**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**AmendmentNo. 2**

**FORM 10-K/A**

| x                                                                                                                                                                  | **ANNUAL REPORT PURSUANT TO SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| **For the fiscal year ended December 31, 2006.**                                                                                                              |
| o                                                                                                                                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
| **For the transition period from             to            .** |

 

**CommissionFile No. 0-29768**

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**24/7 REAL MEDIA, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                              |   | **13-3995672**                        |
|-----------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                          |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                           |   |                                  |
| **132 West 31****st**** Street, New York, New York** |   | **10001**                             |
| (Address of  principal executive offices)                 |   | (Zip Code)                            |

 

**(212)231-7100**

(Registrant’s telephonenumber, including area code)

**Securitiesregistered pursuant to Section 12(b) of the Act:**

| **Title of each class**                 |   | **Name of  each exchange on which registered** |
|-----------------------------------------|--------|------------------------------------------------|
| Common Stock, par  value $.01 per share |   | The NASDAQ  National Market                    |

 

**Securitiesregistered pursuant to Section 12(g) of the Act: None.**

Indicate by check mark if the registrant is awell-known seasoned issuer as defined in Rule 405 of the Securities Act.        Yes o        No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.       Yes o       No x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.        Yes x        No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.        o

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated  filer   o |   | Accelerated filer   [x] |   | Non-accelerated filer   o |
|---------------------------------------------|--------|----------------------------------------|--------|------------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).        Yeso        Nox

As of June 30, 2006, the last business day of theregistrant’s most recently completed second fiscal quarter, the aggregatemarket value of the voting common equity held by non-affiliates of the registrantwas approximately $419.2 million, based upon the last price quoted on theNASDAQ National Market on June 30, 2006 of $8.78. For purposes of thiscalculation, the registrant has assumed that its directors and officers andeach person who beneficially owned 10% or more of the outstanding common stockon that date are affiliates. The registrant does not have any non-voting commonequity outstanding.

Thenumber of outstanding shares of the registrant’s common stock as of March 31,2007 was 50,998,632.

 

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**EXPLANATORYSTATEMENT**

On March 16, 2007, we filed our Annual Report onForm 10-K for the fiscal year ended December 31, 2006. In accordancewith General Instruction G(3), we are now filing this amendment to includein the Form 10-K the information required to be filed pursuant toItems 11-14 of Part III of this Annual Report on Form 10-K. Weare also filing certain exhibits with this amendment.

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**ITEM 11.   EXECUTIVECOMPENSATION.**

**COMPENSATIONDISCUSSION AND ANALYSIS**

The following discussion and analysis should be readtogether with the compensation tables and related disclosures set forth below.This discussion and analysis contains forward looking statements that are basedon our current plans, considerations, expectations and determinations,including statements regarding future company performance targets and goals. Thesetargets and goals are disclosed in the limited context of the 24/7 Real Media,Inc. (the “Company”) compensation programs and should not be understood to bestatements of management’s expectations or estimates of results or otherguidance. We specifically caution readers of these statements not to applythese statements to other contexts.

**CompensationPhilosophy and Objectives**

In this section we discussour overall compensation philosophy, as well as aspects of our compensationprogram that pertain to our Chief Executive Officer, our Chief Operating Officer/ChiefFinancial Officer, and our General Counsel. We refer to these three individualsthroughout as our “Named Executive Officers” or “NEOs.” This discussion coverscompensation and practices related to our most recently completed fiscal year.

**OverallCompensation Philosophy**

The market for quality senior personnel withexperience in the online advertising and technology industry is extremelycompetitive. Companies compete to recruit and retain skilled personnel at alllevels, from lower and mid-level employees to members of executive management. Oneof the main goals underlying our compensation philosophy is, thus, to ensurethat the compensation packages that we offer will both attract and retain adesirable employee base.

Our general compensationphilosophy is designed to link the total compensation of each of our employeesto the Company’s overall performance, the performance of the employee’sbusiness unit or group and the individual performance and success of theemployee. Our theory is that, as an employee’s level of responsibilityincreases, his or her overall compensation should be tied more directly to theachievement of specific performance targets. We believe that these types ofincentives create an environment in which our employees are stakeholders in oursuccess and, therefore, benefit all of our stockholders.

**Executive and KeyEmployee Compensation Philosophy**

Our compensation philosophy for our Named ExecutiveOfficers and key employees is designed to support the general goals outlinedabove, as well as to establish an appropriate relationship between overallcompensation and the Company’s financial performance in key areas, the Company’slong-term growth objectives and the individual performance of each NEO or keyemployee, as well as to attract and retain these qualified individuals.

The Compensation Committee of the Board of Directorsendeavors to achieve these goals for NEO compensation through a competitivetotal compensation package that combines reasonable annual base salaries withcash bonuses, restricted stock grants and stock option awards. Certain of thesecomponents are tied to the Company’s performance in key areas and to theindividual’s achievement of specified performance objectives. Key employeecompensation packages are similarly structured. As a general rule, our NEO andkey employee compensation packages provide a significant portion of totalcompensation through variable, or performance-based, compensation elements. Asa result, these compensation packages incentivize our NEOs and key employees togrow our business over both the short and long-term, which fosters an increasedcommitment to the Company’s overall performance and success.

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Our compensation philosophy is generally opposed tothe granting of perquisites to our NEOs. We do not have programs for providingperquisites or other personal benefits to officers, such as automobiles,permanent lodging or defraying the cost of personal entertainment or familytravel. The only exception is a small grant made to certain NEOs and otherofficers to maintain country club memberships, which the grantees often use toentertain customers of the Company. Our health care and other insuranceprograms are the same for all eligible employees, including NEOs.

The Compensation Committeeintends to adopt a policy in 2007 stating that, if the Company should in thefuture restate any of its financial statements, then all performance-basedawards that have been previously been paid based on the financial statements asoriginally released, shall be returned to the Company, to the extent suchawards would not have been earned under the financial statements, as restated.

**CompensationObjectives**

The Company’scompensation programs are designed to address the following issues and achievethe following objectives:

·       *Competition*—The individual components of compensation andthe actual numbers that are granted reflect the competitiveness in our industryfor skilled personnel, including executive management and key employees.  Compensation packages also reflect the riskand reward to our employees of remaining with the Company in light of thebusiness environment in which we operate.

·       *Reward Individual Performance*—Performance-based compensationelements tie individual compensation to the Company’s performance in key areas,which holds individuals accountable, through their compensation, for theirperformance and impact on the Company.

·       *Retention*—Our compensation packages are designed to attractand retain highly-qualified personnel.  The actual numbers balance the cost to theCompany of investing in an employee against the cost of losing such individualto a competitor and having to retrain a replacement.

·       *Affordability*—Our review process ensures that ourcompensation packages are affordable in relation to the Company’s operatingexpenses and budget, yet further the goals underlying our compensationphilosophy and provide a fair balance between cash and stock-basedcompensation.

·       *Alignmentwith Stockholder Interests*—Performance-based stock options and stockgrants are contingent on the achievement of the Company’s financial targets,and thus are designed to tie compensation to the Company’s stock performance sothat our employees’ interests are aligned with those of our stockholders. Theexercise price of stock options is fixed on the date of grant, and thus theyreward employees only to the extent that the Company’s common stock priceincreases.

**CompensationCommittee Composition**

The Compensation Committee of the Board of Directorsincludes Brian Silva, the Chairman, and Robert Perkins and Arnie Semsky asmembers. Each of these directors qualifies as an “independent director” under Rule 4200of the NASD Marketplace Rules, as an “outside director” under Section 162(m) ofthe Internal Revenue Code (the “Code”) and as a “non-employee director” under Rule 16b-3(c) ofthe Exchange Act. Furthermore, each of these individuals has substantialexperience in setting compensation levels for executives. The CompensationCommittee is responsible for ensuring that the Company’s executive compensationstrategy, policies and programs are competitive within the markets in which wecompete for talent and reflect the long-term investment interests of ourstockholders. The Compensation Committee acts pursuant to a duly adoptedcharter, which is posted on our Website. The Compensation Committee held sixformal meetings, and held a substantial number of informal telephonic 

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discussions, during thefiscal year ended December 31, 2006.  Four of these formal meetings, and all of thetelephonic discussions, were held in “executive session,” with no executives ofthe Company present.

None of our NEOs serves asa member of the board of directors or on the compensation committee of anyentity that has one or more executive officers serving as a member of our Boardof Directors or on our Compensation Committee.

**CompensationCommittee Report**

The Compensation Discussion and Analysis includedherein is a discussion of the Company’s Named Executive Officer compensationphilosophy, policies and programs, written from the perspective of how theCompensation Committee and management view and use such philosophy, policiesand programs. Given the Compensation Committee’s role in overseeing thephilosophy, policies and programs, and its overall responsibility fordetermining the specific compensation for each of the Company’s NEOs in lightof such philosophy, policies and programs, the Compensation Committeeparticipated in the preparation of the Compensation Discussion and Analysis,reviewing successive drafts of the document and discussing them with executivemanagement. The Compensation Committee recommended to the Board of Directors thatthe Compensation Discussion and Analysis be included in the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31,2006.

Brian Silva

Robert Perkins

Arnie Semsky

**Peer Group Analysis**

The CompensationCommittee believes that, in making its compensation-related decisions, it isimportant to consider publicly available information about the compensationpractices of similarly situated companies with which 24/7 Real Media competesfor executive talent. The Chairman of the Compensation Committee periodicallyupdates this group of companies to ensure that it remains relevant. TheCompensation Committee reviewed publicly available information about thecompensation practices of the peer companies listed below in making itscompensation decisions for fiscal year 2006.

·       aQuantive, Inc.

·       DigitasInc.

·       DoubleClickInc.

·       LookSmart,Ltd.

·       Miva, Inc.

·       ValueClick, Inc.

