EITF 00-19. The Company determined that conversion option embedded
in the new instrument can only be realized by the holder



F-20



---

by exercising such conversion option and receiving the entire amount of the proceeds in a fixed number of shares or cash, at the option of the Company. The
contractual conversion price of $0.50 exceeded the fair value of the Companys Common Stock, which was $0.44 at the date of the modification. Accordingly, the conversion feature was not deemed to be beneficial.

The difference between the carrying value of the modified debt instrument and the mandatory redemption amount is being accreted as interest expense over the term of the
amended Securities Purchase Agreement through March 31, 2008.

NOTE 9  CAPITAL LEASE OBLIGATIONS

During April 2006 and April 2007, the Company entered into various capital leases with an aggregate present value of approximately $278,400. In accordance with SFAS 13,
Accounting for Leases (SFAS 13), the present value of the minimum lease payments was calculated using discount rates ranging from 10% to 17%. Lease payments, including amounts representing interest, amounted to approximately
$149,200 and $94,500 for the years ended December 31, 2007 and 2006, respectively. The leases require monthly payments of approximately $13,000 including interest at discount rates ranging from 10% to 17% and are due at various times through
May 2010.

Minimum lease payments due in the years subsequent to December 31, 2007 are as follows:



|                                        |  |   |         |  
|--------------------------------------- |  | - | ------- | -
|Years ending December 31:               |  |   |         |  
|2008                                    |  | $ | 59,052  |  
|2009                                    |  |   | 12,500  |  
|2010                                    |  |   | 5,208   |  
|                                        |  |   |         |  
|Total minimum lease payments            |  |   | 76,760  |  
|Less amounts representing interest      |  |   | (4,947  | )
|                                        |  |   |         |  
|Present value of minimum lease payments |  |   | 71,813  |  
|Less current portion                    |  |   | (55,409 | )
|                                        |  |   |         |  
|Long-term portion                       |  | $ | 16,404  |  
|                                        |  |   |         |  

NOTE 10  SIGNIFICANT CUSTOMERS

A significant portion of the Companys revenue is attributable to a small number of customers.

During the year ended
December 31, 2007, one customers (Cosmetique, Inc.) revenues represented approximately 19.9% of the Companys net revenue, and two customers accounts receivable balances represented approximately 21.5% and 14.7%, respectively,
of total accounts receivable at December 31, 2007.

As more fully described in Note 2, as of December 31, 2007, Cosmetique, Inc. ended their
advertising campaigns, and such revenue will not recur subsequent to December 31, 2007. The Company has commenced an action to collect all amounts outstanding from Cosmetique.

During the year ended December 31, 2006, sales to three customers represented 11%, 21%, and 13% of the Companys net revenue. One customer represented approximately 14.2% of total accounts receivable at
December 31, 2006.

NOTE 11  RELATED PARTY TRANSACTIONS

The CEO and Chairman of the Board of Directors of the Company also serves on the board of directors of a company that is a customer of SendTec. Revenues from this customer were $14,401 and $288,607 during the years
ended December 31, 2007 and 2006, respectively. Accounts receivable from this customer was $3,750 as of December 31, 2007.

The Company pays fees
and commissions in connection with customer referrals to a company whose management includes someone who is a member of the Companys Board of Directors. For the years ended December 31, 2007 and 2006 the Company incurred $184,336 and
$146,739, respectively, in fees and commissions. At December 31, 2007, $23,674 of such fees and commissions were included in accounts payable and $20,792 of such fees and commissions were included in accrued expenses in the accompanying balance
sheet.

The Company pays fees and commissions in connection with consulting and customer referrals to a company whose principal shareholder is a member of
the Companys Board of Directors. For the years ended December 31, 2007 and 2006 the Company incurred $2,000 and $32,000, respectively, in fees and commissions. At December 31, 2007 there were no such fees and commissions that were
unpaid.



F-21



---

The Company pays fees in connection with the Debenture refinancing to a company whose principal shareholder is a member
of the Companys Board of Directors. For the year ended December 31, 2007 the Company incurred $86,276 in fees and expense reimbursements in connection with the Debenture refinancing. At December 31, 2007 there were no such fees and
expenses that were unpaid. There were no fees incurred during the year ended December 31, 2006.

NOTE 12  INCOME TAXES

As describe in Note 3, the Company adopted FIN 48 effective January 1, 2007. FIN 48 requires companies to recognize in their financial statements, the impact of a
tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure.

The Company and its subsidiaries have filed consolidated federal and various state income tax returns for the years ended December 31, 2006 and 2005. These income
tax returns have not been examined by the applicable Federal and State tax authorities.

Management does not believe that the Company has any material
uncertain tax positions requiring recognition or measurement in accordance with the provisions of FIN 48. Accordingly, the adoption of FIN 48 did not have a material effect on the Companys financial statements. The Companys policy, is to
classify penalties and interest associated with uncertain tax positions, if required as a component of its income tax provision.

The Company has the
following net deferred tax assets at December 31, 2007:



|                                 |  |      |             |  
|-------------------------------- |  | ---- | ----------- | -
|                                 |  | 2007 |            
|Deferred tax assets              |  |      |             |  
|Net operating loss carryforward  |  | $    | 8,666,000   |  
|Stock based compensation         |  |      | 1,104,000   |  
|Deferred finance fees            |  |      | 360,000     |  
|Accrued expenses                 |  |      | 333,000     |  
|Goodwill amortization/impairment |  |      | 2,780,000   |  
|Other                            |  |      | 151,000     |  
|Valuation allowance              |  |      | (13,394,000 | )
|                                 |  |      |             |  
|Net deferred tax assets          |  | $    |            |  
|                                 |  |      |             |  

The Company, as a result of having evaluated all available evidence as required under SFAS 109, fully reserved for
its net deferred tax assets at December 31, 2007 since it is more likely than not that the future tax benefits of these deferred tax assets will not be realized in future periods. The valuation allowance amounted to
approximately $13,394,000 as of December 31, 2007.

