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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2008.

or



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

For the transition period from  to

Commission File Number: 000-51702





SENDTEC, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 43-2053462                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

877 Executive Center Drive W., Suite 300

St. Petersburg, Florida 33702

(Address of principal executive offices)

(727) 576-6630

(Registrants telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last report)





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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                                              |  |  |  |                             
|--------------------------------------------- |  |  |  | ----------------------------
|Large accelerated filer   ̈                    |  |  |  | Accelerated filer   ̈        
|Non-accelerated filer   ̈                      |  |  |  | Smaller reporting company  x
|(Do not check if a smaller reporting company) |  | 

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a court.     ̈  Yes     ̈  No

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares
outstanding of each of the issuers classes of common stock as of May 9, 2008, was:



|                                         |  |                   
|---------------------------------------- |  | ------------------
|Class                                    |  | Outstanding shares
|Common stock, par value $0.001 per share |  | 76,266,055        









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SENDTEC, INC. AND SUBSIDIARIES

FORM 10-Q

QUARTERLY PERIOD ENDED MARCH 31, 2008

INDEX



|                                                                                                               |  |     
|-------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                               |  | Page
|PART I  FINANCIAL INFORMATION                                                                                 |  |     
|                                                                                                               | 
|Item 1  Condensed Consolidated Financial Statements (Unaudited)                                               |  |     
|                                                                                                               | 
|Condensed Consolidated Balance Sheets As of March 31, 2008 (Unaudited) and December 31, 2007                   |  | 3   
|                                                                                                               | 
|Condensed Consolidated Statements of Operations (Unaudited) For the Three Months Ended March 31, 2008 and 2007 |  | 4   
|                                                                                                               | 
|Condensed Consolidated Statement of Stockholders Equity (Unaudited) For the Three Months Ended March 31, 2008 |  | 5   
|                                                                                                               | 
|Condensed Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2008 and 2007 |  | 6   
|                                                                                                               | 
|Notes to Unaudited Condensed Consolidated Financial Statements                                                 |  | 7   
|                                                                                                               | 
|Item 2  Management's Discussion and Analysis of Financial Condition and Results of Operations                 |  | 26  
|                                                                                                               | 
|Item 3  Quantitative and Qualitative Disclosures About Market Risk                                            |  | 32  
|                                                                                                               | 
|Item 4  Controls and Procedures                                                                               |  | 32  
|                                                                                                               | 
|PART II  OTHER INFORMATION                                                                                    |  |     
|                                                                                                               | 
|Item 1  Legal Proceedings                                                                                     |  | 33  
|                                                                                                               | 
|Item 1A  Risk Factors                                                                                         |  | 36  
|                                                                                                               | 
|Item 2  Unregistered Sales of Equity Securities and Use of Proceeds                                           |  | 36  
|                                                                                                               | 
|Item 3  Defaults Upon Senior Securities                                                                       |  | 36  
|                                                                                                               | 
|Item 4  Submission of Matters to a Vote of Security Holders                                                   |  | 36  
|                                                                                                               | 
|Item 5  Other Information                                                                                     |  | 36  
|                                                                                                               | 
|Item 6  Exhibits                                                                                              |  | 36  



2



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SENDTEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                      |  |               |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                      |  | March 31,2008 |             |   | December 31,2007 |  
|                                                                                                                                      |  | (Unaudited)   |             |   |                  |  
|ASSETS                                                                                                                                |  |               |             |   |                  |   |             |  
|Current assets                                                                                                                        |  |               |             |   |                  |   |             |  
|Cash                                                                                                                                  |  | $             | 3,466,987   |   |                  | $ | 4,408,969   |  
|Accounts receivable, less allowance for doubtful accounts of approximately $350,000 and $326,000, respectively                        |  |               | 11,635,063  |   |                  |   | 10,319,977  |  
|Prepaid expenses                                                                                                                      |  |               | 249,338     |   |                  |   | 219,704     |  
|                                                                                                                                      |  |               |             |   |                  |   |             |  
|Total current assets                                                                                                                  |  |               | 15,351,388  |   |                  |   | 14,948,650  |  
|Property and equipment, net                                                                                                           |  |               | 1,053,359   |   |                  |   | 1,082,462   |  
|Intangible assets, net                                                                                                                |  |               | 6,503,961   |   |                  |   | 6,760,696   |  
|Goodwill                                                                                                                              |  |               | 22,863,827  |   |                  |   | 22,863,827  |  
|Deferred financing and restructuring fees                                                                                             |  |               |            |   |                  |   | 306,969     |  
|Other assets                                                                                                                          |  |               | 20,329      |   |                  |   | 20,329      |  
|                                                                                                                                      |  |               |             |   |                  |   |             |  
|Total assets                                                                                                                          |  | $             | 45,792,864  |   |                  | $ | 45,982,933  |  
|                                                                                                                                      |  |               |             |   |                  |   |             |  
|                                                                                                                                      |  |              
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                  |  |               |             |   |                  |   |             |  
|Current liabilities                                                                                                                   |  |               |             |   |                  |   |             |  
|Accounts payable                                                                                                                      |  | $             | 9,995,939   |   |                  | $ | 8,723,727   |  
|Accrued expenses                                                                                                                      |  |               | 3,624,719   |   |                  |   | 4,524,025   |  
|Accrued compensation                                                                                                                  |  |               | 325,988     |   |                  |   | 321,031     |  
|Current portion of capital lease obligations                                                                                          |  |               | 47,462      |   |                  |   | 55,409      |  
|Deferred revenue                                                                                                                      |  |               | 1,497,505   |   |                  |   | 2,087,087   |  
|                                                                                                                                      |  |               |             |   |                  |   |             |  
|Total current liabilities                                                                                                             |  |               | 15,491,613  |   |                  |   | 15,711,279  |  
|Debentures payable, net of debt discount of $0 and $2,595,232, respectively                                                           |  |               | 14,368,300  |   |                  |   | 30,134,768  |  
|Capital lease obligations, net of current portion                                                                                     |  |               | 77,099      |   |                  |   | 16,404      |  
|Deferred rent                                                                                                                         |  |               | 93,296      |   |                  |   | 101,934     |  
|                                                                                                                                      |  |               |             |   |                  |   |             |  
|Total liabilities                                                                                                                     |  |               | 30,030,308  |   |                  |   | 45,964,385  |  
|Commitments and contingencies                                                                                                         |  |               |             |   |                  |   |             |  
|Stockholders equity                                                                                                                  |  |               |             |   |                  |   |             |  
|Series B Convertible Preferred stock  $.001 par value; 10,000,000 authorized; 10,207 shares issued and outstanding at March 31,
2008 |  |               | 10          |   |                  |   |            |  
|Common stock  $.001 par value; 190,000,000 shares authorized; 69,077,859 and 53,101,189 shares issued and outstanding,
respectively  |  |               | 69,078      |   |                  |   | 53,101      |  
|Additional paid in capital                                                                                                            |  |               | 95,511,833  |   |                  |   | 82,918,691  |  
|Accumulated deficit                                                                                                                   |  |               | (79,818,365 | ) |                  |   | (82,953,244 | )
|                                                                                                                                      |  |               |             |   |                  |   |             |  
|Total stockholders equity                                                                                                            |  |               | 15,762,556  |   |                  |   | 18,548      |  
|                                                                                                                                      |  |               |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                            |  | $             | 45,792,864  |   |                  | $ | 45,982,933  |  
|                                                                                                                                      |  |               |             |   |                  |   |             |  

See notes to unaudited condensed consolidated financial statements.



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SENDTEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007

(Unaudited)



|                                                                             |  |      |            |   |      |   |            |  
|---------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                             |  | 2008 |            |   | 2007 |  
|Revenues                                                                     |  | $    | 5,603,056  |   |      | $ | 9,192,074  |  
|Cost of revenues                                                             |  |      | 2,029,978  |   |      |   | 4,611,997  |  
|                                                                             |  |      |            |   |      |   |            |  
|Gross profit                                                                 |  |      | 3,573,078  |   |      |   | 4,580,077  |  
|                                                                             |  |      |            |   |      |   |            |  
|Operating expenses                                                           |  |      |            |   |      |   |            |  
|Salaries, wages and benefits                                                 |  |      | 2,758,669  |   |      |   | 3,000,597  |  
|Professional fees                                                            |  |      | 182,981    |   |      |   | 619,162    |  
|Other general and administrative                                             |  |      | 1,211,222  |   |      |   | 1,532,018  |  
|                                                                             |  |      |            |   |      |   |            |  
|Total operating expenses                                                     |  |      | 4,152,872  |   |      |   | 5,151,777  |  
|                                                                             |  |      |            |   |      |   |            |  
|Loss from operations                                                         |  |      | (579,794   | ) |      |   | (571,700   | )
|Other income (expense)                                                       |  |      |            |   |      |   |            |  
|Gain from troubled debt restructuring                                        |  |      | 6,661,990  |   |      |   |           |  
|Registration rights penalty                                                  |  |      | (42,000    | ) |      |   |           |  
|Interest income                                                              |  |      | 19,890     |   |      |   | 35,960     |  
|Interest expense                                                             |  |      | (2,925,207 | ) |      |   | (3,247,753 | )
|                                                                             |  |      |            |   |      |   |            |  
|Total other income (expense)                                                 |  |      | 3,714,673  |   |      |   | (3,211,793 | )
|                                                                             |  |      |            |   |      |   |            |  
|Net income (loss) before cumulative effect of change in accounting principle |  |      | 3,134,879  |   |      |   | (3,783,493 | )
|Cumulative effect of change in accounting principle                          |  |      |           |   |      |   | 88,500     |  
|                                                                             |  |      |            |   |      |   |            |  
|Net income (loss)                                                            |  | $    | 3,134,879  |   |      | $ | (3,694,993 | )
|                                                                             |  |      |            |   |      |   |            |  
|Net income (loss) per common share, basic and diluted:                       |  |      |            |   |      |   |            |  
|-Before cumulative effect of change in accounting principle                  |  | $    | 0.06       |   |      | $ | (0.07      | )
|-Cumulative effect of change in accounting principle                         |  | $    |           |   |      | $ |           |  
|                                                                             |  |      |            |   |      |   |            |  
|-Total                                                                       |  | $    | 0.06       |   |      | $ | (0.07      | )
|                                                                             |  |      |            |   |      |   |            |  
|Weighted average number of common shares outstanding  basic and diluted     |  |      | 56,889,512 |   |      |   | 51,826,629 |  
|                                                                             |  |      |            |   |      |   |            |  

See notes to unaudited condensed consolidated financial statements.



