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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-KSB



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



For the fiscal year ended December 31, 2003



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: 0-20995



AXTIVE CORPORATION

(Exact name of
small business issuer as specified in its charter)



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|DELAWARE                                                       |  | 13-3778895                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



5001 LBJ FREEWAY,
SUITE 275

DALLAS, TEXAS 75244

(Address of principal executive offices)



(972) 560-6328

(Issuers telephone number)



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



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



COMMON STOCK, PAR VALUE $0.01 PER SHARE

REDEEMABLE WARRANTS, EACH TO PURCHASE ONE SHARE OF COMMON STOCK

(Title of Class)



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



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of the issuers knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ̈



The issuers revenue for its most recent fiscal year was approximately $8.8 million.



The aggregate market value of the issuers common stock, $0.01 par value, held by non-affiliates as of March 31, 2004, based on the average bid and asked price of the common stock was approximately $2.5 million.



As of March 31, 2004, the issuer had 37,536,018 shares of common stock
outstanding.



DOCUMENTS INCORPORATED BY REFERENCE: None



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TABLE OF CONTENTS



|           |  |          |  |                                                                                                                 |  |     
|---------- |  | -------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |          |  |                                                                                                                 |  | Page
|           |  |          | 
|Part I     |  |          |  |                                                                                                                 |  |     
|           |  |          | 
|           |  | Item 1.  |  | Description of Business                                                                                         |  | 1   
|           |  | Item 2.  |  | Description of Property                                                                                         |  | 14  
|           |  | Item 3.  |  | Legal Proceedings                                                                                               |  | 15  
|           |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 17  
|           |  |          | 
|Part II    |  |          |  |                                                                                                                 |  |     
|           |  |          | 
|           |  | Item 5.  |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 18  
|           |  | Item 6.  |  | Managements Discussion and Analysis or Plan of Operation                                                       |  | 21  
|           |  | Item 7.  |  | Financial Statements                                                                                            |  | 28  
|           |  | Item 8.  |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                            |  | 57  
|           |  | Item 8A. |  | Controls and Procedures                                                                                         |  | 57  
|           |  |          | 
|Part III   |  |          |  |                                                                                                                 |  |     
|           |  |          | 
|           |  | Item 9.  |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act |  | 58  
|           |  | Item 10. |  | Executive Compensation                                                                                          |  | 61  
|           |  | Item 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 63  
|           |  | Item 12. |  | Certain Relationships and Related Transactions                                                                  |  | 66  
|           |  | Item 13. |  | Exhibits and Reports on Form 8-K                                                                                |  | 69  
|           |  | Item 14. |  | Principal Accountant Fees and Services                                                                          |  | 73  
|           | 
|Signatures |  | 74      



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PART I



|ITEM 1. | DESCRIPTION OF BUSINESS
|------- | -----------------------



GENERAL



In this Annual Report on Form 10-KSB, we will refer to Axtive Corporation, a Delaware corporation, as Axtive, Company, we, us and our.  Prior to October 28,
2002, the Company was known as Edge Technology Group, Inc. Throughout this Annual Report where prior reports included a reference to Edge in a historical context, the reference to Edge has been changed to Axtive.



Axtive Corporation was incorporated in Delaware in July 1994 and commenced
operations in January 1995. Axtive is a publicly traded company (OTC: AXTC.OB). On December 23, 2003, the Company effected a 1-for-10 reverse share split of all of its common stock. Unless otherwise indicated in this report, all share numbers
reflect the 1-for-10 reverse share split for all periods reported.



Our business model is to acquire technology companies that deliver software products and related professional services to middle-market companies. We currently offer products and services that improve the utilization of business information
for middle-market companies within the United States. We expect that current and prospective customers will benefit from integrated business application solutions that are delivered through portal technology or as traditional licensed products. Our
acquisitions target companies with existing strategic relationships with Oracle, IBM or Microsoft that will allow us to take advantage of partnership opportunities available only to those select parties. The technology companies targeted for
acquisition are those that operate within the following business sectors and operating business units: (1) Information Technology (IT) Professional Services; (2) Business Application Software (BAS) comprised of six product
groups; and (3) Application Services and Management.



Our
acquisitions have included ThinkSpark, a professional services firm specializing in the installation and integration of technology solutions from Oracle Corporation; VirtuallyThere, a web services firm; UDT Consulting, a professional services firm
specializing in the installation, integration and application of software solutions from IBM, Informix and Microsoft; and Media Resolutions, an application and managed hosting services provider.



Initial development of our business model has involved the acquisition of IT
Professional Services and Application Services and Management firms that have existing relationships with numerous middle-market customers. Subsequent acquisitions are expected to target companies that service or offer software products operating on
Oracle, IBM or Microsoft database technologies that support the application service delivery channel. Nearly all operations are expected to continue within each operating business unit while a small corporate staff will interface with the capital
markets, formulate and manage our overall strategic objectives and oversee all mergers and acquisitions.



BUSINESS STRATEGY



Our
business strategy is to bring together complementary software-related companies to offer our customers a complete end-to-end solution for their information technology needs. Our targeted customers are an estimated 150,000 middle-market companies
with software and consulting needs. We currently focus on markets primarily within the U.S.



PRODUCT AND SERVICE OFFERINGS



IT Professional Services



IT Professional
Services consist of implementation, integration and development of custom technology applications. In 2002, IT Professional Services generated $536 billion in global revenue and approximately $224 billion in U.S. revenue.1Market research firm Yankee Group projected a 6% annual growth rate for 2003,2and

---

|1 | IT Services Market Declines, TechWeb News, May 13, 2003.
|- | ----------------------------------------------------------



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International Data Corporation (IDC) predicts a growth rate for the sector of 9% for 2004.3This is a highly fragmented market with industry leader IBM Global Services controlling 7.5%, the five largest market
participants controlling less than 20%, the top 400 global corporations controlling less than 50% and over 14,000 small-to-medium sized firms controlling the remaining market share of over 50%.4IDCs chief research officer predicts a 4.9% increase in worldwide IT spending in 2004.5Particularly, North America will see an increase of 3.9% growth in IT Spending.6Soundview Technology cites that IT service providers should have a strong year due to an increasing demand for business process outsourcing services and
application integration work particularly fueled by rising government spending.7We believe that increasing demand
for business-process-outsourcing services and application-integration work, along with rising government spending, should add up to a strong year for a number of IT services providers.



The IT Professional Services sector is currently experiencing a period of significant change, which may create immense
opportunity for proactive entrepreneurial companies. After a multi-year period of record-setting sales through 2000, the sector is still projected to grow, but at a slower pace. Many participants were not prepared for decelerating growth and a
changing environment.



We will continue to serve the needs of
middle-market businesses, initially within the United States. Our management estimates that U.S. middle-market companies were responsible for $62 billion of the U.S. revenue in this sector. We generally define middle-market companies as those that
generate between $10 million and $2 billion in annual revenue and typically employ between 100 and 10,000 persons. There are approximately 150,000 middle-market companies in the United States that we plan to target as potential customers. In
addition, because of the fragmented market for these services, thousands of medium-sized market participants are both our potential competitors for the $62 billion in revenue from U.S. middle-market customers and potentially acquisition targets.
Gartner has indicated that IT spending by middle-market companies will be growing in the coming years.8



We provide IT project and staffing solutions that include planning,
design, deployment, consulting and integration and support services based upon industry-leading Oracle, IBM/Informix and Microsoft database technologies to meet the needs of middle market customers. In addition to database consulting, we offer
technology training, system services and product sales that augment our core IT professional services practices.



Business Application Software



Business application software companies develop, publish and support specific software applications and suites of applications. AMR Research reports that
enterprise software buyers spent $41 billion in 2002 and were estimated to spend $46 billion in 2003.9Furthermore,
studies directed by SmithBarney indicate that a considerable number of CIOs are ready to spend additional budget dollars on database projects.10Additionally, the market for certain types of BAS is changing significantly. In 2001, customer relationship management software (CRM) spending accounted for 29% of BAS spending and will
account for 38% of BAS spending by 2006.11Supply-chain and product life-cycle management software accounted for 20%
of BAS spending in 2001 and is expected to increase to 30% by 2006.12Spending for enterprise resource planning
(ERP) made up 47% of the BAS market in

---

|2 | IT Consulting, Integration Expected to Grow, TechWeb News, March 18, 2003.
|- | ----------------------------------------------------------------------------



|3 | IT services Outlook Improves, VARBusiness,January 7, 2003.
|- | ------------------------------------------------------------



|4 | IT Services Market Declines, TechWeb News, May 13, 2003.
|- | ----------------------------------------------------------



|5 | IDC Projects 2004 Conservative IT Spending Growth of 4.9%; Could Be Higher, VARBusiness, December 12, 2003.
|- | ---------------------------------------------------------------------------------------------------------------



|6 | Ibid.
|- | -----



|7 | Report: IT Services Market Strong In 2004, InformationWeek, January 9, 2004.
|- | ------------------------------------------------------------------------------



|8 | Being Stuck In The Middle Might Be The Right Place, VARBusiness, January 21, 2003.
|- | ------------------------------------------------------------------------------------



|9 | Study Finds Growth In Enterprise Software Market, InformationWeek, May 31, 2002.
|- | --------------------------------------------------------------------------------



|10 | IT Spending Rising, ChannelWeb, February 27, 2004.
|-- | ----------------------------------------------------



|11 | Study Finds Growth In Enterprise Software Market, InformationWeek, May 31, 2002.
|-- | --------------------------------------------------------------------------------



|12 | Ibid.
|-- | -----



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2001, but is expected to shrink to 27% by 2006.13IDC predicts worldwide sales of database software, relational and object-relational database management systems to reach $20 billion by 2006.14



A new term and application for software, enterprise performance management (or EPM), was introduced by AMR Research and described as the
application of the future. EPM is the convergence of existing application areas toward improving the overall performance of the company.15We view this convergence as integral to our business strategy because customers will be able to connect disparate systems in order to draw valuable business conclusions.



Our value proposition for BAS is similar to IT Professional Services in that
both involve integration, implementation and scale to middle-market segments. BAS products typically fall into one of three categories: strategic; operational; or transactional. The typical challenge experienced across all segments of the middle
market is that disparate software applications utilized across all three product categories do not communicate with one another.



We have identified six middle-market business application software product categories that the Company expects to pursue through the course of future
acquisitions and partnerships consisting of Enterprise Operations, Enterprise Intelligence, E-Business Applications, Collaborative Applications, Content and Knowledge Management and Internet Services. These categories are designed to meet the needs
of six targeted industries: financial services; healthcare; light manufacturing; energy/utilities; and wholesale/retail and services.



| |  | Enterprise Operations  consisting of accounting, human resources management, benefits management, workforce management, contract and revenue management, aggregation
services and professional service automation services. Our model focuses on the ability to take these disparate but common Enterprise Operations systems and use all data sources as efficiently as possible by minimizing the duplication of entries.
Streamlining these data operations allows companies to reduce overhead costs associated with redundant systems and the staffing required for those systems.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Enterprise Intelligence  consisting of on-line analytical processing, database (multidimensional and relational), data processing, data mining, costing, budgeting and
forecasting products. With the data input and stored by the Enterprise Operations product category, retrieval and presentation of that data falls in the realm of Enterprise Intelligence products. Because this use of data is the critical component in
the guidance and direction of business processes and decisions, we expect to sell and deliver applications that allow companies to make timely decisions and share the information necessary for proper profit management.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | E-Business Applications  consisting of customer relationship management, sales force automation, commerce analysis, order taking, transactional back-office,
commerce-enabled portals and procurement applications. We plan to use these applications to help customers track their sales activities, make customer service more efficient and implement effective marketing campaigns, for example. The primary focus
of CRM is customer service, with issues ranging from order fulfillment to customer support. All customer interaction touch points are maintained in the CRM system with the sole intent of providing positive customer interaction and thereby increasing
customer loyalty. With fierce competition on the web, we will allow companies to set themselves apart by providing a personalized web browsing experience. Today, a page that includes status information for pending orders and shipments will welcome
corporate buyers. eProcurement programs help companies buy everyday items such as paper, office machinery and cleaning supplies via the web and help manufacturers support a supply chain system with timely refills of required parts.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Collaborative Applications  consisting of voice, fax and video over IP, scheduling, calendaring, integrated messaging, whiteboard conferencing, project management and
document editing applications. These applications facilitate both internal and external communication. We expect to use collaborative
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|13 | Ibid.
|-- | -----



|14 | UPDATE - IDC: Database software market heading to $20 billion, ITWorld, May 23, 2002.
|-- | -------------------------------------------------------------------------------------



|15 | Software is HOT  Highlights from AMRs Spring Conference in the Desert, USBancorp Piper Jaffery, May 31, 2002.
|-- | ---------------------------------------------------------------------------------------------------------------



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applications, for example, to assist a company and its partners in speeding product design and making
manufacturing more efficient. This allows product development to occur in far-flung locations via the sharing of documents in virtual workspaces. Project managers are able to use virtual workspaces for design work and hold project meetings via
digital conference rooms. Supply chain processes are aided by the ability to link employees, customers and suppliers and provide real-time communication during the ordering process. These products also help manage the general communication of
events, calendaring and document tracking for internal process. Externally, these products can be used to expedite customer service and sales presentations.



| |  | Content and Knowledge Management  consisting of spidering, digital rights management, data security, encryption, authentication library services and push
technology applications. Content and knowledge management applications are expected to provide our customers with the ability to maintain online catalogs and other mission-critical data for internal and external consumption. Digitalization of legacy
content allows prior-period investments to be brought into the current web environment and thereby extend the useful life of that data. Electronic content is vulnerable to piracy and misuse at the instant content is downloaded and accessed. Digital
rights management strategies and tools extend protection beyond the firewall restricting who can do what to the electronic content. Protecting intellectual property through digital rights management is a core requirement of e-business
infrastructure. We expect to employee these technologies to facilitate the efficient sharing of digital information in order to increase productivity for customers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Internet Services  consisting of portals, email, facsimile and wireless services. These services provide much of the content delivered in a website portal. These items
are typically generic, informative and time-sensitive. The sources of the content may be the company itself or external feeds such as news agencies or stock markets. In addition, with the introduction of advanced wireless technologies, mobile
customers are well positioned to access content and services anytime, anywhere. We create value for customers through enabling the use of these technologies for use within customer organizations. A key to a company successfully using such services
is the ability to control or push the content from specific providers selected by management, for example, the Vice President of Marketing may want all sales people to have content pushed to them from specific publications as their main source of
industry news so as to maintain a standard of information provided. Or the company may establish a portal with content from specific providers for outside services such as travel, shipping and banking.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Application Services and Management



IDC expects steady growth in worldwide spending on application service
provider (or ASP) services from $11.1 billion in 2001 to over $20 billion by 2006.16This growth is
attributable to companies of all sizes looking to outsource maintenance and competitive IT management activities in order to focus on more strategic activities.17Our strategic objective is to use our ASP delivery mechanism to implement IT solutions for all segments of the middle market. We deliver BAS products either through an ASP or on-site, linking
end-users to applications with significantly lower cost by accessing them through a universal external point. We also offer third-party software and applications through both an ASP and license agreement. Our professional services operating business
units generate recurring revenue by providing ASP hosting contracts as part of their ongoing maintenance and upgrades for customers.



MARKETING AND DISTRIBUTION



Through our operating companies, we market our IT Professional Services, Business Application Software and Application Services and Management outsourcing
to middle-market businesses. We believe that products and services we may develop or acquire should be marketed with the goal of improving utilization of business information. We intend for these product and service offerings to offer professional
services and software applications that support business intelligence systems, enterprise information performance and improved knowledge management throughout our customers business operations. We target middle-market companies that

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|16 | ASP, App Management Markets to Reach $20 Billion by 2006, IDC, March 28, 2002.
|-- | ------------------------------------------------------------------------------



|17 | Ibid.
|-- | -----



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have requirements for IT professional services, business application software and application service and management.



We believe this model will enable middle-market companies to
access integrated business process applications that can be delivered on a fully outsourced basis through portal technology or, if needed, delivered as a traditional licensed product. This entails the integration, deployment, hosting and ongoing
management of, and network access to, remotely hosted business process applications like e-commerce, accounting, scheduling and messaging. We provide products and services to middle-market customers that trade the difficulties of purchasing
software, managing software implementation risk, staffing an internal information technology department and suffering from unpredictable budgets for a single interface, an interoperable data structure, access to applications that complete the
end-to-end solution for business processes and a selection of pricing structures.



We believe that it will be necessary for the success of our business plan to have multiple sales models for generating revenue. We are using the two basic sales models in the industry, software application sales and
service sales.



The software application sales model that we
have deployed consists of:



| |  | License  a one-time fee charged to the customer for a software application which they install and use;
| | - | -------------------------------------------------------------------------------------------------------



| |  | Maintenance  a recurring annual fee charged to the customer for software upgrades, fixes and repairs;
| | - | ------------------------------------------------------------------------------------------------------



| |  | Development and Customization  fees earned for making modifications to existing proprietary software or developing extensions and new functionality;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Royalty  a fee charged to co-developers on a single or recurring basis for product usage or installation;
| | - | ----------------------------------------------------------------------------------------------------------



| |  | Subscription Service  fees charged to the customer to use a software application on a contracted time, per user, per transaction basis or some other formula; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Transactional or Usage Fees  a fee based on a specified number of uses of software applications charged by computer time, bandwidth, task completion or other metrics.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



The service sales model that we use consists of:



| |  | Project-Based Contracts  variable- or fixed-fee contracts for implementation and deployment of application offerings and related training;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | Support Contracts  fees charged for online, phone or on-site support of generic applications assessed on a per-call or contracted basis;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Development Fees fees charged for writing new software code for generic applications and implementations; and
| | - | --------------------------------------------------------------------------------------------------------------



| |  | ASP/Hosting Contracts  monthly fees paid in advance for rack space, monitoring, bandwidth and application usage.
| | - | -----------------------------------------------------------------------------------------------------------------



COMPETITION



The markets for our products and services are highly fragmented. There are relatively few barriers to entry into our markets
and we have faced, and expect to continue to face, competition from new entrants into our markets. Our IT Professional Services, Business Application Software and Application Services and Management businesses are likely to face competition from
four primary categories of businesses: top-tier consulting firms and software consulting divisions; best-of-breed software companies; packaged software sellers; and resellers.



Top-tier consulting firms make up the closest group of competitors in terms of the breadth of their product offerings.
Companies such as Accenture and EDS provide many of the same services, but their focus is on Global 2500 customers instead of the middle-market customer. Similarly, Oracle, IBM and Computer Associates all field professional services divisions that
implement their solutions, but also focus on large companies. Typically, many middle-market customers are not often given the opportunity to work with these companies.



Best-of-breed software companies such as Seibel, PeopleSoft, SAP and others offer specific products to their customers, but,
in most cases, these companies focus on a single offering, intending to be the best in their product category. Our middle-market customers may require implementation and integration of these types of products from time to time. We are qualified to
provide those services for these companies products.



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Packaged software sellers such as Intuit, Great Plains and Lotus offer limited off-the-shelf applications
targeted primarily at the small-office and home-office segment of the middle market, where customer requirements can be satisfied with a standard package and self-installation and support.



Resellers such as JamCracker and WebMethods resell integrated hardware and
software products with thin margins. Many of these resellers are attempting to expand their business offerings by including professional services in an attempt to sell additional generic applications. These companies face several challenges
including the common customer perception that their recommendations are driven by their own product margins instead of the customers needs.



Our competitors generally have greater financial, technical and marketing resources than we do and, as a result, may be able to respond more quickly to
new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sales of their products and services.



We can give no assurance that we will be able to compete successfully with existing or new competitors or that competition
will not have a material adverse effect on our business, financial condition, operating results and liquidity.



DEPENDENCE ON MAJOR CUSTOMERS



Certain customers account for a significant portion of our revenues. In 2003, our ten largest customers represented approximately 48% of our total revenues, and our largest customer accounted for approximately 12%. No other customer
accounted for more than 7% of total revenues in 2003. Some of our significant customers include: Lockheed Martin Corporation; Bloomberg L.P.; Aegis Communications Group; IBM  Data Management Division; ACS Government Services; Devon Energy
Production L.P.; and Computer Science Corporation. We seek to develop long-term relationships with our customers. Although a typical individual customer assignment ranges from two to 12 months in duration, some of our customer relationships have
continued for more than four years. In late 2003, we lost one major customer, and in early 2004 we were notified by Oracle Corporation of their intent to terminate the Oracle Approved Education Center Agreement between Oracle and ThinkSpark. The
revenue generated by these two losses totaled approximately 11% of our total revenues in 2003. If any additional significant customer terminates its relationship with us or substantially decreases its use of our services, it could have a material
adverse effect on our business, financial condition and results of operations.



Typically our customers may cancel their contracts on short notice or may reduce their use of our services. Because of this, we do not characterize our engagements as backlog.



ACQUISITIONS



We have expanded our customer base and added to our technical expertise and service offerings through business combinations.
Given the highly fragmented nature of the IT services industry, we intend to continue to pursue business combinations as part of our growth and operation strategy. The success of this strategy depends not only upon our ability to identify and
acquire businesses on a cost-effective basis, but also upon our ability to integrate acquired operations into our organization effectively, to retain and motivate personnel and to retain customers of acquired or merged companies. In reviewing
potential business combinations, we consider, among other factors, the target companys geographic reach, cultural fit, capabilities in specific technical services, customer base, expected financial performance, valuation expectations and the
abilities of management, sales and recruiting personnel. Since January 1, 2002, we have completed the following business combinations:



Acquisition of Media Resolutions, Inc.



In April 2002, we acquired Media Resolutions, Inc., an ASP and website hosting company located in Dallas, Texas. We paid $330,000 in cash and notes and
50,000 restricted shares of our common stock valued at $313,000 in exchange for all the outstanding shares of Media Resolutions.



The acquisition was accounted for using the purchase method of accounting. As such, the assets and liabilities of Media Resolutions were recorded at their
estimated fair value and the results of operations are included in our consolidated results of operations from the date of acquisition. The excess purchase price over the fair value



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of the tangible and intangible net assets acquired in the acquisition of Media Resolutions totaled approximately $477,000 and was allocated to goodwill. Of
the approximate $477,000 of goodwill recorded in the acquisition of Media Resolutions, Inc., $119,000 was written off in September 2003.



Acquisition of Virtually There, Inc.



In May 2002, we acquired Virtually There, Inc., an ASP and website hosting company located in Fort Worth, Texas. In exchange for the outstanding shares of
Virtually There, we paid $120,000 in notes, issued 115,385 shares of our restricted common stock valued at $455,000 to the shareholders of Virtually There, and assumed approximately $185,000 of the existing liabilities of Virtually There as of the
date of closing.



The acquisition was accounted for using the
purchase method of accounting. As such, the assets and liabilities of Virtually There were recorded at their estimated fair value and the results of operations are included in our consolidated results of operations from the date of acquisition. The
excess purchase price over the fair value of the tangible and intangible net assets acquired in the acquisition of Virtually There totaled approximately $714,000 and was allocated to goodwill. The value allocated to goodwill exceeded the stated
purchase price due to the assumption of liabilities at acquisition.



In July 2003, the Company announced the formation of ThinkSpark Web Services and Solutions, a business unit which combines the operations of its Virtually There, Inc. and Media Resolutions, Inc. subsidiaries.



Acquisition of The Visionary Group, Inc.



In April 2002, we acquired The Visionary Group, Inc., a professional
services firm providing IT Professional Services related to Oracle applications software. Headquartered in Dallas, Texas, The Visionary Group had operations in Dallas and Austin, Texas. We paid $910,000 in cash and notes and satisfied approximately
$70,000 of existing debt in exchange for all the outstanding shares of The Visionary Group.



The acquisition was accounted for using the purchase method of accounting. As such, the assets and liabilities of The Visionary Group were recorded at their estimated fair value and the results of operations are
included in our consolidated results of operations from the date of acquisition. The excess purchase price over the fair value of the tangible and intangible net assets acquired in the acquisition of The Visionary Group totaled approximately
$906,000 and was allocated to goodwill.



Following its
acquisition, revenues for The Visionary Group fell below acceptable levels. We believe the decline resulted from an overall decline in the market and the delay or elimination of several significant projects resulting from general economic
conditions. Despite aggressive steps to rebuild the business including installing new management and producing new product offerings, we were not successful and the company ceased operations in December 2002. Of the approximate $906,000 of goodwill
recorded in the acquisition of The Visionary Group, $600,000 was written off in September 2002, and the balance was written off in December 2002.



Acquisition of Universal Data Technology, Inc.



In May 2002, our newly created and wholly owned subsidiary, UDT Consulting, Inc., acquired the assets of Universal Data Technology, Inc., an IT
Professional Services practice headquartered in Dallas, Texas with additional operations in Arkansas and Florida. Our total purchase price for substantially all of Universal Data Technologys assets was the sum of a minimum purchase price of
$1,127,750 and the product of multiplying two times UDTs adjusted earnings before interest, taxes, depreciation and amortization for the 12 months immediately following the closing date of the acquisition (the Measurement Period).
In July 2003, Axtive, UDT Consulting, Inc., and Universal Data Technology, Inc. entered into a settlement agreement to resolve all outstanding obligations of the parties arising from the acquisition of Universal Data Technology, Inc.s assets.
In July 2003, we paid Universal Data Technology, Inc. $310,000 in full and final payment of the purchase price for the acquisition. $390,000, which represents the difference between the $700,000 originally recorded as a note payable as of the
acquisition date and the amount paid of $310,000, is included as a Gain on extinguishment of debt in the accompanying consolidated statements of operations.



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The acquisition was accounted for using the purchase method of accounting. The assets acquired from
Universal Data Technology were recorded at their estimated fair value and the results of operations are included in our consolidated results of operations from the date of acquisition. The excess purchase price over the fair value of the tangible
and intangible net assets acquired in the acquisition of the assets totaled approximately $1.05 million and was allocated to goodwill.



During the third and fourth quarters of 2003, revenues for UDT Consulting, Inc. fell below acceptable levels. The decline resulted from the loss of
several significant contracts and an overall decline in the market. In an effort to retain the remaining UDT business, while reducing overhead costs, all operations of UDT Consulting, Inc. were consolidated under ThinkSpark Corporation, another of
the Companys subsidiaries. Despite ThinkSparks aggressive steps to maintain the current business, substantially all remaining revenue was lost in December 2003. Of the approximate $1.05 million of goodwill recorded in the acquisition of
Universal Data Technology, $100,000 was written off in September 2003 and the balance was written off in December 2003.



Acquisition of ThinkSpark Corporation



In May 2003, we acquired ThinkSpark Corporation and its subsidiaries, a professional services firm providing IT Professional Services related to Oracle
database software, in a merger transaction. ThinkSpark is headquartered in Dallas, Texas with additional offices in Austin, Texas, San Antonio, Texas, Oklahoma City, Oklahoma and Las Vegas, Nevada. The Company believes that ThinkSpark is a
significant building block for growing Axtives IT professional services business in conjunction with executing the Companys current business plan. As a result of the acquisition, the Company gained an industry savvy management team with
decades of professional service experience, an established and profitable partnership with Oracle and numerous long-term government contracts. We assigned a value of $662,000 to non-compete agreements entered into by ThinkSpark management,
amortizable over 2 years; $662,000 to the Oracle partnership, amortizable over 2 years; and approximately $2.3 million to the government contracts acquired, amortizable over 5 years.



In exchange for all the outstanding shares of ThinkSpark, we paid approximately $242,000 in cash and notes and $198,000 in
acquisition-related costs. As part of the acquisition, Axtive assumed $5.0 million of long-term debt from ThinkSparks secured creditor, Merrill Lynch Business Financial Services, Inc. (Merrill Lynch). The debt assumed is secured by
all of the assets of ThinkSpark, although Merrill Lynch agreed to subordinate its liens on up to $1.0 million of accounts receivable of ThinkSpark under certain circumstances. The debt is also guaranteed by the remaining subsidiaries of Axtive. We
also issued Merrill Lynch warrants to acquire 500,000 shares of Axtives common stock in exchange for Merrill Lynchs assignment to Axtive of an additional $1.9 million of debt due from ThinkSpark. The warrants have an exercise price of
$0.10 per share and can be exercised anytime prior to the tenth anniversary of their issuance (May 2013).



The acquisition was accounted for using the purchase method of accounting. As such, the assets and liabilities of ThinkSpark have been recorded at their
estimated fair value and the results of operations have been included in our consolidated results of operations from the date of acquisition. The excess purchase price over the fair value of the tangible and intangible assets acquired in the
acquisition totaled $2.5 million and was allocated to goodwill.



PATENTS,
TRADEMARKS, ETC.



We currently have no patents. We
acquired the Axtive trademark and logo in June 2002. See Item 12, Certain Relationships and Related TransactionsAcquisition of Axtive Name.



EMPLOYEES



As of December 31, 2003, we employed three executive officers, six full-time employees in the corporate office, 24 full-time
employees within our subsidiaries and a total of 58 billable consultants. None of our employees are subject to a collective bargaining arrangement. We have employment agreements with our executive officers. We believe our relations with our
employees are good.



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WEBSITE INFORMATION



The Internet address of our website is www.axtive.com. We make available, free of charge through our website, access to our Annual Reports on Form
10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K, any amendments to those reports and other filings with the SEC as soon as reasonably practical after filing with the SEC. Our reports filed with or furnished to the SEC are also
available directly from the SECs website at www.sec.gov.



HISTORY



Axtive was originally organized in
Delaware in July 1994 under the name Golf Vision, Inc. The Company changed its name to Edge Technology Group, Inc. in September 2000 and to Axtive Corporation in October 2002.



RISK FACTORS



Readers of this report should carefully consider the following risk factors, in addition to the other information contained in this report. This report
contains statements of a forward-looking nature relating to future events or the future financial performance of Axtive within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and which
are intended to be covered by the safe harbors created by those statutory provisions. Readers are cautioned that such statements are only predictions and that actual events or results may differ substantially. In evaluating those statements, readers
should specifically consider the various factors identified in this report, including the matters set forth below, which could cause actual results to differ substantially from those indicated by the forward-looking statements.



Risks Relating to Our Business



We have experienced significant and continuing losses.



The Company has suffered recurring losses from
operations and has an accumulated deficit of approximately $49.4 million at December 31, 2003. Of this amount, approximately $33.5 million had accumulated through March 31, 2001, and is attributable to the Companys former One-on-One golf video
business. Another approximately $6.2 million reflects impairment charges and bad debts stemming from investments and loans made prior to the Companys creation of its current business plan. For the year ended December 31, 2003, we incurred a
net loss of approximately $4.8 million including impairment charges related to goodwill and intangibles of approximately $1.3 million.