As of December 31, 2007, the Company had net operating loss carry forwards of
approximately $22,806,000 for tax purposes that will expire between the years 2025 and 2027. The net operating losses that the Company has generated to date are subject to limitations due to the change in ownership provisions
under Section 382 of the Internal Revenue Code and similar state provisions. Furthermore, the Company believes there will be a further limitation as a result of the recapitalization agreement (see Note 18). Such limitations are not expected to
impact the Companys future operating results as any limitation to the net operating loss carryforward resulting in a decrease in the deferred tax asset will have a corresponding decrease in the valuation allowance.

The Companys recorded income tax benefit with respect to its continuing operations, net of the increase in the valuation allowance for the years ended
December 31,



|                              |  |      |            |   |      |   |            |  
|----------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                              |  | 2007 |            |   | 2006 |  
|Income tax benefit            |  | $    | (6,147,000 | ) |      | $ | (6,941,000 | )
|Change in valuation allowance |  |      | 6,147,000  |   |      |   | 6,941,000  |  
|                              |  |      |            |   |      |   |            |  
|Net income tax benefit        |  | $    |           |   |      | $ |           |  
|                              |  |      |            |   |      |   |            |  



F-22



---

Following is a reconciliation of the applicable federal income tax as computed at the federal statutory tax rate to the
actual income taxes reflected in the consolidated statement of operations for the years ended December 31:



|                                              |  |      |    |  |      |   
|--------------------------------------------- |  | ---- | -- |  | ---- | --
|                                              |  | 2007 |    |  | 2006 |   
|Tax provision at U.S. federal income tax rate |  | (34  | )% |  | (34  | )%
|State income tax provision net of federal     |  | (4   | )% |  | (4   | )%
|Debentures                                    |  | 16   | %  |  | 23   | % 
|Valuation allowance increase                  |  | 22   | %  |  | 15   | % 
|                                              |  |      |    |  |      |   
|Provision for income taxes                    |  |     |    |  |     |   
|                                              |  |      |    |  |      |   

NOTE 13  COMMITMENTS AND CONTINGENCIES

Legal matters

The Company is involved in various matters that are described in Note 2.

Employment agreements

As part of the SendTec acquisition transaction,
certain executives of SendTec entered into new employment agreements with the Company. The employment agreements each have a term of five years and automatically renew for an additional year at expiration unless either party provides a notice of
non-renewal. The agreements also contain certain non-compete provisions for periods specified by the agreements.

Effective February 3, 2006, the
Company entered into an employment agreement with its Chief Executive Officer for an initial five-year term, which will be renewed for additional one-year terms thereafter, unless written notice is provided by either party. The agreement provides
for an annual base salary of no less than $400,000, as well as such incentive compensation and bonuses as the Board of Directors may determine and to which he may become entitled to pursuant to an incentive compensation or bonus program.

On March 26, 2008, the Company entered into an Amended and Restated Employment Agreement with Paul Soltoff, the Companys Chief Executive Officer and
Chairman of the Board of Directors. The agreement provides for an initial term of five years, which may be renewed for successive one-year terms. Pursuant to the terms of the agreement, Mr. Soltoff shall receive base annual salary of no less
than $400,000, as well as incentive and bonus compensation at the discretion of the Registrants Board of Directors.

Pursuant to the terms of the
amended agreement, the Company may terminate Mr. Soltoffs employment for good cause, as defined in the agreement. If Mr. Soltoffs employment is terminated by reason of his death or disability or other than for good cause, or if
Mr. Soltoff terminates his employment for good reason, as defined in the agreement, the Company will pay his base salary through the date of termination and will pay Mr. Soltoff severance in the amount of two times his then current base
salary. In addition, the Company will pay Mr. Soltoff for all accrued but unused vacation time through the date of termination, and will reimburse him for all reasonable business expenses incurred prior to termination, but not reimbursed as of
the termination date.

Effective February 3, 2006, the Company entered into an employment agreement with its Chief Financial Officer for an initial
five-year term, which will be renewed for additional one-year terms thereafter, unless written notice is provided by either party. The agreement provides for an annual base salary of no less than $225,000, as well as such incentive compensation and
bonuses as the Board of Directors may determine and to which he may become entitled to pursuant to an incentive compensation or bonus program.

Effective
February 3, 2006, the Company entered into an employment agreement with its President for an initial five-year term, which will be renewed for additional one-year terms thereafter, unless written notice is provided by either party. The
agreement provides for an annual base salary of no less than $325,000, as well as such incentive compensation and bonuses as the Board of Directors may determine and to which he may become entitled to pursuant to an incentive compensation or bonus
program.

In addition, the Company entered into employment contracts with four of its executives for initial terms between three and five years, which will
be renewed for additional one-year terms thereafter, unless written notice is provided by the respective party. The agreements provide for annual aggregate base salaries totaling $781,000, as well as incentive compensation and bonuses as the Board
of Directors may determine and to which they may become entitled to pursuant to an incentive compensation or bonus program.

Stock Registration Rights
Agreements

The Company entered into a Registration Rights Agreement with the investors of the Series A Preferred Stock that it issued in October 2005 to
finance its investment in STAC and recorded a liability of $75,000. The Company, upon the consolidation with STAC, also assumed the registration rights obligation under the Securities Purchase Agreement with the Debenture holders, which had an
estimated fair value of $250,000 at the date of the Consolidation.

The Companys registration statement became effective on July 14, 2006.
However, the Company is required to maintain the effectiveness of this registration statement until such time that all of the underlying shares are sold by the selling stockholders or such shares can be sold without volume restriction under Rule
144(k) of the Securities Act, subject to a liquidated damages penalty of 1% per month of the aggregate purchase price paid by the holders. The Company reduced its estimate of the fair value of the accrued registration rights penalty by $193,500
to $131,500 at December 31, 2006, and to $15,200 at December 31, 2007. During the year ended December 31, 2007, $88,500 of the reduction in the liability is reflected as a cumulative effect of change in accounting principle and
$27,800 of the reduction is included in other income (expense) in the accompanying statement of operations. For the year ended December 31, 2006, the entire reduction in the liability is included in other income (expense) in the accompanying
statement of operations.