While the CompensationCommittee ensures that NEO compensation levels are comparable to those ofcompanies in the peer group, peer group data is only one factor that may guidethe Compensation Committee’s decisions. Such data is not a determinative factorin the review process. In any given year, actual NEO compensation may be aboveor below individual or average peer levels based on a number of factors. Thesefactors include the Company’s financial performance in key areas, individualNEO goals and objectives and the NEO’s achievement of such individual goals andobjectives.

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**Total CompensationReview and Decision-Making**

The Compensation Committee reviews and determinescompensation annually for each of our Named Executive Officers both byindividual element (base salary, bonus and stock-based compensation) and intotal. In addition, the Compensation Committee develops, reviews and approvesthe individual NEO performance goals and objectives underlying each element ofNEO compensation, evaluates how NEO performance should be tied to theparticular goals and objectives and sets each NEO’s compensation levels basedon that evaluation.

As described above under “Peer Group Analysis,” onefactor that the Compensation Committee considers in making its compensationdeterminations is what similarly situated companies offer their executiveofficers. Additional factors that the Compensation Committee considers includethe five main objectives underlying our compensation philosophy set forth aboveunder “Compensation Objectives” and the NEO’s individual performance relativeto goals set by the Compensation Committee.

The Compensation Committee also reviews tally sheetsfor each NEO, which set forth current and historical compensation data for theNEO. Specifically, the tally sheets review the current and historical dollaramounts for base salary and bonus, stock-based compensation award amounts,outstanding stock-based compensation award holdings and balances andperquisites. The tally sheets also analyze potential payment obligations underthe employment agreement with each NEO, including an analysis of the impactthat would be created by a change in control of the Company. The CompensationCommittee is committed to reviewing tally sheets on an annual basis.

As Chairman of theCompensation Committee, Brian Silva provides advice on general trends inexecutive compensation and recommended changes to NEO compensation levels. TheCompensation Committee also has the option to engage an outside consultant asneeded to perform its duties, but did not opt to engage any such consultant toassist with its fiscal year 2006 compensation decisions. Upon completion of itsoverall analysis, the full Compensation Committee reviews and approves finalNEO compensation packages.

**Role of NamedExecutive Officers in Setting Compensation Levels**

Our NEOs collectivelyreview and analyze the compensation package for each of the Company’s employeesannually, which includes a review of individual NEO compensation. The NEOs thenmake recommendations to the Compensation Committee regarding the NEOcompensation packages. Ultimately, the Compensation Committee determines thecompensation package for each NEO.

**Elements of NamedExecutive Officer Compensation**

Theindividual elements of our Named Executive Officer compensation for fiscal year2006 are outlined in the table below and consist of three key elements, basesalary, bonus and equity incentives. A detailed discussion of each of thesecompensation elements follows. NEO compensation in subsequent years may includesome or all of these components, as well as other components that are thenapplicable.
| Compensation Element | ** ** | **Key   Characteristics**                                                                                                                                                                                                                                                             |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Base  Salary**     |       | ·  Fixed cash component of pay; 

·  Amount determined based on NEO’s skills,  responsibilities, experience and performance; 

·  NEOs are eligible for annual increases based  on performance, experience and/or changes in job responsibilities. |

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| **Target Bonus**                    |   | ·  Variable cash component of pay; 

·  Target amount determined based on NEO’s  skills, responsibilities, experience and performance; 

·  Reward for short-term stockholder value  creation; 

·  Actual amount depends on achievement of  specified Company revenue, gross profit and EBITDA performance targets for  fiscal year 2006.                                                                                                                                                                                       |
|-------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Vesting Stock Options**           |   | ·  Fixed equity component of pay; 

·  Amount determined based on NEO’s skills,  responsibilities, experience and performance; 

·  Vest in three equal annual installments  beginning of first anniversary of grant date; 

·  Reward stockholder value creation; 

·  Value of award realized will be based on  fair market value of 24/7 Real Media common stock on date of grant.                                                                                                                                  |
| **Performance-Based Stock Options** |   | ·  Variable equity component of pay; 

·  Target amount determined based on NEO’s  skills, responsibilities, experience and performance; 

·  Value of award realized will be based on  fair market value of 24/7 Real Media common stock on date of grant.                                                                                                                                                                                                                                                                                |
| ***Short-Term Stock Options***      |   | ·  Amount of the award that actually becomes  exercisable depends on achievement of specified Company revenue, gross profit  and EBITDA performance targets for fiscal year 2006; 

·  Vest in three equal installments; 

·  First installment vests on first to occur of  date the Company’s accountants certify the fiscal year 2006 financial  statements and March 10, 2007; 

·  Remaining installments vest on November 15,  2007 and November 15, 2008. 

·  Reward stockholder value creation; |
| ***Long-Term  Stock Options***      |   | ·  Amount of the award that actually becomes  exercisable depends on achievement of specified Company revenue, gross profit  and EBITDA performance targets in the three year period consisting of fiscal  year 2006 through fiscal year 2008; 

·  Vest in single installment on first to occur  of date the Company’s accountants certify the fiscal year 2008 financial  statements and March 10, 2009. 

·  Reward long-term stockholder value creation;                                                                          |
| **Performance-Based Stock Grants**  |   | ·  Variable equity component of pay; 

·  Target amount determined based on NEO’s  skills, responsibilities, experience and performance; 

·  Value of award realized will be based on  fair market value of 24/7 Real Media common stock on date of grant.                                                                                                                                                                                                                                                                                |

 

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**Analysisof Each Element of Named Executive Officer Compensation**

The Compensation Committeedetermines each element of NEO compensation individually each year based on thescope of each NEO’s responsibilities, his prior relevant background, trackrecord, training, skills, knowledge, experience and contribution to Companyperformance. In determining the amount of each compensation element, theCompensation Committee also takes into account the compensation paid toexecutive officers by the Company’s peer companies, the overall market demandfor executive officers at the time, the Company’s overall executivecompensation philosophy and the Company-wide compensation objectives. Eachelement of the NEO’s compensation is also evaluated together with the othercomponents of his total compensation package to ensure that the overall packageis adequate.

***BaseSalary***

Base salaries are a fixed cash component of NEOcompensation and are determined individually each year by the CompensationCommittee. In recent years, including fiscal year 2006, the CompensationCommittee has opted to make only minimal increases in NEO base salaries.However, in subsequent years the Compensation Committee may opt to makeadjustments to NEO base salaries based on NEO performance, changes in the scopeof an NEO’s responsibilities, general market conditions or other factors.

The NEO base salaries setby the Compensation Committee for fiscal year 2006 and in prior years have beensomewhat lower than those paid to executive officers of companies in our peergroup. Because our NEOs’ receive a base salary that is lower than what themarket might otherwise dictate, the Compensation Committee grants appropriatelevels of equity-based compensation to our NEOs in the form of stock optionsand stock grants. The Compensation Committee believes that compensation shouldbe skewed towards incentive-based compensation.

***TargetBonuses***

The Compensation Committee assigns an annual targetbonus to each NEO that is a variable cash component of the NEO’s totalcompensation package. The Compensation Committee assesses the competitivenessof these targets every year in connection with its annual compensation review. Aswith base compensation, in recent years the Compensation Committee has opted tomake only minimal increases in NEO target bonuses. As a result, NEO targetbonuses for fiscal year 2006 and in prior years have been somewhat lower thanthose paid to executive officers of companies in our peer group. TheCompensation Committee grants to our NEOs appropriate levels of equity-basedcompensation also help to bridge the gap between the market and the bonusespaid to our NEOs.

The actual amount of the target bonus that each NEOreceived depended upon the Company’s achievement of specified short-termperformance targets. Target bonuses are, therefore, designed to reward our NEOsfor creating value for our stockholders in that the Committee tied NEO bonusesto the Company’s achievement of pre-established revenue, gross profit andEBITDA performance targets for fiscal year 2006. The 2006 performance targetsthat the Compensation Committee tied to bonuses and tied to performance-basedequity compensation (described in more detail below under “Stock Grants andStock Options”) were rather aggressive targets. The bonus and equitycompensation targets tied to the achievement of these ambitious targets weredesigned to incentivize our NEOs to achieve the aggressive performance targets.

Each performance target is tied to one-third of eachNEO’s target bonus. Therefore, if the Company achieves 100% of a performancetarget, each NEO will be entitled to one-third of 100% of his target bonus. Ifthe Company falls short of a particular performance target, each NEO willreceive a pro rata reduction in the target one-third portion of his bonus. Withrespect to the EBITDA performance target, the Company’s actual EBITDA forfiscal year 2006 must be at least 80% of the target EBITDA, or the 

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NEOs will not earn anyincentive compensation under the EBITDA component of their target bonus. If theCompany exceeds 100% of a target component, any increases in NEO bonuses are atthe discretion of the Compensation Committee. Bonuses are typically paid inMarch. The actual bonuses that our NEOs received for fiscal year 2006 were104.9% of the target bonus amounts.

The NEOs have always hadthe option to elect to receive all or a portion of their annual bonuses in theform of common stock, in lieu of cash. If this election is made, the stockissued is based on fair market value on the date of issuance. Each of our NEOsreceived the EBITDA portion of his bonus in 2006 in the form of common stock.

**Stock Grants andStock Options**

**Vesting StockOptions**

Vesting stock options are a fixed cash component ofNEO compensation that reward our NEOs for creating value for our stockholdersin the short-term. The Compensation Committee authorized and approved thevesting stock options for each of the NEOs for fiscal year 2006. The vestingstock options vest in three equal annual installments, beginning on the firstanniversary of the date of grant, which was November 15, 2005. The valueof the award of vesting stock options that each NEO will realize will be basedon the fair market value of the Company’s common stock on the date of grant. Eachstock option expires on the tenth anniversary of the date of grant date. TheCompensation Committee did not grant any vesting stock options to our NEOs aspart of their fiscal year 2007 compensation. Instead, the CompensationCommittee granted our NEOs stock grants, which vest 20% on January 1 ofeach of 2008, 2009 and 2010 and 40% on January 1, 2011, subject tocontinued employment on such dates, unless vesting is accelerated under theterms of the 2002 Stock Incentive Plan or by action of the CompensationCommittee.