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SENDTEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)



|                                                                                         |  |                 |   |  |              |    |                          |                |            |                    |   |        |                     |   |            |   |  |   |             |   |  |   |           
|---------------------------------------------------------------------------------------- |  | --------------- | - |  | ------------ | -- | ------------------------ | -------------- | ---------- | ------------------ | - | ------ | ------------------- | - | ---------- | - |  | - | ----------- | - |  | - | ----------
|                                                                                         |  | Preferred Stock |   |  | Common Stock |    | AdditionalPaid-InCapital |                |            | AccumulatedDeficit |   |        | StockholdersEquity
|                                                                                         |  | NumberofShares  |   |  | Amount       |    |                          | NumberofShares |            | Amount             |   |        |                    
|Balance  January 1, 2008                                                                |  |                |   |  | $            |   |                          |                | 53,101,189 |                    | $ | 53,101 |                     | $ | 82,918,691 |   |  | $ | (82,953,244 | ) |  | $ | 18,548    
|Common stock issued in concurrent offering, net of costs of $38,205                      |  |                |   |  |              |   |                          |                | 10,036,670 |                    |   | 10,037 |                     |   | 1,156,158  |   |  |   |            |   |  |   | 1,166,195 
|Series B Preferred stock issued in troubled debt restructuring, net of costs of $582,465 |  | 10,801          |   |  |              | 11 |                          |                |           |                    |   |       |                     |   | 11,298,624 |   |  |   |            |   |  |   | 11,298,635
|Conversions of Series B Preferred stock into Common stock                                |  | (594            | ) |  |              | (1 | )                        |                | 5,940,000  |                    |   | 5,940  |                     |   | (5,939     | ) |  |   |            |   |  |   |          
|Amortization of stock based compensation                                                 |  |                |   |  |              |   |                          |                |           |                    |   |       |                     |   | 144,299    |   |  |   |            |   |  |   | 144,299   
|Net income (loss)                                                                        |  |                |   |  |              |   |                          |                |           |                    |   |       |                     |   |           |   |  |   | 3,134,879   |   |  |   | 3,134,879 
|                                                                                         |  |                 |   |  |              |    |                          |                |            |                    |   |        |                     |   |            |   |  |   |             |   |  |   |           
|Balance  March 31, 2008                                                                 |  | 10,207          |   |  | $            | 10 |                          |                | 69,077,859 |                    | $ | 69,078 |                     | $ | 95,511,833 |   |  | $ | (79,818,365 | ) |  | $ | 15,762,556
|                                                                                         |  |                 |   |  |              |    |                          |                |            |                    |   |        |                     |   |            |   |  |   |             |   |  |   |           

See notes to unaudited condensed consolidated financial statements.



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SENDTEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007

(Unaudited)



|                                                                                                              |  |      |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                              |  | 2008 |            |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                          |  |      |            |   |      |   |            |  
|Net income (loss) before cumulative effect of change in accounting principle                                  |  | $    | 3,134,879  |   |      | $ | (3,783,493 | )
|                                                                                                              |  |      |            |   |      |   |            |  
|                                                                                                              |  |     
|Adjustments to reconcile net income (loss) to net cash used in operating activities:                          |  |      |            |   |      |   |            |  
|Gain from troubled debt restructuring                                                                         |  |      | (6,661,990 | ) |      |   |           |  
|Depreciation and amortization                                                                                 |  |      | 387,524    |   |      |   | 421,046    |  
|Stock-based compensation                                                                                      |  |      | 144,299    |   |      |   | 197,263    |  
|Non-cash interest                                                                                             |  |      | 2,451,053  |   |      |   | 2,721,935  |  
|Provision for bad debt                                                                                        |  |      | 40,000     |   |      |   | 30,000     |  
|Registration rights penalty                                                                                   |  |      | 42,000     |   |      |   |           |  
|Changes in assets and liabilities:                                                                            |  |      |            |   |      |   |            |  
|Accounts receivable                                                                                           |  |      | (1,355,086 | ) |      |   | (1,059,032 | )
|Prepaid expenses and other assets                                                                             |  |      | (29,634    | ) |      |   | 16,305     |  
|Deferred financing and restructuring fees                                                                     |  |      | (306,969   | ) |      |   |           |  
|Accounts payable                                                                                              |  |      | 1,272,212  |   |      |   | 826,894    |  
|Accrued expenses                                                                                              |  |      | (622,469   | ) |      |   | 319,357    |  
|Accrued compensation                                                                                          |  |      | 4,957      |   |      |   | 37,323     |  
|Deferred rent                                                                                                 |  |      | (8,638     | ) |      |   | (5,418     | )
|Deferred revenue                                                                                              |  |      | (589,582   | ) |      |   | (464,413   | )
|                                                                                                              |  |      |            |   |      |   |            |  
|Total adjustments                                                                                             |  |      | (5,232,323 | ) |      |   | 3,041,260  |  
|                                                                                                              |  |      |            |   |      |   |            |  
|Net cash used in operating activities                                                                         |  |      | (2,097,444 | ) |      |   | (742,233   | )
|                                                                                                              |  |      |            |   |      |   |            |  
|                                                                                                              |  |     
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                          |  |      |            |   |      |   |            |  
|Purchase of property and equipment                                                                            |  |      | (11,803    | ) |      |   | (109,141   | )
|                                                                                                              |  |      |            |   |      |   |            |  
|Net cash used in investing activities                                                                         |  |      | (11,803    | ) |      |   | (109,141   | )
|                                                                                                              |  |      |            |   |      |   |            |  
|                                                                                                              |  |     
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                          |  |      |            |   |      |   |            |  
|Proceeds from sales of common stock                                                                           |  |      | 1,204,400  |   |      |   |           |  
|Repurchase and retirement of commons stock subject to redemption                                              |  |      |           |   |      |   | (92,000    | )
|Principal payments on capital lease obligations                                                               |  |      | (37,135    | ) |      |   | (29,248    | )
|                                                                                                              |  |      |            |   |      |   |            |  
|Net cash provided by (used in) financing activities                                                           |  |      | 1,167,265  |   |      |   | (121,248   | )
|                                                                                                              |  |      |            |   |      |   |            |  
|Net decrease in cash                                                                                          |  |      | (941,982   | ) |      |   | (972,622   | )
|Cash  beginning of period                                                                                    |  |      | 4,408,969  |   |      |   | 6,118,788  |  
|                                                                                                              |  |      |            |   |      |   |            |  
|Cash  end of period                                                                                          |  | $    | 3,466,987  |   |      | $ | 5,146,166  |  
|                                                                                                              |  |      |            |   |      |   |            |  
|                                                                                                              |  |     
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                              |  |      |            |   |      |   |            |  
|Cash paid during the periods for:                                                                             |  |      |            |   |      |   |            |  
|Interest                                                                                                      |  | $    | 594,164    |   |      | $ | 276,262    |  
|Income taxes                                                                                                  |  | $    | 2,210      |   |      | $ | 11,675     |  
|Non-cash investing and financing activities                                                                   |  |      |            |   |      |   |            |  
|Issuance of Series B preferred stock in exchange of debenture principal in connection with debt restructuring |  | $    | 11,881,100 |   |      | $ |           |  
|Issuance of common stock in connection with partial payments of interest                                      |  | $    |           |   |      | $ | 266,732    |  
|Conversion of Debentures Principal into common stock                                                          |  | $    |           |   |      | $ | 550,000    |  
|New capital lease obligation                                                                                  |  | $    | 89,883     |   |      | $ | 278,400    |  

See notes to unaudited condensed consolidated financial statements.



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SENDTEC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  BASIS OF PRESENTATION AND BUSINESS ORGANIZATION

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (the
SEC). Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements for the year ended
December 31, 2007, and notes thereto of SendTec, Inc., (the Company or SendTec) included in the Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007. The results of
operations for the three months ended March 31, 2008 are not necessarily indicative of the results for the full fiscal year ending December 31, 2008.

The unaudited condensed consolidated financial statements include SendTec, Inc. and its wholly owned subsidiaries SendTec Acquisition Corp. (STAC), RelationServe Access, Inc. (Access) and Freindsand.com, Inc.
(Friendsand). All material intercompany balances and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements.

Organization and description of business

The Company was originally formed as Chubasco Resources Corp.
(Chubasco) in the State of Nevada as an exploration stage company engaged in the business of mineral exploration. On June 13, 2005, Chubasco completed a reverse merger with RelationServe, Inc., (RelationServe), which was
accounted for as a recapitalization transaction. Relationserve was a Delaware corporation formed in March 2005 that operated a marketing business it acquired in a reverse acquisition in May 2005. RelationServe, through its wholly-owned subsidiary,
RelationServe Access, Inc. (Access) purchased certain assets and assumed certain liabilities of Omni Point Marketing LLC (Omni Point), and through its wholly-owned subsidiary, Friendsand.com Inc. (Friendsand),
acquired Friendsand LLC (Friendsand LLC). Chubasco changed its name to Relationserve Media, Inc., a Nevada corporation, following its merger with Relationserve, a Delaware corporation. On August 29, 2005, the Company completed a
reincorporation merger in which RelationServe Media, Inc. survived such merger as a Delaware corporation. Effective February 3, 2006, the Company completed its acquisition of the net assets and business of STAC. On July 17, 2006, the
Company changed its name from RelationServe Media, Inc. to SendTec, Inc.

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

NOTE 2  LIQUIDITY, FINANCIAL CONDITION, GOING CONCERN AND LEGAL MATTERS

The Company reported net income of approximately $3,135,000 for the three months ended March 31, 2008, including a non-cash gain from troubled debt restructuring of
$6,662,000. Therefore, the Company incurred a net loss before non-cash gains of $3,527,000 which includes an aggregate of approximately $3,065,000 in non-cash charges which principally includes:



|                              |  |   |          
|----------------------------- |  | - | ---------
|Non-cash interest             |  | $ | 2,451,000
|Depreciation and amortization |  |   | 388,000  
|Stock based compensation      |  |   | 144,000  
|Provision for bad debts       |  |   | 40,000   
|Registration rights penalty   |  |   | 42,000   
|                              |  |   |          
|Total non-cash charges        |  | $ | 3,065,000
|                              |  |   |          

On March 25, 2008, the Company and current debenture holders (the Holders) entered into a
recapitalization agreement (the Recapitalization Agreement) which provided, among other things, that the Holders exchange the Senior Secured Convertible Debentures due March 31, 2008 (the Debentures) with a then
outstanding principal amount of $32,730,000 into shares of the Companys Series B Convertible Preferred Stock (the Series B Preferred) and certain amended and restated Debentures (the Amended Debentures), and extended
the due date of the amended and restated Debentures for up to three years (see Note 7). This transaction has been accounted for as a troubled debt restructuring pursuant to SFAS No. 15, Accounting by Debtors and Creditors for Troubled
Debt Restructurings (SFAS No. 15), resulting in a non-cash gain of approximately $6,662,000. As a result of the new agreement, the Debentures have been reflected as a long term liability in the accompanying unaudited condensed
consolidated balance sheet.