F-23



---

Operating leases

The
Company leases its office facilities under two non-cancelable leases expiring in February 2010 and December 2009, respectively. Minimum annual lease payments due in the years subsequent to December 31, 2007 are approximately as follows:



|                             |  |   |        
|---------------------------- |  | - | -------
|Years ending December 31:    |  |   |        
|2008                         |  | $ | 415,400
|2009                         |  |   | 426,900
|2010                         |  |   | 60,100 
|                             |  |   |        
|Total minimum lease payments |  | $ | 902,400
|                             |  |   |        

Rent expense for the years ended December 31, 2007 and 2006 was approximately $454,600 and $345,600,
respectively, including $80,300 and $20,100, respectively, for a share of operating expenses. Rent expense is recorded on the straight line basis over the term of the lease in accordance with SFAS No. 13, Accounting for Leases.

NOTE 14  STOCKHOLDERS EQUITY

Authorized shares

On November 10, 2006, the Companys Stockholders approved an increase in the authorized shares of the Companys Common Stock to 190,000,000
shares. On April 12, 2007, a registration statement covering 128,940,395 shares of the Companys Common Stock, including shares underlying the Debentures, was declared effective by the Securities and Exchange Commission.

Preferred Stock Series A

On February 3, 2006, the date in which the
Company satisfied the Consolidation Milestones and completed its acquisition of STAC (as described in Note 4), 762,199 shares of preferred stock were converted into 7,621,991 shares of Common Stock.

Common Stock Purchase Warrants

The Company, upon its Consolidation with
STAC, issued to the Debentures investors, seven year Warrants to purchase an aggregate of 10,081,607 shares of the Companys Common Stock exercisable at $0.01 per share in amounts proportionate to the face amount of the Debentures. The Warrants
are exercisable from February 3, 2006 through October 30, 2012. The Warrants feature a cashless exercise provision, which provides (a) the holder with the right, any time after one year from their date of issuance through their date
of termination (and only in the event that there is not an effective registration or prospectus covering the resale of the underlying stock), to exercise such Warrants using the cashless exercise feature and/or (b) for an automatic cashless
exercise on the date of termination. The Company can consent to a cashless exercise of the Warrants at the request of the holder at anytime. A cashless exercise will result in a net share settlement of the Warrants based on a formula in which the
net shares issuable is based upon the then fair value of the Companys Common Stock. The Company evaluated the classification of these Warrants at the date of consolidation and at each reporting date through December 31, 2007 in accordance with
EITF 00-19 and determined that they are equity instruments because (a) net share settlement is within the Companys control and (b) the cashless exercise feature does not potentially result in the issuance of an indeterminate number
of shares.

During the year ended December 31, 2006, Debenture Holders elected to exercise an aggregate of 6,850,877 of their Common Stock purchase
warrants resulting in the issuance of an aggregate of 6,821,460 of Common Stock, including the effects of having net-share settled certain of the warrants through the holders use of the cashless exercise feature. No warrants were exercised
during the year ended December 31, 2007. At December 31, 2007 and 2006, 3,230,730 warrants remained outstanding with respect to this financing transaction.

On September 27, 2006 the Company issued five year warrants to purchase an aggregate of 250,000 shares of the Companys Common Stock exercisable at $0.60 per share with an aggregate fair value of $57,500.
The Company estimated the fair value of the Warrants using the Black Scholes pricing model with the following assumptions: Fair Value of Common Stock $0.36, Risk Free Interest Rate 4.56%, Volatility 90%, Term 5 years. The warrants are exercisable
from September 27, 2006 through September 26, 2011, either through a cash exercise or by use of a cashless exercise provision. The warrants were issued to a consultant for corporate financial advisory services.

A summary of the Companys outstanding common stock purchase warrants granted through December 31, 2006 and changes during the period is as follows:



|                                                      |  |                   |   |  |                               |     
|----------------------------------------------------- |  | ----------------- | - |  | ----------------------------- | ----
|                                                      |  | Number ofwarrants |   |  | Weightedaverageexercise price
|Outstanding at January 1, 2006                        |  | 6,786,757         |   |  | $                             | 0.71
|Granted                                               |  | 10,331,607        |   |  | $                             | 0.02
|Exercised                                             |  | (8,420,877        | ) |  | $                             | 0.05
|Forfeited                                             |  |                  |   |  |                               |    
|                                                      |  |                   |   |  |                               |     
|Outstanding at December 31, 2006                      |  | 8,697,487         |   |  | $                             | 0.53
|                                                      |  |                   |   |  |                               |     
|Weighted-average fair value granted during the period |  |                   |   |  | $                             | 3.39
|                                                      |  |                   |   |  |                               |     

At December 31, 2007, the Company had 8,697,487 outstanding Common Stock purchase warrants with a weighted
average exercise price of $0.53 per share.



F-24



---

Common Stock

During January
2006, holders of ten-year $0.25 warrants to purchase shares of Company Common Stock exercised 50,000 warrants for $12,500, and the Company issued 50,000 shares of the Companys Common Stock.

On February 3, 2006, pursuant to the Securities Exchange Agreement, shares of STAC Common Stock owned by STAC management were exchanged for an aggregate of
9,506,380 shares of Company Common Stock with a fair value of $5,306,023.

On February 3, 2006, pursuant to a letter agreement between the Company and
the Debenture holders waiving the Companys non-compliance with certain provisions of the Securities Purchase Agreement, the Company issued 525,000 shares of Company Common Stock, with a fair value of $1,443,750 to the Debenture Holders
pro-rata in accordance with their respective ownership of the Debentures.