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***Performance-BasedStock Options***

Performance-based stockoptions are a variable equity component of NEO compensation, which are tiedclosely to the Company performance and reward our NEOs for creating value forour stockholders. The Compensation Committee authorized and approved theamounts of performance-based stock options granted to each of our NEOs forfiscal year 2006. The Compensation Committee assesses the competitiveness ofthese grants every year in connection with its annual compensation review. TheCompensation Committee did not grant any performance-based stock options to ourNEOs as part of their fiscal year 2007 compensation.

***Short-Term,Performance-Based Stock Options***

The Compensation Committee assigns target short-term,performance-based stock option grants to each NEO as part of the NEO’s totalcompensation package. The actual amount of the short-term stock options thateach NEO receives depended upon the Company’s achievement of specifiedshort-term performance targets. Short-term stock-options are, therefore,designed to reward our NEOs for creating value for our stockholders in theshort-term. In 2006, the Compensation Committee tied NEO short-term stockoption grants to the Company’s achievement of pre-established revenue, gross profitand EBITDA performance targets for fiscal year 2006. Each performance target istied to one-third of each NEO’s short-term stock options. Therefore, if theCompany achieves 100% of a performance target, each NEO will be entitled toone-third of 100% of his short-term stock options. If the Company falls shortof a particular performance target, each NEO will receive a pro rata reductionin the target one-third portion of his short-term stock options. With respectto the EBITDA performance target, the Company’s actual EBITDA for fiscal year2006 must be at least 80% of the target EBITDA, or the NEOs will not earn anyincentive compensation under the EBITDA component of their short-term stockoptions. If the Company exceeds 100% of a target component, any increases inshort-term stock options are at the discretion of the Compensation Committee.

The short-term stock options vest in three equalannual installments. The first installment vests on the first to occur of thedate on which the Company’s accountants certify the Company’s fiscal year 2006financial statements and March 10, 2007; the second and third installmentsvest on November 15, 2007 and November 15, 2008, respectively. Thevalue of the award of short-term stock options that each NEO will realize willbe based on the fair market value of the Company’s common stock on the date ofgrant. Each stock option expires on the tenth anniversary of the date of grant.The actual amount of short-term stock options that our NEOs received for fiscalyear 2006 were 100% of the target amounts for each of Messrs. Moore, Hsuand Moran.

***Long-Term,Performance Based Stock Options***

The Compensation Committee assigns target long-term,performance-based stock option grants to each NEO as part of the NEO’s totalcompensation package. The actual amount of the long-term stock options thateach NEO will receive depends upon the Company’s achievement of specifiedlong-term performance targets. Long-term stock-options are, therefore, designedto focus NEO attention on the Company’s long-term success and reward our NEOsfor creating value for our stockholders in the long-term. In 2006, theCompensation Committee tied NEO long-term stock option grants to the Company’sachievement of pre-established revenue, gross profit and EBITDA performancetargets in the three year period consisting of fiscal year 2006 through fiscalyear 2008. Each performance target is tied to one-third of each NEO’s long-termstock options. Therefore, if the Company achieves 100% of a performance target,each NEO will be entitled to one-third of 100% of his long-term stock options. Ifthe Company falls short of a particular performance target, each NEO willreceive a pro rata reduction in the target one-third portion of his long-termstock options. With respect to the EBITDA performance target, the Company’sactual EBITDA for the three year period must be at least 80% of the targetEBITDA, or the NEOs will 

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not earn any incentivecompensation under the EBITDA component of their long-term stock options. Ifthe Company exceeds 100% of a target component, any increases in long-termstock options are at the discretion of the Compensation Committee.

The long-term stockoptions vest in a single installment on the first to occur of the date on whichthe Company’s accountants certify the Company’s fiscal year 2008 financialstatements and March 10, 2009. The value of the award of long-term stockoptions that each NEO will realize will be based on the fair market value ofthe Company’s common stock on the date of grant. Each stock option expires onthe tenth anniversary of the date of grant.

***Performance-BasedStock Grants***

Performance-based stockgrants are a variable equity component of NEO compensation, which are tiedclosely to the Company performance and reward our NEOs for creating value forour stockholders. These grants are intended to be “performance-based” under Rule 162(m) ofthe Code. The Compensation Committee authorized and approved the amounts ofperformance-based stock grants for each of our NEOs for fiscal year 2006. TheCompensation Committee assesses the competitiveness of these grants every yearin connection with its annual compensation review.

***Short-Term,Performance-Based Stock Grants***

The Compensation Committee assigns target short-term,performance-based stock grants to each NEO as part of the NEO’s totalcompensation package. The actual amount of the short-term stock grants thateach NEO received depended upon the Company’s achievement of specifiedshort-term performance targets. Short-term stock-grants are, therefore,designed to reward our NEOs for creating value for our stockholders in theshort-term. In 2006, the Compensation Committee tied NEO short-term stockgrants to the Company’s achievement of pre-established revenue, gross profitand EBITDA performance targets for fiscal year 2006. Each performance target istied to one-third of each NEO’s short-term stock grants. Therefore, if theCompany achieves 100% of a performance target, each NEO will be entitled toone-third of 100% of his short-term stock grants. If the Company falls short ofa particular performance target, each NEO will receive a pro rata reduction inthe target one-third portion of his short-term stock grants. With respect tothe EBITDA performance target, the Company’s actual EBITDA for fiscal year 2006must be at least 80% of the target EBITDA, or the NEOs will not earn anyincentive compensation under the EBITDA component of their short-term stockgrants. If the Company exceeds 100% of a target component, any increases inshort-term stock grants are at the discretion of the Compensation Committee.

The short-term stock grants for fiscal year 2006 vestin three equal annual installments. The first installment vests on the first tooccur of the date on which the Company’s accountants certify the Company’sfiscal year 2006 financial statements and March 10, 2007; the second andthird installments vest on November 15, 2007 and November 15, 2008,respectively. The value of the short-term stock grants that each NEO willrealize will be based on the fair market value of the Company’s common stock onthe date of grant. The actual amount of short-term stock grants that our NEOsreceived for fiscal year 2006 was 109% of the target amounts for each of Messrs. Moore,Hsu and Moran.

For fiscal year 2007, the Compensation Committeeassigned target short-term, performance-based stock grants to each of our NEOsthat are tied to the Company’s achievement of pre-established revenue, grossprofit and pro forma operating profit (PFOP) performance targets for fiscalyear 2007. Each performance target is tied to one-third of each NEO’s 2007stock grants. Therefore, if the Company achieves 100% of a performance target,each NEO will be entitled to one-third of 100% of his short-term stock grants. Ifthe Company falls short of a particular performance target, each NEO willreceive a pro rata reduction in the target one-third portion of his short-termstock grants. With respect to the PFOP target, the Company’s actual PFOP forfiscal year 2007 must be at least 80% of the target PFOP, or the 

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NEOs will not earn anyincentive compensation under the PFOP component of their short-term stockgrants. If the Company exceeds 100% of a target component, any increases inshort-term stock grants are at the discretion of the Compensation Committee.

The short-term stockgrants for fiscal year 2007 vest in three equal annual installments. The firstinstallment vests on the first to occur of the date on which the Company’saccountants certify the Company’s fiscal year 2007 financial statements and March 16,2008; the second and third installments vest on January 1, 2008 and January 1,2009, respectively. The value of the short-term stock grants that each NEO willrealize will be based on the fair market value of the Company’s common stock onthe date of grant.

***Long-Term,Performance Based Stock Grants***

The Compensation Committee assigns target long-term,performance-based stock grants to each NEO as part of the NEO’s totalcompensation package. The actual amount of the long-term stock grants that eachNEO will receive depends upon the Company’s achievement of specified long-termperformance targets. Long-term stock-grants are, therefore, designed to focusNEO attention on the Company’s long-term success and reward our NEOs forcreating value for our stockholders in the long-term. In 2006, the CompensationCommittee tied NEO long-term stock grants to the Company’s achievement ofpre-established revenue, gross profit and EBITDA performance targets in thethree year period consisting of fiscal year 2006 through fiscal year 2008. Eachperformance target is tied to one-third of each NEO’s long-term stock grants. Therefore,if the Company achieves 100% of a performance target, each NEO will be entitledto one-third of 100% of his long-term stock grants. If the Company falls shortof a particular performance target, each NEO will receive a pro rata reductionin the target one-third portion of his long-term stock grants. With respect tothe EBITDA performance target, the Company’s actual EBITDA for the three yearperiod must be at least 80% of the target EBITDA, or the NEOs will not earn anyincentive compensation under the EBITDA component of their long-term stockgrants. If the Company exceeds 100% of a target component, any increases inlong-term stock grants are at the discretion of the Compensation Committee.

The long-term stock grantsvest in a single installment on the first to occur of the date on which theCompany’s accountants certify the Company’s fiscal year 2008 financialstatements and March 10, 2009. The value of the award of long-term stockgrants that each NEO will realize will be based on the fair market value of theCompany’s common stock on the date of grant. The Compensation Committee did notgrant any long-term, performance-based stock grants to our NEOs as part oftheir fiscal year 2007 compensation.

**Termination/Changein Control Benefits**

Upon termination of employment, most executiveofficers are entitled to receive severance payments under their employment agreementsor offer letters. In determining whether to approve and as part of the processof setting the terms of such severance arrangements, the Compensation Committeerecognizes that executives and officers often face challenges securing newemployment following termination. The severance packages included in the mostcurrent employment agreement for each of our NEOs is the same severance packagethat the NEO was granted when he first became an NEO of the Company. TheCompensation Committee typically does not alter these severance arrangements. Asa result, we believe that our NEO severance packages are significantly lowerthan those typically offered to executive officers of companies of a similarsize to us.