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The Company believes that its current capital resources combined with revenues it expects to generate during the next
twelve months will enable it to fund its operating activities through March 31, 2009. The Company may seek to raise additional capital to fund the growth of its business and believes it has access to capital resources; however, the Company has
not secured any commitments for new financing at this time and cannot provide any assurance that it will be successful in its efforts to raise additional capital if considered necessary. The Company is currently restricted from incurring additional
indebtedness other than certain permitted indebtedness specified under the terms of the Amended Debentures.

Legal Proceedings

The Company is involved in certain claims and legal actions arising in the ordinary course of business. There can be no assurances that these matters will be resolved on
terms acceptable to the Company. In the opinion of management, based upon advice of counsel and consideration of all facts available at this time, the ultimate disposition of these matters are not expected to have a material adverse effect on the
financial position, results of operations or liquidity of the Company.

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

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

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



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

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

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

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



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

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

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

On September 28, 2006,
Wedbush Morgan Securities, Inc. (Wedbush) commenced arbitration against the Company seeking $500,000 in damages, plus interest and attorneys fees, as a result of an alleged breach of contract. On October 29, 2007 the
arbitrator awarded Wedbush $694,197, which the Company recorded during the year ended December 31, 2007. In December 2007, the Company filed a motion to vacate the arbitrators award in the United States District Court for the Central
District of California, and the motion was denied. In April 2008 the Company filed an appeal of the final arbitrators award.

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

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

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



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

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

NOTE 3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The unaudited condensed
consolidated financial statements include the accounts of SendTec, Inc. and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition

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

Internet advertising: Revenue from the distribution of Internet advertising, which principally includes the placement of banner ads and e-mail transmission services, is recognized when Internet users visit and complete actions at an
advertisers website. Revenue consists of the gross value of billings to clients, including the recovery of costs incurred to acquire online media required to execute client campaigns. The Company reports these revenues gross because it is
responsible for fulfillment of the service, has substantial latitude in setting price and assumes the credit risk for the entire amount of the sale, and it is responsible for the payment of all obligations incurred with media providers.

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

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

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

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



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Revenues by revenue stream are as follows:



|                      |  |                                     |           |      |   |          
|--------------------- |  | ----------------------------------- | --------- | ---- | - | ---------
|                      |  | For the three months endedMarch 31,
|                      |  | 2008                                |           | 2007
|Internet advertising  |  | $                                   | 2,789,080 |      | $ | 6,194,244
|Online search         |  |                                     | 1,583,299 |      |   | 1,191,148
|Direct response media |  |                                     | 527,949   |      |   | 598,709  
|Advertising programs  |  |                                     | 702,728   |      |   | 1,056,044
|Other                 |  |                                     |          |      |   | 151,929  
|                      |  |                                     |           |      |   |          
|                      |  | $                                   | 5,603,056 |      | $ | 9,192,074
|                      |  |                                     |           |      |   |          

Cost of Revenues

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

Cash and Cash Equivalents

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

Accounts Receivable

Accounts receivable are generally due 30 days from the invoice date. The Company has a policy of reserving for uncollectible accounts based on its best estimate of the
amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may
indicate that the realization of an account may be in doubt. Accounts are deemed past due when they are not paid in accordance with contractual terms. Account balances deemed to be uncollectible are charged to the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote. At March 31, 2008 and December 31, 2007, the Company established, based on a review of its outstanding balances, an allowance for doubtful accounts in the
amount of approximately $350,000 and $326,000, respectively.

Property and Equipment

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



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

Goodwill and Intangible Assets

The Company accounts for goodwill and intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires
that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. Goodwill represents



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the excess of the purchase price over the fair value of net assets acquired in business combinations. SFAS 142 requires that goodwill be tested for
impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. The Company
operates a single reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and
assumptions could materially affect the determination of fair value and/or goodwill impairment.

The Companys amortizable intangible assets are
comprised of customer relationships. These costs are being amortized using the straight-line method over their estimated useful lives of 8.5 years. During 2007, non-compete agreements were amortized over the underlying non-compete periods of between
3 to 5 years, until they were determined to be impaired in December 2007, at which time the Company wrote off the remaining unamortized value of the non-compete agreements.

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

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

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates. Significant estimates in 2008 and 2007 include the allowance for doubtful accounts, stock-based compensation, the useful life of property and equipment and intangible
assets, impairment of intangible assets and goodwill, troubled debt restructuring accounting, income taxes, and loss contingencies.

Fair Value of
Financial Instruments

The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses approximate
fair value based on the short-term maturity of these instruments.

Debentures

The Company accounts for debenture modifications in accordance with EITF 02-4, Determining Whether a Debtors Modification or Exchange of Debt Instruments Is Within the Scope of FASB Statement
No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings (SFAS No. 15). EITF 02-4 specifies that if the debtor is experiencing financial difficulty, and the creditor has granted a
concession, the restructuring is within the scope of SFAS No. 15. Otherwise the accounting for the restructuring falls under EITF 96-19, Debtors Accounting for a Modification of Exchange of Debt Instruments.

For debentures which do not fall under the provisions of SFAS No. 15, the Company accounts for conversion options embedded in convertible notes in accordance with
SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock (EITF 00-19). SFAS 133 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments in
accordance with EITF 00-19. SFAS 133 provides for an exception to this rule when convertible notes, as host instruments, are deemed to be conventional as that term is described in the implementation guidance under Appendix A to SFAS 133 and further
clarified in EITF 05-2 The Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19 and when conversion options are considered equity.

For debentures which do not fall under the provisions of SFAS No. 15, the Company accounts for convertible notes (deemed conventional) in accordance with the provisions of EITF (EITF) 98-5
Accounting for Convertible Securities with Beneficial Conversion Features, (EITF 98-5), and EITF 00-27 Application of EITF 98-5 to Certain Convertible Instruments. Accordingly, the Company records, as a discount
to convertible notes, the intrinsic value of such conversion options based upon the differences between the fair value of the



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underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these
arrangements are amortized over the term of the related debt to their earliest date of redemption.

Common Stock Purchase Warrants and Other Derivative
Financial Instruments

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

Registration Rights Agreements

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

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

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

On March 26, 2008, as a result of the Recapitalization Agreement, the Company issued shares of its Series B Preferred Stock that is also subject to a
registration rights agreement. The Company is required to file a registration statement within 90 days from March 26, 2008 and use best efforts to have it declared effective within 150 days from March 26, 2008. At March 31, 2008, the
Company recorded a registration rights penalty of $48,500 which is included in accrued expense in the accompanying unaudited condensed consolidated balance sheet.

Net Income (Loss) Per Share

In accordance with SFAS No. 128 Earnings Per Share, Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares of Common Stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of Common
Stock, Common Stock equivalents and potentially dilutive securities outstanding during each period. Diluted income (loss) per common share is not presented because it is anti-dilutive. The Companys Common Stock equivalents at March 31,
2008 and 2007, include the following:



|                                     |  |             |  |           
|------------------------------------ |  | ----------- |  | ----------
|                                     |  | 2008        |  | 2007      
|Options                              |  | 6,581,496   |  | 6,160,500 
|Warrants                             |  | 8,697,487   |  | 8,697,487 
|Convertible Series B Preferred stock |  | 102,070,000 |  |          
|Convertible Debentures               |  | 84,519,412  |  | 68,060,000
|                                     |  |             |  |           
|Total Common Stock equivalents       |  | 201,868,395 |  | 82,917,987
|                                     |  |             |  |           



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The Company included 3,230,730 Common Stock purchase warrants exercisable at $0.01 per share, in the table above in its
determination of basic and diluted loss per share for the three months ended March 31, 2008 and 2007, because the warrants are exercisable for nominal consideration.

Income Taxes

The Companys accounts for income taxes in accordance SFAS 109, Accounting for Income
Taxes. This approach requires recognition of income tax currently payable, as well as deferred tax assets and liabilities resulting from temporary differences by applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of assets and liabilities. SFAS 109 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using
a more likely than not standard. The Company assesses its deferred tax assets quarterly to determine if valuation allowances are required. See Note 11 for further discussion of the valuation allowances recorded in 2007 and 2008.

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

The
Company has not recognized any income tax expense (benefit) in the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2008 and 2007. Deferred tax assets, which principally arise from net
operating losses, are fully reserved due to managements assessment that it is more likely than not that the benefit of these assets will not be realized in future periods.

Stock-Based Compensation

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

Advertising

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

Advertising and promotional expenses are net of amounts reimbursed to the Company by its partners. Advertising costs were approximately $45,000 and $53,000 for the three
months ended March 31, 2008 and 2007, respectively, and are included in other general and administrative expenses in the consolidated statements of operations.

Concentration of Credit Risk

The Company maintains its cash in bank deposit accounts, which, at times, exceed federally
insured limits. At March 31, 2008 and December 31, 2007, the Company had approximately $3,467,000 and $4,409,000, respectively, in United States bank deposits, which exceed federally insured limits. The Company has not
experienced any losses in such accounts through March 31, 2008.



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Recent Accounting Pronouncements

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

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

In September 2006, the FASB issued SFAS 157 Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The
provisions of SFAS 157 are effective for the first fiscal year beginning after November 2007. The adoption of SFAS 157 did not impact the Companys financial statements.

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

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

In November 2006, the FASB ratified
EITF Issue No. 06-7, Issuers Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in SFAS Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities (EITF 06-7). At the time of issuance, an embedded conversion option in a convertible debt instrument may be required to be bifurcated from the debt instrument and accounted for separately by
the issuer as a derivative under SFAS 133, based on the application of EITF 00-19. Subsequent to the issuance of the convertible debt, facts may change and cause the embedded conversion option to no longer meet the conditions for separate accounting
as a derivative instrument, such as when the bifurcated instrument meets the conditions of Issue 00-19 to be classified in stockholders equity. Under EITF 06-7, when an embedded conversion option previously accounted for as a derivative under
SFAS 133 no longer meets the bifurcation criteria under that standard, an issuer shall disclose a description of the principal changes causing the embedded conversion option to no longer require bifurcation under SFAS 133 and the amount of the
liability for the conversion option reclassified to stockholders equity. EITF 06-7 is applicable to all previously bifurcated conversion options in convertible debt instruments that no longer meet the bifurcation criteria in SFAS 133 in
interim or annual periods beginning after December 15, 2006, regardless of whether the debt instrument was entered into prior or subsequent to the effective date of EITF 06-7.



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The adoption of EITF 06-7 did not impact the Companys consolidated financial position, results of operations or
cash flows.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of this statement did not impact the Companys consolidated
financial position, results of operations or cash flows.