On February 3, 2006, the Company and Sunrise Equity Partners, L.P.
(Sunrise) entered in a Securities Purchase Agreement pursuant to which the Company sold to Sunrise 500,000 shares of the Companys Common Stock for $750,000, of which the Company received net proceeds of $675,000 after deducting
fees and expenses of $75,000. The Company granted Sunrise unlimited and customary piggyback registration rights as well as registration rights similar to the registration rights granted by the Company in connection with the Registration
Rights Agreement dated October 31, 2005 with its then holders of Series A Preferred Stock.

On February 7, 2006, holders of the seven-year $0.01
warrants to purchase shares of Company Common Stock exercised 2,673,948 warrants and as a result of the cashless exercise feature, the Company issued 2,664,398 shares of the Companys Common Stock.

On February 10, 2006 warrants to purchase 200,000 shares of Company Common Stock were exercised at an exercise price of $0.25, resulting in the Company receiving
$50,000.

On April 4, 2006, a holder of ten-year $0.25 warrants to purchase shares of Company Common Stock exercised 410,000 warrants and as a result
of the cashless exercise feature, the Company issued 353,452 shares of Company Common Stock.

On April 9, 2006, a holder of seven-year $0.01 warrants
to purchase shares of Company Common Stock exercised 1,037,985 warrants and as a result of the cashless exercise feature, the Company issued 1,031,245 shares of the Companys Common Stock.

On April 19, 2006, a holder of ten-year $0.25 warrants to purchase shares of Company Common Stock exercised 300,000 warrants and as a result of the cashless
exercise feature, the Company issued 250,139 shares of Company Common Stock.

On April 20, 2006, a holder of seven-year $0.01 warrants to purchase
shares of Company Common Stock exercised 326,479 warrants and as a result of the cashless exercise feature, the Company issued 324,359 shares of the Companys Common Stock.

On May 1, 2006, a holder of ten-year $0.25 warrants to purchase shares of Company Common Stock exercised 71,000 warrants and as a result of the cashless exercise feature, the Company issued 53,967 shares of
Company Common Stock.

On July 10, 2006, a holder of seven-year $0.01 warrants to purchase shares of Company Common Stock exercised 1,730,748 warrants
for $17,307, and the Company issued 1,730,748 shares of the Companys Common Stock.

On July 10, 2006, a holder of ten-year $0.25 warrants to
purchase shares of Company Common Stock exercised 539,000 warrants and as a result of the cashless exercise feature, the Company issued 378,602 shares of the Companys Common Stock.

On July 19, 2006, a holder of seven-year $0.01 warrants to purchase shares of Company Common Stock exercised 576,916 warrants, for $5,769 and the Company issued 576,916 shares of the Companys Common Stock.

On July 19, 2006, a holder of seven-year $0.01 warrants to purchase shares of Company Common Stock exercised 216,344 warrants and as a result of the
cashless exercise feature, the Company issued 212,539 shares of the Companys Common Stock.

On July 24, 2006, a holder of ten-year $0.25
warrants to purchase shares of Company Common Stock exercised 80,000 warrants for $20,000 and the Company issued 80,000 shares of the Companys Common Stock.



F-25



---

On August 29, 2006, a holder of seven-year $0.01 warrants to purchase shares of Company Common Stock exercised
288,458 warrants and as a result of the cashless exercise feature, the Company issued 281,255 shares of the Companys Common Stock.

On
November 1, 2006, the Company issued an aggregate of 740,855 shares of Common Stock to Debenture holders representing payment of $267,951 of interest. These shares were subject to repurchase by the Company 90 days from their issuance in the
event that the Company does not have an effective registration statement covering the resale of the shares. On April 12, 2007, the Companys registration statement was declared effective by the Securities and Exchange Commission, which
terminated the Companys obligation for repurchase of these shares.

On November 20, 2006, a Debenture holder exercised conversion rights on
$20,000 of principal, and the Company issued 40,000 shares of the Companys Common Stock.

On December 20, 2006, a Debenture holder exercised
conversion rights on $100,000 of principal, and the Company issued 200,000 shares of the Companys Common Stock.

On December 27, 2006, a
Debenture holder exercised conversion rights on $250,000 of principal, and the Company issued 500,000 shares of the Companys Common Stock.

On
January 31, 2007, a Debenture holder exercised conversion rights on $250,000 of principal, and the Company issued 500,000 shares of the Companys Common Stock.

On February 1, 2007, the Company issued an aggregate of 722,264 shares of Common Stock to Debenture holders representing payment of $266,732 of interest. These shares were subject to repurchase by the Company 90
days from their issuance in the event that the Company does not have an effective registration statement covering the resale of the shares. On April 12, 2007, the Companys registration statement was declared effective by the Securities
and Exchange Commission, which terminated the Companys obligation for repurchase of these shares.

On February 12, 2007, a Debenture holder
exercised conversion rights on $300,000 of principal, and the Company issued 600,000 shares of the Companys Common Stock.

On March 31, 2007,
two Debenture holders exercised their rights to require the Company to repurchase 254,371 shares of its Common Stock since a registration statement covering the resale of such shares was not yet effective. Accordingly, the Company repurchased and
retired these shares for an aggregate price of $93,933, including interest of $1,933.

On April 13, 2007, a Debenture holder exercised their rights to
require the Company to repurchase 21,198 shares of its Common Stock since a registration statement covering the resale of such shares was not yet effective, Accordingly, the Company repurchased and retired these shares for an aggregate price of
$7,688, including interest of $21.

On April 16, 2007, a Debenture holder exercised conversion rights on $400,000 of principal, and the Company issued
800,000 shares of the Companys Common Stock.

On May 14, 2007, the Company issued an aggregate of 258,497 shares of Common Stock to Debenture
holders representing payment of $74,764 of interest.

On May 18, 2007, a Debenture holder exercised conversion rights on $400,000 of principal, and
the Company issued 800,000 shares of the Companys Common Stock.

On May 23, 2007, a Debenture holder exercised conversion rights on $500,000 of
principal, and the Company issued 1,000,000 shares of the Companys Common Stock.

On June 6, 2007, the Company issued 1,200,000 shares of the
Companys Common Stock in the settlement of litigation.