Our employment agreement with David J. Moore providesfor an annual base salary of $270,450 and a target bonus of $400,000 for 2006.If we terminate Mr. Moore without cause, he is entitled to receiveseverance pay in an amount equal to his annual base salary, plus one-half ofthe maximum bonus for which 

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he is eligible during thefiscal year of termination. If termination is the result of Mr. Moore’sdeath or disability, we will pay his estate an amount equal to two years’ ofhis base salary at his then current rate of pay.

Our employment agreement with Jonathan K. Hsu providesfor an annual base salary of $200,000 and a target bonus of $150,000 for 2006.If we terminate Mr. Hsu without cause, he is entitled to receive severancepay in an amount equal to nine months’ of his base salary, plus the maximum bonusfor which he is eligible during the fiscal year of termination. If terminationis result of the result of Mr. Hsu’s death or disability, we will pay hisestate an amount equal to nine months’ of his base salary at his then currentrate of pay.

Our employment agreement with Mark E. Moran providesfor an annual base salary of $185,658 and a target bonus of $100,000 for 2006.If we terminate Mr. Moran without cause, he is entitled to receiveseverance pay in an amount equal to 4.5 months of his base salary, plusthree-eighths of the maximum bonus for which he is eligible during the fiscalyear of termination. If termination is the result of Mr. Moran’s death ordisability, we will pay to his estate an amount equal to nine months’ basesalary at his then current rate of pay.

The material termsof our NEOs’ employment agreements are as follows:

·       theemployment agreements continue until terminated by either party;

·       duringthe employment term and thereafter, we will indemnify the executive to thefullest extent permitted by law, in connection with any claim against suchexecutive as a result of such executive serving as one of our officers ordirectors or in any capacity at our request in our with regard to any otherentity, employee benefit plan or enterprise;

·       anydispute or controversy arising under or in connection with the employmentagreement (other than injunctive relief) will be settled exclusively byarbitration; and

·       wemay terminate the agreement at any time with cause (as defined in theagreement) and upon 30 days’ notice without cause and, if an executive isterminated without cause (including our giving notice of non-renewal), theexecutive will receive severance pay and bonus, plus continued medical benefitsgenerally for a period equal to one or two times the severance period.

Each of our executiveofficers participates in the Company’s standard health, life, disability andother insurance programs. The table set forth below under “Potential PaymentsUpon Termination of Change in Control” shows estimates of compensation payableto each of our NEOs under specified circumstances.

**TaxTreatment of Executive Compensation**

As part of its role, theCompensation Committee reviews and considers the deductibility of executivecompensation under Section 162(m) of the Internal Revenue Code, whichprovides that the Company may not deduct compensation of more than $1.0 millionin any taxable year  that is paid tocertain executives, unless the compensation qualifies as “performance-based”under federal tax law. In making compensation decisions, the CompensationCommittee considers the effect of Section 162(m) together with otherfactors relevant to the Company’s business needs. The Company’s general policyis to preserve the federal income tax deductibility of compensation paid whenit is appropriate and is in the best interest of us and our stockholders.However, the Compensation Committee also believes that there may becircumstances in which the Company’s interests are best served by maintainingflexibility in the way compensation is provided, whether or not suchcompensation is fully deductible under Section 162(m). The Companybelieves that compensation paid under the executive compensation plans isgenerally fully deductible for federal income tax purposes. However, in certainsituations, the Compensation Committee may approve 

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compensationthat will not meet these requirements in order to ensure competitive levels oftotal compensation.

**Accounting forStock-Based Compensation**

Beginning on January 1,2007, the Company began accounting for stock based payments including its StockOptions, Vesting Shares, Restricted Stock Program and award in accordance withthe requirements of FASB Statement 123(R). The Compensation Committee reviewsand considers the accounting impact of the Company’s equity awards.

**EXECUTIVECOMPENSATION**

The following tables provide information about theannual compensation of the Company’s Chief Executive Officer, Chief OperatingOfficer and Chief Financial Officer and General Counsel (our Named ExecutiveOfficers) during fiscal year 2006, the Company’s last completed fiscal year.

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**SUMMARYCOMPENSATION TABLE**

Thefollowing table sets forth certain compensation information for our NEOs forthe fiscal year ended December 31, 2006.

|                                                     | ** ** | ** ** | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **          | ** ** | **Non-Equity**            | ** ** | ** **         | ** ** | ** **         | ** ** |
|-----------------------------------------------------|------------|------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | ** **          | ** ** | ** **         | ** ** | **Stock**           | ** ** | **Option**          | ** ** | **Incentive Plan**   | ** ** | **All Other** | ** ** | ** **         | ** ** |
| **Name and**                                   | ** ** | ** ** | ** ** | **Salary ($)** | ** ** | **Bonus ($)** | ** ** | **Awards ($)** | ** ** | **Awards ($)** | ** ** | **Compensation ($)** | ** ** | **Compensation**   | ** ** | ** **         | ** ** |
| **Principal Position**                         | ** ** | **Year**   | ** ** | **(1)**             | ** ** | **(2)**            | ** ** | **(3)**             | ** ** | **(3)**             | ** ** | **(4)**                   | ** ** | **($)**            | ** ** | **Total ($)** | ** ** |
| David J. Moore                                      |       |       | 2006       |                |       |               | $          | 270,450             |       |                |       | $                         | —     |               |       |               | $          | 2,019,885 |   |   |   | $ | 1,317,701 |   |   |   | $ | 437,487 |   |   |   | $ | 14,015 |  (5) |   | $ | 4,059,538 |   |
| Chief Executive Officer                             |       |       |       |                |       |               |       |                |       |                |       |                      |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Jonathan K. Hsu                                     |       |       | 2006       |                |       |               | $          | 200,000             |       |                |       | $                         | —     |               |       |               | $          | 1,625,531 |   |   |   | $ | 1,054,161 |   |   |   | $ | 164,058 |   |   |   | $ | — |   |   | $ | 3,043,750 |   |
| Chief Financial Officer and Chief Operating Officer |       |       |       |                |       |               |       |                |       |                |       |                      |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mark E. Moran                                       |       |       | 2006       |                |       |               | $          | 185,658             |       |                |       | $                         | —     |               |       |               | $          | 1,011,543 |   |   |   | $ | 536,342 |   |   |   | $ | 109,372 |   |   |   | $ | — |   |   | $ | 1,842,915 |   |
| Exercutive Vice President and General Counsel       |       |       |       |                |       |               |       |                |       |                |       |                      |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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(1)             Dollar value of base salary earned (all cash).

(2)             The portion of each bonus based upon performancecriteria is included under the column entitled “Non-Equity Incentive PlanCompensation.”

(3)             Aggregate compensation expense recognized by theCompany during the fiscal year ended December 31, 2006 under SFAS 123R,excluding any adjustments in value that related to actual or estimatedforfeiture rates. The dollar amounts thus may include amounts from awardsgranted in and prior to 2006.

(4)             Amounts include the portion of the annual bonus that isbased upon performance measures. For fiscal year 2006, each NEO opted to takethe EBITDA portion (as described in more detail above “Compensation Discussionand Analysis—Elements of Named Executive Officer Compensation—Target Bonuses”)of his actual bonus in shares of stock in lieu of cash.

(5)             Amounts shown reflect $10,933.40 attributable to a clubmembership, charitable contributions and miscellaneous travel expenses.

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**GRANTS OFPLAN-BASED AWARDS**

Thefollowing table discloses certain information regarding the grants ofplan-based awards to our NEOs during the fiscal year ended December 31,2006.

| ** **      | ** ** | ** ** | ** ** | **Estimated Future**     | ** ** | **Estimated Future** | ** ** | **All Other**       | ** ** | ** **          | ** ** |
|-----------------|------------|------------|------------|-------------------------------|------------|---------------------------|------------|--------------------------|------------|---------------------|------------|
| ** **      | ** ** | ** ** | ** ** | **Payouts Under**        | ** ** | **Payouts Under**    | ** ** | **Stock Awards:**   | ** ** | **Grant Date** | ** ** |
| ** **      | ** ** | ** ** | ** ** | **Non-Equity Incentive** | ** ** | **Equity Incentive** | ** ** | **Number of**       | ** ** | **Fair Value** | ** ** |
| ** **      | ** ** | ** ** | ** ** | **Plan Awards(1)**       | ** ** | **Plan Awards(4)**   | ** ** | **Shares of ** | ** ** | **of Stock**   | ** ** |
| ** **      | ** ** | **Grant**  | ** ** | **Target**                    | ** ** | **Maximum**               | ** ** | **Target**               | ** ** | **Maximum**         | ** ** | **Stock or** | ** ** | **Awards ($)** | ** ** |
| **Name**        | ** ** | ** ** | ** ** | **Date**                      | ** ** | **($)(2)**                | ** ** | **($)(3)**               | ** ** | **(#)(5)**          | ** ** | **(#)(6)** | ** ** | **Units (#)(7)** | ** ** | **(8)** | ** ** |
| David J. Moore  |       | —     |       | $                             | 400,000    |                      |       | $                        | 480,000    |                |       | — |   |   | — |   |   |   | — |   |   |   | $ | — |   |   |
|                 |       | 11/10/2006 |       | $                             | —     |                      |       | $                        | —     |                |       | 120,000 |   |   | 120,000 |   |   |   | 40,000 |   |   |   | $ | 1,307,200 |   |   |
| Jonathan K. Hsu |       | —     |       | $                             | 150,000    |                      |       | $                        | 180,000    |                |       | — |   |   | — |   |   |   | — |   |   |   | $ | — |   |   |
|            |       | 11/10/2006 |       | $                             | —     |                      |       | $                        | —     |                |       | 105,000 |   |   | 105,000 |   |   |   | 35,000 |   |   |   | $ | 1,143,800 |   |   |
| Mark E. Moran   |       | —     |       | $                             | 100,000    |                      |       | $                        | 120,000    |                |       | — |   |   | — |   |   |   | — |   |   |   | $ | — |   |   |
|                 |       | 11/10/2006 |       | $                             | —     |                      |       | $                        | —     |                |       | 60,000 |   |   | 60,000 |   |   |   | 20,000 |   |   |   | $ | 653,600 |   |   |
|                 |            |            |            |                               |            |                           |            |                          |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)             As discussed above under “Compensation Discussion andAnalysis—Elements of Named Executive Officer Compensation—Target Bonuses,” theCompensation Committee granted each NEO a target bonus that is tied to theCompany’s achievement of specified performance targets. Awards were earned in2006 and paid in March 2007. Actual dollar amounts are disclosed andreported in the Summary Compensation Table as Non-Equity Incentive PlanCompensation.