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

NOTE 4  PROPERTY AND EQUIPMENT

Property and equipment consist of the following:



|                              |  |               |           |   |                  |   |           |  
|----------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                              |  | March 31,2008 |           |   | December 31,2007 |  
|Equipment                     |  | $             | 1,071,263 |   |                  | $ | 969,578   |  
|Furniture and fixtures        |  |               | 255,838   |   |                  |   | 255,838   |  
|Leasehold improvements        |  |               | 31,394    |   |                  |   | 31,394    |  
|Software                      |  |               | 679,275   |   |                  |   | 679,274   |  
|                              |  |               |           |   |                  |   |           |  
|Property and equipment        |  |               | 2,037,770 |   |                  |   | 1,936,084 |  
|Less accumulated depreciation |  |               | (984,411  | ) |                  |   | (853,622  | )
|                              |  |               |           |   |                  |   |           |  
|Property and equipment, net   |  | $             | 1,053,359 |   |                  | $ | 1,082,462 |  
|                              |  |               |           |   |                  |   |           |  

Depreciation expense was approximately $131,000 and $119,000 for the three months ended March 31, 2008 and
2007, respectively.

Fixed assets include $368,300 and $278,400 of equipment purchases that were financed under capital lease obligations as of
March 31, 2008 and December 31 2007, respectively, of which $89,900 and $278,400 were purchased during the three months ended March 31, 2008 and 2007, respectively. The accumulated depreciation on these assets amounted to $166,800 and
$142,400 as of March 31, 2008 and December 31, 2007, respectively.

NOTE 5  GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS

Goodwill and other intangible assets consist of the following:



|                               |  |               |            |   |                  |   |            |  
|------------------------------ |  | ------------- | ---------- | - | ---------------- | - | ---------- | -
|                               |  | March 31,2008 |            |   | December 31,2007 |  
|Goodwill                       |  | $             | 22,863,827 |   |                  | $ | 22,863,827 |  
|                               |  |               |            |   |                  |   |            |  
|Amortizable Intangible Assets: |  |               |            |   |                  |   |            |  
|Customer relationships         |  | $             | 8,729,000  |   |                  | $ | 8,729,000  |  
|Less accumulated amortization  |  |               | (2,225,039 | ) |                  |   | (1,968,304 | )
|                               |  |               |            |   |                  |   |            |  
|Intangible assets, net         |  | $             | 6,503,961  |   |                  | $ | 6,760,696  |  
|                               |  |               |            |   |                  |   |            |  

The Company, as of March 31, 2008, evaluated the carrying amount of its goodwill in accordance with SFAS 142
to determine whether circumstances indicate that the carrying amount of the goodwill exceeds its net realizable value. The Company also evaluated the carrying amounts of its amortizable intangible assets in accordance with SFAS 144 to determine
whether such carrying amounts exceed net realizable value. The Company does not believe that any material events or changes in its circumstances that occurred during the three months ended March 31, 2008, would indicate that the carrying amount
of its goodwill or amortizable intangibles exceed their fair value.

During 2007, non-compete agreements were amortized over the underlying non-compete
periods of between 3 to 5 years, until they were determined to be impaired in December 2007, at which time the Company wrote off the remaining unamortized value of the non-compete agreements.



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Making estimates about the carrying values of intangible assets requires management to exercise significant judgment. It
is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements, which management considered in formulating its
estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results regarding estimates of the carrying value of these intangibles could differ materially from the Companys estimates.

Amortization expense with respect to the customer relationships amounted to approximately $258,000 for the three months ended March 31, 2008. Amortization
expense with respect to the customer relationships and non-compete agreements amounted to approximately $302,000 for the three months ended March 31, 2007. Amortization expense subsequent to March 31, 2008 is as follows:



|                                                    |  |   |          
|--------------------------------------------------- |  | - | ---------
|Period from April 1, 2008 through December 31, 2008 |  | $ | 770,207  
|Years ending December 31:                           |  |   |          
|2009                                                |  |   | 1,026,941
|2010                                                |  |   | 1,026,941
|2011                                                |  |   | 1,026,941
|2012                                                |  |   | 1,026,941
|2013                                                |  |   | 1,026,941
|2014                                                |  |   | 599,049  
|                                                    |  |   |          
|                                                    |  | $ | 6,503,961
|                                                    |  |   |          

NOTE 6  ACCRUED EXPENSES

Accrued expenses are comprised of the following:



|                              |  |               |           |                  |   |          
|----------------------------- |  | ------------- | --------- | ---------------- | - | ---------
|                              |  | March 31,2008 |           | December 31,2007
|Legal contingencies liability |  | $             | 750,000   |                  | $ | 885,000  
|Media costs                   |  |               | 2,176,671 |                  |   | 2,441,905
|Debt restructuring fees       |  |               | 350,000   |                  |   |         
|Interest                      |  |               |          |                  |   | 901,367  
|Other                         |  |               | 348,048   |                  |   | 295,753  
|                              |  |               |           |                  |   |          
|Total accrued expenses        |  | $             | 3,624,719 |                  | $ | 4,524,025
|                              |  |               |           |                  |   |          

NOTE 7  DEBENTURES

In February 2006, STAC financed its purchase of SendTec, in part, by issuing the Senior Secured Convertible Debentures in the original principal amount of $34,950,000 with an original maturity date of October 31,
2009. The terms of the Debentures are pursuant to a Securities Purchase Agreement (the Securities Purchase Agreement). The Debentures were amended on November 10, 2006, to provide for a (i) reduction in the conversion price
from $1.50 per share to $.50 per share and (ii) change the maturity date from October 31, 2009 to March 31, 2008, in exchange for a release of previous instances of non-compliance with certain financial covenants. The modification of
the Debentures resulted in a constructive extinguishment of this instrument under its terms prior to the date of the modification. The STAC Debenture provided, among other things, for the Company to assume liability for the STAC Debentures on
February 3, 2006, the date of the consolidation of STAC (the Consolidation). Accordingly, the Company was obligated under the terms of the Securities Purchase Agreement, as amended, to repay $34,030,000 of the remaining principal balance
due on the STAC Debentures on March 31, 2008.

On March 25, 2008, the Company and current debenture holders (the Holders) entered
into a recapitalization agreement (the Recapitalization Agreement) which provided, among other things, that the Holders exchange the Senior Secured Convertible Debentures due March 31, 2008 (the Debentures) with a then
outstanding principal amount of $32,730,000 into shares of the Companys Series B Convertible Preferred Stock (the Series B Preferred) and certain amended and restated Debentures (the Amended Debentures). The Series B
Preferred has a stated value equal to the principal value of the Debentures exchanged ($1,700 per share of Series B Preferred). Each share of Series B Preferred is convertible into 10,000 common shares. The Series B Preferred will not earn any
dividends, has a liquidation preference equal to its stated value, has common stock voting rights on an as converted basis subject to certain limitations, is protected for certain anti-dilution



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provisions, and is covered by a registration rights agreement, which provides for certain liquidated damages in the event the Company is not successful in
registering shares underlying potential conversions of the Series B Preferred into common shares of the Company. The exchange of Debentures into Series B Preferred is expected to occur in two separate closings. The first closing (the First
Closing) occurred on March 26, 2008 (the First Closing Date). The second closing (the Second Closing) would occur promptly following the satisfaction of certain conditions, including shareholder approval to amend
the Companys certificate of incorporation to increase the authorized common shares of the Company to 500,000,000.

At the First Closing, the Holders
exchanged $18,361,700 aggregate principal amount of the Debentures (on a pro rata basis) into 10,801 shares of Series B Preferred. The Series B Preferred issued at the First Closing is convertible into a number of shares of Common Stock such that
the aggregate number of shares of Common Stock of the Company outstanding (on an as converted basis) after the First Closing equaled approximately 190,000,000 inclusive of (i) 108,000,000 shares of Common Stock issuable upon conversion of the
Series B Preferred, (ii) approximately 57,000,000 shares of Common Stock then outstanding, and (iii) up to 25,000,000 shares of Common Stock that may be issued in connection with the Concurrent Offering (as defined below) prior to the
Second Closing. Amended Debentures with an aggregate principal amount of $14,368,300 remain outstanding after the First Closing. The Amended Debentures are non-interest bearing.

At the Second Closing, the remaining Amended Debentures will be exchanged for 8,447 shares of Series B Preferred with a stated value of $14,368,300 convertible into approximately 84,529,412 shares of Common Stock of
the Company; provided, however, that in the event the Company has not raised a minimum of $5 million (in the aggregate) of gross proceeds in connection with the Concurrent Offering, only $3,368,300 of the Amended Debentures will be exchanged for
1,978 shares of Series B Preferred. The remaining $11 million of Amended Debentures, as amended at the time of the Second Closing (the Residual Notes), will remain outstanding. The Residual Notes shall: (i) have a term of three
(3) years; (ii) not bear interest; (iii) convert into Common Stock at a price of $0.17 per share; (iv) contain no financial covenants; (v) be a senior and secured obligation of the Company; (vi) have pari-passu
anti-dilution protection to the Series B Preferred; and (vii) automatically convert into Series B Preferred when and if the Company raises $5 million in aggregate gross proceeds in connection with the Concurrent Offering (as defined below).

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

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

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

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



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Interest expense is as follows:



|                      |  |                                     |           |      |   |          
|--------------------- |  | ----------------------------------- | --------- | ---- | - | ---------
|                      |  | For the three months endedMarch 31,
|                      |  | 2008                                |           | 2007
|Discount amortization |  | $                                   | 2,451,053 |      | $ | 2,721,935
|Contractual interest  |  |                                     | 469,134   |      |   | 517,962  
|                      |  |                                     |           |      |   |          
|Debenture interest    |  | $                                   | 2,920,187 |      | $ | 3,239,897
|                      |  |                                     |           |      |   |          

Debt Restructuring Accounting

The Company accounted for the Recapitalization Agreement pursuant to SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings (SFAS No. 15), which required the Company to reduce the
carrying amount of the old debt by the fair value of the shares of Series B Preferred stock granted, determine whether the carrying value of the remaining debt exceeded the future cash payments of the new debt, and if so, record a gain on the excess
of the carrying of the remaining debt over the future cash payments of the new debt. As a result of the application of SFAS No. 15, the Company recorded a gain of approximately $6.7 million, which is reflected in the unaudited condensed
consolidated statement of operations for the three months ended March 31, 2008.

SFAS No. 15 also requires that the new debt be recorded as the
total of future cash payments specified by the Recapitalization Agreement, and no interest expense shall be recognized for any period between March 26, 2008, the date of the First Closing under the Recapitalization Agreement, and the maturity
date of March 31, 2011. At March 31, 2008, the future cash payments of the debentures were $14,368,300, and is reflected in the accompanying unaudited condensed consolidated balance sheet.