See Note 18 for subsequent events impacting stockholders equity.

NOTE 15  SHARE BASED PAYMENTS

The Company, since its inception
has granted non-qualified stock options to various employees and non-employees at the discretion of the Board of Directors. Substantially all options granted to date have exercise prices equal to the fair value of underlying stock at the date of
grant and terms of ten years. Vesting periods range from fully vested at the date of grant to three years.

A description of each the Companys plans
that are in effect during the reporting period, including the number of shares reserved for issuance and shares that remain available for grant as of December 31, 2007 is as follows:



F-26



---

2005 Incentive Stock Plan

On June 21, 2005, the Company adopted the 2005 Incentive Stock Plan (the 2005 Plan), which was approved by its stockholders on August 9, 2005. The Plan provides for the grant of options and the issuance of restricted
shares. An aggregate of 3,300,000 shares of Common Stock is reserved for issuance under the Plan. Both incentive and nonqualified stock options may be granted under the Plan. The Plan terminates on June 21, 2015. The exercise price of options
granted pursuant to this plan may not be less than 100% of the fair market value of the Companys Common Stock on the date of grant and the term of options granted under this plan may not exceed 10 years. For holders of 10% or more of the
combined voting power of all classes of the Companys stock, options may not be granted at less than 110% of the fair value of the Companys Common Stock on the date of grant and the term of such options may not exceed 5 years. As of
December 31, 2007, an aggregate of 3,008,500 shares and options have been granted under the plan, leaving an aggregate of 291,500 shares available for future issuance.

2005 Directors Plan

On August 9, 2005, by written consent, a majority of the Companys stockholders approved the
Companys 2005 Non-Employee Directors Stock Option Plan (the 2005 Directors Plan). The Directors Plan provides for the grant of up to 2,000,000 non-qualified stock options to non-employee directors of the Company. The plan also
provides for (a) each newly elected or appointed director (other than the Chairman) to be granted options to purchase 50,000 shares of Common Stock, of which 50% would become exercisable on the date which is one year from the date of grant and
the remaining 50% would become exercisable on the date which is two years from the date of grant, and (b) for each such director to be an granted an additional option to purchase 50,000 shares of Common Stock on the second anniversary of their
initial election or appointment of which 50% would become exercisable on the date which is one year from the date of grant and the remaining 50% would become exercisable on the date which is two years from the date of grant. All options granted
under the Directors Plan have a maximum term of ten years, subject to accelerated vesting in the event of a change in control of the Company. As of December 31, 2007, an aggregate of 1,200,000 options have been granted under the plan, leaving
an aggregate of 800,000 shares available for future issuance.

2006 Incentive Stock Plan

The 2006 Incentive Plan was adopted by the Board of Directors on March 3, 2006 (the 2006 Plan) and received stockholder approval on July 10, 2006. An aggregate of 2,700,000 shares of Common Stock
have been reserved for issuance under the 2006 Incentive Plan. Under the 2006 Incentive Plan, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options and
restricted stock. The 2006 Incentive Plan is currently administered by the Compensation Committee of the Board of Directors. As of December 31, 2007, an aggregate of 2,566,000 shares and options have been granted under the plan, leaving an
aggregate of 134,000 shares available for future issuance.

2007 Incentive Stock Plan

The Companys Board of Directors adopted the 2007 Incentive Stock Plan A and the 2007 Incentive Stock Plan B on November 15, 2006, (the 2007 Plans), which have been approved by the stockholders.
The Company has not made any grants under such plans.

Share based payments made during the year ended December 31, 2006 are as follows:

On March 10, 2006, the Company granted (under its 2005 option plan) options to purchase an aggregate of 1,690,000 shares of Common Stock to employees of the
Company at an exercise price of $1.80 per share. These options vest 33% one year from the date of grant, 33% and 34% on the second and third anniversaries of the date of grant, respectively, and expire on March 9, 2016 or earlier due to
employment termination.

On March 28, 2006, the Company granted (under its 2006 option plan) options to purchase an aggregate of 200,000 shares of
Common Stock to employees of the Company at an exercise price of $1.70 per share. These options vest 33% one year from the date of grant, 33% and 34% on the second and third anniversaries of the date of grant, respectively, and expire on
March 27, 2016 or earlier due to employment termination.

On May 3, 2006, the Company granted (under its 2005 non-employee directors option
plan) options to purchase an aggregate of 100,000 shares of Common Stock to directors of the Company at an exercise price of $1.375 per share. These options vest 50% one year from the date of grant, and 50% on the second anniversary of the date of
grant, and expire on May 3, 2016 or earlier due to board termination.



F-27



---

On July 26, 2006, the Company granted options to purchase an aggregate of 1,227,000 shares of Common Stock to
employees of the Company. The options are exercisable at $0.48 per share. The options vest 33% one year from the date of grant, 33% and 34% on the second and third anniversaries of the date of grant, respectively, and expire on July 25, 2016 or
earlier due to employment termination.

On September 7, 2006, the Company granted (under its 2005 non-employee directors option plan) options to
purchase an aggregate of 50,000 shares of Common Stock to directors of the Company at an exercise price of $0.41 per share. These options vest 50% one year from the date of grant, and 50% on the second anniversary of the date of grant, and expire on
September 6, 2016 or earlier due to board termination.

On November 15, 2006, the Company granted options to purchase an aggregate of 1,313,500
shares of Common Stock to employees of the Company. 288,500 options are exercisable at $0.36 per share and 1,025,000 options are exercisable at $0.50 per share. The options vest 33% one year from the date of grant, 33% and 34% on the second and
third anniversaries of the date of grant, respectively, and expire on November 14, 2016 or earlier due to employment termination.

The
weighted-average grant-date fair value of options granted during the year ended December 31, 2006 is $0.85.

Weighted average assumptions relating to
the estimated fair value of stock options that the Company granted during the year ended December 31, 2006, are as follows: riskfree interest rate of 4.57%; expected dividend yield zero percent; expected option life of ten years; and
expected volatility of 86%.