We believe we will continue to incur losses until we are able to generate sufficient revenues to offset the operating costs associated with executing our
new business plan. These losses could limit our ability to grow and to raise new funds and could ultimately jeopardize our ability to remain in business.



We need additional financing.



We do not currently maintain a credit facility with any bank or financial institution. We believe that our ability to raise additional financing, either
as debt or equity, is further hindered by our continuing operating losses, the low market price of our common stock and the lack of a listing for our stock on a national securities exchange or association.



We may not be able to carry out our acquisition strategy.



Our business strategy is focused upon making
additional acquisitions of software-related technology companies. To be suitable for acquisition by us, these companies must be small enough to be affordable yet profitable. Acquisition candidates may be few in number and may attract offers from
companies with greater financial resources than us. Acquisitions involve numerous risks, including, among others, loss of key personnel of the acquired company, difficulties associated with assimilating the personnel and operations of the acquired
company, potential disruption of our ongoing business and the maintenance of uniform standards, controls, procedures and policies. While we believe our past acquisitions are compatible with our business plan, we have not experienced success with all
of our past acquisitions. Our acquisition strategy has been adversely affected by our



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continuing need for additional financing, which limits our ability to seek and complete acquisitions. We can provide no assurance that we will be able to
locate suitable acquisition targets or that we will be able to complete additional acquisitions. Our business plan will succeed only if we are able to identify, acquire and manage additional acquisitions. There can be no assurance that we will be
able to implement our business plan, and failure to effectively implement our business plan will have a material adverse effect on us.



Our current financial condition prevents us from financing an acquisition independently.



Our current financial condition will not allow us to finance additional
acquisitions independently. We can offer no assurance that Axtive will be able to obtain financing in addition to that secured in connection with the issuance of the offering of our series A convertible preferred stock (Series A Preferred
Stock) in April 2002 and May 2003, and the private placement of our common stock in February 2004 on acceptable terms or at all. If we cannot obtain additional financing, we will not be able to complete any future acquisitions and will
consequently not be able to successfully implement our business plan.



We depend on major customers.



A small
number of our customers account for a significant portion of our revenues. In 2003, our ten largest customers represented approximately 48% of our total revenues, and our largest customer accounting for approximately 12%. No other customer accounted
for more than 7% of total revenues in 2003. Our typical customer assignments are short in duration due to the nature of our products and services. Our customers may cancel their contracts on short notice or may reduce their use of our products or
services. In late 2003, we lost one major customer, and in early 2004 we were notified by Oracle Corporation of their intent to terminate the Oracle Approved Education Center Agreement between Oracle and ThinkSpark. The revenue generated by these
two losses totaled approximately 11% of our total revenues in 2003. If any additional significant customer terminates its relationship with us or substantially decreases its use of our products or services, it could have a material adverse effect on
our business, financial condition and results of operations.



We depend on our officers and key personnel.



Our prospects depend on the personal efforts of Graham C. Beachum II, our Chairman of the Board and Chief Executive Officer, Graham C. Scooter Beachum III, our President and Chief Operating Officer, and other key personnel
throughout Axtive and its operating companies to implement our acquisition and operating strategies. The loss of the services of these executives could have a material adverse effect on our business and prospects because of their knowledge and
experience of, and contacts within, our industry.



Our success
depends, to a significant extent, on the continued contributions, experience and knowledge of our senior management team and key technical and marketing personnel and the key personnel of our operating companies. Our success also depends upon our
ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, sales and marketing personnel. No assurance can be given that we will be able to successfully attract, assimilate or retain a sufficient number of
qualified personnel. The failure to do so could have a material adverse effect on our business, results of operation and financial condition. Our ability to attract or retain qualified personnel is adversely affected by our continuing operating
losses and need for additional financing.



If we fail to
manage our growth and integrate our acquired businesses, our business will be adversely affected.



If the business strategy discussed in this report results in significant growth of our operations, we will be required to implement and improve our
operating and financial systems and controls, and expand, train and manage our employee base to manage this growth. To the extent that our management is unable to manage the growth and integration effectively, our business, results of operations and
financial condition could be adversely affected. We have not been able to successfully grow or integrate all of our acquired companies, which has led to the termination of some of the acquired businesses. In addition, the integration of the acquired
entities and their operations will require our management to make and implement a number of strategic operational decisions. The timing and manner of the implementation of these decisions could materially impact our business operations.



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We must attract and retain qualified consultants.



Our future success depends, in part, on our ability to attract and retain
adequately trained personnel who can address the changing and increasingly sophisticated technology needs of our customers. While the current employment conditions have lessened our risk somewhat in attracting high caliber consultants, there can be
no assurance that such conditions will continue and we will be successful in attracting and retaining the personnel we require to conduct and expand our operations in the future. Our ability to attract or retain qualified personnel is adversely
affected by our continuing operating losses and need for additional financing.



We do not rely on long-term contracts.



Although we have many long-standing relationships with our customers, our business depends upon those relationships remaining positive and our ability to develop new customers rather than upon long term contracts. If
any significant customer terminates its relationship with us or substantially decreases its use of our services, it could have a material adverse effect on our business, financial condition and results of operations.



We are dependent upon our relationship with Oracle.



We have a significant relationship with Oracle as an implementation
partner. In the event Oracle products become less desirable or competitive in the marketplace, the need for our implementation services would lessen and we could suffer a material adverse effect.



Our services are provided in the form of projects.



We provide and intend to continue to provide project services to our
customers. Projects are distinguishable from the provision of other professional services by the level of responsibility we assume. In a typical project, we assume major responsibility for the management of the project and/or the design and
implementation of specific deliverables based upon customer-defined requirements. As our project engagements become larger and more complex and often must be completed in increasingly shorter time frames, it becomes more difficult to manage the
project, increasing the likelihood of mistakes. In addition, our projects often involve applications that are critical to our customers business. Our failure to timely and successfully complete a project and meet our customers
expectations could have a material adverse effect on our business, results of operations or financial condition. Such adverse effects may include delayed or lost revenues, additional services being provided at no charge and a negative impact to our
reputation. In addition, claims for damages may be brought against us, regardless of our responsibility, and our insurance may not be adequate to cover such claims. Our contracts generally limit our liability for damages that may arise in rendering
our services. However, we cannot be sure these contractual provisions will successfully protect us from liability if we are sued. We sometimes undertake projects on a fixed-fee basis or cap the amount of fees we may bill on a time and materials
basis. Any increased or unexpected costs or unanticipated delays could make such projects less profitable or unprofitable and could have a material adverse effect on our business, results of operations and financial condition.



The market for our services is competitive.



We operate in a competitive industry. We believe that we currently compete
principally with IT professional services firms, technology vendors and internal information systems groups. Many of the companies that provide services in our markets have significantly greater financial, technical and marketing resources than we
do. In addition, there are relatively few barriers to entry into our markets and we have faced, and expect to continue to face, competition from new entrants into our markets. There can be no assurance that we will be able to continue to compete
successfully with existing or future competitors or that competition will not have a material adverse effect on our business, results of operations and financial condition.



Our operating results may be difficult to predict.



Our quarterly operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside our control. Factors that may affect our quarterly revenues or operating results generally include:



| |  | costs relating to the expansion of our business;
| | - | ------------------------------------------------



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| |  | the extent and timing of business acquisitions;
| | - | -----------------------------------------------



| |  | our ability to obtain new and follow-on customer engagements;
| | - | -------------------------------------------------------------



| |  | the timing of assignments from customers;
| | - | -----------------------------------------



| |  | our consultant utilization rate, including our ability to transition employees quickly from completed assignments to new engagements;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| |  | the seasonal nature of our business due to variations in holidays and vacation schedules;
| | - | -----------------------------------------------------------------------------------------



| |  | the introduction of new services by us or our competitors;
| | - | ----------------------------------------------------------



| |  | price competition or price changes; and
| | - | ---------------------------------------



| |  | our ability to manage costs and economic and financial conditions specific to our customers.
| | - | --------------------------------------------------------------------------------------------



Quarterly sales and operating results can be difficult to forecast, even in the short term. Due to all of the foregoing
factors, it is possible that our revenues or operating results in one or more future quarters will fail to meet or exceed the expectations of security analysts or investors. In such event, the price of our common stock would likely be materially
adversely affected.



We may be subject to potential
liabilities (known and unknown) for acts and omissions of our acquired companies.



Although the Company takes reasonable steps including, among others, conducting due diligence, obtaining indemnification protection from sellers, withholding of consideration to ensure compliance with representations
and warrants of the selling shareholders, requiring audits from a recognized independent accounting firm and maintaining a protective legal structure, to protect itself, liabilities could arise that were unknown and obligations stemming from known
liabilities could expand, either of which could have a material negative impact on the Company.



Risks Related to Our Common Stock



The shares eligible for future sale may further decrease the price of our Common Stock.



If our stockholders sell substantial amounts of their common stock in the
public market, including shares issued upon the exercise of outstanding options, the market price of our common stock could fall. As a result of the private placement of our common stock in February 2004 and the related conversion of our outstanding
preferred stock into common, we have a substantial number of outstanding shares of common stock that are restricted securities. These shares are subject to demand and incidental registration rights. The sale of a substantial number of shares of our
common stock may adversely affect the prevailing price of our common stock in the public market and may impair our ability to raise capital through the sale of our equity securities.



There are also a substantial number of outstanding options to purchase shares of our common stock. The exercise of any of
these options would also have a dilutive effect on our stockholders. Furthermore, holders of options are more likely to exercise them at times when we could obtain additional equity capital on terms that are more favorable to us than those provided
in the options. As a result, exercise of the options may adversely effect the terms of future financings and would require us to issue significant amounts of our common stock at the time of exercise.



Our common stock is not listed on any exchange or automated quotation
system, which adversely affects its liquidity and market price.



Our common stock currently trades on the Over-the-Counter Bulletin Board. The lack of a listing on one of the national securities exchanges or automated quotation systems adversely affects the liquidity and market
price of our common stock.



Our common stock is subject
to the penny stock rules, which may make it a less attractive investment.



Our common stock is currently subject to the penny stock rules. The SEC has adopted rules that define a penny stock to be an equity security that has a market price of less than $5.00 per
share, subject to certain exceptions. These rules impose additional sales practice requirements on broker-dealers who sell these securities to



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persons other than established customers and accredited investors. For transactions covered by the penny stock rules, a broker-dealer must make a suitability
determination for the purchaser, must have received the purchasers written consent to the transaction prior to the sale, must disclose the commissions payable to both the broker-dealer and the registered representative and must provide current
quotations for the securities. Additionally, if the broker-dealer is selling the securities as a market maker, the broker-dealer must disclose that fact and that the broker-dealer is presumed to exercise control over the market. Finally, a monthly
statement must be sent to the account holder disclosing recent price information and information on the limited market in the particular stock.



As a result of the additional suitability requirements, additional disclosure requirements and additional sales practices imposed by the penny stock
rules, both the willingness and ability of a broker-dealer to sell our common stock and the ability of holders of our common stock to sell their securities in the secondary market may be adversely effected.



A small number of stockholders could exercise control over Axtive,
which may raise conflicts of interest.



A small number
of stockholders, some of which comprise an affiliated group, own a sufficient amount of our common stock to exercise significant control over our business and our policies and affairs and, in general, determine the outcome of any corporate
transaction or other matters submitted to the stockholders for approval, all in a manner that could conflict with the interests of other stockholders.



Our right to issue preferred stock and anti-takeover provisions under Delaware law could make a third party acquisition of us difficult.



Our certificate of incorporation provides that our
board of directors may issue preferred stock without stockholder approval. The issuance of preferred stock could make it more difficult for a third party to acquire us without the approval of our board of directors. Additionally, Delaware corporate
law imposes certain restrictions on corporate control transactions that could make it more difficult for a third party to acquire us without the approval of our board of directors.



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|ITEM 2. | DESCRIPTION OF PROPERTY
|------- | -----------------------



We lease our office space, and each of the office locations and property details are set forth in the following table:



|                      |  |                                                            |  |               |  |                 
|--------------------- |  | ---------------------------------------------------------- |  | ------------- |  | ----------------
|Description           |  | Address                                                    |  | Square Feet   |  | Lease Expiration
|                      |  |                                                            | 
|Virtually There       |  | 411 West Seventh Street, Suite 200 Fort Worth, Texas 76102 |  | 2,962         |  | July 2004       
|                      |  |                                                            | 
|ThinkSpark            |  | 5001 LBJ Freeway, Suite 275 Dallas, TX 75244               |  | 8,230         |  | August 2007     
|                      |  |                                                            | 
|                      |  | 3305 Northland Dr., Suite 402 Austin, TX 78731             |  | 1,857         |  | February 2006   
|                      |  |                                                            | 
|                      |  | 613 NW Loop 410 Suite 520, San Antonio, TX 78216           |  | 6,439         |  | August 2004     
|                      |  |                                                            | 
|                      |  | 1601 NW Expressway, Suite 850 Oklahoma City, OK 73118      |  | 5,028         |  | February 2006   
|                      |  |                                                            | 
|                      |  | 500 North Rainbow Blvd., Suite 300 Las Vegas, NV 89108     |  | 3,521         |  | Month-to-Month  
|                      |  |                                                            | 
|TERMINATING LEASES(1) |  |                                                            |  |               |  |                 
|                      |  |                                                           
|Houston, Texas        |  | 5,959                                                      |  | December 2006
|                      |  |                                                           
|Cleveland             |  | 6,219                                                      |  | December 2003
|                      |  |                                                           
|Dayton                |  | 3,138                                                      |  | January 2004 

---

|(1) | Terminating leases represent properties acquired as part of the ThinkSpark acquisition but
are no longer needed. The Company is currently in negotiations with the respective landlords and intends to settle any remaining obligations at less than full value. One settlement totaling $55,000 has been agreed to by one landlord. Per the terms
of the settlement, we made a $27,500 payment in March 2004; the balance is due on April 30, 2004. The remaining obligations that have not yet been resolved under terminating leases could total approximately $268,000.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe our facilities are generally in good condition and are adequate
for our current level of operations. We believe that suitable additional or alternative space will be available as needed.



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|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



PROCEEDINGS AGAINST THE VISIONARY GROUP



In June 2002, we were notified that The Visionary Group and Axtive had been sued in the District Court of Dallas County, Texas for non-payment of approximately $110,000 due to former sub-contractors of The Visionary
Group. In order to limit our costs to defend the matter, Axtive agreed to a partial summary judgment pursuant to which Axtive admitted the liability of The Visionary Group, but retained our defenses on the third-party beneficiary claim against
Axtive. In November 2003, we entered into settlement agreements with the parties assigning to them all interest in any claims we may have against any former officer, director or shareholder of The Visionary Group, in exchange for the parties
releasing us from any claims arising out of the suit discussed above.



In April 2003, a judgment was entered against The Visionary Group in the amount of approximately $3,000 for failure to pay the business related expenses of a former employee. The judgment remains outstanding.



PROCEEDINGS AGAINST THINKSPARK



In 2002, a former customer obtained a final judgment against ThinkSpark. The
former customer filed a collection suit against ThinkSpark with respect to the judgment in the amount of $940,000, including attorneys fees. The former customer also filed a lawsuit against certain of ThinkSparks then directors and
stockholders with respect to alleged improper repurchases of stock from certain stockholders. Effective with Axtives acquisition of ThinkSpark, ThinkSpark entered into a settlement agreement and a tolling agreement with the former customer.
ThinkSpark agreed to make a cash payment of $18,000 to the former customer and issue a promissory note for $150,000. The promissory note bears interest at 6% per year and is payable on a monthly basis amortized over 12 months. In exchange, the
former customer agreed not to seek to enforce the judgment, to dismiss with prejudice the separate lawsuit, and upon payment in full of the promissory note, to fully release ThinkSpark and the individual defendants from all claims. The payments due
on the promissory note in 2004 total approximately $65,000. ThinkSpark is currently past due on the payments for the three months of 2004, but is in the process of bringing its payments current. The promissory note matures in May 2004.



In October 2002, a former employee filed a suit against ThinkSpark,
certain of its subsidiaries, and certain of its directors and shareholders seeking damages in the amount of $612,000 for breach of a severance agreement. Effective with Axtives acquisition of ThinkSpark, ThinkSpark entered into a mutual
release agreement with the former employee. In exchange for mutual releases of all claims, ThinkSpark agreed to issue to the former employee a promissory note in the amount of $169,000, which the former employee agreed to accept in settlement of his
claims. A portion of which represented the merger consideration payable to the former employee. The promissory note bears interest at 6% per year and is payable on a monthly basis amortized over 18 months. The former employee agreed to then abate
his lawsuit and, upon payment in full of the promissory note, to dismiss all claims against ThinkSpark and the other defendants. No payments have been made on the promissory note since October 2003. In February 2004, the former employee attempted to
seek a default judgment against the former ThinkSpark directors and stockholders on the lawsuit, which was avoided as a result of answers filed by those individuals. ThinkSpark is currently negotiating with the former employee to restructure the
settlement obligations and bring them current; however, we can provide no assurance that we will be successful in restructuring the settlement or bring our settlement obligations current.



ThinkSpark was sued in state court in Cuyahoga County, Ohio, for breach of a November 1998 lease agreement for office space
in Cleveland, Ohio, which has been vacated by ThinkSpark. The landlord obtained a judgment in March 2003 for approximately $203,000 plus 10% per year until paid and all costs, including collection costs. The landlord has sought to domesticate the
judgment in state court in Texas and ThinkSpark has been served with post-judgment discovery.



ThinkSpark was sued in state court in Tarrant County, Texas for breach of an October 1998 lease agreement for office space in Fort Worth, Texas, which has been vacated by ThinkSpark. The landlord seeks damages for
past due rent, utilities and other sums due under the lease, future rents, brokerage commissions paid by the landlord at the commencement of the lease, and unreimbursed tenant improvement expenses in the total amount of approximately $212,000, plus
attorneys fees. In August 2003, ThinkSpark entered into a Release and Settlement Agreement with the landlord. Pursuant to the terms of the settlement agreement, and in consideration of the terms of



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the settlement, ThinkSpark agreed to a cash payment of $20,000 and executed a promissory note in favor of the landlord for $36,000. The promissory note bore
interest at 6% per year and was payable over 12 months. ThinkSpark failed to make the required payments under the promissory note, and in January 2004, the landlord obtained a final judgment for $224,000. In March 2004, ThinkSpark and the landlord
reached a final settlement and the obligation was settled for payment by ThinkSpark of $36,000.



ThinkSpark was sued in state court in Fulton County, Georgia for breach of a June 2000 lease agreement for office space in Atlanta, Georgia, which has
been vacated by ThinkSpark. The landlord seeks damages for past due rent of approximately $12,000 per month since August 2002. The action as originally filed claimed past due rent from August through November 2002. In November 2003, the landlord
obtained a subsequent judgment for approximately $323,000, and served one of ThinkSparks customers with two separate garnishment orders totaling $323,000. In December 2003, ThinkSpark and the landlord entered into a settlement agreement.
Pursuant to the terms of that agreement, we paid the landlord $200,000 and delivered a bill of sale for all furniture, fixtures and equipment left on the premises in exchange for a release and dismissal of the garnishment orders and full
satisfaction and release of the judgments.



In January 2001, a
United Kingdom subsidiary of ThinkSpark entered into a lease for office space in London for a 15-year term. ThinkSpark was required to be a surety on this lease agreement. In October 2002, the ThinkSpark subsidiary ceased operations in the United
Kingdom and consequently breached the lease agreement. The United Kingdom subsidiary is now in liquidation. The landlord filed suit against ThinkSpark in the United Kingdom. In May 2003, ThinkSpark and the landlord entered into a settlement
agreement. Pursuant to the terms of the settlement agreement, and in consideration of the terms of the settlement, Axtive executed a promissory note in favor of the landlord for $200,000. The promissory note bears interest at 6% per year and is
payable over 12 months. Axtive issued 121,915 restricted shares of our common stock to the landlord as security for the promissory note. Pursuant to the settlement agreement and the promissory note, the shares will be returned to us at various
stages based upon payments made on the promissory note. In October 2003, 32,589 shares were returned to the Company and held by us as treasury stock. In 2004, ThinkSpark became past due on certain payments, but has now brought the payments current.
Approximately $35,000 in payments remain and the promissory note matures in May 2004. Assuming the promissory note is paid in full pursuant to its terms, all of the shares will be returned. All returned shares will be held by us as treasury shares.
If there is a continuing default on the promissory note, the landlord has the right to keep all or part of the shares to satisfy any remaining obligation.



In July 2003, ThinkSpark was sued for breach of a lease agreement for office space in Las Vegas, Nevada. The landlord seeks damages in excess of $10,000
for one months rent plus attorneys fees and costs of the suit. Management believes the rent to have been paid and does not expect an adverse judgment against ThinkSpark.



In July 2003, an individual filed suit against ThinkSpark alleging breach of contract and seeking damages of $14,040 plus
interest, attorneys fees and court costs. The suit was based on a contract between ThinkSpark and the former employee whereby the individual served as an independent contractor as a consultant and expert witness in a collection effort against
a former customer. The individual rendered these services in 2001. ThinkSpark agreed to pay the individual $1,500 per month for a term of eleven months, commencing in August 2003. The parties also executed an agreed judgment in the amount of
$21,500. In December 2003, based on ThinkSparks failure to make timely payments due under the agreement, the individual obtained a lien on ThinkSparks operating bank account. In order to obtain a release of the lien, in December 2003,
ThinkSpark paid all remaining amounts due and the individual abated the proceedings against ThinkSpark and filed a motion for nonsuit with prejudice.



In December 2003, ThinkSpark received notification of a demand for arbitration based on failure to pay for services rendered under a subcontract agreement
and for failure to make payments after entering into a $235,000 promissory note in November 2003 with said subcontractor for a portion of the unpaid services. The amount sought is $304,000 plus interest and attorneys fees and costs. An
administrative hearing in the arbitration was scheduled for February 2004, but was postponed. ThinkSpark is currently in negotiations with the subcontractor to reduce the liability to $75,000; however, we can give no assurance that ThinkSpark will
be successful in reducing the claim.



OTHER LEGAL PROCEEDINGS



Currently, the Company has three judgments totaling
approximately $75,000 pending against us relating to our former One-on-One golf video business. In March 2004, we settled one of the judgments for $39,000 and are in



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negotiations to reduce the amounts payable under the remaining two judgments. Depending on the success or failure of such negotiations, an unfavorable
outcome could have a material negative impact on our business.



Axtive and its subsidiaries are involved in other legal proceedings arising in the ordinary course of business. We believe that none of these other legal proceedings will have a material adverse effect on our financial condition or results
of operations.



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



No matters were submitted to a vote of our stockholders during the fourth quarter of 2003.



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PART II



|ITEM 5. | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | --------------------------------------------------------



MARKET FOR COMMON STOCK



Our common stock is traded on the Over-The-Counter (OTC) Bulletin Board under the symbol AXTC.OB.



The following table sets forth, for the period from January 1, 2002 through
March 31, 2004, the range of high and low closing bid prices for the common stock reported on the OTC Bulletin Board. The quotations from the OTC Bulletin Board reflect interdealer prices without retail mark-up, markdown or commission, and may not
represent actual transactions.



|               |  |      |       |     |   |     
|-------------- |  | ---- | ----- | --- | - | ----
|               |  | High |       | Low
|2002           |  |      |       |     |   |     
|First Quarter  |  | $    | 10.00 |     | $ | 5.00
|Second Quarter |  |      | 7.80  |     |   | 3.50
|Third Quarter  |  |      | 5.10  |     |   | 1.10
|Fourth Quarter |  |      | 4.00  |     |   | 1.20
|               |  |     
|2003           |  |      |       |     |   |     
|First Quarter  |  |      | 2.70  |     |   | 1.70
|Second Quarter |  |      | 2.50  |     |   | 1.00
|Third Quarter  |  |      | 2.50  |     |   | 1.00
|Fourth Quarter |  |      | 3.00  |     |   | 0.80
|               |  |     
|2004           |  |      |       |     |   |     
|First Quarter  |  |      | 1.35  |     |   | 0.57



HOLDERS OF COMMON STOCK



As of March 31, 2004, the last reported closing bid price
of our common stock was $0.80 per share, and there were 154 holders of record of our common stock.



DIVIDENDS



We have not
paid cash dividends on our common stock since the inception of the Company, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Instead, we intend to retain our earnings, if any, to finance the further
implementation of our business plan and for general corporate purposes. Any payment of future dividends will be at the discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions and other factors that our board of directors deems relevant. In addition, the payment of cash dividends on our shares of common stock is prohibited by the terms of our Series A Preferred
Stock.



Holders of our Series A Preferred Stock were entitled
to receive an 8% cumulative dividend payable, when and if declared by the board of directors, in cash or in additional shares of stock. As of December 31, 2003, undeclared dividends payable to holders of the Series A Preferred Stock totaled
approximately $732,024. On February 26, 2004, all of our outstanding shares of Series A Preferred Stock, together with all accrued and unpaid dividends, were converted into shares of our common stock. See Item 5, Market for Common Equity and
Related Stockholder MattersRecent Sales of Unregistered Securities and Item 6, Managements Discussion and Analysis or Plan of OperationLiquidity and Capital Resources.



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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATIONS PLANS



Equity Compensation Plan Information

(as of December 31, 2003)



|                                                                                   |  |                                                                                         |  |                                                                          |  |                                                                                                                                     
|---------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------
|Plan category                                                                      |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |  | Number ofsecurities remainingavailable for futureissuance under equitycompensation plans(excluding securitiesreflected in
column(a))
|                                                                                   |  | (a)                                                                                     |  | (b)                                                                      |  | (c)                                                                                                                                 
|Equity compensation plans approved by security holders (1996 Stock Incentive Plan) |  | 85,000                                                                                  |  | 23.10                                                                    |  | 0                                                                                                                                   
|Equity compensation plans approved by security holders (2002 Stock Incentive Plan) |  | 1,309,550                                                                               |  | 3.44                                                                     |  | 3,690,450                                                                                                                           
|Equity compensation plans not approved by security holders                         |  | 240,000                                                                                 |  | 8.55                                                                     |  | N/A                                                                                                                                 
|Total                                                                              |  | 1,634,550                                                                               |  | 5.21                                                                     |  | 3,690,450                                                                                                                           



1996 Employee Stock
Option Plan



In April 1996, we adopted the 1996 Stock
Option Plan, which was amended most recently in August 2000. The 1996 Plan provides for the granting to directors, officers, key employees and consultants of up to 50,000 shares of common stock in a year. Grants of options may be incentive stock
options or non-qualified stock options and will be at such exercise prices, in such amounts, and upon such terms and conditions, as determined by the board of directors or the compensation committee of the board of directors. The term of any option
may not exceed ten years. In August 2000, the 1996 Plan was amended to increase the number of shares reserved for issuance to 100,000 shares of our outstanding common stock.



During 2000 and 2001, stock option grants were made by the board of directors that would cause the number of options issued
under the 1996 Plan to exceed the number authorized under the plan. As described below, such grants were transferred to the 2002 Stock Incentive Plan and were approved by the stockholders. As of December 31, 2003, there were options exercisable for
85,000 shares of common stock outstanding under the 1996 Plan, which are held by one optionee, and none available for future grants.



2002 Stock Incentive Plan



In June 2002, the Company adopted the 2002 Stock Incentive Plan, which provides for the issuance of non-qualified stock options and incentive stock
options as well as restricted stock awards, unrestricted stock awards, performance stock awards, dividend equivalent rights, stock appreciate rights (in connection with options) and long-term performance awards to eligible employees, officers,
independent consultants and directors of the Company and its subsidiaries. Under the terms of the 2002 Plan, options to purchase common stock are generally granted at not less than fair market value, become exercisable as established by the
administering committee of the board of directors and generally expire ten years from the date of grant. If any shares reserved for an award are forfeited, repurchased or any such award otherwise terminates without a payment being made to the
participant in the form of stock, such shares underlying such award will also become available for future awards under the 2002 Plan.



In July 2002, a majority of our shares entitled to vote approved the adoption of the 2002 Plan by written consent. A Schedule 14C Information Statement
reflecting this action was mailed to our stockholders and filed with the SEC in October 2002. The stockholder approval of the adoption of the 2002 Plan was effective 20 days after the mailing of the Information Statement to our stockholders.



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For administrative convenience and to provide that all options outstanding for current employees are
under a single plan, 291,000 options previously granted pursuant to the 1996 Stock Option Plan, but in excess of the number of shares authorized under the plan (the Transferred Options), were transferred to the 2002 Plan. The
administrative transfer did not change the number of option shares, the vesting schedule or the exercise price of the options previously granted under the 1996 Plan. As a result, there was no accounting impact to the Company.



In May 2003, our board of directors approved an amendment of the 2002 Plan to
increase the number of shares authorized for issuance under the 2002 Plan from the original number of 12,000,000 to 17,000,000 shares, on a pre-split basis. In addition, the amendment provided that upon the effectiveness of a 1-for-10 reverse stock
split announced by the Company, the number of shares authorized for issuance under the 2002 Plan will be 5,000,000 shares. The amendment was immediately effective, but was subject to approval by our stockholders. In May 2003, a majority of our
shares entitled to vote approved the adoption of amendment by written consent. On November 24, 2003, a Schedule 14C Information Statement was mailed to our stockholders reflecting this action. The stockholder approval of the adoption of the
amendment became effective on December 23, 2003.



As of
December 31, 2003, there were 1,309,550 options outstanding under the 2002 Plan (which includes the Transferred Options), of which 857,662 were vested, and 3,690,450 shares of our common stock were available for future awards under the 2002 Plan.



To date, the Company has not issued any restricted or
unrestricted stock awards, stock appreciation rights, dividend equivalents rights or long-term performance awards under the 2002 Plan.



Stand-Alone Agreements



During 2001 we issued 50,000 stock options in conjunction with an employment agreement to an executive officer, and during 2002 we issued 215,000 stock
options in conjunction with employment agreements to the key management of the acquired companies under stand-alone stock option agreements. As of December 31, 2003, 240,000 remained outstanding. The exercise prices on these options ranged from
$4.16 to $15.00 per share with a weighted average price of $8.55 per share. Vesting periods ranged from immediately upon grant to three years with a weighted average vesting period of nine months. All stand-alone options granted in 2001 and 2002
were not intended to be incentive stock options under the Internal Revenue Code of 1986, as amended. The Company recorded no expense related to the grant of options pursuant to stand-alone agreements.