NOTE 8  CAPITAL LEASE OBLIGATIONS

During March 2008, June
2007, and April 2006, the Company entered into various capital leases with an aggregate present value of $89,900, $36,900 and $241,500, respectively. In accordance with SFAS 13, Accounting for Leases (SFAS 13), the present
value of the minimum lease payments was calculated using discount rates ranging from 11% to 17%. Lease payments, including amounts representing interest, amounted to $39,043 for the three months ended March 31, 2008. The leases require monthly
payments of approximately $14,200, including interest at discount rates ranging from 11% to 17% and are due at various times through April 2011.

Minimum
lease payments due subsequent to March 31, 2008 are as follows:



|                                                    |  |   |         |  
|--------------------------------------------------- |  | - | ------- | -
|Period from April 1, 2008 through December 31, 2008 |  | $ | 46,026  |  
|Year ending December 31, 2009                       |  |   | 48,320  |  
|Year ending December 31, 2010                       |  |   | 41,876  |  
|Year ending December 31, 2011                       |  |   | 8,955   |  
|                                                    |  |   |         |  
|Total minimum lease payments                        |  |   | 145,177 |  
|Less amounts representing interest                  |  |   | (20,616 | )
|                                                    |  |   |         |  
|Present value of minimum lease payments             |  |   | 124,561 |  
|Less current portion                                |  |   | (47,462 | )
|                                                    |  |   |         |  
|Long-term portion                                   |  | $ | 77,099  |  
|                                                    |  |   |         |  

NOTE 9  SIGNIFICANT CUSTOMERS

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

During the three
months ended March 31, 2008, one customers sales represented approximately 17.6% of the Companys net revenue. Two customers represented approximately 30.1% and 19.1%, respectively of total accounts receivable at March 31, 2008.



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During the three months ended March 31, 2007, one customers sales (Cosmetique, Inc.) represented approximately
27.2% of the Companys net revenue. Two customers represented approximately 12.0% and 10.8%, respectively of total accounts receivable at March 31, 2007.

Two customers accounts receivable balances represented approximately 21.5% and 14.7%, respectively, of total accounts receivable at December 31, 2007.

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

NOTE 10  RELATED PARTY TRANSACTIONS

The CEO and Chairman of the Board of Directors of the Company also serves on the board of directors of a company that is a customer of the Company. There were no revenues
from this customer during the three months ended March 31, 2008 and 2007, and there was no accounts receivable from this customer as of March 31, 2008. Accounts receivable from this customer amounted to $3,750 as of December 31, 2007.

The Company pays fees and commissions to a company whose management includes someone who is a member of the Companys Board of Directors. For the
three months ended March 31, 2008 and 2007, the Company incurred $70,556 and $32,172, respectively, in fees and commissions. At March 31, 2008, $45,847 of such fees and commissions were included in accrued expenses in the accompanying
unaudited condensed consolidated balance sheet. At December 31, 2007, $23,674 of such fees and commissions were included in accounts payable and $20,792 of such fees and commissions were included in accrued expenses in the accompanying balance
sheet.

The Company pays fees in connection with the Debenture refinancing to a company whose principal shareholder is a member of the Companys Board
of Directors. For the three months ended March 31, 2008, the Company incurred $34,474 in fees and expense reimbursements in connection with the Debenture refinancing. At March 31, 2008, $49,020 of such fees and expenses were included in
accounts payable in the accompanying unaudited condensed consolidated balance sheet. At December 31, 2007, there were no such fees and expenses that were unpaid. There were no fees incurred during the three months ended March 31, 2007.

NOTE 11  INCOME TAXES

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

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

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

The Company, as a result of having evaluated all available evidence as required under SFAS 109, fully reserved for its remaining
net deferred tax assets at March 31, 2008 and December 31, 2007, after consideration of utilization of a portion of these deferred tax assets realized as a result of the gain from the troubled debt restructuring.

NOTE 12  COMMITMENTS AND CONTINGENCIES

Legal matters

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

Employment agreements

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



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Effective February 3, 2006, the Company entered into an employment agreement with Paul Soltoff, its Chief Executive
Officer for an initial five-year term, which will be renewed for additional one-year terms thereafter, unless written notice of intent not to renew is provided by either party. The agreement provides for an annual base salary of no less than
$400,000, as well as such incentive compensation and bonuses as the Board of Directors may determine and to which he may become entitled to pursuant to an incentive compensation or bonus program.

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

Pursuant to the terms of the amended agreement, the Company may terminate Mr. Soltoffs employment for good
cause, as defined in the agreement. If Mr. Soltoffs employment is terminated by reason of his death or disability or other than for good cause, or if Mr. Soltoff terminates his employment for good reason, as defined in the agreement,
the Company will pay his base salary through the date of termination and will pay Mr. Soltoff severance in the amount of two times his then current base salary. The Company determined that the actuarial present value of the death benefit was
approximately $18,700 at March 31, 2008, and has reflected this amount in the caption accrued compensation in the accompanying unaudited condensed consolidated balance sheet. In addition, the Company will pay Mr. Soltoff for
all accrued but unused vacation time through the date of termination, and will reimburse him for all reasonable business expenses incurred prior to termination, but not reimbursed as of the termination date.

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

In addition, the Company has employment contracts
with four of its executives for initial terms between three and five years, which will be renewed for additional one-year terms thereafter, unless written notice of intent not to renew is provided by the respective party. The agreements provide for
annual aggregate base salaries totaling $781,000, as well as incentive compensation and bonuses as the Board of Directors may determine and to which they may become entitled to pursuant to an incentive compensation or bonus program

Operating leases

The Company leases its office facilities under two
non-cancelable leases expiring in February 2010 and December 2009, respectively. Minimum annual lease payments due at March 31, 2008 are approximately as follows:



|                                                    |  |   |        
|--------------------------------------------------- |  | - | -------
|Period from April 1, 2008 through December 31, 2008 |  | $ | 342,200
|Years ending December 31:                           |  |   |        
|2009                                                |  |   | 426,900
|2010                                                |  |   | 60,100 
|                                                    |  |   |        
|Total minimum lease payments                        |  | $ | 829,200
|                                                    |  |   |        

Rent expense for the three months ended March 31, 2008 and 2007 was approximately $113,700 and $97,200,
respectively, including $20,200 and $3,700, respectively, for a share of operating expenses. Rent expense is being recorded on the straight line basis over the term of the lease in accordance with SFAS No. 13, Accounting for Leases.

NOTE 13  STOCKHOLDERS EQUITY

Authorized shares

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



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

Series B Preferred Stock

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

On March 31, 2008, a holder of Series B Preferred Stock exercised conversion rights on 594 shares of Series B Preferred, and the
Company issued 5,940,000 shares of its Common Stock.

Common Stock Purchase Warrants

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

As described below, Debenture Holders to date have elected to exercise an aggregate of 6,850,877 of their common stock purchase warrants resulting
in the issuance of an aggregate of 6,821,460 of common stock, including the effects of having net-share settled certain of the warrants through the holders use of the cashless exercise feature. At March 31, 2008, 3,230,730 warrants
remained outstanding with respect to this financing transaction.

On September 27, 2006 the Company issued five year warrants to purchase an aggregate
of 250,000 shares of the Companys Common Stock exercisable at $0.60 per share with an aggregate fair value of $57,500. The Company estimated the fair value of the Warrants using the Black Scholes pricing model with the following assumptions:
Fair Value of Common Stock $0.36, Risk Free Interest Rate 4.56%, Volatility 90%, Term 5 years. The warrants are exercisable from September 27, 2006 through September 26, 2011, either through a cash exercise or by use of a cashless exercise
provision. The warrants were issued to a consultant for corporate financial advisory services. On March 26, 2008, as a result of the Recapitalization Agreement, the Company reduced the exercise price of the warrants from $0.60 to $0.20 per
share. The change did not affect the fair value of the warrants.

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

At March 31, 2008, the Company has 8,697,487 common stock purchase warrants
outstanding with a weighted average exercise price of $0.52 per share. There were no changes in common stock purchase warrants during the three months ended March 31, 2008.



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Common Stock

On
March 26, 2008, the Company issued 10,036,670 shares of its Common Stock, in connection with the Concurrent Offering, for an aggregate price of $1,204,400 ($0.12 per share).

On March 31, 2008, a holder of Series B Preferred Stock exercised conversion rights on 594 shares of Series B Preferred, and the Company issued 5,940,000 shares of its Common Stock.

NOTE 14  SHARE BASED PAYMENTS

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

A description of each the Companys plans
that are in effect during the reporting period, including the number of shares reserved for issuance and shares that remain available for grant as of March 31, 2008 is as follows:

2005 Incentive Stock Plan

On June 21, 2005, the Company adopted the 2005 Incentive Stock Plan (the 2005
Plan), which was approved by its stockholders on August 9, 2005. The Plan provides for the grant of options and the issuance of restricted shares. An aggregate of 3,300,000 shares of common stock is reserved for issuance under the Plan.
Both incentive and nonqualified stock options may be granted under the Plan. The Plan terminates on June 21, 2015. The exercise price of options granted pursuant to this plan may not be less than 100% of the fair market value of the
Companys common stock on the date of grant and the term of options granted under this plan may not exceed 10 years. For holders of 10% or more of the combined voting power of all classes of the Companys stock, options may not be granted
at less than 110% of the fair value of the Companys common stock on the date of grant and the term of such options may not exceed 5 years. As of March 31, 2008, an aggregate of 2,893,498 shares and options have been granted under the
plan, leaving an aggregate of 406,502 shares available for future issuance. As of December 31, 2007, an aggregate of 3,008,500 shares and options have been granted under the plan.

2005 Directors Plan

On August 9, 2005, by written consent, a majority of the Companys stockholders
approved the Companys 2005 Non-Employee Directors Stock Option Plan (the 2005 Directors Plan). The Directors Plan provides for the grant of up to 2,000,000 non-qualified stock options to non-employee directors of the Company. The
plan also provides for (a) each newly elected or appointed director (other than the Chairman) to be granted options to purchase 50,000 shares of common stock, of which 50% would become exercisable on the date which is one year from the date of
grant and the remaining 50% would become exercisable on the date which is two years from the date of grant, and (b) for each such director to be an granted an additional option to purchase 50,000 shares of common stock on the second anniversary
of their initial election or appointment of which 50% would become exercisable on the date which is one year from the date of grant and the remaining 50% would become exercisable on the date which is two years from the date of grant. All options
granted under the Directors Plan have a maximum term of ten years, subject to accelerated vesting in the event of a change in control of the Company. As of March 31, 2008, an aggregate of 1,150,000 options have been granted under the plan,
leaving an aggregate of 850,000 shares available for future issuance. As of December 31, 2007, an aggregate of 1,200,000 shares and options have been granted under the plan.