A summary of the status of the Companys outstanding stock options as of December 31, 2006 and changes during the
year ended December 31, 2006 are as follows:



|                                         |  |                  |   |  |                              |      |                                                    |     
|---------------------------------------- |  | ---------------- | - |  | ---------------------------- | ---- | -------------------------------------------------- | ----
|                                         |  | Number ofoptions |   |  | Weightedaverageexerciseprice |      | Weightedaverageremainingcontractualterm (in years)
|Outstanding at January 1, 2006           |  | 3,488,000        |   |  | $                            | 3.03 |                                                    |     
|Granted                                  |  | 4,580,500        |   |  | $                            | 1.04 |                                                    |     
|Exercised                                |  |                 |   |  |                              |      |                                                    |     
|Forfeited or Expired                     |  | (2,038,500       | ) |  | $                            | 3.32 |                                                    |     
|                                         |  |                  |   |  |                              |      |                                                    |     
|Outstanding at December 31, 2006         |  | 6,030,000        |   |  | $                            | 1.42 |                                                    | 8.49
|                                         |  |                  |   |  |                              |      |                                                    |     
|Options exercisable at December 31, 2006 |  | 1,825,000        |   |  | $                            | 2.08 |                                                    | 6.71
|                                         |  |                  |   |  |                              |      |                                                    |     

At December 31, 2006, the intrinsic value of options outstanding was $5,770 and there was no intrinsic value
of options exercisable, based on the December 31, 2006 closing price of the Company Common Stock ($0.38 per share).

In addition the table includes
600,000 options that the Company issued to a non-employee in November 2005. As of December 31, 2006, these options have a weighted average exercise price of $3.85, weighted average remaining contractual term of 3.92 years and no
intrinsic value. Amortization of stock based compensation expense with respect to this award amounted to $978,221 for the year ended December 31, 2006 and is included in discontinued operations.

The Company also recorded stock based compensation expense related to shares of common stock issued to non-employees in 2005 of $111,375 in discontinued operations for
the year ended December 31, 2006. All non-employee stock based compensation awards were accounted for in accordance with the provisions of EITF 96-18, Accounting for Equity Instruments with Variable Terms that are Issued for
Consideration other than Employee Services under FASB Statement number 123, Accounting for Stock Based Compensation.

The Company did not make
any shared based payments to non-employees during the years ended December 31, 2007 or 2006.

A summary of the status of the Companys share
based payments as of December 31, 2006 and changes during the year ended December 31, 2006 are as follows:



|                               |  |                 |   |  |                                     |     
|------------------------------ |  | --------------- | - |  | ----------------------------------- | ----
|                               |  | Numberof shares |   |  | Weightedaveragegrant-date fairvalue
|Nonvested at January 1, 2006   |  | 846,667         |   |  | $                                   | 1.04
|Granted                        |  | 3,136           |   |  |                                     | 2.85
|Vested                         |  | (843,136        | ) |  |                                     | 1.04
|Forfeited or Expired           |  | (6,667          | ) |  |                                     | 1.35
|                               |  |                 |   |  |                                     |     
|Nonvested at December 31, 2006 |  | -0-             |   |  | $                                   | 0.00
|                               |  |                 |   |  |                                     |     



F-28



---

Concurrent with the acquisition of STAC, 750,000 shares of stock with a fair value of $750,000 issued to a transaction
advisor who provided services in connection with the acquisition of SendTec vested upon the completion of such services. The fair value of this share based payment was recorded as part of the cost of acquiring SendTec.

The aggregate fair value of unamortized share based payments for all awards granted prior to January 1, 2006 amounted to $1,851,973. The Company amortized the
entire remaining fair value of these awards during the year ended December 31, 2006, including $750,000 for the cost of acquiring SendTec and $1,101,973, which is included in discontinued operations in the accompanying statements of operations
for the year ended December 31, 2006.

Share based payments made during the year ended December 31, 2007 are as follows:

On January 16, 2007, the Company granted (under its 2005 Directors Plan) options to purchase an aggregate of 50,000 shares of Common Stock to a director of the
Company at an exercise price of $0.35 per share. These options vest 50% one year from the date of grant, and 50% on the second anniversary of the date of grant, and expire on January 15, 2017 or earlier due to board termination.

On January 16, 2007, the Company granted (under its 2006 Incentive Plan) options to purchase an aggregate of 250,000 shares of Common Stock to an officer of the
Company at an exercise price of $0.35 per share. The options vest 33% one year from the date of grant, 33% and 34% on the second and third anniversaries of the date of grant, respectively, and expire on January 15, 2017 or earlier due to
employment termination.

On May 21, 2007, the Company granted (under its 2005 Incentive Plan) options to purchase an aggregate of 1,115,000 shares of
Common Stock to employees of the Company at an exercise price of $0.31 per share. The options vest 33% one year from the date of grant, 33% and 34% on the second and third anniversaries of the date of grant, respectively, and expire on May 20,
2017 or earlier due to employment termination.

On September 23, 2007, the Company granted (under its 2005 Incentive Plan) options to purchase an
aggregate of 645,500 shares of Common Stock and (under its 2006 Incentive Plan) options to purchase an aggregate of 447,000 shares of Common Stock to employees of the Company at an exercise price of $0.10 per share. The options vest 33% one year
from the date of grant, 33% and 34% on the second and third anniversaries of the date of grant, respectively, and expire on September 23, 2017 or earlier due to employment termination.

The weighted-average grant-date fair value of options granted during the year ended December 31, 2007 is $0.17.