RECENT SALES OF UNREGISTERED SECURITIES



Private Placement of Common Stock



On February 26, 2004, we issued 23,459,087 shares of our common stock in a
private offering to existing investors at $0.07687 per share. We received gross proceeds of $1.8 million, consisting of $1.05 million in cash and $750,000 in consideration of conversion of promissory notes and note warrants issued by Axtive to
certain of its stockholders. Of the net cash proceeds, after paying legal expenses related to the offering, we have used or expect to use $167,000 to repay short-term notes and a 12% promissory note issued to one of our investors, $456,000 to
satisfy past due liabilities and $296,000 to settle judgments and promissory notes from prior acquisitions. The balance is available for working capital and general corporate purposes. These purchasers have demand registration rights beginning in
February 2005, as well as incidental registration rights, with respect to the shares of common stock acquired.



As part of the February 2004 private offering, two of the purchasers agreed to purchase an aggregate of 15,345,464 additional shares of common stock for
cash on the same terms. The additional purchases are scheduled to occur monthly, in varying amounts, from April 2004 to November 2004.



Additionally on February 26, 2004, we issued 7,648,221 shares of our common stock at $0.07687 per share to our preferred stockholders upon conversion of
all outstanding shares of our Series A Convertible Preferred Stock. Concurrent with this conversion, the preferred stockholders agreed to waive and terminate all warrants issued in conjunction with their previous purchases of Series A Convertible
Preferred Stock.



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On March 5, 2004, as part of the February 2004 offering, we issued 571,090 of our common stock at
$0.07687 per share to one of our stockholders in consideration of the conversion of a promissory note and note warrant issued by Axtive to that stockholder.



On March 26, 2004, as part of the February 2004 offering, we issued an additional 3,694,521 shares of our common stock at $0.07687 per share. We received
additional gross proceeds of $284,000, all of which is available for working capital and general corporate purposes.



We paid no commissions in connection with issuance of the new shares of common stock in 2004. The new shares of Common Stock were issued by the Company in
reliance upon an exemption from registration pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act of 1933. A Form D was filed with the SEC.



Other Issuances



In connection with the settlement of a lease dispute involving a United Kingdom subsidiary of ThinkSpark Corporation, ThinkSpark entered into a settlement
agreement with the landlord. See Item 3, Legal ProceedingsProceedings Against ThinkSpark. Pursuant to the terms of the settlement agreement, we issued 121,915 restricted shares of our common stock to the landlord as security for a
promissory note from Axtive for $200,000. Pursuant to the settlement agreement and the promissory note, the shares will be returned to us at various stages based upon payments made on the promissory note. Assuming the promissory note is paid in full
pursuant to its terms, all of the shares will be returned. In October 2003, 32,589 shares were returned to the Company and are held by us as treasury stock. Assuming the balance of the promissory note is paid in full pursuant to its terms; all
remaining shares will be returned and held as treasury stock. If there is a default on the promissory note, the landlord has the right to keep all or part of the shares to satisfy any remaining obligation. The issuance of the restricted shares of
common stock did not involve a public offering. The restricted shares were issued by the Company in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act.



|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|------- | ---------------------------------------------------------



The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included in Item 7 of
this report. This discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those discussed in the forward-looking
statements as a result of various factors, including those set forth in our filings with the SEC and, specifically, the risk factors set forth in Item 1, Description of BusinessRisk Factors.



GENERAL



Our business model is to acquire technology companies that deliver software products and related professional services to
middle-market companies. We currently offer products and services that improve the utilization of business information for middle-market companies within the United States. We expect that current and prospective customers will benefit from
integrated business application solutions that are delivered through portal technology or as traditional licensed products. Our acquisitions target companies with existing strategic relationships with Oracle, IBM or Microsoft that will allow us to
take advantage of partnership opportunities available only to those select parties. The technology companies targeted for acquisition are those that operate within the following business sectors and operating business units: (1) Information
Technology (IT) Professional Services; (2) Business Application Software (BAS) comprised of six product groups; and (3) Application Services and Management.



Our acquisitions have included ThinkSpark, a professional services firm specializing in the installation and integration of
technology solutions from Oracle Corporation; VirtuallyThere, a web services firm; UDT Consulting, a professional services firm specializing in the installation, integration and application of software solutions from IBM, Informix and Microsoft; and
Media Resolutions, an application and managed hosting services provider.



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Initial development of our business model has involved the acquisition of IT Professional Services and
Application Services and Management firms that have existing relationships with numerous middle-market customers. Subsequent acquisitions are expected to target companies that service or offer software products operating on Oracle, IBM or Microsoft
database technologies that support the application service delivery channel. Nearly all operations are expected to continue within each operating business unit while a small corporate staff will interface with the capital markets, formulate and
manage our overall strategic objectives and oversee all mergers and acquisitions.



RESULTS OF OPERATIONS



Year Ended December
31, 2003 Compared to the Year Ended December 31, 2002



Net Revenue.As a result of our acquisitions in 2002 and the ThinkSpark acquisition in May 2003, revenues increased $6.4 million to $8.8 million for the year ended December 31, 2003 from $2.4 million for the year ended December 31,
2002. This increase includes $5.9 million generated by ThinkSpark, and an increase in revenue of $500,000 from the companies acquired in 2002. Gross margins across all businesses averaged 40.5% in 2003 as compared to 43.0% in 2002. This decline is
primarily due to the revenue associated with the large volume of government contracts, which yield lower margins, since the acquisition of ThinkSpark in May 2003.



General and Administrative Expenses.General and administrative expenses increased $2.6 million, or 80.6% to $5.7
million for the year ended December 31, 2003 from $3.1 million for the year ended December 31, 2002. This increase primarily includes $2.2 million of general and administrative expenses for ThinkSpark, a $170,000 increase in general and
administrative expenses relating to the 2002 acquisitions, and an increase in legal and other professional expenses of $230,000 partially offset by a reduction in the third quarter of office and accounting personnel and the related costs.



Marketing Expenses.Marketing expenses increased
$255,200 to $438,300 for the year ended December 31, 2003 from $183,100 for the year ended December 31, 2002. This increase in expenses is primarily related to salaries and bonuses of internal sales and marketing personnel stemming from the
acquisitions in 2002 and 2003.



Bad Debt. Bad debt
expense in 2003 primarily reflects reserves recorded against receivables of UDT Consulting, Inc. Bad debt expenses in 2002 reflected the $1,037,500 recovery of amounts written off in 2001 with respect to a September 2000 loan that was subsequently
settled in 2002 and all rights sold to a third party. See Note 6, Note Receivable, to our consolidated financial statements included elsewhere in this report.



Depreciation and Amortization Expenses.The depreciation expense of $269,800 for the year ended December 31, 2003 is
related primarily to the property and equipment acquired through the acquisitions. The amortization expense of $741,100 relates to non-competition agreements entered into with former employees of the acquired companies and our Oracle partnership and
government contracts assumed in the ThinkSpark acquisition.



Impairment of Assets.In late 2002, as a result of eliminations or delays on significant contracts and an overall decline in the market, The Visionary Groups revenue fell below acceptable levels and operations were ceased. As
such, the goodwill recorded as part of the acquisition was written off and is included as an impairment of assets for the year ended December 31, 2002. In late 2003, due to a loss of significantly all contracts and an overall decline in the market,
revenue for UDT Consulting fell below acceptable levels and the remaining operations of UDT Consulting were consolidated under another of the Companys subsidiaries. As such, the goodwill recorded as part of the acquisition was written off and
is included as an impairment of assets for the year ended December 31, 2003. Additionally, based on annual third party valuations performed during the third and fourth quarters of 2003 for all the intangibles and goodwill, we also recorded a partial
impairment of the goodwill recorded as part of the Media Resolutions acquisition and an impairment of the intangibles recorded as part of the acquisition of the Axtive trademark and other tangible assets.



Interest Expense.Interest expense increased $247,800 to $313,700 for
the year ended December 31, 2003 from $65,900 for the year ended December 31, 2002. Interest expense in 2002 was attributable to certain loans that were converted into equity in April 2002 with the issuance of preferred stock and the cost of
factoring receivables by our subsidiary, UDT Consulting. Interest expense in 2003 reflects primarily the cost of factoring receivables by two of our subsidiaries, UDT Consulting and ThinkSpark, and seven months interest expense on the
installment note and settlement agreements entered into as a result of the ThinkSpark acquisition.



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Gain on Extinguishment of Debt.Gain on extinguishment of debt for the year ended December 31,
2003 includes $390,000 for a reduction in the final settlement of the amounts owed to UDT Consulting for full and final consideration of the purchase price.



Management Fees.Management fees for the years ended December 31, 2003 and 2002 consist of fees we received from PurchasePooling Solutions, Inc.
and Demand Aggregation Solutions, LLC (DAS) for services of our Chief Operating Officer and other Axtive employees to manage the day-to-day affairs of PurchasePooling and DAS. See Note 5, Related Party Transactions, to our
consolidated financial statements included elsewhere in this report.



LIQUIDITY AND CAPITAL RESOURCES



At December
31, 2003, we had cash and cash equivalents of $146,000 and a working capital deficit of $7.8 million, compared to cash and cash equivalents of $444,000 and a working capital deficit of $1.4 million on December 31, 2002. During 2003, net cash used in
operating activities was $1.5 million as compared to $1.0 million in 2002. The decrease in cash flow from operations in 2003 is primarily the net result of the following: (1) cash used by the net loss of $2.6 million after adjustment for non-cash
expenses, (2) an increase in accounts payable of $1.3 million as a result of the ThinkSpark acquisition, and (3) a net change in all other assets and liabilities of $115,000. During 2002, cash used in operating activities amounted to $1 million and
consisted of (1) cash used by the net loss of $1.0 million after adjustment for non-cash expenses, (2) $600,000 increase in other liabilities resulting from judgments arising from our former One-on-One golf video business and amounts due on
factoring of our receivables, and (3) a decrease in all other assets and liabilities of $600,000.



During 2003, net cash used in investing activities was $750,000 as compared to $1.5 million in 2002. The year 2003 use was due primarily to settlements of
prior acquisitions in the amount of $190,000, management fees receivable and advances due from stockholder in the amount of $395,000 and the acquisition of ThinkSpark, net of cash received, in the amount of $180,000. The year 2002 use was primarily
due to acquisition of subsidiaries in the amount of $1.5 million.



During 2003, net cash provided by financing activities was $1.9 million as compared to $2.9 million in 2002. Net cash provided in 2003 included $2.3 million in proceeds from the issuance of preferred stock and warrants, and $700,000 in
proceeds from related parties offset by $1.0 million in repayments of long-term debt, settlements notes and other short-term notes entered into in connection with the ThinkSpark acquisition,. Net cash provided in 2002 included $2.9 million in
proceeds from the issuance of preferred stock and warrants and $200,000 from the issuance of an option to a related party offset by repayments of $140,000 on short-term notes and capital lease payments.



At February 26, 2004, we had cash and cash equivalents of $1.0 million and a
working capital deficit of $6.2 million.



During 2003, the
Company entered into an Assignment and Assumption Agreement to assume $5.0 million of debt of ThinkSpark outstanding with Merrill Lynch. As of December 31, 2003, the current portion outstanding is $4.8 million. The debt assumed is secured by all the
assets of ThinkSpark, although Merrill Lynch has agreed to subordinate its liens on up to $1.0 million of accounts receivable of ThinkSpark under certain circumstances. The debt is also guaranteed by the remaining subsidiaries of Axtive. The debt is
payable in monthly installments of $55,000 including 6% percent interest in year one, and monthly installments of $60,000, including 8% interest in year two, with the remaining balance due on June 1, 2005. At December 31, 2003, the Company was not
in compliance with certain performance covenants. Under the terms of the Merrill Lynch debt, in the event of a default, Merrill Lynch has the right to accelerate the maturity of the debt, whereupon all outstanding principal, interest and premiums on
the note immediately become due and payable. As such, the entire $4.9 million remaining due was classified as a current liability at December 31, 2003 and is included in Current portion  long-term debt in the accompanying
consolidated balance sheets. Subsequent to December 31, 2003, the Company has cured the default and is in negotiations with Merrill Lynch to obtain a waiver of the performance covenant; however, there can be no assurance that the Company will be
successful in obtaining such waiver.



Also during 2003, a
number of the Companys investors made bridge loans to the Company in the amount of approximately $587,000 to fund the working capital needs of the Company. The notes bore annual interest rates



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of 6% to 12% and are due and payable within two to six months of execution. As of December 31, 2003, the current portion outstanding was $581,000.



On December 15, 2003, we issued 12% promissory notes to
several of the companys investors in the amount of $134,000 to fund the working capital needs of the Company. We also issued warrants to purchase 668,755 shares of common stock at a per share price of $1.10. As of December 31, 2003, the
current portion outstanding, net of discount, was $26,000. Additional issuances of the 12% promissory notes were made in early 2004 for $718,000 for further funding of working capital needs by two of the Companys investors. In connection with
our common stock financing in February 2004, all of these notes were converted into shares of common stock or repaid. See Note 17 Subsequent Events - Private Placement of Common Stock.



Additionally during 2003, the Company entered into various other settlement
agreements with former landlords, customers, and employees of ThinkSpark. Of these settlements, $1.17 million bear interest rates of 6% and are all due and payable within six months to twenty-four months of execution, and $160,000 bear no interest
rate and are due and payable within twelve months of execution. As of December 31, 2003, the balance remaining due is $0.9 million, including $641,800 classified as current on the accompanying consolidated balance sheets.



We expect our liquidity to remain tight throughout 2004; however, we believe
our current cash reserves, cash flows generated by continuing purchases in 2004 as part of the February 2004 offering, and cash flows generated by our acquired companies will be sufficient to meet our liquidity requirements through the end of 2004.
While we have a level of comfort as to the projected cash flows generated by our operating companies, we are relying on projections based upon assumptions and forecasts, including factors beyond our control. Actual results could vary from our
projections and such variance could have a significant adverse effect on our liquidity.



We have historically financed our operations primarily through the sale of equity securities or instruments convertible into equity securities. There can be no assurance that future financings can be completed.



Series A Preferred Financings



In April 2002, we issued 4,200 shares of Series A Convertible Preferred
Stock in a private offering to new and existing private, accredited investors at $1,000 per share. We received gross proceeds of $4.2 million, consisting of $2.7 million in cash and $1.5 million in satisfaction of debt owed by Axtive to one of our
stockholders. Net proceeds of the sale were used for to acquire Media Resolutions, Inc., The Visionary Group, Inc., Virtually There, Inc. and the assets of Universal Data Technology, Inc. and for general corporate purposes. In connection with the
issuance of the Series A Preferred Stock, each purchaser received warrants entitling the holder to purchase shares of our common stock. The purchasers of Series A Preferred Stock have demand and incidental registration rights with respect to the
shares of common stock acquired upon conversion of the Series A Preferred Stock.



In July and August 2002, we issued an additional 240 shares of Series A Preferred Stock in private offerings to accredited investors with identical terms to the April 2002 sale of Series A Preferred Stock. The Company
received gross proceeds of $240,000 in cash. Net proceeds of the sale were used to repay short-term notes of $48,000 and for general corporate purposes. As part of this subsequent issuance, we issued additional warrants exercisable for shares of our
common stock.



In May 2003, we issued 2,335 shares of our
Series A Preferred Stock in a private offering to new and existing private, accredited investors at $1,000 per share. We received gross proceeds of $2.3 million, consisting of $2.25 million in cash and $84,000 in satisfaction of debt owed by Axtive
to a stockholder and to an executive officer. The additional shares were issued on similar terms and conditions as the 2002 issuances of Series A Preferred Stock, including the issuance of warrants to purchase common stock, except the initial
conversion price of the new shares of Series A Preferred was $1.00 per share, additional warrants were issued and the exercise price of the warrants was lower. These purchasers of Series A Preferred Stock have demand registration rights beginning in
May 2004, as well as incidental registration rights, with respect to the shares of common stock acquired upon conversion of the Series A Preferred Stock.



The initial issuance of Series A Preferred Stock in 2002 provided that subsequent issuances of the shares on terms more favorable than those provided to
the original investors in the Series A Preferred would automatically adjust the terms and conditions on the outstanding Series A Preferred Stock to the more favorable terms and



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conditions. As a result, the initial conversion price on all shares of Series A Preferred Stock issued in 2002 was reduced from $7.50 to $1.00 per share, and
the exercise price of the warrants issued in 2002 was reduced from $11.50 per share to $2.00 per share. Each purchaser of Series A Preferred Stock in 2002 was also issued a restated warrant exercisable for additional shares as a result of the
decrease in the initial conversion price.



In July 2003, we
issued an additional 50 shares of Series A Preferred Stock in a private offering to a purchaser in the May 2003 offering, G.C. Scooter Beachum, who is also one of our executive officers. The terms were identical to the May 2003 sale of
Series A Preferred Stock. The Company received gross proceeds of $50,000 in cash. As part of this subsequent issuance, we issued additional warrants exercisable for shares of our common stock.



Private Placement of Common Stock



On February 26, 2004, we issued 23,459,087 shares of our common stock in a
private offering to existing investors at $0.07687 per share. We received gross proceeds of $1.8 million, consisting of $1.05 million in cash and $750,000 in consideration of conversion of promissory notes and note warrants issued by Axtive to
certain of its stockholders. Of the net cash proceeds, after paying legal expenses related to the offering, we have used or expect to use $167,000 to repay short-term notes and a 12% promissory note issued to one of our investors, $456,000 to
satisfy past due liabilities and $296,000 to settle judgments and promissory notes from prior acquisitions. The balance is available for working capital and general corporate purposes. These purchasers have demand registration rights beginning in
February 2005, as well as incidental registration rights, with respect to the shares of common stock acquired.



As part of the February 2004 private offering, two of the purchasers agreed to purchase an aggregate of 15,345,464 additional shares of common stock for
cash on the same terms. The additional purchases are scheduled to occur monthly, in varying amounts from April 2004 to November 2004.



Additionally on February 26, 2004, we issued 7,648,221 shares of our common stock at $0.07687 per share to our preferred stockholders upon conversion of
all outstanding shares of our Series A Convertible Preferred Stock. Concurrent with this conversion, the preferred stockholders agreed to waive and terminate all warrants issued in conjunction with their previous purchases of Series A Convertible
Preferred Stock.



On March 5, 2004, as part of the February
2004 offering, we issued 571,090 of our common stock at $0.07687 per share to one of our stockholders in consideration of the conversion of a promissory note and note warrant issue by Axtive to that stockholder.



On March 26, 2004, as part of the February 2004 offering, we issued an
additional 3,694,521 shares of our common stock at $0.07687 per share. We received additional gross proceeds of $284,000, all of which is available for working capital and general corporate purposes.



CRITICAL ACCOUNTING POLICIES



Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and revenues
and expenses during the periods reported. Actual results could differ from those estimates. The Company believes the following are the critical accounting policies that could have the most significant effect on the Companys reported results
and require the most difficult, subjective or complex judgments by management.



Accounts Receivable



Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.
Management considers the following factors when determining the collectibility of specific customer accounts: customer credit-worthiness; past transaction history with the customer; current economic industry trends; and changes in customer payment
terms. If the financial condition of the Companys customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.



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Based on managements assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation
allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.



Revenue Recognition



The Company earns revenues primarily from providing consulting services and
providing education services. Although the Company provides consulting services under both time-and-material and fixed-price contracts, the majority of our service revenues are recognized under time-and-material contracts as hours and costs are
incurred. Revenues include reimbursable expenses billed to customers. Revenues from consulting services are recognized when the Company has received a signed agreement, the Company has delivered the services, and collection is considered probable by
management. Cost of revenues for consulting services includes salaries, benefits, and other direct expenses related to providing consulting services. Deposits received from customers in advance of the delivery of product or provision of service are
included in Other current liabilities in the accompanying consolidated balance sheets.



Education revenues include amounts billed for providing training seminars at Company-owned and third-party facilities. Revenues from Company-organized
courses are reported on a gross basis. Revenues from training courses conducted for Oracle Corporation are recorded on a net basis, as the Company receives a percentage of the amounts billed to participants. Cost of revenues for education revenues
includes salaries, benefits, and other direct expenses related to providing education services. Education revenues totaled less than 10% of total revenues for the years ended December 31, 2002 and 2003.



Goodwill and Other Intangible Assets



Effective January 1, 2002, we adopted SFAS No, 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and also specifies the criteria
for the recognition of intangible assets separately from goodwill. In accordance with SFAS No. 142, goodwill is no longer amortized but is subject to an impairment test at least annually or more frequently if impairment indicators arise. In
accordance with SFAS No. 142, the Company performed an annual impairment test of goodwill in the third quarter of 2002, and had valuation reports prepared by a third party to assist us in our annual impairment tests of goodwill in the third and
fourth quarters of 2003. Due to an overall decline in business (as further discussed in Note 3, Business Combinations, to our consolidated financial statements), of the approximate $906,000 of goodwill recorded in the acquisition of The
Visionary Group, $600,000 was written off in September 2002, and the balance was written off in December 2002; of the approximate $477,000 of goodwill recorded in the acquisition of Media Resolutions, Inc., $119,000 was written off in September
2003; and of the approximate $1.05 million of goodwill recorded in the acquisition of Universal Data Technology, Inc., $100,000 was written off in September 2003, and the balance was written off in December 2003. Additionally, the intangible asset
recorded for the Axtive trademark was written off in December 2003.



Long-Lived Assets



We have adopted Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under the provisions of this statement, we have evaluated our long-lived assets for financial impairment, and will
continue to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.



We evaluate the recoverability of long-lived assets and certain identifiable intangibles assets to be held and used by measuring the carrying amount of
the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values, less cost to sell.



SEASONALITY



We experience a moderate amount
of seasonality. Typically our billable hours, which directly affect our revenues, are reduced in the second half of the year, especially during the fourth quarter, due to the large number of holidays and vacation time taken by our employees and our
customers. As a result, our operating income as a percentage of revenues is generally the lowest in the fourth quarter of each calendar year.



THIRD PARTY REPORTS AND PRESS RELEASES



We do not make financial forecasts or projections nor do we endorse the financial forecasts or projections of third parties or comment on the accuracy of
third-party reports. We do not participate in the preparation of the reports or the estimates given by analysts. Analysts who issue financial reports are not privy to non-public financial information. Any purchase of our securities based on
financial estimates provided by analysts or third parties is done entirely at the risk of the purchaser.



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We periodically issue press releases to update stockholders on new developments at Axtive and our
business. These releases may contain certain statements of a forward-looking nature relating to future events or our future financial performance within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and which are intended to be covered by the safe harbors created by those statutory provisions. Readers are cautioned that such statements are only predictions and that actual events or results may differ substantially. Our
actual results and the timing of certain events could differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in our filings with the SEC and, specifically, the risk factors
set forth in Item 1, Description of BusinessRisk Factors.



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|ITEM 7. | FINANCIAL STATEMENTS
|------- | --------------------



INDEX TO FINANCIAL STATEMENTS



|                                                                                                                                          |  |     
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                          |  | Page
|                                                                                                                                          | 
|Report of Independent Certified Public Accountants                                                                                        |  | 29  
|                                                                                                                                          | 
|Report of Prior Independent Certified Public Accountants                                                                                  |  | 30  
|                                                                                                                                          | 
|Consolidated Balance Sheets as of December 31, 2002 and 2003                                                                              |  | 31  
|                                                                                                                                          | 
|Consolidated Statements of Operations for the Years Ended December 31, 2002 and 2003                                                      |  | 32  
|                                                                                                                                          | 
|Consolidated Statement of Changes in Stockholders Equity (Deficit) and Comprehensive Loss for the Years Ended December 31, 2002 and 2003 |  | 33  
|                                                                                                                                          | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2002 and 2003                                                      |  | 34  
|                                                                                                                                          | 
|Notes to Consolidated Financial Statements                                                                                                |  | 35  



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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors and Stockholders

of Axtive Corporation



We have audited the accompanying consolidated balance sheet of Axtive Corporation and Subsidiaries (the Company), as of December
31, 2003, and the related consolidated statements of operations, stockholders equity (deficit) and comprehensive loss and cash flows for the year then ended. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audit.



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



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Axtive Corporation and Subsidiaries as of December 31, 2003, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of
America.



The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company incurred a net loss of approximately $4.8 million during the year ended December 31, 2003, and, as of December 31, 2003, the Companys
current liabilities exceeded its current assets by approximately $7.8 million. These factors, among others, as discussed in Note 2 to the financial statements, raise substantial doubt about the Companys ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.













/s/ KBA GROUP LLP

Dallas, Texas

March 26, 2004



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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors and Stockholders

of Axtive Corporation



We have audited the accompanying consolidated balance sheet of Axtive Corporation and Subsidiaries (formerly Edge Technology Group, Inc.)
(the Company), as of December 31, 2002, and the related consolidated statements of operations, stockholders equity (deficit) and comprehensive loss and cash flows for the year then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.



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



In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Axtive Corporation and Subsidiaries as of December 31, 2002, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.



The accompanying
consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company incurred a net loss of approximately $2.2 million during the year ended December 31, 2002, and, as
of that date, the Companys current liabilities exceeded its current assets by approximately $1.4 million. These factors, among others, as discussed in Note 2 to the financial statements, raise substantial doubt about the Companys ability
to continue as a going concern. Managements plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.













Grant Thornton LLP

Dallas, Texas

July 1, 2003



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AXTIVE CORPORATION and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                                                                                                          |  |              |             |   |      |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                                                                                                                                                                          |  | December 31, |            
|                                                                                                                                                                                                                                                                                                          |  | 2002         |             |   | 2003 |  
|CURRENT ASSETS                                                                                                                                                                                                                                                                                            |  |              |             |   |      |   |             |  
|Cash and cash equivalents                                                                                                                                                                                                                                                                                 |  | $            | 444,275     |   |      | $ | 146,055     |  
|Marketable securities                                                                                                                                                                                                                                                                                     |  |              | 26,873      |   |      |   |            |  
|Accounts receivable, net of allowance for doubtful accounts of $58,618 and $149,325 at December 31, 2002 and 2003,
respectively                                                                                                                                                                           |  |              | 392,043     |   |      |   | 1,816,278   |  
|Other current assets                                                                                                                                                                                                                                                                                      |  |              | 121,984     |   |      |   | 225,128     |  
|                                                                                                                                                                                                                                                                                                          |  |              |             |   |      |   |             |  
|Total current assets                                                                                                                                                                                                                                                                                      |  |              | 985,175     |   |      |   | 2,187,461   |  
|NON-CURRENT ASSETS                                                                                                                                                                                                                                                                                        |  |              |             |   |      |   |             |  
|Property and equipment, net                                                                                                                                                                                                                                                                               |  |              | 301,388     |   |      |   | 471,697     |  
|Goodwill                                                                                                                                                                                                                                                                                                  |  |              | 2,247,714   |   |      |   | 3,579,608   |  
|Intangible assets, net                                                                                                                                                                                                                                                                                    |  |              | 361,476     |   |      |   | 3,097,515   |  
|Other assets                                                                                                                                                                                                                                                                                              |  |              | 8,853       |   |      |   | 36,168      |  
|                                                                                                                                                                                                                                                                                                          |  |              |             |   |      |   |             |  
|TOTAL ASSETS                                                                                                                                                                                                                                                                                              |  | $            | 3,904,606   |   |      | $ | 9,372,449   |  
|                                                                                                                                                                                                                                                                                                          |  |              |             |   |      |   |             |  
|CURRENT LIABILITIES                                                                                                                                                                                                                                                                                       |  |              |             |   |      |   |             |  
|Accounts payable                                                                                                                                                                                                                                                                                          |  | $            | 408,187     |   |      | $ | 1,982,803   |  
|Accrued expenses                                                                                                                                                                                                                                                                                          |  |              | 322,380     |   |      |   | 575,745     |  
|Short-term notes payable                                                                                                                                                                                                                                                                                  |  |              | 995,619     |   |      |   | 100,000     |  
|Short-term notes payable - related parties, net of debt discount of $0 and $108,794 at December 31, 2002 and 2003,
respectively                                                                                                                                                                           |  |              |            |   |      |   | 607,491     |  
|Current portion - long-term debt                                                                                                                                                                                                                                                                          |  |              |            |   |      |   | 4,883,646   |  
|Current portion - settlement notes payable                                                                                                                                                                                                                                                                |  |              |            |   |      |   | 1,006,199   |  
|Lease termination liability                                                                                                                                                                                                                                                                               |  |              |            |   |      |   | 236,650     |  
|Other current liabilities                                                                                                                                                                                                                                                                                 |  |              | 666,333     |   |      |   | 608,110     |  
|                                                                                                                                                                                                                                                                                                          |  |              |             |   |      |   |             |  
|Total current liabilities                                                                                                                                                                                                                                                                                 |  |              | 2,392,519   |   |      |   | 10,000,644  |  
|NON-CURRENT LIABILITIES                                                                                                                                                                                                                                                                                   |  |              |             |   |      |   |             |  
|Settlement notes payable, less current portion                                                                                                                                                                                                                                                            |  |              |            |   |      |   | 173,359     |  
|Other liabilities                                                                                                                                                                                                                                                                                         |  |              | 69,195      |   |      |   | 53,735      |  
|                                                                                                                                                                                                                                                                                                          |  |              |             |   |      |   |             |  
|Total non-current liabilities                                                                                                                                                                                                                                                                             |  |              | 69,195      |   |      |   | 227,094     |  
|                                                                                                                                                                                                                                                                                                          |  |              |             |   |      |   |             |  
|TOTAL LIABILITIES                                                                                                                                                                                                                                                                                         |  |              | 2,461,714   |   |      |   | 10,227,738  |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                             |  |              |            |   |      |   |            |  
|STOCKHOLDERS EQUITY / (DEFICIT)                                                                                                                                                                                                                                                                          |  |              |             |   |      |   |             |  
|Series A convertible preferred stock, $.01 par value, 5,000,000 shares authorized, 4,440 issued and outstanding at December 31, 2002, net of
discount; liquidation preference of $4,440,000, and 6,825 issued and outstanding at December 31, 2003, net of discount; liquidation preference of $6,825,000 |  |              | 3,925,572   |   |      |   | 5,871,440   |  
|Common stock, $.01 par value, 10,000,000 shares authorized, 1,904,005 issued at December 31, 2002 and 2,195,688 issued at December 31,
2003                                                                                                                                                               |  |              | 19,040      |   |      |   | 21,957      |  
|Additional paid in capital                                                                                                                                                                                                                                                                                |  |              | 42,095,640  |   |      |   | 43,063,909  |  
|Treasury shares (32,589 shares)                                                                                                                                                                                                                                                                           |  |              |            |   |      |   | (326        | )
|Accumulated deficit                                                                                                                                                                                                                                                                                       |  |              | (44,586,502 | ) |      |   | (49,417,132 | )
|Management fees receivable and advances due from stockholder                                                                                                                                                                                                                                              |  |              |            |   |      |   | (395,137    | )
|Accumulated other comprehensive loss                                                                                                                                                                                                                                                                      |  |              | (10,858     | ) |      |   |            |  
|                                                                                                                                                                                                                                                                                                          |  |              |             |   |      |   |             |  
|TOTAL STOCKHOLDERS EQUITY / (DEFICIT)                                                                                                                                                                                                                                                                    |  |              | 1,442,892   |   |      |   | (855,289    | )
|                                                                                                                                                                                                                                                                                                          |  |              |             |   |      |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY / (DEFICIT)                                                                                                                                                                                                                                                    |  | $            | 3,904,606   |   |      | $ | 9,372,449   |  
|                                                                                                                                                                                                                                                                                                          |  |              |             |   |      |   |             |  