2006 Incentive Stock Plan

The 2006 Incentive Plan was adopted by the Board of Directors on March 3, 2006 (the
2006 Plan) and received stockholder approval on July 10, 2006. An aggregate of 2,700,000 shares of Common Stock have been reserved for issuance under the 2006 Incentive Plan. Under the 2006 Incentive Plan, the Company is authorized
to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options and restricted stock. The 2006 Incentive Plan is currently administered by the Compensation Committee of the Board of Directors. As
of March 31, 2008, an aggregate of 2,537,998 shares and options have been granted under the plan, leaving an aggregate of 162,002 shares available for future issuance. As of December 31, 2007, an aggregate of 2,566,000 shares and options
have been granted under the plan.



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##### Table of Contents

2007 Incentive Stock Plans

The Companys Board of Directors adopted the 2007 Incentive Stock Plan A and the 2007 Incentive Stock Plan B on November 15, 2006, (the 2007 Plans). An aggregate of 3,000,000 shares of Common Stock have been reserved
for issuance under each of the 2007 Plans. Under the 2007 Plans, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options and restricted stock. The 2007 Plans are
currently administered by the Compensation Committee of the Board of Directors. The Company has not made any grants under such plans. On April 28, 208, the Board of Directors approved an increase in the number of shares of Common Stock reserved
for issuance under each of the 2007 Plans to 5,000,000 shares. These amendments to the 2007 Plans are subject to stockholder approval.

There were no share
based payments made during the three months ended March 31, 2008.

A summary of the status of the Companys outstanding stock options as of
March 31, 2008 and changes during the three months ended March 31, 2008 are as follows:



|                                      |  |                  |   |  |                              |      |                                                    |     
|------------------------------------- |  | ---------------- | - |  | ---------------------------- | ---- | -------------------------------------------------- | ----
|                                      |  | Number ofoptions |   |  | Weightedaverageexerciseprice |      | Weightedaverageremainingcontractualterm (in years)
|Outstanding at January 1, 2008        |  | 6,774,500        |   |  | $                            | 1.13 |                                                    |     
|Granted                               |  |                 |   |  |                              |     |                                                    |     
|Exercised                             |  |                 |   |  |                              |     |                                                    |     
|Forfeited or Expired                  |  | (193,004         | ) |  | $                            | 0.75 |                                                    |     
|                                      |  |                  |   |  |                              |      |                                                    |     
|Outstanding at March 31, 2008         |  | 6,581,496        |   |  | $                            | 1.14 |                                                    | 7.85
|                                      |  |                  |   |  |                              |      |                                                    |     
|Options exercisable at March 31, 2008 |  | 3,013,947        |   |  | $                            | 1.67 |                                                    | 7.07
|                                      |  |                  |   |  |                              |      |                                                    |     

At March 31, 2008, there was no intrinsic value of options outstanding based on the March 31, 2008
closing price of the Company common stock ($0.07 per share).

NOTE 15  SUBSEQUENT EVENTS

Issuance of Securities

On April 1, 2008, a holder of Series B
Preferred Stock exercised conversion rights on 173 shares of Series B Preferred, and the Company issued 1,730,000 shares of its Common Stock.

On
April 3, 2008, holders of Series B Preferred Stock exercised conversion rights on 60.8236 shares of Series B Preferred, and the Company issued 608,236 shares of its Common Stock.

On April 8, 2008, a holder of Series B Preferred Stock exercised conversion rights on 485 shares of Series B Preferred, and the Company issued 4,850,000 shares of its Common Stock.



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FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Generally,
the words believes, anticipates, may, will, should, expect, intend,
estimate, continue, and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements which include, but are not limited to, statements
concerning the Companys expectations regarding its working capital requirements, financing requirements, business prospects, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical facts. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the SEC from
time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. The Company undertakes no
obligation to update these forward-looking statements. In addition, the forward-looking statements in this Quarterly Report on Form 10-Q involve known and unknown risks, uncertainties and other factors that could cause the actual results,
performance or achievements of the Company to differ materially from those expressed in or implied by the forward-looking statements contained herein.



|ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
|------- | ----------------------------------------------------------

Overview

We are a holding company organized for the purpose of acquiring, owning, and managing various marketing and advertising
businesses, primarily involving the Internet. Since February 2006 the SendTec direct response marketing services business of our wholly-owned subsidiary, SendTec Acquisition Corp. (STAC), has been our sole line of business. On
March 17, 2006, our Board of Directors authorized us to change our name to SendTec, Inc. and on July 10, 2006 our stockholders approved the name change. Our results of operations for the three months ended March 31, 2008 consist of
STAC and the Company.

Results of Operations

Three
months ended March 31, 2008 compared to three months ended March 31, 2007

Revenues were approximately $5.6 million for the three months ended
March 31, 2008, as compared to revenues of $9.2 million for the three months ended March 31, 2007, a decrease of $3.6 million or 39.0%. A summary of the components of our revenue are as follows:



|                      |  |                                     |           |                     |   |           |  |   |            |   |  |                  |    |  |       |   
|--------------------- |  | ----------------------------------- | --------- | ------------------- | - | --------- |  | - | ---------- | - |  | ---------------- | -- |  | ----- | --
|                      |  | For the three months endedMarch 31, |           | Increase (Decrease) |  
|                      |  | 2008                                |           | 2007                |   | Amount    |  |   | %          |   |  | % oftotalrevenue |   
|Internet advertising  |  | $                                   | 2,789,080 |                     | $ | 6,194,244 |  | $ | (3,405,164 | ) |  | (55.0            | )% |  | (37.0 | )%
|Online search         |  |                                     | 1,583,299 |                     |   | 1,191,148 |  |   | 392,151    |   |  | 32.9             | %  |  | 4.3   | % 
|Direct response media |  |                                     | 527,949   |                     |   | 598,709   |  |   | (70,760    | ) |  | (11.8            | )% |  | (0.8  | )%
|Advertising programs  |  |                                     | 702,728   |                     |   | 1,056,044 |  |   | (353,316   | ) |  | (33.5            | )% |  | (3.8  | )%
|Other                 |  |                                     |          |                     |   | 151,929   |  |   | (151,929   | ) |  | (100.0           | )% |  | (1.7  | )%
|                      |  |                                     |           |                     |   |           |  |   |            |   |  |                  |    |  |       |   
|Revenues              |  | $                                   | 5,603,056 |                     | $ | 9,192,074 |  | $ | (3,589,018 | ) |  | (39.0            | )% |  | (39.0 | )%
|                      |  |                                     |           |                     |   |           |  |   |            |   |  |                  |    |  |       |   



| |  |  | Our internet advertising revenues decreased because one of our largest clients in 2007 ended their advertising campaign in September 2007. Accordingly, this revenue
did not recur in 2008. For the three months ended March 31, 2007 this revenue totaled $2.5 million, and we do not expect this revenue to recur in subsequent periods.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our online search revenues increased 32.9% from the prior year, principally from the addition of new clients.
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Our direct response media revenues decreased from a reduction in media spending from existing clients.
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Our advertising program revenues decreased due to fewer projects being completed during the three months ended March 31, 2008 as compared to the prior year
period.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Costs of revenues were approximately $2.0 million for the three months ended March 31, 2008. Costs of revenues
principally include the costs of media providers and direct production costs. The cost of revenues of our internet advertising was $1.9 million, and $0.1 million was from our offline advertising programs. There are no costs of revenues from online
search, direct response media, and branded media, since those revenue streams are reported as revenue net of related costs. Costs of revenues were approximately $4.6 million for the three months ended March 31, 2007. The cost of revenues of our
internet advertising was $4.3 million, and $0.3 million was from our offline advertising programs.

Gross profit decreased approximately $1.0 million to
$3.6 million for the three months ended March 31, 2008 from gross profit of $4.6 million for the comparable prior year period. Gross profit was approximately $3.6 million for the three months ended March 31, 2008, or 63.8% of revenues. The
decrease in gross profit is due in part to the decrease in revenue and in part due to the change in the mix of components of our revenues. Gross profit from our internet advertising business was $0.8 million, or 29.1% of our internet advertising
revenues for the three months ended March 31, 2008, while our gross profit from offline advertising programs was $0.7 million, or 92.6% of offline advertising program revenue. Gross profit from our other revenue sources was $1.6 million for
online search, and $0.5 million for direct response media. Gross profit was approximately $4.6 million for the three months ended March 31, 2007, or 49.8% of revenues. Gross profit from our internet advertising business was $1.8 million, or
29.8% of our internet advertising revenues for the three months ended March 31, 2007, while our gross profit from offline advertising programs was $0.8 million, or 75.0% of offline advertising program revenue. Gross profit from our other
revenue sources was $1.2 million for online search, $0.6 million for direct response media, and $0.2 million from other sources.

Salaries, wages and
benefits expenses were approximately $2.8 million for the three months ended March 31, 2008, as compared to $3.0 million for the comparable prior year period, a decrease of $0.2 million, or 8.1%. The decrease is primarily due to the decrease in
staff in the areas of sales, account management, operations, and information technology. As a percentage of net revenues, salaries, wages and benefits increased to 49.2% of revenues for the three months ended March 31, 2008 from 32.6% of
revenues for the comparable prior year period.

Professional fees decreased approximately $0.4 million to $0.2 million for the three months ended
March 31, 2008 as compared to $0.6 million for the comparable prior year period. The decrease is primarily due to lower professional fees related to litigation costs.

Other, general and administrative expenses decreased approximately $0.3 million to $1.2 million for the three months ended March 31, 2008, as compared to $1.5 million for the comparable prior year period. The
decrease is primarily due to the decrease in loss contingencies related to the settlements of our lawsuits. Our other general and administrative expenses as a percentage of revenues were 21.6% for the three months ended March 31, 2008, as
compared to 16.7% of revenues for the comparable prior year period.

The components of other general and administrative expenses were as follows:



|                                                |  |                                     |           |      |   |          
|----------------------------------------------- |  | ----------------------------------- | --------- | ---- | - | ---------
|                                                |  | For the three months endedMarch 31,
|                                                |  | 2008                                |           | 2007
|Depreciation and amortization                   |  | $                                   | 387,524   |      | $ | 421,046  
|Travel                                          |  |                                     | 92,896    |      |   | 108,776  
|Marketing expenses                              |  |                                     | 44,947    |      |   | 54,493   
|Rent                                            |  |                                     | 113,726   |      |   | 97,249   
|Internet bandwidth                              |  |                                     | 83,768    |      |   | 133,416  
|Commissions                                     |  |                                     | 157,350   |      |   | 149,675  
|Bad debts expense                               |  |                                     | 40,000    |      |   | 30,000   
|Other                                           |  |                                     | 291,011   |      |   | 537,363  
|                                                |  |                                     |           |      |   |          
|Total other general and administrative expenses |  | $                                   | 1,211,222 |      | $ | 1,532,018
|                                                |  |                                     |           |      |   |          

Operating losses increased approximately $8,000 to an operating loss of $580,000 for the three months ended
March 31, 2008, from $572,000 for the three months ended March 31, 2007. The increase in the operating loss is the result of the decrease in our gross profit of $1.0 million, the decrease in our salaries wages and benefits of $0.2 million,
the decrease in our professional fees of $0.4 million, and the decrease in our other, general and administrative expenses of $0.3 million.