Weighted average assumptions relating to the estimated fair value of stock options that the Company granted during the year ended December 31, 2007, are as follows:
riskfree interest rate of 4.69%; expected dividend yield zero percent; expected option life of six years and six and one half years, and expected volatility of 90%.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has not paid dividends to date and does not expect to pay dividends in the foreseeable future due to its
substantial accumulated deficit. Accordingly, expected dividends yields are currently zero. Historical cancellations and forfeitures of stock options have been insignificant. Based on available data, the Company has assumed that approximately 85% of
outstanding options will vest annually. Unamortized compensation cost relating to options granted prior to January 1, 2006 has been adjusted to reflect this assumption. No options have been exercised to date. The Company continuously monitors
its employee terminations, exercises and other factors that could affect its expectations relating to the vesting of options in future periods. The Companys policy is to adjust its assumptions relating to its expectations of future vesting and
the terms of options at such times that additional data indicates that changes in these assumptions are necessary. Expected volatility is based partly on the historical volatility of the Companys stock and a comparison of volatilities of
similarly situated companies in the marketplace.



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A summary of the status of the Companys outstanding stock options as of December 31, 2007 and changes during
the year ended December 31, 2007 are as follows:



|                                         |  |                  |   |  |                              |      |                                                    |     
|---------------------------------------- |  | ---------------- | - |  | ---------------------------- | ---- | -------------------------------------------------- | ----
|                                         |  | Number ofoptions |   |  | Weightedaverageexerciseprice |      | Weightedaverageremainingcontractualterm (in years)
|Outstanding at January 1, 2007           |  | 6,030,000        |   |  | $                            | 1.42 |                                                    |     
|Granted                                  |  | 2,507,500        |   |  | $                            | 0.22 |                                                    |     
|Exercised                                |  |                 |   |  |                              |     |                                                    |     
|Forfeited or Expired                     |  | (1,763,000       | ) |  | $                            | 0.84 |                                                    |     
|                                         |  |                  |   |  |                              |      |                                                    |     
|Outstanding at December 31, 2007         |  | 6,774,500        |   |  | $                            | 1.13 |                                                    | 8.12
|                                         |  |                  |   |  |                              |      |                                                    |     
|Options exercisable at December 31, 2007 |  | 2,925,625        |   |  | $                            | 1.80 |                                                    | 6.94
|                                         |  |                  |   |  |                              |      |                                                    |     

At December 31, 2007, there was no intrinsic value of options outstanding based on the December 31, 2007
closing price of the Company Common Stock ($0.09 per share).

NOTE 16  RESTRUCTURING CHARGES

During the year ended December 31, 2007 the Company recorded approximately $491,000 in restructuring charges, related to employee termination costs, accelerated
amortization on a non-compete agreement, employee redeployment charges, and other related restructuring charges. There were no restructuring charges incurred during the year ended December 31, 2006.

In April 2007, as a result of the loss of the Companys sole contract in the branded media line of business, the Company restructured operations and began to
reallocate resources of the Company. As part of this reallocation plan, the Company terminated certain employees, incurring approximately $376,000 in termination related costs, and redeployed other employees incurring approximately $33,000 in
employee costs. In connection with employee terminations the Company accelerated the amortization of a non-compete agreement for which the underlying employment agreement was terminated, and recorded a non-cash charge of approximately $52,000.

Other costs incurred in connection with the restructuring totaled approximately $30,000 and relate to the termination of certain service provider
agreements.

NOTE 17  DISCONTINUED OPERATIONS

On
June 15, 2006, the Company sold substantially all of the business and net assets of its wholly-owned subsidiary, RelationServe Access, Inc. (Access) to R.S.A.C., Inc., a wholly-owned subsidiary of Come & Stay S.A., for $1.4
million in cash and the assumption of certain liabilities of Access. Pursuant to the agreement, the Company has agreed to remain liable for certain contingencies and liabilities, and any liabilities in excess of $3 million. As a result of the
transaction, the Company recognized a loss on the sale of the net assets of approximately $191,000. In addition, the Company ceased the operations of Friendsand.com, Inc. (Friendsand). As a result the Company recorded a charge of
approximately $459,000, which represents the net assets of Friendsand.

In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), the Company has reported Accesss and Friendsands results for the year ended December 31, 2006 as discontinued operations because the operations and cash flows of Access and Friendsand
have been eliminated from the Companys ongoing operations as a result of having sold the business of Access and ceasing operations of Friendsand. Discontinued operations includes the loss on the sale of the net assets of Access in the amount
of $191,000 and the write-off of the operating assets of Friendsand of approximately $459,000.



Components of discontinued operations for the year ended December 31, 2006 are as follows:



|                                          |  |   |            |  
|----------------------------------------- |  | - | ---------- | -
|Revenue                                   |  | $ | 2,308,822  |  
|Cost of revenue                           |  |   | 1,312,511  |  
|                                          |  |   |            |  
|Gross profit                              |  |   | 996,311    |  
|                                          |  |   |            |  
|Operating expenses:                       |  |   |            |  
|Salaries, wages, and benefits             |  |   | 2,075,869  |  
|Bad debts                                 |  |   | 647,444    |  
|Professional fees                         |  |   | 1,434,813  |  
|Other general and administrative expenses |  |   | 844,965    |  
|                                          |  |   |            |  
|Total operating expenses                  |  |   | 5,003,091  |  
|                                          |  |   |            |  
|Loss from operations                      |  |   | (4,006,780 | )
|                                          |  |   |            |  
|Interest expense                          |  |   | (94        | )
|                                          |  |   |            |  
|Net loss from discontinued operations     |  | $ | (4,006,874 | )
|                                          |  |   |            |  

There were no discontinued operations for the year ended December 31, 2007.