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



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AXTIVE CORPORATION and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                        |  |              |            |   |      |   |            |  
|----------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                        |  | December 31, |           
|                                                                        |  | 2002         |            |   | 2003 |  
|Net revenues                                                            |  | $            | 2,386,526  |   |      | $ | 8,828,091  |  
|Cost of revenues                                                        |  |              | (1,360,047 | ) |      |   | (5,251,183 | )
|                                                                        |  |              |            |   |      |   |            |  
|Gross profit                                                            |  |              | 1,026,479  |   |      |   | 3,576,908  |  
|Operating expenses                                                      |  |              |            |   |      |   |            |  
|General and administrative                                              |  |              | 3,101,284  |   |      |   | 5,684,985  |  
|Marketing                                                               |  |              | 183,135    |   |      |   | 438,318    |  
|Bad debt expense (recoveries), net                                      |  |              | (978,882   | ) |      |   | 90,707     |  
|Depreciation and amortization                                           |  |              | 134,116    |   |      |   | 1,010,961  |  
|Impairment of assets                                                    |  |              | 906,653    |   |      |   | 1,347,997  |  
|                                                                        |  |              |            |   |      |   |            |  
|Total operating expenses                                                |  |              | 3,346,306  |   |      |   | 8,572,968  |  
|                                                                        |  |              |            |   |      |   |            |  
|Operating loss                                                          |  |              | (2,319,827 | ) |      |   | (4,996,060 | )
|Other income (expense)                                                  |  |              |            |   |      |   |            |  
|Interest expense                                                        |  |              | (65,940    | ) |      |   | (313,719   | )
|Loss on sale of property and equipment                                  |  |              | (16,776    | ) |      |   |           |  
|Gain on extinguishment of debt                                          |  |              |           |   |      |   | 390,619    |  
|Management fees, related party                                          |  |              | 180,000    |   |      |   | 200,000    |  
|Other income (expense), net                                             |  |              | 41,728     |   |      |   | (111,470   | )
|                                                                        |  |              |            |   |      |   |            |  
|Total other income (expense), net                                       |  |              | 139,012    |   |      |   | 165,430    |  
|                                                                        |  |              |            |   |      |   |            |  
|Net loss                                                                |  |              | (2,180,815 | ) |      |   | (4,830,630 | )
|Provision for preferred stock dividends                                 |  |              | (261,444   | ) |      |   | (470,580   | )
|Amortization of discount on preferred stock                             |  |              | (284,066   | ) |      |   | (429,934   | )
|                                                                        |  |              |            |   |      |   |            |  
|Net loss attributed to common stockholders                              |  | $            | (2,726,325 | ) |      | $ | (5,731,144 | )
|                                                                        |  |              |            |   |      |   |            |  
|Net loss per share attributed to common stockholders, basic and diluted |  | $            | (1.51      | ) |      | $ | (2.80      | )
|                                                                        |  |              |            |   |      |   |            |  
|Weighted average common shares outstanding, basic and diluted           |  |              | 1,808,025  |   |      |   | 2,046,783  |  
|                                                                        |  |              |            |   |      |   |            |  



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



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AXTIVE CORPORATION and SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)

AND COMPREHENSIVE LOSS



|                                                                                       |  |              |  |                 |        |        |                           |        |   |                                             |   |  |                                                        |            |   |               |   |         |                    |  |   |                                   |   |  |   |      |   |  |   |             |   |  |   |            |  
|-------------------------------------------------------------------------------------- |  | ------------ |  | --------------- | ------ | ------ | ------------------------- | ------ | - | ------------------------------------------- | - |  | ------------------------------------------------------ | ---------- | - | ------------- | - | ------- | ------------------ |  | - | --------------------------------- | - |  | - | ---- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                                       |  | Common Stock |  | Preferred Stock |        |        | AdditionalPaid in Capital |        |   | AccumulatedOther ComprehensiveIncome (loss) |   |  | Management FeesReceivable andAdvances DueFrom S/Holder |            |   | TreasuryStock |   |         | AccumulatedDeficit |  |   | TotalStockholdersEquity (Deficit) |  
|                                                                                       |  | Shares       |  | Amount          |        | Shares |                           | Amount |   |                                             |   |  |                                                        |            |  
|Balance December 31, 2001                                                              |  | 1,648,856    |  | $               | 16,488 |        |                          |        | $ |                                            |   |  | $                                                      | 40,197,008 |   |               | $ |        |                    |  | $ |                                  |   |  | $ |     |   |  | $ | (42,405,687 | ) |  | $ | (2,192,191 | )
|- Issuance of Series A Preferred Stock and Warrants, Net of Offering Costs of $38,000  |  |             |  |                 |       |        | 4,440                     |        |   | 4,021,506                                   |   |  |                                                        | 380,000    |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 4,401,506  |  
|- Value of Beneficial Conversion Feature of Series A Preferred Stock                   |  |             |  |                 |       |        |                          |        |   | (380,000                                    | ) |  |                                                        | 380,000    |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   |           |  
|- Amortization Of Preferred Stock Beneficial Conversion Feature                        |  |             |  |                 |       |        |                          |        |   | 284,066                                     |   |  |                                                        | (284,066   | ) |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   |           |  
|- Issuance of Option to Infinity                                                       |  |             |  |                 |       |        |                          |        |   |                                            |   |  |                                                        | 200,000    |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 200,000    |  
|- Acquisition of Media Resolutions, Inc.                                               |  | 50,000       |  |                 | 500    |        |                          |        |   |                                            |   |  |                                                        | 312,500    |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 313,000    |  
|- Acquisition of VirtuallyThere, Inc.                                                  |  | 115,385      |  |                 | 1,154  |        |                          |        |   |                                            |   |  |                                                        | 453,460    |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 454,614    |  
|- Acquisiton of Axtive Name and Other Assets                                         |  | 40,000       |  |                 | 400    |        |                          |        |   |                                            |   |  |                                                        | 167,600    |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 168,000    |  
|- Issuance of Shares for Services                                                      |  | 10,000       |  |                 | 100    |        |                          |        |   |                                            |   |  |                                                        | 31,900     |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 32,000     |  
|- Conversion of Infinity Loans                                                         |  | 39,764       |  |                 | 398    |        |                          |        |   |                                            |   |  |                                                        | 257,238    |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 257,636    |  
|- Comprehensive Loss:                                                                  |  |              |  |                 |        |        |                           |        |   |                                             |   |  |                                                        |            |   |               |   |         |                    |  |   |                                   |   |  |   |      |   |  |   |             |   |  |   |            |  
|- Net Loss                                                                             |  |             |  |                 |       |        |                          |        |   |                                            |   |  |                                                        |           |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   | (2,180,815  | ) |  |   | (2,180,815 | )
|- Change in Fair Value of Marketable Securities                                        |  |             |  |                 |       |        |                          |        |   |                                            |   |  |                                                        |           |   |               |   | (10,858 | )                  |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | (10,858    | )
|                                                                                       |  |              |  |                 |        |        |                           |        |   |                                             |   |  |                                                        |            |   |               |   |         |                    |  |   |                                   |   |  |   |      |   |  |   |             |   |  |   |            |  
|Total Comprehensive Loss                                                               |  |              |  |                 |        |        |                           |        |   |                                             |   |  |                                                        |            |   |               |   |         |                    |  |   |                                   |   |  |   |      |   |  |   |             |   |  |   | (2,191,673 |  
|                                                                                       |  |              |  |                 |        |        |                           |        |   |                                             |   |  |                                                        |            |   |               |   |         |                    |  |   |                                   |   |  |   |      |   |  |   |             |   |  |   |            |  
|Balance December 31, 2002                                                              |  | 1,904,005    |  |                 | 19,040 |        | 4,440                     |        |   | 3,925,572                                   |   |  |                                                        | 42,095,640 |   |               |   | (10,858 | )                  |  |   |                                  |   |  |   |     |   |  |   | (44,586,502 | ) |  |   | 1,442,892  |  
|- Issuance of Series A Preferred Stock and Warrants, Net of Offering Costs of $124,000 |  |             |  |                 |       |        | 2,385                     |        |   | 1,849,934                                   |   |  |                                                        | 411,000    |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 2,260,934  |  
|- Issuance of Warrants and Stock for Services                                          |  | 140,000      |  |                 | 1,400  |        |                          |        |   |                                            |   |  |                                                        | 116,600    |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 118,000    |  
|- Amortization Of Preferred Stock Beneficial Conversion Feature                        |  |             |  |                 |       |        |                          |        |   | 95,934                                      |   |  |                                                        | (95,934    | ) |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   |           |  
|- Issuance of Common Stock as Collateral (see Note 12)                                 |  | 121,915      |  |                 | 1,219  |        |                          |        |   |                                            |   |  |                                                        | (1,219     | ) |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   |           |  
|- Additional Shares Issued for Acquisition of Assets                                   |  | 29,768       |  |                 | 298    |        |                          |        |   |                                            |   |  |                                                        | 14,702     |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 15,000     |  
|- Issuance of Warrants to Settle Note Payable                                          |  |             |  |                 |       |        |                          |        |   |                                            |   |  |                                                        | 414,000    |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 414,000    |  
|- Issuance of Warrants to Investors in Connection With Obtaining Debt Financing        |  |             |  |                 |       |        |                          |        |   |                                            |   |  |                                                        | 108,794    |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 108,794    |  
|- Treasury Stock Acquired (see Note 12)                                                |  |             |  |                 |       |        |                          |        |   |                                            |   |  |                                                        | 326        |   |               |   |        |                    |  |   |                                  |   |  |   | (326 | ) |  |   |            |   |  |   |           |  
|- Management Fees Receivable and Advances Due From Stockholder                         |  |             |  |                 |       |        |                          |        |   |                                            |   |  |                                                        |           |   |               |   |        |                    |  |   | (395,137                          | ) |  |   |     |   |  |   |            |   |  |   | (395,137   | )
|- Comprehensive Loss:                                                                  |  |              |  |                 |        |        |                           |        |   |                                             |   |  |                                                        |            |   |               |   |         |                    |  |   |                                   |   |  |   |      |   |  |   |             |   |  |   |            |  
|- Net Loss                                                                             |  |             |  |                 |       |        |                          |        |   |                                            |   |  |                                                        |            |   |               |   |        |                    |  |   |                                  |   |  |   |     |   |  |   | (4,830,630  | ) |  |   | (4,830,630 | )
|- Realized Loss on Sale of Marketable Securities                                       |  |             |  |                 |       |        |                          |        |   |                                            |   |  |                                                        |           |   |               |   | 10,858  |                    |  |   |                                  |   |  |   |     |   |  |   |            |   |  |   | 10,858     |  
|                                                                                       |  |              |  |                 |        |        |                           |        |   |                                             |   |  |                                                        |            |   |               |   |         |                    |  |   |                                   |   |  |   |      |   |  |   |             |   |  |   |            |  
|Total Comprehensive Loss                                                               |  |              |  |                 |        |        |                           |        |   |                                             |   |  |                                                        |            |   |               |   |         |                    |  |   |                                   |   |  |   |      |   |  |   |             |   |  |   | (4,819,772 | )
|                                                                                       |  |              |  |                 |        |        |                           |        |   |                                             |   |  |                                                        |            |   |               |   |         |                    |  |   |                                   |   |  |   |      |   |  |   |             |   |  |   |            |  
|Balance December 31, 2003                                                              |  | 2,195,688    |  | $               | 21,957 |        | 6,825                     |        | $ | 5,871,440                                   |   |  | $                                                      | 43,063,909 |   |               | $ |        |                    |  | $ | (395,137                          | ) |  | $ | (326 | ) |  | $ | (49,417,132 | ) |  | $ | (855,289   | )
|                                                                                       |  |              |  |                 |        |        |                           |        |   |                                             |   |  |                                                        |            |   |               |   |         |                    |  |   |                                   |   |  |   |      |   |  |   |             |   |  |   |            |  



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



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AXTIVE CORPORATION and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                      |  |                                 |             |   |      |   |             |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                                      |  | For the year ended December 31, |            
|                                                                                                      |  | 2002                            |             |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                  |  |                                 |             |   |      |   |             |  
|Net Loss                                                                                              |  |                                 | ($2,180,815 | ) |      |   | ($4,830,630 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                           |  |                                 |             |   |      |   |             |  
|Bad debt expense                                                                                      |  |                                 | 58,618      |   |      |   | 90,707      |  
|Non-cash stock and stock option compensation expense                                                  |  |                                 | 32,000      |   |      |   |            |  
|Depreciation and amortization                                                                         |  |                                 | 134,116     |   |      |   | 1,010,961   |  
|Impairment of assets                                                                                  |  |                                 | 906,653     |   |      |   | 1,347,997   |  
|Gain on extinguishment of debt                                                                        |  |                                 |            |   |      |   | (390,619    | )
|Loss on disposal of fixed assets                                                                      |  |                                 | 16,776      |   |      |   | 3,258       |  
|Common stock and warrants issued for services                                                         |  |                                 |            |   |      |   | 118,000     |  
|(Gain) loss on sale of marketable securities                                                          |  |                                 | (11,569     | ) |      |   | 21,654      |  
|Change in operating assets and liabilities, net of effect of acquisitions:                            |  |                                 |             |   |      |   |             |  
|Accounts receivable                                                                                   |  |                                 | (247,954    | ) |      |   | 177,680     |  
|Other current assets                                                                                  |  |                                 | (85,938     | ) |      |   | (18,136     | )
|Other assets                                                                                          |  |                                 | (5,544      | ) |      |   | 3,312       |  
|Accounts payable                                                                                      |  |                                 | (361,719    | ) |      |   | 1,271,996   |  
|Accrued expenses                                                                                      |  |                                 | 81,103      |   |      |   | (330,939    | )
|Other current liabilities                                                                             |  |                                 | 623,522     |   |      |   | (147,506    | )
|Other liabilities                                                                                     |  |                                 | 18,807      |   |      |   | 200,625     |  
|                                                                                                      |  |                                 |             |   |      |   |             |  
|Net cash used in operating activities                                                                 |  |                                 | (1,021,944  | ) |      |   | (1,471,640  | )
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                  |  |                                 |             |   |      |   |             |  
|Capital expenditures, net                                                                             |  |                                 | (85,080     | ) |      |   | 2,395       |  
|Purchase of marketable securities                                                                     |  |                                 | (54,124     | ) |      |   |            |  
|Acquisition of subsidiaries, net of cash received                                                     |  |                                 | (1,499,846  | ) |      |   | (179,091    | )
|Settlements of prior acquisitions                                                                     |  |                                 |            |   |      |   | (189,710    | )
|Proceeds from the sale of marketable securities                                                       |  |                                 | 103,385     |   |      |   | 16,077      |  
|Advances to affiliated company                                                                        |  |                                 |            |   |      |   | (395,137    | )
|Purchase of Axtive name                                                                               |  |                                 | (9,638      | ) |      |   |            |  
|                                                                                                      |  |                                 |             |   |      |   |             |  
|Net cash used in investing activities                                                                 |  |                                 | (1,545,303  | ) |      |   | (745,466    | )
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                  |  |                                 |             |   |      |   |             |  
|Proceeds from the issuance of preferred stock and warrants                                            |  |                                 | 2,871,382   |   |      |   | 2,176,818   |  
|Payments on long-term debt                                                                            |  |                                 |            |   |      |   | (116,354    | )
|Proceeds from short-term debt (including $0 and $707,549 from related parties, respectively)          |  |                                 |            |   |      |   | 716,284     |  
|Repayment of settlement notes                                                                         |  |                                 |            |   |      |   | (490,245    | )
|Repayment of short-term notes payable                                                                 |  |                                 | (123,000    | ) |      |   | (324,893    | )
|Principal payments under capital leases                                                               |  |                                 | (19,427     | ) |      |   | (42,724     | )
|Issuance of option to Infinity                                                                        |  |                                 | 200,000     |   |      |   |            |  
|                                                                                                      |  |                                 |             |   |      |   |             |  
|Net cash provided by financing activities                                                             |  |                                 | 2,928,955   |   |      |   | 1,918,886   |  
|                                                                                                      |  |                                 |             |   |      |   |             |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                                               |  |                                 | 361,708     |   |      |   | (298,220    | )
|Cash and cash equivalents, beginning of year                                                          |  |                                 | 82,567      |   |      |   | 444,275     |  
|                                                                                                      |  |                                 |             |   |      |   |             |  
|Cash and cash equivalents, end of year                                                                |  | $                               | 444,275     |   |      | $ | 146,055     |  
|                                                                                                      |  |                                 |             |   |      |   |             |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                      |  |                                 |             |   |      |   |             |  
|Cash paid for interest                                                                                |  | $                               | 33,126      |   |      | $ | 202,383     |  
|Cash paid for taxes                                                                                   |  | $                               | 8,615       |   |      | $ |            |  
|SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION                                                       |  |                                 |             |   |      |   |             |  
|Property and equipment acquired through capital leases                                                |  | $                               | 25,498      |   |      | $ |            |  
|Issuance of restricted shares of common stock in connection with acquisitions                         |  | $                               | 768,000     |   |      | $ |            |  
|Issuance of common stock as payment for related party note payable                                    |  | $                               | 258,464     |   |      | $ |            |  
|Fair value of warrants issued in connection with sale of preferred stock                              |  | $                               | 380,000     |   |      | $ | 411,000     |  
|Fair value of warrants issued to settle a note payable                                                |  | $                               |            |   |      | $ | 414,000     |  
|Amortization of preferred stock beneficial conversion feature                                         |  | $                               | 284,066     |   |      | $ | 429,934     |  
|Issuance of common stock as collateral                                                                |  | $                               |            |   |      | $ | 12,191      |  
|Issuance of notes payable in connection with acquisition of ThinkSpark                                |  | $                               |            |   |      | $ | 181,440     |  
|Preferred stock issued in satisfaction of note payable                                                |  | $                               | 1,530,124   |   |      | $ | 84,115      |  
|Issuance of common stock as payment for assets                                                        |  | $                               | 168,000     |   |      | $ | 15,000      |  
|Fair value of warrants issued in connection with obtaining debt financing recorded as a debt discount |  | $                               |            |   |      | $ | 108,794     |  



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



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##### Table of Contents

AXTIVE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2003



1. NATURE OF OPERATIONS and SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Organization



Axtive Corporation (Axtive or Company), formerly
Edge Technology Group, Inc., was incorporated in Delaware in July 1994 and commenced operations in January 1995. We changed the name of our company to Axtive Corporation in October 2002 to better reflect our current business operations and business
strategy.



Axtive is a publicly traded company (OTC: AXTC.OB).
On December 23, 2003, the Company effected a 1-for-10 reverse share split of all of its common stock. Unless otherwise indicated in this report, all share numbers reflect the 1-for-10 reverse share split for all periods presented.



Our business model is to acquire technology companies that deliver software
products and related professional information technology services to middle-market companies. Our acquisitions have included ThinkSpark, a professional services firm specializing in the installation and integration of technology solutions from
Oracle Corporation; VirtuallyThere, a web services firm; UDT Consulting, a professional services firm specializing in the installation, integration and application of software solutions from IBM, Informix and Microsoft; and Media Resolutions, an
application and managed hosting services provider.



We will
continue to offer products and services that improve the utilization of business information for middle-market companies, initially within the United States. We expect that customer organizations will benefit from integrated business application
solutions that are delivered through portal technology or as traditional licensed products. Future acquisitions will target companies with existing strategic relationships with Oracle, IBM or Microsoft, allowing us to take advantage of partnership
opportunities available only to select parties. The technology companies targeted for acquisition are those that operate within the following business sectors and operating business units: (1) IT Professional Services; (2) Business Application
Software comprised of six product groups; and (3) Application Services and Management.



Accounting Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.



Cash and Cash Equivalents



Cash and cash equivalents include bank demand deposits, money market funds
and other highly liquid investments with original maturities of three months or less at the date of purchase.



Marketable Securities



Marketable equity securities are classified as available-for-sale and are recorded at fair market value based on quoted market prices. The net unrealized
gain or loss of marketable securities is included in Accumulated other comprehensive income (loss) in the equity section of the accompanying consolidated balance sheets. Realized gains and losses and declines in market value determined
to be other than temporary are included in Other income (expense), net in the accompanying consolidated statements of operations. Realized gains and losses are based on the average cost of shares acquired.



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Accounts Receivable



Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectibility of specific customer accounts: customer credit-worthiness;
past transaction history with the customer; current economic industry trends; and changes in customer payment terms. If the financial condition of the Companys customers were to deteriorate, adversely affecting their ability to make payments,
additional allowances would be required. Based on managements assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the
Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.



Property and Equipment



Property and equipment, comprised primarily of computer equipment, software and office equipment, are stated at cost, net of accumulated depreciation.
Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets that range from 3 to 7 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated
useful life of the related asset. Expenditures for maintenance and repairs are charged against income as incurred and betterments are capitalized.



Long-Lived Assets



We have adopted Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Under the provisions of this statement, we have evaluated our long-lived assets for financial impairment, and will continue to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not
be fully recoverable.



We evaluate the recoverability of
long-lived assets and certain identifiable intangibles assets to be held and used by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that
the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values, less cost to sell.



Revenue Recognition



The Company earns revenues primarily from providing consulting services and
providing education services. Although the Company provides consulting services under both time-and-material and fixed-price contracts, the majority of our service revenues are recognized under time-and-material contracts as hours and costs are
incurred. Revenues include reimbursable expenses billed to customers. Revenues from consulting services are recognized when the Company has received a signed agreement, the Company has delivered the services, and collection is considered probable by
management. Cost of revenues for consulting services includes salaries, benefits, and other direct expenses related to providing consulting services. Deposits received from customers in advance of the delivery of product or provision of service are
included in Other current liabilities in the accompanying consolidated balance sheets.



Education revenues include amounts billed for providing training seminars at Company-owned and third-party facilities. Revenues from Company-organized
courses are reported on a gross basis. Revenues from training courses conducted for Oracle Corporation are recorded on a net basis, as the Company receives a percentage of the amounts billed to participants. Cost of revenues for education revenues
includes salaries, benefits, and other direct expenses related to providing education services. Education revenues totaled less than 10% of total revenues for the years ended December 31, 2002 and 2003.



Principles of Consolidation



The Companys consolidated financial statements include the Company and
its wholly owned subsidiaries. All significant intercompany balances and intercompany transactions have been eliminated in consolidation.



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##### Table of Contents

Goodwill and Other Intangible Assets



Effective January 1, 2002, we adopted SFAS No, 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and also specifies the criteria
for the recognition of intangible assets separately from goodwill. In accordance with SFAS No. 142, goodwill is no longer amortized but is subject to an impairment test at least annually or more frequently if impairment indicators arise. In
accordance with SFAS No. 142, the Company performed an annual impairment test of goodwill in the third quarter of 2002, and had valuation reports prepared by a third party to assist us in our annual impairment tests of goodwill in the third and
fourth quarters of 2003. Due to an overall decline in business (as further discussed in Note 3, Business Combinations), of the approximate $906,000 of goodwill recorded in the acquisition of The Visionary Group, $600,000 was written off
in September 2002, and the balance was written off in December 2002; of the approximate $477,000 of goodwill recorded in the acquisition of Media Resolutions, Inc., $119,000 was written off in September 2003; and of the approximate $1.05 million of
goodwill recorded in the acquisition of Universal Data Technology, Inc., $100,000 was written off in September 2003, and the balance was written off in December 2003. Additionally, the intangible asset recorded for the Axtive trademark was written
off in December 2003.



A summary of the changes in goodwill is
as follows:



|                                        |  |   |            |  
|--------------------------------------- |  | - | ---------- | -
|Net carrying value at December 31, 2001 |  | $ |           |  
|Acquisitions:                           |  |   |            |  
|The Visionary Group                     |  |   | 906,653    |  
|Media Resolutions, Inc.                 |  |   | 477,646    |  
|Virtually There, Inc.                   |  |   | 718,684    |  
|Universal Data Technology, Inc.         |  |   | 1,051,384  |  
|Impairment lossThe Visionary Group     |  |   | (906,653   | )
|                                        |  |   |            |  
|Net carrying value at December 31, 2002 |  |   | 2,247,714  |  
|Acquisition of ThinkSpark Corporation   |  |   | 2,507,544  |  
|Settlements of previous acquisitions:   |  |   |            |  
|Media Resolutions, Inc.                 |  |   | (732       | )
|Virtually There, Inc.                   |  |   | (4,558     | )
|Impairment losses:                      |  |   |            |  
|Media Resolutions, Inc.                 |  |   | (118,976   | )
|Universal Data Technology, Inc.         |  |   | (1,051,384 | )
|                                        |  |   |            |  
|Net carrying value at December 31, 2003 |  | $ | 3,579,608  |  
|                                        |  |   |            |  



Intangible assets
consist of the following as of December 31:



|                                               |  |                     |         |                         |   |                     |  |                         |           |  |   |        
|---------------------------------------------- |  | ------------------- | ------- | ----------------------- | - | ------------------- |  | ----------------------- | --------- |  | - | -------
|                                               |  | 2002                |         | 2003                   
|                                               |  | Gross CarryingValue |         | AccumulatedAmortization |   | Gross CarryingValue |  | AccumulatedAmortization
|Amortizable intangible assets:                 |  |                     |         |                         |   |                     |  |                         |           |  |   |        
|Non-compete agreements                         |  | $                   | 249,248 |                         | $ | 50,410              |  | $                       | 911,040   |  | $ | 328,334
|Oracle partnership                             |  |                     |        |                         |   |                    |  |                         | 661,792   |  |   | 193,023
|Government contracts acquired                  |  |                     |        |                         |   |                    |  |                         | 2,316,270 |  |   | 270,230
|                                               |  |                     |         |                        
|Intangible assets not subject to amortization: |  |                     |         |                         |   |                     |  |                         |           |  |   |        
|Tradename                                      |  |                     | 162,638 |                         |   |                    |  |                         |          |  |   |       
|                                               |  |                     |         |                         |   |                     |  |                         |           |  |   |        
|Total                                          |  | $                   | 411,886 |                         | $ | 50,410              |  | $                       | 3,889,102 |  | $ | 791,587
|                                               |  |                     |         |                         |   |                     |  |                         |           |  |   |        



Amortization expense
related to the intangible assets totaled $50,410 and $741,177 for the twelve months ended December 31, 2002 and 2003, respectively. The aggregate estimated amortization expense for intangible assets remaining as of December 31, 2003 is as follows:



|      |  |   |          
|----- |  | - | ---------
|2004  |  | $ | 1,175,872
|2005  |  |   | 765,472  
|2006  |  |   | 489,738  
|2007  |  |   | 473,407  
|2008  |  |   | 193,026  
|      |  |   |          
|Total |  | $ | 3,097,515
|      |  |   |          



Income Taxes



In accordance with SFAS No. 109, Accounting for
Income Taxes, deferred tax assets or liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or
liability is expected to be realized or settled. Deferred income tax expense or benefit is based on the changes in the asset or liability from period to period. If available evidence suggests that it is more likely than not that some portion or all
of the deferred tax assets will not be realized, a valuation allowance is established to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance would be included in the
provision for deferred income taxes in the period of change. Due to the continuing losses experienced by Axtive, we continue to fully reserve all net deferred tax assets due to the uncertainty surrounding their recoverability.



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Major Customers



During 2003, one customer accounted for approximately 12% of our total revenues. No other customer accounted for more than
7%. In late 2003, we lost one major customer, and in early 2004 we were notified by Oracle Corporation of their intent to terminate the Oracle Approved Education Center Agreement between Oracle and ThinkSpark. The revenue generated by these two
losses totaled approximately 11% of our total revenues in 2003.



During 2002, one customer accounted for approximately 15% of our total revenues. No other customer accounted for more than 10%.



Fair Value of Financial Instruments



The carrying amounts of cash and cash equivalents, investments, note receivable, notes payable, accounts receivable and accounts payable as reflected in
the accompanying consolidated balance sheets approximate fair value due to the short-term maturity of these instruments.



Loss per Share



Basic loss per share is calculated by dividing loss attributed to common stockholders by the weighted average number of shares of common stock outstanding
during each period.



As of December 31, 2002 and 2003, due to
our net losses, all shares of Common Stock issuable upon conversion of convertible stock and the exercise of outstanding options and warrants have been excluded from the computation of diluted loss per share in the accompanying consolidated
statements of operations as their impact would be antidilutive. The aggregate number of potentially dilutive instruments including preferred stock, warrants and options excluded from the loss per share calculation for the years ended December 31,
2002 and 2003 are 1,513,281 and 11,935,763, respectively.



Accounting for Stock Based Compensation



The
Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Under APB Opinion No. 25,
compensation expense for employees is based on the excess, if any, on the date of grant, between the fair value of the Companys stock over the exercise price. Under APB Opinion No. 25, if the exercise price of an employees stock option
equals or exceeds the fair market value of the Companys stock on the date of grant, no compensation expense is recognized. The Company did not record compensation expense related to the issuance of stock options during the years ended December
31, 2002 and 2003. Had the Company determined compensation based on the fair value at the grant date for its stock options under SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure and amendment of FASB Statement No. 123, net loss and loss per share would have been increased as indicated below:



|                                           |  |                                 |   |  |             |  
|------------------------------------------ |  | ------------------------------- | - |  | ----------- | -
|                                           |  | For the Year Ended December 31, |  
|                                           |  | 2002                            |   |  | 2003        |  
|Net loss attributed to common stockholders |  |                                 |   |  |             |  
|As reported                                |  | ($2,726,325                     | ) |  | ($5,731,144 | )
|Pro forma compensation expense             |  | (1,814,827                      | ) |  | (1,790,224  | )
|                                           |  |                                 |   |  |             |  
|Pro forma                                  |  | ($4,541,152                     | ) |  | ($7,521,368 | )
|                                           |  |                                 |   |  |             |  
|Basic and diluted loss per share           |  |                                 |   |  |             |  
|As reported                                |  | ($1.51                          | ) |  | ($2.80      | )
|Pro forma                                  |  | ($2.51                          | ) |  | ($3.67      | )



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The assumptions used in determining the fair value of options granted for purposes of the preceding pro
forma disclosures are included in Note 14.