(2)             Amounts reported reflect the target annual bonuses forfiscal year 2006. There are no minimums or threshold amounts.

(3)             The maximum bonus that could be paid for fiscal year2006 was 120% of the target bonus.

(4)             Amounts reflect restricted stock awards granted duringfiscal year 2006 and related to fiscal year 2007 compensation, and which arerecorded at fair value at the date of grant. The actual grants vest asfollows:  25% on the earlier of March 16,2008 and the date on which the Company’s accountants certify the auditedfinancial results for fiscal year 2007; 25% on January 1, 2009; and 50% onJanuary 1, 2010.

(5)             Amounts reported reflect the target performance-basedstock grants related to fiscal year 2007 NEO compensation. There are nominimums or threshold amounts.

(6)             The maximum amount that can be granted is 100% of thetarget amount.

(7)             Amounts reported reflect vesting stock grants relatedto fiscal year 2007 NEO compensation. The stock grants vest as follows:  20% on January 1 of each of 2008, 2009and 2010; 40% on January 1, 2011.

(8)             The dollar value stated for the restricted stockreflects the number of shares multiplied by the fair market value in accordancewith SFAS 123R. The assumptions used in the calculation of these amounts areset forth in Note 11 to the Company’s consolidated financial statementsincluded in the Annual Report on Form 10-K for the fiscal year endedDecember 31, 2006.

A summary description of stock options and stockgrants is set forth in the Section entitled “Compensation Discussion andAnalysis” above.

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**OUTSTANDING EQUITYAWARDS AT FISCAL YEAR-END**

The following table shows outstanding stock optionsand stock awards as of December 31, 2006 for each of our Named ExecutiveOfficers.

|                 | ** ** | **Option Awards**  | ** ** | **Stock Awards**   | ** ** |
|-----------------|------------|--------------------|------------|--------------------|------------|
| ** **      | ** ** | ** **         | ** ** | ** **         | ** ** | **Equity** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity Incentive** | ** ** |
| ** **      | ** ** | ** **         | ** ** | ** **         | ** ** | **Incentive** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Plan Awards:** | ** ** |
| ** **      | ** ** | ** **         | ** ** | ** **         | ** ** | **Plan Awards:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Market** | ** ** | **Equity Incentive** | ** ** | **Market or** | ** ** |
| ** **      | ** ** | **Number of** | ** ** | **Number of** | ** ** | **Number of** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Number of** | ** ** | **Value** | ** ** | **Plan Awards:** | ** ** | **Payout Value** | ** ** |
| ** **      | ** ** | **Securities**     | ** ** | **Securities**     | ** ** | **Securities** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Shares or** | ** ** | **of Shares** | ** ** | **Number of** | ** ** | **Number of** | ** ** |
| ** **      | ** ** | **Underlying**     | ** ** | **Underlying**     | ** ** | **Underlying** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Units of** | ** ** | **or Units of** | ** ** | **Unearned Shares,** | ** ** | **Unearned Shares,** | ** ** |
| ** **      | ** ** | **Unexercised**    | ** ** | **Unexercised**    | ** ** | **Unexercised** | ** ** | **Option** | ** ** | **Option** | ** ** | ** ** | ** ** | **Stock That** | ** ** | **Stock That** | ** ** | **Units or Other** | ** ** | **Units or Other** | ** ** |
| ** **      | ** ** | **Options(#)**     | ** ** | **Options(#)**     | ** ** | **Unearned** | ** ** | **Exercise** | ** ** | **Expiration** | ** ** | ** ** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Rights That Have** | ** ** | **Rights That Have** | ** ** |
| **Name**        | ** ** | **Exercised**      | ** ** | **Unexercisable**  | ** ** | **Options(#)** | ** ** | **Price($)** | ** ** | **Date** | ** ** | **Grant Date** | ** ** | **Vested(#)** | ** ** | **Vested($)(1)** | ** ** | **Not Vested(#)** | ** ** | **Not Vested($)(1)** | ** ** |
| David J. Moore  |       |               | 25,001     |               |       |   | — |   |   |   | — |   |   |   | $ | 140.00 |   |   |   | 01/01/09 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 19,497     |               |       |   | — |   |   |   | — |   |   |   | $ | 2.65 |   |   |   | 01/01/11 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 19,500     |               |       |   | — |   |   |   | — |   |   |   | $ | 6.25 |   |   |   | 01/01/11 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 19,500     |               |       |   | — |   |   |   | — |   |   |   | $ | 10.00 |   |   |   | 01/01/11 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 99,991     |               |       |   | — |   |   |   | — |   |   |   | $ | 1.15 |   |   |   | 01/02/12 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 16,500     |               |       |   | — |   |   |   | — |   |   |   | $ | 1.15 |   |   |   | 06/14/14 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 208,750    |               |       |   | — |   |   |   | — |   |   |   | $ | 1.00 |   |   |   | 10/16/12 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 97,500     |               |       |   | — |   |   |   | — |   |   |   | $ | 1.15 |   |   |   | 01/14/13 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 3,656      |               |       |   | — |   |   |   | — |   |   |   | $ | 1.10 |   |   |   | 03/20/13 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 117,684    |               |       |   | — |   |   |   | — |   |   |   | $ | 6.70 |   |   |   | 01/02/14 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 353,499    |               |       |   | 125,000 | (2) |   |   | — |   |   |   | $ | 4.33 |   |   |   | 01/03/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 83,333     | (3)                |       |   | 166,667 | (3) |   |   | — |   |   |   | $ | 6.40 |   |   |   | 11/15/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | —     |               |       |   | 250,000 | (4) |   |   |   |   |   |   | $ | 6.40 |   |   |   | 11/15/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | —     |               |       |   | — |   |   |   | 50,000 | (5) |   |   | $ | 6.40 |   |   |   | 11/15/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1/15/2005 |   |   |   | 100,000 | (6) |   |   | $ | 905,000 |   |   |   | — |   |   |   | $ | — |   |   |
|                 |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 11/15/2005 |   |   |   | 96,500 | (4) |   |   | $ | 873,325 |   |   |   | $ | 75,000 | (5) |   |   | $ | 678,750 |   |   |
|                 |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 11/10/2006 |   |   |   |   |   |   |   | $ | — |   |   |   | $ | 40,000 | (7) |   |   | $ | 362,000 |   |   |
|                 |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 11/10/2006 |   |   |   |   |   |   |   | $ | — |   |   |   | $ | 120,000 | (8) |   |   | $ | 1,086,000 |   |   |
| Jonathan K. Hsu |       |               | 80,001     |               |       |   | — |   |   |   | — |   |   |   | $ | 6.70 |   |   |   | 01/02/14 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|            |       |               | 100,000    |               |       |   | 100,000 | (2) |   |   | — |   |   |   | $ | 4.33 |   |   |   | 01/03/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|            |       |               | 66,666     | (3)                |       |   | 133,334 | (3) |   |   | — |   |   |   | $ | 6.40 |   |   |   | 11/15/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|            |       |               | —     |               |       |   | 200,000 | (4) |   |   | — |   |   |   | $ | 6.40 |   |   |   | 11/15/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|            |       |               | —     |               |       |   | — |   |   |   | 40,000 | (5) |   |   | $ | 6.40 |   |   |   | 11/15/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|            |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1/15/2005 |   |   |   | 80,000 | (6) |   |   | $ | 724,000 |   |   |   | — |   |   |   | $ | — |   |   |
|            |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 11/15/2005 |   |   |   | 77,500 | (4) |   |   | $ | 701,375 |   |   |   | 60,000 | (5) |   |   | $ | 543,000 |   |   |
|            |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 11/10/2006 |   |   |   | — |   |   |   | $ | — |   |   |   | 35,000 | (7) |   |   | $ | 316,750 |   |   |
|            |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 11/10/2006 |   |   |   | — |   |   |   | $ | — |   |   |   | 105,000 | (8) |   |   | $ | 950,250 |   |   |
| Mark E. Moran   |       |               | 6,250      |               |       |   | — |   |   |   | — |   |   |   | $ | 20.00 |   |   |   | 03/25/08 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 15,001     |               |       |   | — |   |   |   | — |   |   |   | $ | 140.00 |   |   |   | 01/01/09 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 6,000      |               |       |   | — |   |   |   | — |   |   |   | $ | 2.65 |   |   |   | 01/01/11 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 6,000      |               |       |   | — |   |   |   | — |   |   |   | $ | 6.25 |   |   |   | 01/01/11 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 6,000      |               |       |   | — |   |   |   | — |   |   |   | $ | 10.00 |   |   |   | 01/01/11 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 40,000     |               |       |   | — |   |   |   | — |   |   |   | $ | 1.15 |   |   |   | 01/02/12 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 16,500     |               |       |   | — |   |   |   | — |   |   |   | $ | 1.15 |   |   |   | 06/14/14 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 5,000      |               |       |   | — |   |   |   | — |   |   |   | $ | 1.35 |   |   |   | 09/01/12 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 48,282     |               |       |   | — |   |   |   | — |   |   |   | $ | 1.00 |   |   |   | 10/16/12 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 51,390     |               |       |   | — |   |   |   | — |   |   |   | $ | 1.15 |   |   |   | 01/14/13 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 80,001     |               |       |   | — |   |   |   | — |   |   |   | $ | 6.70 |   |   |   | 01/02/14 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 150,000    |               |       |   | 50,000 | (2) |   |   | — |   |   |   | $ | 4.33 |   |   |   | 01/03/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | 33,333     | (3)                |       |   | 66,667 | (3) |   |   | — |   |   |   | $ | 6.40 |   |   |   | 11/15/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | —     |               |       |   | 100,000 | (4) |   |   | — |   |   |   | $ | 6.40 |   |   |   | 11/15/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                 |       |               | —     |               |       |   | — |   |   |   | 25,000 | (5) |   |   | $ | 6.40 |   |   |   | 11/15/15 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   |
|                 |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1/15/2005 |   |   |   | 50,000 | (6) |   |   | $ | 452,500 |   |   |   |   |   |   |   | $ | — |   |   |
|                 |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 11/15/2005 |   |   |   | 48,500 | (4) |   |   | $ | 438,925 |   |   |   | 37,500 | (5) |   |   | $ | 339,375 |   |   |
|                 |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 11/10/2006 |   |   |   | — |   |   |   | $ | — |   |   |   | 20,000 | (7) |   |   | $ | 181,000 |   |   |
|                 |       |               |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 11/10/2006 |   |   |   | — |   |   |   | $ | — |   |   |   | 60,000 | (8) |   |   | $ | 543,000 |   |   |

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(1)                 Calculated as the number of sharesmultiplied by the closing price of the Company’s common stock on December 29,2006, the last trading day of fiscal year 2006.