NOTE 18  SUBSEQUENT EVENTS

Debentures

On March 26, 2008, the Company and current debenture holders (the Holders) entered into a recapitalization agreement (the Agreement) which
provides, among other things, that the Holders shall exchange the Senior Secured Convertible Debentures due March 31, 2008 (the Debentures) with a current outstanding principal amount of $32,730,000 into shares of the Companys
Series B Convertible Preferred Stock (the Series B Preferred) and certain amended and restated Debentures (the Amended Debentures). The Series B Preferred has a stated value equal to the principal value of the Debentures
exchanged ($1,700 per share of Series B Preferred). Each share of Series B Preferred is convertible into 10,000 common shares at $0.17 per common share. The Series B Preferred will not earn any dividends, has a liquidation preference equal to its
stated value, has common stock voting rights on an as converted basis subject to certain limitations, is protected for certain anti-dilution provisions, and is covered by a registration rights agreement, which provides for certain liquidated damages
in the event the Company is not successful in registering shares underlying potential conversions of the Series B Preferred into common shares of the Company. The exchange of Debentures into Series B Preferred is expected to occur in two separate
closings. The first closing (the First Closing) occurred on March 26, 2008 (the First Closing Date). The second closing (the Second Closing) would occur promptly following the satisfaction of certain conditions,
including shareholder approval to amend the Companys certificate of incorporation to increase the authorized common shares of the Company to 500,000,000.

At the First Closing, the Holders exchanged $18,361,700 aggregate principal amount of the Debentures (on a pro rata basis) into shares of Series B Preferred. The Series B Preferred issued at the First Closing is convertible into a number of
shares of Common Stock such that the aggregate number of shares of Common Stock of the Company outstanding (on an as converted basis) after the First Closing equals approximately 190,000,000 inclusive of (i) 108,000,000 shares of Common Stock
issuable upon conversion of the Series B Preferred, (ii) approximately 57,000,000 shares of Common Stock currently outstanding, and (iii) up to 25,000,000 shares of Common Stock that may be issued in connection with the Concurrent Offering (as
defined below) prior to the Second Closing. Amended Debentures with an aggregate principal amount of $14,368,300 will remain outstanding after the First Closing. The Amended Debentures are non-interest bearing.



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At the Second Closing, the remaining Amended Debentures will be exchanged for Series B Preferred with a stated value of
$14,368,300 convertible into approximately 84,529,412 shares of Common Stock of the Company; provided, however, that in the event the Company has not raised a minimum of $5 million (in the aggregate) of gross proceeds in connection with the
Concurrent Offering, only $3,368,300 of the Amended Debentures will be exchanged for Series B Preferred. The remaining $11 million of Amended Debentures, as amended at the time of the Second Closing (the Residual Notes), will remain
outstanding. The Residual Notes shall: (i) have a term of three (3) years; (ii) not bear interest; (iii) convert into Common Stock at a price of $0.17 per share; (iv) contain no financial covenants; (v) be a senior and secured obligation of the
Company; (vi) have pari-passu anti-dilution protection to the Series B Preferred; and (vii) automatically convert into Series B Preferred when and if the Company raises $5 million in aggregate gross proceeds in connection with the Concurrent
Offering (as defined below).

Pursuant to the Agreement, the Company is required to complete a private placement of Common Stock or Series B Preferred (the
Concurrent Offering) with select institutional and accredited investors with gross proceeds to the Company of up to $7.0 million at a price per share equal to $0.12, if Common Stock, or on such terms as are called for by the Agreement,
if Series B Preferred. The Concurrent Offering will terminate no later than the earlier to occur of one year from (i) the date of the Second Closing, or (ii) one year plus 150 days after the First Closing. Furthermore, three (3) months after the
date of the Second Closing sales of Common Stock done in connection with the Concurrent Offering shall be done at the greater of $0.12 per share or that price equal to a 35% discount to the market (i.e., the 5-Day volume weighted average price as
reported by Bloomberg immediately preceding the date of issuance).

Subject to an effective registration statement covering the common stock underlying the
Series B Preferred and certain other restrictions, (i) 50% of the outstanding shares of Series B Preferred shall automatically convert into Common Stock if the Common Stock maintains a minimum closing bid price equal to or greater than $0.30 for
fifteen (15) out of twenty (20) consecutive trading days; and (ii) the remaining 50% of the outstanding shares of Series B Preferred Stock shall automatically convert into Common Stock if the Common Stock maintains a minimum closing bid price equal
to or greater than $0.40 for fifteen (15) out of twenty (20) consecutive trading days.

In the event that the value of the average daily trading volume is
less than $1.0 million, conversion shall be limited to $1.0 million of the Series B Preferred for each 20-day period that the minimum closing bid price equals or exceeds the threshold for a minimum of 15 days. In the event that the value of the
average daily trading volume exceeds $1.0 million but is less than $2.0 million, conversion shall be limited to $2.0 million of the Series B Preferred for each 20-day period that the minimum closing bid price equals or exceeds the threshold for a
minimum of 15 days. In the event that the value of the average daily trading volume exceeds $2.0 million, all such conversion restrictions shall terminate.

At the First Closing, the Company was required to pay the Holders in cash an amount equal to the interest payment due under the outstanding principal amount of Debentures as of November 1, 2007 plus interest accrued on such Debentures from
November 1, 2007 to November 16, 2007 in cash at the First Closing. Interest on the principal amount of Debentures remaining after November 16, 2007 ceased to accrue or be payable after such date.

Series B Preferred Stock

On March 26, 2008, in
connection with the Recapitalization Agreement, the Board of Directors of the Company authorized 30,000 shares of Series B Preferred Stock (the Series B Preferred Stock) of the Companys previously authorized preferred stock, with a
par value of $0.001 per share. Each share of Series B Preferred Stock has a face value of $1,700 (the Stated Value), and a perpetual term. Each share of Series B Preferred is convertible into 10,000 common shares at $0.17 per common
share. The Series B Preferred will not earn any dividends, has a liquidation preference equal to its stated value, has common stock voting rights on an as converted basis subject to certain limitations, is protected for certain anti-dilution
provisions, and is covered by a registration rights agreement, which provides for certain liquidated damages in the event the Company is not successful in registering shares underlying potential conversions of the Series B Preferred into common
shares of the Company.

Issuance of Securities

On March 26, 2008, the Company issued 10,036,667 shares of its Common Stock, in connection with the Concurrent Offering, for an aggregate price of $1,204,400 ($0.12 per share).

On March 26, 2008, Debenture holders exchanged $18,361,700 of Debenture principal for 10,801 shares of the Companys Series B Preferred stock, pursuant to the
First Closing.



F-31