Reclassifications



Certain prior period
balances have been reclassified to conform to the current period presentation.



2. GOING CONCERN



The accompanying
consolidated financial statements have been prepared assuming that Axtive will continue as a going concern. We incurred net losses of approximately $2.2 million and $4.8 million during the years ended December 31, 2002 and 2003, respectively, and,
as of those dates, our current liabilities exceeded our current assets by approximately $1.4 million and $7.8 million, respectively. Additionally, at December 31, 2003 we have not made the required monthly payments on a significant portion of our
outstanding debt. These factors, among others, raise substantial doubt about our ability to continue as a going concern. We expect our liquidity to remain tight throughout 2004. We will look to our current cash reserves, cash reserves created by our
additional issuance of shares of common stock in February 2004 and continuing purchases in 2004 as part of the February 2004 offering discussed in Note 17, and cash flows generated from operations to meet current liquidity requirements. While we
have a level of comfort as to the projected cash flows generated by our acquired companies, we are relying on projections based upon assumptions and forecasts, including factors beyond our control. Actual results could vary from our projections and
such variance could have a significant adverse effect on our liquidity.We have historically financed our operations primarily through the sale of equity securities or instruments convertible into equity securities. There can be no assurance
that future financings can be completed. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that might be necessary
should we be unable to continue in existence.



3. BUSINESS COMBINATIONS



The acquisitions described below were made pursuant to
our business model as discussed in Note 1, Nature of Operations and Summary of Significant Accounting Policies. The purchase price for each acquisition was generally based upon a multiple of earnings before interest, taxes, depreciation
and amortization (EBITDA), adjusted for certain non-recurring costs deemed to be unique to the particular company or situation. Since the acquired companies are technology service companies with minimal tangible or intangible assets, the
purchases resulted in amounts characterized as goodwill.



Acquisition of Media Resolutions, Inc.



On
April 11, 2002, we closed the acquisition of Media Resolutions, Inc., an Application Service Provider (ASP) and website hosting company located in Dallas, Texas. We paid $330,000 in cash and notes and 50,000 restricted shares of our $.01
par value common stock (Common Stock) valued at $313,000 in exchange for all the outstanding shares of Media Resolutions.



The acquisition was accounted for using the purchase method of accounting. As such, the assets and liabilities of Media Resolutions were recorded at their
estimated fair value and the results of operations are included in our consolidated results of operations from the date of acquisition. The excess purchase price over the fair value



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of the tangible and intangible net assets acquired in the acquisition of Media Resolutions totaled approximately $477,000 and was allocated to goodwill. Due
to a slight decline in business in 2003, $119,000 of the recorded goodwill was written off in September 2003.



Acquisition of Virtually There, Inc.



In May 2002, we acquired Virtually There, Inc., an ASP and website hosting company located in Fort Worth, Texas. In exchange for the outstanding shares of
Virtually There, Inc., we issued $120,000 in notes, issued 115,385 shares of our restricted Common Stock valued at $455,000 to the shareholders of Virtually There, and assumed approximately $185,000 of Virtually Theres existing liabilities as
of the date of closing.



The acquisition was accounted for
using the purchase method of accounting. As such, the assets and liabilities of Virtually There were recorded at their estimated fair value and the results of operations are included in our consolidated results of operations from the date of
acquisition. The excess purchase price over the fair value of the identifiable assets acquired in the acquisition of Virtually There combined totaled approximately $714,000 and was allocated to goodwill. The value allocated to goodwill exceeded the
stated purchase price due to the assumption of liabilities at acquisition.



In July 2003, the Company announced the formation of ThinkSpark Web Services and Solutions, a business unit which combines the operations of its Virtually There, Inc. and Media Resolutions, Inc. subsidiaries.



Acquisition of The Visionary Group, Inc.



On April 8, 2002, we acquired The Visionary Group, Inc., a professional
services firm providing IT Professional Services related to Oracle applications software. Headquartered in Dallas, Texas, The Visionary Group has operations in Dallas and Austin, Texas. We paid $910,000 in cash and notes and paid approximately
$70,000 of existing debt in exchange for all the outstanding shares of The Visionary Group. The acquisition was accounted for using the purchase method of accounting. As such, the assets and liabilities of The Visionary Group were recorded at their
estimated fair value and the results of operations are included in our consolidated results of operations from the date of acquisition.



Following its acquisition, revenues for The Visionary Group fell below acceptable levels. We believe the decline resulted from an overall decline in the
market and the delay or elimination of several significant projects resulting from general economic conditions. Despite aggressive steps to rebuild the business including installing new management and producing new product offerings, we were not
successful and the subsidiary ceased operations in December 2002. Of the approximate $906,000 of goodwill recorded in the acquisition of The Visionary Group, $600,000 was written off in September 2002, and the balance was written off in December
2002.



Acquisition of Universal Data Technology, Inc.



On May 31, 2002, our newly created and wholly owned
subsidiary, UDT Consulting, Inc., acquired the assets of Universal Data Technology, Inc., an IT Professional Services practice headquartered in Dallas, Texas with additional operations in Arkansas and Florida. Our total purchase price for
substantially all of Universal Data Technologys assets was the sum of $1,127,750 (Minimum Purchase Price) and the product of multiplying two times UDT Consultings adjusted earnings before interest, taxes, depreciation and
amortization, as defined in the acquisition agreement, for the twelve months immediately following the closing date of the acquisition (the Measurement Period). The calculation of the purchase price is subject to certain deductions and
offset provisions. An initial payment of $227,750 and the forgiveness of a $150,000 promissory note from Universal Data Technology to Axtive were applied toward the purchase price as of the date of the closing. In July 2003, we paid Universal Data
Technology, Inc. $310,000 in full and final payment of the purchase price for the acquisition. $390,000, which represents the difference between the $700,000 originally recorded as a note payable as of the acquisition date and the amount paid of
$310,000, is included as a Gain on extinguishment of debt in the accompanying consolidated statements of operations.



The acquisition was accounted for using the purchase method of accounting. The assets acquired from Universal Data Technology were recorded at their
estimated fair value and the results of operations are included in our consolidated results of operations from the date of acquisition. The excess purchase price over the fair value of



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the tangible and intangible net assets acquired in the acquisition totaled approximately $1.05 million and was allocated to goodwill.



During the third and fourth quarters of 2003, revenues for UDT Consulting,
Inc. fell below acceptable levels. The decline resulted from the loss of several significant contracts and an overall decline in the market. In an effort to retain the remaining UDT business, while reducing overhead costs, all operations of UDT
Consulting, Inc. were consolidated under ThinkSpark Corporation, another of the Companys subsidiaries. Despite ThinkSparks aggressive steps to maintain the current business, substantially all remaining revenue was lost in December 2003.
Of the approximate $1.05 million of goodwill recorded in the acquisition of Universal Data Technology, $100,000 was written off in September 2003 and the balance was written off in December 2003.



Allocation of Purchase Price



Following is a summary of the amounts assigned to the assets and liabilities
of the companies acquired in 2002:



Net Assets
Acquired



|                                      |  |   |          
|------------------------------------- |  | - | ---------
|Cash                                  |  | $ | 140,116  
|Accounts receivable                   |  |   | 202,707  
|Property and equipment                |  |   | 240,907  
|Goodwill                              |  |   | 3,154,367
|Intangibles                           |  |   | 249,248  
|Other assets                          |  |   | 94,439   
|                                      |  |   |          
|Total assets acquired                 |  |   | 4,081,784
|Accounts payable and accrued expenses |  |   | 469,749  
|Other liabilities                     |  |   | 85,839   
|                                      |  |   |          
|Total liabilities assumed             |  |   | 555,588  
|                                      |  |   |          
|Total purchase price                  |  | $ | 3,526,196
|                                      |  |   |          



Approximately $1.05
million of goodwill is deductible for tax purposes.



Acquisition of ThinkSpark Corporation



In May
2003, we acquired ThinkSpark Corporation and its subsidiaries (ThinkSpark), a professional services firm providing IT Professional Services related to Oracle database software. ThinkSpark is headquartered in Dallas, Texas with additional
offices in Austin, San Antonio, Oklahoma City, and Las Vegas. The Company believes that ThinkSpark is a significant building block for growing Axtives IT professional services business in conjunction with executing the Companys current
business plan. As a result of the acquisition, the Company gained an industry savvy management team with decades of professional service experience, an established and profitable partnership with Oracle, and numerous long-term government contracts.
We assigned a value of $662,000 to non-compete agreements entered into by ThinkSpark management, amortizable over 2 years; $662,000 to the Oracle partnership, amortizable over 2 years; and approximately $2.3 million to the government contracts
acquired, amortizable over 5 years.



In exchange for all of the
outstanding shares of ThinkSpark, we paid approximately $242,000 in cash and notes and $198,000 in acquisition-related costs. As part of the acquisition, Axtive assumed $5.0 million of long-term debt from ThinkSparks secured creditor, Merrill
Lynch Business Financial Services, Inc. The debt assumed is secured by all of the assets of ThinkSpark, although Merrill Lynch agreed to subordinate its liens up to $1.0 million of accounts receivable of ThinkSpark under certain circumstances. The
debt is also guaranteed by the remaining subsidiaries of Axtive. We also issued Merrill Lynch warrants to acquire 500,000 shares of Axtives common stock in exchange for the retirement of an additional $1.9 million of debt due from ThinkSpark
to Merrill Lynch. The warrants have an exercise price of $0.10 per share and can be exercised anytime prior to the tenth anniversary of their issuance (May 2013). The issuance of these warrants, valued at $414,000 using the Black-Scholes model, had
no effect in the statements of operations as the debt was recorded at fair value as part of the ThinkSpark acquisition.



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The acquisition was accounted for using the purchase method of accounting. As such, the assets and
liabilities of ThinkSpark have been recorded at their estimated fair value and the results of operations have been included in our consolidated results of operations from the date of acquisition. The excess purchase price over the fair value of the
tangible and intangible assets acquired in the acquisition totaled $2.5 million and was allocated to goodwill.



Allocation of Purchase Price



Following is a summary of the amounts assigned to the assets and liabilities of ThinkSpark:



Net Assets Acquired



|                                      |  |   |          
|------------------------------------- |  | - | ---------
|Cash                                  |  | $ | 79,823   
|Accounts receivable                   |  |   | 1,692,622
|Property and equipment                |  |   | 445,746  
|Goodwill                              |  |   | 2,507,544
|Intangibles                           |  |   | 3,639,854
|Other assets                          |  |   | 115,635  
|                                      |  |   |          
|Total assets acquired                 |  |   | 8,481,224
|Accounts payable and accrued expenses |  |   | 1,102,121
|Other liabilities                     |  |   | 6,938,749
|                                      |  |   |          
|Total liabilities assumed             |  |   | 8,040,870
|                                      |  |   |          
|Total purchase price                  |  | $ | 440,354  
|                                      |  |   |          



None of the goodwill
recorded as a result of the ThinkSpark acquisition is expected to be deductible for tax purposes.



Pro Forma Results



The following unaudited pro forma consolidated results of operations have been prepared as if the acquisitions had occurred at the beginning of 2002 and
2003, respectively.



|                                                                        |  |                                |             |   |      |   |            |  
|----------------------------------------------------------------------- |  | ------------------------------ | ----------- | - | ---- | - | ---------- | -
|                                                                        |  | For the YearEnded December 31, |            
|                                                                        |  | 2002                           |             |   | 2003 |  
|Revenues                                                                |  | $                              | 22,425,009  |   |      | $ | 13,403,013 |  
|Net loss attributed to common stockholders                              |  | $                              | (11,654,247 | ) |      | $ | (6,553,626 | )
|Net loss per share attributed to common stockholders, basic and diluted |  | $                              | (5.85       | ) |      | $ | (3.12      | )
|Weighted average shares outstanding, basic and diluted                  |  |                                | 1,990,908   |   |      |   | 2,101,042  |  



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4. PROPERTY AND EQUIPMENT



Property and equipment, including equipment acquired under capital leases, consist of the following:



|                                 |  |                    |         |   |               |   |          |   |  |    
|-------------------------------- |  | ------------------ | ------- | - | ------------- | - | -------- | - |  | ---
|                                 |  | As of December 31, |         |   | Lives (Years)
|                                 |  | 2002               |         |   | 2003          |   |         
|Machinery and computer equipment |  | $                  | 264,982 |   |               | $ | 268,169  |   |  | 5  
|Computer software                |  |                    | 77,559  |   |               |   | 100,201  |   |  | 3-5
|Office furniture and equipment   |  |                    | 52,102  |   |               |   | 365,727  |   |  | 3  
|Leasehold improvements           |  |                    |        |   |               |   | 100,639  |   |  | 3-7
|                                 |  |                    |         |   |               |   |          |   |  |    
|                                 |  |                    | 394,643 |   |               |   | 834,736  |   |  |    
|Less: accumulated depreciation   |  |                    | (93,255 | ) |               |   | (363,039 | ) |  |    
|                                 |  |                    |         |   |               |   |          |   |  |    
|Property and equipment, net      |  | $                  | 301,388 |   |               | $ | 471,697  |   |  |    
|                                 |  |                    |         |   |               |   |          |   |  |    



5. RELATED PARTY TRANSACTIONS



Management Fees



In December 2000, we entered into a management agreement with
PurchasePooling Solutions, Inc., (PurchasePooling) in which PurchasePooling pays us a management fee ranging from $15,000 to $30,000 per month in return for the services provided by our President and other Axtive employees. We recognized
$230,000 and $50,000 in management fees from PurchasePooling during 2002 and 2003, respectively. Of such amounts, $50,000 and $10,000 is reflected as a reduction of management salaries and included in General and administrative expenses,
with the balance reflected as Management fees, related party in the accompanying consolidated statements of operations in 2002 and 2003, respectively.



In October 2001, we participated in the amount of $400,000 in a syndicated loan to PurchasePooling in the total amount of
$1,600,000. The loan was considered impaired and written off by the Company during 2001. In February 2003, the lenders to PurchasePooling (including Axtive) declared the loan to PurchasePooling in default and foreclosed upon the assets of the
company. The previous lenders formed a new entity, Demand Aggregation Solutions, LLC (DAS), to hold the assets, and Axtive, under a management agreement, has agreed to manage the affairs of DAS in exchange for a management fee of $25,000
per month beginning in May 2003. We recognized $200,000 in management fees from DAS during 2003. Of such amount, $40,000 is reflected as a reduction of management salaries and included in General and administrative expenses, with the
balance reflected as Management fees, related party in the accompanying consolidated statements of operations in 2003. Stemming from Axtives participation in the loan, the Company has a 25% membership interest in DAS that is
subject to forfeiture if Axtive breaches its obligations under the management agreement. Additionally, the management agreement with DAS obligates Axtive to advance DAS for working capital needs at a rate not exceeding, on average, $50,000 per month
up to a maximum of $1.2 million over the three year life of the agreement. At such time as DASs cash flow permits, DAS will reimburse the Company for all outstanding advances. Axtive has a receivable from DAS of approximately $395,000 which is
reflected as Management fees receivable and advances due from stockholder in the accompanying consolidated balance sheet at December 31, 2003, as the ultimate collection of this receivable is dependent on DASs ability to begin
producing cash flow sufficient to repay these amounts. Additionally, at December 31, 2003, the Company has trade receivables of $126,000 from DAS for consulting services provided.



In connection with the formation of DAS and Axtives agreement to manage its affairs, DAS participated in the Axtive
2003 Series A Preferred Financing (see Note 9, Financing Transactions) investing $1.2 million of the $2.3 million raised.



Acquisition of Axtive Name



In June 2002, the Company acquired the name Axtive and its related logo and trademark and certain tangible assets including furniture and
fixtures, signage and office supplies from Axtive Software Corporation, as represented by its sole shareholder, G.C. Scooter Beachum III, our President and Chief Operating Officer. The assets were acquired in exchange for an initial
grant of 40,000 restricted shares of Axtives common stock, which was valued at approximately $168,000 at the time of acquisition. This amount was allocated between relative fair values of the intangible ($153,000) and tangible assets ($15,000)
purchased by us.



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On July 1, 2003, we issued 29,768 restricted shares of our common stock, valued at $15,000, to TSTC
International Holding Company, formerly known as Axtive Software Corporation. These shares constituted an additional payment due to TSTC in connection with our June 2002 purchase discussed above. We were obligated to issue the additional restricted
shares, not in excess of 29,768 shares, if the market price of our common stock had not been at or above $7.50 within the one-year period after our purchase. G.C. Scooter Beachum, our President and Chief Operating Officer, is the sole
shareholder and director of TSTC. The issuance of the restricted shares of common stock did not involve a public offering. In December 2003, we determined that the entire intangible was impaired, and wrote off the balance totaling approximately
$177,000.



Short-term Debt



As of December 31, 2003, the Company has recorded $607,000, net of discount,
in short-term notes due to certain of its stockholders. See further discussion in Note 9, Financing Transactions.



6. NOTE RECEIVABLE



On September 22, 2000, we made an unsecured loan of $1.4 million to Hencie, Inc., a Texas-based IT Services business. The loan was guaranteed by a related
company, Hencie Consulting Services, Inc. (collectively Hencie) and personally guaranteed by Hencies CEO. The loan to Hencie matured November 22, 2001, and went into default. Due to the uncertainty surrounding collection of the
note, no interest was accrued in 2001 or 2002 and, during the fourth quarter of 2001, the note was fully reserved to reflect our estimate of its net realizable value.



On May 22, 2002, we entered into a Settlement Agreement and Release with Hencie and the guarantors whereby we received an
agreed judgment in the amount of $1.65 million, subject to reduction, and would receive monthly payments of principal and interest through April 2004 totaling approximately $1.3 million. The amounts due under the Settlement Agreement and Release
were guaranteed by Hencies CEO and secured by shares of Alternate Marketing Networks, Inc. (NASDAQ Small Cap: ALTM), the parent company of Hencie. Because of uncertainties regarding collection of amounts due under the agreement and the lack of
liquidity in the collateral, the Company did not record a gain on settlement. Payments received were recorded as a recovery of the bad debts previously written off.



On September 20, 2002, all rights and amounts due to Axtive under the settlement with Hencie were sold without recourse to
an unrelated third-party in exchange for $802,500. Prior to its sale, the Company had received payments totaling $235,000. Such payments, together with the sale proceeds, totaled $1,037,500 and were recorded as a recovery of bad debts in 2002



7. ACCRUED EXPENSES



Accrued expenses are summarized as follows:



|                               |  |                    |         |      |   |        
|------------------------------ |  | ------------------ | ------- | ---- | - | -------
|                               |  | As of December 31,
|                               |  | 2002               |         | 2003
|Professional fees              |  | $                  | 59,632  |      | $ | 65,938 
|Interest                       |  |                    |        |      |   | 59,391 
|Salaries, bonuses and benefits |  |                    | 223,806 |      |   | 376,080
|Other                          |  |                    | 38,942  |      |   | 74,336 
|                               |  |                    |         |      |   |        
|                               |  | $                  | 322,380 |      | $ | 575,745
|                               |  |                    |         |      |   |        



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8. OTHER CURRENT LIABILITIES



Other current liabilities are summarized as follows:



|                                             |  |                    |         |      |   |        
|-------------------------------------------- |  | ------------------ | ------- | ---- | - | -------
|                                             |  | As of December 31,
|                                             |  | 2002               |         | 2003
|Current portion of capital lease obligations |  | $                  | 41,522  |      | $ | 12,913 
|Judgments                                    |  |                    | 377,969 |      |   | 382,380
|Amounts due on receivables sold              |  |                    | 151,089 |      |   | 11,232 
|Customer deposits                            |  |                    | 39,941  |      |   | 65,496 
|Deferred revenue                             |  |                    | 37,707  |      |   | 83,588 
|Other                                        |  |                    | 18,105  |      |   | 52,501 
|                                             |  |                    |         |      |   |        
|                                             |  | $                  | 666,333 |      | $ | 608,110
|                                             |  |                    |         |      |   |        



9. FINANCING TRANSACTIONS



2002 Series A Convertible Preferred Stock



On April 1, 2002, we issued 4,200 shares of Series A
Convertible Preferred Stock (Series A Preferred) at $1,000 per share providing proceeds to us of $2,631,382 calculated as $4,200,000, less $1,530,124 of the pre-existing debt converted to Series A Preferred and $38,494 of issuance costs.
The Series A Preferred shares carry an 8% cumulative dividend and are convertible, at the option of the holder, into shares of Common Stock any time after one year at an initial conversion price of $7.50 per share. As discussed below, the purchasers
also received warrants to purchase Common Stock. The preferred shares have voting rights pari pasu with the Common Stock and as a separate class on certain matters. The shares also have an antidilution provision whereby the price and number
of shares issuable upon conversion adjusts for stock splits, stock dividends and future share issuances below the conversion price of the Series A Preferred. The Series A Preferred have demand registration rights after one year following closing of
the financing transaction and the right to elect one member to our Board of Directors. The issuance of warrants resulted in a beneficial conversion feature of the Series A Preferred valued at $370,000.



In connection with the issuance of Series A Preferred, each purchaser
received warrants entitling the holder to purchase 2 shares of Common Stock for each 10 shares of Common Stock the holder is entitled to receive upon conversion. The warrants entitle the holder to purchase common shares at the price of $11.50 per
share. The warrants become exercisable on the second anniversary of the issuance of the Series A Preferred and, unless exercised earlier, will expire on the fourth anniversary of the issuance. We issued warrants exercisable for a total of 112,000
shares of Common Stock in the offering.



We paid no commissions
in connection with issuance of Series A Preferred but did incur approximately $38,000 in other issuance costs. Such amount is reflected as a reduction to Additional paid in capital in the accompanying consolidated balance sheets.
Proceeds from the offering were used to acquire Media Resolutions, Inc., The Visionary Group, Inc., Virtually There, Inc. and the assets of Universal Data Technology, Inc. and for general corporate purposes.



In July and August 2002, the Company raised additional funds under the Series
A Preferred offering by issuing 240 shares of Series A Preferred at $1,000 per share providing proceeds to us of $240,000. The terms for the issuance of the Series A Preferred were identical to those investors who had invested in April 2002. In
particular, we issued additional warrants exercisable for a total of 6,400 shares of Common Stock in the offering. The proceeds from the offering were used for general corporate purposes. The Company paid no issuance costs in connection with these
subsequent issuances, and using the same methodology described above, valued the warrants and the conversion feature at $10,000 each. Such amounts were accounted for as described above.



2003 Series A Preferred Financing



On May 23, 2003, the Company issued 2,335 shares of Series A Convertible Preferred Stock (Series A Preferred) in
a private offering to new and existing private, accredited investors at $1,000 per share. The Company received gross proceeds of $2.3 million, consisting of $2.25 million in cash, less $124,000 of issuance costs and $84,000 in satisfaction of debt
owed by the Company to a stockholder and an executive officer. The Series A Preferred shares carry an 8% cumulative dividend and are immediately convertible, at the option of the holder, into shares of common stock at $1.00 per share. The purchasers
also received warrants to acquire 467,000 shares of



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common stock at $2.00 per share in connection with the transaction. These warrants were valued at $334,000 using the Black-Scholes model and have been
treated as a discount to the Series A Preferred and were recorded as an increase in additional paid in capital. The issuance of the warrants resulted in a beneficial conversion feature of the Series A Preferred valued at $334,000. Such amount was
reflected as a discount to the Series A Preferred and the entire amount was fully amortized as the shares were immediately convertible. As a result, the net effect of the beneficial conversion feature did not change additional paid-in-capital. The
amortization of the discount on the preferred stock is deducted from net loss to arrive at the net loss attributed to common stockholders. Demand Aggregation Solutions, LLC (DAS) purchased $1.2 million of the Series A Preferred. See Note
5, Related Party Transactions, regarding our obligation to provide up to $1.2 million in funding to DAS.



The 2002 issuances of Series A Preferred, described above, provided that subsequent issuances of such securities on terms more favorable than those
provided to the original investors in the Series A Preferred would automatically adjust the terms and conditions on the outstanding Series A Preferred to the more favorable terms and conditions (Superior Rights). As a result, the initial
conversion price on all Series A Preferred outstanding prior to the 2003 issuance was reduced from $7.50 to $1.00 per share and the exercise price of the warrants was reduced from $11.50 per share to $2.00 per share. Each purchaser of Series A
Preferred in 2002 was issued a restated warrant exercisable for additional shares as a result of the decrease in the initial conversion price. The additional value of the modified warrants was determined to be $77,000 using the Black-Scholes model,
has been treated as a discount to the Series A Preferred and was recorded as an increase in additional paid in capital. The restated warrants are exercisable for a total of 444,000 additional shares of common stock.



In July 2003, we issued an additional 50 shares of Series A Preferred in a
private offering to a purchaser in the May 2003 offering, G.C. Scooter Beachum, who is also one of our executive officers. This issuance was pursuant to an irrevocable subscription agreement executed by the purchaser at the time of the
issuance of Series A Preferred in May 2003. The terms were identical to the May 2003 sale of Series A Preferred. The Company received gross proceeds of $50,000 in cash in July 2003. As part of this issuance, we issued additional warrants exercisable
for 10,000 shares of our common stock. The calculated value of the warrants was not material.



Short-Term Loans



On
September 11, 2003, three of the Companys investors, GCA Strategic Investment Fund Limited, Beneke Companies, Inc. and G.C. Scooter Beachum made short-term loans to the Company in the amounts of $160,274, $48,745 and $13,220,
respectively. The loans, which were used for working capital, bore annual interest rates of 6% and were due and payable as of January 15, 2004, February 26, 2004 and December 15, 2003, respectively.



On October 15, 2003 and November 20, 2003, GCA Strategic Investment Fund
Limited made two additional short-term loans to the Company in the amounts of $100,000 and $200,000. The loans, which were used for working capital, bore annual interest rates of 6% and 12%, respectively, and were due and payable as of January 15,
2004.



On November 26, 2003, Agincourt L.P., another of the
Companys investors, made a short-term loan to the Company in the amount of $65,000. The loan, which was used for working capital, bore an annual interest rate of 12%, and was due and payable as of February 26, 2004.



12% Promissory Notes



In a private notes offering, on December 15, 2003, we issued G.C.
Scooter Beachum a 12% promissory note in the amount of $13,441 and issued a warrant to purchase 67,205 shares of common stock at a per share price of $1.10. The 12% promissory note has a December 15, 2004 maturity date and is secured by
the Companys assets, including stock of its subsidiaries and other equity investments. Interest on the note was payable quarterly, in arrears, on the last day of March, June, September and December of each year until the maturity date,
commencing March 31, 2004. The warrants were valued at $11,500 using the Black-Scholes model and were recorded as a debt discount. The debt discount will be amortized to interest expense over the term of the note. The note was funded with the
proceeds from the repayment of the principal amount plus accrued and unpaid interest of the September 11, 2003 short-term loan. The Company received no additional funds as a result of this transaction.



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On December 15, 2003, as part of the same private notes offering, we issued three other of the
Companys investors, US Technology Investors LLC, Paul Morris and Jack E. Brown 12% promissory notes in the amounts of $43,900, $20,000 and $56,410, respectively and issued warrants to purchase 219,500, 100,000 and 282,050 shares of common
stock at a per share price of $1.10. The 12% promissory notes and the warrants had the same terms as described above, including security for the notes. The warrants were valued at $35,100, $16,000 and $36,200, respectively, using the Black-Scholes
model and were recorded as a debt discount. The debt discount will be amortized to interest expense over the term of the note. The proceeds from the issuance of the notes were used for working capital.



Subsequent Events



On January 15, 2004, as part of the private notes offering begun in December
2003, we issued GCA Strategic Investment Fund Limited a 12% promissory note in the amount of $668,463 and issued a warrant to purchase 3,342,315 shares of common stock at a per share price of $1.10. The 12% promissory note and the warrant had the
same terms as described above, including security for the notes. The Company received a cash payment of $200,000, with the balance of the note funded with the proceeds from the repayment of the principal amount plus accrued and unpaid interest of
the September 11, 2003, October 15, 2003 and November 20, 2003 short-term loans. The proceeds from the issuance of the notes were used for working capital.



On January 19, 2004, as part of the private notes offering begun in December 2003, we issued Agincourt L.P. a 12% promissory note in the amount of $49,615
and issued a warrant to purchase 248,075 shares of common stock at a per share price of $1.10. The 12% promissory note and the warrant had the same terms as described above, including security for the notes. The proceeds from the issuance of the
note were used for working capital.



Receivables
Factoring



Two of the Companys subsidiaries, UDT
Consulting, Inc. and ThinkSpark Corporation, have engaged with a third-party to factor certain of its receivables. The receivables are purchased by the factor with recourse to UDT Consulting and ThinkSpark and amounts due under the Factoring and
Security Agreement are secured by a pledge of receivables and other assets of UDT Consulting and ThinkSpark, and are guaranteed by Axtive. Under the agreement, UDT Consulting and ThinkSpark receive approximately 80% of the face amount of the
receivable, pay interest at a rate of prime plus 2% and are subject to additional fees in certain circumstances. At December 31, 2003, UDT Consulting and ThinkSpark have approximately $11,000 of receivables sold under the agreement. These
receivables remain on the Companys financial statements until collected and the related liability to the factor is included in Other current liabilities in the accompanying consolidated balance sheets.



Dividends in Arrears



As of December 31, 2003, there had been no dividends declared on the Series
A Preferred and total dividends in arrears at December 31, 2003 totaled $732,024. Undeclared dividends for the years ended December 31, 2002 and December 31, 2003 on the preferred shares as of that date totaled $261,444 and $470,580, respectively,
and are reflected in the computation of net loss attributable to common stockholders in the accompanying consolidated statements of operations. Until declared, dividends are not recorded as a liability by the Company.



10. LONG-TERM DEBT AND SETTLEMENT NOTES PAYABLE



Concurrent with the ThinkSpark acquisition, the Company entered into an
Assignment and Assumption Agreement to assume $5.0 million of debt of ThinkSpark outstanding with Merrill Lynch. The debt assumed is secured by all of the assets of ThinkSpark, although Merrill Lynch agreed to subordinate its liens on up to $1.0
million of accounts receivable of ThinkSpark under certain circumstances. The debt is also guaranteed by the remaining subsidiaries of Axtive. The debt is payable in monthly installments of $55,000 including 6% interest in year one, and monthly
installments of $60,000 including 8% interest in year two, with the remaining balance due on June 1, 2005. The Company also issued Merrill Lynch warrants to acquire 500,000 shares of Axtives common stock at $0.10 per share for a term of 10
years in exchange for Merrill Lynchs assignment to Axtive and settlement of an additional $1.9 million of debt due from ThinkSpark. These warrants were valued at $414,000 using the Black-Scholes model on the date of grant.