(2)                 These awards vest on January 1, 2008.

(3)                 These awards vest in three equalinstallments beginning on the first anniversary of the date of grant. The firstinstallment vested on November 15, 2006; the remaining installments veston November 15, 2007 and November 15, 2008, respectively.

(4)                 Assuming the relevant performance targetsare met, these awards vest in three equal installments; the first installmentvests on the first to occur of March 10, 2007 and the date on which theCompany’s accountants certify the Company’s fiscal year 2006 financialstatements; the remaining installments vest on November 15, 2007 and November 15,2008, respectively

(5)                 Assuming the relevant performance targetsare met, these awards vest in a single installment on the first to occur of March 10,2009 and the date on which the Company’s accountants certify the Company’sfiscal year 2008 financial statements.

(6)                 These awards vest 50% on January 1,2007 and 50% on January 1, 2008.

(7)                 These awards vest 20% on January 1 ofeach of 2008, 2009 and 2010; 40% on January 1, 2011.

(8)                 Assuming the relevant performance targetsare met, these awards vest in three equal annual installments; the firstinstallment vests on the first to occur of March 15, 2008 and the date onwhich the Company’s accountants certify the Company’s fiscal year 2007financial statements; the remaining installments best on January 1, 2008and January 1, 2009, respectively.

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**OPTION EXERCISESAND STOCK VESTED**

Thefollowing table sets forth certain information regarding stock-based awardsthat vested during 2006 and stock options exercises during 2006 for each of ourNamed Executive Officers.

| ** **      | ** ** | **Option Awards**         | ** ** | **Stock Awards**           | ** ** |
|-----------------|------------|--------------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | **Number of Shares** | ** ** | ** **                      | ** ** | **Number of Shares** | ** ** | ** ** | ** ** |
| ** **      | ** ** | Acquired on               | ** ** | **Value Realized on** | ** ** | **Acquired on** | ** ** | **Value Realized on** | ** ** |
| **Name**        | ** ** | ** **                     | ** ** | **Exercise (#)**           | ** ** | **Exercise ($) (1)** | ** ** | **Vesting (#)** | ** ** | **Vesting ($) (2)** | ** ** |
| David J. Moore  |       |                           | 106,808    |                            |       |   | $ | 800,771 |   |   |   | 129,175 |   |   |   | $ | 1,312,000 |   |   |
| Jonathan K. Hsu |       |                           | 344,412    |                            |       |   | $ | 2,071,429 |   |   |   | 102,400 |   |   |   | $ | 1,049,600 |   |   |
| Mark E. Moran   |       |                           | 53,759     |                            |       |   | $ | 443,414 |   |   |   | 65,000 |   |   |   | $ | 656,000 |   |   |
|                 |            |                                |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          The value realized onthe exercise of stock options is the difference between the market price atwhich the shares acquired on exercise were sold and the exercise price of theoptions.

(2)          Thevalue realized on the vesting of stock awards is the market price at closing ofthe Company’s common stock on the vesting date.

**POTENTIAL PAYMENTSUPON TERMINATION OR CHANGE IN CONTROL**

Thetable below shows estimates of the compensation payable to each of our NamedExecutive Officers upon termination of such NEO’s employment with the Companyunder specified circumstances, calculated as if the NEO was terminated effectiveDecember 31, 2006. The actual amount that each NEO will receive depends onthe specific circumstances surrounding his termination of employment. There canbe no assurance that a termination or change in control would produce the sameor similar results as those described below if such event occurs on any dateother than December 31, 2006 or at any other stock price, or if anyassumption is not, in fact, correct. Vested stock options are also excludedfrom this table. For these amounts, see the Outstanding Equity Awards at FiscalYear-End table above.
| Name            | ** ** | ** **                     | ** ** | **Benefit** | ** ** | **Termination  Without Cause  Prior to Change  in Control** | ** ** | **Termination  Without Cause  Following Change  in Control** | ** ** | **Death or  Disability** | ** ** |
|-----------------|------------|--------------------------------|------------|-------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------|------------|
| David J. Moore  |       | Salary                         |       |        | $          | 270,450                                                                         |       |                                                                        |       | $                             | 270,450    |   |   | $ | 540,900 |   |
|            |       | Incentive                      |       |        | 200,000    |                                                                            |       |                                                                        | 200,000    |                          |       | — |   |
|            |       | Accrued paid time  off         |       |        | 14,563     |                                                                            |       |                                                                        | 14,563     |                          |       | 14,563 |   |
|            |       | Benefits  continuation         |       |        | 10,541     |                                                                            |       |                                                                        | 10,541     |                          |       | — |   |
|            |       | Acceleration of equity  awards |       |        | —     |                                                                            |       |                                                                        | 2,911,501  |                          |       | — |   |
|            |       | Total value                    |       |        | $          | 495,554                                                                         |       |                                                                        |       | $                             | 3,407,055  |   |   | $ | 555,463 |   |
| Jonathan K. Hsu |       | Salary                         |       |        | $          | 150,000                                                                         |       |                                                                        |       | $                             | 150,000    |   |   | $ | 150,000 |   |
|            |       | Incentive                      |       |        | 150,000    |                                                                            |       |                                                                        | 150,000    |                          |       | — |   |
|            |       | Accrued paid time  off         |       |        | 13,846     |                                                                            |       |                                                                        | 13,846     |                          |       | 13,846 |   |
|            |       | Benefits  continuation         |       |        | —     |                                                                            |       |                                                                        | —     |                          |       | — |   |
|            |       | Acceleration of equity  awards |       |        | —     |                                                                            |       |                                                                        | 2,118,872  |                          |       | — |   |
|            |       | Total value                    |       |        | $          | 313,846                                                                         |       |                                                                        |       | $                             | 2,432,718  |   |   | $ | 163,846 |   |
| Mark E. Moran   |       | Salary                         |       |        | $          | 69,622                                                                          |       |                                                                        |       | $                             | 69,622     |   |   | $ | 139,244 |   |
|            |       | Incentive                      |       |        | 37,500     |                                                                            |       |                                                                        | 37,500     |                          |       | — |   |
|            |       | Accrued paid time  off         |       |        | 5,713      |                                                                            |       |                                                                        | 5,713      |                          |       | 5,713 |   |
|            |       | Benefits  continuation         |       |        | 3,953      |                                                                            |       |                                                                        | 3,953      |                          |       | — |   |
|            |       | Acceleration of equity  awards |       |        | —     |                                                                            |       |                                                                        | 1,179,808  |                          |       | — |   |
|            |       | Total value                    |       |        | $          | 116,788                                                                         |       |                                                                        |       | $                             | 1,296,596  |   |   | $ | 144,957 |   |

 

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**DIRECTORCOMPENSATION**

As described more fully below, the following chartsummarizes the annual compensation for each of our non-employee directorsduring 2006. David J. Moore, our CEO, does not receive any compensation for hisrole as Chairman of the Board of Directors.

| ** **        | ** ** | **Option** | ** ** | ** **                   | ** ** |
|-------------------|------------|------------|------------|------------------------------|------------|
| **Name**          | ** ** | ** ** | ** ** | **Awards ($) (1)** | ** ** | **Total ($)** | ** ** |
| Robert J. Perkins |       |       | $          | 72,594                       |       |   | $ | 72,594 |   |
| Arnie Semsky      |       |       | $          | 60,341                       |       |   | $ | 60,341 |   |
| Tony Schmitz      |       |       | $          | 50,458                       |       |   | $ | 50,458 |   |
| Brian Silva       |       |       | $          | 57,308                       |       |   | $ | 57,308 |   |
| Val Zammit        |       |       | $          | 66,468                       |       |   | $ | 66,468 |   |
|                   |            |            |            |                              |            |  |  |  |  |  |  |

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(1)          Amountsrepresent the aggregate compensation expense recognized by the Company duringthe fiscal year ended December 31, 2006 under SFAS 123R, excluding anyadjustments in value that related to actual or estimated forfeiture rates. Thedollar amounts thus may include amounts from awards granted in and prior to2006.