Other income
(expense) increased $6.9 million to other income of $3.7 million for the three months ended March 31, 2008 from other expense of $3.2 million for the comparable prior year period. It is comprised of the following:



| |  |  | Gain from troubled debt restructuring  we recorded a gain of approximately $6.7 million on the recapitalization agreement for the restructure of our
debentures during the three months ended March 31, 2008. The gain is non-cash in nature. We did not have any such transaction during the three months ended March 31, 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Interest income  we earned approximately $20,000 in interest on bank deposits for the three months ended March 31, 2008, as compared to $36,000 for the
three months ended March 31, 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense  interest expense decreased $0.3 million to $2.9 million for the three months ended March 31, 2008 from $3.2 million for the comparable
prior year period. The decrease is due in part to amortization of the debt discount as a result of the restructuring of our Debentures in March 2008, and in part to conversions during 2007 of Debentures into our Common Stock. We incurred total
interest expense on the debentures of approximately $2.9 million for the three months ended March 31, 2008. Included in interest expense is $0.5 million of interest that will require payment to our Debenture holders and a non-cash interest
charge of $2.5 million to amortize the debt discount and deferred finance fees as well as $12,000 of imputed interest. We incurred total interest expense on the Debentures of approximately $3.2 million for the three months ended March 31, 2007.
Included in interest expense is $0.5 million of interest that will require payment to our Debenture holders and a non-cash interest charge of $2.7 million to amortize the debt discount.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Registration rights penalty  we entered into an agreement to register the resale of the shares of Common Stock held by our Debenture holders, and preferred
stockholders, as well as those shares that would be issuable if our Debenture holders converted our Debentures and exercised warrants that they hold into shares of our Common Stock. The agreement stipulated that if the registration statement was not
filed and declared effective within certain contractual timeframes we would be subject to a registration rights penalty. The registration statement for the shares was declared effective on July 14, 2006. A new registration statement for the
additional shares of Common Stock issuable upon conversion of our Debentures as a result of the restructuring, effective November 10, 2006, was declared effective on April 12, 2007. In addition, shares issued pursuant to the
Recapitalization Agreement on March 26, 2008 are subject to the registration rights agreement. During the three months ended March 31, 2008, management believes the probability of such penalty is minimal and has estimated the amount of the
penalty for all stock issue to have increased by $42,000. The reduction in the registration rights penalty for the three months ended March 31, 2007 has been presented as a cumulative effect of a change in accounting principle in the
accompanying unaudited condensed consolidated statement of operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our provision for income taxes (benefits) is zero in both
periods. For the three months ended March 31, 2008 and 2007, a provision for income taxes was not made because after evaluating all available evidence, we believe that a valuation allowance is necessary to offset against any potential deferred
tax assets.

We reported net income of approximately $3.1 million for the three months ended March 31, 2008, compared to a loss from operations of
approximately $3.8 million for the three months ended March 31, 2007. Included in the net income for the three months ended March 31, 2008 is a non-cash gain of $6.7 million and non-cash expenses totaling $3.1 million. Included in the net
loss for the three months ended March 31, 2007 are non-cash expenses totaling $3.4 million.

Effective January 1, 2006, we adopted FSP EITF
00-19-2, Accounting for Registration Payment Arrangements. The adoption of this pronouncement did not have a material effect on our financial statements. As a result of the adoption, we recorded a reduction in the registration rights
penalty of $88,500, which is presented as a cumulative effect of change in accounting principle in the accompanying unaudited condensed consolidated statement of operations for the three months ended March 31, 2007.

We reported net income of approximately $3.1 million for the three months ended March 31, 2008, compared to a net loss of $3.7 million for the three months ended
March 31, 2007. Included in the net income for the three months ended March 31, 2008 is a non-cash gain of $6.7 million and non-cash expenses totaling $3.2 million. Included in the net loss for the three months ended March 31, 2007
are non-cash expenses totaling $3.4 million, and a cumulative effect of change in accounting principle of $88,500.

Liquidity and Capital Resources

We generated approximately a $3.1 million income from operations for the three months ended March 31, 2008, which includes an aggregate of
approximately $6.7 million of a non-cash gain and $3.1 million in non-cash charges relating to non-cash interest of $2.5 million, depreciation and amortization of $0.4 million, stock based compensation of $0.1 million, a provision for doubtful
accounts of $40 thousand, and a registration rights penalty of $42 thousand.



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On March 26, 2008, the Company and our Debenture holders (the Holders) entered into a recapitalization
agreement (the Recapitalization Agreement) which provides for, among other things, the conversion of certain Debenture principal into our Preferred Shares, and extends the due date of the remaining Debenture principal for up to three
years.

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

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

Promptly after the First Closing, we are required to use our best efforts to call and hold a meeting of our stockholders to increase
our authorized Common Stock to 500,000,000 shares.

At the Second Closing, the remaining Amended Debentures will be exchanged for Series B Preferred with a
stated value of $14,368,300 convertible into approximately 84,529,412 shares of our Common Stock; provided, however, that in the event we have not raised a minimum of $5,000,000 (in the aggregate) of gross proceeds in connection with the Concurrent
Offering (defined below) on or before the Second Closing, only $3,368,300 of Amended Debentures will be exchanged for Series B Preferred. The remaining $11,000,000 of Amended Debentures, as amended at the time of the Second Closing (the
Residual Notes), will remain outstanding. The Residual Notes shall: (i) have a term of three (3) years; (ii) not bear interest; (iii) convert into Common Stock at a price of $0.17 per share; (iv) contain no
financial covenants; (v) be a senior and secured obligation of ours; and (vi) have pari-passu anti-dilution protection to the Series B Preferred. In such case, the residual $11,000,000 principal amount of Residual Notes shall remain
outstanding as three-year convertible debt with no coupon; provided, however, that the new debt shall automatically convert into Series B Preferred when and if we raise $5,000,000 in connection with the Concurrent Offering (defined below).

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

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



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

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

We integrated our newly acquired
business, STAC, into our existing operations and believe that our current capital resources and resources available from STAC will enable us to sustain operations through March 31, 2009. We may look to raise additional capital to fund the
expansion of our business and believe we have access to capital resources; however, we have not secured any commitments for new financing at this time and we cannot provide any assurance that we will be successful in our efforts to raise additional
capital if considered necessary. We are restricted from incurring additional indebtedness, other than certain permitted indebtedness, as long as our Debentures remain outstanding.

In July 2006 and April 2007, we successfully completed registrations for resale of certain shares of Common Stock, as required pursuant to our agreements with our Debenture holders and holders of our Series A
Preferred Stock. We are required to maintain the effectiveness of these registration statements until such time that all of the registered shares have been sold by the selling stockholders. We are required to successfully complete registration of
our Common Stock issued or issuable to our Debenture holders in connection with the Recapitalization Agreement and we are also required to maintain the effectiveness of the registration statement covering those shares through March 2011.

Net cash flows used in operating activities for the three months ended March 31, 2008 were $2.1 million as compared to net cash used in operating activities of
$0.7 million for the three months ended March 31, 2007. For the three months ended March 31, 2008, our net income from operations of approximately $3.1 million, adjusted for a non-cash gain of $6.7 million and non-cash charges totaling
$3.1 million, used $0.5 million in cash. Changes in assets and liabilities used $1.6 million in cash. For the three months ended March 31, 2007, our net loss from continuing operations of approximately $3.8 million, adjusted for non-cash items
totaling $3.4 million, used $0.4 million in cash. Changes in assets and liabilities used $0.3 million in cash.

Net cash flows used in investing activities
for the three months ended March 31, 2008 were $12,000 as compared to net cash used in investing activities of $0.1 million for the three months ended March 31, 2007. For the three months ended March 31, 2008 we used cash to purchase
$12,000 of property and equipment. For the three months ended March 31, 2007 we cash to purchase property and equipment of $0.1 million.

Net cash
flows provided by financing activities for the three months ended March 31, 2008 were $1.2 million as compared to net cash used in financing activities of $0.1 million for the three months ended March 31, 2007. For the three months ended
March 31, 2008, we received proceeds from the sale of our common stock of $1.2 million, and we made principal payments on capital lease obligations of $37,000. For the three months ended March 31, 2007, we repurchased and retired common
stock that was subject to redemption of $0.1 million, and we made principal payments on capital lease obligations of $29,000.

We reported a net decrease
in cash for the three months ended March 31, 2008 of $0.9 million as compared to a net decrease in cash of $1.0 million for the three months ended March 31, 2007. At March 31, 2008 we had cash on hand of $3.5 million.

Critical Accounting Policies

Our consolidated financial statements
and accompanying notes are prepared in accordance with GAAP, which requires management to exercise its judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of commitments and contingencies at the date of the financial statements.



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The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates in the three months ended March 31, 2008 and 2007 include the allowance for doubtful accounts, stock-based
compensation, the useful life of property and equipment and intangible assets, impairment of intangible assets and goodwill, troubled debt restructuring, income taxes, and loss contingencies. We have also adopted certain policies with respect to our
recognition of revenue that we believe are consistent with the guidance provided under Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 104.

We base our estimates and judgments on a variety of factors, including our historical experience, knowledge of the business and industry, current and expected economic conditions, the attributes of our products and
services, regulatory environment, and in certain cases, the results of outside appraisals. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that
modifications are necessary.

While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound
accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.

A description of significant accounting policies that require us to make estimates and assumptions in the preparation of our consolidated financial statements is as
follows:

Revenue Recognition  We follow the guidance of the SECs Staff Accounting Bulletin 104 for revenue recognition. In general, we record
revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. Certain of our revenue is
reported on a gross basis, while certain other revenue is reported on a net basis, net of related costs. Credits or refunds are recognized when they are determinable and estimable. The following policies reflect specific criteria for our various
revenues streams:

Internet advertising: Revenue from the distribution of Internet advertising, which principally includes the
placement of banner ads and e-mail transmission of services, is recognized when Internet users visit and complete actions at an advertisers website. Revenue consists of the gross value of billings to clients, including the recovery of costs
incurred to acquire online media required to execute client campaigns. We report these revenues gross because we are responsible for fulfillment of the service, have substantial latitude in setting price and assume the credit risk for the entire
amount of the sale, and we are responsible for the payment of all obligations incurred with media providers.