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At December 31, 2003, the Company was not in compliance with certain performance covenants. Under the
terms of the Merrill Lynch debt, in the event of a default, Merrill Lynch has the right to accelerate the maturity of the debt, whereupon all outstanding principal, interest and premiums on the note immediately become due and payable. As such, the
entire $4.9 million remaining due was classified as a current liability at December 31, 2003 and is included in Current portion  long-term debt in the accompanying consolidated balance sheets. Subsequent to December 31, 2003, the
Company has made its required payments through December 2003 and is in negotiations with Merrill Lynch to obtain a waiver of the performance covenant; however, there can be no assurance that the Company will be successful in obtaining such waiver.



Also concurrent with the ThinkSpark acquisition, the Company
entered into various other settlement agreements with former landlords, customers, and employees of ThinkSpark. Of these settlements, $1.17 million bear interest rates of 6% and are due and payable within six months to twenty-four months of
execution, and $395,000 bear no interest rate and are due and payable within twelve months of execution. As of December 31, 2003, the balance remaining due and outstanding is $1,180,000, and is classified as Settlement notes payable in
the accompanying consolidated balance sheets.



11. LEASE TERMINATION
LIABILITY



During 2002, ThinkSpark closed certain offices
that had existing lease obligations. The Company has estimated the liability associated with terminating these leases prior to their respective maturity dates. At December 31, 2003, the estimated liability related to these obligations that has been
recorded by the Company totaled approximately $237,000, and is included in Lease termination liability in the accompanying consolidated balance sheets. This estimate is based on signed releases, if applicable, or managements
expected liability based on ongoing negotiations. The Company is involved in litigation related to unpaid rent on several of these facilities, however management believes that the Company will be able to settle these claims and that the ultimate
remaining liability will approximate $237,000.



12. COMMON STOCK



On December 23, 2003, the Company effected a 1-for-10
reverse share split of all of its common stock. All share numbers discussed reflect the 1-for-10 reverse share split.



In April 2002, we issued 39,764 shares of our $0.01 par value common stock (common stock) in connection with the conversion of a prior period
loan.



In April 2002, we issued 50,000 shares of our common
stock in connection with the acquisition of Media Resolutions, Incorporated. The shares were valued at $313,000, using the fair value of the Companys common stock on the date of issuance.



In May 2002, we issued 115,385 shares of our common stock in connection with
the acquisition of Virtually There, Inc. The shares were valued at $455,000, using the fair value of the Companys common stock on the date of issuance.



In June 2002, we issued 40,000 shares of our common stock in connection with the acquisition of the name Axtive and the related trademark and
logo and certain furniture and fixtures. The shares were valued at $168,000, using the fair value of the Companys common stock on the date of issuance.



In August 2002, we issued 10,000 shares of our common stock in exchange for advisory services related to mergers and acquisitions and financing. The
shares were valued at $32,000, using the fair value of the Companys common stock on the date of issuance.



In June 2003, we issued 121,915 shares of our common stock in connection with the acquisition of ThinkSpark to one of ThinkSparks former landlords
as security for a promissory note (see Note 15, Legal Proceedings, below). Based upon payments made by us on the promissory note, 32,589 shares were returned to the Company in October 2003 and are held by the Company as treasury stock.



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In July 2003, we issued 29,768 shares of our common stock in connection with the acquisition of the name
Axtive and the related trademark and logo and certain furniture and fixtures. The shares were valued at $15,000, using the fair value of the Companys common stock on the date of issuance.



In July 2003, we issued 140,000 shares of our common stock in exchange for
advisory services related to mergers and acquisitions and financing. The shares were valued at $118,000, using the fair value of the Companys common stock on the date of issuance.



13. INCOME TAXES



Temporary differences between the financial reporting and tax basis of assets and liabilities that give rise to deferred
income tax assets and liabilities are as follows:



|                                 |  |                    |             |   |      |   |             |  
|-------------------------------- |  | ------------------ | ----------- | - | ---- | - | ----------- | -
|                                 |  | As of December 31, |            
|                                 |  | 2002               |             |   | 2003 |  
|Deferred tax assets              |  |                    |             |   |      |   |             |  
|Net operating loss carryforwards |  | $                  | 8,835,171   |   |      | $ | 10,096,360  |  
|Property and equipment           |  |                    | 300,262     |   |      |   | 310,463     |  
|Intangibles                      |  |                    |            |   |      |   | 249,776     |  
|Accounts receivable              |  |                    | 133,115     |   |      |   | 54,971      |  
|Capital losses carried forward   |  |                    | 2,171,669   |   |      |   | 2,171,669   |  
|Other                            |  |                    | 75,788      |   |      |   | 77,826      |  
|                                 |  |                    |             |   |      |   |             |  
|Net deferred tax assets          |  |                    | 11,516,005  |   |      |   | 12,961,065  |  
|Valuation allowance              |  |                    | (11,516,005 | ) |      |   | (12,961,065 | )
|                                 |  |                    |             |   |      |   |             |  
|                                 |  | $                  |            |   |      | $ |            |  
|                                 |  |                    |             |   |      |   |             |  



Income tax expense
differs from the statutory rate as follows:



|                                                                             |  |                    |          |   |      |   |            |  
|---------------------------------------------------------------------------- |  | ------------------ | -------- | - | ---- | - | ---------- | -
|                                                                             |  | As of December 31, |         
|                                                                             |  | 2002               |          |   | 2003 |  
|Income tax benefit at statutory rate                                         |  | $                  | 741,000  |   |      | $ | 1,642,414  |  
|Permanent differences                                                        |  |                    | (367,000 | ) |      |   | (91,907    | )
|Change in valuation allowance, including companies acquired in 2002 and 2003 |  |                    | (374,000 | ) |      |   | (1,445,057 | )
|Change in prior year estimate                                                |  |                    |         |   |      |   | (105,450   | )
|                                                                             |  |                    |          |   |      |   |            |  
|                                                                             |  | $                  |         |   |      | $ |           |  
|                                                                             |  |                    |          |   |      |   |            |  



At December 31, 2003,
we had net operating loss carryforwards (NOLs) of approximately $29.6 million, which will expire in 2012 through 2023. However, because of changes in ownership of our common stock, use of these NOLs of approximately $26.0 million
accumulated through 2002 is limited to approximately $115,000 per year. The NOL created in 2003 of approximately $3.6 million has no such limitations.



14. STOCK OPTION PLANS



In April 1996, we adopted the 1996 Stock Option Plan (the 1996 Plan), which was amended most recently in August 2000. The 1996 Plan provides
for the granting to directors, officers, key employees and consultants of up to 50,000 shares of common stock in a year. Grants of options may be incentive stock options or non-qualified stock options and will be at such exercise prices, in such
amounts, and upon such terms and conditions, as determined by the board of directors or the compensation committee of the board of directors. The term of any option may not exceed ten years. In August 2000, the 1996 Plan was amended to increase the
number of shares reserved for issuance to 100,000 shares of our outstanding common stock.



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During 2000 and 2001, stock option grants were made by the board of directors that would cause the number
of options issued under the 1996 Plan to exceed the number authorized under the plan. As described below, such grants were transferred to the 2002 Stock Incentive Plan and were approved by the stockholders. As of December 31, 2003, there were
options outstanding for 85,000 shares of common stock under the 1996 Plan, which are held by one optionee, and none available for future grants.



In June 2002, the Company adopted the 2002 Stock Incentive Plan (the 2002 Plan), which provides for the issuance of non-qualified stock
options and incentive stock options as well as restricted stock awards, unrestricted stock awards, performance stock awards, dividend equivalent rights, stock appreciation rights (in connection with options) and long-term performance awards to
eligible employees, officers, independent consultants and directors of the Company and its subsidiaries. Under the terms of the 2002 Plan, options to purchase common stock are generally granted at not less than fair market value, become exercisable
as established by the administering committee of the board of directors and generally expire ten years from the date of grant. If any shares reserved for an award are forfeited, repurchased or any such award otherwise terminates without a payment
being made to the participant in the form of stock, the shares underlying such award will also become available for future awards under the 2002 Plan.



In September 2002, our stockholders approved the adoption of the 2002 Plan by written consent. The stockholder approval of the adoption of the 2002 Plan
was effective 20 days after the mailing of the Information Statement to our stockholders. For administrative convenience and to provide that all options outstanding for current employees are under a single plan, 291,000 options previously granted
pursuant to the 1996 Stock Option Plan, but in excess of the number of shares authorized under the plan (the Transferred Options) were transferred to the 2002 Plan.



In May 2003, our board of directors approved an amendment of the 2002 Plan to increase the number of shares authorized for
issuance under the 2002 Plan from the original number of 12,000,000 to 17,000,000 shares, on a pre-split basis. In addition, the amendment provided that upon the effectiveness of a 1-for-10 reverse stock split announced by the Company, the number of
shares authorized for issuance under the 2002 Plan will be 5,000,000 shares. The amendment was immediately effective, but was subject to approval by our stockholders. In May 2003, our stockholders approved the adoption of amendment by written
consent. The stockholder approval of the adoption of the amendment became effective on December 23, 2003.



As of December 31, 2003, there were 1,309,550 options outstanding under the 2002 Plan (which includes the Transferred Options), of which 857,662 were
vested and 3,690,450 options remain available for issuance under the 2002 plan. To date, the Company has not issued any restricted or unrestricted stock awards, stock appreciation rights, dividend equivalents rights or long-term performance awards
under the 2002 Plan.



Stand-Alone Stock Option Agreements



During 2001, we issued 50,000 stock options in
conjunction with an employment agreement to an executive officer, and during 2002 we issued 215,000 stock options in conjunction with employment agreements to the key management of the acquired companies under stand-alone stock option agreements. As
of December 31, 2003, 240,000 of these options remained outstanding. The exercise prices on these options ranged from $4.16 to $15.00 per share with a weighted average price of $8.55 per share. Vesting periods ranged from immediately upon grant to
three years with a weighted average vesting period of nine months. All stand-alone options granted in 2001 and 2002 were not intended to be incentive stock options under the Internal Revenue Code of 1986, as amended. As these options had exercise
prices equal to or in excess of the fair market value of the underlying stock, the Company recorded no expense related to the grant of options pursuant to stand-alone agreements.



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Stock option activity during the periods is indicated as follows:



|                             |  |                  |   |  |                              |      
|---------------------------- |  | ---------------- | - |  | ---------------------------- | -----
|                             |  | Number ofOptions |   |  | WeightedAverageExercisePrice
|Balance at January 1, 2002   |  | 386,000          |   |  | $                            | 16.90
|Granted                      |  | 348,690          |   |  |                              | 9.40 
|Exercised                    |  |                 |   |  |                              |      
|Forfeited                    |  | (52,101          | ) |  |                              | 9.30 
|                             |  |                  |   |  |                              |      
|Balance at December 31, 2002 |  | 682,589          |   |  |                              | 13.70
|Granted                      |  | 1,231,500        |   |  |                              | 1.00 
|Exercised                    |  |                 |   |  |                              |      
|Forfeited                    |  | (279,539         | ) |  |                              | 5.81 
|                             |  |                  |   |  |                              |      
|Balance at December 31, 2003 |  | 1,634,550        |   |  | $                            | 5.48 
|                             |  |                  |   |  |                              |      



At December 31, 2002
and 2003, there were 331,468 and 1,130,743 options exercisable, respectively. At December 31, 2003, the weighted-average exercise price and weighted-average remaining contractual life of outstanding options were as follows:



|               |  |                  |  |                                                  |  |                 
|-------------- |  | ---------------- |  | ------------------------------------------------ |  | ----------------
|               |  | Outstanding      |  | Exercisable                                     
|Exercise Price |  | Number ofOptions |  | WeightedAverage RemainingContractualLife (years) |  | Number ofOptions
|$1.00          |  | 1,078,500        |  | 9.38                                             |  | 719,000         
|$4.16          |  | 40,000           |  | 8.41                                             |  | 21,584          
|$4.20          |  | 3,550            |  | 8.54                                             |  | 1,174           
|$7.50          |  | 50,000           |  | 8.41                                             |  | 50,000          
|$7.53          |  | 50,000           |  | 8.28                                             |  | 16,500          
|$7.70          |  | 50,000           |  | 8.19                                             |  | 50,000          
|$15.00         |  | 277,500          |  | 7.15                                             |  | 187,488         
|$23.10         |  | 85,000           |  | 6.55                                             |  | 85,000          
|               |  |                  |  |                                                  |  |                 
|               |  | 1,634,550        |  | 8.73                                             |  | 1,130,746       
|               |  |                  |  |                                                  |  |                 



As of December 31,
2003, we had 2,744,189 warrants outstanding at an average exercise price of $2.18.



In determining the fair value of options granted for purposes of the SFAS No. 123 pro forma disclosures in Note 1, the Company used the Black-Scholes option pricing model with the weighted-average assumptions:
risk-free interest rates of 3.25% in 2003 and 5.0% in 2002; dividend yield of zero; volatility of 151% in 2003 and 706% in 2002; and expected option lives of ten years in 2003 and three years in 2002.



The weighted average fair value of options granted during 2002 and 2003 was
$5.20 and $1.00 respectively.



At December 31, 2002 and 2003,
common shares were reserved for future issuance under conversion of outstanding preferred stock, stock options, stock warrants and debt warrants as follows:



|                            |  |           |  |           
|--------------------------- |  | --------- |  | ----------
|                            |  | 2002      |  | 2003      
|Preferred stock             |  | 626,859   |  | 7,557,024 
|Stock options               |  | 682,589   |  | 1,634,550 
|Stock warrants              |  | 203,833   |  | 2,744,189 
|                            |  |           |  |           
|Total reserved common stock |  | 1,513,281 |  | 11,935,763
|                            |  |           |  |           



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15. COMMITMENTS AND CONTINGENCIES



Operating Leases



The Company leases office space and office equipment under operating leases expiring through 2007. Expense recorded for these leases for the years ended
December 31, 2002 and 2003 was approximately $96,000 and $689,000, respectively. Minimum rental commitments under noncancelable operating leases are as follows:



|      |  |   |          
|----- |  | - | ---------
|2004  |  | $ | 570,208  
|2005  |  |   | 349,432  
|2006  |  |   | 228,015  
|2007  |  |   | 132,298  
|      |  |   |          
|Total |  | $ | 1,279,953
|      |  |   |          



Legal Proceedings



Proceedings Against The Visionary Group



In June 2002, we were notified that The Visionary Group
and Axtive had been sued in the District Court of Dallas County, Texas for non-payment of approximately $110,000 due to former sub-contractors of The Visionary Group. In order to limit our costs to defend the matter, Axtive agreed to a partial
summary judgment pursuant to which Axtive admitted the liability of The Visionary Group, but retained our defenses on the issue of third-party beneficiary against Axtive. In November 2003, we entered into settlement agreements with the parties
assigning to them all interest in any claims we may have against any former officer, director or shareholder of The Visionary Group, in exchange for the parties releasing us from any claims arising out of the suit discussed above.



In April 2003, a judgment was entered against The Visionary Group in the
amount of approximately $3,000 for failure to pay the business related expenses of a former employee. The judgment remains outstanding.



Proceedings Against ThinkSpark



In 2002, a former customer obtained a final judgment against ThinkSpark. The former customer filed a collection suit against ThinkSpark with respect to
the judgment in the amount of $940,000, including attorneys fees. The former customer also filed a lawsuit against certain of ThinkSparks then directors and stockholders with respect to alleged improper repurchases of stock from certain
stockholders. Effective with Axtives acquisition of ThinkSpark, ThinkSpark entered into a settlement agreement with the former customer. ThinkSpark agreed to make a cash payment of $18,000 to the former customer and issue a promissory note for
$150,000. The promissory note bears interest at 6% per year and is payable on a monthly basis amortized over 12 months. In exchange, the former customer agreed not to seek to enforce the judgment, to dismiss with prejudice the separate lawsuit, and
upon payment in full of the promissory note, to fully release ThinkSpark and the individual defendants from all claims. As of December 31, 2003 the balance remaining due and outstanding is $101,000, including past due payments of $37,000, and is
included in Current portion  settlement notes payable in the accompanying consolidated balance sheets



In October 2002, a former employee and shareholder filed a suit against ThinkSpark, certain of its subsidiaries, and certain of its directors and
shareholders seeking damages in the amount of $612,000 for breach of a severance agreement. Effective with Axtives acquisition of ThinkSpark, ThinkSpark entered into a mutual release agreement with the former employee. In exchange for mutual
releases of all claims, ThinkSpark agreed to issue to the former employee a promissory note in the amount of $169,000, a portion of which represented the merger consideration payable to the former employee and shareholder. The promissory note bears
interest at 6% per year and is payable on a monthly basis amortized over 18 months. The former employee agreed to then abate his lawsuit and, upon payment in full of the promissory note, to dismiss all claims against ThinkSpark and the other
defendants. As of December 31, 2003 the balance remaining due and outstanding is $133,000, including past due payments of $28,000, and is included in Current portion  settlement notes payable in the accompanying consolidated
balance sheets. As no payments have been made on the promissory note since October 2003, the former employee attempted to seek a default judgment against the former ThinkSpark directors and stockholders on the lawsuit, which



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was avoided as a result of answers filed by those employees. ThinkSpark is currently negotiating with the former employee to restructure the settlement
obligations and bring them current; however, we can provide no assurance that we will be successful in restructuring the settlement or bring our settlement obligations current.



In January 2001, ThinkSpark Limited, a United Kingdom subsidiary of ThinkSpark, entered into a lease for office space in
London for a 15-year term. ThinkSpark was required to be a surety on this lease agreement. In October 2002, ThinkSpark Limited ceased operations in the United Kingdom and consequently breached the lease agreement. ThinkSpark Limited is now in
liquidation. The landlord filed suit against ThinkSpark in the United Kingdom. In May 2003, ThinkSpark and the landlord entered into a settlement agreement. Pursuant to the terms of the settlement agreement, and in consideration of the terms of the
settlement, Axtive executed a promissory note in favor of the landlord for $200,000. The promissory note bears interest at 6% per year and is payable over 12 months. As of December 31, 2003 the balance remaining due and outstanding is $101,000 and
is included in Current portion - settlement notes payable in the accompanying consolidated balance sheets. Axtive issued 121,915 restricted shares of our common stock to the landlord as security for the promissory note. Pursuant to the
settlement agreement and the promissory note, the shares will be returned to us at various stages based upon payments made on the promissory note. In October 2003, 32,589 shares were returned to the Company and are held by us as treasury stock.
Assuming the balance of the promissory note is paid in full pursuant to its terms, all remaining shares will be returned and held as treasury stock. If there is a default on the promissory note, the landlord has the right to keep all or part of the
shares to satisfy any remaining obligation. As of December 31, 2003, the remaining unreturned shares have been treated as outstanding in the accompanying financial statements and were recorded at par value with an offset to additional paid in
capital.



In December 2003, ThinkSpark received notification of
a demand for arbitration based on failure to pay for services rendered under a subcontract agreement and for failure to make payments after entering into a $235,000 promissory note in November 2003 with said subcontractor for a portion of the unpaid
services. The amount sought is $304,000 plus interest and attorneys fees and costs. An administrative hearing was scheduled for February 2004, but has been postponed. ThinkSpark is currently in negotiations with the subcontractor to reduce the
liability to $75,000; however, we can give no assurance that ThinkSpark will be successful in reducing the claim. As such, as of December 31, 2003, the entire $235,000 promissory note is included in Current portion  settlement notes
payable in the accompanying consolidated balance sheets, and the remaining liability is included in Accounts payable in the accompanying consolidated balance sheets.



ThinkSpark was sued in state court in Cuyahoga County, Ohio, for breach of a November 1998 lease agreement for office space
in Cleveland, Ohio, which has been vacated by ThinkSpark. The landlord obtained a judgment in March 2003 for approximately $203,000 plus 10% per year until paid and all costs, including collection costs. The landlord has sought to domesticate the
judgment in state court in Texas and ThinkSpark has been served with post-judgment discovery. ThinkSpark is in discussions with the landlord to settle the judgment; however, we can give no assurance that ThinkSpark will be able to enter into a
settlement. Managements estimate of the potential liability has been recorded at $50,000 and is included in the accompanying consolidated balance sheets as Lease termination liability.



ThinkSpark was sued in state court in Tarrant County, Texas for breach of an
October 1998 lease agreement for office space in Fort Worth, Texas, which has been vacated by ThinkSpark. The landlord seeks damages for past due rent, utilities and other sums due under the lease, future rents, brokerage commissions paid by the
landlord at the commencement of the lease, and unreimbursed tenant improvement expenses in the total amount of approximately $212,000, plus attorneys fees. In August 2003, ThinkSpark entered into a Release and Settlement Agreement with the
landlord. Pursuant to the terms of the settlement agreement, and in consideration of the terms of the settlement, ThinkSpark agreed to a cash payment of $20,000 and executed a promissory note in favor of the landlord for $36,000. The promissory note
bears interest at 6% per year and is payable over 12 months. ThinkSpark failed to make the required payments under the promissory note, and in January 2004, the landlord obtained a final judgment for $224,000. In March 2004, ThinkSpark and the
landlord reached a final settlement and the obligation was settled for payment by ThinkSpark of $36,000. As such, as of December 31, 2003, ThinkSpark has recorded an outstanding liability of $36,000 which is included in Lease termination
liability in the accompanying consolidated balance sheets.



In August 2003, ThinkSpark was sued in Greene County, Ohio for breach of a November 1998 lease agreement extension for office space in Dayton, Ohio, which has been vacated by ThinkSpark. The landlord seeks damages for $55,556. ThinkSpark is
in discussions with the landlord to settle the judgment; however, we can give



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no assurance that ThinkSpark will be able to enter into a settlement. Managements estimate of the potential liability has been recorded at $56,000 and
is included in the accompanying consolidated balance sheets as Lease termination liability.



ThinkSpark was sued in state court in Fulton County, Georgia for breach of a June 2000 lease agreement for office space in Atlanta, Georgia, which has
been vacated by ThinkSpark. The landlord seeks damages for past due rent of approximately $12,000 per month since August 2002. The action as originally filed claimed past due rent from August through November 2002. In November 2003, the landlord
obtained a subsequent judgment for approximately $323,000, and served one of ThinkSparks customers with two separate garnishment orders totaling $323,000. In December 2003, ThinkSpark and the landlord entered into a settlement agreement.
Pursuant to the terms of that agreement, in December 2003, we paid the landlord $200,000 and delivered a bill of sale for all furniture, fixtures and equipment left on the premises in exchange for a release and dismissal of the garnishment orders
and full satisfaction and release of the judgments.



In July
2003, ThinkSpark was sued for breach of a lease agreement for office space in Las Vegas, Nevada. The landlord seeks damages in excess of $10,000 for one months rent plus attorneys fees and costs of the suit. Management believes the rent
to have been paid and does not expect an adverse judgment against ThinkSpark.



In July 2003, an individual filed suit against ThinkSpark alleging breach of contract and seeking damages of $14,040 plus interest, attorneys fees and court costs. The suit was based on a contract between
ThinkSpark and the former employee whereby the individual served as an independent contractor as a consultant and expert witness in a collection effort against a former customer. The individual rendered these services in 2001. ThinkSpark agreed to
pay the individual $1,500 per month for a term of eleven months, commencing in August 2003. The parties also executed an agreed judgment in the amount of $21,500. In December 2003, based on ThinkSparks failure to make timely payments due under
the agreement, the individual obtained a lien on ThinkSparks operating bank account. In order to obtain a release of the lien, in December 2003, ThinkSpark paid all remaining amounts due and the individual abated the proceedings against
ThinkSpark and filed a motion for nonsuit with prejudice.



Other Legal Proceedings



The Company is
involved in other legal proceedings arising in the ordinary course of business and has three judgments totaling approximately $75,000 pending against it. As of December 31, 2003, the judgments are recorded in Other liabilities on the
accompanying consolidated balance sheets. In March 2004, one of the judgments was settled for $39,000 and we are in negotiations to reduce amounts payable under the two remaining judgments. We do not expect the ultimate outcome of any of these
matters, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows of the Company as a whole. However, depending on the amount and timing, an unfavorable outcome of any such
matters could possibly materially affect our future results of operations or cash flow in any particular period.



Axtive and its subsidiaries are involved in other legal proceedings arising in the ordinary course of business. We believe that none of these other legal
proceedings will have a material adverse effect on our financial condition or results of operations.



Employment Agreements



Graham C. Beachum II



In January 2001, we entered into an employment agreement with Mr. Beachum to serve as our President and Chief Executive Officer. The agreement expires on
January 2, 2005, unless terminated earlier. Under the agreement, Mr. Beachum was entitled to receive an annual base salary of $100,000, which would be increased to $240,000 upon the successful conclusion of an equity offering by Axtive of at least
$10 million. The annual base salary will be increased by 5% each fiscal year. Pursuant to the agreement, Mr. Beachum will also be eligible to receive a bonus based on our performance, as determined by the board of directors or its compensation
committee. In the event that Mr. Beachum is terminated without cause, including a change of control (as defined in the agreement), or terminates his employment for good reason (as defined in the agreement), he will be entitled to receive as
severance the amount of his base salary for (1) the remainder of his term of employment or (2) six



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months, whichever period is shorter. The agreement also contains customary nondisclosure and non-competition covenants, as well as an assignment of
inventions.



Subsequent to December 31, 2003, the employment
agreement was amended to increase Mr. Beachums annual base salary to $165,000. Among other things, the amendment also restates the terms of discretionary incentive compensation, which is to be determined by the compensation committee of our
board of directors, and sets forth certain significant objectives to be considered for purposes of a discretionary bonus with respect to the 2004 fiscal year. Mr. Beachum is also eligible to receive additional grants of stock options as determined
by the compensation committee.



Mr. Beachum is the father of
G.C. Scooter Beachum III, our President and Chief Operating Officer.



G. C. Scooter Beachum III



In January 2001, we entered into an employment agreement with Mr. G. C. Scooter Beachum III to serve as our President and Chief Operating Officer. The employment agreement expires on January 2, 2005,
unless terminated earlier. Under the employment agreement, Scooter Beachum is entitled to receive an annual base salary of $95,000 that shall be increased to $165,000 upon the successful conclusion of an equity offering by Axtive of at least $10
million. The annual base salary shall be increased by 5% each fiscal year. Mr. Beachum is currently paid $150,000 annually. In addition, Scooter Beachum was granted options to purchase 750,000 shares of Axtives Common Stock at an exercise
price of $1.50 per share, of which 25% vested upon the grant date and the remainder vesting at the rate of 18.75% on January 2 of each successive year. Pursuant to the employment agreement, Scooter Beachum will also be eligible to receive a bonus
based on our performance, as determined by the Board of Directors or its Compensation Committee. In the event that Scooter Beachum is terminated without cause, including a change of control (as defined in the employment agreement), he will be
entitled to receive as severance the amount of his base salary for (i) the remainder of his term of employment, or (ii) six months, whichever period is shorter. The employment agreement also contains customary nondisclosure and non-competition
covenants, as well as an assignment of inventions.



Mr. Beachum
is the son of Graham C. Beachum II and the son-in-law of Paul L. Morris, one of our directors.



16. INVESTMENT BANKING AGREEMENT



On June 26, 2003, the Company entered into an amended Investment Banking Agreement with Atlas Capital Services, LLC (Atlas), that was effective May 1, 2003, to act as an agent on a per transaction fee
basis on our behalf in connection with certain advisory and investment banking services for a term of six months. At execution, the Company issued to Atlas 115,000 shares of its common stock and warrants to purchase 125,000 shares of common stock at
$2.00 per share. The common stock issued to Atlas was valued at $57,500 using the fair value of the stock on the date of the agreement. The value of the warrants issued to Atlas was $48,000 using the Black-Scholes model. The value of the common
stock and the warrants were recorded as a prepaid and amortized over the term of the agreement. At December 31, 2003, the prepaid was fully expensed. Additionally, Atlas is also entitled to a $10,000 per month advisory fee. As of December 31, 2003,
we have paid Atlas $60,000 under the terms of this amended agreement.



Additionally, in connection with entering into the agreement with Atlas, we issued Leeb Brokerage Service, Inc. (Leeb) 25,000 shares of our common stock as a fee for the introduction of Atlas to the Company. The common stock
issued to Leeb was valued at $12,500 using the fair market value of the stock on the date of the agreement.



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17. SUBSEQUENT EVENTS (unaudited)



Private Placement of Common Stock



On February 26, 2004, we issued 23,459,087 shares of our common stock in a private offering to existing investors at
$0.07687 per share. We received gross proceeds of $1.8 million, consisting of $1.05 million in cash and $750,000 in consideration of conversion of promissory notes and note warrants owed by Axtive to certain of its stockholders. Of the net cash
proceeds, after paying legal expenses related to the offering, we have used or expect to use $167,000 to repay short-term notes and a 12% promissory note issued to one of our investors, $456,000 to satisfy past due liabilities and $296,000 to settle
judgments and promissory notes from prior acquisitions. The balance is available for working capital and general corporate purposes. These purchasers have demand registration rights beginning in February 2005, as well as incidental registration
rights, with respect to the shares of common stock issued.



As
part of the February 2004 private offering, discussed above, two of the purchasers agreed to purchase an aggregate of 15,345,464 additional shares of common stock for cash totaling approximately $1.2 million on the same terms. The additional
purchases are scheduled to occur monthly, in varying amounts, from April 2004 to November 2004.



Additionally on February 26, 2004, we issued 7,648,221 shares of our common stock at $0.07687 per share to our preferred stockholders upon conversion of
all outstanding shares of our Series A Preferred Stock. Concurrent with this conversion, the preferred stockholders agreed to waive and terminate all warrants issued in conjunction with their previous purchases of Series A Preferred Stock.



On March 5, 2004, as part of the February 2004 offering, we
issued 571,090 of our common stock at $0.07687 per share to one of our stockholders in consideration of the conversion of a promissory note and note warrant issued by Axtive to that stockholder.



On March 26, 2004, as part of the February 2004 offering, we issued an
additional 3,694,521 shares of our common stock at $0.07687 per share. We received additional gross proceeds of $284,000, all of which is available for working capital and general corporate purposes.



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|ITEM 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- | -------------------------------------------------------------------------------------



None.



|ITEM 8A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES



As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934. Based upon their evaluation, the CEO and the CFO concluded that our disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by the Company in the reports
filed or submitted by it under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and include controls and procedures designed to ensure that
information required to be disclosed by Axtive in such reports is accumulated and communicated to the Companys management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.