**Summary of DirectorCompensation**

All non-employee membersof the Board of Directors are reimbursed for their expenses for each Boardmeeting they attend and are eligible to receive stock options pursuant to the2002 Stock Incentive Plan. Effective January 2005, members of the Board ofDirectors are awarded 20,000 options, an additional 5,000 options for eachCommittee membership and an additional 2,500 options for each Committeechairmanship, on the date of each Annual Meeting of Stockholders, to purchaseshares of common stock at the fair market value on the date of grant, proratedfor directors who have served for less than one year since their initial grant.These grants vest in three equal annual installments. With regard to thecompensation for Mr. Schmitz, a former employee of the Company, wecontinued to vest and make available to Mr. Schmitz his existing stockoptions granted during his employment with the Company, which were fully vestedat the end of 2006. Mr. Schmitz received the stock options granted to theBoard of Directors at the 2006 Annual Meeting of Stockholders. Through the 2004Annual Meeting of Stockholders, each director was paid an annual cash fee of$6,000 for attending the meetings of the Board of Directors and was given anon-qualified option to purchase 3,333 shares of common stock at the fairmarket rate on the date of the grant. In addition, on January 1, 2005 eachdirector was given a one-time grant of 15,000 options to purchase shares ofcommon stock at the fair market rate on the date of the grant. Directors werealso given an additional one-time grant of 5,000 options for each Committeemembership and an additional one-time grant of 2,500 options for each Committeechairmanship, to purchase shares of common stock at the fair market rate on thedate of the grant. These one-time grants vested immediately.

**STOCK INCENTIVEPLANS**

**1998 StockIncentive Plan and 2002 Stock Incentive Plan**

*Background;Purpose; Eligibility.*

The following provisions are applicable to our 1998and 2002 Stock Incentive Plans and are intended only as a summary. Theincentive plans are intended (i) to offer our employees and consultantsand those of our subsidiaries stock-based incentives and other equity-basedawards, thereby creating a means to raise the level of stock ownership byemployees and consultants in order to attract, retain and reward such employeesand consultants and strengthen the mutuality of interests between suchemployees and consultants and our stockholders and (ii) to offerequity-based awards to non-employee directors, thereby 

17

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attracting, retaining andrewarding such non-employee directors and strengthening the mutuality ofinterests between non-employee directors and stockholders.

All of our employees andconsultants are eligible to be granted stock options, stock appreciation rightsand restricted stock. Our non-employee directors are eligible to receive grantsof nonqualified stock options and to receive grants of common stock.

*Administration.*

The incentive plans areadministered by the Compensation Committee of our Board of Directors, exceptthat with respect to awards to non-employee directors, the Plans areadministered by the Board of Directors. The Compensation Committee has fullauthority and discretion, subject to the terms of the incentive plans, todetermine who is eligible to receive awards and the amount and type of awards. TheCompensation Committee may grant stock options, stock appreciation rights, andrestricted stock under the Plans. Terms and conditions of awards are set forthin written grant agreements. No option may have an exercise price less than thefair market value of the common stock at the time of original grant (or, in thecase of an incentive stock option granted to a ten percent stockholder, 110% offair market value). Awards under the incentive plans may not be made on orafter the tenth anniversary of the date of its adoption, but awards grantedprior to such date may extend beyond that date. All options granted under theincentive plans expire no more than ten years from the date of grant.

*Available SharesAnd Other Units.*

As of December 31,2006, a maximum of 802,423 and 9,620,453 shares of common stock may be issuedpursuant to the 1998 Stock Incentive Plan and the 2002 Stock Incentive Plan,respectively. The maximum number of incentives that may be granted to anyindividual for each fiscal year during the term of the incentive plans is750,000. In general, upon the cancellation or expiration of an award, theunissued shares of common stock subject to such awards will again be availablefor awards under the incentive plans. The number of shares of common stockavailable for the grant of awards and the exercise price of an award may beadjusted to reflect any change in our capital structure or business by reasonof certain corporate transactions or events. The 2002 Plan has an automaticincrease of 600,000 shares available for issuance thereunder on the first tradingday of each calendar year.

*Change of Control*

The Stock Incentive Plan provides that, unlessotherwise provided at the time of grant, all stock incentives granted under thePlan shall fully vest upon the occurrence of certain events constituting a changeof control of the Company. It has generally been the practice of the Companysince 2000 to provide that stock incentives shall not vest upon a change ofcontrol, unless the grantee’s employment is terminated, or constructivelyterminated, involuntarily, including as a result of death or disability, in thetwo years following the change in control.

18

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**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.

The following table sets forth information regardingbeneficial ownership of our common stock as of March 31, 2007 by: (i) eachperson who we know to own beneficially more than 5% of the common stock; (ii) eachof our directors and Named Executive Officers; and (iii) our currentdirectors and NEOs as a group.

| Beneficial Owner                                           | ** ** | ** ** | ** **    | **Amount and Nature  of Beneficial Ownership** | ** ** | **Percentage  Ownership(1)** | ** ** |
|-----------------------------------------------------------------|------------|------------|---------------|--------------------------------------------------------------------|------------|------------------------------|------------|
| David J. Moore                                                  | ** ** |       | **1,878,110** | **(2)**                                                            |       |                         | **3.60**   | **%** |   |
| Robert J. Perkins                                               | ** ** |       | **37,640**    | **(3)**                                                            |       |                         | *****      | ** ** |   |
| Tony Schmitz                                                    | ** ** |       | **80,829**    | **(4)**                                                            |       |                         | *****      | ** ** |   |
| Arnie Semsky                                                    | ** ** |       | **24,113**    | **(5)**                                                            |       |                         | *****      | ** ** |   |
| Brian Silva                                                     | ** ** |       | **15,352**    | **(6)**                                                            |       |                         | *****      | ** ** |   |
| Valentine J.  Zammit                                            | ** ** |       | **117,988**   | **(7)**                                                            |       |                         | *****      | ** ** |   |
| Jonathan K. Hsu                                                 | ** ** |       | **454,211**   | **(8)**                                                            |       |                         | *****      | ** ** |   |
| Mark E. Moran                                                   | ** ** |       | **690,644**   | **(9)**                                                            |       |                         | **1.34**   | **%** |   |
| All current directors and  officers as a group (9 persons) | ** ** |       | **3,298,887** | **(10)**                                                           |       |                         | **6.21**   | **%** |   |
| **Beneficial  Holders of 5% or more**                           |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| T. Rowe Price  Associates, Inc.                            | ** ** |       | **5,236,120** | **(11)**                                                           |       |                         | **11.88**  | **%** |   |
| 100 E. Pratt Street                                             |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| Baltimore, MD 21202                                             |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| Wellington  Management Company, LLP                             | ** ** |       | **4,979,100** | **(12)**                                                           |       |                         | **9.76**   | **%** |   |
| 75 State Street                                                 |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| Boston, MA 02109                                                |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| Driehaus Capital Management  LLC and Richard H. Driehaus        | ** ** |       | **4,179,207** | **(13)**                                                           |       |                         | **8.19**   | **%** |   |
| Driehaus Capital Management  LLC                                |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| 25 East Erie Street                                             |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| Chicago, IL 60611                                               |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| Richard H.  Driehaus                                            |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| 1336 Beltjen  Road, The Tunick Building                         |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| St. Thomas,  USVI 00802                                    |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| Pequot Capital Management,  LLC                                 | ** ** |       | **3,206,700** | **(14)**                                                           |       |                         | **6.29**   | **%** |   |
| 500 Nyala Farm Road                                             |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| Westport, CT 06880                                              |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| Mellon Financial  Corporation                                   | ** ** |       | **3,120,177** | **(14)**                                                           |       |                         | **6.12**   | **%** |   |
| c/o Mellon  Financial Corporation                               |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| One Mellon Center                                               |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| Pittsburgh,  Pennsylvania 15258                                 |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| PubliGroupe USA Holdings                                        | ** ** |       | **2,487,100** | **(15)**                                                           |       |                         | **4.92**   | **%** |   |
| 1100 Santa Monica Blvd,  Suite 550                         |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |
| Los Angeles, CA, 90025                                     |       |       | ** **    |                                                               |       |                         | ** ** | ** ** |   |

 

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*                 **Represents less than 1% of the outstandingcommon stock.

       (1) Percentage is based on total outstanding shares of common stock of50,998,632 as of March 31, 2007. Beneficial ownership is determined inaccordance with the rules of the Securities and Exchange Commission andgenerally includes voting or investment power with respect to securities,subject to community property laws, where applicable. Shares of common stocksubject to options or warrants 

19

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that are exercisablewithin 60 days of March 31, 2007 and beneficially owned by the personholding such options and warrants are treated as outstanding for the purpose ofcomputing the percentage ownership for such person, but are not treated asoutstanding for the purpose of computing the percentage ownership of any otherperson. The address for each of the persons listed above, unless otherwisespecified below, is c/o 24/7 Real Media, Inc., 132 W. 31 st Street, New York, NY 10001.

       (2) Includes (i) 42,293 shares of common stock held by a familytrust and other trusts held for the benefit of Mr. Moore’s family members,beneficial ownership of which is disclaimed by Mr. Moore; Mr. Moore’swife is the co-trustee of each such trust; (ii) 20,697 shares of commonstock issuable upon exercise of warrants; and (iii) vested options topurchase 1,122,744 shares of common stock exercisable within 60 days of March 31,2007. Excludes unvested options to purchase 508,334 shares of common stock notexercisable within 60 days of March 31, 2007. The number of shares ofcommon stock issuable upon exercise of such warrants is subject toanti-dilution adjustments.

       (3) Includes vested options to purchase 37,640 shares of common stockexercisable within 60 days of March 31, 2007. Excludes unvestedoptions to purchase 59,862 shares of common stock not exercisable within60 days of March 31, 2007.

       (4) Includes (i) 828 shares of common stock issuable upon exerciseof warrants; and (ii) vested options to purchase 80,001 shares of commonstock exercisable within 60 days of March 31, 2007. Excludes unvestedoptions to purchase 20,000 shares of common stock not exercisable within60 days of March 31, 2007. The number of shares of common stockissuable upon exercise of such warrants is subject to anti-dilutionadjustments.

       (5) Includes vested options to purchase 24,113 shares of common stockexercisable within 60 days of March 31, 2007. Excludes unvestedoptions to purchase 52,779 shares of common stock not exercisable within 60 daysof March 31, 2007.