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

Direct response media: Revenue derived from the purchase
and tracking of direct response media, such as television and radio commercials, is recognized on a net basis when the associated media is aired. In many cases, the amount we bill to clients significantly exceeds the amount of revenue that is earned
due to the existence of various pass-through charges such as the cost of the television and radio media. Amounts received in advance of media airings are deferred and included in deferred revenue in the accompanying balance sheet. We report these
revenues on a net basis since amounts earned are based on a fixed percentage of the selling price.

Advertising
programs: Revenue generated from the production of direct response advertising programs, such as infomercials, is recognized on the completed contract method when such programs are complete and available for airing. Production activities
generally take eight to 12 weeks and we usually collect amounts in advance and at various points throughout the production process. Amounts received from customers prior to completion of commercials are included in deferred revenue and direct costs
associated with the production of commercials in process are deferred and included within other current assets in the accompanying balance sheet. In addition, revenues from creative services, third party research, retainer fees, and strategic
consulting are included in this category. We report these revenues gross because we are responsible for the fulfillment of the service.

Intangible assets
consist of customer relationships, and deferred finance fees. Deferred finance fees are amortized over the lives of the underlying Debentures using the interest method. We review the carrying value of intangibles and other long-lived assets for
impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. With respect to the valuation



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of our goodwill, we considered a variety of factors including our market capitalization adjusted for a control premium and a discounted cash flow forecast to
determine the enterprise value of our business using the income approach. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If
such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.

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

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS No. 109). SFAS No. 109 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and
tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. SFAS No. 109 additionally requires the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.

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

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Interest Rate Risk

The primary objective of our investing activities is to preserve capital while at the same time maximizing yields
without significantly increasing risk. Our interest income is sensitive to changes in the general level of U.S. interest rates.We invest our excess cash in U.S. government insured overnight securities in order to protect and preserve our
invested funds. We have not used derivative financial instruments. Investing in U.S. government securities may produce less income than investing in other marketable securities, but minimize our risk to market value fluctuations.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our management, including our principal executive officer and principal accounting officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We carry out a variety of on-going
procedures, under the supervision and with the participation of management, including our principal executive officer and principal accounting officer, to evaluate the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2008.



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There have been no significant changes in our internal controls over financial reporting during our most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Sarbanes-Oxley
Implementation

During 2007 the management of SendTec, Inc has completed an evaluation and assessment of the Companys system of Internal Control Over
Financial Reporting (ICOFR). This review was conducted in accordance with the PCAOB pronouncement titled AS5 utilizing a top-down, risk based approach. Management selected the COSO small company internal control framework as the basis and bench mark
for the internal control review. Management is responsible for establishing and maintaining an adequate system of ICOFR.

Management has identified a
comprehensive list of risks and has specifically focused on risks related to financial reporting and disclosure. Management also reviewed the existence and effectiveness of controls at the entity and transaction level. Based on their evaluation and
assessment, management believes that the Companys system of ICOFR is effective as of March 31, 2008.

PART II OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

We are involved in certain claims and legal
actions arising in the ordinary course of business. There can be no assurances that these matters will be resolved on terms acceptable us. In the opinion of our management, based upon advice of counsel and consideration of all facts available at
this time, the ultimate disposition of these matters are not expected to have a material adverse effect on our financial position, results of operations or liquidity.

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

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

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



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

Pursuant to an Asset Purchase Agreement, dated as of June 6, 2006, relating to certain of our discontinued operations, we believe the
purchaser, Come & Stay, S.A., is required to assume certain liability with respect to the LeadClick matter noted in the preceding paragraph; however, Come & Stay, S.A. has contested its liability. As a result, we commenced an
arbitration proceeding before the International Chamber of Commerce seeking to have Come & Stay, S.A. assume liability for amounts that we paid to LeadClick, as mentioned in the preceding paragraph.

On or about August 31, 2006, an action was commenced in the United States District Court for the Southern District of Florida (Case No. 06-61327) by Richard F.
Thompson, as the putative class representative, against us and certain of our former officers and directors alleging securities laws violations in connection with the purchase of our stock during the period from May 24, 2005 to August 2006. The
named plaintiff in the case previously filed suit against us, as an individual, in State Court in Indiana, which action was dismissed in July 2006. The Florida District Court permitted the plaintiff to file an amended complaint and on
November 13, 2006, plaintiff filed a First Amended Class Action Complaint (the First Amended Complaint) adding an additional plaintiff, L. Alan Jacoby, who purportedly purchased 10,000 shares of our Common Stock in the
open market, and naming additional former and present officers and directors of SendTec and others as defendants. The First Amended Complaint, styled as a class action, alleges violations of Section 11 and Section 12(2) of the Securities
Act of 1933, as amended (the "Securities Act") and Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act"), and Rule 10b-5 promulgated thereunder. Plaintiffs claim, among other things, violations of the
various acts: (a) by selling securities through persons who were not registered as agents and/or broker dealers with the Securities Exchange Commission or the States of Florida or Indiana and were not affiliated as an agent or representative of
any broker/dealer; (b) by failing to disclose to purchasers of RelationServe Media, Inc. stock that they were selling securities of RelationServe stock through unregistered agents and broker/dealers was in violation of state and federal
securities laws which caused a substantial contingent liability for claims of rescission by investors and exposing RelationServe to substantial legal fees, criminal and civil liability which would have a material adverse impact to the
RelationServes financial condition; (c) by failing to disclose that in July 2005 RelationServes Chief Executive Officer and Chief Operating Officer received evidence of accusations of employee theft of data and employee kickbacks
had been made and the matter was so material that CEO hired an outside attorney to investigate the matter; (d) failing to disclose that a former director has previously been sued by stockholders of two other corporations; and (e) by
failing to disclose that financial statements beginning the third quarter of 2005 were false and misleading as a senior officer Richard Hill, had directed that finance recognize income in the third quarter in violation of the Sarbanes-Oxley Act of
2002. The invoices directed to be recorded either did not exist or were otherwise untraceable, cancelled, or were never shipped, with the exception of just a few (adjustments to income that would be required as a result of the allegations, if any,
relate to certain discontinued operations). In addition to the claims of securities law violations, plaintiffs claim violation of Section 20(a) of the Exchange Act as to controlling persons of SendTec, violations of the Florida Securities Act,
violations of the Indiana Securities Act, sales of unregistered, non-exempt securities, violation of anti-fraud provisions under Indiana law, deception under Indiana law, and fraud. Plaintiffs seek rescission, damages, treble damages, punitive
damages, compensatory damages, interest, costs, and attorneys fees.

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



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

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

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

On September 28, 2006, Wedbush Morgan Securities, Inc. (Wedbush) commenced
arbitration against us seeking $500,000 in damages, plus interest and attorneys fees, as a result of an alleged breach of contract. On October 29, 2007, the arbitrator awarded Wedbush $694,197, which we recorded during the year ended
December 31, 2007. In December 2007, we filed a motion to vacate the arbitrators award in the United States District Court for the Central District of California, and the motion was denied. In April 2008 we filed an appeal of the final
arbitrators award.

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

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

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



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

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



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

There have been no material changes in our risk
factors from the information provided in our Risk Factors included in Item 6, Managements Discussion and Analysis or Plan of Operation in our Annual Report on Form 10-KSB for the fiscal year ended December 31,
2007.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|------- | ------------------------------------------------------------

On
March 26, 2008, Debenture holders exchanged $18,361,700 of Debenture principal for 10,801 shares of the Companys Series B Preferred stock, pursuant to the First Closing. These shares were issued to existing holders of the Company's
securities pursuant to an exemption from registration under Section 3(a)(9) of the Securities Act of 1933, as amended.

On March 26, 2008, the
Company issued 10,036,670 shares of its Common Stock, in connection with the Concurrent Offering, for an aggregate price of $1,204,400 ($0.12 per share). These shares were issued to existing holders of the Company's securities pursuant to an
exemption from registration under Section 3(a)(9) of the Securities Act of 1933, as amended.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



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

None.



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

None.



|ITEM 6. | EXHIBITS
|------- | --------

A. Exhibits



|    |  |                                                                                                                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 |  | Amended and Restated Certificate of Incorporation of RelationServe, Inc. dated August 29, 2005 (incorporated herein by referenced to Exhibit 3.1 to the Companys Current Report on
Form 8-K filed with the Commission on September 2, 2005).                                
|    | 
|3.2 |  | Amended and Restated By-Laws of RelationServe Media, Inc. (incorporated herein by reference to Exhibit 3.2 to the Companys Current Report on Form 8-K filed with the Commission on
September 2, 2005).                                                                      
|    | 
|3.3 |  | Amendment to Amended and Restated By-Laws of RelationServe Media, Inc. (incorporated herein by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed with the
Commission on December 5, 2005).                                                          
|    | 
|3.4 |  | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of SendTec, dated November 15, 2006 (incorporated herein by reference to Exhibit 3.4 to the Companys
Registration Statement on Form SB-2, filed with the Commission on December 22, 2006).
|    | 
|3.5 |  | Form of Certificate of Designation of the Series B Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Companys current Report on Form 8-K filed with the
Commission on March 28, 2008).                                                    



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##### Table of Contents

|     |  |                                                                                                                                                                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Form of Recapitalization Agreement, dated as of March 25, 2008, by and among the Company, STAC and the Agent (incorporated herein by reference to Exhibit 10.1 to the Companys
current Report on Form 8-K filed with the Commission on March 28, 2008).
|     | 
|10.2 |  | Form of Amended and Restated Senior Secured convertible Debenture (incorporated herein by reference to Exhibit 10.2 to the Companys current Report on Form 8-K filed with the Commission
on March 28, 2008).                                           
|     | 
|10.3 |  | Form of Amendment to STAC Security Agreement, dated as of March 26, 2008, by and between STAC and the Agent (incorporated herein by reference to Exhibit 10.3 to the Companys current
Report on Form 8-K filed with the Commission on March 28, 2008). 
|     | 
|31.1 |  | Section 302 Certification of the Chief Executive Officer*                                                                                                                                                                                               
|     | 
|31.2 |  | Section 302 Certification of the Chief Financial Officer*                                                                                                                                                                                               
|     | 
|32.1 |  | Section 906 Certification of Chief Executive Officer*                                                                                                                                                                                                   
|     | 
|32.2 |  | Section 906 Certification of Chief Financial and Accounting Officer*                                                                                                                                                                                    



|* | Filed herewith
|- | --------------



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SIGNATURES

In
accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|             |  |               |  |                                                                   
|------------ |  | ------------- |  | ------------------------------------------------------------------
|             |  | SendTec, Inc.
|             |  |              
|May 15, 2008 |  | By:           |  | /s/ Paul Soltoff                                                  
|             |  |               |  | Paul Soltoff Chief Executive Officer (Principal
Executive Officer)
|             |  |               |  |                                                                   
|May 15, 2008 |  | By:           |  | /s/ Donald Gould                                                  
|             |  |               |  | Donald Gould (Principal Financial
Officer)                        



38