INTERNAL CONTROL OVER FINANCIAL REPORTING



During the quarter ended December 31, 2003, there were no changes in the
Companys internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART III



|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
|------- | ---------------------------------------------------------------------------------------------------------------



DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES



|                           |  |     |  |                                                     
|-------------------------- |  | --- |  | ----------------------------------------------------
|Name                       |  | Age |  | Position                                            
|Directors                  |  |     |  |                                                     
|                           |  |    
|Graham C. Beachum II       |  | 56  |  | Chairman of the Board and Chief Executive Officer(1)
|                           |  |    
|Ron Beneke                 |  | 60  |  | Director(1)(2)                                      
|                           |  |    
|Paul L. Morris             |  | 62  |  | Director(1)                                         
|                           |  |    
|Brad A. Thompson           |  | 39  |  | Director(1)(2)                                      
|                           |  |    
|Alan W. Tompkins           |  | 42  |  | Director(1)(2)                                      
|                           |  |    
|Executive Officers         |  |     |  |                                                     
|                           |  |    
|G.C. Scooter Beachum III |  | 34  |  | President and Chief Operating Officer               
|                           |  |    
|Stanley D. Strifler        |  | 45  |  | President, ThinkSpark Corporation                   
|                           |  |    
|Key Employees              |  |     |  |                                                     
|                           |  |    
|Kerry S. Osborne           |  | 44  |  | Chief Technology Officer, ThinkSpark Corporation    

---

|(1) | Member of the interim audit committee
|--- | -------------------------------------



|(2) | Member of the compensation committee
|--- | ------------------------------------



Set forth below is a description of the backgrounds of each of our directors,
executive officers and key employees.



Graham C. Beachum
II has been a director and the Chairman of the Board and Chief Executive Officer of Axtive since January 2001. From January 2001 to April 2004, he also served as the Companys President. From January 2000 to December 2000, Mr. Beachum was a
private investor. From September 1996 to January 2000, Mr. Beachum was the Chairman and Chief Executive Officer of Axtive Software Corporation, a maker of customer relationship management software that was sold to Remedy Corporation in 2000. Mr.
Beachum is the father of G.C. Scooter Beachum III, our President and Chief Operating Officer.



Ron Beneke became a director of Axtive in May 2003 in connection with our additional sale of shares of Series A Preferred Stock. Since he founded
the company in April 1992 Mr. Beneke has served as President of Beneke Companies, Inc., of Dallas, which is the general partner of Beneke/Krieg Company, a national real estate partnership whose primary business is the acquisition of apartment
projects financed with tax-exempt housing bonds. Mr. Benekes 28 years of experience in the real estate industry include ten years in legal practice. He spent six years as managing partner of a forty-lawyer firm of which he was a founding
member. Mr. Beneke is a member of the Management Committee of Demand Aggregation Solutions, LLC and a member of the Board of Directors of NetLink Transaction Services, LLC.



Paul L. Morrisbecame a director of Axtive in May 2003 in connection with our additional sale of shares of Series A
Preferred Stock. Mr. Morris has been President and CEO of Wagner & Brown, Ltd., a large, closely-held independent oil and gas company headquartered in Midland, Texas since 1994. Prior to joining Wagner & Brown, Mr. Morris served as President
of Banner Energy and in management positions with Columbia Gas System. Mr. Morris currently holds Board positions with the Rawls College of Business at Texas Tech University, Memorial Hospital and Medical Center (Midland) and the Petroleum Museum of
Midland, where he is President. He is a past



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President of the Permian Basin Petroleum Association and has served on the Boards of the Midland Chamber of Commerce and United Way. Mr. Morris is the
father-in-law of G.C. Scooter Beachum III, our President and Chief Operating Officer.



Brad A. Thompson became a director of Axtive in May 2003 in connection with our additional sale of shares of Series A Preferred Stock. Mr.
Thompson, of St. Croix, U.S. Virgin Islands, has been the Chief Investment Officer and Chief Financial Analyst of Global Capital Advisors, LLC, a fund management firm that is the exclusive advisor to a Bermuda exempt investment fund and a licensed
small business investment company, since 1998. Mr. Thompson is the former President of Time Plus of Athens, Georgia, a payroll and accounting firm, and he was also previously the Chief Financial Officer of AAPG, Inc., a specialty retail sporting
goods firm. Mr. Thompson began his career with SunTrust, and has also held financial consulting and financial analyst positions with Merrill Lynch and SAFECO Insurance Company of America.



Alan W. Tompkins became a director of Axtive in May 2003 in connection with our additional sale of shares of Series A
Preferred Stock. Mr. Tompkins has been Vice President and General Counsel of Unity Hunt, Inc. in Dallas since March 2003. In 2002, Mr. Tompkins practiced law for the firm of Hance Scarborough Wright Ginsberg & Brusilow LLP. Between 1997 and
2001, Mr. Tompkins served as associate general counsel to Richmont Corporation / Mary Kay Holding Corporation. Mr. Tompkins practiced law in Dallas for more than six years at firms including Weil Gotshal & Manges, with a focus on corporate
merger and acquisition transactions, venture capital and private equity investments. Mr. Tompkins has extensive experience in the merchant banking business, where he worked primarily with companies in the manufacturing, distribution, financial and
broadcast industries. Mr. Tompkins is a Certified Public Accountant and a former adjunct professor of business law at the Edwin L. Cox School of Business at SMU. He presently serves on the board of directors of the USA Film Festival and on the
Judicial Nominating Commission for the City of Dallas.



G.C.
Scooter Beachum III became our President and Chief Operating Officer in April 2004. From June 2003 to April 2004, he served as Executive Vice President and General Manager. In June 2003, he was designated an executive officer. Mr.
Beachum also served as our Vice President and General Manager from January 2001 to June 2003. Mr. Beachum began his career as the founder of StreetSmart, a technology product and pricing report that provided competitive intelligence to
Dell Computer Corporation, IBM Corporation, Digital Equipment Corporation and other personal computer companies. In 1993, he sold his first entrepreneurial venture and shortly thereafter founded Axtive Software Corporation, with the development of
ART, an embedded customer relationship solution that captures customer registration data and initiates ongoing licensing, marketing and service relationships. The ART product line was followed by e.Monogram, an
E-business personalization application suite for business-to-business enterprises. After supporting customer organizations such as IBM and Lotus Development, Axtive Software Corporations technology and development operations were acquired by
Remedy Corporation in 2000. Mr. Beachum is the son of Graham C. Beachum II and the son-in-law of Paul L. Morris.



Stanley D. Strifler has been the President of ThinkSpark Corporation since October, 2002 and was designated an executive officer of Axtive in June
2003. From 1999 to 2002, Mr. Strifler served as President and CEO of ePartners. Under his leadership, ePartners grew its team from 50 professionals and $17.0 million in revenue to more than 650 professionals with a revenue stream of $110.0 million.
During this tenure, ePartners became the leading Microsoft Business Solutions partner in the world. From 1995 to 1999, Mr. Strifler served as Senior Vice President of Technology Solutions Company and was responsible for 550 professionals and $100
million in annual revenue. In 1984, Mr. Strifler founded The Strifler Group, growing it to 50 professionals and $8.0 million in revenue by 1992. Mr. Strifler began his career in 1977 at IBM as a systems engineer and worked for Ernst & Whinney as
a senior consultant from 1981 to 1984.



Kerry S. Osborne
has been the Chief Technology Officer of ThinkSpark since May 2003 in connection with our acquisition of ThinkSpark. Mr. Osborne was a founder of ThinkSpark in 1987. Prior to starting ThinkSpark, Mr. Osborne worked for Standard Oil of Ohio as a
Computer Geologist and Master Hospital Systems as an Oracle database consultant.



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ELECTION OF DIRECTORS



Effective with our issuance of Series A Preferred Stock in May 2003, our board of directors was expanded from three to seven members. At the same time,
two members of our board, J. Keith Benedict and John A. Wagner, resigned from the board and four new members were appointed to fill the new vacancies. There are currently two vacancies on the board of directors.



Pursuant to the terms and conditions of the Series A Preferred Stock, the
holders of Series A Preferred Stock generally have the right to elect two members of our board of directors. The holders of shares of Series A Preferred Stock issued before May 1, 2003, as long as shares with a liquidation preference of at least
$2.0 million, remain outstanding, have the right, voting separately as a class, to elect one member of the board of directors. The holders of shares of Series A Preferred Stock issued after May 1, 2003, as long as shares with a liquidation
preference of at least $1.0 million remain outstanding, have the right, voting separately as a class.



In May 2003, the then principal holders of Series A Preferred Stock, consisting of Sandera Partners, L.P., Global Capital Funding Group, L.P., GCA
Strategic Investment Fund Limited and Demand Aggregation Solutions, LLC, entered into a Stockholders and Voting Agreement with respect to the Companys capital stock they owned or would acquire in the future. They agreed to vote their shares to
elect two independent directors to the board. For this purpose, an independent director is an individual who is not (1) an officer or director of the voting stockholder, the Company or any affiliate of either, (2) the holder of more than 10% of the
voting power of the voting Stockholder, the Company or any Affiliate of either or (iii) a relative (as defined in the Stockholders and Voting Agreement) of the voting stockholder or any person described in the preceding clauses. These principal
holders also agreed to vote their shares of Axtive capital stock to elect the individuals currently serving as directors to our board of directors. With its purchase of common stock in the February 2004 private offering, B/K Venture Capital, LLP, an
affiliate of Mr. Beneke, also became bound by the Stockholders and Voting Agreement with respect to the share it owns or acquires.



SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE



Under U.S. securities laws, directors, certain executive officers and persons holding more than 10% of our common stock must report their initial
ownership of the common stock, and any changes in that ownership, to the SEC. The SEC has designated specific due dates for these reports. Based solely on our review of copies of the reports filed with the SEC, or written representations of the
reporting person, each of our listed directors and executive officers, except for Graham C. Beachum II, was late with respect to one filing in 2003.



AUDIT COMMITTEE



Our board of directors continues to serve as our audit committee on an interim basis. We anticipate that this interim status will continue until we are
able to fill the one or both of the current vacancies on the board with new, independent directors.



We have not yet designated an audit committee financial expert from the members of the interim audit committee. Although the members of the interim audit
committee are financially literate and sophisticated, we do not believe that any of the current members qualify as an audit committee financial expert as defined by the SEC. Our objective is to fill at least one of the current vacancies on the board
with an independent director who would qualify as an audit committee financial expert and serve on the audit committee.



CODE OF ETHICS



In April 2004, our board of directors adopted a Code of Business Conduct and Ethics, which is designed to help officers, directors and employees resolve
ethical issues in an increasingly complex business environment. The Code of Business Conduct and Ethics is applicable to all of our officers, directors and employees, including our principal executive officer, principal financial officer, principal
accounting officer or controller and other persons performing similar functions. The Code of Business Conduct and Ethics covers topics, including but not limited to, conflicts of interest, confidentiality of information, and compliance with laws and
regulations. Our Code of Business Conduct and Ethics is available, free of charge, on our website at www.axtive.com.



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Waivers from our Code of Business Conduct and Ethics are discouraged, but any waivers from the Code of
Business Conduct and Ethics that relate to our principal executive officer, principal financial officer, principal accounting officer or controller and other persons performing similar functions or any other executive officer or director must be
approved by our audit committee and will be posted on our website at www.axtive.com.



|ITEM 10. | EXECUTIVE COMPENSATION
|-------- | ----------------------



SUMMARY COMPENSATION



The following table provides summary information concerning compensation paid by us to our Chief Executive Officer and our executive officers in 2003, if any, who earned more than $100,000 in salary and bonus for all
services rendered in all capacities during the fiscal year ended December 31, 2003. We refer to the executive officers listed below as named executive officers. For a list of our current executive officers, see Item 9, Directors, Executive
Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange ActDirectors, Executive Officers and Key Employees.



|                                      |  |      |  |                           |                                  |                             |                         |  |   |  
|------------------------------------- |  | ---- |  | ------------------------- | -------------------------------- | --------------------------- | ----------------------- |  | - | -
|                                      |  |      |  | AnnualCompensation Salary |                                  | Long-termcompensationawards |                         | 
|Name and Principal Position(s)        |  | Year |  |                           | Securitiesunderlying options (#) |                             | All othercompen- sation
|Graham C. Beachum II                  |  | 2003 |  | $                         | 100,000                          |                             | 604,500                 |  | $ | 
|Chief Executive Officer               |  | 2002 |  | $                         | 100,000                          |                             |                        |  | $ | 
|                                      |  | 2001 |  | $                         | 95,833                           |                             | 150,000                 |  |   | 
|                                      |  |      |  |                          
|G. C. Scooter Beachum III           |  | 2003 |  | $                         | 150,000                          |                             | 300,000                 |  | $ | 
|President and Chief Operating Officer |  | 2002 |  | $                         | 111,042                          |                             |                        |  | $ | 
|                                      |  | 2001 |  | $                         | 91,041                           |                             | 75,000                  |  |   | 
|                                      |  |      |  |                          
|Stanley D. Strifler                   |  | 2003 |  | $                         | 266,667                          |                             |                        |  | $ | 
|President, ThinkSpark Corporation     |  | 2002 |  | $                         |                                 |                             |                        |  | $ | 
|                                      |  | 2001 |  | $                         |                                 |                             |                        |  |   | 



In accordance with the
rules of the SEC, other compensation in the form of perquisites and other personal benefits has been omitted for the named executive officers listed in the table above because the aggregate amount of these perquisites and other personal benefits was
less than the lesser of $50,000 or 10% of the total of annual salary and bonuses for the named executive officers in 2003.



No restricted stock awards have been made to the named executive officers listed in the table above.



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STOCK OPTIONS GRANTED DURING THE YEAR ENDED DECEMBER 31, 2003



The following table provides information regarding the grant of stock
options during fiscal 2003 to the named executive officers.



|                                |  |                   |  |                                                                                                |   |  |                            |      |                |           |        |   |         |  |   |          
|------------------------------- |  | ----------------- |  | ---------------------------------------------------------------------------------------------- | - |  | -------------------------- | ---- | -------------- | --------- | ------ | - | ------- |  | - | ---------
|                                |  | Individual Grants |  | Potential Realizable ValueAt Assumed Annual Rates ofStock Price AppreciationFor Option Term(1)
|Name                            |  | OptionsGranted(#) |  | % 0f TotalOptionsGranted toEmployeesIn FiscalYear                                              |   |  | Exerciseor BasePrice($/Sh) |      | ExpirationDate |           | 5% ($) |   | 10% ($)
|Graham C. Beachum II            |  | 604,500           |  | 49.1                                                                                           | % |  | $                          | 1.00 |                | 5/22/2013 |        | $ | 577,100 |  | $ | 1,277,001
|Graham C. Scooter Beachum III |  | 300,000           |  | 24.4                                                                                           | % |  | $                          | 1.00 |                |           |        | $ | 286,402 |  | $ | 633,747  
|Stanley D. Strifler             |  |                  |  |                                                                                               |   |  |                            |     |                |          |        |   |        |  |   |         

---

|(1) | In accordance with SEC rules, these columns show gain that could accrue for the listed
options, assuming that the market price per share of our common stock appreciates from the date of grant over a period of 10 years at an annualized rate of 5% and 10%, respectively. If the stock price does not increase above the exercise price at
the time of exercise, the realized value from these options will be zero.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES



None of the named executive officers exercised any stock options during the year ended December 31, 2003. The following table provides information regarding the number of shares covered by both exercisable and
unexercisable stock options as of December 31, 2003, and the values of in-the-money options, which values represent the positive spread between the exercise price of any such option and the fiscal year end value of our common stock.



|                                |  |                                                                      |  |                                                                 |  |              |  |               
|------------------------------- |  | -------------------------------------------------------------------- |  | --------------------------------------------------------------- |  | ------------ |  | --------------
|                                |  | Number of securitiesunderlying unexercisedoptions at fiscal year-end |  | Value of the unexercised in-the-money optionsat fiscal year-end
|Name                            |  | Exercisable#                                                         |  | Unexercisable#                                                  |  | Exercisable$ |  | Unexercisable$
|Graham C. Beachum II            |  | 524,875                                                              |  | 229,625                                                         |  |             |  |              
|Graham C. Scooter Beachum III |  | 260,939                                                              |  | 114,061                                                         |  |             |  |              
|Stanley D. Strifler             |  |                                                                     |  |                                                                |  |             |  |              



DIRECTOR COMPENSATION



Currently, our directors who are not our employees
receive no compensation for their service as directors.



EMPLOYMENT
CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS



Graham C.
Beachum II. In January 2001, we entered into an employment agreement with Mr. Beachum to serve as our President and Chief Executive Officer. The agreement expires on January 2, 2005, unless terminated earlier. Under the agreement, Mr. Beachum
was entitled to receive an annual base salary of $100,000, which would be increased to $240,000 upon the successful conclusion of an equity offering by Axtive of at least $10 million. The annual base salary will be increased by 5% each fiscal year.
Pursuant to the agreement, Mr. Beachum will also be eligible to receive a bonus based on our performance, as determined by the board of directors or its compensation committee. In the event that Mr. Beachum is terminated without cause, including a
change of control (as defined in the agreement), or terminates his employment for good reason (as defined in the agreement), he will be entitled to receive as severance the amount of his base salary for (1) the remainder of his term of employment or
(2) six



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months, whichever period is shorter. The agreement also contains customary nondisclosure and non-competition covenants, as well as an assignment of
inventions.



Effective as of April 1, 2004, the employment
agreement was amended to increase Mr. Beachums annual base salary to $165,000. Among other things, the amendment also restates the terms of discretionary incentive compensation, which is to be determined by the compensation committee of our
board of directors, and sets forth certain significant objectives to be considered for purposes of a discretionary bonus with respect to the 2004 fiscal year. Mr. Beachum is also eligible to receive additional grants of stock options as determined
by the compensation committee.



Mr. Beachum is the father of
G.C. Scooter Beachum III, our President and Chief Operating Officer.



In January 2001, we entered into an employment agreement with Mr. G. C. Scooter Beachum III to serve as our President and Chief Operating Officer. The employment agreement expires on January 2, 2005,
unless terminated earlier. Under the employment agreement, Scooter Beachum is entitled to receive an annual base salary of $95,000 that shall be increased to $165,000 upon the successful conclusion of an equity offering by Axtive of at least $10
million. The annual base salary shall be increased by 5% each fiscal year. Mr. Beachum is currently paid $150,000 annually. In addition, Scooter Beachum was granted options to purchase 750,000 shares of Axtives Common Stock at an exercise
price of $1.50 per share, of which 25% vested upon the grant date and the remainder vesting at the rate of 18.75% on January 2 of each successive year. Pursuant to the employment agreement, Scooter Beachum will also be eligible to receive a bonus
based on our performance, as determined by the Board of Directors or its Compensation Committee. In the event that Scooter Beachum is terminated without cause, including a change of control (as defined in the employment agreement), he will be
entitled to receive as severance the amount of his base salary for (i) the remainder of his term of employment, or (ii) six months, whichever period is shorter. The employment agreement also contains customary nondisclosure and non-competition
covenants, as well as an assignment of inventions.



Mr. Beachum
is the son of Graham C. Beachum II and the son-in-law of Paul L. Morris, one of our directors.



Stanley D. Strifler.In May 2003, we entered into an employment letter with Mr. Strifler to serve as President of ThinkSpark. Under his employment letter, Mr. Strifler is entitled to receive an annual base
salary of $250,000. In addition to his salary, he was entitled to receive $100,000 representing compensation for past services. In the event that Mr. Strifler is terminated without cause, or terminates his employment for good reason (as defined in
the letter) before the first anniversary of the Effective Time (as defined in the letter), he will be entitled to receive as severance the amount of his base salary for a period of twelve (12) months. The agreement also contains customary
nondisclosure and non-competition covenants, as well as an assignment of inventions.



|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



The following table sets forth information as of March 31, 2004 (the Ownership Date) with respect to the
beneficial ownership of our common stock by:



| |  | each of our directors and named executive officers;
| | - | ---------------------------------------------------



| |  | all of our executive officers and directors as a group; and
| | - | -----------------------------------------------------------



| |  | each person or group of affiliated persons known to us to own beneficially more than 5% of our common stock.
| | - | ------------------------------------------------------------------------------------------------------------



Unless otherwise indicated in the footnotes to the table, and subject to
community property laws where applicable, the following persons have sole voting and investment control with respect to the shares beneficially



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owned by them. In accordance with SEC rules, if a person has a right to acquire beneficial ownership of any shares of common stock, on or within 60 days of
the Ownership Date, upon (1) exercise of outstanding options, (2) the exercise of common stock purchase warrants or (4) otherwise, the shares are deemed beneficially owned by that person, are deemed to be outstanding solely for the purpose of
determining the percentage of our shares that person beneficially owns and are reflected in the table. These shares are not included in the computations of percentage ownership for any other person.



|                                                                  |  |                                          |  |      |  
|----------------------------------------------------------------- |  | ---------------------------------------- |  | ---- | -
|Person or Group                                                   |  | Shares of Common StockBeneficially Owned | 
|                                                                  |  |                                         
|Directors and Named Executive Officers (1):                       |  |                                          |  |      |  
|Graham C. Beachum II(2)                                           |  | 625,625                                  |  | 1.6  | %
|Ron Beneke(3)                                                     |  | 19,698,638                               |  | 43.8 | %
|Paul Morris                                                       |  | 381,361                                  |  | 1.0  | %
|Alan W. Tompkins                                                  |  |                                         |  |     |  
|Bradley A. Thompson(4)                                            |  | 1,441,663                                |  | 3.8  | %
|G.C. Scooter Beachum III(5)                                     |  | 872,894                                  |  | 2.3  | %
|Stanley D. Strifler(6)                                            |  | 106,000                                  |  | *    |  
|All executive officers and directors as a group (7 persons)(7)    |  | 23,126,181                               |  | 50.3 | %
|                                                                  |  |                                         
|Beneficial Owners of 5% or More of Our Outstanding Common Stock : |  |                                          |  |      |  
|B/K Venture Capital, LLP(8)                                       |  | 19,698,638                               |  | 43.8 | %
|GCA Strategic Investment Fund Limited(9)                          |  | 10,536,728                               |  | 28.0 | %
|Sandera Partners, L.P.(10)                                        |  | 13,007,242                               |  | 31.2 | %

---

|* | Less than 1%
|- | ------------



|(1) | The address of each executive officer and director is c/o Axtive Corporation, 5001, LBJ
Freeway, Suite 275, Dallas, Texas 75244.
|--- | --------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes options to purchase 625,625 shares of common stock that were exercisable on or
within 60 days of the Ownership Date.
|--- | -----------------------------------------------------------------------------------------------------------------------------



|(3) | Includes shares of common stock directly owned by B/K Venture Capital, LLP or which B/K
Venture Capital, LLP has the contractual right to acquire as of the Ownership Date. Mr. Beneke is CEO of B/K Venture Capital, LLP and, therefore, may be deemed to share voting and investment power with respect to the shares of Common Stock. This
filing should not be construed as an admission by Mr. Beneke that he is the beneficial owner of the shares of common stock.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Includes shares of common stock directly owned by Global Capital Funding Group, L.P., of
which Mr. Thompson is indirectly a limited partner.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Includes (a) 49,768 shares of common stock owned by TSTC International Holding Company, which
is wholly owned by Mr. Scooter Beachum, (b) options to purchase 310,939 shares of common stock that were exercisable on or within 60 days of the Ownership Date and (c) 132,500 shares of common stock in which he has an indirect beneficial ownership
interest as a result of his membership interest in Beachum Investments, LLC.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Includes 106,000 shares of common stock in which he has an indirect beneficial ownership interest as a result of his membership interest in Beachum Investments, LLC.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Includes (a) 19,986,906 shares of common stock that are indirectly owned, and (b) options to purchase a total of 936,564 shares of common stock that were exercisable
on or within 60 days of the Ownership Date.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | Includes shares of common stock directly owned by B/K Venture Capital, LLP or which B/K
Venture Capital, LLP has the contractual right to acquire as of the Ownership Date. The address of B/K Venture Capital, LLP is 8080 N. Central Expressway, Suite 1580, Dallas, Texas 75206.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(9) | The address of GCA Strategic Investment Fund Limited is c/o Prince Management Ltd., Mechanics
Building, 12 Church Street, Hamilton, Bermuda HM 11.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



|(10) | The address of Sandera Partners, L.P. is 1601 Elm Street, Suite 4000, Dallas, Texas 75201.
|---- | ------------------------------------------------------------------------------------------



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##### Table of Contents

|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



FINANCINGS



PurchasePooling Investment



In September 2000, we issued 264,485 shares of Axtive common stock to PurchasePooling Investment Fund in return for 9,593,824 shares of Series A
Convertible Preferred Stock of PurchasePooling Solutions, Inc., a start up web-based demand aggregator working toward enabling government and educational entities to save significantly on large-ticket capital items by combining their purchasing
power nationwide and globally. In December 2000, we invested an additional $620,000 in PurchasePooling in return for 2,214,285 shares of its Series C Convertible Preferred Stock. As a result, at December 31, 2000, we had an approximately 18%
ownership interest in PurchasePooling. In 2000, we entered into an agreement to acquire from Odyssey Ventures Online S.A. 975,000 shares of Series A Convertible Preferred Stock of PurchasePooling in exchange for 26,881 shares of Axtive common stock.
In April 2001, the agreement was finalized and the shares of Axtive common stock were issued.



Based on a valuation obtained on PurchasePooling in July 2001, we determined that the investment was impaired. Accordingly, we recorded an impairment charge of $2.5 million.



In October 2001, we participated in the amount of $400,000 in a syndicated
loan to PurchasePooling in the amount of $1,600,000. The loan, structured as a Convertible Note with Warrants, bore interest at 15% per annum, and if not converted earlier, would mature in October 2003. Because PurchasePooling was in its development
stage and was not generating any cash flows, we had no expectation for repayment of the loan. We did not accrue interest on the note.



Based upon the ongoing evaluation of our investment in PurchasePooling, we determined in April 2002, that our investment was not recoverable. As a result,
we wrote off the remaining $2,680,000 of our investment in PurchasePooling as of December 31, 2001. The write-off for the year 2001 was $5.2 million.



Through February 2003, Graham C. Beachum II was the interim Chief Executive Officer of PurchasePooling. In February 2003, the lenders to PurchasePooling
(including Axtive) declared the loan to PurchasePooling in default and foreclosed upon the assets of the company. The previous lenders formed a new entity, Demand Aggregation Solutions, LLC (DAS), to hold the assets, and Axtive, under a
management agreement, has agreed to manage the affairs of DAS in exchange for a management fee of $25,000 per month. Stemming from Axtives participation in the loan, the Company has a 25% membership interest in DAS that is subject to
forfeiture if Axtive breaches its obligations under the management agreement. Additionally, the management agreement with DAS obligates Axtive to fund DASs working capital needs at a rate not exceeding, on average, $50,000 per month up to a
maximum of $1.2 million over the three year life of the agreement.



Acquisition of Axtive Name



In
June 2002, the Company acquired the name Axtive (pronounced active) and its related logo and trademark and certain tangible assets including furniture and fixtures, signage and office supplies from Axtive Software
Corporation, as represented by it sole shareholder, G.C. Scooter Beachum III, our President and Chief Operating Officer. The assets were acquired in exchange for an initial grant of 40,000 restricted shares of Axtives common stock,
which was valued at approximately $168,000 at the time of acquisition. This amount was allocated between relative fair values of the intangible ($153,000) and tangible assets ($15,000) purchased by us.



66



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In July 2003, we issued 29,768 restricted shares of our common stock to TSTC International Holding
Company, formerly known as Axtive Software Corporation. These shares constituted an additional payment due to TSTC in connection with our June 2002 purchase of certain intangible assets, including the name Axtive, and certain tangible
assets. We were obligated to issue the additional restricted shares, not in excess of 29,768 shares, if the market price of our common stock had not been at or above $7.50 within the one-year period after our purchase. Mr. Scooter Beachum is the
sole shareholder and director of TSTC. The issuance of the restricted shares of common stock did not involve a public offering. In December 2003, we determined that the intangible was impaired and wrote off the balance totaling approximately
$177,000.



AFFILIATE RELATIONSHIPS IN FINANCING TRANSACTIONS



Until the end of May 2003, J. Keith Benedict and John A. Wagner served as
members of our board of directors and were representatives of the investment manager (or its affiliates) of H.W. Capital L.P. Concurrent with the May 2003 financing activities, Alan W. Tompkins became a member of our board of directors. Mr. Tompkins
is Vice President and General Counsel of Unity Hunt, Inc., a Texas corporation owned by several trusts. Those trusts hold limited partnership interests in Sandera Partners, L.P., which is one of our stockholders. Sandera was also a purchaser of
additional shares of Series A Preferred Stock in May 2003 and a purchaser of our common stock in the February 2004 private offering.



Concurrent with the May 2003 financing activities, Ron Beneke became a member of our board of directors. Mr. Beneke is a member of the management
committee of DAS, one of the purchasers of shares of Series A Preferred Stock in May 2003. Mr. Beneke is also a principal of B/K Venture Capital, LLP, one of the purchasers of our common stock in the February 2004 private offering.



In September to December 2003, affiliates of Mr. Beneke made bridge loans to
us in the aggregate principal amount of $113,745 which bore interest rates from 6% to 12% per year. In February 2004, we repaid the affiliates all amounts due, plus accrued interest. In January 2004, as part of a December 2003 private offering of
12% promissory notes and warrants, an affiliate of Mr. Beneke purchased a 12% promissory note in the original principal amount of $49,615 and was issued related warrants to purchase common stock. As part of the February 2004 private offering of our
common stock, in lieu of converting this 12% promissory note and warrant to common stock, the affiliate elected to be repaid, terminated the warrant, and B/K Venture Capital, LLP increased the amount of its purchase of common stock by an amount
equal to the principal amount of the 12% promissory note.



Concurrent with the May 2003 financing activities, Brad A. Thompson became a member of our board of directors. Mr. Thompson is an officer of Global Capital Advisors, LLC, which is an affiliate of GCA Strategic Fund Limited, one of the
purchasers of shares of Series A Preferred Stock in April 2002 and May 2003.



Concurrent with the May 2003 financing activities, Paul L. Morris became a member of our board of directors. Mr. Morris was one of the purchasers of shares of Series A Preferred Stock in April 2002. In December 2003,
as part of the December 2003 private notes offering, Mr. Morris purchased a 12% promissory note in the original principal amount of $20,000 and was issued related warrants to purchase common stock. As part of the February 2004 private offering of
our common stock, Mr. Morris converted his 12% promissory note and related warrants into 260,178 shares of our common stock.