       (6) Includes vested options to purchase 14,166 shares of common stockexercisable within 60 days of March 31, 2007. Excludes unvestedoptions to purchase 42,084 shares of common stock not exercisable within60 days of March 31, 2007.

       (7) Includes (i) 8,279 shares of common stock issuable uponexercise of warrants; and (ii) vested options to purchase 40,486 shares ofcommon stock exercisable within 60 days of March 31, 2007. Excludesunvested options to purchase 52,571 shares of common stock not exercisablewithin 60 days of March 31, 2007. The number of shares of commonstock issuable upon exercise of such warrants is subject to anti-dilutionadjustments.

       (8) Includes vested options to purchase 238,333 shares of common stockexercisable within 60 days of March 31, 2007. Excludes unvestedoptions to purchase 406,668 shares of common stock not exercisable within60 days of March 31, 2007.

       (9) Includes vested options to purchase 497,090 shares of common stockexercisable within 60 days of March 31, 2007. Excludes unvestedoptions to purchase 208,334 shares of common stock not exercisable within60 days of March 31, 2007.

(10) Includes or excludes, as the case may be, shares as described in theabove footnotes.

(11) The ownership information and the stockholder’s address are based oninformation contained in the stockholder’s statement on Schedule 13G, filedwith the Securities and Exchange Commission on February 14, 2007, in whichthe stockholder reports that it has sole dispositive power with respect to6,060,120 shares of common stock and sole voting power with respect to1,248,500 shares of common stock. These securities are owned by variousindividual and institutional investors, for which T. Rowe Price Associates, Inc.(“Price Associates”) serves as investment advisor with power to directinvestments and/or sole power to vote the securities. For purposes of thereporting requirements of 

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the Securities ExchangeAct of 1934, Price Associates is deemed to be a beneficial owner of suchsecurities; however, Price Associates expressly disclaims that it is, in fact,the beneficial owner of such securities.

(12) The ownership information and the stockholder’s address are based oninformation contained in the stockholder’s statement on Schedule 13G, filedwith the Securities and Exchange Commission on February 14, 2007, in whichthe stockholder reports that it does not hold sole dispositive power or solevoting power with respect to any common stock.

(13) The ownership information and the stockholders’ addresses are basedon information contained in the stockholders’ statement on Schedule 13G, filedwith the Securities and Exchange Commission on February 14, 2006, in whichthe parties report that, collectively, they have shared dispositive power withrespect to 3,706,984 shares of common stock and shared voting power withrespect to 1,963,116 shares of common stock; and that Richard H. Driehaus hassole voting and dispositive power with respect to an additional 472,223 shares ofour common stock, or approximately 1%.

(14) The ownership information and the stockholder’s address are based oninformation contained in the stockholder’s statement on Schedule 13G, filedwith the Securities and Exchange Commission on February 14, 2007, in whichthe stockholder reports that it has sole dispositive power with respect to3,206,700 shares of common stock and sole voting power with respect to3,154,800 shares of common stock.

(15) The ownership information and the stockholder’s address are based oninformation contained in the stockholder’s statement on Schedule 13G, filedwith the Securities and Exchange Commission on February 14, 2007, in whichthe stockholder reports that it has sole dispositive power with respect to2,225,587 shares of common stock and sole voting power with respect to1,667,393 shares of common stock.

(16) The ownership information and the stockholder’saddress are based on information contained in the stockholder’s statement onSchedule 13G, filed with the Securities and Exchange Commission on June 2,2003, in which the stockholder reports that it has shared dispositive powerwith respect to 2,509,104 shares of common stock and shared voting power withrespect to 2,509,104 shares of common stock, taking into account theone-for-five reverse split of our common stock completed on February 27,2004. Pursuant to a Lock-Up and Standstill Agreement dated October 31,2001, PubliGroupe USA Holding has agreed: (i) through October 2004,without the consent of the Company, not to acquire additional shares of ourcommon stock or take any corporate action inconsistent with the recommendationsof the Board of Directors of the Company; and (ii) through October 2006,to vote its shares at any stockholder meeting in the manner recommended by ourBoard of Directors, as reflected in our proxy statement.

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**EQUITY COMPENSATIONPLAN INFORMATION**

The following table sets forth information as ofDecember 31, 2006 with respect to shares of the Company’s common stockthat may be issued under the Company’s existing equity compensation plans.

| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of**

**securities to be**

**issued upon**

**exercise of**

**outstanding**

**options, warrants**

**and rights (a)** | ** ** | **Weighted-average**

**exercise price of**

**outstanding**

**potions, warrants**

**and rights** | ** ** | **Number of securities**

**available for future**

**issuance under equity**

**compensation plans**

**(excluding securities**

**reflected in (a))** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  Compensation Plans approved by security holders     |       |       | 7,126,712  |                                                                                                                                                                      |       |                                                                                                                    | $          | 6.36                                                                                                                                                                                                      |       |   |   |   3,539,263 |   |   |
| Equity  Compensation Plans not approved by security holders |       |       |       |                                                                                                                                                                      |       |                                                                                                                    | —     |                                                                                                                                                                                                      |       |   |   |   |   |
| Total                                                       |       |       | 7,126,712  |                                                                                                                                                                      |       |                                                                                                                    | $          | 6.36                                                                                                                                                                                                      |       |   |   |   3,539,263 |   |   |

 

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.

Tony Schmitz, a member ofour Board of Directors, was an employee of the Company throughOctober 2004. Mr. Schmitz served as a consultant for us fromNovember 2004 through December 2004 for a fee of $10,000 per month.The Company continued to vest and make available to Mr. Schmitz hisexisting stock options granted while he was an employee, which were fullyvested at the end of 2006. Mr. Schmitz received the stock options grantedto the Board of Directors at the 2006 Meeting of Stockholders.

**ITEM 14.**         PRINCIPALACCOUNTING FEES AND SERVICES.

Thefollowing is a summary of the fees billed or to be billed to us by GoldsteinGolub Kessler LLP, our principal accountant, for professional services renderedfor the fiscal years ended December 31, 2006 and 2005:

| **Fee Category** | ** ** | ** ** | ** ** | **Fiscal 2006 Fees** | ** ** | **Fiscal 2005 Fees** | ** ** |
|-----------------------|------------|------------|------------|--------------------------------|------------|--------------------------------|------------|
| Audit Fees(1)         |       |       | $          | 705,000                        |       |                           |       | $ | 764,800 |   |   |
| Audit-Related Fees(2) |       |       | —     |                           |       |                           | —     |   |   |
| Tax Fees(3)           |       |       | —     |                           |       |                           | —     |   |   |
| All Other Fees(4)     |       |       | 28,842     |                           |       |                           | 2,800      |   |   |
|                  |       |       | $          | 733,842                        |       |                           |       | $ | 767,60 |   |   |

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(1)          *Audit Fees*. Consists of fees billed for professionalservices rendered for the audit of our annual consolidated financial statementsand review of the interim consolidated financial statements included inquarterly reports and services that are normally provided by Goldstein GolubKessler LLP in connection with statutory and regulatory filings or engagements,including the Sarbanes-Oxley of 2002.

(2)          *Audit-Related Fees*. Consists of fees billed for assuranceand related services that are reasonably related to the performance of theaudit or review of our consolidated financial statements and are not reportedunder “Audit Fees.” There were no audited-related fees for fiscal year 2006 or2005.

(3)          *Tax Fees*. Consists of fees billed for professionalservices for tax compliance, tax advice and tax planning. These servicesinclude preparation of federal and state income tax returns. There were no taxfees for fiscal year 2006 or 2005.

(4)          *All Other Fees*. Consists of fees for management advisoryservices other than the services reported above.

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**POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT ANDPERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS.**

The Audit Committee’s policy is to pre-approve allaudit and permissible non-audit services provided by the independent auditors.These services may include audit services, audit-related services, taxservices, and other services. Pre-approval is generally provided for up to oneyear, and any pre-approval is detailed as to the particular service or categoryof services and is generally subject to a specific budget. The independentauditors and management are required to periodically report to the AuditCommittee regarding the extent of services provided by the independent auditorsin accordance with this pre-approval and the fees for the services performed todate. The Audit Committee may also pre-approve particular services on acase-by-case basis.

No non-audit-related fees, tax fees, or all other feeswere approved by our Audit Committee pursuant to Rule 2-01(c)(7)(i)(C) ofRegulation S-X.

The audit reports issued by Goldstein Golub KesslerLLP, dated March 13, 2007, on the consolidated financial statements of theRegistrant as of December 31, 2006 and December 31, 2005 and for thethree years in the period ended December 31, 2006, did not contain anadverse opinion or a disclaimer of opinion, and were not qualified or modified,as to uncertainty, audit scope or accounting principles.

During the two most recent fiscal years there were noreportable events as defined in Item304(a)(1)(v) of Regulation S-K.

The Audit Committee has determined that the provisionof services rendered above for “All Other Fees” is compatible with maintainingGolstein Golub Kessler LLP’s independence.

Through September 30, 2005, Goldstein GolubKessler LLP (the “Firm”) had a continuing relationship with American ExpressTax and Business Services Inc. (“TBS”) from which it leased auditing staffwho are full-time, permanent employees of TBS and through which its partnersprovided non-audit services. Subsequent to September 30, 2005, thisrelationship ceased and the Firm established a similar relationship with RSMMcGladrey, Inc. (“RSM”). The Firm has no full-time employees andtherefore, none of the audit services performed were provided by permanentfull-time employees of the Firm. The Firm manages and supervises the audit andaudit staff, and is exclusively responsible for the opinion rendered inconnection with its examination.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

|     | 24/7 REAL MEDIA, INC. |
|----------|-----------------------|
|     | By:                   | /s/ DAVID J. MOORE |
|     |                  | David J. Moore |
| * * | * *              | *Chief Executive Officer* |
|     |                  | Date: April 30,  2007 |

 

 

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