G.C. Scooter Beachum III, our President and Chief Operating Officer, and Stanley D. Strifler, President of ThinkSpark Corporation, are each
members of Beachum Investments, LLC, one of the purchasers of shares of Series A Preferred Stock in May 2003. In addition, Scooter Beachum was an individual purchaser of Series A Preferred Stock in May 2003.



In September 2003, Scooter Beachum made a bridge loan to us in the principal
amount of $13,220, which bore interest at 6% per year. In December 2003, as part of the December 2003 private notes offering, Scooter Beachum purchased a 12% promissory note in the original principal amount of $13,441 and was issued related warrants
to purchase common stock. We repaid Scooter Beachums bridge loan, including accrued interest, out of the proceeds of the December 2003 private notes offering. As part of the February 2004 private offering of our common stock, Scooter Beachum
converted his 12% promissory note and related warrants into 174,853 shares of our common stock.



67



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##### Table of Contents

See Item 5, Market for Common Equity and Related Stockholder MattersRecent Sales of
Unregistered Securities and Item 6, Managements Discussion and Analysis or Plan of OperationLiquidity and Capital Resources.



EMPLOYMENT RELATIONSHIPS



We have entered into employment agreements or employment letters with each of Graham C. Beachum II, G.C. Scooter Beachum III and Stanley D.
Strifler. See Item 10, Executive CompensationEmployment Contracts and Change-in-Control Arrangements with respect to the employment arrangements with named executive officers.



ACQUISITION OF THINKSPARK CORPORATION



Prior to our acquisition of ThinkSpark Corporation in May 2003, Stanley D.
Strifler, President of ThinkSpark, had a right to purchase certain capital stock from ThinkSpark pursuant to an October 2002 employment agreement with ThinkSpark. In connection with our acquisition, Mr. Strifler agreed to new employment terms with
the surviving corporation, which superseded the previous employment agreement. He also agreed to waive any right to purchase capital stock of ThinkSpark in consideration of a promissory note from ThinkSpark for $135,000. The promissory note bears
interest at 6% per year and is payable in monthly installments amortized over a five-month period. In late 2003, ThinkSpark became past due on the final monthly installment, but made the final payment in March 2004.



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##### Table of Contents

|ITEM 13. | EXHIBITS AND REPORTS ON FORM 8-K
|-------- | --------------------------------



(a) The following exhibits are filed as part of this report as required by Item 601 of Regulation S-B.



|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                           
|           | 
|3.1        |  | Certificate of Incorporation of Edge Technology Group, Inc., as amended (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Companys Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996).                                                                                                                                                                       
|           | 
|3.2        |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of Edge Technology Group, Inc. (changing the name of the Company from Edge Technology Group to Axtive
Corporation) (incorporated by reference to Exhibit 3.3 to the Companys Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2002 filed with the SEC on November 14, 2002).                               
|           | 
|3.3        |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of Axtive Corporation (to effect the 1-for-10 reverse stock split) (filed herewith).                                                                                                                                                                                                                                                    
|           | 
|3.4        |  | Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.3 to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 filed with the
SEC on July 23, 2003).                                                                                                                                                                                                        
|           | 
|4.1        |  | Form of Specimen Common Stock Certificate (filed herewith).                                                                                                                                                                                                                                                                                                                                                           
|           | 
|4.2        |  | Subscription and Securities Purchase Agreement, dated as of May 22, 2003, by and among Axtive, Demand Aggregation Solutions, LLC, Beachum Investments, LLC, Sandera Partners, L.P., GCA
Strategic Investment Fund Limited, Kerry Osborne, and Graham C. Beachum III (incorporated by reference to Exhibit 3 the Schedule 13D dated May 23, 2003 and filed by G.C. Scooter Beachum III with the SEC on June 5, 2003).
|           | 
|4.3        |  | First Restated Certificate of Designation, Preference and Rights of Series A Convertible Preferred Stock of Axtive Corporation, dated May 23, 2003 (incorporated by reference as Exhibit 4.6 to
the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                             
|           | 
|4.4        |  | Acknowledgement of Discharge of Indebtedness, Release of Claims and Agreement, dated as of May 22, 2003, by and among Graham C. Beachum II, Graham C. Beachum III, and Axtive (incorporated by
reference to Exhibit 1 to the Schedule 13D dated May 23, 2003 and filed by Graham C. Beachum II with the SEC on June 2, 2003).                                                                                         
|           | 
|4.5        |  | Acknowledgement of Discharge of Indebtedness, Release of Claims and Agreement, dated as of May 22, 2003, by and among Sandera Partners, L.P. and Axtive (incorporated by reference as Exhibit
4.8 to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                        
|           | 
|4.6        |  | Registration Rights Agreement, dated May 23, 2003, by and among Axtive, Demand Aggregation Systems, LLC, Beachum Investments, LLC, Sandera Partners, L.P., GCA Strategic Investment Fund
Limited, Kerry Osborne and Graham C. Beachum III (incorporated by reference as Exhibit 4.9 to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).      
|           | 
|4.7        |  | Stockholders and Voting Agreement, dated as of May 23, 2003, among Sandera Partners, L.P., Global Capital Funding Group, L.P., GCA Strategic Investment Fund Limited, and Demand Aggregation
Solutions, LLC (incorporated by reference to Exhibit 4 the Schedule 13D dated May 23, 2003 and filed by Demand Aggregation Systems, LLC with the SEC on June 20, 2003).                                                  
|           | 
|4.8        |  | Form of Warrant to Purchase Common Stock of Axtive Corporation, dated as of May 23, 2003, as issued to May 2003 purchasers of Series A Preferred Stock (incorporated by reference to Exhibit 5
the Schedule 13D dated May 23, 2003 and filed by G.C. Scooter Beachum III with the SEC on June 5, 2003).                                                                                                             



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|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | 
|4.9        |  | Restated Registration Rights Agreement, dated May 23, 2002, by and among Axtive, Sandera Partners, L.P., GCA Strategic Investment Fund Limited, Global Capital Funding Group, L.P., Paul
Morris, Jack Brown, Alex Rankin, U.S. Technology Investors, Inc. and Rex Jobe (incorporated by reference as Exhibit 4.12 to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23,
2003).                                       
|           | 
|4.10       |  | Form of Restated Warrant to Purchase Common Stock of Axtive Corporation, dated as of May 23, 2003, as issued to 2002 purchasers of Series A Preferred Stock (incorporated by reference as
Exhibit 4.13 to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                                                                                  
|           | 
|4.11       |  | Subscription Agreement, dated May 22, 2003, by and between Axtive and Graham C. Beachum III (incorporated by reference to Exhibit 4 the Schedule 13D dated May 23, 2003 and filed by G.C.
Beachum III with the SEC on June 5, 2003).                                                                                                                                                                                                                                                 
|           | 
|4.12       |  | Subscription and Securities Purchase Agreement, dated as of December 15, 2003, by and among Axtive Corporation, the Reporting Person, Jack E. Brown, Paul Morris, U.S. Technology Investors,
LLC, GCA Strategic Investment Fund Limited, and Agincourt, L.P. (incorporated by reference to Exhibit 7 to the Schedule 13D dated February 26, 2004 and filed by G.C. Beachum III with the SEC on March 3, 2004).                                                                       
|           | 
|4.13       |  | Form of Warrant to Purchase Common Stock of Axtive Corporation, as issued to purchasers of 12% Promissory Notes pursuant to December 15, 2003 Subscription and Securities Purchase Agreement
(filed herewith).                                                                                                                                                                                                                                                                       
|           | 
|4.14       |  | Subscription and Securities Purchase Agreement, dated as of February 26, 2004, by and among Axtive Corporation, the Reporting Person, B/K Venture Capital, LLP, Sandera Partners, L.P., W.
Robert Dyer, Jr., Jack E. Brown, Paul Morris, U.S. Technology Investors, LLC, GCA Strategic Investment Fund Limited, and Agincourt, L.P. (incorporated by reference to Exhibit 7 to the Schedule 13D dated February 26, 2004 and filed by G.C. Beachum
III with the SEC on March 3, 2004).
|           | 
|4.15       |  | Registration Rights Agreement, dated as February 26, 2004, by and among Axtive Corporation, the Reporting Person, B/K Venture Capital, LLP, Sandera Partners, L.P., W. Robert Dyer, Jr., Jack
E. Brown, Paul Morris, U.S. Technology Investors, LLC, GCA Strategic Investment Fund Limited, and Agincourt, L.P. (filed herewith).                                                                                                                                                    
|           | 
|*10.1      |  | Amended and Restated 1996 Stock Option Plan (incorporated by reference to our 1996 definitive Proxy Statement filed on April 7, 1997).                                                                                                                                                                                                                                                                                                                                               
|           | 
|*10.2      |  | 2002 Stock Incentive Plan, adopted effective June 25, 2002 (incorporated by reference to Exhibit 10.27 of the Companys Quarterly Report on Form 10-QSB for the quarterly period ended
June 30, 2002 and filed with the SEC on August 19, 2002).                                                                                                                                                                                                                                     
|           | 
|*10.3      |  | Amendment No. 1 to 2002 Stock Incentive Plan, dated effective as of May 23, 2003 (incorporated by reference as Exhibit 10.7 to the Companys Annual Report on Form 10-KSB for the year
ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                                                                                                                                                             
|           | 
|*10.4      |  | Employment Agreement, dated as of January 2, 2001, between Edge and Graham C. Beachum II (incorporated by reference as Exhibit 10.8 to the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                                                                                                                                                     
|           | 
|*10.5      |  | Employment Agreement, dated as of January 2, 2001, between Edge and Graham C. Beachum III (incorporated by reference as Exhibit 10.9 to the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                                                                                                                                                    
|           | 
|*10.6      |  | Employment letter, dated May 9, 2003, between Axtive and Stanley D. Strifler (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                       
|           | 
|10.7       |  | Management Services Agreement, dated as of February 14, 2003, by and between Axtive and Demand Aggregation Solutions, LLC (incorporated by reference to Exhibit 1 the Schedule 13D dated May
23, 2003 and filed by Demand Aggregation Systems, LLC with the SEC on June 20, 2003).                                                                                                                                                                                                   



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|           |  |                                                                                                                                                                                                                                                                                                                                                                         
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                             
|           | 
|10.8       |  | Agreement and Plan of Merger, dated April 8, 2002, among Edge, Visionary Acquisition Corp., The Visionary Group, Inc. and The Visionary Group Shareholders (incorporated by reference to
Exhibit 10.23 of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2001 and filed with the SEC on April 16, 2002).                                    
|           | 
|10.9       |  | Agreement and Plan of Merger, dated April 11, 2002, among Edge Technology Group, Inc., Media Resolutions Acquisition Corp., Media Resolutions, Incorporated and Media Resolutions Shareholders
(incorporated by reference to Exhibit 10.24 of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2001 and filed with the SEC on April 16, 2002).
|           | 
|10.10      |  | Agreement and Plan of Merger, dated May 30, 2002, among Edge Technology Group, Inc., VT Acquisition Corp., Virtually There, Inc. and the shareholders of Virtually There, Inc. (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated May 30, 2002 and filed with the SEC on June 14, 2002).                                      
|           | 
|10.11      |  | Asset Purchase Agreement, dated as of May 31, 2002, by and among Universal Data Technology, Inc., its Shareholders, Edge Technology Group, Inc. and UDT Consulting, Inc. (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on Form 8-K dated May 30, 2002 and filed with the SEC on June 14, 2002).                                            
|           | 
|10.12      |  | Agreement and Plan of Merger by and among Axtive Corporation, Axtive Acquisition Corp., ThinkSpark Corporation and Kerry Osborne dated as of May 23, 2003 (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K dated May 23, 2003 and filed with the SEC on June 9, 2003).                                                            
|           | 
|10.13      |  | Assignment and Assumption Agreement, dated as of May 27, 2003, among ThinkSpark Corporation, ThinkSpark, L.P., Axtive and Merrill Lynch Business Financial Services, Inc. (incorporated by
reference to Exhibit 4.12 of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                       
|           | 
|10.14      |  | Term Loan Agreement, dated as of May 27, 2003, between Axtive and Merrill Lynch Business Financial Services, Inc. (incorporated by reference to Exhibit 4.12 of the Companys Annual
Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                               
|           | 
|10.15      |  | Debt Exchange Agreement, dated as of May 27, 2003, by and among ThinkSpark Corporation, Axtive and Merrill Lynch Business Financial Services, Inc. (incorporated by reference to Exhibit 4.12
of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                              
|           | 
|10.16      |  | Warrant to Purchase Common Stock of Axtive Corporation, dated May 27, 2003, and issued to Merrill Lynch Business Financial Services, Inc. (incorporated by reference to Exhibit 4.12 of the
Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003                                                         
|           | 
|10.17      |  | Bill of Sale and Asset Purchase Agreement, dated as of June 21, 2002, by and between Axtive Software Corporation and Edge (incorporated by reference to Exhibit 10.28 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002, and filed with the SEC on August 19, 2002).                                                          
|           | 
|10.18      |  | Factoring and Security Agreement, dated June 24, 2002, between UDT Consulting, Inc., and Landry Marks Partners, LP (incorporated by reference to Exhibit 10.29 of the Companys Form
10-QSB for the quarterly period ended June 30, 2002 and filed with the SEC on August 19, 2002).                                                                                    
|           | 
|10.19      |  | Factoring and Security Agreement, dated August 7, 2003, between ThinkSpark L.P., and Landry Marks Partners, LP (filed herewith).                                                                                                                                                                                                                                        
|           | 
|10.20      |  | Letter of Agreement, dated August 18, 2003, among ThinkSpark Corporation, ThinkSpark, L.P., Landry Marks Partners, LP and Merrill Lynch Business Financial Services, Inc. (filed
herewith).                                                                                                                                                                             
|           | 
|16.1       |  | Letter on Change in Certifying Accountant (incorporated by reference to Exhibit 16.1 of the Companys Form 8-K dated August 8, 2003 and filed with the SEC on August 14,
2003).                                                                                                                                                                                         



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|           |  |                                                                                                                                                                                                     
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                         
|           | 
|21.1       |  | Subsidiaries of Axtive (filed herewith).                                                                                                                                                            
|           | 
|31.1       |  | Chief Executive Officers Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                 
|           | 
|31.2       |  | Principal Financial Officers Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                             
|           | 
|32.1       |  | Chief Executive Officers and Principal Financial Officers Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).

---

|* | Indicates management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------



(b) Reports on Form 8-K.



On December 3, 2003, Axtive filed a Form 8-K announcing its Board of Directors had engaged KBA Group LLP, Certified Public Accountants, as the
Companys independent accountants for the purpose of auditing the Companys consolidated financial statements for the year ended December 31, 2003.



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|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



KBA Group LLP is our current independent auditor and served as our independent auditor for 2003. Grant Thornton LLP served as our independent auditor for
2002. The fees for all professional services provided to us by our independent auditors during each of the last two fiscal years were as follows:



|                   |  |      |        |      |   |        
|------------------ |  | ---- | ------ | ---- | - | -------
|                   |  | 2002 |        | 2003
|Audit Fees         |  |      |        |      |   |        
|Grant Thornton LLP |  | $    | 74,869 |      | $ | 12,310 
|KBA Group LLP      |  |      |       |      |   | 97,650 
|Audit-Related Fees |  |      |        |      |   |        
|Grant Thornton LLP |  |      | 4,100  |      |   |       
|KBA Group LLP      |  |      |       |      |   | 67,575 
|Tax Fees           |  |      |       |      |   |       
|All Other Fees     |  |      |       |      |   |       
|                   |  |      |        |      |   |        
|Total              |  | $    | 78,969 |      | $ | 177,535
|                   |  |      |        |      |   |        



Audit Fees.
Audit fees consisted principally of audit work performed on the consolidated financial statements and review work on our interim consolidated financial statements.



Audit-Related Fees. Audit-related fees consisted of fees related to the 2002 acquisitions of The Visionary Group,
Media Resolutions, Virtually There and UDT Consulting, the 2003 acquisition of ThinkSpark and the audit of the 401(k) Plan for 2002.



Tax Fees. We did not pay our independent auditors any fees for tax services during the last two fiscal years.



All Other Fees. We did not pay our independent auditors any other fees
during the last two fiscal years.



The audit committee of our
board of directors has adopted a written approval policy with respect to both audit and non-audit services. The approval policy requires that the audit committee pre-approve all audit and non-audit services provided to us by our independent
auditors. All audit and non-audit services performed in 2003 were pre-approved by the audit committee.



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SIGNATURES



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



|                                                                                                    
|----------------------------------------------------------------------------------------------------
|AXTIVE CORPORATION                                                                                  
|                                                                                                    
|/s/ GRAHAM C. BEACHUM II                                                                            
|                                                                                                    
|Graham C. Beachum II Chairman of the Board and Chief
Executive Officer (principal executive officer)



Date: April 12, 2004



In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.



|                         |  |                                                                                           |  |               
|------------------------ |  | ----------------------------------------------------------------------------------------- |  | --------------
|Name                     |  | Title                                                                                     |  | Date          
|                         |  |                                                                                          
|/s/ GRAHAM C. BEACHUM II |  | Chairman of the Board, Chief Executive Officer and Director (principal executive officer) |  | April 12, 2004
|                         |  |                                                                                           | 
|Graham C. Beachum II     |  |                                                                                           | 
|                         |  |                                                                                          
|/s/ STEPHEN P. SLAY      |  | Corporate Controller (principal financial and accounting officer)                         |  | April 12, 2004
|                         |  |                                                                                           | 
|Stephen P. Slay          |  |                                                                                           | 
|                         |  |                                                                                          
|/s/ RON BENEKE           |  | Director                                                                                  |  | April 9, 2004 
|                         |  |                                                                                           |  |               
|Ron Beneke               |  |                                                                                           |  |               
|                         |  |                                                                                          
|/s/ PAUL L. MORRIS       |  | Director                                                                                  |  | April 8, 2004 
|                         |  |                                                                                           |  |               
|Paul L. Morris           |  |                                                                                           |  |               
|                         |  |                                                                                          
|/s/ BRAD A. THOMPSON     |  | Director                                                                                  |  | April 12, 2004
|                         |  |                                                                                           |  |               
|Brad A. Thompson         |  |                                                                                           |  |               
|                         |  |                                                                                          
|/s/ ALAN W. TOMPKINS     |  | Director                                                                                  |  | April 12, 2004
|                         |  |                                                                                           |  |               
|Alan W. Tompkins         |  |                                                                                           |  |               



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EXHIBIT INDEX



|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                           
|           | 
|3.1        |  | Certificate of Incorporation of Edge Technology Group, Inc., as amended (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Companys Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996).                                                                                                                                                                       
|           | 
|3.2        |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of Edge Technology Group, Inc. (changing the name of the Company from Edge Technology Group to Axtive
Corporation) (incorporated by reference to Exhibit 3.3 to the Companys Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2002 filed with the SEC on November 14, 2002).                               
|           | 
|3.3        |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of Axtive Corporation (to effect the 1-for-10 reverse stock split) (filed herewith).                                                                                                                                                                                                                                                    
|           | 
|3.4        |  | Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.3 to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 filed with the
SEC on July 23, 2003).                                                                                                                                                                                                        
|           | 
|4.1        |  | Form of Specimen Common Stock Certificate (filed herewith).                                                                                                                                                                                                                                                                                                                                                           
|           | 
|4.2        |  | Subscription and Securities Purchase Agreement, dated as of May 22, 2003, by and among Axtive, Demand Aggregation Solutions, LLC, Beachum Investments, LLC, Sandera Partners, L.P., GCA
Strategic Investment Fund Limited, Kerry Osborne, and Graham C. Beachum III (incorporated by reference to Exhibit 3 the Schedule 13D dated May 23, 2003 and filed by G.C. Scooter Beachum III with the SEC on June 5, 2003).
|           | 
|4.3        |  | First Restated Certificate of Designation, Preference and Rights of Series A Convertible Preferred Stock of Axtive Corporation, dated May 23, 2003 (incorporated by reference as Exhibit 4.6 to
the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                             
|           | 
|4.4        |  | Acknowledgement of Discharge of Indebtedness, Release of Claims and Agreement, dated as of May 22, 2003, by and among Graham C. Beachum II, Graham C. Beachum III, and Axtive (incorporated by
reference to Exhibit 1 to the Schedule 13D dated May 23, 2003 and filed by Graham C. Beachum II with the SEC on June 2, 2003).                                                                                         
|           | 
|4.5        |  | Acknowledgement of Discharge of Indebtedness, Release of Claims and Agreement, dated as of May 22, 2003, by and among Sandera Partners, L.P. and Axtive (incorporated by reference as Exhibit
4.8 to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                        
|           | 
|4.6        |  | Registration Rights Agreement, dated May 23, 2003, by and among Axtive, Demand Aggregation Systems, LLC, Beachum Investments, LLC, Sandera Partners, L.P., GCA Strategic Investment Fund
Limited, Kerry Osborne and Graham C. Beachum III (incorporated by reference as Exhibit 4.9 to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).      
|           | 
|4.7        |  | Stockholders and Voting Agreement, dated as of May 23, 2003, among Sandera Partners, L.P., Global Capital Funding Group, L.P., GCA Strategic Investment Fund Limited, and Demand Aggregation
Solutions, LLC (incorporated by reference to Exhibit 4 the Schedule 13D dated May 23, 2003 and filed by Demand Aggregation Systems, LLC with the SEC on June 20, 2003).                                                  
|           | 
|4.8        |  | Form of Warrant to Purchase Common Stock of Axtive Corporation, dated as of May 23, 2003, as issued to May 2003 purchasers of Series A Preferred Stock (incorporated by reference to Exhibit 5
the Schedule 13D dated May 23, 2003 and filed by G.C. Scooter Beachum III with the SEC on June 5, 2003).                                                                                                             



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##### Table of Contents

|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | 
|4.9        |  | Restated Registration Rights Agreement, dated May 23, 2002, by and among Axtive, Sandera Partners, L.P., GCA Strategic Investment Fund Limited, Global Capital Funding Group, L.P., Paul
Morris, Jack Brown, Alex Rankin, U.S. Technology Investors, Inc. and Rex Jobe (incorporated by reference as Exhibit 4.12 to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23,
2003).                                       
|           | 
|4.10       |  | Form of Restated Warrant to Purchase Common Stock of Axtive Corporation, dated as of May 23, 2003, as issued to 2002 purchasers of Series A Preferred Stock (incorporated by reference as
Exhibit 4.13 to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                                                                                  
|           | 
|4.11       |  | Subscription Agreement, dated May 22, 2003, by and between Axtive and Graham C. Beachum III (incorporated by reference to Exhibit 4 the Schedule 13D dated May 23, 2003 and filed by G.C.
Beachum III with the SEC on June 5, 2003).                                                                                                                                                                                                                                                 
|           | 
|4.12       |  | Subscription and Securities Purchase Agreement, dated as of December 15, 2003, by and among Axtive Corporation, the Reporting Person, Jack E. Brown, Paul Morris, U.S. Technology Investors,
LLC, GCA Strategic Investment Fund Limited, and Agincourt, L.P. (incorporated by reference to Exhibit 7 to the Schedule 13D dated February 26, 2004 and filed by G.C. Beachum III with the SEC on March 3, 2004).                                                                       
|           | 
|4.13       |  | Form of Warrant to Purchase Common Stock of Axtive Corporation, as issued to purchasers of 12% Promissory Notes pursuant to December 15, 2003 Subscription and Securities Purchase Agreement
(filed herewith).                                                                                                                                                                                                                                                                       
|           | 
|4.14       |  | Subscription and Securities Purchase Agreement, dated as of February 26, 2004, by and among Axtive Corporation, the Reporting Person, B/K Venture Capital, LLP, Sandera Partners, L.P., W.
Robert Dyer, Jr., Jack E. Brown, Paul Morris, U.S. Technology Investors, LLC, GCA Strategic Investment Fund Limited, and Agincourt, L.P. (incorporated by reference to Exhibit 7 to the Schedule 13D dated February 26, 2004 and filed by G.C. Beachum
III with the SEC on March 3, 2004).
|           | 
|4.15       |  | Registration Rights Agreement, dated as February 26, 2004, by and among Axtive Corporation, the Reporting Person, B/K Venture Capital, LLP, Sandera Partners, L.P., W. Robert Dyer, Jr., Jack
E. Brown, Paul Morris, U.S. Technology Investors, LLC, GCA Strategic Investment Fund Limited, and Agincourt, L.P. (filed herewith).                                                                                                                                                    
|           | 
|*10.1      |  | Amended and Restated 1996 Stock Option Plan (incorporated by reference to our 1996 definitive Proxy Statement filed on April 7, 1997).                                                                                                                                                                                                                                                                                                                                               
|           | 
|*10.2      |  | 2002 Stock Incentive Plan, adopted effective June 25, 2002 (incorporated by reference to Exhibit 10.27 of the Companys Quarterly Report on Form 10-QSB for the quarterly period ended
June 30, 2002 and filed with the SEC on August 19, 2002).                                                                                                                                                                                                                                     
|           | 
|*10.3      |  | Amendment No. 1 to 2002 Stock Incentive Plan, dated effective as of May 23, 2003 (incorporated by reference as Exhibit 10.7 to the Companys Annual Report on Form 10-KSB for the year
ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                                                                                                                                                             
|           | 
|*10.4      |  | Employment Agreement, dated as of January 2, 2001, between Edge and Graham C. Beachum II (incorporated by reference as Exhibit 10.8 to the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                                                                                                                                                     
|           | 
|*10.5      |  | Employment Agreement, dated as of January 2, 2001, between Edge and Graham C. Beachum III (incorporated by reference as Exhibit 10.9 to the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                                                                                                                                                                    
|           | 
|*10.6      |  | Employment letter, dated May 9, 2003, between Axtive and Stanley D. Strifler (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                       
|           | 
|10.7       |  | Management Services Agreement, dated as of February 14, 2003, by and between Axtive and Demand Aggregation Solutions, LLC (incorporated by reference to Exhibit 1 the Schedule 13D dated May
23, 2003 and filed by Demand Aggregation Systems, LLC with the SEC on June 20, 2003).                                                                                                                                                                                                   



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##### Table of Contents

|           |  |                                                                                                                                                                                                                                                                                                                                                                         
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                             
|           | 
|10.8       |  | Agreement and Plan of Merger, dated April 8, 2002, among Edge, Visionary Acquisition Corp., The Visionary Group, Inc. and The Visionary Group Shareholders (incorporated by reference to
Exhibit 10.23 of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2001 and filed with the SEC on April 16, 2002).                                    
|           | 
|10.9       |  | Agreement and Plan of Merger, dated April 11, 2002, among Edge Technology Group, Inc., Media Resolutions Acquisition Corp., Media Resolutions, Incorporated and Media Resolutions Shareholders
(incorporated by reference to Exhibit 10.24 of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2001 and filed with the SEC on April 16, 2002).
|           | 
|10.10      |  | Agreement and Plan of Merger, dated May 30, 2002, among Edge Technology Group, Inc., VT Acquisition Corp., Virtually There, Inc. and the shareholders of Virtually There, Inc. (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated May 30, 2002 and filed with the SEC on June 14, 2002).                                      
|           | 
|10.11      |  | Asset Purchase Agreement, dated as of May 31, 2002, by and among Universal Data Technology, Inc., its Shareholders, Edge Technology Group, Inc. and UDT Consulting, Inc. (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on Form 8-K dated May 30, 2002 and filed with the SEC on June 14, 2002).                                            
|           | 
|10.12      |  | Agreement and Plan of Merger by and among Axtive Corporation, Axtive Acquisition Corp., ThinkSpark Corporation and Kerry Osborne dated as of May 23, 2003 (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K dated May 23, 2003 and filed with the SEC on June 9, 2003).                                                            
|           | 
|10.13      |  | Assignment and Assumption Agreement, dated as of May 27, 2003, among ThinkSpark Corporation, ThinkSpark, L.P., Axtive and Merrill Lynch Business Financial Services, Inc. (incorporated by
reference to Exhibit 4.12 of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                       
|           | 
|10.14      |  | Term Loan Agreement, dated as of May 27, 2003, between Axtive and Merrill Lynch Business Financial Services, Inc. (incorporated by reference to Exhibit 4.12 of the Companys Annual
Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                                                               
|           | 
|10.15      |  | Debt Exchange Agreement, dated as of May 27, 2003, by and among ThinkSpark Corporation, Axtive and Merrill Lynch Business Financial Services, Inc. (incorporated by reference to Exhibit 4.12
of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003).                                              
|           | 
|10.16      |  | Warrant to Purchase Common Stock of Axtive Corporation, dated May 27, 2003, and issued to Merrill Lynch Business Financial Services, Inc. (incorporated by reference to Exhibit 4.12 of the
Companys Annual Report on Form 10-KSB for the year ended December 31, 2002 and filed with the SEC on July 23, 2003                                                         
|           | 
|10.17      |  | Bill of Sale and Asset Purchase Agreement, dated as of June 21, 2002, by and between Axtive Software Corporation and Edge (incorporated by reference to Exhibit 10.28 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002, and filed with the SEC on August 19, 2002).                                                          
|           | 
|10.18      |  | Factoring and Security Agreement, dated June 24, 2002, between UDT Consulting, Inc., and Landry Marks Partners, LP (incorporated by reference to Exhibit 10.29 of the Companys Form
10-QSB for the quarterly period ended June 30, 2002 and filed with the SEC on August 19, 2002).                                                                                    
|           | 
|10.19      |  | Factoring and Security Agreement, dated August 7, 2003, between ThinkSpark L.P., and Landry Marks Partners, LP (filed herewith).                                                                                                                                                                                                                                        
|           | 
|10.20      |  | Letter of Agreement, dated August 18, 2003, among ThinkSpark Corporation, ThinkSpark, L.P., Landry Marks Partners, LP and Merrill Lynch Business Financial Services, Inc. (filed
herewith).                                                                                                                                                                             
|           | 
|16.1       |  | Letter on Change in Certifying Accountant (incorporated by reference to Exhibit 16.1 of the Companys Form 8-K dated August 8, 2003 and filed with the SEC on August 14,
2003).                                                                                                                                                                                         



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##### Table of Contents

|           |  |                                                                                                                                                                                                     
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                         
|           | 
|21.1       |  | Subsidiaries of Axtive (filed herewith).                                                                                                                                                            
|           | 
|31.1       |  | Chief Executive Officers Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                 
|           | 
|31.2       |  | Principal Financial Officers Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                             
|           | 
|32.1       |  | Chief Executive Officers and Principal Financial Officers Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).

---

|* | Indicates management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------



4